401(k) http://www.wisebread.com/taxonomy/term/3831/all en-US Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/real_estate_agent_working_with_client_online.jpg" alt="Real estate agent working with client online" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>It's no secret that 401(k) fund options are notoriously opaque. While target-date funds provide convenience to investors, they often come with higher fees than alternative investment vehicles, have highly variable returns, and aren't a good fit for many retirement savers. Let's simplify things, and review a low-stress strategy for building a solid two-to-three-fund portfolio for your 401(k).</p> <h2>The downsides to target-date funds</h2> <p>Designed to gradually adjust your investment mix as you approach retirement age, target-date funds have exploded in popularity since their designation as qualified default investment alternatives by the 2006 Pension Protection Plan. The upsides of target-date funds are that they're easy to select (96 percent of Vanguard plans make it the default investment option), they automatically rebalance, and they offer appropriate investment diversification. (See also: <a href="http://www.wisebread.com/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement?ref=seealso" target="_blank">What You Need to Know About the Easiest Way to Save for Retirement</a>)</p> <p>However, all that convenience comes at a high price. A 2015 review of over 1,700 target-date funds by FutureAdvisor determined that their average expense ratio (the annual fee charged to shareholders to cover operating expenses) was a relatively high 1.02 percent, meaning that you'd pay $51 every year for every $5,000 in your balance. Assuming an average investment return of 7 percent per year, you would miss out on an extra $4,998 in retirement savings over a 30-year period.</p> <p>On top of high fees, some target-date funds' returns barely cover their high annual expense ratios. The same review of 1,700 target-date funds pointed out that the lowest five-year average annual returns were 2.9 percent. (Returns are expressed net of expense ratios.) As of September 2017, 2.9 percent is not that much higher than the rate of a five-year CD at a credit union.</p> <p>Here's a better alternative to target-date funds.</p> <h2>Your guide to choosing your 401(k) investment options</h2> <p>In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett (aka The Oracle of Omaha) provided an investment strategy that would &quot;be superior to those attained by most investors who employ high-fee managers.&quot; Buffett recommended putting 90 percent of one's investments in a very low-cost S&amp;P 500 index fund, and the remaining 10 percent in short-term government bonds. This is the same advice that he has set in his will. (See also: <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett?ref=seealso" target="_blank">The 5 Best Pieces of Financial Wisdom From Warren Buffett</a>)</p> <p>More and more 401(k) plans are offering passively managed index funds that track a benchmark, such as the S&amp;P 500. And for good reason: The Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] has an annual expense ratio of 0.14 percent, just a $7 annual fee for a balance of $5,000. That's $44 in annual savings when you compare it to a target-date fund with a 1.02 percent annual expense ratio.</p> <p>Worried that this approach doesn't provide you enough diversification? Think again: An index fund tracking the S&amp;P 500 is investing in 500 large-cap companies. That's as diversified as you can get. (See also: <a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you?ref=seealso" target="_blank">How Too Much Investment Diversity Can Cost You</a>)</p> <p>Let's use Buffett's advice to build your 401(k) plan's portfolio.</p> <h3>Step 1: Check your plan for a U.S. equities index fund</h3> <p>There is a good chance that your 401(k) plan offers a low-cost S&amp;P 500 index fund. Buffett personally recommends an S&amp;P 500 Vanguard index fund. Vanguard is an investment management company known for having very low fees compared to competitors, especially on its index funds. In 2016, close to 60 percent of Vanguard plans offered an index core giving you access to broadly diversified index funds for U.S. stocks. In truth, you can do just as well with other index funds tracking the S&amp;P 500, such as the Fidelity 500 Index Investor [Nasdaq: FUSEX] and the Northern Stock Index [Nasdaq: NOSIX].</p> <p>In the event, that you don't have access to a low-cost index fund tracking the S&amp;P 500 through your workplace 401(k), you have two action items. First, see if your plan offers another large cap index fund (one investing in large U.S. companies based on a market index). This type of fund normally invests at least 80 percent of its assets in securities within its benchmark index, such as the Fidelity Large Cap Stock Fund [Nasdaq: FLCSX] and the Vanguard U.S. Growth Fund [Nasdaq: VWUSX]. Second, contact your plan administrator and request adding a low-cost S&amp;P 500 index fund.</p> <h3>Step 2: Check your plan for a fund of short-term investment-grade bonds</h3> <p>Just like there are index funds for investing in equities, there are also index funds for investing in bonds. For example, there is the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], which has an annual expense ratio of 0.20 percent, or $10 in fees for a balance of $5,000.</p> <p>Don't have access to such a fund? Look for a low-cost fund giving you the most exposure to high- and medium-quality, investment-grade bonds with short-term maturities, including corporate bonds, pooled consumer loans, and U.S. government bonds. Why short-term maturities? Short-term bonds tend to have low risk and low yields, ensuring that one portion of your nest egg remains stable at all times &mdash; something you'll really benefit from during any recessions.</p> <p>Then, request that your plan administrator add a low-cost index fund for domestic bonds.</p> <h3>Step 3: Allocate 90 percent to the equities index fund and 10 percent to the bonds index fund</h3> <p>Now you're ready to rebalance your portfolio. Using your online portal, look for an option that says &quot;exchange funds&quot; or &quot;transfer money between funds&quot; to move your nest egg dollars from your existing investments into the equities index fund and bonds index fund. (Note: Depending on your plan rules, including vesting rules, you may not be able to move 100 percent of your balance until a certain date. In that case, move everything that you can and the remaining once it becomes eligible.)</p> <p>Exchange your entire 401(k) balance and allocate 90 percent of that amount to the equities index fund and 10 percent to the bonds index fund. Confirm your transaction.</p> <h3>Step 4: Adjust your future contributions</h3> <p>To keep future contributions going into the right place, adjust your paycheck investment mix so that 90 percent of withholdings go to the equities index fund and 10 percent go into the bonds index fund.</p> <p>If your 401(k) offers an automatic rebalance feature, opt-in for it so that your portfolio is automatically readjusted to the 90/10 without you moving a finger. If your 401(k) doesn't offer that feature, plan to manually rebalance your account once a year.</p> <h3>Step 5: Revisit the 90/10 allocation at important life changes</h3> <p>Marriage. Birth of your first child. Purchase of your first home. Being able to start making catch-up contributions. Reaching age 59 1/2. These and more critical milestones in your life may require you to adjust your 90/10 allocation. As you get closer to retirement age, you should gradually shift from a growth strategy (selecting funds that exhibit signs of above-average growth) to an income strategy (picking funds that provide a steady stream of income) so that you hold fewer stocks and more bonds. The beauty of a target-date fund is that is does all of this for you automatically as you age. Without one, you'll need to stay on top of this occasional rebalancing yourself.</p> <h2>The bottom line</h2> <p>One of the main reasons that your 401(k) will perform better is that you're minimizing fees. If you were to allocate 90 percent of a $5,000 401(k) balance into the Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] and 10 percent into the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], you would just pay $7.30 in annual fees. That's $43.70 in annual savings over putting the entire $5,000 in a target-date fund with a 1.02 percent annual expense ratio. It doesn't sound like a large amount of savings, but compounded over the years it can add up to thousands of dollars more in your retirement fund.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds">Why Warren Buffett Says You Should Invest in Index Funds</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-traps-to-avoid-with-your-401k">7 Traps to Avoid With Your 401(k)</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement">What You Need to Know About the Easiest Way to Save for Retirement</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement 401(k) bonds equities expense ratios fees index portfolio rebalancing s&p 500 short-term bonds target-date funds Warren Buffett Thu, 21 Sep 2017 08:31:06 +0000 Damian Davila 2023013 at http://www.wisebread.com 8 Signs It's Time to Retire http://www.wisebread.com/8-signs-its-time-to-retire <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/8-signs-its-time-to-retire" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/senior_woman_relaxing_0.jpg" alt="Senior woman relaxing" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>There will come a time when you consider making the shift from worker bee to retiree. But knowing the best moment to stop working is not always easy to determine. How do you know whether your money will last once you stop earning a salary? Is there a &quot;magic age,&quot; when retiring makes sense, or do you just go with a gut feeling?</p> <p>There's no science to knowing when to retire, but there may be some signs to follow. If most or all of these apply to you, maybe it's time to submit that resignation and begin the next chapter of your life.</p> <h2>1. You have enough money for the retirement you want</h2> <p>It's impossible to know precisely how much you'll need in retirement, but there are some basic calculations you can make to see how long your money will last if you stop working.</p> <p>You must first calculate what your annual living expenses will be. Research shows that people tend to spend less as they get older, but be sure to factor in the potential costs of new activities like travel, eating out, and caring for grandchildren. Then, examine how much money you have saved, and what the return on that money might be as you age. Match those numbers up with your expected life span. There are other things to consider, such as whether you plan to draw equity from your home. There are many online calculators that can help you with these figures.</p> <p>Generally speaking, if you take the annual expenses you expect and multiply them by 25, you'll be in the ballpark of what you need to retire comfortably. Once you are approaching this number, it may be a sign that you can stop working. (See also: <a href="http://www.wisebread.com/6-ways-you-can-cut-costs-right-before-you-retire-0?ref=seealso" target="_blank">6 Ways You Can Cut Costs Right Before You Retire</a>)</p> <h2>2. You must collect distributions from your retirement plan</h2> <p>If you have a 401(k) or IRA, there comes a point at which you are required to take distributions. For most people, this age is 70-&frac12;. You can delay taking 401(k) distributions until after you stop working, but not for the money in a traditional IRA. If you are being forced to take distributions, there's not much incentive to continue working.</p> <h2>3. You can collect the maximum in Social Security</h2> <p>The government incentivizes people to retire later by offering them more money from Social Security if they wait longer to collect it. You can begin collecting benefits as early as age 62, but those benefits will be higher if you wait longer. Those approaching retirement age can get full benefits if they wait until age 67, and may get additional credits if they wait until age 70. If you're already getting the maximum benefit from the government, perhaps it's a sign that you're ready to retire for good. (See also: <a href="http://www.wisebread.com/6-smart-ways-to-boost-your-social-security-payout-before-retirement?ref=seealso" target="_blank">6 Smart Ways to Boost Your Social Security Payout Before Retirement</a>)</p> <h2>4. Your expenses are the lowest they've been in years</h2> <p>Your house is completely paid off. The kids are out of the house and college is paid for. You're not yet at the point where you have high medical expenses. Your cost of living hasn't been this low in decades. Sure, you may have big ticket things you want to pay for (travel, for example), but your day-to-day existence no longer requires a bi-weekly paycheck. It's still important to assess whether you have enough saved to last, but if you've downsized your lifestyle to a super-low level, it may no longer be necessary to keep working.</p> <h2>5. You no longer get any pleasure from work</h2> <p>We've all heard stories about older people who continue working simply because it makes them happy. Often, working gives them purpose and a sense of satisfaction that can't be replaced in retirement. But what if you're not one of these people? What if the work itself isn't rewarding, and you find yourself drained rather than energized by it? Then it may be time to consider retiring, assuming that your financial ducks are lined up well. Life is too short to work at an unsatisfying job if you don't have to.</p> <h2>6. Your health is starting to decline</h2> <p>In a perfect world, you will be healthy and spry enough to take advantage of all that retirement can offer. You will be perfectly able to handle that long bike tour through the south of France, and those backpacking trips on the Pacific Crest Trail. You'll have energy to spend time and keep up with your grandkids. But, if you are starting to see your health fade, perhaps it's time to stop working before you're unable to enjoy retirement the way you wish.</p> <h2>7. Your spouse wants you to</h2> <p>If your significant other is done working and has an urge to begin the next chapter of their life, perhaps it's that time for you as well. Many of the happiest retired couples are those that retire at the same time, and make post-work plans together. How fun is your spouse's retirement going to be if you're still schlepping into the office every day? (See also: <a href="http://www.wisebread.com/5-money-conversations-couples-should-have-before-retirement?ref=seealso" target="_blank">5 Money Conversations Couples Should Have Before Retirement</a>)</p> <h2>8. You are confident in your post-work plans</h2> <p>Many people continue working because they honestly don't know what they'd do otherwise. But if you have mapped out your retirement life, have a good sense of how you'll fill your days, and feel excited about what you want to do, that's a sign you may be ready to retire. If work is actually preventing you from moving forward on your plans, maybe it's time to think seriously about stopping work, assuming you are also ready financially.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F8-signs-its-time-to-retire&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F8%2520Signs%2520Its%2520Time%2520to%2520Retire.jpg&amp;description=8%20Signs%20Its%20Time%20to%20Retire"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/8%20Signs%20Its%20Time%20to%20Retire.jpg" alt="8 Signs It's Time to Retire" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/8-signs-its-time-to-retire">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-expensive-mistakes-of-the-newly-retired">9 Expensive Mistakes of the Newly Retired</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-enjoy-retirement-if-you-havent-saved-enough">How to Enjoy Retirement If You Haven&#039;t Saved Enough</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-reasons-why-your-retirement-cost-calculations-may-be-wrong">8 Reasons Why Your Retirement Cost Calculations May Be Wrong</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/these-5-expenses-will-probably-cost-you-a-lot-less-in-retirement">These 5 Expenses Will Probably Cost You a Lot Less in Retirement</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) downsizing expenses Health leisure required minimum distributions saving money social security working Thu, 14 Sep 2017 08:00:06 +0000 Tim Lemke 2020506 at http://www.wisebread.com 6 Age Milestones That Impact Your Retirement http://www.wisebread.com/6-age-milestones-that-impact-your-retirement <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/6-age-milestones-that-impact-your-retirement" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/piggy_bank_with_happy_birthday_party_glasses.jpg" alt="Piggy bank with Happy birthday party glasses" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Legally significant ages seem to cluster early in life &mdash; you can drive at 16, vote, smoke, and enlist at 18, and drink at 21. After that, you might think that there are no more important age milestones to reach.</p> <p>But there <em>are</em> more important milestones you'll reach as you near retirement. Here are the important ages that can impact your retirement, and the reasons why they were chosen.</p> <h2>Age 50 &mdash; Take advantage of catch-up contributions</h2> <p>IRAs and 401(k) retirement plans are tax-advantaged, which means you receive a tax-break by contributing to them. For traditional IRAs and 401(k)s, you contribute pretax income, which means you lower your overall tax burden for the year, and the money grows tax-free. With Roth IRAs and 401(k)s, you contribute post-tax dollars, and the money still grows tax-free. Since high income earners could potentially avoid paying any taxes at all if they simply contributed a large enough portion of their income, there are limits to the amount of money you can contribute each year. As of 2017, you can contribute an annual total of $5,500 to an IRA and $18,000 to a 401(k).</p> <p>However, there is something called a catch-up provision for anyone over age 50. If you've reached your half-century mark, you can contribute an additional $1,000 to an IRA (for a $6,500 total contribution) and an additional $6,000 to a 401(k) (for a $24,000 total contribution). Taking advantage of these catch-up provisions can help you to make sure your retirement is more secure.</p> <h2>Age 59&frac12; &mdash; Take penalty-free withdrawals from tax-sheltered accounts</h2> <p>Since you fund traditional IRAs and 401(k)s with pretax income, every withdrawal you make will be taxed at your ordinary income tax rate. But if you try to withdraw money from either of these types of accounts before you have reached age 59&frac12;, then you will also owe a 10 percent early withdrawal penalty on the amount you withdraw, in addition to the ordinary income tax.</p> <p>You are not required to take withdrawals as of age 59&frac12; &mdash; that is just the earliest age that you are allowed to do so without incurring a penalty.</p> <p>You might be wondering why 59&frac12; is the magic number. Congress decided to use this age because life insurance actuarial tables consider you to be 60 years old once you have reached age 59 and six months, and at the time that the rules were put in place, 60 was a relatively common age for retirement.</p> <h2>Age 62 &mdash; Take early Social Security retirement benefits</h2> <p>Social Security beneficiaries reach eligibility as of age 62. This is the very earliest that you can access your benefits from Social Security, although taking your benefits the moment you've blown out 62 candles is not necessarily a good idea.</p> <p>Social Security changes the benefit amount based on whether you retire before or after your full retirement age. This means the longer you wait, the more money you will see in your benefit checks &mdash; to the tune of about an additional 8 percent per year. If you take benefits before hitting your full retirement age, your payments will be permanently reduced. (See also: <a href="http://www.wisebread.com/5-questions-to-ask-before-you-start-claiming-your-social-security-benefits?ref=seealso" target="_blank">5 Questions to Ask Before You Start Claiming Your Social Security Benefits</a>)</p> <p>These early benefits have been around for quite some time. Early retirement at age 62 was introduced for women only in 1956, and the option was extended to men in 1961. Women were offered this benefit first because of the concern for widows without an income, although it became clear that men were also very interested in the option of taking early benefits.</p> <h2>Age 64 and 9 months &mdash; Enroll in Medicare</h2> <p>The initial seven-month enrollment period for Medicare spans from the three months before your 65th birthday, through the month of your birthday, and the three months following your birthday. Enrolling during this period means you will pay no fees or penalties for enrollment, and enrolling within the three months before your 65th birthday means that you will have Medicare coverage starting on the first day of your birthday month. Enrolling during your birthday month or afterward will result in a delayed start for coverage.</p> <p>If you miss the initial enrollment period for Medicare, you can still sign up during the general enrollment period between January 1 and March 31 of each year, and your coverage will begin July 1 of that year. However, there is a late penalty for missing your initial enrollment period. For Medicare Part A, your monthly premium will increase by 10 percent for twice the number of years that you could have had Part A but didn't sign up.</p> <p>If you miss the initial enrollment period for Part B, you will have to pay the late enrollment penalty for as long as you are a Medicare beneficiary. The monthly premium will increase by 10 percent for each full 12-month period that you were eligible for Part B but did not sign up.</p> <h2>Age 66 or 67 &mdash; Reach full Social Security retirement age</h2> <p>Your full retirement age is the point at which you receive your full benefits from Social Security. When Social Security was first enacted, 65 was chosen as the retirement age. In 1983, to deal with the coming demographic shift that would occur when baby boomers started to retire, Congress gradually increased the full retirement age from 65 to 67, based on birth year:</p> <table> <tbody> <tr> <td> <p><strong>Birth Year</strong></p> </td> <td> <p><strong>Full Retirement Age</strong></p> </td> </tr> <tr> <td> <p>1943-1954</p> </td> <td> <p>65</p> </td> </tr> <tr> <td> <p>1955</p> </td> <td> <p>66 and 2 months</p> </td> </tr> <tr> <td> <p>1956</p> </td> <td> <p>66 and 4 months</p> </td> </tr> <tr> <td> <p>1957</p> </td> <td> <p>66 and 6 months</p> </td> </tr> <tr> <td> <p>1958</p> </td> <td> <p>66 and 8 months</p> </td> </tr> <tr> <td> <p>1959</p> </td> <td> <p>66 and 10 months</p> </td> </tr> <tr> <td> <p>1960 and later</p> </td> <td> <p>67</p> </td> </tr> </tbody> </table> <h2>Age 70&frac12; &mdash; Begin taking required minimum distributions</h2> <p>When you put money into a tax-deferred account like a traditional IRA or 401(k), you don't have to pay taxes on that money until you withdraw it. While this helps your tax burden during your career, you do need to remember that Uncle Sam will want his cut eventually.</p> <p>This is why the IRS requires each account holder to begin withdrawing money during the year he or she reaches age 70&frac12;. There is a minimum withdrawal you must take, and failing to take out the minimum means the IRS will take 50 percent of the amount you should have withdrawn.</p> <p>To figure out your required minimum distribution (RMD), you need to calculate it based upon the balance of each of your tax-deferred accounts as of December 31 of the previous year, and the correct IRS distribution table. These tables calculate life expectancy based upon your age and give you a number (corresponding to the number of years they expect you to live), by which you will divide your balance to determine your RMD.</p> <p>It may seem that 70&frac12; is an arbitrary number, but there is a lot of thought put into this milestone age. The IRS makes a distinction between people born in the first half of the year, and those born in the second half. If your birthday falls between July 1 and December 31, you don't officially have to take an RMD until the year you turn 71. This means that those with birthdays in the first half of the year take their first RMD the year they turn 70, and those with a later birthday take their first RMD the year they turn 71 &mdash; which averages out to 70&frac12;.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F6-age-milestones-that-impact-your-retirement&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F6%2520Age%2520Milestones%2520That%2520Impact%2520Your%2520Retirement.jpg&amp;description=6%20Age%20Milestones%20That%20Impact%20Your%20Retirement"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/6%20Age%20Milestones%20That%20Impact%20Your%20Retirement.jpg" alt="6 Age Milestones That Impact Your Retirement" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/emily-guy-birken">Emily Guy Birken</a> of <a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-tax-day-is-april-15-and-other-weird-financial-deadlines">Why Tax Day Is April 15 and Other Weird Financial Deadlines</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-signs-its-time-to-retire">8 Signs It&#039;s Time to Retire</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-face-4-ugly-truths-about-retirement-planning">How to Face 4 Ugly Truths About Retirement Planning</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-penalty-free-way-to-withdraw-retirement-money-early">The Penalty-Free Way to Withdraw Retirement Money Early</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/if-you-want-your-401k-to-grow-stop-doing-these-6-things">If You Want Your 401K to Grow, Stop Doing These 6 Things</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) ages catch-up contributions fees IRA milestones penalties required minimum distributions rmd social security taxes Wed, 23 Aug 2017 08:00:08 +0000 Emily Guy Birken 2007140 at http://www.wisebread.com 7 Ways Retirement Planning Changes When You're Single http://www.wisebread.com/7-ways-retirement-planning-changes-when-youre-single <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-ways-retirement-planning-changes-when-youre-single" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/senior_woman_relaxing.jpg" alt="Senior woman relaxing" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>It can sometimes feel like everything is created with couples in mind &mdash; including retirement planning. When every article, tip, and suggestion for retirement starts with the assumption that you are married, you might be forgiven for assuming that retiring solo is just a matter of cutting retirement planning advice in half.</p> <p>But there are specific challenges and concerns (not to mention benefits!) that single retirees need to prepare for before they hang up their careers. Here are seven ways that preparing for retirement is different for singles.</p> <h2>1. You need to have adequate disability insurance</h2> <p>Relying on no one but yourself can feel pretty liberating. Not only do you answer to no one but yourself, but you also get to enjoy the fruits of your own labor without having to compromise.</p> <p>The downside to this, however, is figuring how you will protect yourself in case your income runs dry. While anyone who relies on income from their job should carry adequate disability insurance, this is even more important for single workers who may not have another safety net to catch them if a disability makes it impossible to work. You need to protect yourself, your income, and your assets from the possibility you may be unable to work, even before you start the nitty-gritty of retirement planning.</p> <p>Even if you have disability insurance through work, that may not be adequate to protect you from a loss of income. Make sure you know exactly how much your work insurance covers and for how long, so that you are not left without an income if it's not enough. Also, don't assume that you are immune to potential disabilities just because the most strenuous thing you do at work is operate the copy machine. Illness is behind the majority of long-term absences from work &mdash; and anyone can get sick at any time.</p> <h2>2. Prepare for your health care needs</h2> <p>Health care costs are a major concern for all retirees, since this is one aspect of your retirement budget that you may not have control over. According to a 2016 Fidelity study, a 65-year-old couple retiring in 2016 would need $260,000 for health care to cover their medical and health care needs for the rest of their lives.</p> <p>That dollar figure is frightening no matter your marital status, and it's important that single people recognize that their costs may be higher than just half of a couple's health care costs. That's because many married couples can help each other to remain independent in ways that single retirees would need to pay for. For instance, you may need to pay for someone to help you at home or for entry into a retirement community sooner than a married couple would need those things.</p> <p>While <a href="http://www.wisebread.com/is-long-term-care-insurance-worth-it" target="_blank">long-term care insurance</a> has often been touted as a method of mitigating these expenses for both married and single retirees, the cost of this kind of insurance has become prohibitive. To prepare for the possibility of bad health in retirement, singles should also explore creative solutions to long-term health issues. For instance, taking in a rent-free roommate who helps with daily tasks is not only money-saving, but also offers social support. Planning ahead for potential solutions to health and mobility issues can provide you with some imaginative solutions that money can't buy.</p> <h2>3. Assign a power of attorney</h2> <p>It's easy to assume that you can skip the whole issue of legal planning if you are single and childless, but that's not necessarily true. For instance, do you know who will take care of your health care or financial decisions if you should become incapacitated? You need to assign a power of attorney to make sure that your wishes are followed if you cannot make your own decisions.</p> <p>Your power of attorney also needs to know where to find your important papers and should be kept apprised of any changes in your life or directives. This is the person who will pay your bills and handle your advanced directive if you fall ill. You can either pick someone in your life whom you trust, or hire a professional whom you trust to fill that role.</p> <h2>4. Invest in tax-deferred retirement vehicles during your career</h2> <p>Single workers miss out on a number of tax breaks that are offered to married couples. According to Jane Hodges writing for <em>The Wall Street Journal</em>, &quot;Without child tax credits, a spouse exemption, and no one with whom to realize the benefits of filing jointly, singles can take a pretty big tax punch during peak earning years.&quot;</p> <p>For this reason, single workers have a particular need to invest in tax-advantaged retirement vehicles, such as 401(k) and traditional IRA accounts. These vehicles allow you to make pretax contributions, which lowers your taxable income while also helping you prepare financially for retirement.</p> <h2>5. Consider rolling over into a Roth IRA before age 70&frac12;</h2> <p>Of course, Uncle Sam will still want his cut of the income you put in tax-deferred retirement accounts, which can cause a nasty tax surprise for singles post-retirement. That's because withdrawals from tax-deferred retirement accounts are taxed as ordinary income, and single retirees still do not have access to the tax breaks offered to married couples.</p> <p>This can become a serious problem for some single retirees as of age 70&frac12; because of the required minimum distributions on tax-deferred accounts. Traditional IRAs and 401(k)s require that retirees begin withdrawing a minimum distribution (based on a percentage of total assets) at age 70&frac12;, which means you might be facing a surprisingly high tax bracket upon reaching age 70&frac12;. You may also be forced to take more money from your accounts than you want or need because of the required minimum distribution.</p> <p>To protect yourself from this potentially painful tax bite, consider rolling over a portion of your assets from tax-deferred funds to a Roth IRA account before age 70&frac12;. Since Roth accounts are funded with after-tax dollars, you will have to pay ordinary income tax on your rollover. However, this will allow you to decide when you will pay those taxes and give you more freedom to keep your money invested if you don't need it.</p> <h2>6. Hold off on Social Security for as long as you can</h2> <p>Options for optimizing Social Security benefits are much simpler for singles. Basically, the only way to get a higher monthly benefit if you are single is to wait. The longer you can wait to receive your benefits between age 62 (the earliest you can take benefits) and 70 (when the benefits stop growing), the more money you will see with every monthly check. Even if you cannot wait until age 70, or your full retirement age (currently age 66), know that each month you delay taking your Social Security retirement benefits means a little more money in your checks.</p> <p>It's also important to remember that the federal government does not necessarily define single the same way you do. If you are divorced but were married for at least 10 years, then you are eligible for spousal benefits based on your ex's income record. However, you will collect your spousal benefits concurrently with your retirement benefits, so you will only see an increased benefit if your ex-spouse made a lot more money than you did.</p> <h2>7. Embrace the opportunities</h2> <p>While the IRS and Social Security Administration may both make marriage look like the better option &mdash; at least financially &mdash; it's important for singles to remember how many more opportunities they have available to them than do married couples. That's because a footloose and fancy-free retiree has far fewer obstacles to retirement than does a married couple.</p> <p>For instance, retiring abroad can be a very economical (not to mention fun) choice, and it is much easier for a single retiree to pull up roots than it is for a couple. Similarly, traveling in retirement can be much cheaper for one, since you do not have to compromise on where you are willing to save money.</p> <p>Single retirees can also explore alternative living options, like living with several friends &mdash; there's an excellent reason why all the Golden Girls were single, after all &mdash; or taking in a younger boarder or roommate, or even moving to a cheaper state. Making these decisions solo means you can find the living situation or opportunity that best fits your needs, wants, and temperament.</p> <!--<h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><script async defer src="//assets.pinterest.com/js/pinit.js"></script> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/7%20Ways%20Retirement%20Planning%20Changes%20When%20Youre%20Single.jpg" alt="7 Ways Retirement Planning Changes When You're Single" width="250" height="374" /></p> </div>--><!--<h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><script async defer src="//assets.pinterest.com/js/pinit.js"></script> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/7%20Ways%20Retirement%20Planning%20Changes%20When%20Youre%20Single.jpg" alt="7 Ways Retirement Planning Changes When You're Single" width="250" height="374" /></p> </div>--><br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/emily-guy-birken">Emily Guy Birken</a> of <a href="http://www.wisebread.com/7-ways-retirement-planning-changes-when-youre-single">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-retirement-planning-steps-late-starters-must-make">7 Retirement Planning Steps Late Starters Must Make</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you">Choosing a Retirement Account: What&#039;s Available, and What’s Best for You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-is-when-you-should-borrow-from-your-retirement-account">This Is When You Should Borrow From Your Retirement Account</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) advice disability insurance health care IRA loss of income not married power of attorney retirement planning singles Fri, 14 Jul 2017 09:01:05 +0000 Emily Guy Birken 1982441 at http://www.wisebread.com How to Save for Retirement When You Are Unemployed http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-save-for-retirement-when-you-are-unemployed" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/latin_american_woman_saving_in_a_piggybank.jpg" alt="Latin American woman saving in a piggy bank" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>When you're unemployed, saving for retirement may be the last thing on your mind. It may seem impossible to save for the future when you have no steady income to even pay basic bills.</p> <p>But depending on your situation, it may still be possible to build your nest egg even if you're not working full-time. Here are some tools and suggestions for keeping an eye on the future during a period of joblessness.</p> <h2>Familiarize yourself with IRAs</h2> <p>Individual retirement accounts (IRAs) are great for people who don't have access to employer-sponsored retirement plans like 401(k) accounts. A traditional IRA is similar to a 401(k), in that any contributions are deducted from whatever taxable income you have. With a Roth IRA, on the other hand, earnings are taxed up front, but any gains you have won't be taxed when you withdraw money at retirement age.</p> <p>IRAs are useful for people who are self-employed, or who earn money inconsistently through part-time or freelance work. So if you're not employed full-time but still have some earned income, these accounts can help you save.</p> <h2>Think of retirement savings as a necessary expense</h2> <p>When you're unemployed, it's important to get a handle on all of your expenses so that you know where you need to cut. You may find that there are a lot of costs (luxury purchases, eating out, cable TV) that can be taken out of your household budget, while other expenses (food, electricity, debt payments) are more necessary. If you think of retirement savings as a necessity, you will be forced to cut spending elsewhere.</p> <h2>Roll over your old 401(k)</h2> <p>If you've been laid off from a job, you will no longer be able to contribute to the 401(k) you may have had from your employer. But the account will still exist and the money is still yours. You can let the old 401(k) account sit, but it's better to roll it into a traditional individual retirement account (IRA). The IRA will give you more flexibility and investment options, and may also have lower fees. And you can begin contributing to it once you have any earned income at all.</p> <h2>Focus on rebalancing</h2> <p>You may not be able to add much to your retirement accounts, but you can work to make sure they are optimized. This means making sure you have the right mix of investments based on your retirement date, and getting the optimal blend of stocks in various industries and asset classes. It's always smart to examine your portfolio to ensure you are not over- or underinvested in any one area.</p> <h2>Look for higher bank interest rates</h2> <p>If you're not taking in much income for the time being, you need to have your cash savings working for you. That means any cash savings you have should generate as much income as possible. Interest rates are still quite low, but many online banks offer interest rates on CDs and savings accounts that are higher than average.</p> <h2>Avoid the temptation to cash out</h2> <p>It may be tempting to take money out of your retirement funds, but you should avoid it if at all possible. One of the best ways to see your retirement savings grow is to let your investments do their thing. You can see a meaningful increase in your retirement savings just from market gains, even if you're not contributing for the time being.</p> <p>Withdrawing from retirement accounts, however, has consequences. First, any money you take out has no chance to grow and help you expand your overall retirement savings. Second, there are penalties and taxes associated with taking money out of retirement accounts early. (See also: <a href="http://www.wisebread.com/5-questions-to-ask-before-you-borrow-from-your-retirement-account?ref=seealso" target="_blank">5 Questions to Ask Before You Borrow From Your Retirement Account</a>)</p> <h2>Continue to focus on growth, if you can</h2> <p>If you are unemployed and have some investments in a taxable brokerage account, you may be tempted to shift them to dividend stocks or other income-producing investments. This can give you extra income at a time when you may need it. But making this kind of adjustment could have a long-term negative impact on the overall growth of your portfolio. If dividends, bonds, or other income-focused investments will help you keep the lights on, fine. But it's best to focus on finding other sources of income, or reduce your spending first before going this route.</p> <h2>Reinvest dividends, if you can</h2> <p>If you do have dividend stocks already, you can still contribute to your retirement portfolio by reinvesting any dividend income you get from stocks. You may be tempted to use that investment income to pay bills and help get through your unemployed period, but if you can get by without it, direct the dividends to buy more stocks and other investments instead. Even small contributions added to your retirement accounts can add up to considerable savings over time.</p> <h2>Get your spouse involved</h2> <p>Perhaps you never thought to include your spouse in retirement planning because you felt it wasn't necessary while you were working. Now his or her income can be directed to help you save. This may be a challenge, since they are now also working to help pay more of the bills. But there are some ways to use your spouse's income for your own retirement accounts. If you have a traditional or Roth IRA, your spouse's earned income can go toward your account. (Note: This is only allowed if you file your taxes jointly.)</p> <h2>Plan to pay into accounts later</h2> <p>If you are unemployed but expect to be working in short order, you can postpone contributions to your IRA and add money later, even if it's after the end of the year. In fact, you can contribute to an IRA all the way up until April 15 of the following year. So for example, let's say you planned to max out your IRA by making monthly payments. (This would be about $458 monthly for a total of $5,500 for the year &mdash; the maximum amount allowed by the IRS for people under 50.) But let's say you are out of work from August through October of that year. You can hold off on contributing during that time and make up the difference in later months, even the first few months of the following year, if necessary.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fhow-to-save-for-retirement-when-you-are-unemployed&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FHow%2520to%2520Save%2520for%2520Retirement%2520When%2520You%2520Are%2520Unemployed.jpg&amp;description=How%20to%20Save%20for%20Retirement%20When%20You%20Are%20Unemployed"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/How%20to%20Save%20for%20Retirement%20When%20You%20Are%20Unemployed.jpg" alt="How to Save for Retirement When You Are Unemployed" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-traps-to-avoid-with-your-401k">7 Traps to Avoid With Your 401(k)</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/which-retirement-account-is-right-for-you">Which Retirement Account Is Right for You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-valid-reasons-not-to-contribute-to-your-401k">6 Valid Reasons Not to Contribute to Your 401(k)</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-reasons-every-millennial-needs-a-roth-ira">6 Reasons Every Millennial Needs a Roth IRA</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement 401(k) contributions dividends interest rates job loss loss of income rebalancing Roth IRA saving money stocks traditional ira unemployment Wed, 12 Jul 2017 09:00:14 +0000 Tim Lemke 1979037 at http://www.wisebread.com Best Money Tips: How to Get the Most Out of Your 401(k) http://www.wisebread.com/best-money-tips-how-to-get-the-most-out-of-your-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/best-money-tips-how-to-get-the-most-out-of-your-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/401k_savings_jar_538810408.jpg" alt="Learning how to get the most out of a 401(k)" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Welcome to Wise Bread's <a href="http://www.wisebread.com/topic/best-money-tips">Best Money Tips</a> Roundup! Today we found articles on ways to get the most out of your 401(k), simple hacks that will change how you travel, and summer tax scams to watch out for.</p> <h2>Top 5 Articles</h2> <p><a href="https://dyernews.com/3-tips-for-to-getting-the-most-out-of-your-401k/">3 Tips For Getting the Most Out of Your 401(k)</a> &mdash; Re-evaluate your contributions every so often, especially if your finances have changed &mdash; due to a promotion or a raise, for example. [Dyer News]</p> <p><a href="https://www.popsugar.com/smart-living/Travel-Hacks-43667791">These 3 Very Simple Hacks Will Change How You Travel Forever</a> &mdash; Remember that you are a guest when you travel to foreign countries. It's your responsibility to learn about the traditions of the place you're visiting and to respect the locals' way of life. [PopSugar Smart Living]</p> <p><a href="http://www.dontmesswithtaxes.com/2017/06/irs-warns-of-four-hot-summer-tax-scams.html">IRS warns of four hot summer tax scams</a> &mdash; Robocall scammers might invoke the IRS e-payment option, EFTPS, to sound more legit. Don't fall for it! [Don't Mess With Taxes]</p> <p><a href="https://moneyaware.co.uk/2017/06/7-ways-to-save-on-your-food-budget/">7 Ways to Save On Your Food Budget</a> &mdash; Try the store brand versions of the products that you usually buy name brand, and see if you can tell the difference. If store brand works for you, start buying that instead. [StepChange MoneyAware]</p> <p><a href="http://moneypantry.com/pharmacy-rewards-programs/">11 Best Pharmacy Rewards Programs: Earn Rewards for Shopping at Your Local Drugstore</a> &mdash; These pharmacy and drugstore loyalty programs offer discounts, members-only coupons, and points that you can redeem for store credit. [Money Pantry]</p> <h2>Other Essential Reading</h2> <p><a href="https://www.csmonitor.com/Technology/2017/0622/Facebook-wants-to-shift-its-focus-to-meaningful-online-communities-and-connections">Facebook wants to shift its focus to 'meaningful' online communities and connections</a> &mdash; Facebook CEO Mark Zuckerberg wants the social network to be a place where people can build communities with shared interests. [The Christian Science Monitor]</p> <p><a href="https://timemanagementninja.com/2017/06/5-tips-to-be-more-present-and-productive/">5 Tips to Be More Present and Productive</a> &mdash; Make eye contact when you are having a conversation with someone and show them that they have your full attention. [Time Management Ninja]</p> <p><a href="https://lifehacks.io/when-you-start-learning-a-new-language/">These 5 Amazing Things Will Happen When You Start Learning a New Language</a> &mdash; Learning a new language opens up career opportunities that weren't available to you before. [Life Hacks]</p> <p><a href="http://www.everybodylovesyourmoney.com/2017/06/26/invest-in-yourself.html">10 Healthy and Cost-Friendly Ways to Invest In Yourself</a> &mdash; If you're not working in your field of choice, start researching how to get the job you want. [Everybody Loves Your Money]</p> <p><a href="http://www.cashthechecks.com/3-steps-start-investing-like-millionaire/">3 Steps To Start Investing Like A Millionaire</a> &mdash; Max out your contributions to tax-advantaged investments, like the Roth IRA, to reduce your tax burden. [Cash The Checks]</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/amy-lu">Amy Lu</a> of <a href="http://www.wisebread.com/best-money-tips-how-to-get-the-most-out-of-your-401k">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-silly-reasons-people-dont-invest-but-should">9 Silly Reasons People Don&#039;t Invest (But Should)</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-dumb-401k-mistakes-smart-people-make">5 Dumb 401(k) Mistakes Smart People Make</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-investing-concepts-to-ignore-and-10-to-follow">10 Investing Concepts to Ignore and 10 to Follow</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-boost-your-odds-of-retiring-early">5 Ways to Boost Your Odds of Retiring Early</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment 401(k) best money tips Wed, 28 Jun 2017 08:31:10 +0000 Amy Lu 1973676 at http://www.wisebread.com 5 Biggest Ways Millennials Risk Their Retirements http://www.wisebread.com/5-biggest-ways-millennials-risk-their-retirements <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-biggest-ways-millennials-risk-their-retirements" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/sad_man_has_spent_all_his_money.jpg" alt="Sad man has spent all his money" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>If you're stressing out about whether or not you're saving enough for retirement, you're not alone. Millennials are among those struggling the most with this dilemma. According to a 2016 study, 64 percent of working millennials believe they'll never save a $1 million nest egg.</p> <p>Why are millennials so worried? Sadly, this age group is prone to making less-than-ideal money moves that could hurt them later in life. Let's review the five biggest ways in which millennials are risking their retirement. (See also: <a href="http://www.wisebread.com/4-things-millennials-should-do-today-to-prepare-for-retirement?ref=seealso" target="_blank">4 Things Millennials Should Do Today to Prepare for Retirement</a>)</p> <h2>1. Delaying the start of retirement savings</h2> <p>Nearly four in 10 millennials haven't started saving for retirement. The same 2016 survey found that 61 percent of females and 50 percent of males belonging to the millennial generation have their finances stretched &quot;too thin&quot; to save for retirement. Even worse, 54 percent of women and 43 percent of men of this generation are living paycheck to paycheck.</p> <p>However, delaying retirement contributions has a serious impact. If a worker were to deposit just $50 per month into a 401(k) with an 8 percent annual rate of return for 10 years, they would end up with around $9,200 at the end of the 10-year period. The IRS sets a cap on how much you can contribute to a retirement account per year, which for 2017, is $18,000 to a 401(k) and $5,500 to an IRA. If you keep delaying your contributions to your retirement accounts, you'll never be able to fully make up that gap.</p> <h2>2. Taking out high student loans</h2> <p>Student Loan Hero estimated the average student loan balance for a member of the Class of 2016 at $37,172, up 6 percent from the year before. With so many Americans still believing in the importance of postsecondary education, it's easy to see how the average student loan continues to climb. Studies have shown that higher education still leads to better earnings potential, after all.</p> <p>Still, loans are rising too fast. Back in 1993, only 45 percent of college graduates had a student loan and their average balance was $15,000 in inflation-adjusted dollars. By having to pay down a high student loan, millennials are foregoing sizable contributions to their retirement accounts.</p> <p>Assuming a $30,000 balance on a federal direct loan with a 4 percent interest rate, you would pay about $304 per month. That's $3,648 in missed retirement contributions every year. By the time that a millennial pays back that standard loan (10 years), they would have missed out on $54,259 in retirement savings, assuming an 8 percent annual return.</p> <h2>3. Putting their kids' college fund before their own retirement fund</h2> <p>Given the tough time that they're having paying back their own student loans, 19 percent of millennial parents say education for their children is their top financial priority, according to TD Ameritrade. Those millennial parents are socking away an average $310 every month for their children's college fund.</p> <p>Every month, these millennial parents are hit with the double whammy of paying down their own student loans and then putting money away for their children's education. No wonder millennial parents ranked saving for retirement third on their list of financial priorities. (See also: <a href="http://www.wisebread.com/why-saving-too-much-money-for-a-college-fund-is-a-bad-idea?ref=seealso" target="_blank">Why Saving Too Much Money for a College Fund Is a Bad Idea</a>)</p> <h2>4. Not setting a retirement savings goal</h2> <p>If you don't know where you're going, you'll never know when you get there. According to the Employment Benefit Research Institute, across all generations, workers age 25&ndash;34 are the smallest percentage of individuals who have tried to calculate how much money they'll need to live comfortably in retirement.</p> <p>By not setting a retirement savings goal, millennials may be misjudging how much to contribute from every paycheck toward their retirement accounts. This explains the low average contribution levels per paycheck from millennial men and women &mdash; 7.3 and 5.7 percent, respectively. In 2016, 75 percent of workers age 25&ndash;34 said their total savings and investments were under $25,000.</p> <h2>5. Accepting a first-job salary offer without negotiation</h2> <p>Faced with a countdown to start paying back student loans, many millennials are so eager to start generating income they skip salary negotiations. According to a survey from NerdWallet and Looksharp, of 8,000 recent grads that entered the job market between 2012 and 2015, only 38 percent negotiated their salary offer from a new employer. The same survey revealed that 74.4 percent of employers had room for a 5 to 10 percent salary bump, 8.6 percent of them had room for a 11 to 20 percent salary bump, and 1.3 percent of them were willing or able to go above 20 percent.</p> <p>Do millennials skip negotiations over fear of having their job offer retracted? Not really: Close to nine out of 10 employers in the survey had never done such a thing.</p> <p>Failing to negotiate a starting salary is one of the biggest ways in which millennials are shortchanging their retirement. Let's crunch some numbers to see why. In 2016, The Collegiate Employment Research Institute found that the average starting salary for holders of a bachelor's degree was $41,880. Negotiating a 5 to 10 percent raise on your first-job salary offer would have yielded a starting salary ranging from $43,974 to $46,068. That would have been an extra $2,094 to $4,188 per year, enough to cover six to 13 $304 monthly payments on a $30,000 federal direct loan with a 4 percent interest rate.</p> <p>Saving for retirement may seem like a big hairy monster, but it doesn't need to be that way. By understanding what's keeping you from starting or saving enough for your retirement, you'll have a better chance of meeting your retirement saving goals. (See also: <a href="http://www.wisebread.com/how-to-face-4-ugly-truths-about-retirement-planning?ref=seealso" target="_blank">How to Face 4 Ugly Truths About Retirement Planning</a>)</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F5-biggest-ways-millennials-risk-their-retirements&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F5%2520Biggest%2520Ways%2520Millennials%2520Risk%2520Their%2520Retirements_0.jpg&amp;description=5%20Biggest%20Ways%20Millennials%20Risk%20Their%20Retirements"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/5%20Biggest%20Ways%20Millennials%20Risk%20Their%20Retirements_0.jpg" alt="5 Biggest Ways Millennials Risk Their Retirements" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/5-biggest-ways-millennials-risk-their-retirements">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-ways-retirement-planning-changes-when-youre-single">7 Ways Retirement Planning Changes When You&#039;re Single</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-signs-you-arent-saving-enough-for-retirement">10 Signs You Aren&#039;t Saving Enough for Retirement</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-is-when-you-should-borrow-from-your-retirement-account">This Is When You Should Borrow From Your Retirement Account</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-tax-day-is-april-15-and-other-weird-financial-deadlines">Why Tax Day Is April 15 and Other Weird Financial Deadlines</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) college funds IRA millennials not saving enough paycheck to paycheck salary negotiation savings goals student loans young adults Tue, 20 Jun 2017 08:00:11 +0000 Damian Davila 1961116 at http://www.wisebread.com 6 Reasons Every Millennial Needs a Roth IRA http://www.wisebread.com/6-reasons-every-millennial-needs-a-roth-ira <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/6-reasons-every-millennial-needs-a-roth-ira" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/her_company_and_savings_are_growing.jpg" alt="Her company and savings are growing" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>You're young. You're earning a bit of money. You know you need to start saving for retirement. So what's the easiest way to get started?</p> <p>One of the best vehicles for retirement savings for millennials is a Roth IRA, which is a type of account that offers a great selection of investment options and tax advantages. You contribute to a Roth with money that's <em>already </em>been subject to income tax, but when you withdraw it in retirement, everything you've earned in the fund is tax-free. In comparison, you don't pay tax on 401(k) or traditional IRA contributions until you take out the money in your later years. Both have benefits, but there are reasons you might particularly want to consider a Roth while you're young.</p> <p>It's easy to open a Roth IRA through most popular online brokerage firms, and you don't need a lot of money to get started. (See also: <a href="http://www.wisebread.com/5-retirement-accounts-you-dont-need-a-ton-of-money-to-open?ref=seealso" target="_blank">5 Retirement Accounts You Don't Need a Ton of Money to Open</a>)</p> <p>Here are some reasons why a Roth IRA is an essential part of any millennial's investment plan.</p> <h2>1. You may not have a 401(k)</h2> <p>If you work for a company, you may be offered a 401(k) plan, which allows you to invest in a variety of mutual funds and deduct any contributions from your taxable income. In many cases, your company will match a portion of any contributions you make.</p> <p>But these days, an increasing number of millennials are performing a variety of contract or &quot;gig&quot; jobs, rather than working full-time with a single company. A Roth IRA is not tied to an employer, so anyone can invest as long as they have earned income. If you are earning income but don't have access to a 401(k) plan, a Roth IRA may be your next best option.</p> <h2>2. You have a 401(k), but it's lousy</h2> <p>If you have a 401(k), it's wise to take advantage of it, especially if your company offers a match. But be aware that your 401(k) plan may not offer a wide range of things to invest in, and there may be high fees. This is why many financial planners suggest contributing to a 401(k) up to the company match, and then placing any additional savings in a Roth IRA, which may offer lower costs and more investment choices.</p> <h2>3. There are some tax advantages over a 401(k)</h2> <p>The key feature of a Roth IRA is that any investment gains can be withdrawn tax-free anytime after age 59&frac12;. If you are a millennial, this is a big deal &mdash; because unless you're making big bucks already, there's a good chance you will be in a higher tax bracket when you are older. This tax advantage is in contrast to a traditional IRA or a 401(k) plan, in which the tax advantages come upfront.</p> <h2>4. You can use it to pay for education</h2> <p>Typically, if you withdraw from an IRA before age 59 &frac12;, you must pay a 10 percent penalty on the withdrawal, plus any income tax. But the one big exception involves qualified higher education expenses.</p> <p>If you use a Roth IRA to pay for education, and limit your withdrawal to your contributions but not your earnings, there are no penalties or taxes. If you do decide to include Roth earnings in your withdrawal, those funds will be subject to income tax. This is a helpful feature for millennials, who may consider going back to school. Parents can also use a Roth IRA to pay for educational expenses for their children. Keep in mind that money from a Roth IRA could impact financial aid calculations. And of course, any money taken out for college means less money in the account for retirement.</p> <h2>5. You can get cash quickly in an emergency</h2> <p>It's not the best idea to withdraw money from a retirement account, because you'll lose out on the potential investment gains from the cash you take out. But, you are permitted to take out <em>your contributions</em> from a Roth IRA without penalty at any time. This makes them potentially useful as emergency savings accounts.</p> <p>Just remember it's only the money you put into the account, not the gains, that can be taken out penalty-free. When you're young and not earning much, it helps to have funds that you can tap whenever a crisis arises. Just don't get in the habit of using a Roth IRA this way too often; the account is meant for long-term investment gains and will benefit you the most if you leave your money alone to grow. (See also: <a href="http://www.wisebread.com/using-your-roth-ira-as-an-emergency-fund-ever-a-good-idea?ref=seealso" target="_blank">Using Your Roth IRA as an Emergency Fund &mdash; Ever a Good Idea?</a>)</p> <h2>6. You can keep contributing for as long as you want</h2> <p>If you are a millennial, it's impossible to know when you will retire. You may choose to retire at age 60, or keep working until you're 100. Thus, it makes sense to have an investment account that will let you contribute for as long as you want.</p> <p>One of the nice things about a Roth IRA is that you will not be forced to make withdrawals at any time. This is in contrast to traditional IRAs, which require you to begin pulling out money by age 70&frac12;. (This assumes, of course, that rules don't change between now and then.)</p> <p><em>(Editor's note: An eagle-eyed reader pointed out that any Roth earnings used to pay for education would be subject to income taxes. We've corrected the text to reflect that.)</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/6-reasons-every-millennial-needs-a-roth-ira">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-4"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/using-your-roth-ira-as-an-emergency-fund-ever-a-good-idea">Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-signs-your-retirement-is-on-track">8 Signs Your Retirement Is on Track</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-one-thing-will-get-you-to-1-million-tax-free">This One Thing Will Get You to $1 Million (Tax-Free!)</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-steps-to-starting-a-retirement-plan-in-your-30s">8 Steps to Starting a Retirement Plan in Your 30s</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) contributions emergency funds investing millennials Roth IRA self employed tax advantaged withdrawals Thu, 01 Jun 2017 09:00:11 +0000 Tim Lemke 1957901 at http://www.wisebread.com Don't Let Outdated Money Advice Endanger Your Money http://www.wisebread.com/dont-let-outdated-money-advice-endanger-your-money <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/dont-let-outdated-money-advice-endanger-your-money" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-503170570.jpg" alt="Woman ignoring outdated money advice" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>We've all received unsolicited financial advice, often from well-meaning relatives and friends. In many cases, this advice is useful. But a lot of &quot;classic&quot; personal finance advice simply hasn't aged well, and is now viewed as flawed. It's just not applicable anymore in today's world.</p> <p>Before you blindly accept any money advice you receive, be sure to do some additional research to find out if the advice is outdated. Here are nine examples of financial tips that may no longer apply.</p> <h2>&quot;Find a good employer and stay forever&quot;</h2> <p>Many of us know an older relative that began working at a company as a teenager and then retired from that same firm four decades later. Often, they walked away with a sizable pension and even health benefits for life. (See also: <a href="http://www.wisebread.com/if-youre-lucky-enough-to-receive-a-pension-here-are-6-things-you-need-to-do?ref=seealso" target="_blank">If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do</a>)</p> <p>This doesn't happen much anymore. Job security is not what it once was. A decline in labor unions means that guaranteed annual pay increases are a thing of the past. And a pension? Forget it.</p> <p>There's a lot of evidence now that switching jobs periodically will result in higher pay increases. And with the introduction of 401(k) plans, retirement savings are portable when your employer changes.</p> <h2>&quot;Pay off all of your debt as soon as you can&quot;</h2> <p>This is not so much &quot;bad&quot; advice, it's just less than ideal. Yes, it's a fine goal to remain as close to debt-free as possible, but in the current environment, carrying <em>some </em>kinds of low-interest debt may be more beneficial for you in the long run.</p> <p>Let's say you have a 30-year fixed-rate mortgage and were fortunate enough to lock in a low 3.5 percent interest rate. Let's also say stock market returns are averaging 7 percent per year. Over time, you're going to be better off using any extra money you have to invest in stocks rather than pay off your loan early. Generally speaking, if your investment returns outpace current interest rates, there's not much incentive to pay off debt early.</p> <h2>&quot;Technology is a fad&quot;</h2> <p>There was a time when some of the most savvy investors dismissed many tech stocks because they didn't understand them. The bubble collapse of advertising-dependent dot-com companies in the late 1990s didn't help the image of this sector. But there's no denying the fact that investing in technology companies with solid business models has been a clear path to wealth in recent years.</p> <p>All you need to do is look at the incredible returns for companies like Amazon, Apple, Netflix, Facebook, and others. A full 15 percent of companies in the S&amp;P 500 are technology companies, and they comprise most of the companies traded on the NASDAQ.</p> <p>Tech stocks are still notoriously volatile, but if you ignore the sector completely, you're ignoring some big potential returns.</p> <h2>&quot;Max out your 401(k)&quot;</h2> <p>While there's still little question that you should take advantage of your employer's 401(k) plan, people aren't quite as eager anymore to recommend that you contribute the maximum amount allowed. That's because over time, we've learned that the investment options and fees in many plans are rather lousy.</p> <p>Now, the best advice is to contribute to your 401(k) up to the amount that is matched by your employer. After that, begin contributing as much as you can into a Roth IRA, which offers tax-free growth and a wide array of investment choices.</p> <h2>&quot;Education debt is good debt&quot;</h2> <p>Attending college isn't a bad thing, but don't be cavalier about the impact that student loan debt will have on your financial wellbeing. College costs are increasing, along with stories of students and new grads being weighed down by tens or even hundreds of thousands of dollars of debt. (See also: <a href="http://www.wisebread.com/15-ways-to-pay-back-student-loans-faster?ref=seealso" target="_blank">15 Ways to Pay Back Student Loans Faster</a>)</p> <p>Carrying this debt can create a ripple effect that impacts your ability to save, purchase a home, or invest. And student loan debt can't be discharged in bankruptcy. Nowadays, any thought of borrowing for school should not be taken lightly.</p> <h2>&quot;Diversify your portfolio with a mix of stocks and bonds&quot;</h2> <p>Financial advisers have always emphasized diversification, but over time there's evidence that younger investors don't need to devote as much of their portfolio to fixed-income investments. Investing in bonds is useful for people who are nearing retirement age. But if you've got a long way to go before you stop working, you'll be best off with mostly stocks, which will offer much better returns and greater potential to meet your retirement goals.</p> <p>There is more risk and volatility associated with buying stocks, but a long time horizon will give you plenty of time to recoup any losses and then some (especially since people are living longer than ever). If you're not sure what stocks to invest in, pick a simple, low-cost index fund that mirrors the performance of the overall stock market.</p> <h2>&quot;Try to become a millionaire&quot;</h2> <p>There is an enormous amount of mystique surrounding the $1 million mark, and there's no question that saving that amount is something to be proud of. But a million dollars won't carry you as far as it once did. (See also: <a href="http://www.wisebread.com/5-reasons-being-a-millionaire-is-overrated?ref=seealso" target="_blank">5 Reasons Being a Millionaire Is Overrated</a>)</p> <p>If you plan to retire at age 60, keep in mind that you need your nest egg to last for 30 years or more. Will $1 million allow you to maintain your lifestyle and pay for things like long-term care? It's certainly possible to retire with $1 million, but you may still have to live conservatively to make the money last.</p> <h2>&quot;Always buy instead of rent&quot;</h2> <p>Homeownership is a powerful thing. It allows you to build equity and get some possible tax breaks while also offering you a place to live. But we've learned in recent years that it's not for everyone.</p> <p>Home prices are sky high in many areas of the country, and having a mortgage payment that's too expensive can make it hard to save for the future or even live comfortably. Remember that just because you qualify for a loan of a certain size doesn't mean that's a sensible loan size for you.</p> <p>The best advice now is to purchase a home if you believe you can make a large down payment and then comfortably make monthly payments while still saving for other future needs. If you're not quite there yet, don't fret. Renting is OK as long as you're still saving, investing, and building your net worth in other ways.</p> <h2>&quot;Buy Coca-Cola stock&quot;</h2> <p>For decades, you'd often hear investors gloat about the consistent, predictably great returns from Coke. Heck, the great <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett" target="_blank">Warren Buffett</a> owns a ton of shares and drinks several Cokes a day.</p> <p>It's still a good company, but anyone who bought Coca-Cola shares in recent years will have seen below-average market returns. Shares have risen just 18 percent in the last five years compared to nearly 70 percent for the S&amp;P 500. Quite simply, the company has had to work very hard to maintain profits in an age when people are increasingly concerned about the health impact of sugary drinks and snacks.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/dont-let-outdated-money-advice-endanger-your-money">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-you-putting-off-these-9-adult-money-moves">Are You Putting Off These 9 Adult Money Moves?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/millennial-millionaires-how-the-brokest-generation-can-also-become-the-richest">Millennial Millionaires: How the Brokest Generation Can Also Become the Richest</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-online-forums-thatll-help-you-reach-your-financial-goals">9 Online Forums That&#039;ll Help You Reach Your Financial Goals</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/10-ways-to-increase-your-net-worth-this-year">10 Ways to Increase Your Net Worth This Year</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-financial-basics-every-new-grad-should-know">The Financial Basics Every New Grad Should Know</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Personal Finance 401(k) bad advice debt education investing pensions retirement saving money stocks student loans Fri, 19 May 2017 09:00:09 +0000 Tim Lemke 1948480 at http://www.wisebread.com We Do the Math: Save for Retirement or Pay Off Credit Card Debt? http://www.wisebread.com/we-do-the-math-save-for-retirement-or-pay-off-credit-card-debt <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/we-do-the-math-save-for-retirement-or-pay-off-credit-card-debt" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-514332608.jpg" alt="Couple wondering if they should save for retirement or pay off debt" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Should you save for retirement or pay off credit card debt? If you're carrying a card balance, you may be wrestling with whether to put all your resources into attacking the debt, or start building your retirement nest egg while you slowly pay off debt.</p> <p>Which one will give you a better net worth? There's no simple answer. For some people the situation may warrant clearing credit card debt first; for others, it's better to start investing right away. To figure out which scenario is better in a given situation, we'll need to do some math. Don't worry, we'll show you how to do it in a few easy steps.</p> <h2>Step 1: Gather important numbers about your debt and your retirement plan</h2> <p>First, look through your credit card statements and accompanying information to pull up the following numbers:</p> <ul> <li>Credit card debt. You'll find this on the front of your credit card statement.<br /> &nbsp;</li> <li>Credit card interest rate, or APR (Annual Percentage Rate). You'll find this further down on your statement, in a section labeled &quot;Interest Charged&quot; or something similar.<br /> &nbsp;</li> <li>Minimum payment. You'll find this in your card's terms and conditions, under a discussion about how minimum payments are calculated. It will probably be a percentage, but there may also be a flat sum.</li> </ul> <p>Next, consider any retirement plan you are enrolled in or have available. What is the average annual return? You can identify past returns by reviewing your retirement account statements. For example, your 401(k) plan account may list your annual return. Note that past returns don't guarantee or predict future returns, but we'll use the average annual return as a proxy for future returns in this case, knowing that if our portfolio takes a long-term downward turn, our calculations will change.</p> <p>Finally, how much extra do you have in your monthly budget that you could put toward credit card payments, retirement investments, or both?</p> <p>Follow along as we consider a hypothetical debt situation and retirement opportunity. Let's say there's $500 in our monthly budget, which equals $6,000 annually ($500 x 12 months = $6,000) to put toward debt or retirement.</p> <p>Currently, the balance on our credit card is $5,000. Our APR is 22%. Our minimum monthly payment is 3% of our outstanding balance or $25, whichever is greater.</p> <p>Our employer offers a 401(k) plan. For the sake of keeping this illustration simple, we'll say our employer doesn't match employee contributions and we choose to make taxable contributions with a Roth designated account within the 401(k).</p> <p>In reality, you might choose instead to make tax-deductible contributions to a&nbsp;<a href="http://www.wisebread.com/how-to-set-up-an-ira-to-build-wealth?ref=internal" target="_blank">traditional retirement account</a>. With a Roth 401(k) there are no immediate tax benefits, which makes our calculations simpler and therefore better suited for this purpose.</p> <p>We'll say the default investment in our 401(k) is a&nbsp;<a href="http://www.wisebread.com/the-4-best-investments-for-lazy-investors?ref=internal" target="_blank">target-date mutual fund</a> with an average annual return of 6.3% since its inception. We know that future performance is unpredictable. But to run the numbers for the retirement vs. debt decision, we'll apply an annual return of 6% to our retirement account.</p> <p>We'll look at the retirement account and credit card balance after five years to compare the two choices: 1) making minimum payments on our card balance so we can start investing right away, or 2) putting all our extra money toward our credit card debt before we consider retirement investing.</p> <p>In both scenarios, we'll assume that we won't make additional charges on our credit card. In addition, we'll contribute to our retirement account when we have money available to invest.</p> <h2>Step 2: Calculate net worth if you prioritize retirement savings over paying off credit card debt quickly</h2> <p>In this scenario, we'll see what happens if we only make minimum payments on our credit card so that we can get started investing for retirement right away. Your credit card statement should state very clearly how long it will take to pay off your balance if you make minimum payments.</p> <p>You can also find an&nbsp;<a href="http://www.calcxml.com/calculators/how-long-will-it-take-to-pay-off-my-credit-card" target="_blank">online calculator</a> to help you with these calculations. Here's the information we'll enter for our example (you can put in your own numbers from your real-life situation):</p> <ul> <li>Current credit card balance: $5,000<br /> &nbsp;</li> <li>Annual percentage rate: 22%<br /> &nbsp;</li> <li>Proposed additional monthly payment: $0<br /> &nbsp;</li> <li>Minimum payment percentage: 3%<br /> &nbsp;</li> <li>Minimum payment amount: $25<br /> &nbsp;</li> <li>Skip December payment when offered? No</li> </ul> <p>Results indicate that we'll carry this debt for more than 17 years (205 months) and pay more than $7,000 in interest during this time. Click the button that says &quot;Detailed Results&quot; to see a breakdown of the payments. Make sure that under the Assumptions tab, you've asked for a monthly table display.</p> <p>In the first month, our payment is $150 and this amount slowly diminishes until we're paying the minimum amount of $25 for the last several years.</p> <p>Since we're making minimum payments on the credit card, we'll be able to put $350 of our total available $500 toward retirement in the first month ($500 - $150 = $350). The second month and subsequent months, we'll be able to increase the amount we invest, as our credit card balance dwindles. Every month we also earn some interest (6%/12 months), so our retirement account balance grows in that way, too.</p> <p>After five years (60 months), our credit card balance will be trimmed to less than $2,500.</p> <p>At the end of five years, our retirement account grows to just over $27,300. Considering our debt and retirement balances, our net worth is $24,800 ($27,300 in assets and $2,500 in liabilities). Note that investment returns are not guaranteed; the 6% rate is for illustration purposes only.</p> <p>You can&nbsp;<a href="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/Rains_We Do The Math Spreadsheet - Sheet1.pdf" target="_blank">download the spreadsheet</a> with these calculations.</p> <h2>Step 3: Calculate net worth if you pay off credit card debt completely before investing for retirement</h2> <p>In this scenario, we'll apply all of our extra income to credit card debt first. When the debt is paid in full, we'll begin to contribute to the retirement account.</p> <p>We enter this information to learn how quickly we'll pay off the debt with $500 per month (again, enter your own information to get personalized results):</p> <ul> <li>Current credit card balance: $5,000<br /> &nbsp;</li> <li>Annual percentage rate: 22%<br /> &nbsp;</li> <li>Minimum payment percentage: 0%<br /> &nbsp;</li> <li>Minimum payment amount: $0<br /> &nbsp;</li> <li>Proposed additional monthly payment: $500<br /> &nbsp;</li> <li>Skip December payment when offered? No</li> </ul> <p>To keep the credit card payment at $500 per month (and pay off credit card debt first), we'll enter the minimum payment percentage as 0% and the minimum payment amount as $0 &mdash; even though the actual terms of the credit card agreement will most likely specify a percentage of 2% or more and a minimum payment of $10 or more. When we view the results, we find that the payoff happens in 12 months. We'll make 11 payments of $500 and one payment of $74.</p> <p>After we finish paying off the credit card debt, we can begin investing. We'll invest $426 in the twelfth month ($500&ndash;$74) and $500 in subsequent months. Consider using a&nbsp;<a href="http://www.calculator.net/future-value-calculator.html" target="_blank">Future Value calculator</a>, to determine how much your retirement account will be worth at the end of five years.</p> <p>Here's the information we entered into the Future Value calculator:</p> <ul> <li>Number of periods: 48. (We'll invest for four years, or 48 months.)<br /> &nbsp;</li> <li>Start amount: $426. (We'll start with the first month's contribution as the balance in our account.)<br /> &nbsp;</li> <li>Interest rate: 0.5% (6% annual rate divided by 12 months).<br /> &nbsp;</li> <li>Periodic deposit: $500.<br /> &nbsp;</li> <li>Deposit made at the beginning or end of the period: End.</li> </ul> <p>If we earn 6% annually on our investments, our retirement account grows to $27,590 in five years. In addition, our credit card debt is paid off. Our net worth is $27,590 &mdash; that's $2,790 <em>more </em>than if we had prioritized retirement savings first and stuck with only paying the minimum on our credit card debt each month.</p> <h2>What else to consider</h2> <p>These calculations are a starting place. Your situation may be similar to this scenario, but it might not be. For instance, if your APR is considerably lower and your retirement returns higher than in the scenarios above, you may very well find that you're better off investing in the market while reducing your credit card debt slowly. Changes in one or several of these factors could alter results:</p> <ul> <li>Larger or smaller credit card balances;<br /> &nbsp;</li> <li>Higher or lower credit card APRs;<br /> &nbsp;</li> <li>Better or worse investment performance;<br /> &nbsp;</li> <li>Availability of a company match on your 401(k);<br /> &nbsp;</li> <li>Administrative fees associated with your 401(k);<br /> &nbsp;</li> <li>Choosing to invest in a traditional 401(k).</li> </ul> <p>If you opt for a traditional 401(k), your contributions come out of your pretax income, thereby reducing your taxable income, which could result in a lower tax liability and a higher tax refund. A tax refund could be applied to your credit card balance, allowing you to more easily pay off debt while also saving for retirement.</p> <p>To calculate the immediate tax benefit of saving within a traditional 401(k) account, multiply the contribution amount by your marginal tax rate. In addition, you could be eligible for a&nbsp;<a href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit" target="_blank">saver's credit</a>, which further increases the benefit of retirement savings.</p> <h2>How to get started with either scenario</h2> <p>Whatever path you choose, you may need help taking first steps. Consider these ways to get started:</p> <h3>Debt payoff</h3> <ul> <li>Consider transferring or consolidating your balances on a&nbsp;<a href="http://www.wisebread.com/the-best-0-balance-transfer-credit-cards?ref=internal" target="_blank">0% balance transfer card</a>.<br /> &nbsp;</li> <li>Consider a&nbsp;<a href="http://www.wisebread.com/how-to-do-a-one-month-spending-freeze?ref=internal" target="_blank">no-spend week or month</a> in which you don't spend on anything except essentials.<br /> &nbsp;</li> <li>Apply cash gifts from family to credit card balances.<br /> &nbsp;</li> <li>Work a part-time job to pay down balances.<br /> &nbsp;</li> <li>Find ways to spend less on everyday expenditures and apply savings to debt payoff.</li> </ul> <h3>Retirement saving</h3> <ul> <li>Consider enrolling in your employer's retirement plan, if offered. You may have the opportunity to contribute to a&nbsp;<a href="http://www.wisebread.com/403b-vs-401k-how-are-they-different?ref=internal" target="_blank">401(k) or 403(b) account</a>, for example.<br /> &nbsp;</li> <li>Set up an&nbsp;<a href="http://www.wisebread.com/choosing-a-retirement-account-whats-available-and-what-s-best-for-you?ref=internal" target="_blank">IRA</a> with a brokerage account or&nbsp;<a href="http://www.wisebread.com/should-you-trust-your-money-with-these-4-popular-financial-robo-advisers?ref=internal" target="_blank">robo-adviser</a>.<br /> &nbsp;</li> <li>Start an&nbsp;<a href="http://www.wisebread.com/the-sep-ira-is-how-the-self-employed-do-retirement-like-a-boss?ref=internal" target="_blank">SEP-IRA</a> if you have self-employment income.</li> </ul> <p>When considering your choices, keep in mind that credit card interest rates are relatively fixed, whereas investment returns tend to be much more variable. The main instances in which credit card rates fluctuate these days are when the Federal Reserve raises the federal funds rate, or when you make late payments and are charged a penalty interest rate.</p> <p>The point is, if your card's APR is 22%, you could be certain to save at least 22% of your balance by paying off credit card interest early. In contrast, the precise benefit of early investing is less certain.</p> <p>Should you save for retirement or pay off credit card debt? Doing the math can help you make a decision.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fwe-do-the-math-save-for-retirement-or-pay-off-credit-card-debt&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FWe%2520Do%2520the%2520Math-%2520Save%2520for%2520Retirement%2520or%2520Pay%2520Off%2520Credit%2520Card%2520Debt-.jpg&amp;description=We%20Do%20the%20Math%3A%20Save%20for%20Retirement%20or%20Pay%20Off%20Credit%20Card%20Debt%3F"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/We%20Do%20the%20Math-%20Save%20for%20Retirement%20or%20Pay%20Off%20Credit%20Card%20Debt-.jpg" alt="We Do the Math: Save for Retirement or Pay Off Credit Card Debt?" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/julie-rains">Julie Rains</a> of <a href="http://www.wisebread.com/we-do-the-math-save-for-retirement-or-pay-off-credit-card-debt">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-retiring-with-debt-isnt-the-end-of-the-world">Why Retiring With Debt Isn&#039;t the End of the World</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-dirty-secrets-of-credit-cards">The Dirty Secrets of Credit Cards</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/all-the-ways-minimum-payments-are-evil">All the Ways Minimum Payments Are Evil</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-one-third-of-americans-havent-saved-for-retirement">Why One-Third of Americans Haven&#039;t Saved for Retirement</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Debt Management Retirement 401(k) APR bills calculating comparisons interest rates nest egg Paying Off Debt Thu, 18 May 2017 08:30:15 +0000 Julie Rains 1949201 at http://www.wisebread.com What You Need to Know About the Easiest Way to Save for Retirement http://www.wisebread.com/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-649699796.jpg" alt="Learning about the easiest way to save for retirement" title="" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>If you have a 401(k), chances are you've been given the option to invest in a &quot;target-date&quot; fund. This is a balanced mutual fund that gradually changes its investment mix depending on how close you are to retirement. It's designed to hold a higher percentage of riskier, growth-oriented investments like stocks when you're young, and increase the proportion of more conservative investments, such as cash and bonds, as you age.</p> <p>Many brokerage firms offer target-date funds, which come with names like Fidelity Freedom 2050 or Lifepath Index 2045. The idea is to pick one associated with the year you expect to retire.</p> <p>There are advantages to these funds, especially for those who don't want to spend a lot of time managing their investments. But there are some drawbacks, too.</p> <h2>Pros</h2> <p>Let's start with the upsides.</p> <h3>1. They automatically rebalance</h3> <p>Target-date funds are designed to build wealth while you're working, and protect it as you approach retirement. They accomplish this by gradually and automatically changing the investment mix over time, which is referred to as rebalancing. Because it's not particularly easy for the average investor to make these kinds of changes on their own, a target-date fund offers the convenience of &quot;set it and forget it,&quot; saving you time and extra work.</p> <h3>2. They are easy to select</h3> <p>Picking which mutual fund is right for you is tricky, because there are often so many choices. There are funds for specific industries, funds for growth, and others for income &mdash; it can be overwhelming. When choosing which target-date fund is right for you, though, all you need to do is pick one that lines up best with the year you expect to retire. So if you are now 30 years old and plan to retire at age 63, you would pick a fund labeled with the year 2050.</p> <h3>3. They offer diversification</h3> <p>Most target-date funds are essentially &quot;funds of funds.&quot; In other words, they are comprised of a mix of mutual funds, which are already made up of a blend of stocks and bonds. Thus, investors are hardly at risk of placing too much of their money in any single investment.</p> <h2>Cons</h2> <p>All that convenience comes at a price.</p> <h3>4. They have high fees</h3> <p>If you invest in target-date funds, you can expect that fund managers and brokerage firms will take a bigger chunk of your money than they would for basic index funds. The Wall Street Journal reported last year that the average expense ratio on more than 2,200 target-date funds was more than 0.9 percent. Meanwhile, there are many basic index funds that have ratios of less than 0.1 percent.</p> <p>An expense ratio measures what it costs an investment company to run a mutual fund, and is calculated by the fund's annual operating expenses divided by the average dollar value of its assets under management. Those operating expenses are taken out of the fund's assets and lower the return for investors. Over time, a higher expense ratio could impact your overall investment balance by thousands of dollars.</p> <h3>5. They aren't one-size fits all</h3> <p>Not everyone generates the same amount of income during their lifetime, and expenses in retirement can vary wildly. Thus, the right mix of bonds, stocks, and other investments will differ depending on the investor. Target-date funds don't take this into account. One investor may be able to retire comfortably with a portfolio of bonds and cash, while another might need more growth stocks to meet their retirement goals.</p> <h3>6. Funds with similar names may actually be quite different</h3> <p>There are thousands of target-date funds out there. Many of them have very similar names and similar goals, but differ in their investment mix. For example, the Fidelity Freedom 2035 fund is currently comprised of 64 percent U.S. stocks, 31 percent international stocks, and 5 percent bonds. The Vanguard Target Retirement 2035 fund, however, is 48 percent U.S. stocks, 32 percent international stocks, and about 20 percent bonds. Thus, the performance and risk of these funds may vary even if their names and goals are very similar.</p> <h3>7. They may not be aggressive enough for some older people</h3> <p>On one hand, you probably don't want to be investing in all stocks when you are approaching retirement age. But if you become too conservative, you might miss out on big returns. There are some financial advisers who argue that it's OK to stay aggressive in retirement as long as you have enough saved to endure a possible downturn. In fact, one 2013 study argued in favor of a <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2324930" target="_blank">counterintuitive approach to retirement saving</a> &mdash; more conservative investing when you're young, and more aggressive investing as you get closer to retirement.</p> <p>If you think you want a more aggressive fund than the target date that corresponds with your projected retirement age, you can always choose one with a later target date. For instance, if you're planning on retiring in 15 years, but want a fund that's more aggressive now, you might choose a 2040 or 2050 target date fund.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/start-planning-now-for-when-your-target-date-fund-ends">Start Planning Now for When Your Target-Date Fund Ends</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/your-401-k-is-not-an-investment">Your 401(k) is not an investment</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement 401(k) aggressive bonds conservative risks stocks target date funds Tue, 09 May 2017 08:30:14 +0000 Tim Lemke 1940329 at http://www.wisebread.com Half of Americans Are Wrong About Their Retirement Savings http://www.wisebread.com/half-of-americans-are-wrong-about-their-retirement-savings <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/half-of-americans-are-wrong-about-their-retirement-savings" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-172427755 (1).jpg" alt="Couple learning they&#039;re wrong about their retirement savings" title="" class="imagecache imagecache-250w" width="250" height="142" /></a> </div> </div> </div> <p>Some financial mistakes are easier to recover from than others. Failing to properly plan for retirement falls into the not-so-easy camp. And yet, the latest in a long series of retirement preparedness studies indicates that many working age households in the U.S. are making this very mistake.</p> <p>This new study, prepared by the Center for Retirement Research (CRR) at Boston College, analyzed two key findings. First, it compared people's objectively measured, actual retirement preparedness with their perceived preparedness. And second, instead of just highlighting how many people are less prepared than they think (a common finding among retirement studies), it also found that some people are actually more prepared than they realize, causing needless worry.</p> <p>Let's break it down.</p> <h2>Over half are not well prepared</h2> <p>According to the CRR study, over half (52 percent) of working age households are at risk of not being able to maintain their current standard of living in retirement. That's even if these households work until age 65, annuitize all of their financial assets, and turn their home equity into an income stream via a reverse mortgage.</p> <p>In 1989, just 30 percent of households were deemed to be at risk. The study's authors attribute the growth in this number to three main factors:</p> <ul> <li>The increased time people are spending in retirement &mdash; the result of a fairly static average retirement age (around 63) combined with lengthening life spans.<br /> &nbsp;</li> <li>Increases in Medicare premiums.<br /> &nbsp;</li> <li>The sweeping change from defined-benefit to defined-contribution retirement plans, such as 401(k) plans. In managing their own retirement accounts, the authors said, &quot;individuals make mistakes at every step along the way,&quot; which has resulted in a woefully inadequate median retirement account balance of just $111,000 for households nearing retirement.</li> </ul> <h2>Over half of the unprepared don't realize it</h2> <p>Of the 52 percent of households that are at risk of not being able to maintain their standard of living in retirement, the CRR study found that nearly two-thirds (63 percent) don't know they're in trouble at all &mdash; the worst possible situation. (See also: <a href="http://www.wisebread.com/10-signs-you-arent-saving-enough-for-retirement?ref=seealso" target="_blank">10 Signs You Aren't Saving Enough for Retirement</a>)</p> <p>The study's authors identified two main reasons.</p> <p>First, there is a &quot;wealth illusion&quot; that comes from having a 401(k). In other words, a person may have what seems like a lot of money in their plan, but not realize how little income it could actually produce in retirement.</p> <p>For example, a standard assumption is that 4 percent of your retirement savings can be withdrawn each year in retirement without too much danger of running out of money. A $100,000 balance would then translate into just $4,000 per year.</p> <p>The second reason is a false sense of security that comes from having a relatively high income. A high-income earner may not understand that Social Security benefits will replace a smaller percentage of his or her income than someone with a lower income. In other words, for high-income people, it takes more personal savings to maintain their standard of living in retirement than they may realize.</p> <h2>Of those who are prepared, half don't realize it</h2> <p>If 52 percent of all working age households are not adequately preparing for retirement, that means 48 percent are doing a good job. However, of those prepared 48 percent, the CRR study found that half worry that they're not on track. Of course, that's a much better problem to have than not realizing you're unprepared, but unnecessary worry is still a problem.</p> <p>The study's authors cited three main factors:</p> <ul> <li>For homeowners, not understanding how much income could be generated through a <a href="http://www.wisebread.com/reverse-mortgages-the-best-way-to-eat-your-home?ref=internal" target="_blank">reverse mortgage</a>.<br /> &nbsp;</li> <li>For those still covered by a defined-benefit pension plan, not fully appreciating just how valuable that benefit is. (See also: <a href="http://www.wisebread.com/if-youre-lucky-enough-to-receive-a-pension-here-are-6-things-you-need-to-do?ref=seealso" target="_blank">If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do</a>)<br /> &nbsp;</li> <li>If married, not understanding how much money they may be entitled to via spousal Social Security benefits.</li> </ul> <h2>Solutions</h2> <p>What should you do if you realize you may be under or over-preparing for retirement? Run some numbers using a retirement planning calculator &mdash; preferably a couple of calculators since different tools use different assumptions &mdash; and rerun the numbers periodically. (See also: <a href="http://www.wisebread.com/how-much-should-you-have-saved-for-retirement-by-30-40-50?ref=seealso" target="_blank">How Much Should You Have Saved for Retirement by 30? 40? 50?</a>)</p> <p>Knowledge is your best bet when it comes to staying on track with your retirement savings. Don't just guess. Figure out how much you need to be investing each month so that you can afford to live comfortably in your retirement years, and then, make the necessary changes in your budget to set that money aside. (See also: <a href="http://www.wisebread.com/7-retirement-planning-steps-late-starters-must-make?ref=seealso" target="_blank">7 Retirement Planning Steps Late Starters Must Make</a>)</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> of <a href="http://www.wisebread.com/half-of-americans-are-wrong-about-their-retirement-savings">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-7"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-is-why-you-cant-postpone-planning-for-your-retirement-and-how-to-start">This Is Why You Can&#039;t Postpone Planning for Your Retirement (And How to Start)</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/one-smart-thing-you-can-do-for-your-retirement-today">One Smart Thing You Can Do for Your Retirement Today</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/intimidated-by-retirement-investing-get-professional-help">Intimidated by Retirement Investing? Get Professional Help!</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-while-caring-for-kids-and-parents">How to Save for Retirement While Caring for Kids and Parents</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-signs-its-time-to-retire">8 Signs It&#039;s Time to Retire</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) investing IRA nest egg preparedness saving money Fri, 28 Apr 2017 09:00:08 +0000 Matt Bell 1935019 at http://www.wisebread.com How to Face 4 Ugly Truths About Retirement Planning http://www.wisebread.com/how-to-face-4-ugly-truths-about-retirement-planning <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-to-face-4-ugly-truths-about-retirement-planning" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-155373418.jpg" alt="Learning ugly truths about retirement planning" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Most working Americans still have a long way to go to ensure a comfortable, financially secure retirement. But, with consistency and dedication, retirement planning can be a feasible project. Let's review some of the ugly truths of retirement planning, and the strategies you can use to conquer them. (See also: <a href="http://www.wisebread.com/7-things-financial-advisers-wish-you-knew-about-retirement?ref=seealso" target="_blank">7 Things Financial Advisers Wish You Knew About Retirement</a>)</p> <h2>1. Employer matches require work</h2> <p>While people often like to think of employer matches as free money, the truth is that you do need to do some &quot;work&quot; to earn those matches.</p> <p>First, your employer may require a minimum period of employment or contribution to your retirement account before you become eligible for employer contributions. According to a Vanguard analysis of 1,900 401(k) plans with 3.6 million participants, 27 percent of employers <a href="http://money.usnews.com/money/retirement/articles/2015/06/29/how-does-your-401-k-stack-up" target="_blank">require a year of service</a> before providing any matching contributions. And that waiting period may be on top of the waiting period to be eligible for an employer-sponsored 401(k) in the first place.</p> <p>Second, once you're eligible for the employer match, you may have to contribute a minimum percentage from each paycheck yourself to get it. According to Vanguard, 44 percent of employers required a 6 percent employee contribution to get the entire 401(k) match on offer.</p> <p>Third, only 47 percent of surveyed employers provide immediate vesting of employer contributions. Since only moneys in your retirement account that are fully vested truly belong to you, you may have to wait up to six years to get to keep it all. If you part ways with your employer earlier than that, you may have to say goodbye to some or all of those employer contributions. (See also: <a href="http://www.wisebread.com/15-retirement-terms-every-new-investor-needs-to-know?ref=seealso" target="_blank">15 Retirement Terms Every New Investor Needs to Know</a>)</p> <h3>How to handle it</h3> <p>Find out the applicable rules for employer contributions under your employer-sponsored retirement account. Ask about the waiting period for eligibility, how much you should contribute to get the full employer match, and what is the applicable vesting schedule for employer contributions. This way you'll know how to make the most (and keep the most!) of any employer contributions.</p> <h2>2. Full retirement age is higher than many of us think</h2> <p>According to the 2016 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), one in every two American workers expected to retire <a href="https://www.ebri.org/pdf/briefspdf/ebri_ib_422.mar16.rcs.pdf" target="_blank">no later than age 65</a>.</p> <p>The problem with that plan is that only those with born in 1937 or earlier have a full retirement age of 65. Your full retirement age is the age at which you first become entitled to full or unreduced retirement benefits from the Social Security Administration (SSA). Retiring earlier than your full retirement age decreases your retirement benefit from the SSA.</p> <p>For those born 1960 or later, full retirement age is 67. If this were your case, retiring at age 62 or age 65 would <a href="https://www.ssa.gov/planners/retire/retirechart.html#chart" target="_blank">decrease your monthly benefit</a> by about 30 percent or 13.3 percent, respectively. (See also: <a href="http://www.wisebread.com/13-crucial-social-security-terms-everyone-needs-to-know?ref=seealso" target="_blank">13 Crucial Social Security Terms Everyone Needs to Know</a>)</p> <h3>How to handle it</h3> <p>If you're one of the 84 percent of American workers expecting Social Security to be a source of income in retirement, then you need to keep track of your retirement benefits. There are two ways do this.</p> <p>First, since September 2014, the SSA mails Social Security statements to workers at ages 25, 30, 35, 40, 45, 50, 55, and 60 and over, who aren't yet receiving Social Security benefits and don't have an online &quot;my Social Security&quot; account. Here is a <a href="https://www.ssa.gov/myaccount/materials/pdfs/SSA-7005-SM-SI%20Wanda%20Worker%20Near%20retirement.pdf" target="_blank">sample of what those letters look like</a>. Second, you could sign up for a my Social Security account at <a href="http://www.ssa.gov/myaccount" target="_blank">www.ssa.gov/myaccount</a> and have access to your Social Security statement on an ongoing basis.</p> <p>Through either one of these two ways, you'll get an estimate of your retirement benefit if you were to stop working at age 62 (earliest age you're eligible to receive retirement benefits), full retirement age, and age 70 (latest age that you can continue delaying retirement to receive delayed retirement credits). That way you can plan ahead for when it would make the most sense to start taking your retirement credits.</p> <h2>3. Retirement accounts have fees</h2> <p>One of the most common myths about 401(k) plans is that they don't have any fees. The reality is that both you and your employer pay fees to plan providers offering and managing 401(k) plans. One study estimates that 71 percent of 401(k) plan holders <a href="http://www.aarp.org/work/retirement-planning/info-02-2011/401k-fees-awareness-11.html" target="_blank">aren't aware that they pay fees</a>.</p> <p>While an annual fee of 1 to 2 percent of your account balance may not sound like much, it can greatly reduce your nest egg. If you were to contribute $10,000 per year for 30 years in a plan with a 7 percent annual rate of return and an 0.5 percent annual expense ratio, you would end up with a balance of $920,000 at the end of the 30-year period. If the annual expense ratio were to increase to 1 percent or 2 percent, your final balance would be $840,000 or just under $700,000, respectively.</p> <h3>How to handle it</h3> <p>One way to start minimizing investment fees is to pay attention to the annual expense ratio of the funds that you select.</p> <ul> <li>When deciding between two comparable funds, choose the one with the lower annual expense ratio. Research has shown that funds with a lower expense ratio tend to better performers, so you would be minimizing fees <em>and </em>increasing your chances of higher returns.<br /> &nbsp;</li> <li>Explore index funds. For example, the Vanguard 500 Index Investor Shares fund [<a href="https://finance.yahoo.com/q?s=vfinx" target="_blank">Nasdaq: VFINX</a>] has an annual expense ratio of 0.14 percent, which is around 84 percent lower than the average expense ratio of funds with similar holdings. The Admiral version of this equity index fund has an even lower annual expense ratio of 0.05 percent.<br /> &nbsp;</li> <li>Check the prospectus of your funds for a schedule of fees. From redemption fees to 12b-1 fees, there are plenty of potential charges. Review the fine print of any fund that you're considering investing in and understand the rules to avoid triggering fees. For example, you may need to hold a fund for at least 65 days to prevent triggering a redemption fee. (See also: <a href="http://www.wisebread.com/watch-out-for-these-5-sneaky-401k-fees?ref=seealso" target="_blank">Watch Out for These 5 Sneaky 401(k) Fees</a>)</li> </ul> <h2>4. 401(k) loans are eating away nest eggs</h2> <p>According to the latest data from the EBRI, 23 percent of American workers <a href="https://www.ebri.org/pdf/briefspdf/ebri_ib_422.mar16.rcs.pdf" target="_blank">took a loan</a> from their retirement savings plans in 2016. On top of the applicable interest rate on your loan, you'll also be liable for an origination fee and an ongoing maintenance fee. Given that origination fees range from <a href="http://www.nber.org/papers/w17118.pdf" target="_blank">$25 to $100</a> and maintenance fees can go up to $75, 401(k) loans are one expensive form of financing. (See also: <a href="http://www.wisebread.com/5-questions-to-ask-before-you-borrow-from-your-retirement-account?ref=seealso" target="_blank">5 Questions to Ask Before You Borrow From Your Retirement Account</a>)</p> <p>Additionally, when you separate from your employer, the full unpaid balance is due within 60 days from your departure. If you don't pay back in time, that balance becomes taxable income, triggering potential penalties at the federal, state, and local level. One penalty that always applies is the 10 percent early distribution tax for retirement savers under age 59-1/2.</p> <h3>How to handle it</h3> <p>Don't borrow from your retirement account. Studies have shown that 401(k) borrowers tend to come back for additional loans, increasing their chances of default. One study found that 25 percent of 401(k) borrowers came back for a <a href="http://www.nytimes.com/2013/08/17/your-money/one-dip-into-401-k-savings-often-leads-to-another.html" target="_blank">third or fourth loan</a>, and 20 percent of 401(k) borrowers came back for <em>five </em>or more loans. Borrowing from your retirement account should be a very last-resort option because there are few instances when it's worth it. (See also: <a href="http://www.wisebread.com/this-is-when-you-should-borrow-from-your-retirement-account?ref=seealso" target="_blank">This Is When You Should Borrow From Your Retirement Account</a>)</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/how-to-face-4-ugly-truths-about-retirement-planning">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-traps-to-avoid-with-your-401k">7 Traps to Avoid With Your 401(k)</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-tax-day-is-april-15-and-other-weird-financial-deadlines">Why Tax Day Is April 15 and Other Weird Financial Deadlines</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-reasons-early-retirement-might-be-financially-risky">4 Reasons Early Retirement Might Be Financially Risky</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-inventor-of-the-401k-has-second-thoughts-about-your-retirement-plan-now-what">The Inventor of the 401K Has Second Thoughts About Your Retirement Plan — Now What?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) contributions employer match fees full retirement age loans nest egg social security ugly truths Fri, 07 Apr 2017 08:00:13 +0000 Damian Davila 1922316 at http://www.wisebread.com Why Tax Day Is April 15 and Other Weird Financial Deadlines http://www.wisebread.com/why-tax-day-is-april-15-and-other-weird-financial-deadlines <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-tax-day-is-april-15-and-other-weird-financial-deadlines" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-175261184.jpg" alt="Learning why Tax Day is on April 15" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>April is one of the finest months of the year. The sun breaks through the clouds, the cherry blossoms bloom, and the promise of warm weather beckons.</p> <p>So of course, the IRS, in its infinite wisdom, decided to place Tax Day right smack dab in the middle of all of this riotous spring beauty.</p> <p>Though I have always believed that the placement of Tax Day in mid-April is proof of the federal government's grim sense of humor, there is actually some method to their madness &mdash; both for this, and all other seemingly arbitrary financial dates and deadlines.</p> <p>Here are the reasons behind some of the most head-scratching financial dates in the United States.</p> <h2>Why is Tax Day on April 15?</h2> <p>Paying federal income taxes is actually a relatively new phenomenon in American history. The first time an income tax was levied on Americans was in 1861 in order to help pay for the Civil War. In 1872, the law surrounding the tax was repealed after opponents successfully argued that federal income tax was unconstitutional.</p> <p>Fast forward to February 3, 1913, when Congress adopted the 16th amendment to the constitution, which allows for federal income tax. Congress also determined the first due date for filing 1913 taxes would be March 1, 1914 &mdash; one year and a couple of weeks later. March 1 offered an easy-to-remember due date that gave citizens just over a full year to get used to being taxpayers, gather up their receipts into the early 20th century version of a shoe box, and file their first returns.</p> <p>Then in 1918, the due date was moved to March 15, for reasons that no one in Congress saw fit to explain or write down.</p> <p>Congress again moved the filing due date in 1955, this time to the now-familiar date of April 15. According to the IRS, the date change helped to spread out the tax season workload for IRS employees.</p> <p>However, there may be a slightly more mercenary reason for the date change: According to Ed McCaffery, a University of Southern California law professor and tax guru, by the mid 1950s, the income tax was applying to increasing numbers of middle class workers, which meant the government had to issue more refunds. &quot;Pushing the deadline back gives the government more time to hold on to the money,&quot; McCaffery claimed in Fortune magazine. And the longer the government holds onto taxes that have been withheld but are destined to be refunded, the more interest it earns on the money.</p> <h3>Okay, so why is Tax Day on April 18 this year?</h3> <p>If you look at an April calendar for 2017, you'll see that April 15 falls on a Saturday this year, which means we get a little extension, since Tax Day can't fall on a weekend. However, you might be confused as to why we get an extension to Tuesday, April 18, instead of Monday, April 17.</p> <p>The reason for our extra day is a Washington, D.C. holiday known as Emancipation Day. Though only Washington, D.C. observes this holiday, a federal statute enacted decades ago states that holidays observed in our nation's capital have a nationwide impact.</p> <h2>Why was 65 chosen as full retirement age for Social Security?</h2> <p>When the Social Security Act was officially adopted in 1935, the age of 65 was chosen as the standard retirement age for beneficiaries. Why was that age chosen as the proper time for full retirement? Why not 63 or 67 or 70?</p> <p>There are a couple of persistent myths out there about this choice, but they are nothing more than misconceptions:</p> <h3>Myth #1: People would die before collecting</h3> <p>The age of 65 was chosen so that people would not live long enough to collect benefits. According to life expectancy actuarial tables from 1930, the average life span was 58 for men and 62 for women, which would make it seem as if Social Security was designed to never make a payout to beneficiaries. However, this myth stems from an unfamiliarity with actuarial tables, which offer an average of <em>all </em>life spans, starting from birth. High infant mortality in the 1930s lowered the overall rate of life expectancy, but anyone who made it to adulthood had a much better chance of reaching age 65 and collecting benefits.</p> <h3>Myth #2: Bismarck was 65</h3> <p>The age of 65 was chosen because Otto von Bismarck &mdash; the author of the world's first old-age social insurance program upon which our Social Security program was partially based &mdash; was 65 when Germany adopted his program. This myth is false on several counts. Bismarck was actually 74 when the German system was adopted, and Germany initially set the retirement age at 70. Germany's retirement age was not lowered to 65 until 1916, at which point Bismarck had been dead for nearly two decades.</p> <h3>The truth behind 65</h3> <p>The actual reason why 65 was chosen as the initial full retirement age for Social Security is pretty boring. The Committee on Economic Security, which Franklin D. Roosevelt created to propose Social Security legislation, conducted a comprehensive analysis of actuarial studies, domestic private pension systems in America, and the social insurance experience in other countries. Based upon that research, the committee recommended 65 as the standard retirement age for Social Security.</p> <h2>Why is 59&frac12; the minimum age to take distributions from tax-deferred retirement accounts?</h2> <p>When it comes to tax-deferred accounts like 401(k)s and traditional IRAs, you are not allowed to take distributions until you have reached the magical age of 59&frac12;. Otherwise, you will owe a 10 percent early withdrawal penalty on the amount you withdraw, in addition to the ordinary income tax you'll owe whenever you take a distribution.</p> <p>So why is the IRS asking you to celebrate half-birthdays when you're nearly 60 years old? Congress used the age of 59&frac12; as the earliest withdrawal age because life insurance actuarial tables consider you to be 60 years old once you have reached the age of 59 and six months &mdash; and at the time that the rules were put in place, 60 was a relatively common age for retirement.</p> <h2>Why must you begin taking required minimum distributions from tax-deferred retirement accounts at age 70&frac12;?</h2> <p>Of course, the IRS is not just about picking random minimum ages for when you <em>can </em>take distributions from tax-deferred retirement accounts &mdash; they also have a random age for when you <em>must </em>take distributions from those accounts.</p> <p>Since the money in your tax-deferred account was placed there before you paid taxes on it, Uncle Sam does want you to eventually pull the money out again so he can get his cut of the money in the form of taxes. That means the IRS requires each account holder to begin withdrawing money during the year that they reach age 70&frac12;. This is called the required minimum distribution (RMD).</p> <p>But unlike the 59&frac12; rule, 70&frac12; does not actually mean your half-birthday. The IRS makes a distinction between those individuals born in the first half of the year and those born in the second half. If your birthday falls between January 1 and June 30, you have to take your first RMD during the calendar year you turn 70. But if your birthday falls between July 1 and December 31, then you don't officially have to take your first RMD until the calendar year you turn 71.</p> <p>Describing this year as being when you are 70&frac12; is actually shorthand, since some folks will be taking their first RMD the year they turn 70, and some will be taking their first RMD the year they turn 71.</p> <h2>Why does Social Security think New Year's babies were born in the previous year?</h2> <p>Unless you happen to have a January 1 birthday, you might not know about this odd piece of Social Security dating. But according to the Social Security Administration, individuals born on the first of the year are considered to have birthdays in the previous year. So Social Security will group someone with a January 1, 1954 birthday with beneficiaries who were born in 1953.</p> <p>This can actually make a big difference when it comes to some Social Security benefits, particularly when those benefits are eliminated. For instance, in 2015 Congress ended the restricted application strategy for any beneficiary born after 1953. The restricted application let applicants specify which Social Security benefits they did <em>not</em> want to apply for, even if they were eligible for all of them. So, for example, beneficiaries who reached full retirement age could claim a spousal benefit while continuing to let their own grow. Beneficiaries who were born on January 1, 1954 were grouped with those with 1953 births &mdash; which means anyone born on January 2, 1954 had rotten luck in terms of using the restricted application.</p> <p>Why does Social Security extend a year 24 hours past the time the rest of us do? This odd birth year dating occurs because the Social Security Administration groups beneficiaries who have birthdays on the first of the month with beneficiaries born in the previous month. This grouping allows first-of-the-month babies to have a little more leeway when it comes to deadlines and other requirements. In order to be completely fair with the first-of-the-month grouping, January 1 babies are then considered to have been born in the previous year.</p> <h2>The government is not entirely lacking in sweet rhyme and pure reason</h2> <p>The financial dates that we all must adhere to may seem like ridiculous and arbitrary decisions, but there was some thought put into them. Those thoughts might only make sense to the people that made the decisions, but at least we know they weren't throwing darts at a calendar.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/emily-guy-birken">Emily Guy Birken</a> of <a href="http://www.wisebread.com/why-tax-day-is-april-15-and-other-weird-financial-deadlines">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/heres-how-your-taxes-will-change-when-you-retire">Here&#039;s How Your Taxes Will Change When You Retire</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/3-ways-more-money-in-retirement-might-cost-you">3 Ways More Money in Retirement Might Cost You</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-smart-ways-to-boost-your-social-security-payout-before-retirement">6 Smart Ways to Boost Your Social Security Payout Before Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-questions-to-ask-before-you-start-claiming-your-social-security-benefits">5 Questions to Ask Before You Start Claiming Your Social Security Benefits</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement Taxes 401(k) ages benefits dates distributions finance facts full retirement age IRA IRS social security tax day trivia Wed, 29 Mar 2017 08:00:22 +0000 Emily Guy Birken 1914689 at http://www.wisebread.com 7 Traps to Avoid With Your 401(k) http://www.wisebread.com/7-traps-to-avoid-with-your-401k <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-traps-to-avoid-with-your-401k" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-163904271.jpg" alt="Finding traps to avoid with your 401(k)" title="" class="imagecache imagecache-250w" width="250" height="142" /></a> </div> </div> </div> <p>More and more Americans are choosing an employer-sponsored 401(k) as their preferred way to build up their nest eggs. As of 2014, an estimated 52 million Americans were participating in a 401(k)-type plan.</p> <p>When used properly, a 401(k) can be a powerful tool to save for your retirement years, but there are a couple of crucial pitfalls that you have to watch out for. From high fees to limited investing choices, here is a list of potential downsides to 401(k) plans &mdash; and how to work around them.</p> <h2>1. Waiting to set up your 401(k)</h2> <p>Depending on the applicable rules from your employer-sponsored 401(k), you may be eligible to enroll in the plan within one to 12 months from your start date. If your eligibility kicks in around December, you may think that it's fine to wait until the next year to set up your retirement account.</p> <p>This is a big mistake for two main reasons.</p> <p>First, contributing to your 401(k) with pretax dollars allows you to effectively reduce your taxable income for the current year. In 2017, you can contribute up to $18,000 ($24,000 if age 50 or over) to your 401(k), so you can considerably reduce your tax liability. For example, if you were to contribute $3,000 between your last two paychecks in December, you would reduce your taxable income by $3,000. Waiting until next year to start your 401(k) contribution would mean missing out on a lower taxable income!</p> <p>Second, your employer can still contribute to your 401(k) next year and make that contribution count for the current year, as long as your plan was set up by December 31 of the current year. Your employer contributions have to be in before Tax Day or the date that you file your federal taxes, whichever is earlier.</p> <h3>How to work around it</h3> <p>If you meet the requirements to participate in your employer-sponsored 401(k) toward the end of the year, make sure to set up your account by December 31st. That way, you'll be ready to reduce your taxable income for the current year through your own contributions and those from your employer before their applicable deadline (December 31 and Tax Day or date of tax filing (whichever is earlier), respectively).</p> <h2>2. Forgetting to update contributions</h2> <p>When you set up your 401(k), you have to choose a percentage that will be deducted from every paycheck and put into your plan. It's not uncommon that plan holders set that contribution percentage and forget it. As your life situation changes, such as when you get a major salary boost, marry, or have your first child, you'll find that your contributions may be too big or too small. (See also: <a href="http://www.wisebread.com/5-times-its-okay-to-delay-retirement-savings?ref=seealso" target="_blank">5 Times It's Okay to Delay Retirement Savings</a>)</p> <h3>How to work around it</h3> <p>To keep a contribution level that is appropriate to your unique financial situation, revisit your percentage contribution every year and whenever you have a major life change. Don't forget to also check whether or not you elected an annual increase option &mdash; a percentage by which your contribution is increased automatically each year &mdash; and adjust it as necessary.</p> <h2>3. Missing out on maximum employer match</h2> <p>Talking about contributions, don't forget that your employer may contribute to your plan as well. In a survey of 360 employers, <a href="https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/bigger-401k-matches.aspx" target="_blank">42 percent of respondents</a> matched employee contributions dollar-for-dollar, and 56 percent of them only required employees to contribute at least 6 percent from paychecks to receive a maximum employer match.</p> <h3>How to work around it</h3> <p>Employers require you to work a minimum period of time before starting to match your contribution. Once you're eligible, meet the necessary contribution to maximize your employer match. One estimate puts the average missed employer contribution at $1,336 per year. This is free money that you can use to make up for lower contribution levels from previous months or years.</p> <h2>4. Sticking only with actively managed funds</h2> <p>When choosing from available funds in their 401(k) plan, account holders tend to focus on returns. There was a time in which actively managed funds were able to deliver on their promise of beating the market and delivering higher-than-average returns. That's why 401(k) savers often choose them.</p> <p>However, passively managed index funds &mdash; funds tracing an investment index, such as the S&amp;P 500 or the Russell 2000 &mdash; have consistently proven that they can beat actively managed funds. Over the five past years, only 39 percent of active fund managers were able to beat their benchmarks, which is often an index. That's why over the same period, investors have taken $5.6 billion out of active funds and dumped $1.7 trillion into passive funds.</p> <h3>How to work around it</h3> <p>Find out whether or not your 401(k) offers you access to index funds. Over a long investment period, empirical evidence has shown that index funds outperform actively managed funds. Review available index funds and choose the ones that meet your retirement strategy. (See also: <a href="http://www.wisebread.com/3-steps-to-getting-started-in-the-stock-market-with-index-funds?ref=seealso" target="_blank">3 Steps to Getting Started in the Stock Market With Index Funds</a>)</p> <h2>5. Chasing high returns instead of lower costs</h2> <p>When reading the prospectus of any fund, you'll always find a disclaimer warning you that past returns aren't a guarantee of future returns. So, why are you holding onto those numbers so dearly? As early as 2010, investment think tank Morningstar concluded that a fund's annual expense ratio is the only reliable indicator of future investment performance, even better than the research firm's well-known star rating.</p> <p>And guess what kind of funds have the lowest annual expense ratios? Index funds! For example, the Vanguard 500 Index Investor Shares fund [Nasdaq: <a href="https://finance.yahoo.com/quote/VFINX?p=VFINX" target="_blank">VFINX</a>] has an annual expense ratio of 0.16 percent, <a href="https://personal.vanguard.com/us/funds/snapshot?FundId=0040&amp;FundIntExt=INT" target="_blank">which is 84 percent lower</a> than the average expense ratio of funds with similar holdings. If your 401(k) gives you access to lowest cost <a href="https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&amp;FundId=0540" target="_blank">Vanguard Admiral shares</a>, you would shed down that annual expense ratio even further to 0.05 percent.</p> <h3>How to work around It</h3> <p>When evaluating a fund in your 401(k), look for comparable alternatives, including index funds. To maximize the growth of your nest egg, chase funds with lower annual expense ratios and investment fees. Regardless of their performance (which tends to be better anyway!), you'll minimize your investment cost. (See also: <a href="http://www.wisebread.com/watch-out-for-these-5-sneaky-401k-fees?ref=seealso" target="_blank">Watch Out for These 5 Sneaky 401(k) Fees</a>)</p> <h2>6. Not periodically rebalancing your portfolio</h2> <p>Even when choosing index funds, you still need to periodically adjust your portfolio. Let's assume that you follow this investment recommendation from Warren Buffett for your 401(k): <a href="http://www.berkshirehathaway.com/letters/2013ltr.pdf" target="_blank">90 percent in a low-cost index fund</a>, and 10 percent in government bonds. (See also: <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett?ref=seealso" target="_blank">The 5 Best Pieces of Financial Wisdom From Warren Buffett</a>)</p> <p>Depending on the market, your portfolio allocation may be way off as early as one quarter. If the S&amp;P 500 were to have a huge rally, you may now be holding 95 percent of your 401(k) in the index fund. That would be much more risk that you may be comfortable with, so you would need to take that 5 percent and put it back into government bonds. On the other hand, holding 85 percent in government bonds would make you miss your target return for that year. Forgetting to <a href="http://www.wisebread.com/the-most-important-thing-youre-probably-not-doing-with-your-portfolio?ref=internal" target="_blank">rebalance your portfolio</a> once a year when necessary is one easy way to derail your saving strategy.</p> <h3>How to work around it</h3> <p>Many 401(k) plans offer an automatic annual rebalancing feature. Review the fine print of this feature with your plan and decide whether or not it's suitable for you. If your plan doesn't offer an automatic rebalancing feature, choose a date that makes the most sense to you and set it as your day to rebalance your portfolio every year.</p> <h2>7. Taking out 401(k) loans</h2> <p>Treating your 401(k) as a credit card is a bad idea for several reasons. Doing this:</p> <ul> <li>Creates additional costs, such as origination and maintenance fees;<br /> &nbsp;</li> <li>Becomes due in full within 60 days of separating from your employer;<br /> &nbsp;</li> <li>Turns into taxable income when not paid back, triggering potential penalties from the IRS and state and local governments; and<br /> &nbsp;</li> <li>May quickly turn into a bad habit: <a href="http://www.nytimes.com/2013/08/17/your-money/one-dip-into-401-k-savings-often-leads-to-another.html" target="_blank">25 percent of 401(k) borrowers</a> go back for a third or fourth loan, and 20 percent of them take out at least five loans.</li> </ul> <h3>How to work around it</h3> <p>Treat your 401(k) as a last-resort source of financing. There are very few instances when you should <a href="http://www.wisebread.com/this-is-when-you-should-borrow-from-your-retirement-account?ref=internal" target="_blank">borrow from your retirement account</a>. Make sure that you go through all of your credit options and include the opportunity cost of foregoing retirement savings, including potential taxes and penalties, when comparing a 401(k) loan against another type of loan.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/7-traps-to-avoid-with-your-401k">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-face-4-ugly-truths-about-retirement-planning">How to Face 4 Ugly Truths About Retirement Planning</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-save-for-retirement-when-you-are-unemployed">How to Save for Retirement When You Are Unemployed</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/6-age-milestones-that-impact-your-retirement">6 Age Milestones That Impact Your Retirement</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds">Why Warren Buffett Says You Should Invest in Index Funds</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-signs-your-retirement-is-on-track">8 Signs Your Retirement Is on Track</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Retirement 401(k) actively managed funds contributions employer match employment fees index funds loans rebalancing Thu, 23 Mar 2017 09:00:15 +0000 Damian Davila 1909973 at http://www.wisebread.com