nest egg

4 Golden Rules of Investing in Retirement

Matt Bell — Thu, 19 Jul 2018 08:00:09 +0000

After you've spent a lifetime investing for retirement, it can feel very different to invest in retirement. Many retirees are hesitant to start withdrawing from the nest eggs they've carefully built over the years. And, they sometimes feel especially nervous about managing that account, knowing it needs to last as long as they do.

Thankfully, there are some guidelines that can help. Here are four golden rules for investing in retirement.

1. Don't be too conservative

Longevity is increasing. Your retirement could last for two decades or more. According to the Social Security Administration, a 65-year-old man today can expect to live to nearly age 85. A 65-year-old woman today can expect to live past age 86. And those are just averages. Many people will live well into their 90s.

Of course, given a choice, most people would prefer to live a long life. However, the more years you spend in retirement, the longer your nest egg will need to last. That's why it's important to avoid being overly conservative with your investments in your later years. Bond-like returns will only get you so far. (See also: 5 Ways Longevity Is Changing Retirement Planning — And What to Do About It)

This reality is reflected in many of today's target-date funds. For example, Vanguard's Target Retirement 2020 fund, which is designed for people right on the cusp of retirement, currently has 54 percent of its assets invested in stocks. The lowest level of stock exposure Vanguard's target-date funds ever hit is 30 percent, which occurs seven years after each fund's target date. Thereafter, it remains fixed.

If you're managing your own portfolio, you would be wise to take a page from these professionally managed portfolios and make sure you're maintaining a healthy exposure to stocks. (See also: 7 Reasons You're Never Too Old to Buy Stocks)

2. Don't be too aggressive

By the same token, you can't afford to get carried away with risk. With the current long-running bull market showing few signs of running out of steam, it may be tempting to take on more risk than you should, especially if you feel somewhat behind on your retirement savings. But that would be dangerous to your portfolio and your peace of mind.

Instead, trust the rules of asset allocation. If your optimal asset allocation calls for a 50/50 stock/bond mix, stick with that. One day, the bull market will end and you'll be glad you weren't invested any more aggressively than you should have been. If you're not sure what your optimal mix should be, Vanguard's asset allocation questionnaire can help you figure it out.

Remember, if your nest egg isn't as large as it should be, you have other options besides taking undue risk with your investments. For example, if you're still in the workforce, pushing back your intended retirement date even by a few months or a year can make a noticeable difference in your financial health. (See also: How One More Year of Work Can Transform Your Retirement)

3. Consider maintaining a cash "bucket"

One of the biggest threats to your portfolio in retirement goes by the fancy name of sequence of returns risk. That refers to the possibility that the market could fall just as you enter retirement. While the market naturally ebbs and flows over time, a significant downturn right at the start of retirement can put a strain on your cash flow throughout retirement.

Especially if you lean toward the conservative side of the risk spectrum, one way to manage that risk is to implement the bucket strategy — creating a cash account containing two to three years' worth of essential living expenses. That can help you avoid having to withdraw from your investment account in a bear market.

When the market is falling, you draw living expenses from your cash bucket, giving your investment account time to recover. When the market is growing, you draw from your investment account while also using a portion of your gains to refill your cash bucket. (See also: 8 Ways to Preserve Your Net Worth in Retirement)

4. Make sure you're on the same page as your spouse

Within many marriages, there's a division of labor, with each spouse taking the lead in different areas. If one of you has been managing the investments, now is the time to bring the other into the process. Otherwise, when the investment-manager spouse dies, it can leave the surviving spouse ill-equipped to take over.

If you handle the investments in your household, start talking about your investments with your spouse. How many accounts do you have and what's the total balance? What are the online passwords? What strategy are you following with your investments? If you were to die first, how would you recommend your spouse manage the account? If you're using a fairly involved approach, is there a simplified alternative? (See also: 5 Money Conversations Couples Should Have Before Retirement)

One of the sweetest rewards of a life lived well is peace of mind in your later years. When it comes to experiencing financial peace of mind during retirement, the four steps described above should help.

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This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Ways Longevity Is Changing Retirement Planning (And What to Do About It)

Aja McClanahan — Mon, 22 Jan 2018 09:30:09 +0000

There's no doubt about it: People are living longer and need more money to support their extended life spans. In the U.S. alone, the average life expectancy has reached the mid-80s for people turning 65 today, though it's not unusual for someone to live well into their 100s.

Longer life spans should be a reason to rejoice — after all, it means additional memories and experiences that come with having more time on earth. However, living longer also brings legitimate concerns about saving enough money to support such a long stay.

If you're uncertain that you'll have enough money to enjoy a retirement of 30 or 40 years, you should start planning now. Take a look at how living longer could affect your retirement income and what you can do to prepare for it.

1. You need to save more money

Much of the financial advice for retirement hasn't considered a retirement period that could last 30 or 40 years. If people aren't advised to save enough during their career, they'll likely have a smaller nest egg that will be depleted much faster. In the case of a long life span, saving the typical 10 to 15 percent of income traditionally recommended for retirement probably won't be enough.

You should consider working with a financial planner to discuss the prospects of a longer retirement. Get solid numbers on your potential cost of living to cover various scenarios. Calculate what you could need 20, 30, and even 40 years after you leave the working world, and figure out the amount of money you should be saving to cover those scenarios. (See also: How to Face These 7 Scary Facts About Retirement Saving)

2. Your investments may need longer exposure to risk

There are a couple of ways your investing strategy may change with a longer life span. For one, you may find yourself using catch-up contributions and may opt to max out every retirement vehicle you can as early as your 40s and 50s.

Then, there's the idea of allocation and risk. Morgan Ranstrom, CFA of Trailhead Planners, says that moving away from equities into bonds may no longer be a good strategy. "It may be necessary to maintain more stock and/or risk exposure in a retiree's investment portfolio to reduce the risk of outliving their money," he says.

An investment adviser can help you create a reasonable asset allocation plan that considers a longer retirement period. Make sure you have a rebalancing plan for each stage of your life, from pre-retirement through 20 or 30 years post-retirement. Seeing these scenarios, with possible outcomes, will give you an idea of how to adjust your investment strategy both now and later on in life. (See also: 7 Reasons to Invest in Stocks Past Age 50)

3. You'll need more insurance

Michael Dinich, professional estate and tax planner, points out that, "Many universal life policies were funded at a level that would only guarantee coverage until mid-80s." Extending policies for older retirees can be extremely costly, leaving people without coverage when they need it most.

In addition to life insurance, longer life spans could increase the need for long term care insurance. This type of insurance can help cover nursing home costs. Getting this insurance in your 50s or 60s can be expensive, but it will be significantly cheaper than if you wait until you're older. (See also: The Best Age to Buy Long-Term Care Insurance)

Check your existing insurance policies to find additional products that may cover your needs. For example, some policies can be converted partially or completely once the term expires so they last longer. There may also be hybrid products that cover a combination of life, burial, and long term care. The key is to check into these options early to prevent being ineligible at an older age.

4. You may need to work longer

Living longer means you may need to keep working longer to continue growing your retirement savings. Kevin Langman, financial planner at Finovo, says he sees clients with a more fluid concept of their working careers. "Instead of working to a set date and stopping," he explains, "we see careers going through stages, with a few decades of full-time work followed by a shift to more part-time and passion-fueled work."

Just because you may need to work later in life doesn't mean it has to be stressful or you have to languish in a job you dislike. Investigate ways to extend your career in a way you don't dread — maybe turn a passion or hobby into a side gig. Langman encourages his entrepreneurial clients to explore residual income options like, "products and services that can continue to generate income even once they are not working on them full-time anymore." (See also: 6 Great Retirement Jobs)

5. You'll need to account for inflation

Brian Saranovitz, of Your Retirement Advisor, says that planning for inflation can be tricky such a long way out. He says, "In some cases, retirees will need to create an inflation-adjusted retirement income for 25, 35, or possibly more years." With such a far-out horizon, it can be hard to pinpoint exactly how much inflation will affect an asset base.

Work closely with your retirement planner or investment adviser to control the effects of not only inflation, but other forces that can erode assets quickly like taxes and market volatility. Some options include exploring alternative investments and insurance products to increase the effectiveness of your portfolio. (See also: 4 Ways to Protect Your Retirement From Inflation)

Roger Whitney has been a financial adviser for 27 years. He sums up the idea of a longer retirement in this way: "Traditional retirement planning worked for our parents. They lived retirement on the park bench of life. The modern retiree will likely live longer, be more active, and spend more in retirement. They'll still be on the playground."

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Signs You're Making All the Right Moves for Retirement

Dan Rafter — Tue, 05 Dec 2017 09:00:07 +0000

The 2017 Retirement Confidence Survey from the Employee Benefit Research Institute made a disheartening discovery; only six in 10 U.S. workers feel confident that they'll be able to retire comfortably. That means 40 percent think they won't.

That's grim news. But you don't have to fall into this group if you're making the right financial moves to prepare for your after-work years.

It can be tricky to know for sure how confident you should feel about your nest egg, but some key signs can indicate that you're on your way to building a happy and healthy retirement.

1. You've worked out the kind of retirement you want

The best way to prepare for retirement? You have to plan for it. This means knowing how you want to spend your after-work years. After all, if you plan on traveling the globe after retiring, you'll need plenty of money. If you instead plan to spend more time visiting your grandchildren, reading, or playing golf, you might not need to save quite as much.

The key is to determine what kind of retirement you want long before it arrives. That way, you can financially plan for it. And if you're in a relationship, remember that both you and your partner have to agree, and prepare for, the retirement lifestyle that suits you both. (See also: How to Find Your New Identity After Retirement)

2. You've set a retirement age

Do you know when you want to retire? You should. That decision can have a huge impact on your finances once you leave the working world.

If you were born between 1943 and 1954, your full retirement age is 66. If you were born after 1959, your full retirement age is 67. You can start claiming Social Security benefits once you turn 62. But if you wait until you hit full retirement age — or beyond — the money you receive each month will be far higher. In fact, if you start claiming your Social Security benefits at 62, your monthly payment will be lowered by 30 percent compared to how much you'd get at full retirement age.

And if you can hang on until age 70, you'll collect a monthly benefit that is 132 percent of the monthly amount you would have received if you started claiming Social Security at full retirement age.

There's nothing wrong with claiming your benefits early, if you've planned for this. But make sure you know how much money you'll need before retiring early. (See also: 5 Questions to Ask Before You Start Claiming Your Social Security Benefits)

3. You've made a retirement budget

Before you hit retirement age, it's important to determine how much money you expect to spend and receive each month once that steady paycheck has disappeared. This means it's time to create a monthly retirement budget.

For income, you can include any pensions, Social Security payments, disability payments, rental income, or annuity income you plan on receiving. You can also include the amount of money you expect to draw from your retirement savings. For expenses, include everything that you'll spend money on each month, including groceries, eating out, mortgage, auto payments, health care expenses, and utility bills.

Once you know how much you'll be spending and how much you'll be earning in retirement, you can better prepare for it. (See also: Here's How You Should Budget Your Social Security Checks)

4. You've paid off your debts

The best way to increase the odds of a happy retirement is entering your post-work years without any debt. That means paying off your credit cards, paying off your mortgage, and making sure you don't owe any money on your car once you've retired.

Paying off debt isn't easy. It's why so many of us are struggling under mountains of credit card debt. Before your retirement hits, though, start funneling money toward your debt. The more you pay off, the less financial stress you'll face in retirement. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

5. You've maximized your retirement savings contributions

You should be contributing to an IRA, 401(k) plan, or a combination of both. But as retirement gets closer, make sure you are contributing the maximum amount to these retirement savings vehicles. Doing so will leave you with the greatest financial cushion for retirement.

It might seem like a financial sacrifice to devote, say, 15 percent of your regular paycheck to a 401(k) account. But by saving that much, as opposed to 5 percent or 10 percent, you can dramatically increase the amount of money you'll have when retirement arrives. (See also: 10 Signs You Aren't Saving Enough for Retirement)

6. You're playing catch-up

Once you hit your 50th birthday, you can contribute even more money each year to your 401(k) plan or IRAs. Take advantage of this benefit to provide a late-in-life boost to your retirement savings.

For the 2017 tax year, you are allowed to contribute up to a maximum of $18,000 in a 401(k) plan. But if you're 50 or older, you can make what are known as catch-up contributions and contribute an extra $6,000 — meaning that you can put a total of $24,000 into your 401(k) this year. For the 2018 tax year, 401(k) contribution limits will be raised to $18,500, which means those age 50 or older can contribute up to a total of $24,500 per year. (See also: 6 Ways Meeting the 2018 401(k) Contribution Limits Will Brighten Your Future)

Traditional and Roth IRAs also have catch-up policies for investors 50 or older. For the 2017 tax year, you can contribute up to $5,500 in either form of IRA. But if you are 50 older, you can contribute an additional $1,000, meaning that you can save up to $6,500 this year in a Roth or traditional IRA. This will be remaining the same in the 2018 tax year.

7. You've prioritized your spending — even when it comes to your kids

It's not easy telling your kids no, even when both they and you are adults. But when it comes to saving for retirement, you might have to do just this.

You might want to help your children pay for their college tuition. And hopefully, you've already saved for this. But if you didn't, you shouldn't be putting off saving for retirement to help your adult children pay for college.

Your children have other options when it comes to college: They can find a less expensive school, attend community college for two years, or apply for loans and grants. If you can't afford to save for both retirement and your children's college tuition, you absolutely must put saving for retirement first.

If you don't? You might just become a financial burden for your adult children when you can't afford to maintain a healthy retirement lifestyle. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

8. You've tinkered with your savings formula

Early in your working days, it's a sound strategy to invest in a riskier mix of stocks, bonds, and other investment vehicles. The potential rewards are higher, and you have more years to recoup whatever losses you might suffer from a potentially more volatile portfolio.

But once you get closer to retirement, it's time to rebalance your investments to eliminate much of the risk. When you're 10 or five years from retirement, you want a safer investment mix because time is running short. You won't have as many years to recover from the downs that sometimes come with a high-risk, high-reward savings portfolio.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Roadblocks to Retirement (And How to Clear Them)

Paul Michael — Wed, 29 Nov 2017 10:00:06 +0000

How often do you dream about retirement? It's nice to think about the day when you can stop answering to a boss, and instead spend your time relaxing, traveling, and enjoying life to the fullest. Well, if you want that dream to become a reality, you may need to make some significant life changes now. If you're guilty of the following things, you could end up working well past your planned retirement age. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

1. You simply aren't putting enough money away

Most people vastly underestimate the amount they need to stash away for their golden years. The problem comes from the fact that many financial planners will tell you to put between 10 and 15 percent of your income toward retirement. However, that assumes you started saving in your 20s.

If you are now 40, and only started putting money away 10 years ago, you need a higher savings rate in order to make up for those missing years. In fact, you would have to put around 25 percent of your salary away each month and work until you're 70 in order to make up for the shortfall. And as always, compound interest is the real key to saving. By missing out on those years in your 20s, you will have significantly impacted your future nest egg. (See also: How to Start Saving for Retirement at 40+)

2. You aren't taking advantage of your employer's 401(k) match

Simply put, any kind of match that your employer gives you is free money, and it would be silly not to take advantage of every cent. The average match out there is 3 percent of your pay, although companies can vary greatly on what they offer. This means that if you only put in 2 percent of your salary, you are leaving 0.7 percent of your income on the table. It may not seem like a lot, but that can really add up over time.

If your company offers you 50 percent on the dollar for up to 6 percent of your pay, you should be putting 6 percent away. If it's a dollar amount match, say $2,500 per year, make sure you put in at least that amount. (See also: 5 Dumb 401(k) Mistakes Smart People Make)

3. Your plan is not aggressive enough

Most 401(k) plans have something called a "target date" that is used to figure out what your retirement portfolio will look like. If you have 30 years to go until retirement, you will almost certainly want at least a moderately aggressive portfolio. This will be comprised primarily of stocks, which offer higher gains, but are more volatile and can lose their value quickly. However, the stock market will always recover over time, and if you have that time to spare, this is the plan you should use.

If you have less time to go until retirement, your portfolio will have way less stocks in it, opting instead for a larger percentage of bonds. These are much safer, but they don't have the ability to make as much money as stocks. If you came into the retirement savings habit late, you should talk to a professional about how to organize your portfolio. You simply may not have enough time to make money with a conservative plan, but could also risk losing money with a more aggressive one. (See also: Start Planning Now for When Your Target-Date Fund Ends)

4. You're spending too much of your disposable income

A coffee here. A magazine there. Eating out every week. These small expenditures really add up, and instead of saving the money you'll need to survive after you stop working, these frivolous buys are burning holes in your pocket.

Yes, life's little luxuries are important for your morale and self-esteem from time to time, but get a handle on those expenses and budget accordingly. You may find that you're spending $40 a month just on coffee. That's $480 a year. Let's say you plan on retiring in 30 years, and you stop getting that morning coffee for one year. A good rate of return on retirement investments is about 8 percent. Thirty years down the road, that $480 will become almost $5,000. If you cut your daily coffee out entirely, it will add over $63,500 to your retirement fund in a 30 year period. Now think about it: Is that "luxury" really worth it? (See also: 7 Effortless Ways to Prevent Budget-Busting Impulse Buys)

5. Social Security benefits alone will not be enough

It seems unfair that we pay into the system all our working lives, and when it comes time to retire, we get very little back. But, that is simply the result of a population that is living longer, yet retiring at the same age of 65. There just isn't enough money in Social Security to totally support you unless you have almost everything completely bought and paid for by the time you retire, and even then, it will be tough going.

Right now, benefits for retired workers average around $1,374 per month, or just over $16,400 annually. When you consider that the federal poverty line is currently $12,060 for a one-person household, that's a little too close for comfort.

While it's possible to survive on that, barely, you have to ask yourself: Do you really want to spend the last 20+ years of your life scraping to make ends meet? (See also: 6 Smart Ways to Boost Your Social Security Payout Before Retirement)

6. You're using your home like a cash machine

It's so tempting to dig into the equity in our homes, especially when the housing market is strong and interest rates are so low. But, every time you refinance your home to take out money, and start another 30-year mortgage, you are seriously impacting the quality of your retirement.

Ideally, by the time you retire, you'll want that home to be paid for; no mortgage left, only taxes and maintenance. But if you are 40 years old and just did a 30-year refinance to take out some cash, you've ensured you'll be paying that mortgage until you hit 70. Not only that, but every time you do a cash-out refi, you're spending money on fees.

If you must refinance, consider doing a 10 or 15-year fixed rate term instead. Get that mortgage paid off quickly. You'll also pay thousands less in interest over the life of the loan. (See also: 3 Times a Refinance Is the Wrong Move)

7. You're not aiming to become a millionaire

When people start tucking away money for retirement, they don't really consider the lump sum they are going to need when they eventually stop working. And ask any average Joe if they will be a millionaire one day, and they will laugh at you and say something like, "Yeah, right!"

But, everyone should be doing what they can to become a millionaire in retirement. While it may not be possible to hit that figure exactly, you should still aim as high as you can.

It's commonly advised that by the time you hit retirement age, you should have at least 10 times your current salary in your retirement account. With the current median income hovering around the $60K mark, that means that you should have just over half a million dollars in your fund if you retire this year. If you're a higher earner, let's say you earn $120K a year, that figure should be over a million. (See also: Here's How Far $1 Million Will Actually Go in Retirement)

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Revive an Old Retirement Fund

Dan Rafter — Fri, 10 Nov 2017 09:00:06 +0000

You know that you should be investing regularly in a 401(k) plan or IRA to build a retirement nest egg. But what if you haven't been contributing enough to your 401(k)? What if that old IRA that you started a decade ago has been sitting untouched ever since?

Or, what if you're past 50 and retirement is looming ever nearer?

The good news is that it's possible to revive an old or neglected retirement savings plan, even after you've hit the half-century mark. It just takes dedication to devoting more of your income to your IRA or 401(k) plan along with a willingness to take advantage of catch-up contributions that are available to those 50 or older. (See also: 7 Retirement Planning Steps Late Starters Must Make)

Some concerning statistics

According to a 2017 retirement plan wellness "scorecard," 75 percent of Baby Boomers between ages 50 and 68 are contributing to their 401(k) plans. That sounds great, but Baby Boomers actually had the lowest participation among all age groups in the study.

The same study found that 77 percent of Gen Xers (ages 35–49) contributed to their 401(k) plans while 82 percent of millennials (ages 21–34) did the same.

More worrisome news came from the 2017 PWC Employee Financial Wellness Survey. The survey found that 30 percent of Baby Boomers have just $50,000 or less saved for retirement — significantly short of the amount needed for a happy and healthy post-work life. (See also: 10 Signs You Aren't Saving Enough for Retirement)

Time to play catch-up

If you don't have enough money in your 401(k) plan, or if you have an IRA that you've been mostly neglecting, you can boost the amount of money you save each year if you are age 50 or older.

For the 2017 tax year, you are allowed to contribute up to $18,000 in a 401(k) plan. But if you're over 50, you can go past this threshold with what are known as catch-up contributions. Currently, at 50+, you can contribute an extra $6,000 to a 401(k) for a total of $24,000 a year.

Traditional and Roth IRAs also have catch-up policies for investors 50 or older. For the 2017 tax year, you can contribute up to $5,500 in either type of IRA. But if you are 50 or older, you can contribute an additional $1,000 for a total of $6,500 this year in your neglected IRA.

If you can make these extra contributions happen, do it. The catch-up contributions are designed to help sluggish savers boost their retirement dollars as they get closer to leaving the workforce. They're a good option for providing a boost to a 401(k) plan or a largely ignored IRA.

Increase your regular contributions

When you take out a 401(k), you tell your employer what percentage of your paycheck you want devoted to the savings vehicle. If you're not contributing as much as possible with each paycheck by the age of 50, now is the time to change that. It is absolutely essential, if your retirement savings account is lacking, to boost those regular contributions.

You should definitely increase those contributions so that you are saving enough to meet your company's matching program, if it offers one. Many employers offer a matching program. To take advantage of this, you'll have to contribute a set minimum amount of dollars in a given year to your 401(k).

The amount of money employers match, and the way company matching programs work, varies. But it is possible to earn thousands of dollars in free money each year if you contribute enough of each paycheck to qualify for matching funds from your employer. Those funds are basically free dollars from your company, and can help provide another boost to a 401(k) plan that needs more money.

Change your spending priorities

Once retirement nears, boosting your savings for it should become your top financial priority. Fortunately, many adults in their 50s have already helped pay for their children's college tuitions, so that major expense is behind them. These adults can then boost the amount of money they contribute to old IRAs or underfunded 401(k) funds.

But what if you still have children getting ready to attend or already attending college? It's OK to tell these kids that your retirement savings come first.

Financial experts agree that it is more important for adults to build their retirement savings than it is for them to pay for their children's college tuitions. This doesn't mean that you can't help your kids pay for college. It just means that you shouldn't contribute so much that you can't afford to sock away enough for retirement. (See also: Are You Ruining Your Retirement by Spoiling Your Kids?)

As you move past 50, it's time to shift priorities toward yourself. You don't want to enter retirement unsure of whether you have enough dollars saved up to afford it.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Ways to Protect Your Retirement From Inflation

Dan Rafter — Fri, 03 Nov 2017 09:00:06 +0000

When you're saving for retirement, it's easy to forget that the goods you'll be buying years or decades from now will probably cost more, all thanks to inflation. It's important to keep this in mind when planning the amount of money you'll need during your after-work years.

Here are five ways you can inflation-proof your retirement savings:

Don't be too conservative

It can be tempting to stow a greater percentage of your retirement income in low-risk bonds, especially as you get nearer to your retirement date. And bonds certainly should be part of your retirement portfolio. But too many people focus too much on bonds. They don't look at the real return on these investment vehicles with the effects of inflation factored in. Because bonds are less risky, they also offer lower rates of return.

Say a bond has rate of return of 6 percent. If inflation is at 3 percent, that rate of return is really only 3 percent — a fairly low payoff.

That's why it's important to include some riskier investments, such as stocks, in your retirement savings plan. Yes, there is more risk that stocks will lose value. But stocks also have the potential of providing a far higher rate of return; one that will help overcome the rising costs that come with inflation. (See also: 7 Reasons to Invest in Stocks Past Age 50)

Do your research

Investing in just any group of stocks won't help you overcome inflation. Certain companies and financial sectors thrive when inflation rises, while others tend to struggle. For instance, investing in retail stocks might not help you overcome inflation. That's because retailers tend to struggle when high inflation makes the products they are selling unattractive to consumers. However, companies in the agricultural sector tend to do better when inflation is higher. Their stocks, then, are a better hedge against a rising inflation rate.

Invest in treasury inflation-protected securities

Treasury inflation-protected securities, better known as TIPS, are designed to protect investors from inflation. That's because the return is tied to the Consumer Price Index. This is an especially useful tool for investors living on a fixed income, like retirees.

Say you invest $100,000 in TIPS. If inflation is 4 percent, your principal balance will now be worth $104,000 after a year. When TIPS reach their maturity date, investors get back either their original principal amount — what they originally invested — or one that's been adjusted for inflation, whichever is greater. TIPS also provide a bit of interest income, paying this out every six months. Investors don't have to pay state and local taxes on this interest or on the growth in principal, but they do have to pay federal taxes on that money earned.

Investors can purchase TIPS at no cost from the U.S. Treasury in $100 values. You might also be able to invest in TIPS when you invest in a mutual fund that includes them as part of their investment mix.

Invest in commercial real estate

The value of commercial real estate can continue to rise even if the stock market is struggling. By including investments in commercial real estate along with stocks in your retirement savings portfolio, you can build a diverse investment mix that you can then use as a hedge against inflation.

The easiest way to invest in commercial real estate is to put your money in a real estate investment trust, or REIT. With a REIT, you'll be pooling your money alongside other investors in commercial real estate buildings such as offices and apartment properties. You can also invest in a mutual fund that includes commercial real estate assets among its investment mix. (See also: The Only 5 Rules You Need to Know About Investing in Real Estate)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

We Do the Math: Save for Retirement or Pay Off Credit Card Debt?

Julie Rains — Thu, 18 May 2017 08:30:15 +0000

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.

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.

Step 1: Gather important numbers about your debt and your retirement plan

First, look through your credit card statements and accompanying information to pull up the following numbers:

Credit card debt. You'll find this on the front of your credit card statement.
Credit card interest rate, or APR (Annual Percentage Rate). You'll find this further down on your statement, in a section labeled "Interest Charged" or something similar.
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.

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.

Finally, how much extra do you have in your monthly budget that you could put toward credit card payments, retirement investments, or both?

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.

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.

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).

In reality, you might choose instead to make tax-deductible contributions to a traditional retirement account. With a Roth 401(k) there are no immediate tax benefits, which makes our calculations simpler and therefore better suited for this purpose.

We'll say the default investment in our 401(k) is a target-date mutual fund 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.

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.

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.

Step 2: Calculate net worth if you prioritize retirement savings over paying off credit card debt quickly

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.

You can also find an online calculator 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):

Current credit card balance: $5,000
Annual percentage rate: 22%
Proposed additional monthly payment: $0
Minimum payment percentage: 3%
Minimum payment amount: $25
Skip December payment when offered? No

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 "Detailed Results" to see a breakdown of the payments. Make sure that under the Assumptions tab, you've asked for a monthly table display.

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.

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.

After five years (60 months), our credit card balance will be trimmed to less than $2,500.

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.

You can download the spreadsheet with these calculations.

Step 3: Calculate net worth if you pay off credit card debt completely before investing for retirement

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.

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):

Current credit card balance: $5,000
Annual percentage rate: 22%
Minimum payment percentage: 0%
Minimum payment amount: $0
Proposed additional monthly payment: $500
Skip December payment when offered? No

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 — 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.

After we finish paying off the credit card debt, we can begin investing. We'll invest $426 in the twelfth month ($500–$74) and $500 in subsequent months. Consider using a Future Value calculator, to determine how much your retirement account will be worth at the end of five years.

Here's the information we entered into the Future Value calculator:

Number of periods: 48. (We'll invest for four years, or 48 months.)
Start amount: $426. (We'll start with the first month's contribution as the balance in our account.)
Interest rate: 0.5% (6% annual rate divided by 12 months).
Periodic deposit: $500.
Deposit made at the beginning or end of the period: End.

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 — that's $2,790 more than if we had prioritized retirement savings first and stuck with only paying the minimum on our credit card debt each month.

What else to consider

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:

Larger or smaller credit card balances;
Higher or lower credit card APRs;
Better or worse investment performance;
Availability of a company match on your 401(k);
Administrative fees associated with your 401(k);
Choosing to invest in a traditional 401(k).

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.

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 saver's credit, which further increases the benefit of retirement savings.

How to get started with either scenario

Whatever path you choose, you may need help taking first steps. Consider these ways to get started:

Debt payoff

Consider transferring or consolidating your balances on a 0% balance transfer card.
Consider a no-spend week or month in which you don't spend on anything except essentials.
Apply cash gifts from family to credit card balances.
Work a part-time job to pay down balances.
Find ways to spend less on everyday expenditures and apply savings to debt payoff.

Retirement saving

Consider enrolling in your employer's retirement plan, if offered. You may have the opportunity to contribute to a 401(k) or 403(b) account, for example.
Set up an IRA with a brokerage account or robo-adviser.
Start an SEP-IRA if you have self-employment income.

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.

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.

Should you save for retirement or pay off credit card debt? Doing the math can help you make a decision.

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This article is from Julie Rains of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Half of Americans Are Wrong About Their Retirement Savings

Matt Bell — Fri, 28 Apr 2017 09:00:08 +0000

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.

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.

Let's break it down.

Over half are not well prepared

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.

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:

The increased time people are spending in retirement — the result of a fairly static average retirement age (around 63) combined with lengthening life spans.
Increases in Medicare premiums.
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, "individuals make mistakes at every step along the way," which has resulted in a woefully inadequate median retirement account balance of just $111,000 for households nearing retirement.

Over half of the unprepared don't realize it

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 — the worst possible situation. (See also: 10 Signs You Aren't Saving Enough for Retirement)

The study's authors identified two main reasons.

First, there is a "wealth illusion" 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.

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.

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.

Of those who are prepared, half don't realize it

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.

The study's authors cited three main factors:

For homeowners, not understanding how much income could be generated through a reverse mortgage.
For those still covered by a defined-benefit pension plan, not fully appreciating just how valuable that benefit is. (See also: If You're Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do)
If married, not understanding how much money they may be entitled to via spousal Social Security benefits.

Solutions

What should you do if you realize you may be under or over-preparing for retirement? Run some numbers using a retirement planning calculator — preferably a couple of calculators since different tools use different assumptions — and rerun the numbers periodically. (See also: How Much Should You Have Saved for Retirement by 30? 40? 50?)

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: 7 Retirement Planning Steps Late Starters Must Make)

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Retirement Accounts You Don't Need a Ton of Money to Open

Kat Tretina — Mon, 24 Apr 2017 08:00:10 +0000

When I graduated from school and started working, my parents and friends told me repeatedly how important it was to start saving for retirement. But when I looked into opening an account, most institutions required $1,000 or more to get started. I didn't have that much money to set aside, and it seemed so overwhelming. So I didn't open an account until years later.

I'm kicking myself for it. The earlier you start saving for retirement, the more compound interest it builds and the less you need to invest to retire comfortably. I missed out on years of interest because I was too intimidated by account minimums, and didn't think of alternatives. (See also: 10 Signs You Aren't Saving Enough for Retirement)

Instead of making my same mistakes, you can start saving for retirement today by opening a Roth IRA. Below, find out why Roth IRAs are such a useful option and where you can open one without a lot of startup cash. (See also: 4 Reasons Why a Roth IRA May be Better Than Your 401(k))

What is a Roth IRA?

If you're just starting out, don't have access to a 401(k), or want to supplement your retirement nest egg, a Roth IRA is a fantastic savings vehicle.

Unlike a 401(k), where you make your retirement contributions with pretax dollars, with a Roth you contribute your after-tax income. While that means you don't get an upfront tax break, you won't owe money on account withdrawals once you retire. You already paid taxes, so you can take out the money free and clear.

A Roth IRA is a perfect tool for young people just starting out. Because your contributions are made after taxes, you can take out the principal from the Roth IRA in the case of an emergency without owing any penalties or fees. While you should never touch your retirement savings except in the most dire of circumstances, having money in a Roth IRA can give you additional peace of mind. (See also: Using Your Roth IRA as an Emergency Fund — Ever a Good Idea?)

Roth IRAs with low minimums

While many institutions require a minimum investment of $1,000 or more to open an account, there are several reputable firms where you can open a Roth IRA without a minimum investment.

1. TD Ameritrade

TD Ameritrade does not charge any setup, low-balance, or annual fees for Roth IRAs, and they do not have a minimum startup investment. You can open an account with just a few dollars. There are commission and brokerage fees, but TD AmeriTrade's fees are low compared to other big-name banks and brokerage firms.

2. Capital One

Capital One is one of the oldest online brokerage firms around, and they offer low fees and automatic contribution and investment options. There are no minimums to open a Roth IRA and they do not charge inactivity fees, but you do need to be a Capital One 360 customer. If you have a checking or savings account with Capital One, you can sync your account so you can view them all at once and make contributions or withdrawals between them.

3. Scottrade

With Scottrade, you can open a Roth IRA with no minimum investment, zero account maintenance fees, and trades for as little as $7 each. You can invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

4. Merrill Edge

Merrill Edge offers Roth IRAs with no minimum investment. Ranked #1 in Kiplinger's Best Online Brokers list in 2016, the company charges just $6.95 a trade. And right now, they're offering up to $600 in cash bonuses to new investors who open an account.

5. Betterment

If you are a hands-off investor and would like help choosing and managing your investments, Betterment may be for you. It's a robo-adviser company that assesses your financial situation, goals, and risk tolerance and calculates an investing strategy for you. There is no account minimum, and the management fee ranges from $4/month for investing balances under $20,000 to 0.25% for balances over $20,000.

Start investing

If you've been putting off opening up a retirement account because you thought you didn't have enough money, know that there are plenty of options, and a Roth IRA is a great place to start. Opening an account and starting the saving habit now — even just a little at a time — will pay off over the long-term.

This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Face 4 Ugly Truths About Retirement Planning

Damian Davila — Fri, 07 Apr 2017 08:00:13 +0000

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: 7 Things Financial Advisers Wish You Knew About Retirement)

1. Employer matches require work

While people often like to think of employer matches as free money, the truth is that you do need to do some "work" to earn those matches.

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 require a year of service 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.

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.

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: 15 Retirement Terms Every New Investor Needs to Know)

How to handle it

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.

2. Full retirement age is higher than many of us think

According to the 2016 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), one in every two American workers expected to retire no later than age 65.

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.

For those born 1960 or later, full retirement age is 67. If this were your case, retiring at age 62 or age 65 would decrease your monthly benefit by about 30 percent or 13.3 percent, respectively. (See also: 13 Crucial Social Security Terms Everyone Needs to Know)

How to handle it

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.

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 "my Social Security" account. Here is a sample of what those letters look like. Second, you could sign up for a my Social Security account at www.ssa.gov/myaccount and have access to your Social Security statement on an ongoing basis.

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.

3. Retirement accounts have fees

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 aren't aware that they pay fees.

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.

How to handle it

One way to start minimizing investment fees is to pay attention to the annual expense ratio of the funds that you select.

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 and increasing your chances of higher returns.
Explore index funds. For example, the Vanguard 500 Index Investor Shares fund [Nasdaq: VFINX] 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.
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: Watch Out for These 5 Sneaky 401(k) Fees)

4. 401(k) loans are eating away nest eggs

According to the latest data from the EBRI, 23 percent of American workers took a loan 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 $25 to $100 and maintenance fees can go up to $75, 401(k) loans are one expensive form of financing. (See also: 5 Questions to Ask Before You Borrow From Your Retirement Account)

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.

How to handle it

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 third or fourth loan, and 20 percent of 401(k) borrowers came back for five 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: This Is When You Should Borrow From Your Retirement Account)

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Inventor of the 401K Has Second Thoughts About Your Retirement Plan — Now What?

Tim Lemke — Mon, 13 Feb 2017 10:30:33 +0000

In the early 1980s, the 401K plan was introduced as a potential supplement to the pension plans offered by employers. Now, they are a staple of retirement planning, while pensions are available to fewer workers than ever before.

A 401K allows workers to set aside a certain amount of their salary and invest into a variety of mutual funds. Often, companies will match contributions up to a certain amount. These plans can be powerful vehicles for amassing great wealth in retirement, but the founders of these plans recently voiced concerns that the plans are inadequate for many people, and that they were never meant to replace pensions altogether.

For sure, 401K plans place more of the savings burden and risk onto the individual than pensions do. And many plans are lousy, with high fees and poor investment choices. So, what to do? Here's how to build that big retirement fund even when you're at the mercy of the 401K.

1. Save Up to the Match, Regardless

You may be annoyed that a 401K is all your employer has to offer, but if the company is offering to match contributions, you'd be a fool not to participate. Even if the plan has lousy mutual funds with high fees, free money is still free money. Most good companies offer at least 50 cents for every dollar you contribute up to a certain amount, and that can add up to a lot of dough over time.

2. Get an IRA

A 401K is not the only vehicle for saving for retirement. Individual retirement accounts, or IRAs, offer some good tax advantages and better flexibility than a 401K. There's no company match for an IRA, but you have the ability to invest in just about anything. That's why many investors will put money in a 401K up to the company match, then put any additional savings in IRAs. Most people can contribute $5,500 annually into an IRA. With a traditional IRA, any money you contribute is deducted from your taxable income. With a Roth IRA, your money is taxed right away but you don't have to pay tax on any gains when you withdraw the money at retirement.

3. Start Early and Have a Long Time Horizon

Despite the flaws of a 401K, it's still very possible to amass a large sum for retirement if you begin investing when you are young and keep it up for a long time. If you enter the workforce when you're 18 and keep saving and investing until retirement age, that means you'll have 45 years to allow your nest egg to grow. In fact, under this scenario, it's possible to retire a millionaire by putting aside less than a few hundred dollars per month.

4. Find the Low-Cost Funds

Even if your 401K plan isn't perfect, you owe it to yourself not to make matters worse by investing in bad funds. Many 401K plans offer mutual funds with high management fees and other expenses, but most also offer low-cost options, including basic S&P 500 Index funds. Find those funds with the lowest fees, so you get to keep more of your money. Look for funds with expense ratios below 0.5%, if possible.

5. Embrace the Power

When an employer offers a pension, it almost always contributes to a pension fund and then hopes that investment returns are enough to meet the obligations they have to employees. So in reality, the only significant difference between a pension and a 401K plan is who is in control. With a 401K plan, you have more control over how you invest. For some people, this is scary. But for others, it's just as scary to leave their financial future in the hands of others.

6. Make a Good 401K Part of Your Job Search

Think about the last time you searched for a job. When you applied and interviewed for positions, did you take the quality of the company's 401K plan into account? Chances are, this was far down the list of concerns, below salary, health benefits, and even vacation time. But imagine if more people turned down job offers because of a lousy 401K plan or a low company match. If more prospective employees voiced concerns about the quality of retirement plans during the hiring process, companies might be more likely to improve their plans.

7. Talk to Your Lawmakers

It's unlikely that the President or Congress can force companies to bring back pensions, but they are the ones who could change 401K plans to make them more attractive. Lawmakers could pass legislation that improves the tax benefits of plans or increases the amount investors are allowed to contribute. They could pressure companies to boost their matching contributions, and require more companies to offer plans to more employees. Lawmakers could also propose new kinds of savings plans managed by the government. At the very least, voicing your concerns about the quality of the 401K as a retirement option could start a conversation on Capitol Hill.

8. Join a Union, If You Can

Much of the erosion of defined benefit plans has coincided with the drop in influence of labor unions in America. According to the AFL-CIO, about 75% of union workers participate in defined benefit plans, compared to about 20% for nonunion workers. But far fewer people are part of unions these days.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 of the Fastest Ways to Go Broke in Retirement

Matt Bell — Mon, 19 Sep 2016 09:00:11 +0000

Ah, retirement. The golden years. Time to kick back and enjoy a little well-earned rest and relaxation.

Not so fast. For many older Americans, their later years are filled with financial worry. And much of it is self-inflicted.

Here are four key mistakes retirees make that can leave them living on financially shaky ground.

1. Investing Too Conservatively

I still remember my high school golf coach stressing the importance of hitting through the ball instead of to the ball. Something similar can be said about investing in retirement.

It would be a mistake to think of your retirement date as something you invest to, after which you shift dramatically into an ultra conservative investing mode.

Play it too safe with your nest egg and inflation will wreak havoc on your hard-saved money.

With the odds increasingly stacked in favor of living a long life, it's important to continue investing in a way that you're likely to at least outpace increases in the cost of living. That usually means maintaining some level of exposure to stocks.

One way financial advisers suggest minimizing the fear of stock market investing in your later years is to develop a healthy cash savings account before retirement — a very healthy savings account.

More specifically, they recommend having one-to-two years' worth of living expenses in savings. During times of market decline, the idea is to withdraw from that savings account for living expenses instead of drawing on your investment account, thereby giving your investment account time to recover.

2. Investing Too Aggressively

Of course, the opposite is true, as well. You don't want to hit retirement, realize you don't have enough in your IRA or 401K, and try to make up for lost time by investing like you're a 20-year-old with plenty of time to ride out the markets ups and downs.

The time-tested principles of asset allocation still apply. Take a good risk tolerance questionnaire and set your stock/bond mix accordingly.

3. Carrying Too Much Debt Into Retirement

Ideally, you want to retire your mortgage by the time you retire from your job. Having to continue paying on what for most people is their single largest expense can be burdensome, especially with health care expenses looming as a great unknown.

Today, however, more seniors than ever are still making payments on their homes. According to the Consumer Financial Protection Bureau, about 30% of homeowners age 65 and older have mortgages.

And not only that. Many seniors are still paying off student loans. In 2014, about 17% of outstanding student loan debt was held by borrowers in their 50s, according to the New York Fed. Some of that debt was incurred for the borrowers' own education, perhaps because they went back to school later in life or they refinanced earlier loans. Some of it was for their kids or grandkids.

If you still have mortgage, student loan, or credit card debt, it can be helpful to your sanity and your solvency to delay retirement until such debts are paid off.

4. Keeping the Bank of Mom and Dad Open

According to a Merrill Lynch study, 68% of parents age 55 or older have provided some form of financial support to their adult children in the past five years. That support included helping to make their rent or mortgage payments, pay their cellphone bills, cover their car payments, or pay their health care costs.

Many other parents stand ready to help. According to a study by BMO Harris Premier Services, nearly 50% of parents said they'd be willing to put off their retirement if their adult children needed financial help. Some 25% said they would take on debt, and 20% said they'd raid their retirement accounts if necessary.

However, in their classic book, The Millionaire Next Door, authors Thomas Stanley and William Danko said many parents mistakenly assume that soon after providing some financial help, their adult children will be financially self-sufficient. Instead, they found that recipients of so-called "economic outpatient care" all-too-easily become dependent on such help, making it bad for the adult children and their parents alike.

Far better, they said, to "teach your children to live on their own."

No Mulligans

My high school golf coach didn't let us take do-overs, or "mulligans," during practice rounds. He said it was a bad habit. After all, there would be no second chances in a tournament.

The same can be said about managing money in retirement. When we get older, we simply won't have time to recover from financial mistakes. So take these lessons to heart as you plan for a financially secure retirement.

This article is from Matt Bell of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

13 Money Goals You Can Still Reach by 2017

Mikey Rox — Fri, 12 Aug 2016 09:00:08 +0000

We've passed the halfway point of 2016, and maybe you're down on yourself because you haven't achieved some of your annual financial goals. Life can sometimes derail our money-saving plans — and that can make you feel like a failure. But the year isn't over yet. So chin up, buttercup! It's never too late to give your money a makeover, like with these 13 money goals that are still attainable by 2017.

1. Increase Your Emergency Fund

Whether you want to increase your fund by $500 or $1,000, there's still time to build your bank account.

Ideally, you should have about three to six months' of income in reserves. If you're not in a position to save this much, aim for an emergency fund sufficient to help you get through most unexpected expenses, like a home or car repair. You'll have to make a few sacrifices, such as spending less on entertainment or shopping less, but with five months left in the year, you can hit this goal by saving $100 to $200 a month.

2. Start Planning for Retirement

Your retirement account isn't going to grow itself. The older we get, the more important it is to plan for the future. If you haven't started saving for retirement yet, now's the time to get serious. Talk to your employer about enrolling in the company's 401K plan. If this isn't an option, open an Individual Retirement Account (IRA) through your bank or with the help of a financial adviser.

3. Increase Retirement Contributions

Then again, maybe you're already saving for retirement, but feel now's the time to increase your contribution. Whether you're currently contributing 2% or 5% of your income to a retirement account, set a goal of increasing your contribution by at least 1% before the end of the year.

4. Reduce Expenses

It's easier to attain money goals when you reduce expenses and free up cash. For the next four to five months, eliminate or reduce at least one expense a month. This can include downgrading your cable package or getting rid of cable altogether (it's a common trend these days), using coupons to lower your grocery bill, or riding your bike or carpooling to work a few days a week to save on transportation costs. The savings add up quickly, and before you know it you'll have a bigger bank account.

5. Create a Second Income Stream

Our income isn't always enough to meet our money goals. Rather than complain about your situation, think creatively about ways to increase your income. Working a side hustle a few days a week can generate money to build your savings account, pay off debt, or start saving for retirement.

If you're an expert in your field, offer consulting on the side. Or if you have excellent writing skills, look into freelance writing opportunities and share your knowledge. Don't think your second income stream has to be glamorous, either. If you don't mind odd jobs or getting your hands dirty, you can make extra money around the neighborhood cleaning houses, doing handyman work, or cutting grass.

6. Give Up a Costly Habit

Bad habits are expensive.

Before the end of the year, make a concerted effort to eliminate at least one bad habit. This includes things like drinking too much alcohol and smoking, as well as habits that aren't as dangerous to your health but detrimental to your finances. Do you have a routine of stopping for coffee and breakfast every morning on the way to work? If you can eliminate this $5 daily purchase from your budget, you'll save about $25 a week, or $100 a month.

7. Simplify Your Life

Less can be more. If you're tired of clutter or feel the stuff you own takes too much of your time and energy, set a goal to simplify and unload a few possessions. Selling off items can put extra cash in your pocket, plus you can save money on storage fees and free up space in your house, garage, attic, or basement.

8. Give to Charity

It's not too late to make a charitable donation and give back. While you're simplifying and decluttering your life, consider donating a few items to your favorite organization. You'll not only help someone in need, you can write off charitable donations on your tax return and lower your tax bill.

9. Purchase Life Insurance

Life insurance is necessary for everyone, but especially for people with children and other dependents who rely on their income. A policy can cover the cost of a funeral and burial, plus pay off any expenses you leave behind, such as a mortgage and credit cards.

There are no hard-and-fast rules regarding the amount of coverage to purchase, but some money experts recommend a policy that's eight to 10 times your income. If you already have a policy, review your coverage to make sure it's adequate for your needs. If you don't have a policy, it's time to get one.

10. Budget Your Money

If you overspend every month and can't get ahead, the problem could be poor budgeting. The truth is, attaining many of your money goals by 2017 will require an airtight budget. You have to know what's coming in and what's going out before you can come up with a plan for your personal finances. Now's the time to put pen to paper and review your income and expenses to determine a reasonable amount to spend in various spending categories, such as food, transportation, entertainment, shopping, etc.

11. Say No to Credit Card Debt

Credit cards are simple and convenient, but they're also a source of pain and suffering if you let balances grow out of control. Before the end of the year, come up with a plan to pay off or pay down at least one credit card. Don't stop until you're debt free. (See also: How to Get Rid of Interest on Your Credit Card Debt)

You can achieve this goal by paying more than your minimums every month. Or negotiate a lower interest rate with your creditors so that more of monthly payments go toward reducing the principal. Since the amounts we owe make up 30% of our credit scores, paying off credit cards also increases your credit score.

12. Automate Your Finances

Paying bills on time also contributes to a higher credit score. Forgetting a due date and paying late can result in late fees, and when bills arrive 30 or more days past due, your credit score suffers. To avoid these situations, automate your finances. Set up automatic bill payments between your bank and creditors and you'll never miss another due date.

13. Check Your Credit Report

Everyone should check their credit reports at least once a year and dispute erroneous information. If it's been more than 12 months since you last reviewed your reports, visit AnnualCreditReport.com today and get a free copy of your reports from each of the three bureaus. Credit report mistakes and fraudulent activity can drive down your FICO score and trigger credit rejections and higher interest rates on loans and credit cards — and when you're charged higher interest rates, you pay more for credit.

What are some of your money goals that you'd like to reach by the end of the year? How do you plan to meet those goals? Let's discuss in the comments below.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Signs You Aren't Saving Enough for Retirement

Andrea Cannon — Thu, 02 Jun 2016 10:30:03 +0000

Are you concerned that you aren't saving enough for retirement? Well, you're not alone. In fact, more than one third of Americans haven't started investing for retirement yet. About 75% of Americans over the age of 40 are also behind on their retirement savings, so it's time to break the statistic. We've come up with some common warning signs that you may not be saving enough and need to increase what you're investing.

1. You Don't Have Specific Goals in Mind

First, you need to figure out what the minimum is that you'll need to retire. This will allow you to properly plan your retirement and ensure you are meeting your benchmark goals. Work on determining a target retirement age and goal amount so that you can develop a savings plan on your own or with a skilled professional.

It's also important that you know what you'll get from Social Security so that you can plan what you need to save above that. Lastly, work on an estimated monthly financial plan so that you have some idea what you'll be spending on monthly bills and debt payments.

2. You Don't Know How Much to Save

Most professionals recommend saving at least 10% of your gross salary, if you've been saving since your 20s. However, if you don't start saving until your 30s, Schwab recommends upping that contribution to 15%–25%. If you start in your 40s or later, you would want to save 35% of your income, which is a rather hefty amount. This is all thanks to the power of compounding interest, so it's never too early to start saving.

3. You Aren't Matching Your Employer's Contribution

If your employer is matching your 401K contribution, that is basically free money invested in your future. That's why it's crucial to at least match your employer's contribution, so that they can help you prepare for your retirement as much as possible.

4. You've Borrowed From Your 401K

Borrowing against your 401K is never a good idea. It may help in the short-run, but in the long-run, it can affect your savings goals and financial health during retirement. You would also need to save more aggressively going forward just to catch up with your original savings goals.

5. You Aren't Prioritizing Your Future

One of the first things you should always think about is building savings for yourself so you have the money you need in case of an emergency or unexpected expense. Short of that savings account, you shouldn't be prioritizing anything over your retirement savings. Your retirement and your future should be your first priority, even over your children's education, because nobody will be saving for your retirement except for you.

6. You're Only Investing in a 401K

Contributing to a 401K is a great start to your retirement savings, but it usually isn't enough. Your best bet is to diversify your portfolio, investing in both a 401K and an IRA or Roth IRA. This will ensure you are well prepared for your golden years. (See also: Which Retirement Account Is Right for You?)

7. You Aren't Accounting for Inflation

On average, inflation rates linger around 3%, which means that your expenses will double in less than 25 years. You will need to account for this, as it's one of the biggest retirement planning mistakes anyone makes.

8. You Haven't Sought Advice

You may not necessarily need a financial planner, but that doesn't mean that you shouldn't seek advice on your retirement portfolio from time to time. For instance, have you diversified properly? Are you investing in the right types of investment products? Have you adjusted your portfolio to match the appropriate level of risk and reward for your age range and lifestyle? These are some of the many questions you need to ask yourself (and/or a professional) to ensure you are saving and planning correctly. (See also: Do You Need a Financial Planner?)

9. You Haven't Started Saving Yet

The sooner you start investing in your future, the more you'll have by retirement, thanks to compound interest. This also means that the sooner you start saving, the less you'll need to save every month to have enough in your retirement years. (See also: Stop Making These 10 Bogus Retirement Savings Excuses)

10. You're Worried About Retirement

Possibly the most obvious sign that you aren't saving enough is that you feel very nervous about retirement. If you don't think you're saving enough, then you probably aren't.

Do you know of other signs that a person isn't saving enough for retirement? Please share your thoughts in the comments!

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This article is from Andrea Cannon of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Moves That Guarantee a Great Retirement

Damian Davila — Fri, 27 May 2016 10:00:12 +0000

Times have changed. Retirement is no exception.

Back in 1998, 60.5% of Americans said they were very satisfied with their retirement in a study conducted by the Employee Benefit Research Institute. Fast forward 14 years later, that percentage dropped to 48.6%. Even worse, the percentage of Americans not satisfied at all with their retirement situation went up from 7.9% to 10.5%.

But you can avoid that fate. Here are four ways to turn this period into the best time of your life.

1. Semi-Retire

An old retirement adage goes, "When you retire, think and act as if you were still working; when you're still working, think and act a bit as if you were already retired." There are three good reasons why this is true.

First, putting off retirement may help stave off certain maladies of aging, such as Alzheimer's disease. According to French researchers, there is a correlation between higher retirement age and lower dementia risk.

Second, later retirement allows you to make the most out of your nest egg:

While you can start receiving Social Security retirement benefits at age 62, you can wait until full retirement age to receive delayed retirement credits.
Roll over a former employer's 401K plan after you turn 70 1/2 into another plan with a current employer, and you aren't required to take required minimum distributions (RMDs) starting the second year after the rollover.
By continuing to work part-time, you can continue to contribute to a Roth IRA (up to $6,500 in 2016) after you reach age 70 1/2.

Third, 83% of U.S. retirees cited "enjoying working" as a major reason to work for pay after retirement. Among current workers who expect to work in retirement, 79% of them cite "wanting to stay active and involved" as a major reason to work for pay in retirement.

2. Take Advantage of Catch-Up Contributions

Starting age 50, you can make additional contributions on top of the regular limit to eligible plans.

Catch-up contributions of up to $6,000: 401K (other than a SIMPLE 401K), 403(b), SARSEP, and governmental 457(b).
Catch-up contributions of up to $3,000: SIMPLE IRA and SIMPLE 401K.
Catch-up contributions of up to $1,000: Traditional or Roth IRA.

Let's take a look at the power of catch-up contributions: Let's imagine that you have a 401K and you make $6,000 in catch-up contributions for 15 years. Here is how much more you would have at the end of 15 years, assuming different rates of return, in your 401K:

3% return compounded annually: $113,398.69
4% return compounded annually: $122,728.99
5% return compounded annually: $132,951.76
6% return compounded annually: $144,154.23
7% return compounded annually: $156,431.90

3. Research Adequate Health Coverage and Disability Insurance

Despite the best-laid plans, chances are circumstances will require you to make some changes along the way. Nearly one out of two Americans reported retiring earlier than expected. While some individuals have good reasons, such as accumulating sufficient financial resources or wanting to do something else, many had negative reasons. Of those that retire early, 61% of cited health reasons or disabilities, and 18% cited the need to care for a spouse or family member.

This is why getting the right health coverage and disability insurance now for your spouse and yourself is a key way to make retirement enjoyable. Plan ahead so that you don't become part of the 24% of Americans who aren't confident about paying for medical expenses in retirement. Disability insurance is essential for the main breadwinner of the household. (See also: Make These 7 Money Moves Now or You'll Regret It in 20 Years)

If you have to retire early due to health problems, the Social Security Administration suggests applying for Social Security disability benefits, which are full, unreduced retirement benefits.

4. Consider Retiring Abroad

According to a study from a Transamerica Center for Retirement Studies, 71% of Americans say travel has helped them enjoy retired life. That's why one way to turn retirement into the best time of your life is to move abroad. Additionally, living abroad can enable you to reduce your living expenses during retirement, without forsaking quality of life. Several cities around the world offer visa pension programs, such as Malaysia's My Second Home and Panama's "pensionado" program, that offer U.S. retirees generous tax breaks and high-quality medical services at reduced costs. Of course, beautiful locales and ideal weather conditions don't hurt either! (See also: 4 Exciting World Cities You Can Afford to Retire In)

How do you plan turn retirement into the best time of your life?

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: