Retirement should be a time to finally relax and enjoy your golden years, but for many people, this is only possible with careful planning, discipline, and smart financial decisions made during your working years. Below we take a look at some essential tips financially savvy people use to be successful in retirement.
Start Early and Save Consistently
Financially savvy savers know that you need to start early and save consistently in order to reap the most benefits of compound interest. As soon as you can make saving for retirement a regular habit, this should be your goal. By doing so, you can take advantage of the growth potential of your investments and build a substantial nest egg.
Starting Late in the Retirement Savings Game?
If you’re getting a late start in saving for retirement, taking advantage of compound interest is still possible, but it will likely require more focused effort and discipline. The most crucial step to take is to start today. Try to contribute as much as you can to retirement accounts like IRAs and 401(k)s while taking advantage of any matching contributions by employers. You can also delay retirement by a few years if possible, allowing more growth through compound interest. The key when starting late is to practice consistent, disciplined saving and make smart investment choices.
Set Clear Financial Goals
Savvy savers are proactive planners, which means they set clear goals for their money. Take the time to assess your current financial situation, estimate your retirement expenses, and determine how much you need to save to meet those expenses. Set specific, achievable goals to help stay on track and make informed financial decisions. Once you get going, you’ll need to keep tabs on where your money is going and how much it’s growing. Meet with an investment professional at least annually but also after any big life changes—like a new baby or a job transition. You want to understand how those changes could affect your retirement savings plan.
Maximize Retirement Account Contributions
Take full advantage of retirement savings accounts like 401(k)s and IRAs. This includes contributing the maximum allowable amount each year, taking advantage of any employer matches or tax benefits. Additionally, you want to avoid borrowing from your 401(k) account. A 401(k) loan can be risky due to taxes and penalties if you can’t repay the loan. Not to mention, it’s usually not worth the loss of long-term compound growth on the money you borrow.
Minimize Debt
Carrying excessive debt into retirement can be a burden during your golden years, so you’ll want to work diligently to minimize debt before retirement. This might involve paying off credit card balances, mortgages, or other outstanding loans. Reducing debt will decrease financial stress and untangle more resources for enjoying retirement.
Create a Budget and Stick to It
Budgeting is a fundamental tool of financial success. Budgets help to maintain financial discipline and avoid overspending. The financially savvy create detailed budgets that outline their expected income and expenses. They track their spending carefully and adjust their budget as needed to ensure they stay within their means.
Create a Diverse Investment Portfolio with a Long-Term Focus
A well-diversified investment portfolio is a hallmark of savvy savers. Be sure you’re diversifying your investments across various asset classes, such as stocks, bonds, and real estate. This helps lead to more stable and consistent returns over the long term.
Speaking of long-term moves, smart investors play the long game when it comes to investing, and they’re not looking for short-term gains, so they don’t jump from investment to investment with every up and down in the stock market. However, you should also be investing in less volatile wealth building channels, such as mutual funds with a history of growth. Just remember that the key to a successful portfolio of growth is patience.
If you have any questions, or if you’re looking for personalized guidance tailored to your unique situation, don’t hesitate to reach out. Contact me directly for more information or to schedule an appointment. Let’s embark on the journey to a successful retirement together.
Saving for retirement should be a critical component of any financial plan, but it can be challenging if you’re also working toward debt repayment. The good news is that it’s possible to do both at the same time. The key is to be consistent and disciplined, and in time you’ll see the benefits of your efforts. Read on for strategies you can use to save for retirement while tackling debt.
Prioritize High-Interest Debt
High-interest debt, such as credit card debt, can quickly accumulate interest and make paying it off even more challenging. By addressing this debt first, you can reduce the amount of interest you’ll pay over time. The amount of money you’ll rescue from credit card interest can be applied to remaining debt payments. Once your highest interest debt is paid off, move onto the debt with the next highest interest rate. This is known as the avalanche method of paying off debt.
Build an Emergency Fund
Establishing an emergency fund will help you cover unexpected expenses without having to rely on credit cards and thereby adding to your debt. Aim to save at least three months’ worth of living expenses in your emergency fund before you start allocating more funds toward retirement savings.
Increase Your Cash Flow
Increasing your monthly cash flow will provide you with more cushion in your budget to save for your emergency fund, meet your debt repayment plan, and save for retirement. In order to increase your cash reserves, think about requesting a raise, making a career change, or taking on a side hustle.
Consider a Balanced Approach
A balanced approach involves allotting a portion of your income toward paying off debt and a portion toward saving for retirement. You’ll need to decide what percentage of your income should go toward each goal, but this approach can help make progress toward both debt repayment and retirement savings without neglecting one for the other.
Cut Expenses and Establish a Budget
If you’re struggling with debt and saving for retirement, it’s probably time to take a closer examination at your income and expenses. Where is your money going each month? What can you do to build better financial habits? Look for areas where you can cut back, such as dining out, shopping, and entertainment. Even small slashes in costs can have an impact on your finances. When you begin to pay attention to where your money is actually going, you can make informed decisions that will help you redirect more funds toward your savings goals.
Automate Savings
Automating savings is an ideal way to ensure that you’re on track to meet your retirement goals. If your employer offers a retirement plan that allows you to contribute a percentage of your paycheck toward retirement savings, be sure you’re taking advantage of it. You can also set up automatic transfers from your checking account to a retirement savings account like an IRA. Automating savings is a set-it-and-forget-it approach that provides consistent progress in saving for retirement.
With inflation at an all-time high since the 1980s, more Americans are living paycheck to paycheck and sinking further into debt. If you’re trying to get out of debt, you’re not alone. Creating a plan is possible, and you don’t need to start off with a bang. Here are some practical steps you can start today to help set you on the path to becoming debt free.
Decide on a Debt Payoff Strategy
Here are a few proven approaches to boosting the speed of your debt payoff:
Debt snowball: This strategy focuses on paying off your smallest debt first while continuing to pay the minimum monthly amount on all others. Once your first debt is paid off, you roll the amount you had been paying on that debt into payments on the next largest debt. You continue this method until your last and largest debt is paid off. This approach can be effective if small wins motivate you to keep going.
Debt avalanche: This strategy tackles the debt with the highest interest rate first while continuing to pay the minimum monthly amount on all others. Just like the snowball method, once your debt with the highest interest rate is paid off, you roll that amount into payments on the debt with the next highest interest rate, and so on. This approach can be effective if you’re worried about high interest rates as it may help save money over the course of your debt repayment plan.
Debt consolidation: This strategy involves rolling all debt into a single new one, ideally at a lower interest rate. This helps to make payments more streamlined, and could possibly shorten your payoff timeline. You can consolidate debt with balance transfer cards and personal loans. This approach can be effective if you’re overwhelmed by the number of debts and payment dates to keep track of.
Debt management plan: This strategy involves working with a nonprofit credit counseling agency. They can set up a debt management plan to help decrease your interest rate and get you started on a repayment plan. This approach can be effective if you have substantial credit card debt and haven’t made much progress in paying it off.
Tally Your Debt
Once you have an idea of the approach you want to take in paying off your debt, you need to take a deep dive into your accounts. Gather the most recent statements from all your loans and credit cards, and make an inventory of your debts. List each debt with the following information:
Creditor name
Current balance
Due date
Minimum monthly payment
Interest rate
Target date for a zero balance
Once you have all that cataloged, determine your monthly total in debt payments. Note that for credit card payments, if you’re not paying them in full each month, you’ll want to specify the minimum monthly amount due.
Build a Budget
First, get precise with your income, including side hustles, seasonal work, etc. Knowing how much you’re brining in each month from all sources of income helps to paint a clear picture of the available funds to spend. Next, add up your monthly expenses. This needs to include both essential expenses (mortgage, utilities, etc.) and discretionary expenses (typically optional purchases). Once you know your monthly income and expenses, you’ll know how much you can devote to paying down debt.
One way to boost your debt repayment journey is to scale back to a bare-bones budget, focusing on just housing, food, utilities, transportation, and bills while eliminating all discretionary expenses. If you go with this budget style, remember that it’s not forever, and the end goal will be worth it.
Cut Back on Spending
Many of us can’t do a hardcore bare-bones budget, but we can find ways to cut back on spending. Check your online subscriptions, streaming services, gym memberships, etc. How can you lower these costs, or cut them out altogether? Try preparing meals at home and bringing a sack lunch to the office. Keep an eye on water and electricity usage. Try to negotiate lower rates for insurance and cell service. The more you can scale back on spending, the more “found” money you’ll have to put toward debt.
Increase Income
If you find that you’re doing everything you can to tighten your financial belt and still barely making a dent in your debt, it might be time to consider increasing your income. While taking a second job is a viable option, you could also consider taking the initiative to ask for a raise from your employer, especially if it’s been a while since your last pay bump and your work performance has been consistently on point. However, if you’re new to the company or your position, it would be wise to hold off on this approach.
Additionally, side gigs such as dog walking, driving for companies like Uber or Door Dash, babysitting, and cleaning can all help to bring in extra income, and you can work around your full-time job. Also consider selling items you already own on reselling platforms like eBay, Poshmark, Mercari, and Facebook Marketplace.
Lower Your Interest Rates
Lowering your interest rates would allow you to put more funds toward paying down debt. Here are a few approaches:
Balance transfer: A balance transfer allows you to shift debt from one account to another, ideally one with a lower interest rate. Many balance transfer cards offer a 0% APR for a limited amount of time. Moving high-interest debt to a credit card with 0% APR can help you knock down that debt at a much fast clip than sticking with a card with a high APR.
Consolidate debt: Debt consolidation involves combining multiple debts into a single monthly payment. Many creditors offer debt consolidation loans, which are created specifically for paying off debt. Their terms typically specify a repayment period with a fixed interest rate.
Negotiate a lower rate with creditors: Some creditors will work with you to come up with a repayment method that might better help you meet your goal. This could be a reduced interest rate or a smaller minimum monthly payment. Not every lender will offer to help, but it’s worth the inquiry.
Debt repayment is usually a journey, not a sprint, but the steps outlined above can help to pay off debt faster. The sooner you start, the sooner you’ll be debt free.
After working for decades to save for retirement, you’re finally ready to retire. This calls for a pivotal shift in focus from growing your investment portfolio to planning how you’re going to live off those savings, possibly for decades to come. With the right strategies in place, you can help make sure your retirement savings last.
Establish Your Budget
First, you need to determine your known expenses in retirement (both needs and wants) so you can build your budget to meet those costs. Some examples include:
Mortgage payments
Travel goals
Debt repayment
Health insurance and costs
Any big purchases like a boat or a vacation home
Are you planning to minimize expenses in retirement? Are you able to tap into additional income sources in retirement through avenues such as passive income or a part-time job? Will your spending increase now that you’re not tied to a full-time job? These are just some examples of questions to ask yourself to be sure your assets can reach your goals. It’s important to answer them as honestly as possible. And if you start out with conservative estimates — meaning you plan for greater spending than what transpires — you’ll end up with more flexibility down the road. Of course, don’t forget to factor in extra expenses for unforeseen costs that tend to crop up
Is the 4-Percent Rule Right for You?
First, you need to figure out how many years of retirement you need to plan for. If you’re retiring at age 55, plan for at least 40 years of retirement. If you’re retiring earlier than age 55, plan to live until at least age 95 so you don’t run the risk of outliving your assets. If you’re retiring later than age 55, you won’t need to plan for quite as many decades.
Now that you know approximately how many years of retirement to plan for, you need to think about how much you should withdraw. The “4 percent rule” is typically a recommended starting point. Using this method, you would withdraw no more than 4 percent of your retirement savings. This leaves enough funds in the account to give your investments a chance to grow in future years. Growth is important to help withstand the impact of inflation on your assets.
While a 4 percent withdrawal rate will ensure that your money lasts a good while, a more current trend is to withdrawal just 3% from retirement accounts. This is due to the low returns on fixed income investments. Additionally, a more conservative withdrawal rate will give you more elbow room with your budget in the future.
Playing the conservative game is never a bad idea, and could even strengthen your financial position over time. For example, you can allow your accounts to grow by withdrawing just 3 or 4 percent if you consistently average 5 or 6 percent returns.
Balance Income and Growth
Your portfolio needs to line up with your goals, time horizon, and risk tolerance. This typically means selecting a combination of stocks, bonds, and cash investments that will work collectively to produce a steady flow of retirement income and prospective growth — while also helping to safeguard your money. For example, think about:
Building a bond ladder: This is a fixed income strategy where investors disperse their assets across multiple bonds with varying maturity dates. This method provides for short-term liquidity to help manage cash flow and also hedge against fluctuations in interest rates.
Adding dividend-paying stocks to your portfolio: Essentially, each share of owned stock entitles investors to a set dividend payment, which is paid in regular scheduled payments, either in cash or in the form of additional company stock. In this way, they are almost like passive income. They are tax-advantaged and provide protection against inflation, especially when they can grow over time.
Continuing to Hold Enough in Stocks: To keep up with inflation and grow your assets, you still need to stay in the stock game. While stocks are volatile, insufficiency runs an even greater risk of depleting your nest egg too soon. Your stock allocation should align with your investment objectives and time horizon first, then modified for risk tolerance.
Withdrawal Sequencing Matters
The longer your tax-advantaged retirement accounts have to compound, the better off you’ll be in the long run. Therefore, it’s typically recommended to withdraw from taxable accounts first, followed by tax-deferred accounts, and finally tax-exempt accounts like Roth IRAs and 401(k)s. Of course, like anything with taxes, withdrawal sequencing has a number of caveats and exceptions to consider when it comes to your personal circumstances, but this is a reliable starting point.
Manage Your Money
You can help to preserve the long-term growth of your portfolio by managing your day-to-day finances. This means funding an emergency fund — ideally with at least a year’s worth of expenses. Additionally, you can adhere to the three-bucket school of thought:
Immediate Bucket: This is where you stash quick-access funds for safekeeping. A high-yield savings account or a money market account fits the bill because the focus of this bucket is not to earn a high interest rate or return.
Intermediate Bucket: You want the funds in this bucket to grow enough to carry you a little more into the future. You still want to avoid high risk or volatility, so opt for a low-to-moderate risk category that offers a reasonable return on your money — think bonds or CDs. Real estate investment could also fall into this bucket.
Long-term Bucket: This bucket is for growing investments and outpacing inflation. If you’ve set up your immediate and intermediate buckets properly, you won’t need to touch your long-term bucket for at least a decade. Because the goal of these funds is to outlast you, you need to invest into this bucket more aggressively. Stocks, real estate investment trusts, annuities, etc. provide the most growth potential, so this is the bucket for those investments. It’s important to work closely with the guidance of a financial advisor on this strategy.
Individual Retirement Accounts (IRAs) allow for a tax-advantaged way to invest your money long-term. Whether you choose to invest in a traditional IRA or a Roth IRA (or a combination of the two), you’ll defer paying income tax on the money you set aside for retirement. Follow these IRA investment strategies to boost your retirement savings and maximize the value of you IRA.
Max it Out
The maximum amount you can contribute to an IRA for 2022 is $6,000, and it is generally worth making the maximum contribution. Note that there are income limits. You can make a full contribution if your income is less than $144,000 ($214,000 if you are married filing jointly). For 2022, retirement savers age 49 and younger can max out an IRA by saving $500 per month or making a deposit any time before the 2022 IRA contribution deadline of April 15, 2023.
Make Catch-Up Contributions
As of the calendar year you turn age 50, you are eligible to contribute an extra $1,000 to your IRAs for that year, and all following years. If you weren’t able to save as much as you would’ve liked earlier in your career, catch-up contributions offer an opportunity to boost your yearly savings until retirement.
Don’t Wait Until the Contribution Deadline
It’s true that you can make a contribution to an IRA up until the mid-April tax filing deadline and apply it to the previous tax year. By shifting some funds into an IRA, you may be able to reduce your tax bill or boost your refund. However, that may not be the most beneficial move depending on your circumstances. When you wait to contribute, you miss out on potential growth. There is also the chance that you will be making an investment at a high point in the market. Contributing to an IRA at the beginning of the tax year enables the funds to compound for a longer stretch of time. You can also consider making small monthly contributions as a budget-friendly approach that will still yield favorable results.
Low- and Moderate-Income Workers Can Claim the Savers Credit
If your adjusted gross income (AGI) is below $34,000 as an individual or $68,000 as a couple in 2022, you may be eligible to claim the saver’s tax credit as well as the tax deduction for your IRA contribution. This credit is worth between 10% and 50% of the amount you contribute to an IRA up to $2,000 for individuals and $4,000 for couples.
Use Your Tax Refund to Contribute to Your IRA
You can use IRS Form 8888 to deposit all or part of your tax refund directly into an IRA. Provided the deposit is made by the due date of your tax return, you can file a tax return claiming a traditional IRA contribution before the money has actually been deposited in the account. In other words, if you file earlier rather than later, it’s possible to use your tax refund to make an IRA contribution you already claimed on your tax return.
Consider Converting to a Roth IRA
For some taxpayers, it may be beneficial to convert an existing traditional IRA to a Roth IRA. Expect to pay income taxes on the conversion amount, which could be substantial, so be sure to do the math before you make the leap. The funds that are moved into the Roth grow tax-free and will be tax-free upon withdrawal in the future, provided the account is at least five years old. The decision to convert to a Roth IRA basically boils down to whether you want to take the tax hit now or later. The farther away you are from retirement, the more advantageous a Roth IRA could be, because the Roth’s earnings will have more years to compound.
The Federal Reserve recently raised its target federal funds rate by half-a-percentage point, which is the largest interest hike in more than 20 years. This follows an initial quarter-point increase in March. Read on to find out how rising interest rates could impact credit cards, mortgages, auto loans, and savings accounts.
A Delicate Dance to Avoid Recession
Analysts expect more hikes in 2022, taking the federal funds rate to above 2.5% or even 3% by year’s end. The challenge here is raising rates to curb inflation without raising them high enough to trigger a recession. While it will take some time to determine whether rate increases will curb inflation, the effect on your finances could be immediate. Anything from savings account interest to borrowing power to mortgage loans and refinances could be impacted.
Credit Card Interest
Individual banks and financial institutions use the federal funds rate as a starting point to set their own prime rate, or the interest rate passed onto the most creditworthy consumers. Most credit card issuers add several percentage points to the prime rate, so the average credit cardholder can expect their interest rates to be above the prime rate. According to the Federal Reserve, the average interest rate last year was 16.44 percent for cardholders who did not pay off their balance each month. With the latest half percentage point rate hike, an interest rate of 16.44 will increase to 16.94.
If you are carrying credit card debt, think about transferring a high-interest balance to a credit card with a 0% introductory rate. Many cards offer 0% APR for the first 12-21 months. This move will shield you from the rate hikes that are coming down the pipeline while also providing an interest-free path to get that debt paid off for good.
Savings Accounts
While higher interest rates typically raise costs for borrowers, it can mean higher yields for savers. Whether or not rate increases will translate to greater revenue depends on the type of account and can vary from institution to institution. While larger banks already have plenty of deposits, and therefore have little incentive to pay depositors more, smaller banks and credit unions may start raising rates on savings accounts in order to gain new customers. This puts pressure on other institutions to increase their rates, which can cause a domino effect of increasing rates across institutions.
Mortgage Loans
The Federal Reserve does not set mortgage rates, and unlike with savings accounts, the central bank’s decisions don’t impact mortgage rates as directly. However, the mortgage industry as a whole is keenly aware of the Fed, and the industry’s ability to interpret the Fed’s actions means that mortgage rates usually move in the same direction as the federal funds rate. Keep in mind, however, that mortgage rates also react to the ebb and flow of the U.S. and global economies, moving up and down daily. A point worth noting: other types of home loans, like adjustable-rate mortgages and home equity lines of credit, are more in step with the Fed’s move, so these loans will ordinarily move higher the next time an individual loan resets its rate.
Stocks and Bonds
If you are a long-term investor, your portfolio should be built with a balance of both stabilizing (bonds) and riskier (stocks) investments, which means that it should be able to withstand tumultuous periods like this. It’s best not to panic and instead focus on your long-term financial goals regardless of what happens in the short-term.
Car Loans
While car loan rates will increase as the Fed raises interest rates, car buyers need not be concerned because it has a very limited impact on monthly payments. For example, an increase of a quarter percentage point on a $25,000 loan is a $3 increase on monthly payments.
Student Loans
Borrowers who have federal or private student loans with a fixed interest rate won’t be affected by the Fed’s interest rate hikes, but borrowers with variable-rate student loans will see higher monthly payments and total interest charges over the life of the loan.
