Archives for November 25, 2018

The median net worth excluding home equity for Americans approaching retirement age is around $46,000. Using the 4% rule as a guide to sustainable retirement spending levels, $46,000 will provide around $1,840 per year in inflation-adjusted spending power. Throwing sustainability out the window, that $46,000 will provide a couple with a little under three years of a poverty-level lifestyle before running out entirely.

Clearly, as a country overall, we need to save more money. That said, saving is clearly tough to do — if it weren’t, there’d be a lot fewer people depending on Social Security for a majority of their incomes in retirement. To make saving a bit easier and enable you to improve your chances at having financially comfortable golden years, here are five simple tricks for saving more money.

No. 1: Make it automatic

Your 401(k), 403(b), TSP, or other employer-sponsored retirement plan can be an incredible tool to help you save more money. Perhaps the best feature of those types of plans for someone who needs to save more money is that once you sign up to contribute to yours, it’s automatic. The money comes straight out of your paycheck and starts compounding for you as soon as it gets invested.

Generally speaking, there are two families of employer-sponsored plans: Traditional and Roth. In the Traditional plans, the money comes out of your paycheck pre-tax and compounds tax-deferred on your behalf. You do pay ordinary income taxes when you withdraw that money in retirement. In the Roth plans, the money comes out of your paycheck after taxes are calculated, and it also compounds tax-deferred on your behalf. Once you qualify, though, retirement withdrawals from Roth plans are tax-free.

No. 2: Bank your tax adjustment

Every fall, the tax brackets are reviewed for a potential inflation adjustment for the next year. In 2019, the brackets will adjust upward a bit, and the standard deductions will increase somewhat as well. As a result, all else being equal, your first paycheck in January will be a bit bigger than it would have been without those adjustments.

If you were making ends meet before that adjustment, you should still be able to make ends meet after this adjustment hands you more money. If you start saving that extra cash headed your way, you can begin improving your nest egg without feeling any pinch from the adjustment. While each individual adjustment might be small, over time, it can add up.

No. 3: Save half your raises

The average salary increase was around 3% in 2018 and is expected to be similar in 2019. No matter what sort of raise you get, when you get one, your paycheck immediately after the raise will be a bit larger than it was immediately before it. If you were covering your costs before the raise, then the raise itself is gravy. Sock away half of it, and you’ll soon be making substantial progress toward improving your savings.

Why half? Well, when your paycheck goes up, so do your taxes, and in some cases, your benefits costs may rise as well. If you save half of the raise, some of the rest can go to pay for those increased costs, and you will still likely keep a little something extra in your take-home pay as an immediate reward for a job well done.

No. 4: Save your tax refund — twice

Tax refunds have generally averaged between $2,500 and $3,000 each year over the past decade or so. While it may feel good to get that large chunk of change, the reality is that your refund is nothing more than a return of money you loaned to Uncle Sam interest-free. If you really want to loan Uncle Sam money, buy Treasuries and at least get paid a little for the use of your cash.

If you were living throughout the year without that money, it’s an excellent idea to save it, since you won’t feel its loss from your monthly cash flows. In addition, you should be able to adjust your withholdings to get your refund closer to $0 in the future, freeing up a bit from each future paycheck as well. That way you can effectively save your refund twice, once from the refund check itself and the other time through the increased take-home pay from your reduced withholdings.

No. 5: Treat your savings like a priority bill

One of the easiest ways to not save money is to treat your savings like it’s where you put the money left over at the end of the month that you don’t spend on anything else. The trouble with that approach is that your absolute must-haves come first, followed by things you want to spend on, then the absent-minded spending that happens simply because you have the money. As a result, your savings are often neglected.

If you treat your savings like a priority bill and put money toward it first each paycheck, it will be taken care of before the absent-minded spending kicks in. What you’ll likely find with this approach is that you’ll still have enough to cover your needs and take care of some of your wants, but you’ll waste a lot less cash on things you don’t really care about. It can be a pretty painless way to boost your savings.

The more you save, the better off you’ll wind up

The money you save today can go a long way toward providing you with a better future. It doesn’t take much to start down the path of building wealth, but once you do, you’ll begin to feel the incredible sense of empowerment that comes from being in control of your own money. As that money compounds on your behalf, you’ll help yourself get closer to your own financial independence day.

The ability to save money is one of the many skills one must learn in order to become financially successful, and one of the most difficult. Moody’s Analytics analyzed different demographics and determined that savings rates increase as we age.

Sadly, according to their data, only one age group saves between ten and fifteen percent of their income, an amount many financial experts often cite as reasonable. Another age group actually carried a negative savings rate! Find out how much each age group saves to see how you compare to your peers.

Under-35s Do Not Save at All

Surprisingly, those under age 35 do not save a single penny, on average. In fact, this group actually ends up with a negative savings rate of one and a half percent. Negative savings rates are often associated with taking on debt and are often the result of people living beyond their means. The negative savings rate makes sense when you consider all of the costs this age group faces like attending college, starting their first job and starting their first household. If you want to consolidate your debt, join MoneyTips and try our free Debt Optimizer tool.

Investing your savings early in life is one of the most powerful actions you can take with your money due to the effect of compound interest. Unfortunately, the typical person under age 35 is not taking advantage of this great opportunity while time is still on their side.

35-to-44-Year-Olds Begin to Save

The 35-to-44-year-old group saves just 2.6% of their income, which is better than nothing. However, their savings rate is lower than what someone in his or her late thirties and early forties should save to become financially independent.

This age group also has many financial costs to account for, such as buying a first home and raising children. Unfortunately, many people overextend themselves during this time by buying fancy cars and larger homes than they cannot truly afford. Redirecting the money from some of these excessive purchases into investments or IRAs could help this age group reach a higher savings rate.

45-to-54-Year-Olds Save More
Those aged 45 to 54 years old save 5.7% of their income. While that improves over the younger groups’ savings rates, this demographic still does not save enough by any stretch of the imagination.

Many expensive life events, such as raising older children or even paying for college, prohibit many from saving as much as they would like. Parents should not expect to pay for higher education with savings rates this low, as they likely have not yet saved enough for their retirement up to this point. After all, you can get a loan for college, but no one gives out loans for money to live on in retirement.

55-and-Older Group Saves the Most

People aged 55 years or older save the most money, with a savings rate of thirteen percent. This group saves as much as some financial experts cite, but unfortunately, they hit that savings rate way too late in life. This group can likely save more due to fewer large costs, as mortgages are paid off, kids have moved out and job-related costs slow down as retirement draws near.

Comparing savings rates to your peers will show you whether you are saving more than those in your age group are, but comparing does not measure how well you are doing financially, as it is based on others that might not be meeting their own goals. Instead, come up with a plan to reach your financial objectives and calculate the appropriate amount you need to save to achieve them. Only then can you truly know how successfully you manage your finances. There’s a tip you can save at any age.

You still have time before the end of the year to make some money-smart moves that will improve your retirement nest egg. Here’s how:

Max out your retirement plan:

You may be able to squeeze a little more money from each paycheck for your retirement savings. You can contribute up to $18,500 to a 401(k), 403(b) or federal Thrift Savings Plan in 2018, plus $6,000 in catch-up contributions if you’re 50 or older.

Contact your 401(k) administrator or your employer’s human resources department ASAP to find out how much you’re on track to contribute to your 401(k) by the end of the year and to ask about the steps you need to take to boost your contributions.

The earlier you make the change, the better because 401(k) contributions are made through payroll deduction. If you’re contributing to a traditional or Roth IRA for 2018, you have until April 15, 2019.

Add a bonus to your plan:

If you aren’t on track to max out your retirement account for the year, adding money from a year-end bonus can be a great way to boost your contributions without affecting your regular take-home pay.

Rules vary, and some plans don’t allow participants to contribute their bonus, says Mariana Edwards, with benefits consultant Willis Towers Watson.

Make sure that you don’t cross the annual contribution limit. You have until the tax-filing deadline to withdraw any extra contribution and the earnings on it, which will both be taxable.

Use your side hustle to boost retirement savings:

you have self-employment or freelance income, open a solo 401(k). You must open it by Dec. 31, although you have until April 15, to contribute and take a tax deduction for 2018.

You can contribute up to $18,500 ($24,500 if you’re 50 or older) to a solo 401(k), minus any contributions you’ve made to an employer’s 401(k) for the year.

You also can contribute up to 20 percent of your net self-employment income to the plan. Contributions to the solo 401(k) can total $55,000 in 2018 (or $61,000 if 50 or older) but can’t exceed your self-employment income for the year.

Another option is to open a SEP account, but if you have just a little freelance income, you can contribute more money to a solo 401(k). SEP contributions are limited to 20 percent of net self-employment income, up to $55,000.

Convert to a Roth:

Consider converting some money from a traditional IRA to a Roth IRA this year, up to the top end of your income tax bracket.

You’ll pay taxes on the conversion (minus any portion that represents nondeductible IRA contributions), but the money will grow tax-free in the Roth after that.

Be careful about making a large conversion if you’re within two years of signing up for Medicare. Otherwise you could have to pay extra for Medicare Part B if your adjusted gross income (plus tax-exempt interest income) is more than $85,000 if you’re single or $170,000 if you’re married filing jointly.

Your last tax return on file determines your Medicare premiums, so a 2018 conversion could affect 2020 premiums.

One of the great things about being a salaried employee is gaining access to a host of workplace benefits, from health insurance to paid time off to a 401(k) plan. But while some of those benefits might seem like awesome perks, the reality is that they’re not all they’re cracked up to be. Here are a few you might, in fact, be better off without.

1. Free lunch

We all know that food is expensive, so it stands to reason that if your company offers its employees free lunch during the day, that’s something to celebrate. But before you get too caught up in the glory of no-cost soups and sandwiches, remember that by providing lunch, your employer is essentially pushing you to stay in the building all day rather than take an actual break. This especially holds true if you don’t have a dedicated lunch or break room and therefore have no choice but to consume that free food at your desk.

2. A free cell phone plan

Even a cheap cell and data plan will easily cost you $50 a month, so if your company is willing to pay that bill for you, it might seem like a boon. The flip side, however, is that in providing you with that service, your employer might, in turn, expect you to be available at all times. And that’s a good way to kiss your work-life balance goodbye.

3. Free car service home for working late

Some city-based companies will pay to send you home in a car if you work past a certain hour — say 8:00 or 9:00 at night. And if you’re looking at a 45-minute subway ride versus a cushy lift home in a car that’ll take you right to your door, the latter might initially hold more appeal. At the same time, such a policy might prompt you and others like you to work later than necessary, thereby giving up more of your downtime. And while there’s nothing wrong with occasionally clocking in longer hours, recognize that the more you do it, the more your company will come to expect it.

4. Comp time for working weekends

Some companies offer comp time when you’re forced to work over a weekend to address a pressing need. Often, what’ll happen is that you’ll put in a day that you don’t normally work, and your company will, in turn, give you a day back to use later. At first glance, it probably seems like a sweet deal, especially when the alternative is to work on a weekend without getting much more than a thank you in return. But remember that while it’s nice to get a day back, you might be restricted as to when you can use it. Or — a more likely scenario — you might be forced to use it within a very limited period of time (say, the upcoming week), thereby narrowing your chances of actually getting to use it at all.

5. Unlimited vacation

Though most companies haven’t hopped aboard the unlimited vacation train, a growing number of businesses are allowing employees to take time off as needed as opposed to having a preset number of days to use within a given a calendar year. Initially, unlimited vacation time might seem great, since, in theory, it allows you to escape the office without restriction. But be aware that much research has shown that workers actually take less time off under limitless policies. In some cases, you might land in a situation in which if you do take more vacation days than your peers, it reflects poorly on you, thereby causing you to — you guessed it — limit your own time off anyway.

Let’s be clear: It pays to be open-minded about your workplace benefits and not assume that your company has evil intentions behind them. At the same time, be wary of these perks in particular, because what might seem like a good thing at first could end up being nothing more than a reason to eventually hate your job.