Archives for May 13, 2019

You’ll often hear or read that Americans are sorely lacking in retirement savings, and while some of that data is perhaps incomplete or exaggerated, it’s safe to say that a large chunk of workers are not taking steps to build a nest egg. Earlier this year, the Center for Financial Services Innovation found that 42% of U.S. adults don’t have any retirement savings at all.

Why is this problematic? Without savings, you risk struggling financially at a time when you deserve to lead a dignified lifestyle. Social Security, for example, pays the average recipient today $17,532 a year — that’s several notches above the poverty line, but it’s hardly rolling in cash.

Of course, some workers can look forward to pension income or perhaps funds from an inheritance to pay the bills during their golden years. But if you’re not one of them, then you’ll need savings on top of Social Security for a shot at a comfortable lifestyle.

Now some financial experts will tell you that if you’re not in the habit of saving for retirement, and don’t have money in your budget allocated for that purpose, then you’ll need to drastically alter your current lifestyle to fund your nest egg. Many, in fact, will advise you to cut back on just about every luxury possible in an effort to ramp up your savings.

In theory, that’s decent advice. In practice, it’s nearly impossible to follow. And that’s why you’re better taking a middle-ground approach to building long-term savings.

You need to save, but you also need to live

There’s a difference between eliminating some indulgences and completely doing away with any semblance of gratification in life.

Depriving yourself of every single luxury you enjoy is no way to function, and if you push yourself to go that route in an effort to focus on savings, you’re likely to give up early on when you realize it’s just too hard. A better approach, therefore, is to be reasonable. If you’re not currently saving enough (or any) money for retirement, go through your expenses, identify those that aren’t essentials — think restaurant meals, store-bought coffee, cable, streaming services, rideshares, movie tickets, and live entertainment — and choose a few that you’re willing to part with or cut back on.

For example, if you’re currently depleting your entire paycheck but typically spend $300 a month on restaurants, $150 a month on cable, and $100 a month on a fancy gym with a sauna, you might cancel that gym membership and downgrade to a cable package that’s $40 cheaper, but keep going to restaurants if that’s your favorite thing to do. Similarly, you might decide to give up a car you can technically live without and deal with the inconvenience of taking the bus, all while maintaining your current level of spending in other categories with wiggle room.

The point is to make reasonable, sustainable lifestyle choices that allow you to save money as needed, but also enjoy your day-to-day existence. And the good news? You don’t need to sock away a fortune each month to build a solid nest egg. Sure, the more you’re able to save, the better, but setting aside even a few hundred dollars a month will go a long way if you start early enough and give your invested savings enough time to grow.

Check out the following table, which shows what your nest egg might amount to depending on when you start saving modestly:

If You Start Saving $300 a Month at Age:	Here’s What You’ll Have by Age 67 (Assumes a 7% Average Annual Return):
27	$719,000
32	$498,000
37	$340,000
42	$228,000
47	$148,000

The more time you give yourself to build savings, the better, especially if you’re not going to get anywhere close to maxing out a 401(k) or even an IRA. With the former, you can sock away up to $19,000 a year if you’re under 50, and with the latter, $6,000. At the same time, cutting back on some luxuries could do the trick of freeing up $300 a month, and once invested, that money can grow into a far more substantial sum over several decades’ time. And in case you’re wondering about the 7% return, it’s actually a couple of percentage points below the stock market’s average, which means it’s a reasonable figure to work with over a lengthy investment window.

The less you spend, the more you can save — that’s pretty obvious. But just as it’s advisable to spend in moderation, so too it is reasonable to save in moderation when your income is limited and you can’t bear the thought of cutting out every luxury under the sun. So don’t do that. Instead, make some compromises, but also let yourself live a little on the road to retirement. You deserve it.

When you’re plugging away at your job day after day, year after year, early retirement may sound like a dream. And for a good chunk of workers, that dream may become a reality.

Roughly 43% of workers end up retiring earlier than they had expected, according to a report by Employee Benefit Research Institute. However, of those who retired early, only about one-third said they did so because they could afford it. The most common reasons people gave for leaving their job earlier than they had anticipated were health issues or a shift in their company, such as downsizing or reorganization.

If you’re forced into early retirement, it can throw off all your retirement plans. If you were expecting to leave your job at, say, age 67 but get laid off at 62 and can’t find another job, the disadvantages are twofold. First, you miss out on five years of potential savings. Second, you’re spending more time in retirement, so you’ll need even more money to last the rest of your life.

Now, a few years may not sound like a big deal. When you’ve been working the last 40-odd years, what’s wrong with retiring a few years earlier than you’d planned? The truth is it can make a bigger difference than you may think.

To see just how much of an impact early retirement can make on your savings, let’s look at a hypothetical example.

Say you’re 40 years old with $25,000 saved for retirement. You’re currently saving about $200 per month, and you plan on retiring at age 67. At that rate, you’d have around $334,000 saved, assuming you earned a 7% annual return on your investments.

However, say you’re forced into an early retirement at 62. You were still saving $200 per month up to that point, but without that extra five years to save, you ended up with only around $228,000 saved. In other words, retiring just five years early could potentially cost you more than $100,000 in savings.

In addition, because you started using your savings earlier, your retirement money won’t last as long — meaning you’ll either run out of money soon, or you’ll need to live on less each month to stretch every dollar. And when you’re already starting out with less money than you’d hoped in your retirement fund, pinching pennies may prove difficult.

Preparing for the unpredictable

So how can you prepare when you never know if you’ll be forced into an early retirement? After all, when you set a retirement goal and start saving, you usually have a retirement age in mind. If you end up losing your job before retirement age and have no other sources of income, there’s little you can do to save more. That being said, there are a few things you can do to protect yourself against potentially unpredictable situations.

The first option is the most obvious yet also the most difficult: Save more while you can to cushion the blow in case you have to retire early. Figure out how much you want to have saved and by what age, then see what it would take to have that much saved a few years earlier. If you start saving early enough, you won’t need to boost your savings too dramatically each month to see them add up significantly over time.

For example, say you want to have $500,000 saved by age 67. If you’re 30 years old now with nothing yet saved for retirement, you’ll need to save around $250 per month to reach that goal, assuming you earn a 7% return on your investments. But if you wanted to have, say, $650,000 saved by age 62, all other factors remaining the same, you’d need to save around $500 per month.

If you plan for retirement assuming you’ll need more money with less time to save, you’re automatically setting yourself up to save more. Then even if you’re not forced into retirement, you may still be able to retire early simply because you can afford to do so.

Making the most of Social Security

Another option for those who may not be able to afford to save more is to use Social Security to your advantage. How much you receive in benefits depends on when you claim. The only way to receive 100% of the benefits you’re entitled to is by claiming when you reach your full retirement age (FRA) — which is between age 66 and 67 depending on the year you were born.

If you claim before your FRA (you’re eligible as early as 62), your benefits will be reduced. If you wait beyond your FRA to claim (up to age 70 when the bonus for waiting maxes out), you’ll receive a bonus on top of your full amount to make up for the time you weren’t receiving benefits. You also don’t have to claim when you retire; in fact, if you’re forced into an early retirement, it may be wise to wait as long as you can to claim.

Say your FRA is 67, and if you claim at that age, you’d be receiving $1,500 per month in benefits. If you claim at 62, your benefits would be reduced by 30%, leaving you with just $1,050 per month. Delay claiming until age 70, though, and you’d receive a 24% boost on top of your full amount, bringing your checks to around $1,860 per month.

Of course, that means you’d need to survive on your personal savings until you claim Social Security. But if you can afford to delay claiming benefits until age 70, you’ll be receiving those bigger checks for life. So even if your retirement fund runs dry, you’ll still have those fatter checks coming every month for the rest of your life.

Planning for retirement can feel like a guessing game — and a lot of the time, it is. Life will always throw curveballs, and even if you do all your homework and save diligently for decades, your plans may be thrown out the window if you end up retiring earlier than you’d expected. But just because you can’t predict the future doesn’t mean you can’t do your best to prepare for any hurdles that may arise.

After working hard all your life, the last thing you want to do is find yourself cash-strapped in retirement Opens a New Window.. But if you’re not careful, that could be the reality you inevitably wind up facing. Here are a few reasons why you might struggle financially during your golden years — and what to do about them.

1. You wait too long to start saving

Most of us can’t afford to part with huge chunks of our income on a regular basis. As such, setting aside $200 or $300 a month for retirement is actually pretty respectable, and if you start saving early enough in life, you’ll give your money plenty of time to grow into a larger sumOpens a New Window.. On the other hand, if you wait too long to start setting money aside for the future, you’ll see far less growth on your savings, which could lead to a shortfall later on.

Check out the following table, which shows what a monthly retirement plan contribution of $300 might turn into over time:

If You Start Saving $300 a Month at Age:	Here’s What You’ll Have by Age 67 (Assumes a 7% Average Annual Return):
22	$1.03 million
27	$719,000
32	$498,000
37	$340,000
42	$228,000
47	$147,000

If you begin saving that money at the start of your career, you stand to retire with around $1 million. But if you wait until your late 40s to start socking a modest amount of money away, you’ll wind up with much less. In our example, saving $300 a month over a 20-year timeframe results in $147,000 in savings, but that’s not a whole lot over what could be a 30-year retirement. If you want to avoid money problems later in life, start saving when your career kicks off, or shortly thereafter.

2. You decide to rely on Social Security for most of your income

Many workers neglect their retirement savings because they plan to fall back on Social SecurityOpens a New Window. once retired. That logic, however, might leave you with a serious income shortfall on your hands. That’s because Social Security is only designed to replace about 40% of the average worker’s pre-retirement income. Most seniors, however, need roughly twice that amount to live comfortably.

In fact, the average Social Security recipient today collects just $1,461 a month, or $17,532 a year. If that doesn’t sound like a whole lot of money to live on (which it shouldn’t), then you’ll need to build savings of your own, even if it means cutting back on expenses at present to free up cash to sock away for the future.

3. You don’t downgrade your lifestyle when your income drops

Many seniors carry their pre-retirement expenses into their golden years. But once you move over to a fixed income, you may not have the ability to maintain the lifestyle you once enjoyed, and if you don’t start making adjustments early on, you might spend down your nest egg quickly, thereby leaving yourself cash-strapped a few years down the line.

Rather than assume that you can keep up the lifestyle you’re used to, map out a retirement budget Opens a New Window. based on the actual income you have available (think withdrawals from your IRA or 401(k), Social Security, and any other income source at your disposal) and see what it allows for. It may be that you can’t retain a large house with high property taxes and also take three nice vacations a year, but you can do one or the other. Decide what’s most important to you and allocate your limited income to the things that matter most — but don’t spend your money recklessly and assume it won’t hurt you eventually.

The last thing you want to do is find yourself perpetually scrambling for cash during your golden years. To avoid that fate, start saving early on, understand the role Social Security will play in your retirement, and adjust your spending to avoid prematurely depleting your cash reserves. With any luck, you won’t end up struggling financially like so many seniors unfortunately do.

The $16,728 Social Security bonus most retirees completely overlook If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.

Retiring early is a dream for many. After all, a life of leisure with no need to report to work sounds great — especially if you have plans for retirement, such as traveling the world. Unfortunately, even if you actually manage to save a pretty substantial nest egg, there could be obstacles standing in your way to early retirement. The biggest of those obstacles: covering healthcare costs.

A recent TD Ameritrade survey of adults over 45 with at least $250,000 in investable assets found that concern about medical costs was cited as the No. 1 barrier to early retirement. Respondents are right to be worried, as most estimates suggest seniors will need hundreds of thousands of dollars to cover out-of-pocket care costs — even when they’re covered by Medicare. For those who retire early, figuring out how to get insurance before Medicare kicks in at age 65 can make things even more complicated.

While healthcare is inevitably going to be a big issue for anyone hoping to retire early, there are ways you can plan ahead, so your needs for insurance and medical care don’t make leaving the workforce early an impossibility. Here are a few ways to ensure health costs don’t keep you working once you’re ready to hand in your notice.

Understand all your options

If you retire before age 65 — the age when you become eligible for Medicare — you’ll have to figure out how to get healthcare coverage. Depending on your situation, your options may include:

• Getting covered through a spouse’s plan: This can be the best approach if you have a spouse who plans to keep working, but find out what kind of costs you’ll incur. Many employers require employees to pay a higher share of premiums for their spouse or other dependents, which means even if your spouse’s insurance is free or cheap, yours may not be.
• Maintaining coverage through COBRA: As long as you were covered by insurance when you left work, you’re typically allowed to retain coverage under your employer’s plan for 18 months, or sometimes even longer if you’re disabled. If you have only a few months until you become Medicare-eligible, this could be a good option that allows you to keep your doctor and your coverage. But be aware that you’ll have to start paying 100% of the premiums, which your employer may have been previously subsidizing, so maintaining coverage through COBRA can be quite expensive.
• Getting individual coverage: You can also buy an individual insurance plan on the private market. Retiring and losing employer-provided coverage counts as a qualifying event, which means you don’t have to wait until open enrollment to get a policy. Policies can be bought directly through an insurer, or on either the state or federal Obamacare exchange. Depending on your income, you may be eligible for subsidies to help cover premium costs, so this option could be more affordable than COBRA or getting covered through a spouse’s plan. Just be sure to check the deductible and coverage to find a policy that’s comprehensive enough for your needs.

After you turn 65, you’ll need to sign up for Medicare to avoid late enrollment penalties. But you should know Medicare has some important coverage exclusions, as well as premiums and coinsurance costs you must pay. Many people sign up for Medigap plans, which provide additional coverage above and beyond what Medicare offers. You could also opt for a Medicare Advantage Plan, which is an alternative to traditional Medicare that can sometimes provide broader coverage.

Be sure to shop around carefully to understand Medicare Advantage, Medigap plans, and the limitations of Medicare. Don’t expect you’ll just be covered once you turn 65.

Invest in an HSA (or set aside dedicated funds for care)

No matter how you get insurance in early retirement, you can expect to incur at least some out-of-pocket costs. Before you leave the workforce early, you need to make sure you have the cash to cover them.

The best way to prepare to pay for care is to invest in a health savings account (HSA) while you’re still working. You’re only eligible to open an HSA if you have a qualifying high-deductible health plan (HDHP), but if you do then you can open an HSA with nearly any broker or financial institution, and you even get a tax deduction for deposited funds, up to annual limits.

Although HSA funds can be withdrawn to cover healthcare costs as you incur them, it’s usually smarter to invest your HSA money and leave it until you’re ready to retire. This could provide you with a big chunk of change to cover your healthcare expenditures after early retirement. Money can be withdrawn tax-free to cover healthcare costs, so tax savings both when depositing and when withdrawing funds make HSAs a very valuable resource. You’re also allowed to withdraw money from an HSA for any reason after age 65 without incurring any penalties, but you do have to pay ordinary income tax on withdrawals not used for healthcare expenses.

If you aren’t able to invest in an HSA, you still need to aggressively save for healthcare costs if you plan to retire early. Consider opening a separate traditional or Roth IRA, and making annual contributions. If you go this route, treat it as a dedicated savings account only meant to cover healthcare during your golden years. By setting aside money specifically for healthcare, you can make sure you don’t run out of savings too soon when you need your investments to provide other financial support in retirement.