Archives for September 22, 2019

Many people dream of retiring early, and for you, that could mean leaving the workforce during your 50s. And there are plenty of good reasons to go this route. By retiring young, you’ll get a chance to travel or enjoy your newfound free time at a point when you’re likely to have a decent amount of energy and be in relatively good health.

But before you pull the trigger on retirement during your 50s, be sure to lock in your answers to these key questions.

1. Where will my income come from?

To retire comfortably, you’ll need a modest amount of income — but your choices are more limited when you leave the workforce in your 50s. That’s because you can’t begin collecting Social Security until age 62 at the earliest and you’ll incur costly early withdrawal penalties if you remove funds from a tax-advantaged retirement savings plan like an IRA or 401(k) prior to age 59 1/2.

If you have money in a traditional brokerage account, real estate investments, or another unrestricted source (meaning, one you can access at any age), then you should be all set. But be mindful of the income-related limitations you’ll face during your 50s.

2. What will I do with my time?

Filling your days meaningfully is important whether you retire in your 50s, 60s, or beyond. But when you retire in your 60s, you’re apt to know more people in a similar boat. On the other hand, if you retire in your 50s, you may find that you’re starved for company and hesitant to travel or pursue certain activities solo.

Of course, you may have a spouse or plenty of friends to spend your days with, coupled with a jam-packed itinerary for your first few years out of the workforce. If so, great. But if not, just make sure you have a plan for how you’ll keep yourself occupied.

3. What will I do about healthcare?

The great thing about working is (potentially) having access to an employer-sponsored health insurance plan. If you’re looking to retire in your 50s, you’ll need to figure out what you’ll do for health insurance, since you’ll be too young to sign up for Medicare, which begins at age 65. Most likely, that will mean buying a private plan and grappling with the premium costs that come with it. But footing the bill for health insurance could be costlier than anticipated, so make sure you can afford it before resigning from your job.

4. Do I have recourse if things don’t work out?

Retiring early — very early — is a move that could work out well for you. But what if it doesn’t? What if you find that you don’t have enough money to enjoy the lifestyle you want or you’re bored senseless most weeks and miss office life?

Before you retire in your 50s, figure out what your backup plan will be if you wind up regretting your decision. Maybe you’ll have the option to return to your former career and pick up where you left off. Or maybe you’ll start your own business, whether it relates to your previous field or is something completely different. There are plenty of options to play around with, but it helps to know what you’ll fall back on if things don’t go as planned.

The fact that you have the option to even contemplate retiring in your 50s means you’ve done a good job of saving and planning for your future. Just be sure to address these important points before making your decision to leave the workforce official.

Too many millennials (ages 23 to 38) are in the dark when it comes to their savings. Nearly half (48%) don’t know how much they have in their personal savings, according to data from Northwestern Mutual’s 2019 Planning & Progress Study, which polled more than 2,000 U.S. adults.

It’s important to be aware of how much you’re saving so you know if you’re on track for a comfortable retirement or to reach your other financial goals, such as buying a home.

“As you age, the importance of understanding your personal finances continues to make a larger and larger impact,” Emily Holbrook, senior director of planning at Northwestern Mutual, tells CNBC Make It. “You have less time to recover from any losses or mistakes that you might make.”

How much should young people have in the bank? There’s a lot of room for debate, but Fidelity, the nation’s largest retirement-plan provider, provides some goals to aim for:

• By 30: Have the equivalent of your annual salary saved
• By 35: Have the equivalent of twice your annual salary saved
• By 40: Have the equivalent of three times your annual salary saved

In addition to retirement savings, experts also recommend saving up an emergency fund of three to six months’ worth of living expenses.

For many people, this advice can be overwhelming. But it’s key to remember that what’s important is getting started at all. As a first step, Holbrook recommends that millennials leverage the resources available to them. “If they’re established in the workplace, really making sure that they have a firm understanding of their 401(k) plan,” she says.

Remember, if you’re in your 20s or 30s, you still have decades to save for retirement. “The younger you are, the more time you have to make up for lost time,” Meghan Murphy, a VP at Fidelity, previously told CNBC Make It.

Start by putting away whatever you can. If you can only save $30 a month, do that. Then aim to work your way up to contributing 15% of your income to savings.

“It’s something to work toward over time,” Murphy says. “Always make sure you’re getting that company match [on your 401(k)], then try to increase your savings by 1% annually until you reach that 15%.”

If you’re nearing 40 and only have a small amount put away, don’t panic. At this point, “the best thing you can do is to set a goal,” Murphy says. “It may not be, ‘I’ll have three times my income by the time I’m 40,’ but maybe it’s ‘I’m going to do what I need to do to have twice my income.’”

And if you aren’t sure where to start, don’t be afraid to ask an expert. “There is a wealth of knowledge available through employers, through financial experts, checklists and simple ways to help people start thinking about it,” Murphy says.

When planning for your golden years, many people prefer to think about the “good” costs they’ll face. Considering vacations, home renovations, or new hobbies, it can be fun to plan for the leisurely side of retirement.

But there are plenty of dangerous costs associated with your post-working years, too. In general, workers are most worried about running out of money, with 48% sharing this concern, according to a report from the Transamerica Center for Retirement Studies. Also, 44% are worried about the future of Social Security, saying they’re afraid their future benefits may be reduced or eliminated altogether.

There’s one overwhelming fear, though, that the majority of adults nearing retirement age say “terrifies” them: healthcare costs.

The scary reality of healthcare costs in retirement

A whopping 58% of adults age 50 and older say they’re “terrified” of how healthcare costs will affect their retirement plans, a survey from Nationwide found. In addition, nearly 70% of survey respondents said the idea of healthcare expenses potentially ballooning out of control when they’re no longer working is one of their top fears.

Healthcare costs are a valid concern. The average worker currently in their 40s can expect to spend roughly $335,000 on healthcare expenses alone in retirement, according to a report from Urban Institute. Longer lifespans also impact the amount retirees will spend, and those who live into their 90s or beyond could spend over $500,000 on healthcare costs.

Part of the reason healthcare expenses are so intimidating is that they’re unpredictable. Nobody knows exactly what health issues will arise decades down the road, so it can be impossible to predict how much those problems will cost. Also, Medicare doesn’t cover everything, and if you don’t fully understand how Medicare works and what expenses you’re responsible for, it can be costly.

Approximately 60% of workers age 50 and older said they wish they better understood Medicare coverage, according to the Nationwide survey. Medicare can be confusing, but not knowing what expenses are covered and what you’ll have to pay for out-of-pocket can make it harder to plan for these costs. And when you go into retirement without a clear idea of even the basic costs you can expect to face, you run the risk of spending more than you expected.

How much can you depend on Medicare in retirement?

Once you turn 65 years old, you’re eligible to enroll in Medicare. Some retirees may think all their healthcare costs will be taken care of once they have Medicare coverage, but there are still several expenses you’ll be responsible for.

First, you’ll still have to cover all premiums, deductibles, copays, and coinsurance. If you opt for Original Medicare (or Parts A and B), you typically won’t pay a premium for Part A but you’ll be responsible for a Part B premium of $135.50 per month in 2019. You’ll also face a Part A deductible of $1,364 per benefit period (which starts when you’re admitted to the hospital and ends 60 days after you leave), as well as a Part B deductible of $185 per year. Then, if you also want prescription drug coverage, you’ll need to sign up for Part D at an additional cost.

In addition, Original Medicare doesn’t cover most routine care, including dental and vision. For those expenses, you’ll either need to pay out of pocket, enroll in a Medicare Supplement insurance plan to fill the gaps in Original Medicare coverage, or sign up for a Medicare Advantage plan, which is similar to the insurance you likely receive through your employer. Because these plans are offered through Medicare-approved third-party insurance companies, rates vary widely — but you’ll likely pay higher premiums in exchange for greater coverage.

Regardless of which insurance option you choose, there will be out-of-pocket expenses to consider in retirement. The more you prepare for these costs now, the less you’ll have to worry about them once you retire.

Start preparing for healthcare costs long before retirement

The earlier you begin preparing for potential healthcare expenses in retirement, the less stressful they’ll be down the road.

One way to start saving for healthcare costs is to enroll in a health savings account (HSA). An HSA is essentially a mini retirement account just for medical expenses. You can contribute tax-deductible dollars upfront, let your money grow over the years, and then withdraw your cash tax-free as long as it goes toward eligible medical expenses.

One caveat to the HSA is that you’re only eligible for one if you’re enrolled in a high-deductible healthcare plan, meaning you have to have a deductible of at least $1,350 for individuals or $2,700 for families. You also are limited to how much you can contribute to an HSA. For 2019, the contribution limits are $3,500 per year for individuals or $7,000 per year for families, and those who are age 55 or older can contribute an additional $1,000 per year. If you’re eligible for an HSA, contributing as much as you can will help you establish a healthy nest egg just for healthcare expenses, making those costs less intimidating in retirement.

Another factor to consider when preparing for retirement is long-term care. Approximately 70% of today’s 65 year olds will need long-term care at some point, according to the U.S. Department of Health and Human Services, and the average stay in a nursing home costs roughly $6,800 per month. Furthermore, Medicare doesn’t cover long-term care, so you’ll be left to foot the bill if you need these services.

Long-term care insurance can help cover some of these costs, but the key is to sign up sooner rather than later. The older you are when you sign up, the higher your premiums will be. And if you wait until you need long-term care to enroll in insurance, you’ll likely be denied coverage altogether.

Healthcare costs are something every retiree will face at some point and can quickly drain your retirement fund if you’re not prepared for them. By educating yourself on what to expect and then adjusting your planning to account for these costs, you can ensure you’re doing everything possible to prepare for anything life throws your way during your golden years.

The Federal Reserve’s recent interest-rate cut might help frequent credit card users, but it offers nothing for people trying to build a cushion of savings.

The central bank announced on Wednesday it was reducing its benchmark interest rate by one quarter of a percentage point, its second rate cut this year, and that could pinch your wallet, wealth advisors warn.

“From a saver’s perspective, a drop in interest rates hurts because banks generally pay lower interest on savings,” John Sweeney, head of wealth and asset management at Figure Technologies, told FOX Business.

A change in the Fed rates or drop in the markets shouldn’t deter you from saving and making investments, however. Even if you earn less, you’re still earning something.

Here are some tips to help grow your nest egg:

Put less in your checking account

For your monthly bills, try keeping only one to two months of spending requirements in your checking account, Sweeney urged.

“You will earn very little on these funds so try to keep a small buffer — so you don’t bounce checks — and replenish your account with earnings each month as you spend,” Sweeney said.

Start an emergency fund now if you don’t already have one

Bulk up on saving for a rainy day. People should have at least six months worth of living expenses in a liquid account so they can withdraw money without a penalty if needed.

“Everyone gets a flat tire or breaks their glasses, and you need to spend money to get back on track that is outside of your normal monthly expenditures. People should look for savings accounts that are liquid and offer a high interest rate,” Sweeney suggested, advising consumers not only to shop for the best return but to keep an eye on it to make sure it stays competitive.

Track ‘excess cash’ in your retirement account

It’s important to be conscious of any extra money you might have in a retirement account or any other savings accounts that should be invested for the long-term.

“Ensure that regular deposits into retirement accounts go straight into long-term funds that align with your time horizon and risk tolerance,” Sweeney said.

Don’t alter long-term savings goals

Don’t let a change in interest rates alter your long-term investment goals. If you’re planning to buy a home, and you’ve saved up enough money to do it, don’t stress about a short-term change in rates.

“Do shop to find a competitive rate, with a convenient and pleasant borrowing experience, but don’t forgo a decision to buy a house because mortgage rates climbed last week,” Sweeney suggested.