Archives for October 12, 2019

You might have heard that the age you begin taking Social Security matters. You can start as early as 62, but you must wait until your full retirement age (FRA) — which is 66 or 67 depending on your birth year — to get the full benefit you’re entitled to. Starting early will decrease your benefits by up to 30%, while delaying benefits until 70 could net you as much as a 32% boost in your monthly checks.

Delaying Social Security might seem like the logical choice if you want the most money possible, especially if you didn’t save as much for retirement as you should have when you were younger. But there are a few instances where claiming early is actually the smarter play, even if it means getting smaller monthly checks. Here are three of them.

1. You know you won’t live long

If you have a terminal illness or a chronic health issue that could lead to death, delaying benefits just doesn’t make sense. If you wait too long, you could reduce your lifetime benefit, or you might not get any benefits at all. You may as well start right away at 62 or as soon as you find out about your health condition so that you can get as much money out of the program as possible in the time you have left.

To decide whether starting benefits early or delaying makes sense, you have to weigh their lifetime benefits. Make a my Social Security account to estimate your benefits at 62, at your FRA, and at age 70. Multiply these amounts by the number of months you expect to receive benefits to see which offers you the most overall. It’s best to err on the side of caution if you have a serious health condition, just in case things quickly take a turn for the worse.

2. You were forced to retire earlier than you planned

Job loss, a chronic illness or serious injury, or a family issue could force you into retirement months or even years before you’d planned. This is problematic because it extends the length — and therefore, the cost — of your retirement while also reducing the time you have to save for your expenses. If you had a cushion built into your retirement savings, you may just have to tighten the belt a little in retirement and cut back on your travel plans. But if you were behind on retirement savings, as many are, you might be unable to make ends meet even if you scale back your spending.

Social Security can help pick up some of the slack. Beginning early means accepting that your monthly checks will be smaller and that you’ll probably get less money overall, but it also means you can minimize your reliance on your personal savings. Withdrawing less each year keeps more money in your retirement accounts where it can continue to grow. It can also help reduce your tax bill for the year.

It all depends on how early you were forced to retire and how much savings you already had. You might be able to make ends meet in other ways, like by seeking out a new job or part-time employment rather than relying on Social Security. If you can do this, it’s probably the smarter play. Consult with a financial advisor if you’re unsure of how much you can safely withdraw in retirement or how you should handle Social Security following a forced early retirement.

3. Your spouse earned a lot more than you over his or her lifetime

Married couples have to determine the best time for each partner to claim Social Security. When the two spouses earn similar amounts, it makes the most sense for each person to delay benefits as long as possible if they’re trying to get the most benefits overall. 

When one spouse has consistently earned a lot more than the other, it makes more sense for the higher-earning spouse to delay benefits until 70 or as long as possible so they can get the largest checks. If need be, the lower-earning spouse can begin benefits right away at 62 in order to provide some income that can sustain the couple until the higher earner’s Social Security benefits kick in. At that point, if the lower earner’s spousal benefit is larger than the benefit they’re entitled to based on their own work record, the Social Security Administration will automatically switch them over to this.

Social Security is a vital part of most people’s retirement plan, so it requires a strategy. Most of the time, delaying benefits at least until your FRA makes sense, but if one of the above three scenarios applies to you, you might be better off starting Social Security ahead of schedule.

You probably know that you should be saving for retirement. But when it’s so far away, and you have more immediate concerns to worry about, it’s hard to give up a sizable chunk of your earnings for a benefit you won’t realize for decades. After all, you’ll have plenty of time to save for retirement in the future, right?

Maybe. But what most people don’t realize is that every day you put off saving for retirement, you might be increasing the amount of money you will need to set aside from each paycheck in the future. Waiting a few years or a decade to begin saving could be a $100,000 mistake.

Don’t believe me? Take a look at the evidence.

Why you need to start saving for retirement right now

If you had to keep all of your retirement savings in cash, most people would probably never retire because inflation would erode the value of those savings over time. That’s why you invest your retirement funds in assets like stocks and bonds, in order to help them beat the inflation rate and grow over time. Money you contribute when you’re younger matters more because it has more time to grow before you need to begin drawing upon your savings. 

To understand what kind of effect this can have, let’s consider a few different scenarios. For each scenario in the table below, we’ll assume that the person earns a 7% annual rate of return on their investments and plans to retire at 65. Here’s how much they would have by the time they retired based on when they began saving and how much they set aside per month for retirement.

Retirement account balances at 65 based on starting age and monthly savings amount

	Starting at Age 25	Starting at Age 35	Starting at Age 45	Starting at Age 55
Saving $100/month	$239,562	$119,353	$49,195	$16,580
Saving $250/month	$598,905	$283,382	$122,986	$41,449
Saving $500/month	$1,197,811	$566,765	$245,973	$82,899
Saving $1,000/month	$2,395,621	$1,133,529	$491,946	$165,797

The table clearly illustrates that the earlier you begin saving, the more your savings will be worth in the end. Some of the above differences come from additional personal contributions. The person who begins saving $100 per month at 25 will end up putting $12,000 more of their own money toward retirement than the person who began saving $100 per month at 35, but they will end up with over $120,000 more in the end. And this difference could be even greater if you set aside more money per month or get a larger rate of return on your investments.

If the person who began saving at 35 wanted to retire with the same amount of money as the person who began saving $100 per month at 25, they would have to save about $211 per month, assuming that the market conditions are roughly the same in both cases. Over 30 years, that adds up to $75,960 in personal retirement contributions. But the person who saved $100 per month over 40 years would only have to set aside $48,000 of their own money for their future. That’s a difference of nearly $28,000.

You’ll probably need to save more than you think

It would be nice if you only needed to save a few hundred thousand dollars for retirement, but $1 million to $2 million is a better ballpark figure for most workers today. The average retirement today is about 18 years and the average household headed by an adult 65 or older spends nearly $50,000, on average. That puts the average retirement close to $900,000, and costs will likely go up as people live longer and inflation makes everything more expensive. Social Security will cover some of this, but you’ll still need plenty of your own personal savings.

You can calculate how much you’ll need for retirement by subtracting your preferred retirement age from your estimated life expectancy to get the approximate length of your retirement. Then, total up your estimated annual living expenses in retirement, keeping in mind that some, like healthcare, may increase while others, like child care, may decrease or disappear. Multiply your estimated expenses by the number of years of your retirement, adding 3% for inflation.

Use a retirement calculator to do this and to estimate your investment rate of return. Your investments could grow as much as 7% to 8% per year, but use 5% to 6% to be conservative. Finally, subtract the money you expect from Social Security, a pension, or a 401(k) match to estimate what you must save on your own. Create a my Social Security account to estimate your Social Security benefit if you’re unsure how much this will be.

Your retirement calculator should tell you how much you must save each month to hit your goal. Do what you can to make this happen, even if it means trimming the fat from your budget. It might seem like you’re giving money up, but you’re actually saving yourself money over the long term, not to mention improving your financial security.

If you absolutely can’t make ends meet, you might have to rethink your retirement age. Delaying retirement a few months or years helps you by giving you more time to save while simultaneously decreasing the cost of your retirement. You could also consider working part-time in the early years of your retirement. This enables you to transition slowly out of the workforce without drawing down your retirement savings too quickly.

Saving for retirement might be less fun than spending that money today, but it’s vital that you start saving as soon as possible. You’ll need this money to cover your basic expenses in retirement and the sooner you start saving, the less of your own money you’ll have to spend on retirement overall.

Parents can be the most important influence on a teen considering college. But how they talk to their children about the all of their choices — Ivy League, state university, community college, trade school, coding boot camp or even no postsecondary education at all (gap year or straight to work) — can determine whether these 18-year-olds ultimately succeed or fail.

And failure is costly. At least 40% of students don’t graduate from four-year schools within six years, and those who don’t graduate and took on debt are three times more likely than those who graduated to default on their loans.

After collecting and analyzing more than 200 personal stories and surveys of more than 1,000 students who have chosen different paths for higher education, we developed a set of guidelines for parents — and mistakes they sometimes make. Here are six common ones to avoid:

1. Paying too close attention to the college rankings lists

Students already feel enough pressure around the college-choosing process. Using the various rankings of best colleges to create a list of which colleges your child should visit or apply to only amps it up. What’s more, the rankings don’t correspond to what your child is trying to accomplish. Quality and value aren’t absolute, as they can only be measured in relation to why someone is choosing something, the outcome they desire and their circumstance that defines what is a good or bad choice.

Blindly following the rankings can cause your child to pursue a host of choices that might look good to society at large, but will be a bad fit for your child’s specific circumstance.

2. Using your criteria to select college options, not your child’s

A close cousin of using the rankings to form your child’s college list is using your own criteria. It is your child who will be going to school, not you. If you pick your child’s school or major and it doesn’t match her ability or interest, you’re setting her up for a bad experience. Instead, help your child define what is important and what is a nonstarter — for her.

3. Forcing your child to go to college

Not everyone is ready for college right away. In our research, we learned that when students attended school just to appease a parent, the outcomes were bad — 74% of the students we interviewed dropped out or transferred.

Here’s the bottom line: Do not force someone to go to college for its own sake without their having a sense of excitement, passion or purpose.

In a similar vein, some students are ready for college, but if they don’t get into their top choice or “dream” schools, parents often encourage (aka force) them to apply to a bunch of schools that don’t excite them and are not in line with their passions and abilities (see above).

Instead, parents can help them broaden their options for what they could do next, including options like a college alternative program or a discovery gap year filled with jobs, internships and apprenticeships, community service and short courses at a coding bootcamp, online program or community college.

4. Requiring that your child stay at (or close to) home

The flip side of forcing your child to go to college is forcing your child to stay at home.

Many students feel the need to get away from their hometown or family when they graduate high school. But their parents don’t allow them the option. They force them to apply only to local schools or sometimes don’t even allow them to go to college at all.

If you see that your child needs to “get away” but cost is a countervailing consideration, use sites like Edmit and TuitionFit to see what you might be able to afford — or get creative and offer your child the ability to attend locally with the promise that you won’t snoop, interfere or visit uninvited.

5. Encouraging your child to bite off more than she can chew

If your child does need to get away (in other words, that is her primary goal for going to college), make sure that, in so doing, she doesn’t bite off more than she can chew.

Whatever your child does next should probably be short and low-cost because right now she isn’t choosing college for the experience she will have there, or to necessarily pursue a career. If after she’s gotten away, she finds herself trapped at a school that doesn’t correspond with what she wants to do next — as often happens in this circumstance — trouble abounds.

Combining our advice in mistakes 3 and 4, allow her to get away, but don’t force her to go to college.

6. Making the decision for your child

As your child struggles to improve her life, don’t help her “avoid” that struggle until she has wrestled with the full dimension of it. Depriving your child of the opportunity to do things for herself, wrestle with her own problems and learn from her mistakes takes away an opportunity to grow, learn and innovate in her life. Instead, coach your child through the decisions and make the trade-offs that your child will face explicit—and let her choose.

Choosing whether and where to go to college is a challenging process. Encouraging your child to make her choice based on your own or society’s assumptions about the ideal college experience or career choice can set her up for failure. Make sure your child chooses the right college, at the right time, for her own unique circumstance.

The Great Recession has officially been over for a decade, but for many Americans, there’s still little reason to celebrate.

Many people’s finances haven’t recovered from the recession’s blows, according to a survey by personal finance website Bankrate.com.

“There are still tens of millions who are struggling to even get back to where they were before the economy took a turn for the worse,” said Mark Hamrick, senior economic analyst at Bankrate.com.

More than half of Americans who were adults amid the Great Recession said they endured some type of negative financial impact, Bankrate found. And half of those people say they’re doing worse now than before the crisis.

More than half of U.S. households have no emergency savings, AARP recently found.

Fewer than half (46%) of those who were adults at the time of the recession say they’ve seen their paychecks grow since before it began. More than a third of those who say they, or their partner, lost a job during the recession say their pay has actually dropped from before the recession.

More than 2,700 adults were interviewed online in May.

The median family income, after accounting for inflation, was $60,336 in 2017, little different than it was in 2000 ($58,544). During the same time, medical, childcare and college costs have all ballooned.

The economy has bounced back from when the unemployment rate spiked at 10% in 2009 and more than 15 million Americans were out of work. Today, the unemployment rate is 3.6%. Gross domestic product, the broadest measure of goods and services produced in the U.S., rose at a 2.6% annual rate in the fourth quarter of 2018. During the recession, it fell 4.3%, the largest decline since World War II.

Yet, Hamrick said, “it’s not like you can import that data into your personal experiences.”

“Surveys like this help to provide the detail and the colors of the economy, which remind us that individual results vary,” he said.

How much people have recovered from the crisis, he said, has a lot to do with where they live, the sector in which they work and how damaged they were by the recession. Gender also plays a role.

Twenty-seven percent of women say their overall financial situation is worse today than it was before the recession, compared with 19% of men.

“Women face bias in the workplace and that exhibits itself in the pay and opportunities for advancement that they’re given,” Hamrick said.

He said the next economic slump, whenever it occurs, could be particularly damaging. “Many Americans are still digging out from the recession,” he said. “Even a modest downturn is going to cause further harm to Americans’ personal finances.”