Archives for November 11, 2019

In retirement, as in every other stage of life, high-income and low-income households tend to lead different existences. Yes, they all spend money on necessities like food, housing, and healthcare, but how much they spend and the proportion of their budgets that these necessities take up vary. This, in turn, affects the quality of one’s retirement.

A recent Employee Benefit Retirement Institute (EBRI) study investigated the differences in retirement spending between high-income and low-income households, and it returned some interesting results. For the purpose of the study, it considered households to be high income or low income based on whether their income fell above or below the median income for their age range. This is $65,000 for adults aged 50 to 64, $49,000 for adults 65 to 74, and $30,000 for adults 75 and older.

Low-income households spend more on basic necessities

The study found that low-income households tend to spend a larger proportion of their budgets on basic necessities, like housing, food, and healthcare. While housing only took up around 44.2% of the budget for high-income adults aged 50 to 64, it took up 47.3% for low-income households of the same age.

While both groups saw a slight dip in the percentage of their income spent on housing in the 65-to-74 age range, the difference becomes even more prominent as the two groups age. Among those 75 and older, high-income households only needed to devote 41.4% of their budget to housing, while low-income households spent 48.8% of their income on housing — almost half of their budget.

Food spending tells a similar but less dramatic story. Low-income households spend about 12% to 13% of their budgets on food, while high-income households keep this percentage at just 9% to 10% of their overall spending. Interestingly, the percentage of income that high-income households spend on food actually rises over time, while low-income households spend a smaller proportion of their budgets on food as they age.

Low-income households actually spend less on healthcare during their younger years — just 7.6% of annual spending for low-income households aged 50 to 64 compared to 8% for high-income households of the same age. But this trend quickly reverses for adults 65 to 74, when low-income households suddenly increase their healthcare spending to 10.8% of their annual spending, while high-income households only see a modest 0.2% increase.

Things even out a bit as both groups age even more, with low- and high-income households spending 10.4% and 10.9% on healthcare, respectively, once they’re 75 or older. This makes sense, as people tend to develop more health problems as they age and must devote more funds to healthcare, regardless of income. Adults 65 and older spend three times as much on healthcare as their working-age counterparts, according to the Center for Medicare and Medicaid Services.

All told, low-income households spend close to 70% of their money just covering these three basic living expenses. High-income households spend closer to 62% on the same necessities.

High-income households spend more on gifts and entertainment

So what do high-income households spend their extra money on? Entertainment and gifts appear to account for a big part of that difference. While low-income households aged 50 to 64 only spend 8.4% of their average annual spending on entertainment, and this percentage steadily declines to a mere 6.5% by the time they’re 75 or older, high-income households actually see their entertainment expenditures rise from 12.6% of their average annual spending when they’re 50 to 64 to 13.4% when they’re 65 to 74 before declining slightly as they age past 75.

Gifts and charitable contributions rise for both groups over time, but high-income households spend considerably more on them than low-income households. Low-income households in the 50-to-64 age group spent just 3% of their total budget on gifts and contributions, while high-income households of the same age spent 6.6% of their budget. Spending on gifts rises to 5% and 8.1%, respectively, as the groups reach their mid-70s.

The old adage tells us that money doesn’t buy happiness, but it can certainly make a difference in the quality of your retirement. While low-income households seem to progressively tighten the belt on entertainment spending as they reserve their existing savings for their basic expenses, high-income households appear to spend more freely on leisure and gifts, suggesting a different experience of and outlook on retirement.

How you can cut costs on basic expenses in retirement

Low-income retirees who want to make more time for leisure and entertainment must bring some of their other living costs down to free up more cash. Housing is most people’s largest expense, so cutting this back will save you quite a bit of money. You could explore downsizing or moving to a more affordable area. Homeowners should try to pay off their mortgages before retirement, if possible. Refinancing is also an option if you’d like to secure a lower monthly payment.

You may not have complete control over your healthcare costs, but taking steps to remain healthy as you age can improve your quality of life and minimize your healthcare spending. Once you’re eligible for Medicare, take advantage of its free health and screening services, and consider purchasing supplemental insurance for things that Original Medicare doesn’t cover, like dental insurance or hearing aids, so you don’t have to pay for them out of your own pocket.

The above figures are averages. They don’t reflect every individual case. A high-income individual who plans poorly and overspends on frivolous things could struggle to get by, while a low-income person who diligently saved for retirement and lives modestly might enjoy a comfortable retirement. If you want retirement to be a happy, exciting time in your life, begin planning for it now and look for ways to reduce your basic living expenses so you have more free cash for doing what you love.

If you want a financially secure retirement, you have to save for it. But it’s hard to get an early start on your retirement savings, especially with all the demands on your hard-earned money for immediate needs. Balancing current and future financial necessities can seem next to impossible.

Unfortunately, it’s all too common for people to hit their 50th birthdays before they get serious about building up a retirement nest egg. Lawmakers know that, and that’s why you’ll find provisions in many different tax-favored retirement accounts that let you set aside a little extra cash if you’re 50 or older. In fact, 2020 will see a sizable increase in the maximum contribution limits that older Americans are allowed to make to 401(k)s. So if you’re fortunate enough to have a workplace retirement plan available to you, then you might be able to take an extra step toward your financial goals in the coming year — and save yourself some taxes at the same time.

What are catch-up contributions?

Lawmakers created catch-up contributions back in the early 2000s as part of tax reform efforts. The move acknowledged the fact that the huge Baby Boom generation was approaching retirement age, and that many people nearing the end of their careers hadn’t yet saved enough to cover their financial needs.

As a result, a number of different retirement plans  allow for catch-up contributions:

• For IRAs, those 50 or older can contribute an additional $1,000 per year.
• Participants in SIMPLE IRAs and SIMPLE 401(k) plans get a $3,000 catch-up contribution annually if they’re 50 or older.
• 401(k) participants who were 50 or older in 2019 were able to contribute an extra $6,000 beyond the regular contribution limits.

You’ll even find some catch-up provisions in other contexts. For instance, health savings accounts also provide for a catch-up contribution of $1,000, although it’s only available to those 55 or older rather than using 50 as the eligibility age.

What’s happening to catch-up contributions in 2020?

As part of the tax law provisions that created them, the catch-up contributions for 401(k) and SIMPLE plans are indexed to inflation. That means that as prices rise, so too will the catch-up amounts.

However, most of these numbers don’t change from year to year. That’s because the law requires the numbers to stay the same until there’s enough of an adjustment to kick the number up to the next $500 increment. So back in 2015, the 401(k) catch-up climbed from $5,500 to $6,000.

After five years, 401(k) catch-up contributions are getting another bump higher. Starting in 2020, those 50 or older will be able to set aside an extra $6,500 in their retirement plans. That gets added on to the new base contribution limit of $19,500, providing for as much as $26,000 in total retirement savings just in your 401(k).

Too much to ask?

Of course, a lot of people aren’t going to be able to come close to maxing out their 401(k) contributions. Even with a salary in the low six-figures, saving as much as a quarter of your total pay just isn’t realistic for a lot of people.

But before you dismiss the idea completely, consider the fact that by the time you’re in your 50s, many of the financial burdens you’ve had in the past have often eased. Kids grow up and go off on their own, paying off your mortgage can make monthly payments disappear, and you’re often at the peak of your earning potential in your career.

Start saving more

When they created catch-up contributions, lawmakers definitely had in mind urging workers who are approaching retirement to get into gear with their savings strategies. Take advantage of what they gave you to save more, and you’ll be in a better position to have the retirement you’ve dreamed of.

Retirement is an adventure, and it can be the perfect time to start fresh with a new beginning.

For some people, that may mean living out their golden years in a different city. Moving during retirement is a big decision that shouldn’t be taken lightly, and it’s not always the right decision for everyone. Some retirees may not be able to bear the thought of moving away from friends, family, and their community, and it can also be a big risk to leave everything behind and start new.

That said, there are also a few great reasons to consider moving once you retire. Not only can it be a fun adventure, but it can also help you save money and afford a more enjoyable retirement.

1. You can stretch your savings

If you’re currently living in a city with a higher than average cost of living, moving to a less expensive area can help you save loads of cash on everything from housing to transportation to healthcare and more.

This can be an especially smart move if your savings are less than stellar, because you’ll be able to afford a more comfortable lifestyle even without a robust retirement fund. And if you’re also willing to downsize to a smaller home in your new city, that can help you save even more.

Depending on where you choose to move, you may even be able to get by on Social Security benefits. Although relying on your monthly checks as your primary source of income in retirement isn’t typically recommended, if you’re nearing retirement age with little to nothing saved, you may have no choice. But if you move to a city that’s much more affordable than the one you currently call home, you just might be able to lower your general living expenses enough to survive on Social Security.

2. You could save money on taxes

Each state and city has slightly different regulations when it comes to taxes, but some are more tax-friendly than others.

For example, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t have a state income tax, which could potentially help you save thousands of dollars per year. This is particularly beneficial if most of your retirement income is coming from tax-deferred accounts such as 401(k)s or traditional IRAs, because with these types of accounts, you’ll typically be responsible for paying income tax on the money you withdraw in retirement.

You may also be able to save money on Social Security taxes, depending on where you live. There are 37 states that don’t tax Social Security benefits, and moving to one of these could result in more money in your pocket. Keep in mind that you’ll probably still need to pay federal taxes on a portion of your benefits, but avoiding the state tax will help you save some money.

Before you consider moving, however, make sure you’re looking at the big picture. For instance, if you move to a city where you can avoid paying taxes on your income and Social Security benefits but you’re paying sky-high property and sales taxes, that may not necessarily be the best decision. Or if you’re saving on taxes but the overall cost of living is much higher, you might not come out ahead financially. So before you make any big decisions, make sure you’ve done your homework and understand whether you’ll really be saving money by moving.

3. You might find more job opportunities

Many Americans want to continue working in their 60s, 70s, or beyond, but not everyone is able to do so. In fact, although 80% of workers say they expect to continue doing at least some work for pay during their retirement years, only 28% actually do so, according to a report from the Employee Benefit Research Institute. Part of the reason why it might be difficult to continue working at an older age is because in many cities, there may be fewer opportunities out there for retirees looking to pursue part-time work.

If you’re determined to continue working part-time in retirement — whether it’s to boost your income or simply satisfy a career change you’ve been craving for years — moving to a city that has more job opportunities could be a smart decision. Especially if you currently live in a smaller town with few job openings in your field, you might have more luck moving somewhere with more opportunities to continue working part-time after you retire from your full-time career. Just keep in mind that if you plan to move to a big city, you’ll probably see your general cost of living increase. So be sure to weigh the pros and cons of moving before you decide it’s the right choice for you.

Moving to a new city in retirement can be an exciting new adventure, but make sure it makes sense for your situation. If you’re up for a change of scenery and a new beginning — and you’ve done your homework to make sure it’s the right decision financially — it might be one of the best choices you’ll ever make.

No matter your income or background, you’ll probably experience a few financial emergencies in your lifetime. A tree might fall on your house during a storm. You might lose your job and be out of work for a couple of months. Your kid might break an arm and need to go to the emergency room. There’s no anticipating these things, but that doesn’t mean you can’t plan for them. 

You may not know when an emergency will happen or how costly it will be, but developing a general emergency plan can help you better weather these unexpected expenses. Here are five tips to get you started.

1. Create an emergency fund

The most important thing you can do to prepare yourself for emergencies is to create an emergency fund. This is money you keep in a savings account so it’s readily accessible if you need it to cover emergency expenses like an insurance deductible or a hospital bill. It should contain at least three months of living expenses, although six is even better. 

If you don’t already have an emergency fund, start one by allocating a certain amount towards it from each paycheck. Keep saving until you hit your goal. Remember to replenish your emergency fund after you draw upon it and reevaluate how much it should contain at least once a year. A growing family or increasing expenses will require a larger emergency fund.

2. Make sure you have enough insurance

Insurance is rarely cheap, but it can reduce the cost of a $100,000 emergency to only a few hundred dollars. Everyone should have health insurance, and your emergency fund should contain at least enough money to cover your health insurance deductible. You can also save for medical expenses in a health savings account (HSA) if your deductible exceeds $1,350 for a single individual in 2019 or $2,700 for a  family. 

You must carry some auto insurance liability coverage to legally drive a car, but you should also purchase coverage for repairs to your vehicle following an accident so you don’t have to pay these out of pocket. If you own a home, your mortgage lender will likely require you to have homeowners insurance, and if you rent, you should get renters insurance. Families may also want to consider investing in life insurance in case one spouse dies. This coverage can help your family cover their basic expenses even after you’re gone.

That’s a lot of policies and you’ll probably pay quite a bit in premiums between all of them each year. But when an emergency arises, you’ll be glad you have the coverage. Reevaluate your policy limits once every year or so and shop around periodically to ensure you’re getting the best rate, but don’t let your coverage lapse.

3. Keep some cash at home

It’s unlikely that you’ll find yourself in a financial emergency that is so immediate you won’t have time to run to the bank, but just in case, it’s smart to keep a few hundred dollars in cash somewhere safe at home. In a natural disaster, services may be down and you might not be able to access the money in your bank for several days or even a few weeks. Having a little cash on hand can help your family cover vital expenses like food or gas until things get back to normal.

It’s up to you to decide how much cash you feel comfortable keeping at home. It’s best to put it in a fireproof and waterproof safe if you have one – and store it somewhere out of the way where visiting guests won’t see it. Memorize the code and try not to write it down. If you do have to write it down, don’t store the code anywhere near the safe itself.

4. Create an emergency budget

You probably already have a regular budget – and if you don’t, you should. A budget helps you decide how to spend the money you’ve got coming in each month. But if you lose your job or have huge medical bills to pay, you might have to tighten your belt. This is never easy, but you can make it easier by already having a plan in place. 

Make a list of all your monthly bills and prioritize them in terms of importance. Then, figure out which you are willing to go without in an emergency. For example, a gym membership or a subscription to a streaming service isn’t as important as your mortgage payment and your utility bills, so you could eliminate them if need be. 

Ideally, you won’t need to fall back on this budget because your emergency fund will cover all your living expenses for a few months, but if you’re out of work for a long time or if you can’t work because you’re seriously injured, you might have to sacrifice some of the less-important items you spend your money on.

5. Pay down your debt

Paying down debt is beneficial for many reasons, one of which is that if you owe less, your debt will cost you less and you’ll be more able to handle any financial emergencies. Start with your high-interest debt first, like credit card debt. Make a list of all of your debts, their outstanding balances, and their interest rates. Place them in order with the debt that has the highest interest rate on top. If two debts have the same interest rate, place the one with the lowest balance first. Aim to pay them off in this order if you want to pay the least amount of money overall.

Make sure you still make at least the minimum payment on all of your debts to avoid late fees, and then put any extra cash toward the debt at the top of your list first. For credit card debt, you could also try transferring your balance to a card with a 0% introductory APR or taking out a personal loan to prevent the balance from growing any more. For student debt, choose the repayment plan that offers the highest monthly payment you can comfortably afford. You can always change this if you hit hard times, but this strategy will help you pay off your debt faster and decrease how much you pay overall.

Remember, when it comes to financial emergencies, it’s not if, it’s when. If you don’t already have a financial emergency plan in place, follow the steps above to set one up now.

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