Honduras is known for itâs beautiful beaches and low cost of living. The country is home to one of the largest cities in Central America, Tegucigalpa, and plenty of quaint mountain towns and a popular island called Roatan. In recent years, Americans have flocked to this Central American oasis of some 10 million people because their retirement savings can go much farther than in the U.S. A financial advisor can help you plan your retirement abroad and help you stretch your Social Security and other retirement funds while in Honduras.
Cost of Living and Housing in Honduras
According to Numbeo, a cost-of-living database, the cost of living in Honduras is about 41% lower, overall, than in the U.S., not counting housing costs. Rent in Honduras is about 73% lower than in the U.S.
Letâs look at a specific example. One of the most popular places to retire in Honduras is Roatan. Rent on a one-bedroom apartment in Roatanâs center will cost an average of $250 per month, and a three-bedroom apartment in the same area will cost about $967 per month. In contrast, an apartment in New York City will run about $3,452 for a one-bedroom and about $6,767 for a one-bedroom in downtown Manhattan.
If you want to purchase property in Honduras, the average price per square foot is about $93.79. In the U.S., the average cost per square foot to purchase a home or apartment is $292.35.
Retire in Honduras â Visas
Americans do not need visas to visit Honduras as tourists. However, if you want to retire in Honduras, you will need to get a retirement residency card, of which there are three types. The Secretary of Justice processes these in Tegucigalpa. You will need to work with a Honduran attorney to get your residency card.
It takes up to nine months to process an application for a retirement residency card, but Americans may enter Honduras on a tourist visa and begin their application process in country. Be prepared to spend about $2,500 to complete this process.
Be sure to bring your passport, police record, a health certificate, a passport photo and any residence-related documents with you when you enter Honduras as your residency application will require them. You must also be able to prove that you have at least $1,500 of lifetime monthly income if you are applying for the retirement visa.
Retire in Honduras â Healthcare
Honduras does not have a robust public health system. The World Health Organization ranks it 131st out of 191 countries. Therefore, many retirees choose to get private healthcare insurance and live near private hospitals. People can purchase healthcare insurance in Honduras or before leaving home. There are several 24-hour hospitals in Tegucigalpa and San Pedro Sula, all popular with American expats.
Most pharmacies will offer the same prescriptions as in the U.S., especially in a tourism hotspots. It is important to note that rural healthcare is scarce in Honduras.
Retire in Honduras â Taxes
If you earn an income in Honduras, it will be taxed between 10% and 20%. If you purchase a home in Honduras and then sell it, your real estate capital gains will be taxed at 10%. Additionally, your property will be taxed each year at about 0.4% of the total property value.
Money received from the U.S., like a pension, tax-advantaged account or Social Security retirement benefits, will not be taxed as income by Honduras.
Donât forget that as an American citizen the U.S. government will tax you on foreign-earned income.
Retire in Honduras â Safety
According to the U.S. Department of State, violent crime, such as homicide and armed robbery, is common in Honduras. Additionally, gang activity, street crime and narcotics and human trafficking are pretty widespread. In large cities such as Tegucigalpa, violent crime exists and riots or protests are expected. However, there are plenty of gated communities and large pockets of expats living in Honduras that employ security staff to maintain a safe living environment.
Honduras is a beautiful tropical location to visit or live in. It is home to mountains, beaches and more, so there is a bit of something for everyone living in Honduras. It is important to remember personal safety in Honduras and not take unnecessary risks when traveling throughout the country, mainly because private hospitals are only available in cities and tourist hotspots.
Tips on Retiring
Consider talking with a financial advisor before moving abroad. Finding a financial advisor doesnât have to be hard. SmartAssetâs free advisor matching tool can connect you to several financial advisors in your area. You can find the perfect financial advisor for you in as little as five minutes. If youâre ready, get started now.
Retiring comfortably in Honduras is entirely possible, even on Social Security retirement benefits. For some people, Social Security is even enough to provide disposable income for recreational purposes. Calculate your Social Security retirement benefit here.
If you are retired and need to fill a gap in your monthly income stream, save for other medium- to long-term goals or supplement your existing investment mix, Certificates of Deposit (CDs)– including Discover’s CDs and tax-advantagedÂ Individual Retirement Account (IRA) CDs — can provide a safe and practical solution.
A simple way to reach your goals.
Watch your savings grow with aÂ CD.
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Supplement cash flow. Â CDs can provide a steady source of income that also has the potential for growth. Discoverâs CDs, for example, offer guaranteed returns on terms ranging from 3 months to 10 years. The longer the term, the higher the interest rate. And since your rate of return is fixed, you know exactly how much income to expectâ and when to expect it (when your CD matures your principal plus interest accrued and not withdrawn is returned to you) âa major plus for retirees looking to close a gap in their cash flow.
One CD strategy for generating cash flow is called a CD ladder. Open a series of CDs that mature at different times. When the first CD matures, harvest the interest income, but reinvest the principal in another CD at the top of your âladder.â This approach can create a consistent and ongoing income stream to last throughout your retirement years. With Discover CDs, you always have convenient renewal options at maturity, making it easy to put this income-management practice into effect.
Fund medium- and longer-term goals.Â Open separate CDs with an eye toward funding different financial goals. Will you need to purchase a new car in the next three years? Are you planning an extended trip abroad to celebrate a special anniversary? Do you hope to help a grandchild with college costs? Time the CD maturity to match your savings goal. Again, Discover offers CDs with maturities as short as three months or as long as 10 years.
An alternative to bonds.Â Investors often choose U.S. Treasury bonds when seeking a safe haven for their investment dollars. Yet CDs should be on your list of worthy alternatives. Both Treasuries and CDs offer safety; however, in some cases, CDs offer more attractive yields.
CDs can provide a steady source of income that also has the potential for growth.
A home for excess IRA/401(k) distributions. Current IRS rules require individuals to begin taking distributions from their retirement accounts when they reach the age of 70Â½ in order to comply with required minimum distribution rules. To the extent that those distributions are more than you’ll need to spend, which may be the case for those who have delayed taking distributions, consider contributing them to a CD until you need to use the funds.
And remember, the safety of Discover’s CDs and IRA CDs being FDIC insured to the maximum allowed by law can be a big comfort when preserving your assets is more important than ever.
Regardless of your time horizon, risk tolerance, or savings goal, you can always find the right savings vehicle for your needs at Discover. Discover offers an Online Savings Account to help you with your short-term savings goals, a full range of CDs and IRA CDs with terms from 3 months to 10 years, and Money Market Accounts that have a competitive rate. Open a Discover account onlineÂ or call our 24-hour U.S-based Customer Service at 1-800-347-7000.
The article and information provided herein are for informational purposes only and are not intended as a substitute for professional advice.
The post Retiring: Turn to CDs For Cash Flow appeared first on Discover Bank – Banking Topics Blog.
Hey everyone! Michelle speaking for a moment. Today, I’d like to introduce you to my friend Amanda Holden. She runs one of my favorite financial blogs – Dumpster Dog. Below is a guest post from her on why investing for retirement is important for women – and how you can start. Enjoy!
Play along with me for a moment: Imagine a deliciously styled woman in her 70s.
She is having a sip of her morning espresso at a sidewalk café in Paris. She’s perusing a big, beautiful novel alongside her (much younger) Parisian lover, who is bringing her a third croissant for before 10 am (because why not).
This woman is you.
Or at least, this woman could be you.
Whether or not your retirement dream includes croissants and a Parisian lover, you’re going to need to save and invest to make it happen.
We’re so accustomed to thinking about retirement in terms of an age—age 65—when in reality, retirement is an amount of money saved.
Because young people will not have access to the pension plans of our parents and grandparents, retirement is entirely our responsibility.
After spending six years workin’ in a fancy investment management job, I quit.
Helping the rich get richer just wasn’t going to be “it” for me. So, I created my own business, called Invested Development (Invested Development is great for beginners and for those looking to step up their investing game. My favorite part of this work is that “ah-hah moment” when students realize that investing is absolutely within their capacity.
Part of this work is addressing the specific hurdles that women face and finding solutions to those problems so that my students can live out their Golden Years in style.
Here are four reasons women need to save and invest for retirement—and how to do it.
1. Retirement is the single biggest lifetime expense for everyone, not just women.
Can we real-talk for a hot minute? It’s hard as hell to get motivated to save for retirement. Retirement is so frickin’ far away and you’ve likely got more immediate financial goals you’d like to achieve, like a down payment for a home or building a luxury palace for your collection of rescued street cats.
But, here’s the rub: Retirement will likely be the single-biggest expense in your lifetime. That’s right: Bigger than a house (at least, for most of us), and bigger than kid’s college. Take a step back, and simply think about what retirement is: You’re living for 20 or 30 years with no working salary.
Ask yourself: How much money do you need to spend in one, single year? How about for twenty or thirty years?
Without getting too caught up in the numbers, you get the idea: That’s a heckuva lot of money to save. Saving money is going to be the foundation to achieving retirement—but investing is the secret sauce.
2. Women live longer than men.
The job of saving and investing for retirement is already big. And for women, it will be even bigger.
In 2019, women have a life expectancy of 81.6, while the average for men is 76.9. That’s nearly five more years to account for. And the tough truth is—these years aren’t usually cheap or easy or healthy.
This means that women need to plan to be alive for longer than men, which means they need more money for retirement. And really, we should all plan to live to be at least 90 or even 100.
The worst thing you can do is make a plan that assumes you’ll live to be 81.6, and then live to be 100 with nothing in the bank. (This is especially important as life expectancies are expected to rise over the next several decades.)
3. Women need their own money.
Hey! Would you like to feel very angry right now? Well then allow me to introduce you to: The National Institute on Retirement Security!
Their data shows us year after year that women are significantly more likely to live in poverty than men in retirement, and it’s worse for women of color and single women. Any of us could be single, divorced, or widowed. I’m still single IF YOU CAN BELIEVE IT!
It’s rare that life ends up the way that we expect it to.
Planning for a scenario where no one gets sick and no one gets divorced is more than just dumb, it’s dangerous—especially for those of us living in countries with waning social safety nets.
We all know, in theory, that a partner is not financial plan; the hard part is making a plan into reality and doing the work now, and not waiting until disaster or heartbreak strikes.
(Because really, I can think of no worse time to learn about Modern Portfolio Theory, expense ratios, AND THE DAMN BANK PASSWORD than after a messy divorce or the unexpected death of a spouse.)
4. Women Earn Less Than Men
Think of what investing is: Investing is using your money to make even more money.
That’s right, ladies: Let’s make money do some of the heavy lifting around here! Putting our money to work is especially important for women, who are likely to earn less than men over the course of a lifetime. Women will have less money to work with, making it critical that we make the most of the money we do have.
I do not think this is fair.
My absolute first choice would be to close this wage and opportunity gaps and for moms to have support at work. While we are working towards the cultural shift and legislative changes necessary to leveling the playing field for women, women must work within the system we’ve got.
And that means learning about investing and prioritizing her future self, even when it’s so hard.
How to Invest for Retirement
Your first step is to understand your options for retirement accounts. Where should your investments go?
Are you already covered by workplace retirement account, like a 401(k) or 403(b)? Or are you self-employed?
If so, that you’ll need to open your own at a brokerage bank of your choosing—think Fidelity or Charles Schwab. Depending on your needs, you could open a Roth IRA, SEP IRA, and/or Solo 401(k).
Next, you’ll have to decide how to invest within your retirement account.
A 401(k) is not an investment—a 401(k) holds investments. Just like your checking account holds cash, but a 401(k) holds cash, stocks, mutual funds, and so on. You can think of your 401(k) or Roth IRA as a glorified adult Caboodles (with special tax treatment)—it just holds your investments.
The treasures held inside are the investments.
Many people will opt for a mix of stocks and bonds appropriate to their goals and risk tolerance. You may find it easiest to invest in stocks and bonds using mutual funds. A mutual fund bundles together some other investment type—you can think of them as big ol’ suitcases. And just like a suitcase, what is packed inside is the most important part, and will say a lot about the type of trip you’re about to take.
Many money experts prefer index mutual funds or index ETFs which are funds that aim to return the average of whatever market they “mimic,” with very low fees. Basically, you’re just along for the ride.
No matter which strategy you choose, you’ll need to minimize what you pay in fees. Any fees you pay to an advisor, plan administrator, or broker, are fees that will come directly from your potential investment returns—so you’d better be damn certain of the value you get out of that service. Remember, the goal here is to make you rich, not to fund some overpaid mutual fund manager’s Viagra-blue sportscar.
Finally, Become Confident in Your Saving and Investing Plan
Are you ready to learn how to invest, make the most of your money, and make your badass granny dreams a reality?
Take Invested Development, which is a live, virtual, four-part Investing 101 course taught by me. (That’s right, you can take the class from the comfort of your home—popcorn, sweatpants, greasy topknot and all!) I’m committed to helping my students learn by making them laugh and providing a judgment-free place to ask questions. You will walk away with a plan of action you’re confident in.
Feeling in charge of your money and investments: It’s a powerful place for a woman to be.
And often, learning requires the right teacher: I’m a writer and educator specializing in teaching women how to invest. Through my business, Invested Development, I’ve taught thousands of women to invest, revolutionizing what they think is possible for themselves and their financial futures. I take women who are unsure of their knowledge and turn them into confident, wealth-building badasses.
I also write a blog called The Dumpster Dog Blog, which has been nominated for Money Blog of the Year and Women’s Money Blog of the Year for two years running.
Invested Development has upcoming classes in January and February. Because it is live, virtual, and classroom style, spaces in the class are limited. Invested Development will show you that investing is something that is absolutely within your capacity: don’t put it off for one day longer. Your future granny depends on it.
Are you saving for retirement? Why or why not?
The post Why Investing for Retirement is So Important for Women (and How To Do It)Â appeared first on Making Sense Of Cents.
Wondering what retirement mistakes will ruin your retirement? Here are the biggest retirement mistakes we all make.
Have you ever checked in to see if you are on track for retirement? I know this can feel like a daunting task, but preparing yourself for retirement can help you save more and avoid common retirement mistakes.
For some, retirement means quitting their job after 40+ years, but it can also mean working towards early retirement, in your 20’s, 30’s, 40’s, and so on.
I know that’s not for the “average” American, but by avoiding some of the retirement mistakes I will talk about today, you can start preparing for retirement at any age.
Related: How To Save For Retirement
The thing about retirement is that sadly many out there are not saving enough money. In fact, according to Zacks Investment Research, 72% do not save enough for retirement each month.
Also, according to surveys done by Bankrate, 20% of people aren’t saving any money, and 61% of Americans have no idea what they will need to save for retirement.
These numbers are very alarming.
Saving money in general is an important thing to do, but if you don’t want to work for the rest of your life, saving for retirement should be something that you are thinking about. And, I believe that saving for retirement is possible if you start working towards it and avoid retirement mistakes when it comes to planning and saving.
While many believe the economy ruins their chances for retirement, in reality most retirement mistakes come from specific beliefs people have about retirement. Some of these beliefs come from expectations of what their budget will be during retirement, that they can rely on their pension or social security, and more.
There are many reasons for why a person might not be saving for retirement, and by looking at the various retirement mistakes you might be making, I feel that more people can be aware of and overcome their retirement preparation problems.
Here are five retirement mistakes and how they might be hurting your chances for retirement:
1. You ignore saving for retirement altogether.
Many people skip out on saving for retirement for several reasons, including:
Believing you don’t have enough money to save for retirement.
Thinking that you’re too young to care about retirement or that it’s too late to start.
Relying too much on pensions and social security.
No matter how young or how old you are, you should be saving and preparing for retirement. You never know when you will need it, and I am all for a person being in charge of their own retirement plan instead of relying too much on other sources of retirement (such as relying on social security 100%).
Millennials are especially at risk and according to an article by Business Insider, a shocking 40% of millennials have nothing saved for retirement. This is a scary number because these people will all have to retire one day and I’m not sure what they will do when the time comes.
But, it isn’t just young people who aren’t saving for retirement. Bankrate found that only 60% of people aged 45-54 have some type of retirement savings. You can read more crazy retirement statistics here.
It is important to realize that part of the reason for these low savings rates is that many are currently living paycheck to paycheck, which makes it hard to even approach saving for retirement. Fortunately, you can start investing with very little money, and you can learn how to start investing for beginners if you are wanting to start planning for retirement.
There is never a bad time to start saving for retirement, and you can correct this retirement mistake by starting today.
Side note: I highly recommend that you check out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more. And, it’s FREE!
2. You take on debt for others and don’t think about your future.
I talked about this topic in the post Should I Ruin My Retirement By Helping My Child Through College? This is a hard thing for a lot of parents especially as student loans are out of control, and I am hearing from parents nearly every week saying that they cannot afford to retire because they are paying for their child to go to college.
If this is your situation, I want you to STOP making this one of your retirement mistakes. Unless you are on track for retirement, I honestly think you need to seriously start prioritizing your future. Your child will be fine without your monetary support.
There are lots of ways to support your child through school that don’t involve leveraging your future for their education. You can help them find a job, find scholarships, be an emotional support, and more.
You can take out loans for college, but you cannot take out loans for retirement.
3. You think you’ll never have to retire.
Recently, I read an article about someone who made hundreds of thousands of dollars a year, had a monthly budget of around $30,000 (yes, MONTHLY!), and yet hardly saved anything. This person said they didn’t really feel the need to save for retirement because they enjoyed their job so much. That’s just crazy!
See, even wealthy people make retirement mistakes.
Assuming you will love your job forever can be a huge mistake. While it’s great that you love your job now, it’s hard to judge what you will love decades down the line.
Also, you never know if something will come up in the future that will completely prevent you from working, such as a medical issue or some sort of major life change. Beyond realizing that you will need to prepare for retirement, an emergency fund should be something you already have or are working on – emergency funds are there to protect you from the what-ifs.
Everything You Need To Know About Emergency Funds
Is A Credit Card Emergency Fund A Smart Idea?
4. You miscalculate how much money you’ll spend in retirement.
For some reason, many people just assume they will spend less money in retirement, but that is not always the case.
While you might find some ways to save money on things like commuting expenses, work clothes, lunch if you weren’t bringing it, you will probably experience a very similar budget to the one you had while working.
You are still going to spend money on housing (even if you pay off your home completely, you will still need to pay property taxes, utility bills, etc.), food, clothing, entertainment, and so on.
Many retirees also take up new hobbies or activities. And, some retirees just have more time to pursue things they’ve already been doing, which can add up to a lot of extra expenses.
Plus, medical expenses may come up, you might decide to travel more, and like I said, the truth is that retirement spending is not usually much different than what you are currently spending.
Some make plans to become super frugal after they enter retirement, but life doesn’t always work out so perfectly. To make sure this isn’t one of the retirement mistakes you are making, I recommend starting to cut down your budget now.
By living frugally before you retire, you will be able to save more, will have less expenses going into retirement (the less money you spend, the less you need in the future), and you might even reach retirement sooner. Really, if you cut your spending now and become more frugal, you will be used to living with less. I’ve been living a more frugal and minimalist lifestyle since we moved onto our boat, and it can be a life changing thing.
5. You use your retirement funds for expenses other than retirement.
This is one of the worst money mistakes out there, and unfortunately many young people are making it. I’ve actually heard far too many stories about people taking money out of their retirement funds in order to pay for a vacation, a timeshare, pay off low interest debt, and more.
When preparing for retirement, this is a HUGE mistake.
While I don’t know everything about taking money out of retirement funds, I do know that this can usually hurt you more in the long run. Taking funds out of a retirement account can lead to large penalties and paying extra towards taxes.
The other thing about saving for retirement is that the longer you have funds invested, the more you will have for retirement. Compound interest is a powerful thing, and if you are taking money out of your retirement account it means that you don’t get the full benefit of it.
You should always just use your retirement funds purely for retirement. If you are struggling with debt or need help differentiating between wants and needs, it’s time to make a change. Don’t wreck your future by making this huge retirement mistake.
What retirement mistakes have you seen? Do you think you will have enough money to retire and how are you preparing for retirement? What age do you expect to retire?
The post You CAN Reach Retirement! Avoid These Top 5 Retirement Mistakes appeared first on Making Sense Of Cents.
The only way to retire with financial security is by saving for retirement ASAP. Although setting aside retirement savings is a solid start in the right direction, making sure youâre saving enough toward your retirement goal is just as important.
Once youâve decided how much you’ll contribute to your retirement fund, youâll be closer to knowing if your savings are on track. Hereâs how to get started.
The main takeaway is that you can get on track to retire at just about any age. But you have to be willing to commit to saving as much as you can and on a completely consistent basis.
Compound Earnings Catapults Your Retirement Fund
Building your retirement savings isnât something you can do on a whim, work on for a few years, and then abandon. You need to set up a plan â and the earlier in life, the better â then commit to it for decades.
Why? Because compound earnings over time is what gets you to your retirement goal faster.
When you invest into your retirement, your funds earn interest. That interest is reinvested to earn more interest. This is the concept behind âcompound interestâ. To successfully plan for retirement, putting your contributions on auto-pilot is essential to maximize your compounded earnings.
This starts with opening the right to retirement plan, or even a combination of plans. From there, you can set up payroll deductions or automatic transfers from your bank account to fund whatever retirement plan youâve chosen.
Choosing the Right Retirement Plan
You can start saving for retirement by participating in a workplace retirement plan, if your employer offers one. This will typically be a 401(k), 403(b), 457 or Thrift Savings Plan (TSP).
Under current tax contribution laws, you can contribute up to $19,500 per year to any of those plans, or $26,000 if youâre 50 or older. Some employers also offer a matching contribution that grows your savings fund more quickly.
A limitation of an employer-sponsored plan is that youâre often on your own to manage it. There might also be limited investment options, including some that have high investment fees. A good workaround for this problem is to sign up with a 401(k)-specific robo-advisor, like Blooom.
Itâs a service that creates and manages a portfolio within your employer-sponsored plan, including replacing high-fee funds with those that charge lower fees. And it provides this service for a low, flat monthly fee. Your employer doesnât need to be involved in the process â just add Blooom to your existing plan.
If You Donât Have an Employer-Sponsored Retirement Plan
If you donât have access to an employer-sponsored plan, you have a few options depending on your situation. Here are other types of retirement plans to consider:
Traditional IRA or Roth IRA. It can either include brokerage firms if you prefer self-directed investing, or robo-advisors if youâd rather have your investments managed for you. IRA contribution limits for either type of retirement plan let you contribute up to $6,000 per year, or $7,000 if youâre 50 or older. Here are a few places to open an IRA account.
SEP-IRA. If youâre self-employed and a high-income earner, a SEP-IRA is the best way to build up a large retirement portfolio in less time. Rather than an annual contribution limit of $6,000 for traditional and Roth IRAs, the limit for a SEP-IRA is a whopping $57,000.
Solo 401(k). A Solo 401(k) is also designed for self-employed workers (though it can also include a spouse who participates in the business). It has the same employee contribution limit as a standard 401(k) at $19,500 per year, or $26,000 if you are 50 or older. But a solo 401(k) lets you make an additional employer contribution to the plan up to $57,000 (or $63,500 if you are 59 or older). Employer contributions are also capped no more than 25% of your total compensation from your business.
General Retirement Find Milestone Guidelines
The number of variables involved in retirement makes it impossible to come up with a specific savings goal to aim for in your situation. But like any plan, youâll need to have milestones to let you know if youâre on track to retire or not.
Although there are different methods of calculating retirement milestones, the Fidelity Retirement Widget offers the best ballpark figure. The widget is incredibly user-friendly, produces easy to understand results, and is absolutely free to use.
It determines how much money you should have at each age, based on your answers to three questions:
What is your current age?
What age do you expect to retire?
What do you think your lifestyle will be in retirement? (You can choose below average, average, and above average.)
The last question about your lifestyle in retirement is admittedly vague, but an educated guess is enough.
Plugging in a starting age of 25, with an expected age of retirement of 67, and an average lifestyle in retirement, Fidelity provided the following retirement milestones in five-year increments:
Each bar represents a multiple of your current annual income at a specific age. For example, at age 30, your total retirement savings should roughly equal your annual income. At 35, you shouldâve saved double your income, and so on until age 67 when you retire.
At that point your retirement savings should be 10 times the amount of your annual income just before retiring. (It will be 12X your income at 67 if you expect an above average lifestyle, but just 8X if you expect to live a below-average lifestyle.)
How Accurate Are These Retirement Savings Milestones?
Thereâs no guaranteed method to project your exact future earnings or how much your retirement fund will compound over time. The best we can do is a ballpark estimate, especially if youâre only in your 20s or 30s.
But letâs work a loose example to demonstrate the validity of the Fidelity estimate.
Letâs say you reach 67, your final salary is $100,000, and youâve accumulated 10 times that income in your combined retirement savings (i.e. $1 million).
Itâs not reasonable to assume a $1 million portfolio will consistently generate 10% annual returns, fully replacing your $100,000 pre-retirement income.
General Rule of Thumb for Retirement Savings
Generally, you can plan on replacing 80% of your pre-retirement income. That means $80,000 per year of income in retirement. The reduction assumes you wonât have work-related expenses, like commuting, or making additional retirement contributions. It also assumes a lower annual tax bite. After all, once you retire, youâll no longer be paying FICA taxes.
If you have a $1 million retirement portfolio, you can withdraw 4% per year without draining your portfolio to zero. This is whatâs frequently referred to as the safe withdrawal rate.
Withdrawals of 4% will come to $40,000 on a $1 million portfolio. That will represent 50% of the $80,000 in needed retirement income.
Presumably, the rest will come from a combination of Social Security and any available pension income. You can use the Social Security Quick Calculator to determine what your benefits will be at retirement.
Using a Retirement Calculator to Track Your Goals
With your estimated Social Security benefits in mind, a retirement calculator can help you understand the remaining gap between your savings and how much you need for retirement.
For example, letâs say youâre 25-years-old, earning $50,000 annually, and your employer offers a 401(k) plan. For each of the remaining examples, weâll assume your employer doesnât match contributions, and assume a 7% annual rate of return on investments reflecting a mix of stocks and bonds in your plan.
If you want your 401(k) plan balance to match your salary by age 30, youâll need to contribute
17% of your income â or about $8,500 per year â to your plan. With a 7% annual rate of return, thatâll give you a balance of $50,717.
If you expect to be earning $75,000 per year by the time youâre 35, youâll need to have $150,000 in your plan by the time you reach that age.
Assuming your income averages $62,500 per year between the ages of 30 and 35, youâll need to contribute 21% of your income, or $13,125 per year, to reach the $150,000 threshold in your plan.
The Magic of Saving for Retirement Early
Looking long-term, at retirement at age 67, letâs assume your income will grow to $100,000 between age 35 and 67. In this scenario, your average annual income is $87,500. Since you expect to earn $100,000 just before retiring, you should have $1 million sitting in your 401(k) plan.
What will it take to reach that goal?
One of the biggest and best secrets of retirement planning is the earlier in life you begin saving, the less youâll need to save later on in life. And sometimes thatâs nothing.
In this case, since you already have $150,000 in your plan at age 35, simply by investing the money at an average annual return of 7% for 32 years your plan will grow to $1.3 million. Thatâs without making even a single dollar of additional contribution.
And for what itâs worth, if you simply made the maximum 401(k) contribution of $19,500 each year between 35 and 67, your plan would have more than $3.4 million by the time you reach retirement.
The most fundamental rule of retirement savings planning is: save early and often!
Planning for Early Retirement
If youâre 25 years old and you want to retire at 50, decide how much income youâll need to live on by the time you reach 50. Since you wonât have the benefit of Social Security or a pension, youâll rely entirely on your retirement savings.
Letâs say youâll need $40,000 per year to live in retirement. In this case, youâll need to have $1 million in your retirement portfolio based on the 4% safe withdrawal rate.
How Much to Save for an Early Retirement
To get from $0 to $1 million in your retirement plan between 25 and 50, youâll need to make the maximum 401(k) contribution allowed at $19,500 each year for 25 years. Assuming your investment produces a 7% return, youâll have $1,181,209 by the time you reach 50. Thatâll be a little bit higher than your $1 million retirement goal.
Itâll be difficult to carve out the full $19,500 on a $50,000 income youâre earning at age 25, but it gets easier as the years pass and your income increases. You might even decide to lower your contributions in your 20s, and work up to the maximum by the time youâre 30.
Just be aware that the foundational strategy of reaching early retirement is based on saving a seemingly ridiculous percentage of your income. Although others are saving 10% or maybe 15% of their income each year, youâll need to think more in terms of 30%, 40%, or 50% savings. It all depends on how early you want to retire.
What to Do if Youâre Not on Track to Retire
Unfortunately, this describes the majority of Americans. But it doesnât need to be you, even if youâre not currently on track to retire.
Letâs say youâre 45 years old and earning $100,000, and you currently have $100,000 in total retirement savings. That means that at age 45 your retirement fund is where Fidelity recommends it shouldâve been at age 30.
Donât give up hope.
If you make the maximum contribution of $19,500 per year between ages 45 and 50, then increase it to the maximum of $26,000 per year from ages 50 to 65, youâll have just over $1.3 million in your plan by the time you reach 65.
You wonât benefit from compound earnings that you wouldâve seen had you started saving aggressively in your 20s, but your situation is far from hopeless.
The main takeaway is that you can get on track to retire at just about any age. But you have to be willing to commit to saving as much as you can and on a completely consistent basis.
The post Am I On Track to Retire? appeared first on Good Financial CentsÂ®.
Is taking money from your 401(k) plan a good idea? Generally speaking, the common advice for raiding your 401(k) is to only take this step if you absolutely have to. After all, your retirement funds are meant to grow and flourish until you reach retirement age and actually need them. If you take money from your 401(k) and donât replace it, you could be putting your future self at a financial disadvantage.
Still, we all know that times are hard right now, and that there are situations where removing money from a 401(k) plan seems inevitable. In that case, you should know all your options when it comes to withdrawing from a 401(k) plan early or taking out a 401(k) loan.
If you take money from your 401(k) and donât replace it, you could be putting your future self at a financial disadvantage.
401(k) Withdrawal Options if Youâve Been Impacted by COVID-19
First off, you should know that you have some new options when it comes to taking money from your 401(k) if you have been negatively impacted by coronavirus. Generally speaking, these new options that arose from the CARES Act include the chance to withdraw money from your 401(k) without the normal 10% penalty, but you also get the chance to take out a 401(k) loan in a larger amount than usual.
Here are the specifics:
The CARES Act will allow you to withdraw money from your 401(k) plan before the age of 59 Â½ without the normal 10% penalty for doing so. Note that these same rules apply to other tax-deferred accounts like a traditional IRA or a 403(b).
To qualify for this early penalty-free withdrawal, you do have to meet some specific criteria. For example, you, a spouse, or a dependent must have been diagnosed with a CDC-approved COVID-19 test. As an alternative, you can qualify if you have âexperienced adverse financial consequences as a result of certain COVID-19-related conditions, such as a delayed start date for a job, rescinded job offer, quarantine, lay off, furlough, reduction in pay or hours or self-employment income, the closing or reduction of your business, an inability to work due to lack of childcare, or other factors identified by the Department of Treasury,â notes the Consumer Financial Protection Bureau (CFPB).
Due to this temporary change, you can withdraw up to $100,000 from your 401(k) plan regardless of your age and without the normal 10% penalty. Also be aware that the CARES Act also removed the 20 percent automatic withholding that is normally set aside to pay taxes on this money. With that in mind, you should save some of your withdrawal since you will owe income taxes on the money you remove from your 401(k).
The Cares Act also made it possible for consumers to take out a 401(k) loan for twice the amount as usual, or $100,000 instead of $50,000. According to Fidelity, you may be able to take out as much as 50% of the amount you have saved for retirement. However, not all employers offer 401(k) loan options through their plans and they may not have adopted the new CARES Act provisions at all, so you should check with your current employer to find out.
A 401(k) loan is unique from a 401(k) withdrawal since youâll be required to pay the money back (plus interest) over the course of 5 years in most cases. However, the interest you pay actually goes back into your retirement account. Further, you wonât owe income taxes on money you take out in the form of a 401(k) loan.
Taking Money out of Your 401(k): What You Should Know
Only you can decide whether taking money from your 401(k) is a good idea, but you should know all the pros and cons ahead of time. You should also be aware that the advantages and disadvantages can vary based on whether you borrow from your 401(k) or take a withdrawal without the intention of paying it back.
If You Qualify Through the CARES Act
With a 401(k) withdrawal of up to $100,000 and no 10% penalty thanks to the CARES Act, the major disadvantage is the fact that youâre removing money from retirement that you will most certainly need later on. Not only that, but you are stunting the growth of your retirement account and limiting the potential benefits of compound interest. After all, money you have in your 401(k) account is normally left to grow over the decades you have until retirement. When you remove a big chunk, your account balance will grow at a slower pace.
As an example, letâs say you have $300,000 in a 401(k) plan and you leave it alone to grow for 20 years. If you achieved a return of 7 percent and never added another dime, you would have $1,160,905.34 after that time. If you removed $100,00 from your account and left the remaining $200,000 to grow for 20 years, on the other hand, you would only have $773,936.89.
Money you have in your 401(k) account is normally left to grow over the decades you have until retirement. When you remove a big chunk, your account balance will grow at a slower pace.
Also be aware that, while you donât have to pay the 10% penalty for an early 401(k) withdrawal if you qualify through the CARES Act, you do have to pay income taxes on amounts you take out.
When you borrow money with a 401(k) loan using new rules from the CARES Act, on the other hand, the pros and cons can be slightly different. One major disadvantage is the fact that youâll need to repay the money you borrow, usually over a five-year span. You will pay interest back into your retirement account during this time, but this amount may be less than what you would have earned through compound growth if you left the money alone.
Also be aware that, if you leave your current job, you may be required to pay back your 401(k) loan in a short amount of time. If you canât repay your loan because you are still experiencing hardship, then you could wind up owing income taxes on the amounts you borrow as well as a 10% penalty.
Note: The same rules will generally apply if you quit your job and move out of the United States as well, so donât think that moving away can get you off the hook from repaying your 401(k) loan. If youâre planning to leave the U.S. and youâre unsure how to handle your 401(k) or 401(k) loan, speaking with a tax expert is your best move.
Keep in mind that, with both explanations of a 401(k) loan and a 401(k) early withdrawal above, these pros and cons are predicated on the idea you can qualify for the special benefits included in the CARES Act. While the IRS rules for qualifying for a coronavirus withdrawal are fairly broad, you do have to be facing financial hardship or lack of childcare due to coronavirus. You can read all the potential qualification categories on this PDF from the Internal Revenue Service (IRS).
If You Don’t Qualify Through the CARES Act
If you donât qualify for special accommodation through the CARES Act, then you will have to pay a 10% penalty on withdrawals from your 401(k) as well as income taxes on amounts you take out. With a traditional 401(k) loan, on the other hand, you may be limited to borrowing just 50% of your vested funds or $50,000, whichever is less.
However, you should note that the IRS extends other hardship distribution categories you may qualify for if youâre struggling financially . You can read about all applicable hardship distribution requirements on the IRS website.
Taking Money Out of Your 401(k): Main Pros and Cons
The situations where you might take money out of your 401(k) can be complicated, but there are some general advantages and disadvantages to be aware of. Before you take money from your 401(k), consider the following:
Pros of taking money out of your 401(k):
You are able to access your money, which could be important if youâre suffering from financial hardship.
If you qualify for special accommodations through the CARES Act, you can avoid the 10% penalty for taking money from your 401(k) before retirement age.
You can take out more money (up to $100,000) than usual from your 401(k) with a 401(k) withdrawal or a 401(k) loan thanks to CARES Act rules.
Cons of taking money out of your 401(k):
If you take money out of your 401(k), youâll have to pay income taxes on those funds.
Removing money from your 401(k) means you are reducing your current retirement savings.
Not only are you removing retirement savings from your account, but youâre limiting the growth on the money you take out.
If you take out a 401(k) loan, youâll have to pay the money back.
Alternatives to Taking Money from your 401(k)
There may be some situations where taking money out of your 401(k) makes sense, including instances where you have no other option but to access this money to keep the lights on and food on the table. If you cash out your 401(k) and the market tanks afterward, you could even wind up feeling like a genius. Then again, the chances of optimally timing your 401(k) withdrawal are extremely slim.
With that being said, if you donât have to take money out of your 401(k) plan or a similar retirement plan, you shouldnât do it. You will absolutely want to retire one day, so leaving the money youâve already saved to grow and compound is always going to leave you ahead in the long run.
With that in mind, you should consider some of the alternatives of taking money from a 401(k) plan:
See if you qualify for unemployment benefits. If you were laid off or furloughed from your job, you may qualify for unemployment benefits you donât even know about. To find out, you should contact your stateâs unemployment insurance program.
Apply for temporary cash assistance. If you are facing a complete loss in income, consider applying for Temporary Assistance for Needy Families (TANF), which lets you receive cash payments. To see if you qualify, call your state TANF office.
Take out a short-term personal loan. You can also consider a personal loan that does not use funding from your 401(k). Personal loans tend to come with competitive interest rates for consumers with good or excellent credit, and you can typically choose your repayment term.
Tap into your home equity. If you have more than 20% equity in your home, consider borrowing against that equity with a home equity loan or home equity line of credit (HELOC). Both options let you use the value of your home as collateral, and they tend to offer low interest rates as a result.
Consider a 0% APR credit card. Also look into 0% APR credit cards that allow you to make purchases without any interest charged for up to 15 months or potentially longer. Just remember that youâll have to repay all the purchases you charge to your card, and that your interest rate will reset to a much higher variable rate after the introductory offer ends.
The Bottom Line
In times of financial turmoil, it may be tempting to pull money out of your 401(k). After all, it is your money. But the ramifications to your future financial wellbeing may be substantial. The CARES Act has introduced new options to leverage your 401(k), without the normal penalties. Find out if you qualify and take time to understand the details behind the options. We recommend speaking to a tax expert if you have any questions or concerns regarding possible tax penalties.
The traditional wisdom is to leave your retirement untouched, and we agree with that. If you’re in a financial bind, consider other options to get you through the rough patch. Tapping into your 401(k) should really be your last resort.
The post Should I Take Money Out of My 401(k) Now? appeared first on Good Financial CentsÂ®.
When most parents offer to fund their childâs tuition, itâs with the expectation that their financial circumstances will remain relatively unchanged. Even with minor dips in income or temporary periods of unemployment, a solid plan will likely see the child through to graduation.
Unfortunately, what these plans donât tend to account for is a global pandemic wreaking havoc on the economy and job market.
Now, many parents of college-age children are finding themselves struggling to stay afloat – much less afford college tuition. This leaves their children who were previously planning to graduate college with little or no debt in an uncomfortable position.
So if youâre a student suddenly stuck with the bill for your college expenses, what can you do? Read below for some strategies to help you stay on track.
Contact the University
Your first step is to contact the university and let them know that your financial situation has changed. You may have to write something that explains how your parentâs income has decreased.
Many students think the federal government is responsible for doling out aid to students, but federal aid is actually distributed directly by the schools themselves. In other words, your university is the only institution with the authority to provide additional help. If they decide not to extend any more loans or grants, youâre out of luck.
Ask your advisor if there are any scholarships you can apply for. Make sure to ask both about general university scholarships and department-specific scholarships if youâve already declared a major. If you have a good relationship with a professor, contact them for suggestions on where to find more scholarship opportunities.
Some colleges also have emergency grants they provide to students. Contact the financial aid office and ask how to apply for these.
Try to Graduate Early
Graduating early can save you thousands or even tens of thousands in tuition and room and board expenses. Plus, the sooner you graduate, the sooner you can get a job and start repaying your student loans.
Ask your advisor if graduating early is possible for you. It may require taking more classes per semester than you planned on and being strategic about the courses you sign up for.
Fill out the FAFSA
If your parents have never filled out the Free Application for Federal Student Aid (FAFSA) because they paid for your college in full, now is the time for them to complete it. The FAFSA is what colleges use to determine eligibility for both need-based and merit-based aid. Most schools require the FAFSA to hand out scholarships and work-study assignments.
Because the FAFSA uses income information from a previous tax return, it wonât show if your parents have recently lost their jobs or been furloughed. However, once you file the FAFSA, you can send a note to your university explaining your current situation.
Make sure to explain this to your parents if they think filing the FAFSA is a waste of time. Some schools wonât even provide merit-based scholarships to students who havenât filled out the FAFSA.
Get a Job
If you donât already have a job, now is the time to get one. Look at online bulletin boards to see what opportunities are available around campus. Check on job listing sites like Monster, Indeed and LinkedIn. Make sure you have a well-crafted resume and cover letter.
Try to think outside the box. If youâre a talented graphic designer, start a freelance business and look for clients on sites like Upwork or Fiverr. If youâre a fluent Spanish speaker, start tutoring other students. Look for jobs where you can study when things are slow or that provide food while youâre working.
Ask anyone you know for suggestions, including former and current professors, older students and advisors. If you had a job back home, contact your old boss. Because so many people are working remotely these days, they may be willing to hire you even if youâre in a different city.
It may be too late to apply for a Resident Advisor (RA) position now but consider it as an option for next year. An RA lives in the dorms and receives free or discounted room and board in exchange for monitoring the students, answering their questions, conducting regular inspections and other duties.
Take Out Private Loans
If you still need more money after youâve maxed out your federal student loans and applied for more scholarships, private student loans may be the next best option.
Private student loans usually have higher interest rates and fewer repayment and forgiveness options than federal loans. In 2020, the interest rate for federal undergraduate student loans was 2.75% while the rate for private student loans varied from 3.53% to 14.50%.
Private lenders have higher loan limits than the federal government and will usually lend the cost of tuition minus any financial aid. For example, if your tuition costs $35,000 a year and federal loans and scholarships cover $10,000 a year, a private lender will offer you $25,000 annually.
Taking out private loans should be a last resort because the rates are so high, and thereâs little recourse if you graduate and canât find a job. Using private loans may be fine if you only have a semester or two left before you graduate, but freshmen should be hesitant about using this strategy.
Consider Transferring to a Less Expensive School
Before resorting to private student loans to fund your education, consider transferring to a less expensive university. The average tuition cost at a public in-state university was $10,440 for the 2019-2020 school year. The cost at an out-of-state public university was $26,820, and the cost at a private college was $36,880.
If you can transfer to a public college and move back home, you can save on both tuition and housing.
Switching to a different college may sound like a drastic step, but it might be necessary if the alternative is borrowing $100,000 in student loans. Remember, no one knows how long this pandemic and recession will last, so itâs better to be conservative.
The post My Parents Can’t Afford College Anymore – What Should I Do? appeared first on MintLife Blog.
When it comes to making a 401k early withdrawal, there are a number of reasons why it might be tempting. With millions still unemployed due to the pandemic, unexpected expenses are taking a particularly hard toll. One reason why early withdrawal isnât uncommon in the U.S. might be because itâs easy to assume youâll have time to rebuild your 401k nest egg.
However, is the benefit of withdrawing your retirement savings early truly worth the cost? For many people, their 401k is their primary method of investing in their financial future. Before making a decision about early withdrawal, itâs important to consider the penalties and fees that could impact you. Read on to learn exactly what happens when you decide to dip into your 401k so you wonât be surprised by the repercussions.
How Much Are You Penalized for a 401k Early Withdrawal?
On the surface, withdrawing funds from your 401k might not seem like a bad option under extenuating circumstances, but you could face penalties. Young adults are especially prone to early withdrawals because they figure they have plenty of time to replace lost funds.
If youâre not experiencing a significant hardship, 401k early withdrawal probably isnât the right choice for you. Ultimately, you could lose a substantial portion of your retirement savings if you choose to withdraw your 401k early to use the money to make other risky financial moves. Below, letâs delve further into the penalties that usually apply when you withdraw early.
1) Your Taxes Are Withheld
When you prematurely withdraw from your retirement account, your first consideration should be that youâll have to pay normal income taxes on that money first. This means youâre losing at least roughly 30 percent of your savings to federal and state taxes before additional penalties.
Even if you only have $10,000 you want to withdraw, consider that youâre automatically giving $3,000 of your cash to the government. In the best case scenario, you might receive some money back in the form of a tax refund if your withholding exceeds your actual tax liability.
2) You Are Penalized by the IRS
If you withdraw money from your 401k before youâre 59 Â½ , the IRS penalizes you with an extra 10 percent on those funds when you file your tax return. If we use the example above, an additional $1,000 would be taken by the government from your $10,000 â leaving you with just $6,000. If youâre 55 or older, you could try to get this penalty lifted by the IRS through the Rule of 55, which is designed for people retiring early.
Also, there are exceptions under the CARES Act, which is designed to help people affected by the pandemic. There are provisions under the act that state individuals under the age of 59 Â½ can take up to $100,000 in Coronavirus-related early distributions from their retirement plans without facing the 10 percent early withdrawal penalty under certain conditions.
3) You Lose Thousands in Potential Growth
Even if youâre not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, youâll miss out on potential future savings growth because you wonât gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings â not only on your principal investment but also on your accrued interest.
Also, if you make a 401k early withdrawal while the market is down, youâre doing yourself a disservice because youâll be leaving thousands on the table. Itâs unlikely youâll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.
When Does a 401k Early Withdrawal Make Sense?
In certain cases, it actually might be strategic to move forward with 401k early withdrawal. For example, it could be smart to cash out some of your 401k to pay off a loan with a high-interest rate, like 18â20 percent. You might be better off using alternative methods to pay off debt such as acquiring a 401k loan rather than actually withdrawing the money.
Always weigh the cost of interest against tax penalties before making your decision. Some 401k plans do allow for penalty-free early withdrawals due to a layoff, major medical expenses, home-related costs, college tuition, and more. Regardless of your strategy to withdraw with the least penalties, your retirement savings are still taking a significant hit.
401k Early Withdrawal, Hardship, or Loan: Whatâs the Difference?
Knowing the differences between a 401k early withdrawal, a hardship withdrawal, and a 401k loan is crucial. Due to the many obstacles to make a 401k early withdrawal, you may find you want to keep it untouched. If youâre convinced you still need to use your 401k for financial assistance, consult with a trusted financial advisor to figure out the best option.
When Does ThisÂ Apply?
Your funds are withdrawn to pay off large debts or finance large projects.
Your 401k fund is typically subject to taxes and penalties.
Youâre only eligible for this type of withdrawal under circumstances such as a pandemic or natural disasters.
Withdrawals canât exceed the amount of the need and the funds are still subject to taxes and penalties.
The loan must be paid back to the borrowerâs retirement account under the plan.
The money isnât taxed if the loan meets the rules and the repayment schedule is followed.
If youâve left a job and donât know what to do with your Roth IRA, a 401k transfer is a good option. Most likely, you will save money and have a wider range of investment options when you transfer your funds. 401k fees can be high, and rolling over your funds to a Roth IRA account could be wise in the long run. Also, be aware that the process is more complicated for indirect rollovers.Â
If youâre one of the millions of Americans who rely on workplace retirement savings, early 401k withdrawal may jeopardize your future financial stability.
There are very few instances when cashing out a portion of your 401k is a smart move.
In most cases, any kind of early 401k withdrawal is detrimental to your retirement plans.
Stick to your budget and bulk up your emergency fund to stay one step ahead.
In short, 401k early withdrawals are usually counterproductive. Prevent compromising your hard-earned savings by using a free budgeting tool that will set you up for success. After all, being prepared and informed are two of the most important parts of maintaining financial health.
The post 401k Early Withdrawal: What to Know Before You Cash Out appeared first on MintLife Blog.
Iâm 51 years old and donât have a large nest egg. Iâm a single parent with three kids. Iâm a second career middle school teacher, so there is not a lot of money left over each month.Â
How much money should I be saving to be able to retire in my 70s? Where should I invest that money?
You still have 20 years to build your nest egg if all goes as planned. Sure, youâve missed out on the extra years of compounding youâd have gotten had you accumulated substantial savings in your 20s and 30s. But thatâs not uncommon. Iâve gotten plenty of letters from people in their 50s or 60s with nothing saved who are asking how they can retire next year.
I like that youâre already planning to work longer to make up for a late start. But hereâs my nagging concern: What if you canât work into your 70s?
The unfortunate reality is that a lot of workers are forced to retire early for a host of reasons. They lose their jobs, or they have to stop for health reasons or to care for a family member. So itâs essential to have a Plan B should you need to leave the workforce earlier than youâd hoped.
Retirement planning naturally comes with a ton of uncertainty. But since I donât know what you earn, whether you have debt or how much you have saved, Iâm going to have to respond to your question about how much to save with the vague and unsatisfying answer of: âAs much as you can.â
Perhaps I can be more helpful if we work backward here. Instead of talking about how much you need to save, letâs talk about how much you need to retire. You can set savings goals from there.
The standard advice is that you need to replace about 70% to 80% of your pre-retirement income. Of course, if you can retire without a mortgage or any other debt, you could err on the lower side â perhaps even less.
For the average worker, Social Security benefits will replace about 40% of income. If youâre able to work for another two decades and get your maximum benefit at age 70, you can probably count on your benefit replacing substantially more. Your benefit will be up to 76% higher if you can delay until youâre 70 instead of claiming as early as possible at 62. That can make an enormous difference when youâre lacking in savings.
But since a Plan B is essential here, letâs only assume that your Social Security benefits will provide 40%. So you need at least enough savings to cover 30%.
If you have a retirement plan through your job with an employer match, getting that full contribution is your No. 1 goal. Once youâve done that, try to max out your Roth IRA contribution. Since youâre over 50, you can contribute $7,000 in 2021, but for people younger than 50, the limit is $6,000.
If you maxed out your contributions under the current limits by investing $583 a month and earn 7% returns, youâd have $185,000 after 15 years. Do that for 20 years and youâd have a little more than $300,000. The benefit to saving in a Roth IRA is that the money will be tax-free when you retire.
The traditional rule of thumb is that you want to limit your retirement withdrawals to 4% each year to avoid outliving your savings. But that rule assumes youâll be retired for 30 years. Of course, the longer you work and avoid tapping into your savings, the more you can withdraw later on.
Choosing what to invest in doesnât need to be complicated. If you open an IRA through a major brokerage, they can use algorithms to automatically invest your money based on your age and when you want to retire.
By now youâre probably asking: How am I supposed to do all that as a single mom with a teacherâs salary? It pains me to say this, but yours may be a situation where even the most extreme budgeting isnât enough to make your paycheck stretch as far as it needs to go. You may need to look at ways to earn additional income. Could you use the summertime or at least one weekend day each week to make extra money? Some teachers earn extra money by doing online tutoring or teaching English as a second language virtually, for example.
I hate even suggesting that. Anyone who teaches middle school truly deserves their time off. But unfortunately, I canât change the fact that we underpay teachers. I want a solution for you that doesnât involve working forever. That may mean you have to work more now.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to AskPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.