The Retirement Crisis and How to Avoid It

There is a retirement crisis currently underway.  Why is this?  Because people don’t save during their working years to fund their golden years.  The Economic Policy Institute recently released are startling report about American’s retirement savings.

The Retirement Revolution That Failed: Why the 401(k) Isn’t Working

The graph above shows the median account values of retirement savings for a given age group.  The overall median among all age groups is a meager $5,000 while the median value for those closest to retirement, 56-61 age group, have only $17,000 saved up.

To put this in perspective, I am 26 years old, and have been employed full time for less than 4 years.  In my retirement accounts, which include a company 401k, a rollover IRA and a Roth IRA, I have $47,589 saved.

Retirees are relying on Social Security by larger percentages these days.  Nearly 2 out of every 3 retirees relies on Social Security for at least 90% of their retirement income.  No matter your current age, there are ways to insure that you are setting yourself up for success in your later years.  Here are the steps I followed to have my current retirement savings:

  1. Fund a Company 401k and get full employer match.  This should be a no brainer.  Fund your company’s 401k plan at least to the amount that will maximize your employer’s match.  It’s FREE MONEY.
  2. Start an IRA.  I prefer a Roth IRA because it is money you will never be taxed on again, and is a good complement to a 401k (which you will pay income tax on in the future).  Go to Vanguard’s website and get one started in a matter of minutes.
  3. Maximize out your 401k.  If you are under 50, you can contribute up to $18,000 of your pre-tax pay to a 401k.  If you are over 50, you can contribute an additional $6,000.  See if you can contribute an additional 1 or 2 percent each year until you reach the maximum.

Planning for retirement is now more important than ever.  Many don’t have pensions to rely on anymore, so the responsibility is now on YOU to determine your retirement destiny.

Budget Smart, Invest Wise

Should I Save or Invest?

Why not do both?

Whether you save or invest your money really depends on the financial objectives you are trying to accomplish.  Saving, usually refers to putting money away where it can be accessed quickly and easily for an impending purchase.  On the other hand, investing should tie up your money for a length of time, but it will also produce better returns.

TIAA-CREF’s video below breaks down the difference between the two.  After watching, decide what financial goals you are trying to achieve in both the short term and long term.

https://www.youtube.com/watch?v=PvKXr_mkF5s

 

Budget Smart, Invest Wise

Student Loans: Grace Period, Waste Period

I spoke with my sister who just recently graduated with student loan debt.  She asked me, “How do I start paying back my loans?”  I told her, I don’t know.

If you have recently graduated from college then chance are you have student loans to pay back.  There is student loan exiting counselling you must go through and then it seems like you’re all finished.

This is exactly what I did.  After I graduated I went through loan counselling sometime during the late summer of 2012.  And then… Nothing.  I don’t even believe I received an email until almost six months later when it was time to start paying back my loans.  My grace period was coming to an end.

If you take out a student loan through your college or university you will most likely have a grace period of six months.  This is so you can have time to “Get your finances in order”.  I assume these loan company figure if you were this easy to get into debt it was the least they could do.

The bad part about this “Grace Period” is that interest is accruing during the six months you aren’t paying back your loans.  The loan companies try their best to hide this from you and make it as difficult as possible to figure out how to pay back your loans before the period is over.

Step 1: Log on to https://studentaid.ed.gov/sa/?login=true and find out who your student loan provider is.

Step 2: Create an online account with your provider(s) and set up your account information.

Step 3: Begin paying back your loans before the grace period ends to limit the amount of interest you will pay over the life of the loan.

 

Budget Smart, Invest Wise

Thinking Outside the Retirement Box

Having a company 401k is a beautiful thing.  A company match is the biggest way to get a free return on your retirement savings.  But don’t let a company sponsored retirement plan be the end all be all to your future savings.  When it comes to your financial future, I’m a big believer in having multiple sources.  IRA’s, taxable brokerage accounts, real estate.  There are many ways you can put your money to work.

Working at a company for 40 years and having a retirement plan coupled with social security might lead to a decent retirement future.  Decent is not what I’m seeking and neither should you.  You need your company retirement savings plan, but you also need an IRA, and other investments to fund an excellent life during your golden years.

The following article presents additional ways to save for those future years.  It is possible to save too little, but you can never save too much.  Check out ways to expand your retirement portfolio and ensure you make the choices now for a great financial future.

http://finance.yahoo.com/news/ve-maxed-401-k-where-205207623.html

Budget Smart, Invest Wise

 

 

Video Series: Setting Up a Roth IRA

In Part II of the video series, we will talk about just how one should start a Roth IRA.  Roth IRA’s are an essential tool to have when it comes to retirement planning.  The money you place into your Roth IRA and the earnings that accumulate over time are never taxed.  When you reach your retirement years, 401k’s, pensions and social security are all taxed.  This is why it is important to have a non-taxed account to supplement your retirement years.  Ramit explains Roth IRA’s below and where you can begin funding your very own account.

Budget Smart, Invest Wise

January 2015 Budget Review

The month of January was an exciting one.  I switched jobs and left the corporate world.  Because of unused vacation days, my income for the month of January was quite high.  This allowed me to put extra money towards my student loans.

I did incur some extra costs that I typically didn’t have.  As of now, I have elected COBRA continuation health coverage.  It is quite expensive and ate up more of my income than I had initially planned but no worries.  Life insurance is another category that I have to take on now as well.

After I had met all of my expenses for the month of January, I had a remaining $45.22 balance.  This amount I used to make an extra payment on my student loans.  My income for the month of February will most likely not be as high as it was for the month of January.  This means that the amount I have to spend and use to pay down debt will be less.  Every dollar, every penny is accounted for.  Take a look at an in-depth review of my January 2015 budget.  There is no perfect science to budgeting your income and expenses.  Everyone has their own way they like to do it.  The purpose is to hold yourself financially responsible and take steps towards your financial well-being.

Earned Income (After-Tax) $5430.94
Mortgage ($660.00)
Rent/Utilities/Cable ($528.99)
Car Payment ($300.00)
Car Insurance/Cell phone ($121.46)
Gas ($69.68)
Groceries ($100.00)
Eating Out ($142.54)
Roth IRA Contribution ($300.00)
Miscellaneous Expenses ($321.82)
Student Loans ($2545.22)
Life Insurance ($33.98)
Health Insurance ($307.25)
Final Amount $0.00

Budget Smart, Invest Wise

How to Double your Retirement Income

bankingsense.com
bankingsense.com

You get a job with a company that offers a 401k with a match.  What do you do?  You do what you’ve been told to do.  You contribute what you need to get the max contribution from the employer.  For me, I contribute 6% and get a 3.5% match, totaling to 9.5%.  I am nearly saving 10% of my salary in my early 20’s.  I’m doing a good job of preparing for retirement right?…  Well yes and no.  ALWAYS, I repeat ALWAYS, contribute what you need to your 401k to get your company match.  It’s FREE MONEY.

This is where I will tell you about the easiest way one can double his or her retirement income.  It is through a Roth IRA.  You see a 401k is pre-tax money, so you will pay taxes on your withdrawals in retirement along with whatever social security you are receiving at the time.  Combine social security and your 401k and you will have only 75% (assumming a 25% income tax bracket) of the income you receive during retirement.  A Roth IRA allows you to pay taxes on the money now, so regardless of what tax bracket you are placed in the future you can keep all of the income you withdraw!

Check out the spreadsheet I have attached to truly see how a Roth IRA can double your retirement income.  Keep in mind also with a Roth you never owe taxes and with your 401k you will.

Actionable step for the day, set up a Roth IRA!

To project your retirement income with a 401k and a Roth IRA, simply enter your salary into the cell along with your contribution and your employer match and watch the pie chart on the left shift!  Consider increasing your 401k contribution at work for more income in retirement.

Retirement Calculations