Half of Americans Won’t Be Able to Afford Their Standard of Living in Retirement: Here’s What You Can Do | SmartAsset.com
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Will you have to downsize in your retirement?
Many families plan to adjust their lifestyles in retirement. They swap the family house, say, for a smaller home. Or they move to a less expensive community. When this is a choice, it can be an excellent way to slow down and stretch the value of your portfolio.
Unfortunately, for many households, downsizing won’t just be an option. It will be a necessity.
That’s the result of a recent study published by Boston College’s Center for Retirement Research. The CRR researches the many different financial and lifestyle issues that surround modern retirement and publishes a statistic called the National Retirement Risk Index. This index measures how many households have less in retirement savings than they will need in the years ahead.
For hands-on help planning your retirement, consider matching for free with a vetted financial advisor.
What the CRR Study Says
The CRR’s findings are stark. Fully half of the nation’s working-age households will not have enough money to maintain their standard of living once in retirement. Making matters worse, this study assumes a strong working and saving life in which people work until age 65 and annuitize their assets, and even accounts for Social Security income.
Instead, according to the CRR’s findings, millions of households will have to cut back on both luxuries and necessities in order to survive. The specifics will range based on the needs of any given individual. In some cases, retirees won’t be able to enjoy some of the same things that made them happy in their working years. They might have to go out for dinner less often, for example, or they may no longer be able to travel.
For other people the situation will get more dire. In order to survive, retirees will have to sell valued assets like a family home or may have to skip necessities like food and medication.
The National Retirement Risk Index is based on the concept of income replacement. Essentially, how effectively can the proceeds of a retirement portfolio replace working income? It isn’t a one-to-one relationship, because, once retired, most households need less money to maintain the same standard of living on a day-to-day basis. You no longer have to save for retirement, for example. You typically pay less in taxes, no longer have dependents to support, have paid off the mortgage on your house and in general have fewer costs. For many households, the rule of thumb is that your retirement portfolio needs to replace 80% of your working income in order to maintain the same standard of living.
Yet half of all households will fall short of even that 80% mark by at least 10 points, the level at which the NRRI considers a household “at risk.”
Underprepared For Retirement – A Wider Trend
This is the latest survey to emphasize what financial experts have been warning of for years: There is a retirement crisis brewing in America.
Around the late 1970s and the early 1980s, the economy shifted from what is called “defined benefit” retirement planning to “defined contribution.” Instead of receiving a guaranteed pension from their employers, most workers were enrolled in the now-common 401(k) plans. This has system has struggled to keep up with workers’ needs, however, and in the decades since there has been a growing concern that households simply have not been able to save up the money they will need to pay for retirement.
The National Retirement Risk Index has found this consistently to be the case. Since 2004, it has found that about half of households surveyed do not have the money they will need to maintain their standard of living in retirement.
Previously, older generations were less at risk, as in 2004 many older households still reflected the more generous retirement plans and pay scales of a previous era. In the most recent publication, however, that difference has been erased. Now the NRRI finds equal risk across all age groups. The center has also found this broadly true across most income groups as well. Even across high-income households (defined as $85,000/$248,000 or more for single/married households), 41% of all households surveyed fall below their own replacement level of savings.
As to what policymakers can do to address this crisis, there are many proposed solutions. Yet arguably two of the biggest issues when it comes to addressing retirement shortfalls are time and money.
From the perspective of time, effective solutions will differ across various households. Policymakers may be able to help younger households through a series of employer- and tax-based options, helping people to get more income and to save up more in their retirement accounts during their working lives. This can be an effective solution for someone who has decades of growth left ahead of them. However this problem is equally stark for households that are just a few years away from retirement, and they likely do not have the time to catch up through savings and investment. Households approaching retirement are likely to founder without a simple plan to get them more money.
Which is the other problem. Ultimately, the retirement crisis is about money. Households need more of it, and it will have to come from somewhere. Whether the government spends this money directly through Social Security overhauls or whether an employer does so by reintroducing pensions or boosting benefits and pay, this comes down to somebody, somewhere cutting a check. Finding those funds remains one of the biggest problems when it comes to solving the retirement crisis.
That solution needs to come soon, however, because the Boston College findings are quite clear. For millions of Americans, retirement will not be something to look forward to. It will be an era of struggle and want.
But this does not have to be your own experience.
Saving for retirement is a massive project that should last for your entire career. Ideally, you can begin setting aside money as early as possible. Even just a small amount of savings in your 20s can add up to a significant nest egg by the time you reach your 60’s. If you have children, you can do the same for them. Making modest contributions to a portfolio that can grow over 60 years will be one of the best ways you can help young children get a head start on life. But no matter what age you’re at, it’s never too soon or too late to start.
Beyond that, the rule of thumb is 10%. Whenever possible, set aside 10% of your salary into retirement savings. If you have an employer with a matching 401(k), maximize that, followed by Roth IRA and Roth 401(k) accounts.
Don’t just rely on rules of thumb though. Use tools like our retirement calculator to reverse engineer your savings plan. Start with a sense of how much money you will need in retirement, then work backwards to figure out how much you should be contributing in order to reach that goal. Even if the numbers are large, it’s better to have a clear plan than a best-guess approach.
Finally, if you do need to change your standard of living in retirement, begin planning for that early. Again, by understanding what you can contribute and how that can grow over time, you will have a sense of what’s possible from your retirement account. Make your plans from there. That will give you a degree of control over how you have to change your lifestyle, so that you’re making cuts that you’re comfortable with instead of scrambling to meet your needs as they arise.
Bottom Line
The Center for Retirement Research at Boston College released its latest National Retirement Risk Index, and its findings are grim. Fully half of all Americans will need to cut their standard of living in order to ever retire.
Retirement Tips
You’ve worked. You’ve saved. You have a portfolio that’s humming along. So, with all of that going for you, how can you know when you’re ready to retire?
But the best way to know how your retirement plan is to get professional help. A financial advisor can help you save and plan for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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Many Americans have income that fluctuates from week to week. When incomes are unsteady, any unexpected expense can leave you coming up short. If you don’t have a fully funded emergency fund, you may find yourself looking around for loans to bridge the gap and get you to your next paycheck. Payday loans are out there, but at a high cost to borrowers. Before taking out a payday loan you may want to first make a budget. You can work with a financial advisor who can help you make a long-term financial plan that you can budget your finances to meet.
Payday Loans: Short-Term Loans with a High Price
What are payday loans? Say you’re still 12 days away from your next paycheck but you need $400 for emergency car repairs. Without the $400 your car won’t run, you won’t make it to work, you’ll lose your job and possibly lose your housing too. High stakes.
If you go to a payday lender, they’ll ask you to write a future-dated check for an amount equal to $400 plus a financing fee. In exchange, you’ll get $400. You’ll generally have two weeks or until your next paycheck to pay that money back. Say the financing fee is $40. You’ve paid $40 to borrow $400 for two weeks.
If you pay back the money within the loan term, you’re out $40 but you’re not responsible for paying interest. But the thing is, many people can’t pay back their loans. When that happens, the money they borrowed is subject to double-digit, triple-digit or even quadruple-digit interest rates. It’s easy to see how a payday loan can lead to a debt spiral. That’s why payday loans are illegal in some places and their interest rates are regulated in others.
When your loan term ends, you can ask your payday loan lender to cash the check you wrote when you agreed to the loan. Or, you can roll that debt into a new debt, paying a new set of financing fees in the process. Rolling over debt is what leads to a debt spiral, but it’s often people’s only choice if they don’t have enough money in their account to cover the check they wrote.
Are Payday Loans a Good Idea?
Not all debt is created equal. An affordable mortgage on a home that’s rising in value is different from a private student loan with a high-interest rate that you’re struggling to pay off. With payday loans, you pay a lot of money for the privilege of taking out a small short-term loan. Payday loans can easily get out of control, leading borrowers deeper and deeper into debt.
And with their high-interest rates, payday loans put borrowers in the position of making interest-only payments, never able to chip away at the principal they borrowed or get out of debt for good.
Payday Loans and Your Credit
Payday loans don’t require a credit check. If you pay back your payday loan on time, that loan generally won’t show up on your credit reports with any of the three credit reporting agencies (Experian, TransUnion and Equifax). Paying back a payday loan within your loan term won’t boost your credit score or help you build credit.
But what about if you’re unable to repay your payday loan? Will that payday loan hurt your credit? It could. If your payday lender sells your debt to a collection agency, that debt collector could report your unpaid loan to the credit reporting agencies. It would then appear as a negative entry on your credit report and lower your credit score. Remember that it takes seven years for negative entries to cycle off your credit report.
Having a debt that goes to collections is not just a blow to your credit score. It can put you on the radar of some unsavory characters. In some cases, debt collectors may threaten to press charges. Because borrowers write a check when they take out a payday loan, debt collectors may try to press charges using laws designed to punish those who commit fraud by writing checks for accounts with non-sufficient funds (these are known as NSF checks).
However, future-dated checks written to payday lenders are generally exempt from these laws. Debt collectors may threaten to bring charges as a way to get people to pay up, even though judges generally would dismiss any such charges.
Alternatives to Payday Loans
If you’re having a liquidity crisis but you want to avoid payday lenders, there are alternatives to consider. You could borrow from friends or family. You could seek a small personal loan from a bank, credit union or online peer-to-peer lending site.
Many sites now offer instant or same-day loans that rival the speed of payday lenders, but with lower fees and lower interest rates. You could also ask for an extension from your creditors, or for an advance from your employers.
Even forms of lending we don’t generally love, like credit card cash advances, tend to have lower interest rates than payday loans do. In short, it’s usually a good idea to avoid payday loans if you can. Instead, consider working on a budget that can help you get to your next paycheck with some breathing room, and make sure you have a rainy day fund.
The Bottom Line
When considering a short-term loan, it’s important to not just look for low-interest rates. Between fees and insurance policies, lenders sometimes find ways to bump effective interest rates to triple-digit levels even if they cap their APRs. The risks of taking a payday loan bring home the importance of working hard to build up an emergency fund that you can draw on.
Tips for Retirement Planning
If you’re not already preparing for retirement then it’s a good idea to create a retirement plan and make sure you’re contributing to it regularly. If you’re overwhelmed or don’t know where to begin, a financial advisor can help you map it all out. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Not sure how much you need to save for retirement? Consider using our free retirement calculator to get the number you need so that you can start making the right progress.
Amelia Josephson
Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia’s work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
According to a retirement study released by Stanford University, only about 50% of American workers have access to a 401(k) or equivalent employer-sponsored retirement plan. And many who have a retirement account, aren’t making sufficient contributions to meet their targeted retirement goals.
Retirement savings is a life venture where the stronger you start — and the earlier it happens — the better you’ll finish. If you work for an employer and have access to a 401(k) plan, do all you can to maximize your contributions, especially while you’re young.
401(k) plans are one of the most generous retirement plans available. You can contribute up to $19,500 per year, or up to $26,000 if you’re 50 or older. You’ll also get a tax deduction for your contribution and full tax deferral on your investment income between now and retirement. Early in life, fund your plan with reckless abandon, especially if your employer offers a matching contribution.
How Much You Should Have in Your 401(k)
There’s no heavy science here, since much of the progress you’ll make with your 401(k) plan is dependent on your personal circumstances. However, there are general retirement savings guides to know, based on your age.
One way to gauge this is through the Fidelity Retirement Widget. When using this free tool, enter your age, your expected retirement age, and what you think your lifestyle will be at reach retirement. The results will show you how much savings you should have in your 401(k) plan at various ages.
For the example below, we input age 25, a retirement age of 67, and an average expected lifestyle.
Age
Annual Income
Approximate 401(k) Income Multiple
Recommended 401(k) Balance
30
$50,000
1X
$50,000
35
$65,000
2X
$130,000
40
$80,000
3X
$240,000
45
$100,000
4X
$400,000
50
$140,000
6X
$840,000
55
$150,000
7X
$1.05 million
60
$150,000
8X
$1.2 million
67
$150,000
10X
$1.5 million
The recommended 401(k) balances are just approximations and can be adjusted higher or lower. For example, if you expect your lifestyle in retirement to be below average, the widget will recommend having 8X your annual income in your 401(k) plan at 67. If you expect your lifestyle to be above average, it will recommend 12X your annual income in retirement.
How to Manage My 401(k) Plan Investments
If you don’t know how to manage your retirement plan investments, that’s not a problem. There are services available to help you get the job done.
One example is Personal Capital. The free version comes with a 401(k) analyzer that discloses fund fees in your plan so you can switch to funds with lower fees. If you use the premium version, you’ll also get the 401(k) Fund Allocation, to help you learn where your money should be invested.
A more direct approach is available through blooom. For $10 per month, it provides direct management of your employer-sponsored retirement plan, whether it’s a 401(k), 403(b), 457 or Thrift Savings Plan (TSP). After a brief questionnaire, blooom sends you a recommended investment strategy for your plan. And since the service doesn’t actually take custody of your retirement account, you don’t need your employer’s approval to get started with blooom.
With the investment management services that are now available for 401(k) plans, lack of investment knowledge is no longer a reason to avoid investing through your retirement plan.
401(k) and Retirement Tips
Although the focus on retirement planning is almost entirely on the numbers, discipline and knowledge are equally important. When building your retirement plan, implement a few strategies.
1. Set Goals
You can certainly use the savings suggestions from the Fidelity Retirement Widget, but you need to work within the scope of your own financial circumstances. The important point is, whatever method you use, have goals in place. Those goals determine not only how much you’ll contribute to your plan, but also how aggressively you’ll invest the money.
For example, if you can’t make the full $19,500 per year contribution allowed, you might need to invest your plan portfolio more aggressively. One option is placing a higher allocation in stocks.
This strategy is recommended in the early years of your plan participation since you have more time to bounce back from aggressive investing. A popular rule for your stock portfolio allocation is calculating 120 minus your age.Here’s an example:
120 – 25 (years old) = 95 (% of stock allocation)
That means 95% of your retirement portfolio should be invested in stocks, and the remaining 5% in fixed-income investments. As you get older, the formula reduces your stock allocation as your investment time horizon shortens. The advantage of a heavier investment in stocks is that they’ve averaged 10% returns since the 1920s.
The larger stock allocation will result in a faster accumulation of investment earnings.
2. Start as Early as Possible
This is best demonstrated by two examples.
Investor A begins investing $10,000 per year into a 401(k) plan at age 25, with an average annual rate of return of 7%. By age 40, their plan accumulated $260,722 — but they stop further contributions.
Nonetheless, since Investor A continues earning 7% per year on their investment balance between the ages of 40 and 67, they reach retirement age with $1.62 million in their 401(k) plan.
Investor B begins investing $10,000 per year into his 401(k) plan at age 35, also with an average annual rate of return of 7%. Because Investor B started later than Investor A, Investor B plans to make annual contributions straight through to age 67.
But by retirement age, their 401(k) plan has grown to just $1,143,545.
Even though Investor B made $10,000 contributions for a full 32 years — while Investor A contributed for just 15 years, then stopped — Investor A still ended up with a larger 401(k) plan at retirement, and by nearly $500,000.
This example illustrates why it’s so important to start saving for retirement as early in life as possible.
3. Understand Your 401(k)
Not knowing much about 401(k) plans is perfectly understandable — after all, retirement savings isn’t a part of regular high school or college curriculums. Given that your 401(k) plan is your single biggest asset in life, and the very foundation of your retirement, it’s worth learning about this account.
First, information about your plan should be available from your plan administrator. You likely received a copy of it when you were first hired. Study the plan from cover to cover, and make sure you understand all the major provisions.
4. Never Touch Your Retirement Savings
For some workers, employer-sponsored retirement plans aren’t just their primary retirement savings, but their only savings. Borrowing against your retirement fund through a 401(k) loan, for example, might be tempting but you’ll hurt your long-term retirement plan.
The loans typically come with a five-year repayment period if you meet certain requirements, and have very low interest rates. But 401(k) loans have three very important “gotcha provisions”:
You lose investment growth on borrowed funds. Once loan proceeds are removed from the account, they’re no longer being invested. You’ll pay interest of maybe 3% or 4%, which goes into your account, but that’s a lot less than the 7% or 8% you can earn in a balanced portfolio.
You’ll have another debt to repay. You’ll ultimately have to repay the loan. Additional loan repayments on your monthly budget might reduce the amount of new funds you’re putting into your retirement plan.
If you’re terminated, the loan is due sooner. You’re required to repay the full amount of the outstanding loan balance within 60 days, if you’re terminated from your employer. If you don’t, the remaining balance is automatically considered a taxable early distribution, subject to both ordinary income tax and a 10% early withdrawal penalty if you are under 59 1/2.
No matter how attractive the terms of a 401(k) loan may be, your best strategy is to pretend it doesn’t exist.
5. Don’t Rely on Social Security
One of the major reasons people don’t contribute enough to their 401(k) plans is an overly optimistic estimate of their anticipated Social Security benefits. Unfortunately, Social Security is not a retirement plan. It’s better described as a retirement supplement.
At most, Social Security supplies about 40% of your pre-retirement income, and that’s primarily for lower-income earners. If you’re at the higher end of the income scale (e.g. $100,000 per year) the percentage is much lower.
Use the Social Security Quick Calculator to get a rough estimate of what your Social Security benefit might be once you reach retirement. With this information on hand, you can better estimate how much money you’ll need to save in your retirement fund.
Frequently Asked Questions
Since the main purpose of a 401(k) plan is to replace your earned income in retirement, you’ll also need to increase your contributions. Of course, you won’t be able to contribute more than the maximum amount allowed by the IRS, plus any matching contribution from your employer.
If that’s insufficient, look into adding a traditional IRA or Roth IRA to your investment mix. Under either plan, you can contribute up to $6,000 per year, or $7,000 if you are 50 or older. Roth IRA contributions aren’t tax-deductible, but you can take income out of the plan tax-free at retirement.
One other major advantage with IRA accounts, whether traditional or Roth, is that you can open them through self-directed investment accounts. There, you’ll have unlimited investment options and you can invest as aggressively as you choose. You may find yourself getting a higher annual return on your IRA investments than you do in your 401(k) plan.
One other factor to be aware of as your income increases is that your 401(k) contribution may be limited if you’re defined as a highly compensated employee (HCE). Special rules will apply, and you’ll need to be aware of them as well as to create workarounds.
If your income declines, you’ll be forced to lower your standard of living. That means you’ll need less income in retirement and won’t need quite as much in your 401(k) plan either.
But this is another compelling reason to begin contributing to your 401(k) plan as early as possible. If you begin contributing to a retirement plan right out of college, you might have enough money in your plan by the time you reach your 40s to withstand an income decline and the lower 401(k) contributions.
There’s no simple or blanket answer. View your company’s stock the same way you would any other security you’re thinking about investing in. Ask yourself this question:
Would I invest in my company’s stock if I didn’t work for them?
If the answer is no, you should avoid it. And even if the answer is yes, be careful.
Holding a large amount of stock in the same company you work for may sound noble, but it also holds the potential for financial trouble. After all, the same pressures that might cause your employer to terminate your employment could also put downward pressure on company stock.
You’d be facing a double-jeopardy situation in which both your employment and your retirement plan would be at risk of loss.
Most financial advisors recommend you put no more than 10% of your plan into your employer’s stock. Again — If you wouldn’t invest in the company if you weren’t an employee, you might not want to go that high either.
Maximizing Your 401(k) Savings
How you approach your 401(k) savings strategy is unique to your personal financial situation. However, the key points to a sound retirement plan are:
Participating in your employer’s 401(k) plan, if one is offered
Contributing to the plan as early as possible
Getting curious about your plan, and about how 401(k)s work
Using a 401(k) management service, if you need extra guidance
Setting goals and making adjustments along the way to stay on track
Avoid borrowing against your 401(k)
If you follow these tips, you’ll be in a more secure place upon reaching retirement.
This post may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. As an Amazon Associate, I earn from qualifying purchases. Please read the full disclosure here.
Empower Personal Wealth, LLC (“EPW”) compensates Money Bliss for new leads. Money Bliss is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC.
You are looking for the best investment app to help you save money, but all of them seem too complicated. You want something that is simple, easy to use, helpful, and even better if the app is free.
Empower is an online service for tracking your finances. Before a merger, the company began in 2009, and to this day it has been growing exponentially with a user base of over two million people.
Personal Capital is now Empower.
The app works on desktop as well as mobile devices, giving users the ability to track their spending easily wherever they go.
Empower also offers a suite of tools that help you get out more information about how you are using your money so that you can make better financial decisions.
On this Empower review, we will focus on what they do well, how it works for those who use it, and where Empower could improve.
Don’t forget… here is a list of all of the budgeting apps on the market.
If you are looking for an easier way to monitor your financials and see how healthy your finances really are, then you may want to check out what Empower has to offer.
What is Empower?
Empower is an online tool for tracking your finances.
It has been called the best financial app out there, and I agree with that statement. But, I personally use it as one of the money management tools to help guide our financial decisions.
I have used Empower to track my investments for over six years now, which probably makes me a bit of an expert on this topic because I use it on a regular basis.
Overall, Empower is a financial planning and wealth management tool that users can use to manage their net worth. The product offers tools for managing investments, retirement, debt payoff, and other personal finance goals.
How does it work?
First of all, Empower is a FREE app that helps you keep track of all your accounts. It can help you to invest better and did we mention… it is free to use!
To get the most out of this app, you’ll have to link each of your financial accounts one by one so that Empower can learn how you spend money.
It takes a couple of minutes to create an account and verify your identity.
The longest step is linking accounts to the Empower app. Just make sure you do this step within 7 days to get the most out of the app.
Features of Empower
The features of Empower include the ability to visualize your overall financial picture, keep track of your investments in a dashboard, and see which companies you are invested in.
Most people associate Empower as one of the best tools to help with investing, like a stock screener and an investment calculator.
But, there are many great features available for free including:
Net Worth Planner
Retirement Planner
Fee Analyzer
Cash Flow Management
Savings Planner
Budgeting
College Savings Planner
Investment Checkup
Pros and Cons of Empower
First of all, Empower is free to use. So, you might as well test drive the system and check out if the Empower app fits what you are looking for.
Just like any of the Empower reviews will tell you, there are positives and negatives with every type of money management app available.
You just have to decide the most important features for you. As well as what you are willing to pay.
Pros of Empower:
Free portfolio management tool.
Good for new investors who want a free-to-use tool with minimal features.
Easy to use and can be accessed on multiple platforms.
Can track investments across multiple accounts.
Tracks over 23,000 securities and over 1,000 mutual funds. – check
Offers a free app for on-the-go access.
Offers in-depth analysis and investment research on stocks, bonds, and ETFs.
Cloud-based platform
Free to use!
Cons of Empower:
Sales call from staff
Wealth management service is more expensive than a traditional advisor or simply investing in index funds.
High wealth management fee
Unable to reconcile your bank statements with Empower, but since they are coming from your bank directly, they should already be in sync.
No credit health information
Budgeting Tool needs improvement
Limited transaction management and budgeting
No import option for transactions from any platform including YNAB, Quicken or Mint
Cloud-based platform
Many people report that the Empower app requires $100,000 in investment assets to be eligible. That is untrue. In fact, it works best for those who have at least $100k in some form of investments – 401k, IRA, brokerage accounts, or even cash!
Empoweris incredibly easy to use and has helpful financial planning tools.
Overall, it is one of the many great tools to help further push you to financial freedom.
Empower Pricing
While Empower is free to access personal finance tools, it does come at a small price of annoyance.
Empower is free
Empower is a free online portfolio platform that helps people save and invest their money. It offers tools to track net worth, create investment plans, compare retirement accounts, view savings goals and cash flow, and more.
This is the great part of using this app!
The downside is to make these dashboards free is they are trying to entice you to move to their wealth management services.
You do not need to invest your money with Empower to use this platform.
It is best to keep everything invested where it currently is and use their free tools to analyze and make the necessary changes.
As such, once you sign up, you will receive calls on a reoccurring basis offering you a free analysis. There is no pressure to do this. Once you have said no enough times, they will stop calling you.
For those under $1 million in investable assets, their fee is 0.89%.
As you can read in this book, there are many ways to invest yourself without paying that fee.
In fact, this is my favorite book explaining how much harder and longer you have to work by paying someone a 1% wealth management fee.
However, for a small percentage of people, this may be a more cost-effective way of receiving professional advice, as it eliminates hidden costs from this type of service.
Empower Tools
Empower is a financial management platform that provides tools to help individuals manage their personal finances. The platform offers tools for portfolio tracking, performance analysis, and retirement planning. The company also provides its users with educational resources on financial topics.
Under their free dashboard, these are the tools you can use for free.
Net Worth Calculator
This simple tool will keep track of your net worth. Very simple and always available.
Know where you stand, by downloading the free app to see your true net worth in real-time.
Understanding your personal financial statement is important.
Savings Planner
One of the most asked questions is how much I need to save for:
Retirement
Emergency Fund
To Pay Down Debt
Calculate how much to save each year with a 70% chance of reaching your retirement goals. Learn how much you are currently savings and how much you need to start saving.
Cash Flow
Cash flow is the amount of cash available for expenses at a certain time. This term used in personal finance describes the rate at which one’s income and expenses change over time.
The Cash Flow tool is easy to use because Empower automatically tracks deposits and spending. The time saver feature allows users to see their cash flow, balance sheet, net worth, asset allocation over a period of time.
Cash flow is a budgeting tool that offers limited information on spending. It provides a second check when using another program that gives you more details like Quicken or Simplfi.
Retirement Planner
This is the #1 reason I recommend Empower especially if you are looking to stay away from a financial planner.
Trying to figure out how much you need for retirement by yourself seems like picking a random number from the sky.
The retirement planner is used by millions of people to figure out how on track they are for retirement. Plus get tips on what they can do to improve their chances of success.
Budgeting
Budgeting is a method of allocating financial resources by identifying and evaluating needs, prioritizing them in order to meet goals, and monitoring the achievement of those goals.
Empower includes a budgeting section to help you set monthly spending targets and track your spending. They automatically import the information from linked accounts such as checking, savings, and credit card statements.
Using their free online financial dashboard, allows you to track your spending and investments. There are interactive charts, graphs, pie-charts, and even widgets. All to make sure your budgeting is on track.
Investment Checkup
This portfolio analysis is the process of measuring performance and risk in order to develop a strategy for capital allocation. The goal of portfolio analysis is to improve return on investment, which can be achieved by increasing return on assets, decreasing the risk of losses, or reducing the variance.
The Empower app lets you explore your entire portfolio visually. It also provides asset allocation tools and tax optimization tools to help manage a person’s financial life.
Fee Analyzer
A fee analyzer helps people to determine the annual fees they are paying in their retirement plan.
401K Analyzer also calculates how much your retirement is costing you and provides a breakdown of any hidden fees that may be present within mutual funds with which it has been linked. This Retirement Planner tool uses assumptions about account holdings and investment behavior for calculating expenses against an estimated portfolio value.
Consequently, these fees add up over time and will drastically put a drag on your portfolio and reduce your retirement savings.
Empower Dashboard is Free
Just remember, you do not need to hire an advisor to use the platform.
Empower is a free tool for individual investors.
Empower provides users with access to all of the above-mentioned advanced tools for free. In addition, they offer free financial advice through their blog and social media pages.
It allows users to track their investments and get a personalized financial plan. The service also offers apps for iOS and Android devices, which makes it easy to manage finances on the go.
Empower Wealth Management Review of Services
In addition to offering free financial tools, Empower provides wealth management services.
You get to work one-on-one with an advisor who will give you personalized advice based on your situation.
They help you to invest, save money and track your financial goals.
Their advisors start by determining your risk tolerance and goals in order to construct the best personal financial plan for you.
If you are interested in getting a better understanding of your financial situation, Empower is an excellent option. It gives users the tools to understand their investments, budgets, and cash flow all with one app.
All it requires is that you sign up for free without any obligations or commitments from them whatsoever. You do not have to agree to use their wealth management program.
Personally, I cannot comment on an Empower advisor review as I have not used this service personally.
Empower Investment Strategy
The Empower investment strategy is a simple way to invest your money for the long-term.
This means that you will be able to retire and live a comfortable life without any concern about how you will be able to live.
They employ the tactic called Smart Weighting because they invest equally across all sectors and industries, which can provide diverse returns with minimal risk. The best part of this strategy is it’s easy to use as Empower has created an interface that makes portfolio management simple for users on any device or platform.
Empower’s software is able to identify tax-loss harvesting opportunities (opportunities where the investor sells an investment after it has fallen in value and pays fewer taxes than if the sale had occurred earlier) than investing on their own.
In addition, Empower invests passively for cost efficiency which means that they don’t take any active management into account.
The best part about Empower and one of the key areas I prefer, is they include socially responsible investments as well as an investment strategy to fit any budget.
They identify which companies are doing good work for society and invest in them accordingly. This feature makes personal finance much more interesting and easier than ever before!
Wealth Management Tiers
Many people invest in various financial services and products, such as mutual funds or stocks. They are promised that these investments will generate a good return, but they do not always make the best choice. Wealth management services are a way to help people manage their personal investments. They may charge fees for their service, but that is not always the case.
Depending on your level of assets, will determine the amount of services you will receive.
Investment Services:
This is the most basic level to receive financial and retirement planning guidance from their team of experts.
$100K in investment assets
Unlimited advice from any of the available financial advisors
Managed ETF portfolio
Wealth Management:
This is where you can receive more personalized services and dedicated support to manage your money as you move through new financial challenges.
$200K minimum in investment assets
Two dedicated financial advisors
Access to specialists in real estate, stock options, and more
Regular reviews on your customized portfolio
Tax optimization
Private Client :
This is the most exclusive level at Empower to help you receive comprehensive financial planning. They will help build a customized investment plan to reach your lifestyle goals.
over $1 million in investment assets
Two dedicated financial advisors
Priority access to specialists
In-depth retirement and wealth planning
Wealth Management Fee Structure
Empower charges only an all-inclusive annual management fee at a fraction of the cost of traditional financial institutions. In addition, they do not charge hidden fees, trailing fees, or trade commissions.
First $1 million = .89%
First $3 million = .79%
Next $2 million = .69%
Next $5 million = .59%
Over $10 million = .49%
Overall, if you want a financial advisor or a second opinion, using Empower wealth management services may be for you.
Even if you don’t join, you can still use the tools for free, no questions asked.
My Empower Review from Experience
I have had a lot of experience using Empower in the past. They provide snapshot financial pictures of your personal situation that are very informative.
Plus it is a free tool to use, which is always a bonus.
Empower is one of my favorite online tools to see all your finances in one place.
It is eye-opening to see the overall picture. Also, tracking investments across multiple accounts can be overwhelming, but they make the process seamless and help you stay on top of things.
Personally, my favorite tools are the net worth, fee analyzer, and retirement planner.
I use Empower in conjunction with Quicken. Read my Quicken review.
My Empower dashboard is my overall financial picture whereas Quicken tracks all of my day-to-day spending and helps me remember when we purchased something for a return.
The app has a convenient interface that makes managing your personal financial situation easy, even if you’re not familiar with finance jargon or investing terminology. With this tool at hand, keeping track of where everything stands financially becomes easier than ever before!
Just to note… to get the best financial picture, you must include all of your accounts. The more time you spend in the Empower dashboard, the more helpful analysis you will get from the tool.
Empower Alternatives
In addition to Empower, there are other financial apps that can help you allocate your portfolio.
These include Betterment with Wealthfront also being a viable option for those who want the best of both worlds by tracking their investments in stocks and bonds. However, these alternatives have much higher fees than what is charged by Empower which makes it an appealing alternative if the fee does not bother you.
Also, if you are looking for budgeting capabilities you may want to look at Quicken, Mint, YNAB, or Simplifi.
At the end of the day, you have to decide what your goals are and what you are looking for.
From all of the free and paid budgeting apps, here are our top budgeting apps to check out!
This section may contain affiliate links, which helps us to continue providing relevant content and we receive a small commission at no cost to you. Please read the full disclosure below.
Personal Capital Advisors Corporation (“PCAC”) compensates Money Bliss (“Company”) for new leads. (“Company”) is not an investment client of PCAC.
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Is Empower right for you?
Empower is a company that offers tools for personal finance management. This app has more than one hundred different tools to help you with your finances, including monthly budgeting and investing tracking.
Empower also helps people manage their credit card debt, establish emergency funds, track retirement savings progressions, calculate their net worth, and much more!
The smartphone app integrates locations, bank accounts, and credit scores which allows users to access current information on their financial situation.
The online portal allows for comparing available investment options.
This tool allows people to plan out the future of their money as well as provides them with valuable financial information in an easy-to-read format so they can make informed decisions.
As stated before, Empower is a financial app that can help you manage your investment assets. It has many features and it’s not perfect, but it’s the best out there in terms of value for money.
You can always test drive it and see what you learn about your personal finance situation.
Now you can try it free (no credit card required!)
Know someone else that needs this, too? Then, please share!!
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Retiring at 40 may sound like a pipe dream. But it’s entirely within reach if you save $1 million while working. The key elements for achieving this feat are sticking to a budget and implementing a comprehensive retirement strategy. But with rising expenses, is $1 million enough? To answer this question, you must identify your expenses, including taxes and monthly debt obligations and compare them to your sources of income. Here’s how investing and budgeting can set you on the path to early retirement.
A financial advisor can also work with you to get a realistic estimate of when you may be prepared to retire.
Can I Retire at 40 With $1 Million?
Retiring a quarter-century before the standard retirement age requires careful planning. However, one rule persists for retirement no matter what age it begins: Your savings must generate enough income to cover your living expenses for the rest of your life.
With this principle in mind, retiring at 40 means you can’t rely on traditional retirement vehicles such as individual retirement accounts (IRAs) or 401(k) accounts.
These accounts are not accessible until you reach the age of 59.5. Therefore, you must research alternative retirement savings instruments to create the income you can use once you stop working.
Smartasset’s retirement calculator helps you assess how your financial situation matches your retirement objectives. You’ll enter information such as your rate of return, Social Security benefit and location to evaluate your ability to retire at 40.
How to Determine How Much You Need to Retire
Retirement always requires evaluating how taxes, expenses and income work together for you. Retiring young means having all your ducks in a row to avoid surprises or financial hardships later on. Here’s how to assess how much you need to retire:
Calculate Your Costs in Retirement
Your expenses are an essential piece of information in a retirement plan. In other words, your cost of living provides the necessary context for how you’ll retire. For example, a yacht club membership can significantly alter your budget.
Likewise, your state of residence impacts how far your dollars go each year. For example, a recent study from the U.S. Department of Commerce shows that in Nevada, a popular retirement state, the overall cost of living is 95.5% of the national average.
As a result, retirees will get a discount on living expenses (plus zero state income taxes!) for living in the state. On the other hand, Hawaii’s costs are 113.2% of the national average, meaning that retirement there will cost more.
Determine Your Income
Your tax rate decides how much income stays in your pocket. Retirees often prefer living in a tax-friendly state like Georgia or Florida because of the absence of state income taxes.
That said, your forms of income will also influence your tax status. For example, rental income from real estate incurs regular income taxes, while selling stocks for a profit incurs capital gains taxes.
In addition, healthcare expenses are a growing cost for retirees. Specifically, HealthView Services data reporting shows that a couple retiring at 65 in good health will spend about $662,00 on healthcare throughout their lives.
As a result, it’s best to plan for several hundred thousand dollars of medical expenses during retirement. Furthermore, retiring at 40 means addressing an additional 25 years of medical costs.
To do so, experts advise designating 15% of your annual income for healthcare costs. However, this amount may be higher if you have a chronic health condition.
And having children at home is expensive, whether you’re retired or not. For instance, The Washington Post states the average annual cost of child-rearing is about $17,000 per child. Therefore, it’s crucial to add this item to your budget for an accurate idea of your finances.
Identify Retirement Income Streams
With expenses accurately laid out, you can turn to your income streams. For retirement to be feasible, the $1 million nest egg must return enough income to cover your expenses. So, if you invest $1 million for a 5% return, your annual income is $50,000.
Remember, stocks are riskier than other assets, such as certificates of deposits (CDs), so diversifying your investments is critical. Otherwise, a stock portfolio that is successful this year might tank the next year, leaving you without income. In addition, you have little margin for error with $1 million; every dollar needs to provide a return.
Next, Social Security is a form of income that you’ll encounter a few decades into retirement. Because you won’t collect Social Security benefits until 62 or older, retiring at 40 means waiting 22 years to receive your first check.
So, while Social Security will be a boon in the second half of your retirement, you’ll have to get yourself there with the income you create independently.
Look at the Numbers
So, let’s look at an example combining costs and income streams. Let’s say you want to retire at 40 with one child in the house. Your life expectancy is 80, so you plan a 40-year retirement. In addition, you’ll retire in Nevada, which has no state income taxes. Here are your annual expenses:
$22,000 for housing
$15,000 for healthcare
$5,000 for utilities and property taxes
$7,000 for food
$6,000 for entertainment, phone and internet
$3,000 for auto upkeep and insurance
Your total annual expenses are $58,000, or $4,833 monthly.
To meet these expenses, you collect income from multiple sources: First, you purchase two rental properties for $500,000 total, which generate $4,000 of monthly income ($48,000 per year).
You also have a $250,000 savings account with a 4% interest rate ($10,000 per year) and a $500,000 brokerage account with an average return of 5% ($25,000 per year). So, your investments provide $83,000 of annual income.
Next, your income and single filing status place you in the 12% tax bracket, leaving you with about $51,040 of your real estate and savings account income after taxes. In addition, you’ll pay 15% for long-term capital gains taxes on your brokerage account.
So, your total monthly income after taxes is $72,290 annually. Fortunately, this figure is about $14,300 above your expenses, leaving a margin for when investments underperform or surprise expenses crop up.
That said, your income and expenses won’t remain static throughout retirement. Instead, inflation will drive up your cost of living each year at an average rate of 3%.
The expenses of $58,000 this year will grow by thousands of dollars after five years because of economic trends. Overall, it’s best to sock away surplus income to prepare for higher expenses in the future.
Remember, you’ll age into Social Security at 62 and receive an income bump at that time. For example, the Social Security Administration’s 2022 Statistical Supplement estimates the average 62-year-old’s monthly check to be $2,364.
Depending on your circumstances, you can decide when you reach 62 whether to start collecting this benefit or delay it for higher future income.
How to Boost Your Retirement Income
The example above demonstrates a path for retirement at 40 with $1 million. However, you must adhere to a tight budget to do so. On the other hand, you can give yourself more financial flexibility by increasing your income with these tactics:
Delay Social Security Benefits
Social Security isn’t automatic. Instead, you apply for it when you want to start collecting it. As a result, you can choose any age starting at 62 to begin collecting this benefit.
Increase Your Interest Rate
The interest rates of savings accounts and certificates of deposit (CDs) are constantly shifting to attract customers. For example, the typical high-yield savings account has an interest rate of between 0.5% to 4.15%.
So, moving money out of a conventional savings or checking account can provide more annual income. Plus, your deposits have FDIC insurance up to $250,000, meaning they have shelter from market downturns.
Understand Your Income Tax Implications
Your tax situation is unique to you, and failing to grasp the details can incur additional fees. For instance, say you want to sell some stock through your brokerage account after holding it for 364 days.
Doing so will incur short-term capital gains taxes, which are identical to regular income taxes. On the other hand, waiting a few days will put you in the long-term capital gains timeframe, increasing your taxes by 3%. So, staying on top of these transactions can help lower your tax burden.
How to Make Your Savings Go Further in Retirement
Likewise, you can maximize your savings potential to make early retirement easier. Here’s how to make your savings work for you:
Use a Budget
Although the word ‘budget’ might make your stomach churn, it’s one of your most powerful financial tools. Budgeting helps you gain control of your finances by providing a clear overview of your income and expenses.
Budgeting lets you track where your money is coming from and where it is going, enabling you to make informed decisions about your spending and saving habits.
Additionally, a budget also helps you set financial goals and work towards them. In this case, it’s your roadmap to retiring at 40. So, you can allocate resources wisely and prioritize what matters most.
Choose Low-Fee Investments
Management fees can be the death of otherwise successful portfolios. This characteristic applies to brokerage accounts, which can invest in mutual funds, exchange-traded funds, real estate investment trusts (REITs) and other funds that can have exorbitant administrative fees.
Evaluating an account’s fee structure before investing money is crucial to keeping more of your money.
Care for Your Health
Healthcare is paramount for retirement planning. It’s undeniable that every retiree will require healthcare services at some point in their journey. However, by taking proactive measures, you can determine the timing and way you receive such care.
In particular, regular check-ups and engaging in physical exercise serve as preventive measures that can substantially diminish the frequency of hospital visits, fostering physical well-being and financial stability.
Work Part-Time
Additionally, embracing part-time employment can bolster your finances upon early retirement. Pursuing this option can augment your income and counteract rising inflation. Moreover, this approach possesses the added advantage of enabling a prolonged deferral of Social Security, which ultimately translates into higher benefits later on.
Pay Off Debt
Lastly, it’s critical to recognize the dangerous grip that debt can exert upon your financial liberty. For instance, the burdensome nature of credit card balances and personal loans comes from their exponential interest rates. This predicament imposes sizable obstacles on the path toward retiring at 40.
Remember, the gains from investments seldom surpass the annual percentage yield (APY) that debts impose. Therefore, prioritizing the repayment of high-interest debts promotes financial health, whether during the prime of your career or your golden years.
Bottom Line
Retiring at 40 with $1 million requires a strategic investment approach. Specifically, you must create a well-thought-out plan that includes various types of assets, such as brokerage accounts, savings accounts and real estate.
In addition, calculating your expenses meticulously and ensuring that your income covers them effectively is crucial. In this scenario, $1 million must last for several decades until you become eligible for Social Security. So, thinking creatively about generating income during that time is essential.
Tips for Retiring at 40 with $1 Million
Investing $1 million for retirement means maximizing the return of every dollar during your career. Working for two decades or less means you can’t afford a mistake when investing. Fortunately, a financial advisor can help you find assets with low fees and substantial returns. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Ideally, retiring at 40 means starting off your golden years while you’re relatively young and healthy. However, your future health is unknown, especially after you become a senior citizen. So, you can prepare for this possibility by budgeting for the cost of independent living.
Ashley Kilroy
Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
One day you’ll likely want to close the book on your career and start a new chapter of your life, but do you know how to plan for retirement?
The majority of working Americans say they are behind on their retirement savings goals, according to a Bankrate survey. If you don’t know how to plan for retirement, you could find yourself in the same position.
A financially secure retirement might feel like a lofty goal, but it’s totally within reach if you educate yourself on a few fundamental retirement savings concepts.
It’s time to take the first step toward confident retirement planning. Ryan Inman, a financial planner for physicians at Financial Residency, and Andy Wang, managing partner at Runnymede Capital Management, are here to help. Below, they share the concepts that you need to master if you’re wondering how to learn about retirement planning.
But first: Test your knowledge with our retirement quiz. When you’re done, the experts’ guidance on how to plan for retirement can help you fill in any gaps to ace the quiz—and your retirement.
Retirement quiz: What do you know about retirement?
Harnessing the power of compound interest
Compound interest has been called the eighth wonder of the world. Its surprising ability to grow wealth can feel like a miracle, but it’s actually just good old-fashioned math.
“Compounding is the key to most great investors’ success,” Wang says. That’s because as you earn interest on your money, your money grows. He points out that over time, you earn interest not just on your initial deposit but also on the interest that accumulates.
This same principle applies to stock investing where constant reinvestment of capital gains produces a compounding effect so you earn gains on your gains, he adds.
Because the interest you earn is based on an ever-growing amount of money, your rate of wealth accumulation accelerates as the years go by.
How compound interest works: An example
An example can help when you’re learning about retirement planning, especially when math is involved.
Let’s say you put $10,000 into a diversified 60/40 mix of equities and fixed income that has an average annual return of 6% within your IRA. This is how compound interest would fuel your money’s growth over the years:
Year 1: You would make 6% on the $10,000, which is $600.
Year 2: You would make 6% on your money again, but this time it would be on a balance of $10,600. As a result, you’d add $636 to your account.
Year 3: You would make 6% on $11,236, or $674.16.
Year 10: You would have $17,908.48 in your account thanks to the power of compounding.
You can play with the numbers in a compound interest calculator to see the phenomenon yourself.
Compound interest is fundamental to how you plan for retirement because it yields bigger results over longer periods of time—and saving for retirement is all about the long term.
“The longer your money is invested, the more compound interest grows,” Inman says.
As a result, he says one of the biggest retirement savings mistakes you can make is to put off saving for retirement—because it prevents you from harnessing the impressive power of compound interest.
Understanding your tax-advantaged retirement options
When saving for retirement, Inman and Wang recommend that you make use of any available tax-advantaged accounts (in other words, accounts that save you money on taxes).
Some savers have access to a 401(k) or other employer-sponsored retirement accounts through their jobs. Every American who earns income can contribute to an individual retirement account, or IRA.
Let’s take a closer look at each of these tax-advantaged retirement options to help you understand how to plan for retirement.
The 401(k) retirement plan
The most common employer-sponsored plan is the 401(k), which allows employees to put a certain amount of each paycheck toward retirement. “The 401(k) is one of the best options you have to save for retirement,” Wang says.
One of the reasons it’s such a great option, he says, is that contributing to a 401(k) can ease your tax bill each year.
“The money you contribute doesn’t count toward your gross income for the year, and that lowers your taxable income as a result,” he explains. “For example, let’s say you make $25,000 per year and you contribute $2,000 into your 401(k). As far as the IRS is concerned, you made $23,000 and you’ll be taxed on the $23,000.”
In addition to lowering your tax bill, your 401(k) is growing your retirement savings thanks to the power of compound interest.
401(k) match
Sometimes, employers will also offer what’s known as a 401(k) match, which means they’ll match whatever you contribute to your retirement savings up to a certain amount.
For example, Inman says that if your employer offers a 3% match and you’re contributing at least 3% of your salary to your 401(k), then your employer will contribute an additional amount equal to 3% of your salary.
If your employer offers a 401(k) match and you’re not enrolled, “You’re not only missing out on the tax benefits of a 401(k), but you’re leaving free money on the table,” Inman says.
Vesting periods
How to learn about retirement planning means understanding your vesting period. Inman notes that some companies have vesting periods, which means you won’t receive the full 401(k) match until you satisfy a particular length of employment.
Maximum contributions
The maximum contribution is the total amount you’re allowed to contribute to your 401(k) each year. This limit can change year to year according to the latest tax laws. In the 2023 tax year, for example, you can contribute a maximum of $22,500 to your 401(k) account, the IRS says. If you’re over 50, you can take advantage of catch-up contributions—up to an additional $7,500 per year.
The individual retirement account (IRA)
Another popular retirement account is the IRA. According to Inman, there are two main types of IRAs, each with a different tax advantage.
Traditional IRA
Generally speaking, Inman says, a Traditional IRA allows you to deduct your contributions from your taxes now, but you’ll need to pay taxes on the money you withdraw in retirement. You can withdraw your contributions and earnings without IRS penalty at age 59½.
Roth IRA
The other type of IRA is the Roth IRA. Inman notes that contributions to a Roth IRA can’t be deducted from your taxes now, but when you withdraw your earnings in retirement (at age 59½ or later, to avoid a penalty), you do so tax-free. Because you pay taxes on your contributions, you can withdraw those from your Roth IRA anytime.
“Some earners’ income is too high to qualify for a Roth IRA,” Inman says. (In 2023, the income limit is $153,000 for individuals and $228,000 for married couples filing jointly, according to the IRS.)
Unsure of which type of IRA to choose? Dive into all the differences between a Roth IRA and a Traditional IRA. Check the latest IRS guidance on income and contribution limits before selecting the best option for you.
Automating your retirement savings
If you find yourself thinking about how to plan for retirement but not actually doing the regular saving that you need to, then automating your retirement savings might be for you.
Inman and Wang note that most 401(k) plans have automation features: Once you opt in and configure your preferences, your plan will deduct a certain dollar amount or percentage out of every paycheck and invest it in the funds you pre-selected.
There are even mobile apps that have emerged to make it easier for people to automate their retirement savings than ever before. They allow savers to set up automatic deposits from their checking or savings accounts into a retirement savings fund according to their risk tolerance and goals.
“Technology’s come a long way in helping us automate our retirement savings,” Inman says.
When considering how to plan for retirement, automating your retirement savings has two key benefits:
1. Automation removes emotion from investing
The fact is, it’s not always a pleasant experience to move money from your checking account into your retirement savings. Wang notes that when you’re automating your savings, “you won’t even miss that money, but it can grow to a significant amount over time.”
Because of this out-of-sight-out-of-mind phenomenon, Inman suggests increasing your 401(k) contribution amounts whenever you get a raise at work.
2. Automation helps you take advantage of dollar-cost averaging
You might have noticed that the stock market can be up one day and down the next. These unpredictable swings pose the risk that you could “buy high” right before the prices swing lower.
Inman points out that when you’re automating your savings, you’re investing the same amount of money at regular intervals. So if the market is up, your retirement savings go up, but you’re buying at higher prices. If the market goes down, your savings go down, but you’re also buying at lower prices.
Over time, your costs average out, and this is what is known as dollar-cost averaging. “Automation is allowing us to dollar-cost average without us even knowing that we’re doing it,” Inman says.
Estimating how much money you’ll need in retirement
You could use every savvy retirement strategy in the book, but how do you know how much you should save before you can retire?
“Conventional wisdom says that you should expect to need 70% to 90% of your annual pre-retirement income in retirement,” Wang says. For example, he says that a person who earns an average of $100,000 per year before retirement should expect to need $70,000 to $90,000 per year in retirement.
The 4% rule
Another frequently used rule of thumb when learning about retirement planning is known as the 4% rule, Wang says. The idea is that if you can withdraw no more than 4% each year from your savings in retirement (adjusting for inflation and taxes along the way), then “you should have a very high probability of not outliving your money during a 30-year retirement,” he says.
If our eventual retiree will need to withdraw $80,000 a year, that annual pre-tax income needs to represent no more than 4% of their retirement savings. Because 4% is the same as 1/25, they would need to multiply $80,000 by 25 to arrive at a target retirement savings goal of $2,000,000.
Put your knowledge to work toward your retirement
By taking this retirement quiz and studying new retirement concepts, you’ve taken the first steps toward how to learn about retirement planning.
Now, it’s time to make the moves that your future self will thank you for. See how Discover can empower you to confidently follow your retirement plan.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode starts with a round of Money Hot Takes.
Then we pivot to this week’s money question from Sean:
“Hey folks,
Huge fan of the podcast. I have been listening for years, but this is, I think, the first time I’m submitting a question and it’s a complicated one.
I currently work as an engineer for a municipal utility. As an engineer, I have some ability for job mobility. While I do like my job, I have thought about what it would take to draw me away from my job, and I have had trouble figuring out what a ‘godfather offer’ would need to be.
As a civil servant, I have great healthcare, a pension, job security and overtime if I work beyond my scheduled 40-hour workweek. In the private sector, I have more income potential, but I would lose a lot of these benefits and end up working a lot more hours. I’ve had some trouble figuring out how to evaluate some of these benefits, particularly the pension.
Thank you,
Check out this episode on either of these platforms:
Episode transcript
Sean Pyles: Hey, Liz, if you had a job that offered you a pension, would you still leave just because you were bored?
Liz Weston: Well, pensions are sweet, but I do like being challenged, so maybe.
Sean Pyles: All right, I’m going to say I wanted a yes or no answer, but I think that that’s OK. I just hope that you would at least stick around until you’re fully vested.
Liz Weston: Well, of course.
Sean Pyles: Yes. But in this episode, we answer a listener’s question who’s considering bailing on a pension.
Welcome to the NerdWallet Smart Money podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I’m Sean Pyles.
Liz Weston: And I’m Liz Weston. Listeners, remember to send us your money questions. Maybe you’re wondering if now is a good time to buy up a bunch of gold or you’re wondering how far in advance you should book an international vacation. Whatever your questions, send it our way. Leave us a voicemail or text us on the Nerd hotline at 901-730-6373; that’s 901-730-N-E-R-D. You can also email us at [email protected]
Sean Pyles: In this episode, our co-host Sara Rathner and I answer a listener’s question about how to leave a job. But first, Liz and I are going to get mad because it’s time for another round of Money Hot Takes. This is our occasional segment where we rail against something that we just don’t like in the personal finance space. The goal is for us personally to blow off a little bit of steam and hopefully help our listeners make smarter decisions in a world full of scammers, fraudsters and phonies or sometimes just plain old misconceptions that can cost you money.
Liz Weston: Oh, I love this. This is going to be fun. OK, Sean, what do you have for us?
Sean Pyles: Today, I’m calling out the online, quote, unquote, “courses” that some influencers peddle to their followers. A lot of these classes aren’t providing you any information that you can’t get on your own for free, and the folks teaching them are often, shall we say, not exactly qualified. And a shoutout to Rebecca Jennings from Vox who wrote an article that so well articulates my feelings and concerns around these courses. We’ll have a link to that article in the show notes.
Liz Weston: So what’s in these courses, Sean?
Sean Pyles: Kind of everything that you can imagine you might want to improve upon. There are classes in things like how to use Excel. There are classes in how to get started investing or budgeting. There are even classes on how to make your own class to sell to people, which is a little meta.
Liz Weston: Of course, of course.
Sean Pyles: And the prices vary greatly. Some are under a hundred dollars; others are over a thousand dollars, maybe $2,000.
Liz Weston: Ooh, well, I think I know the answer to this question, but tell us why you don’t like them.
Sean Pyles: Well, as I mentioned at the outset, a lot of people are paying for information that they can get elsewhere for free. And again, many of these people have very questionable credentials. Sometimes the people who are teaching these classes are not actually experienced or qualified in what they’re telling you to do. And in fact, they’re just really good at marketing themselves, which I always have an issue with. People who seem just overly into marketing their own personality for the sake of getting money and attention on the internet.
Liz Weston: Yeah. And I imagine that could cause people not to go to good sources to get their information or leave them with a patchwork of incomplete information.
Sean Pyles: Exactly. They think that they’re getting everything they need to know about how to get started investing from one online class when in fact it might just be a small piece of the picture. Also, they can seem a little scammy to me. This is especially the case with classes around investing. Some will teach you how to invest and then maybe try to get you set up with investing during the class, and they’ll get you set up through a platform that also pays the influencer and affiliate commission, which seems like quite the conflict of interest there. And also, never mind the platform the influencer is peddling might not be the right one for you. So this person is getting money from you signing up for their class, and they’re also getting money from the company that they’re pushing on you as well, which I just don’t like.
Liz Weston: Now, I will say I like online courses in some cases because they help me get up to date or catch up on something I should have learned earlier, like Excel. The Excel courses were very helpful, but they’re not all bad. So how do you determine which are the better ones?
Sean Pyles: I’m with you, Liz. I am not an absolutist. In pretty much anything, there are plenty of great online classes. I’m a huge fan of Masterclass, for example. Not paid to say that; I just use their stuff a lot, but they are very well vetted. I think it’s important to vet your sources and to be selective about the type of information that you’re getting. Maybe a language course from someone who lives abroad and has learned a different language is something that you can more easily get into versus a class that’s about the secret to getting rich. Also, maybe don’t have this online course be the only source of information on the subject.
Liz Weston: Yes, maybe you could even come to a site, I don’t know, NerdWallet.
Sean Pyles: Yeah, we are a great alternative. And you know what? I think some folks might be thinking, “Hey, how is NerdWallet different from these online personal finance influencers or courses?” And to that, I have two words to say: journalistic rigor. Our content is deeply reported, edited, fact-checked, not to mention editorially independent, to ensure that the information that we’re giving is as accurate and consumer-first as possible.
Liz Weston: And if you need more personalized help with your money, there are plenty of professionals who can help you. Financial coaches can help you get a grip on your budget and financial goals. Accredited financial counselors can offer tools to wrangle your debt, and fee-only fiduciary financial planners are a solid choice if you need guidance on building your wealth.
Sean Pyles: Very well said, Liz. So that is my rant, and Liz, now you’re up.
Liz Weston: OK. This is really nerdy, Sean, but I am annoyed that people don’t understand how life expectancy works.
Sean Pyles: OK, you’re right. That is really nerdy. I’m going to need you to elaborate on what that even means and why it’s making you so mad.
Liz Weston: OK. This is important because understanding life expectancy is key to so many things about retirement planning, which is basically how long your retirement will last, right? So you need to know roughly your life expectancy so you can figure out when to take Social Security, and it probably can help you better understand all the debates about raising the retirement age. Remember when I was in Paris and they were setting fire to the garbage over there?
Sean Pyles: Yes.
Liz Weston: Yeah, that’s this debate. So I just read a New York Times article about the best age to retire, and it used the wrong number. It said the average life expectancy was 76 years.
Sean Pyles: OK, so you’re out here dragging the Gray Lady for being wrong, is that right?
Liz Weston: Sorry, hats off to The New York Times, lots of great reporting, but that’s the average U.S. life expectancy from birth. That factors in infant mortality and all the people who die young or young-ish from accidents or disease or whatever. That number is 76, by the way, because largely of all the COVID deaths, which is the reason that life expectancy has dropped a bit. But that number is pretty much irrelevant for retirement planning because the longer you survive, the longer you’re likely to survive. What matters is how much life you’re likely to have left when you get to retirement age. And at 62, which is the earliest age you can claim Social Security, the average man can expect to live until almost 81 and the average woman till 84. If you make it to 65, both men and women are likely to make it to their mid-80s. Now, your mileage may vary. Obviously, lifestyle, genetics, other factors come into play. Unfortunately, Black people tend to have shorter life expectancies. But the more income and education you have, the more years you can probably add to your life expectancy.
Sean Pyles: And I imagine this really matters when it comes to claiming Social Security.
Liz Weston: Oh, it’s so true. If you file early at 62, you are settling for a permanently reduced check. You’re giving up a lot of money because you’re likely to live well past the age when the larger checks that you would’ve gotten for waiting more than make up for the smaller checks you bypassed in the meantime. We talked to Nerd Tina Orem, and her calculator can show you your break-even age. And what’s more, if you’re the higher earner in a married couple, you’ve really done your spouse a disservice if you file early. And that’s because your benefit determines what your spouse gets to live on after you’re gone. So starting early means you’ve permanently reduced the survivor check that your spouse will have to live on for the rest of their lives.
Sean Pyles: Got it. OK. And that’s especially important for men to think about because women tend to outlive men.
Liz Weston: Yeah. And if you are a same-sex couple, again, it’s the higher earner that matters. So it’s something to keep in mind. The higher earner should delay as long as possible. And also, it can really help to use a calculator to estimate your own life expectancy. And there’s a really good one at livingto100.com.
Sean Pyles: Well, I think that we both feel a little bit better getting that out of our system. I don’t know about you, Liz.
Liz Weston: Yes, thank you. I do.
Sean Pyles: Great. Now let’s get on to this episode’s money question segment with co-host Sara Rathner.
Sara Rathner: This episode’s money question comes from the excellently named Sean, who sent us an email. “Hey folks, huge fan of the podcast.” Thank you. “I’ve been listening for years, but this is, I think, the first time I’m submitting a question and it’s a complicated one. I currently work as an engineer for a municipal utility. As an engineer, I have some ability for job mobility. While I do like my job, I have thought about what it would take to draw me away from my job. And I’ve had trouble figuring out what a, quote, unquote, ‘Godfather offer’ would need to be. As a civil servant, I have great healthcare, a pension, job security, and overtime if I work beyond my scheduled 40-hour work week. In the private sector, I have more income potential but I would lose a lot of these benefits and end up working a lot more hours. I’ve had some trouble figuring out how to evaluate some of these benefits, particularly the pension. Thank you, Sean.”
To help us answer Sean’s question, on this episode we’re joined by NerdWallet data writer Liz Renter. Welcome back to Smart Money, Liz.
Liz Renter: Thanks, Sara. I’m excited to be here.
Sean Pyles: So first, I think folks should understand the total value of work benefits because it extends well beyond the cash that you get. According to March 2023 data from the Bureau of Labor Statistics, for government workers, benefits represent about 38% of compensation, compared with just under 30% for private-sector workers. As our listener knows, the benefits of government jobs are pretty cushy, and that can be really hard to give up.
Sara Rathner: That 30% to 38% figure might come as a surprise to you because I think when people are evaluating a job opportunity, there’s so much of a focus on the salary and maybe a bonus if that’s part of the deal. But if you’re thinking of leaving your current job, it is worth it to work to understand your total compensation, not just wages, but benefits as well. So listing out your benefits, like paid time off, access to resources like financial advisors or even discounted legal assistance, maybe some cold brew coffee on tap in the office kitchen.
Each of these has a specific value, but it can be pretty tedious to add it all up. Another big thing to think about are taxes. This is a bigger deal if you’re thinking of becoming a freelancer or a contract worker where you’d be on the hook for sorting out your own tax obligation. Based on what you figure out, you might decide whether or not you want to go down the freelancer or contractor route at all, or would you prefer to be a full-time employee at a company? Another big one, this is a really big one: health care.
Liz Renter: Huge.
Sara Rathner: Huge and so expensive. Definitely contact HR during the interview process, or when you have the offer and you have some time to think it over, to get the health care plan options and their pricing.
Liz Renter: Yeah. And I just want to interject, Sara, that’s a good point. If you’re talking to a potential employer or even your current employer about what the health care costs look like, how much they’re covering, keep in mind that employers get a heck of a discount on premiums. They get a group discount because they’re paying for multiple policies at once or helping to pay for multiple policies at once. So if self-employment is under consideration or a job that may not offer health insurance at all, your premiums are going to be much, much higher than what your employer would be paying in the situation where they’re helping to cover those costs.
Sara Rathner: Yes. And I have been in both boats and …
Liz Renter: Same.
Sara Rathner: … real expensive to be self-employed when it comes to health insurance coverage. And that was one of my reasons for not pursuing that for the remainder of my career if I can help it. But you know, you do you. And then also, here’s another one. There are all these extra benefits that really add up. Things like a monthly gym stipend or a cell phone stipend. A lot of remote workers get a home internet stipend as well. And the cost of these things can really offset the price of some of the things you might have been paying for out of pocket if you were previously at a job that didn’t provide this as a benefit.
Liz Renter: Right. And I think those things are far less likely in, like the listener wrote in about, a municipal job or a state government job. Unlikely you’re going to have a keg of cold brew in the kitchen unless you’re in a really affluent city and tax rates are pretty high. But you’re right, some of those things that you take for granted, the snacks and the catered lunches at private industry, really do add up. You can spend a lot of money on those yourself if you’re having to pay for them.
Sara Rathner: Yeah, you definitely see a lot of those benefits in the tech industry because they are just falling all over themselves to make these companies more attractive to job applicants than the tech company down the street. Literally down the street, depending on what city you’re in. And so if that’s an industry where you are weighing some job offers, then yeah, you’re going to see some pretty wild benefits that have a dollar value to them.
Sean Pyles: Well, that said, there is one benefit that you will maybe get at a municipality that a tech company is not really going to be offering you. And that is the pension benefit that our listener wrote in about. And I want to give a quick rundown of how pensions work because they’re pretty incredible and they’re unfortunately not very common. So pensions are typically employer funded. That means the employer is putting in money, which is great. So the amount folks get in retirement depends on wages earned and how long they worked for the company or, in this case for our listener, a municipality.
Then upon retirement, someone who has access to a pension, they get payouts, typically for life. You generally do have to work at an organization for a set amount of time to get full access to the payouts. That’s called being fully vested. But once you’re fully vested, you can leave that job and still get access to the pension benefits upon retirement. So, so cool. I really wish I had a pension. Now, like I mentioned, pensions are really rare nowadays. So again, pensions are a very sweet benefit to have, and I would think very hard about losing that, especially if you’re not fully vested.
Liz Renter: Yeah, absolutely, Sean. And the listener wrote in about putting a dollar figure on their pension. So I just want to know that that’s an extremely difficult thing to do without a lot of details, and a lot of time, and a big spreadsheet and a calculator. Anyways, when you’re thinking about how long you’ve been at a job, how much your employer’s putting in, what the specifics are about vesting and if you decide to leave that government job, to leave your pension, and what would it take to create something comparable yourself? So there’s a lot of numbers involved, a lot of time frames, a lot of assumptions. So this is one instance where we would say, “If you really want to get precise on that measurement, it might make sense to consult with a certified financial planner who can put the dollar amount on those things.”
Sean Pyles: You’d likely want to talk with a CFP who maybe has some gray in their hair and who has done this before since figuring out pensions can be so complicated.
Liz Renter: Right. Yeah, exactly.
Sara Rathner: And honestly, if you have a financial planner that you already have a working relationship with, I mean, job hunting is an excellent time to have a check-in with them in general, and they might even help you wade through competing job offers or even just the comparison of a job offer to what you’re currently working in. And they can help you work through all the financial considerations of those options. And so that is a great way to utilize their assistance.
So let’s get to the other part of a listener’s question. The mushier stuff that folks should consider if they find themselves itching to leave a job. To start, they should ask themselves, what’s behind this urge? Are they bored, unhappy, unfulfilled? Are they upset because there’s no cold brew in the break room and they really want that?
Liz Renter: Yeah, this is key, Sara. I think there’s so many considerations when you’re thinking about a career move. And I had two really major career changes in my younger years. It’s over the past 20 years, but they were really pretty close together when I was in my late 20s. One when I moved from state government to private industry, and then a few years later, I went from private industry to self-employment. So those are pretty big changes. And in each of those changes, I was weighing different motivations. In one case, it was more about the money and advancement, and in the other case, it was more about what’s really going to make me happy long term? And so I think really diving into why and what your motivations are for leaving or staying, and getting clear on those before you start weighing your options, is a good place to start.
Sean Pyles: To what extent did you have that conversation with yourself or maybe with those around you around, “OK, if I leave this job, I might be making a little bit less, but I will be that much happier.” Or, “If I go to this job, I’ll be making a good amount more, but it’s going to be a boring job.” How did you think about those things?
Liz Renter: It’s tough. I probably had limited discussions. So as a single mom, it was just me and my daughter at the time, who was probably 4 when I made the first job change, maybe 7 when I made the second job change. So there weren’t a lot of people for me to toss these ideas around with. And I’m an extremely private person, but these were conversations I was having with myself. And in the first job going from state government to private industry, I realized in state government that, yes, the paycheck is steady, the benefits are nice, but I really love to work hard.
And in my experience, this government job, you were rewarded for how long you were there, not how well you were doing. And that was tough to deal with, and it really bred apathy among the people around me. I wanted to be somewhere where I could work hard and that would be recognized. So that’s not to say that all government workers are taking naps at their desk. That definitely wasn’t my experience, but personally, I wasn’t being recognized for the hard work that I was doing, and that was really important to me.
Sean Pyles: Right. That makes sense.
Liz Renter: And so that one was really more about the professional rewards of working. And then the second one, it was more about the trade-offs. Am I willing to give up some of those professional rewards to really fulfill my personal life? So as I said, my daughter was really young at the time, I was dropping her off early in the morning, I was picking her up after work, sometimes 12 hours later. And the job was paying more than my state government job, but I definitely felt like I was punching a clock and I wasn’t fulfilled, and I totally could not see myself doing that for years upon years. And I knew leaving that job meant I would absolutely take a decrease in pay, at least in the short term, as I got on my feet as a self-employed freelance writer. But when I balanced that against what was really important to me and what was going to make me happy and make me feel good about the way I was living my life, it was a no-brainer.
Sara Rathner: Yeah. I’ve known people who’ve switched jobs out of boredom and ended up regretting it, actually, because the reason they were bored at their previous job was they’d done it for a while and it became rote. But they realized leaving for a greater challenge meant giving up maybe some of the work-life balance and predictability that came with a job that was quote, unquote, “boring,” and they had to make pretty big structural changes to how they operated at home with their household, with their family, to accommodate the new challenges of a new career.
Sean Pyles: Kind of goes back to the idea that it’s not what decision you make, it’s what you do with the decision that you make. If you do leave a job that you’re bored at and you find that your next gig isn’t quite what you wanted it to be, there are going to be other opportunities later on.
Sara Rathner: Yeah.
Liz Renter: I think that’s a good point. When I went into freelancing and I knew I was going to take a pay cut and I was banking on turning that around in a year or two, I always had that in the back of my head like, “OK, worst-case scenario, I’ll get a part-time job for when my daughter’s in school,” or, “Worst worst-case scenario, I’ll go back to working full time.” With a reassessment of maybe I find something that’s closer to home so there’s less of a commute, what have you. But I think knowing that, “OK, I’ve thought through why I want to do it. I know this is the move I want to make, but just in case, I have these outs and these would be perfectly acceptable if things didn’t work out once I make this decision.”
Sean Pyles: Yeah. And I think your experience demonstrates how important it is to think through various scenarios. What could you fall back on if you do need to make a change after this job switch maybe doesn’t pan out how you thought it was going to.
Liz Renter: Right. I think if you’re planning well enough in advance, if you’re sitting around listening to this podcast thinking about, “Well, I’ve been thinking maybe I’m not happy where I am and maybe I should be considering this,” now’s a great time to make sure that, and I know we talk about this a lot on podcast, but make sure that your emergency fund is in place. Maybe cushion it a little bit more. You want to set these guardrails for, OK, sometimes we make decisions with what we think is all the right information and it turns not to work out the way we expected. So if you have those extra guardrails up, just in case, it can make you feel more secure moving forward with your decision when it’s time.
Sara Rathner: Yeah. And keep your professional network warm. Because it is a risk to take a new job, and sometimes you take a new job and hate it immediately, and you’re like, “I’m just going to job hunt again.” And so by keeping that network warm, by staying in touch with old co-workers or friends or relatives who maybe have some professional connections that would be helpful to you, you still also have an out. Not just financially, but also professionally where you’re still open to hearing about opportunities. Because if the jump that you made ended up being a pretty bad bet, then you’re still pursuing other places you could go and you haven’t closed off all the doors to that.
Sean Pyles: Well, now I want to talk about the counterpoint. About when it actually might be a good idea to stick around at a job. Conventional wisdom, at least among millennials, is that you shouldn’t stay at a job for too long because you’ll probably be able to earn more money going to a different job after a couple years. But sometimes staying at a job for potentially several years can be the best choice for people. So let’s discuss that. Liz, you’ve been at NerdWallet nine years, so what’s kept you around and how do you think about that sort of equation?
Liz Renter: So it’s interesting to think back at how this has changed over the generations because, definitely my grandparents to a certain extent and a little bit my parents as well, those generations you were rewarded for just staying where you were. You get a good job with good benefits and you don’t leave for 50 years, and then they throw you this big party. And that’s changed over the years where there’s more mobility and we can experience different opportunities. And I think there’s room for both of that. A little bit of each. So if you are the type that really wants to be loyal to a single company and wants that stability and you’re happy with what you’re getting paid, you don’t have to keep chasing 5% salary increases at other companies. That’s not a requirement. If you’re good where you are, you like your work and you’re working towards your long-term financial goals, that’s totally acceptable. You don’t have to get in on this hustle life.
Sean Pyles: That can also be a good way to approach things, given that the macroeconomic conditions right now are a little shaky. Many companies still have the policy of last in, first out when it comes to layoffs. So for this year in particular, it might not be a bad idea to stick around if you do like the job that you have.
Liz Renter: Right. People are still leaving their jobs at really high rates, but they’re getting into new jobs at really high rates. The unemployment rate hasn’t ticked up, which means people that are leaving their jobs aren’t filing for unemployment, they’re going elsewhere. So that’s a positive sign if you do want to change jobs. But to your point, Sean, there is a lot of uncertainty, and if you’re risk intolerant, it might make sense to sit tight for a while and see how things shake out.
Sean Pyles: Well, Liz, do you have any final thoughts for those who might be thinking about switching jobs right now?
Liz Renter: I would say, yes, it’s as complicated as you think it is. I envision it as you’ve got all of these scales in front of you that you’re trying to balance and you’re trying to figure out, “OK, if I take away this much of my work-life balance, how much salary do I have to add to make it worthwhile?” Or, “If I take away the cold brew in the kitchen, how much of a cell phone stipend do I need to add to make it worthwhile?” So there’s all these scales you’re trying to balance here, and it’s a lot to think about. So you just do the best you can, set up some guardrails just in case things don’t go well.
Sean Pyles: And maybe take your time making a decision. Don’t rush into anything too hastily. Otherwise, the scales may just collapse and go crazy.
Sean Pyles: All right, well thank you so much for talking with us, Liz.
Liz Renter: Thanks for having me again.
Sean Pyles: All right, and with that, let’s get into our takeaway tips. Sara, will you please start us off?
Sara Rathner: Sure. First, know what you’re getting. Compensation can include a lot more than the cash you get. Understand your total compensation ahead of any job hunt.
Sean Pyles: Next up, go beyond the math. Jobs are about a lot more than the money. Consider things like personal fulfillment and work-life balance when weighing other job options.
Sara Rathner: Finally, there’s nothing wrong with sticking around. If you’re fulfilled and well compensated in your current position, staying put might be your best option.
Sean Pyles: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That’s 901-730-N-E-R-D. You can also email us at [email protected] Visit nerdwallet.com/podcast for more info on this episode. And remember to follow, rate and review us wherever you’re getting this podcast.
Sara Rathner: And here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances.
Sean Pyles: This episode was produced by Liz Weston, Tess Vigeland and myself. Kaely Monahan mixed our audio. And a big thank-you as always to the folks on the NerdWallet copy desk. And with that said, until next time, turn to the Nerds.
Transcription of above video follows below. You can find more videos on the Good Financial Cents YouTube Channel.
Today I will answer a common question I get from a lot of people. Do you have a situation, you are working somewhere, you change jobs, either decided to go somewhere else, you were laid off or you were fired. Whatever the reason, if you’ve been there for awhile you most likely participated in the 401(k) plan. Now that you have left that job and you have started your new job, you have to make a very, very important decision on what to do with that 401(k). The common question I get is this:
“Jeff, I’ve got an old 401(k). Does it make sense to roll over into an IRA.”
Depending on your situation, most likely I will say yes, but there are some instances where it could make sense to roll it into your existing 401(k), which I will address in another video. Today I want to make the case why you should at least consider rolling over the 401(k) into an IRA.
1. More Investment Options
First and foremost, you want more investment choices. Most commonly what I see in most 401(k) plans you are going to have approximately 12-15 investment choices to choose from. I have seen some bigger plans that are going to have 40, 50 or maybe even 60 investment choices, but generally that is what I see. If you take that money and roll it over into an IRA, instead of just having those 12-15 investment choices, now your just opened up to the world of all the different investment options that you have. If you want to invest into individual stock, you can do so in the IRA. Most likely, you weren’t allowed to do that in your 401(k). That also applies to other investments that you will be able to invest in too.
2. Simplify Your Life
What about the simplification of your life by the consolidation of paper and account statements. I can remember one particular case, where I had a client. We sat down and he had seven different 401(k) plans. Imagine getting seven different quarterly statements and trying to sort through it. Not only that, but also trying to keep track of the investment strategy of what is going on with those seven different 401(k) accounts. By rolling over to an IRA, and now you’re being able to consolidate into this one account and if you change jobs several times, why not consider consolidating and simplifying your life. I’m all about less paperwork. Less paperwork equals more efficiency and easier to keep track of what is going on in your financial life.
3. Control Your Income
Another aspect you want to consider rolling over into an IRA, especially if you are approaching on your retirement is being able to control your retirement income. Typically, when you take a distribution from a 401(k) plan, they are going to withhold the standard 20% tax withholdings. Once you roll over to an IRA, you have some discretion, as far as how much taxes you want to be withheld from your distributions. When it comes to retirement planning and income planning, the less that you have to pay upfront to Uncle Sam, the better.
Now, in the first year retirement, it is a little bit harder to determine what the exact tax may be, but typically after I have been working with a client for a year or so, we can kind of gauge how much taxes we need to withhold from our distributions to make sure that we have taken enough out for the end of the year.
4. RMD’s
Another consideration regarding distributions from IRAs and why you should roll over from your 401(k) is if you are approaching 70-1/2. Once you hit age 70-1/2, you have to start what’s called required minimum distributions. Within the IRA, now you have discretion, as far as what investments you want to liquidate or remove from the IRA. Maybe there is something that is not performing as far and you would like to take that or liquidate it out of the IRA. With the 401(k) and those limited investment choices, you are not going to have as much say on what gets liquidated.
Those are quickly just four reasons why I think you should consider rolling over your 401(k) into an IRA. Once again, going back to point number one, having more investment choices to me that is it. Have more choices. I compare it to going out to eat and I can go to a restaurant that has five things versus going to a 65 item buffet. Anytime I have more choices, generally I am going to be happier because depending on what mood I’m in or what is going on, I will have more options to choose from.
Massachusetts is a beautiful state, filled with culture and history. It’s also a populous state that’s home to a wide range of businesses, including many in the biotechnology and engineering fields.
If you live in Massachusetts, you’ll need to find a bank that fits your lifestyle and savings needs. Fortunately, Massachusetts has no shortage of local banks, regional banks, national banks, and credit unions. The many options can make it hard to narrow down the best banks in Massachusetts for you. Below are some of the best banks in Massachusetts.
10 Best Banks in Massachusetts
From small local banks to national banks with locations in Massachusetts, here are some of the best banks in Massachusetts to help you find the right fit.
1. Citizens Bank
Citizens Bank is a regional bank with branches in Massachusetts, as well as Connecticut, Delaware, Florida, Maryland, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, and Washington, DC. Fee-free ATM access is only available at Citizens Bank ATMs, but out-of-network fees are only $2 per transaction.
Fees:
$9.99 monthly service fees (waived with one deposit per month)
$35 overdraft fee
Balance requirements:
No minimum deposit to open
No minimum daily balance required
ATMs:
Fee-free at more than 3,200 locations in 11 states
$3 fee for each out-of-network ATM transaction
Interest on balance:
Up to 0.07% APY on savings accounts
Up to 2.75% APY on CDs
Up to 2.75% APY on money market accounts
Additional perks:
Credit cards offer $150 bonus and cash back
Discounts on mortgages and home equity loans
2. Rockland Trust Bank
Rockland Trust Bank is a local bank headquartered in Rockland. Branches and ATMs are located throughout Massachusetts. If you’re looking for a local bank, Rockland Trust Company is one of the best banks in Massachusetts. They not only offer great customer service, but they also have fee-free checking accounts and all the latest mobile banking features.
Fees:
No monthly fees
$35 overdraft fee
Balance requirements:
$25 deposit to open
No minimum daily balance required
ATMs:
Fee-free at Rockland Trust Bank ATMs
$2 fee for each out-of-network ATM transaction
Interest on balance:
Up to 0.01% APY on savings accounts
Up to 0.05% APY on CDs
Up to 0.10% APY on money market accounts
Additional perks:
Smart ATMs offer enhanced features
YourBanker provides customer support within the app
3. Chime
While there are no branches in Massachusetts, Chime could give you everything you need. Chime is one of several online banks offering Massachusetts residents free checking accounts, a high-yield savings account, and fee-free access to cash at more than 60,000 ATMs1 nationwide.
Fees:
No monthly service fees
No overdraft fees5
Balance requirements:
No minimum deposit to open
No minimum balance required
ATMs:
Fee-free at 60,000+ ATMs nationwide
$2.50 out-of-network ATM fee
Interest on balance:
2.00% APY3 on savings accounts
Additional perks:
Early direct deposit access2
SpotMe provides $200 overdraft protection
4. Salem Five Bank
Another local bank that’s one of the best banks in Massachusetts is Salem Five, a Salem-based bank with a heavy concentration in the Boston area. Salem Five only has one checking account, a fee-free option that offers $.05 cash back on debit card purchases. You’ll get nationwide cash access while traveling, thanks to a partnership with the AllPoint network.
Fees:
No monthly service fees
$35 overdraft fee
Balance requirements:
$10 minimum deposit to open
No minimum balance requirements
ATMs:
Fee-free at Salem Five ATMs
Fee-free at 55,000+ AllPoint ATMs nationwide
$2 out-of-network ATM transaction fee
Interest on balance:
Up to 0.01% APY on savings accounts
Up to 4.41% APY on CDs
Additional perks:
$0.05 cash back on debit card purchases
Solid small business banking options
5. Greylock Federal Credit Union
If you’d prefer a community bank, check to see if you qualify for membership at Greylock Federal. You’ll get a free checking account and competitive interest rates on personal banking options like loans. Greylock has 14 locations in Berkshire County, Massachusetts, and Hudson, New York, as well as a co-op partnership that offers ATM access nationwide.
Fees:
No monthly fees
$15 overdraft fee
Balance requirements:
$15 minimum deposit to open
No minimum balance requirements
ATMs:
Fee-free at Greylock Federal Credit Union ATMs
Fee-free at co-op ATMs nationwide
$3.25 out-of-network ATM transaction fee
Interest on balance:
Up to 0.20% APY on savings accounts
Up to 3.05% APY on Share CDs
Additional perks:
Competitive rates on auto loans
Video teller services available
6. GO2bank
Another option for those who don’t mind doing all their banking online is GO2bank. GO2bank is one of the best banks for those who use a lot of cash. You’ll get fee-free access to AllPoint ATMs nationwide, as well as cash deposits at 90,000+ retailers. There’s also a free checking account, as well as a savings account that earns 4.50% APY.
Fees:
No monthly maintenance fees
$15 overdraft fee
Balance requirements:
No minimum daily balance
No minimum deposit to open
ATMs:
Fee-free at AllPoint ATMs nationwide
$3 for each out-of-network ATM transaction
Interest on balance:
4.50% APY on savings
Additional perks:
Deposit cash at 90,000 retailers nationwide
7% instant cash back on gift card purchases
7. Eastern Bank
Eastern Bank is one of the best banks in Massachusetts if you’re looking for a bank with a deep history in the area. Based in Boston, Eastern Bank has been around since 1818 and has evolved over the years.
If you’re in the market for a new checking account, you can currently earn a bonus of up to $600 for opening a new account. The bonuses are balanced based, so a balance of less than $4,000 will earn you only $200.
Fees:
No monthly maintenance fees
$35 overdraft fee
Balance requirements:
$25 minimum deposit to open
No minimum daily balance
ATMs:
Fee-free at Eastern Bank ATMs
Fee-free at thousands of SUM Program ATMs nationwide
$2 out-of-network ATM fee
Interest on balance:
0.01% APY on savings accounts
Up to 4.50% on CDs
Up to 3.50% APY on money market accounts
Additional perks:
Up to $600 bonus for new accounts
Up to $50 in overdraft protection
8. Middlesex Savings Bank
Middlesex Savings Bank is the largest mutual bank in Massachusetts. Branches and ATMs are largely centered in the Boston area, but checking account holders get fee-free ATM use at AllPoint ATMs nationwide. If you have direct deposit or are under the age of 26, you’ll also qualify for up to five ATM fee reimbursements per statement cycle.
Fees:
No monthly maintenance fees
$35 overdraft fee
Balance requirements:
$1 minimum deposit to open
No minimum daily balance
ATMs:
Fee-free at Middlesex savings bank ATMs
Fee-free at AllPoint ATMs nationwide
Up to five out-of-network ATM fee reimbursements per year
$2 out-of-network ATM fee
Interest on balance:
Up to 1.45% APY on savings
Up to 1.55% on CDs
Up to 4.50% APY on money market accounts
Additional perks:
Competitive rates on mortgages and personal loans
Earn $50 for each new qualifying referral
9. Mass Bay Credit Union
With branches in South Boston, Everett, Quincy, and the Seaport District, Mass Bay is like many credit unions in that it offers competitive rates on deposit accounts and loans. You’ll have live access to customer service at Mass Bay branches in Massachusetts, as well as through three Interactive Teller Machines in the area. You’ll need to live or work in Boston or the surrounding areas to qualify for an account.
Fees:
No monthly maintenance fees
$25 overdraft fee
Balance requirements:
No minimum daily balance
$5 minimum opening deposit
ATMs:
Fee-free at Mass Bay CU ATMs
Fee-free at AllPoint ATMs nationwide
Six free out-of-network withdrawals per month ($1 per transaction after that)
Interest on balance:
Up to 0.10% APY on savings (share accounts)
Up to 3.35% on CDs
Up to 0.80% APY on money markets
Additional perks:
Free financial counseling for members
Free interest-bearing checking account for balances of $400 or more
10. Bank of America
Although it’s not a community bank, there are benefits to national banks like Bank of America, including access to branches and ATMs nationwide. One downside to Bank of America is that each checking account comes with monthly maintenance fees. But you can waive those by having direct deposit, maintaining a $1,500 daily balance, or enrolling in the Bank of America Preferred Rewards program.
In addition to physical locations and ATMs, Bank of America also has a robust selection of mobile banking features that keep banking convenient.
Fees:
$12 monthly fee (waived with requirements)
$10 overdraft fee
Balance requirements:
No minimum daily balance ($1,500 to waive maintenance fees)
$100 minimum opening deposit
ATMs:
Fee-free at 16,000 Bank of America ATMs nationwide
$5 for each out-of-network ATM transaction
Interest on balance:
Up to 0.04% APY on savings
Up to 4.50% on CDs
Additional perks:
$200 bonus for new credit card signups
Mobile banking offers enhanced security features
What kind of account is right for you?
Financial institutions come in a variety of forms, and the one that’s best for you depends on your needs. Do you need wealth management services, or is avoiding ATM fees while traveling a bigger priority? It’s important to first make sure a bank is insured by the Federal Deposit Insurance Corporation, but from there, it’s all about looking for the best bank to help with your financial life.
Advantages and Disadvantages of Local Banks
They might not have all the amenities of the biggest banks, but local banks do have their advantages. You’ll often get many of the basic features of an online bank through the mobile banking app, including easily transferring money and depositing checks. The best local bank is involved in the community and offers small business banking and loan options that are above and beyond what national banks offer.
But even the best local bank can fall short in some areas. Not all local banks are insured by the Federal Deposit Insurance Corporation, so it’s important to check for that. Local banks may also offer limited banking services and less competitive rates on savings and retirement accounts than other banks.
Advantages and Disadvantages of Online Banks
Online banks are an option, regardless of where you live. Today’s online accounts typically offer all the amenities you need, including the ability to transfer money and deposit checks.
If you regularly deal with cash, though, an online bank might not be as good a deal as you’d get with other types of bank accounts. Some online banks have ATM network partnerships that let you withdraw and deposit cash nationwide.
For those who don’t usually need cash, though, it might be worth looking into what the bank charges for out-of-network ATM fees. Keep in mind that the other bank will assess a fee in addition to the one your bank charges.
Advantages and Disadvantages of National Banks
No matter where you live in Massachusetts, national banks probably have branches nearby. Bank of America, for instance, has branches throughout Massachusetts. The best thing about national banks is that you can always find a branch and ATM, even if you leave home.
But there’s another benefit to going big. With a corporate bank, you often have a broader range of features. There may be multiple deposit accounts, including a free checking account, an interest-bearing account, and savings account options that will help with retirement planning. Many large banks also offer investment accounts and advisors to help you manage your money.
There is a disadvantage to going national, though. Unlike other banks in your area, you might find it tough to get customer service when you need help with your checking account, savings account, or wealth management. Yes, you can visit a local branch, but if the representatives are busy, you might have a long wait.
Advantages and Disadvantages of Regional Banks
Regional banks can combine the best of both extremes. For one, you’ll probably find branches and ATMs when you leave the state to go to nearby areas like Rhode Island or New York. A regional bank may also offer unlimited ATM reimbursements or have partnerships with networks that give you fee-free cash access nationwide.
Being in between can work against a regional bank, though. You might find that interest rates aren’t as competitive as online accounts that are trying to win business. A regional bank may only offer one checking account, compared to the multiple options you get with corporate banks. But you may also not get the same personalized service as you’d get with going local.
Frequently Asked Questions
How can someone determine whether a bank is the right fit for them?
What’s right for someone else might not be the best option for you. While shopping for banks, keep in mind the features you’ll use most often, as well as how important it is to bank locally. If you need that in-person contact that you can only get at a local bank, an online bank likely won’t work for you. If competitive rates and an easy-to-use mobile app are more valuable, you can kick off your search with that in mind.
What should someone look for in an online bank?
Online banks give you everything you need to manage your account through an app. You’ll likely also be able to access your online bank through the website. If you need to deposit a check, transfer money, or pay bills, you can do it. But where online banks fall short is when it comes to cash. Make sure you can deposit and withdraw cash when you need it without having to pay dozens of dollars in fees every year.
Which account is best for you?
It’s never been easier to manage your finances. Mobile banking lets you do everything electronically. But the right account is one that helps you set money aside and earn interest on it while also keeping fees to a minimum. You’ll also want a bank that gives you the type of customer support you prefer. Whether that’s 24/7 support by phone or through in-app chat or it’s face-to-face in a bank branch, you can find a bank that offers it.
Massachusetts has banks to fit every preference. You’ll just need to shop around to find the right bank for you. If you already have a bank, make sure you check out the competition occasionally. You may find switching accounts can save you money while also boosting the interest rates you’re earning on your balance.
Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank N.A. or Stride Bank, N.A.; Members FDIC. Credit Builder card issued by Stride Bank, N.A.
1. Out-of-network ATM withdrawal fees may apply with Chime except at MoneyPass ATMs in a 7-Eleven, or any Allpoint or Visa Plus Alliance ATM.
2. Early access to direct deposit funds depends on the timing of the submission of the payment file from the payer. Chime generally make these funds available on the day the payment file is received, which may be up to 2 days earlier than the scheduled payment date.
3. The Annual Percentage Yield (“APY”) for the Chime Savings Account is variable and may change at any time. The disclosed APY is accurate as of November, 17th, 2022. No minimum balance required. Must have $0.01 in savings to earn interest.
5. Chime SpotMe is an optional, no fee service that requires a single deposit of $200 or more in qualifying direct deposits to the Chime Checking Account each month. All qualifying members will be allowed to overdraw their account up to $20 on debit card purchases and cash withdrawals initially, but may be later eligible for a higher limit of up to $200 or more based on member’s Chime Account history, direct deposit frequency and amount, spending activity and other risk-based factors. Your limit will be displayed to you within the Chime mobile app. You will receive notice of any changes to your limit. Your limit may change at any time, at Chime’s discretion. Although there are no overdraft fees, there may be out-of-network or third party fees associated with ATM transactions. SpotMe won’t cover non-debit card transactions, including ACH transfers, Pay Anyone transfers, or Chime Checkbook transactions. See Terms and Conditions.
Should I save for retirement or use my extra income to pay off debt? That is a question that many Americans are currently faced with. There is no question that debt has become a huge problem for most people in this country. In fact, I believe that the best way to financial freedom is to eliminate all debt!
However, most Americans have also neglected their retirement savings as well. According to a recent article by Market Watch:
The gap between what Americans need for retirement and the amount they have saved is a staggering $6.6 trillion. The $6.6 trillion retirement income deficit amounts to about $90,000 per household if you count all 72 million households ages 32 to 64, though that figure includes even those who have enough saved for retirement, said Anthony Webb, a research economist at Boston College’s Center for Retirement Research.
This means that many of us will be in serious financial trouble once the time for retirement comes around. The only way to correct this is to start saving today, or forgo retirement and work until you are physically unable.
So then the question becomes…which is more important? If you are in debt and behind in your retirement savings, where do you stick your cash? Do you hold off on contributing to retirement accounts until you are completely debt free? Should you instead max out your retirement accounts and take much longer to get out of debt? Is there a logical, orderly way to combine both?
Pay Off Debt Before Saving For Retirement
There are two very strong arguments for why you should completely get out of debt before contributing to your retirement accounts.
Guaranteed Rate Of Return
If you concentrate on getting out of debt, then you guarantee yourself a rate of return on your money that is equal to the rate of interest on your debt. For instance, if you are currently paying 20% each year on your credit card debt, then by paying it off, you guarantee yourself a 20% annual rate of return! That sounds like a great investment to me!
The same is true for any other type of debt for which you pay interest. Even though the interest rate on a house or a car is generally lower than that of a credit card, and the fact that they are amortized means that more of the interest is paid in the beginning of the loan, there is still significant savings to be had by paying them off early.
Financial Freedom
The second argument for paying off your debt before saving for retirement, is that you gain financial freedom! Being debt free means that you are now free to allocate your money any way you wish – after covering your living expenses, of course.
Fund Your Retirement Accounts Before Focusing On Debt
The Power Of Compound Interest
Simply stated, compounding interest describes what happens when interest is calculated on a principal amount of money, and then that interest is added to the principal and now interest will be calculated on this new higher amount. For instance, if you save $10,000 and it earns 10% interest over the course of a year, you have earned $1,000, meaning you now have $11,000 in your account. If we are dealing with compound interest, the next year will begin with a new principal amount of $11,000 and your 10% interest will now earn $1,100 in the second year!
Since you aren’t going to withdrawal any money out of your retirement account, each year the returns from the previous year are invested as well, so your account continues to build even if you do not add new funds [Note: The actual mechanics of investment accounts work a little differently, but the basic result is still the same].
So each year that you neglect to save for retirement, you are not only losing out on what you would have contributed for that year, but you are also missing out on the compound interest on your contribution for the next 20 to 40 years!
Tax Deferred Accounts Have An Annual Contribution Limit
If you wait until you are completely out of debt before you contribute to your retirement accounts, you will still be subject to the IRA contribution limits or the 401k contribution limits for that particular year. So even if you now have $40,000 to contribute to your retirement in 2015 because you neglected retirement savings in the previous years to get out of debt, you will still only be able to contribute $16,500 to your 401k and $5,000 to your IRA (assuming that the limits don’t change between now and then, and you are under 50)!
You May Be Missing Out On Free Money
If your employer offers a 401k employer match, then by refusing to contribute to your 401k until you get out of debt, you are passing up on free money! You could actually be turning away thousands of dollars each year because you are so focused on debt! If you make your retirement planning a priority, then you can avoid giving away money!
Save For Retirement While Getting Out Of Debt
Here is my suggestion for most people. There is no rule that says you have to go “all or nothing” when it comes to allocating your money. Put some of your money toward debt repayment, and put some toward retirement saving.
Because debt has such a negative influence on our financial freedom, happiness, and even weight, my vote is always to eliminate debt. However, because of the prospect of free money for retirement, I can’t imagine passing on my 401k contributions.
So, if you are in debt and have a chance to contribute to a 401k, do it – at least contribute enough to get the full employer match. Then put the rest of your money toward debt repayment.
Some may ask…why not contribute more? Good question. Well, do you remember that compound interest that we talked about? If you are in debt, chances are that it is working against you. You are not only charged interest on the principal amount, but also on any previously accumulated interest! That means that you must make getting out of debt a top priority – right below getting free money!
What are your thoughts? Tell us what you think about the debt vs. retirement debate in the comments!