Friend of the blog Matt sent in a great question this week:
Hi Jesse – do you have any recommendations when it comes to life insurance? I know Term is the way to go, but that’s about all I got…
I scanned your blog posts and didn’t see anything too specific with it but if you have any guidelines for pricing or coverage recommendations, please let me know!
Matt
Matt’s Right. We Want Term!
Matt’s right. Term life insurance is the best option in 99.99% of cases.
Other types of life insurance (Whole, Variable, Universal, etc.) are bloated products that are “pushed” and “sold” far more often than they’re genuinely sought after. These products try to combine investing with insurance and end up being overpriced versions of each.
Some things aren’t worth combining!
The smarter option is to buy insurance that only acts as insurance and then use your remaining money to invest in pure investments. Term life insurance is just that life insurance product. All it does is provide money to your beneficiaries if you die. If you don’t die, it doesn’t pay. It’s simple.
But Do We Need Life Insurance?
How do we determine if someone needs life insurance?
I use the same framework I would use for anyinsurance question (home, boat, pet llama insurance, etc.).
Are you exposed to a financial risk that you could not comfortably recover from using your current asset base?
Let’s say your house burns down. Does that present a financial risk you could recover from using your current assets (cash, investments, etc)? If you answer no, then you need home insurance. (If you have a mortgage, your lender likely mandates you have insurance so they’recovered should the house burn down).
If your wedding ring got stolen, does it present a financial risk you could recover from? Personally, I wear a ~$200 tungsten carbide wedding ring. If my finger got stuck in a tragic 3-ring binder accident while compiling someone’s financial plan, I could replace that $200 ring without issue. I do not need ring insurance. Granted, the cosmetic costs of finger reconstruction might make me wish I had better health insurance…
Back to the point: that’s the framework to use! Does the downside risk present an insurmountable financial burden to you (or your beneficiaries?)
The answer for many younger readers with dependents (spouses, children) is a screaming YES. As in, “If I died and the family lost my income, it would be very financially uncomfortable for many years!”
But how much coverage do you need?
My Preferred Methods: Income Replacement and “DIME”
The two methods I prefer (and suggested to reader Matt) are the Income Replacement method and the DIME method.
Income replacement suggests you replace your income for a certain number of years, typically until your children reach a particular age or until your spouse reaches retirement age.
In my personal case, I wanted to replace my income until my youngest child (who is still technically hypothetical) is out of the house. I chose a 30-year term policy equivalent to ~20 years of my income (with a small discount rate for future years). No matter when I get hit by that proverbial bus, 20 years of income should cover my youngest child until they’re out of the house.
The DIME method adds up any outstanding debts, add in your income for a certain number of years, then adds your remaining mortgage, and finally adds on future expected education costs. Debts, income, mortgage, education.
The DIME method double-counts a few things. For example, I’m using my income to pay my debts and mortgage. I shouldn’t need to double-count them. Nevertheless, I like the idea of itemizing the biggest future expenses (college costs, mortgage payoff, etc.) and ensuring your life insurance policy can cover them.
The Best of the Rest
Other strategies I’ve seen for sizing life insurance policies include:
The Human Life Value (HLV) method. It asks an individual to consider their annual income for each year until their retirement, add in other benefits and bonuses, subtract the income used for their personal consumption, and then discount future income to today’s value.
Done correctly, this method should provide the beneficiaries with a lump sum of the resources you would have expected to provide to them over the remainder of your working life. It’s just a bit too complicated and mathematical for most people to get right.
The Budget-Based method simply multiplies your household’s monthly expenses by the number of months you expect those expenses to be maintained. It’s similar to Income Replacement, but looks at expenses rather than income.
Lastly, the “Rule of Thumb” (which I think is a poor name!) suggests you multiply your income by 10. Very much “one size fits all,” which is why I don’t like it.
Granted, one detail to note is that most life insurance sizing strategies are intentionally conservative, leading to policy sizes that are large enough during the highest-risk years but end up being too large as time goes on.
For example: a young family might need a $2M, 25-year policy on each parents. But by the time the kids are in college, that $4M of total coverage is surely too much.
Thanks for the question, Matt!
And to all of you: term life insurance is a smart financial planning move. But I hope none of you ever need to collect!
Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.
-Jesse
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Your 40s can be a pivotal decade in your life. It’s typically a time of peak earnings, growing family responsibilities, and an increased focus on long-term financial stability. You may have a house, kids, and a busy job. College expenses may be looming. Maybe you’re hatching a plan to start your own business or buy a beach house that’ll one day be your empty-nester home.
To navigate these years successfully, it’s essential to make strategic financial moves that can secure your future and make your plans and dreams a reality. Here are some critical financial planning tips to consider as you move through your 40s.
7 Financial Moves to Make During Your 40s
In your 40s, you’re old enough to know what you want and likely have enough earning years ahead to achieve your goals — if you manage your money right. The following strategies can help you build wealth in your 40s.
1. Maintain or Replenish Emergency Funds
Life is full of unexpected twists and turns. Not all of them are fun, such an expensive car or home repair, a medical emergency, or losing your job. An emergency fund offers financial stability during a stressful time. It also saves you from running up expensive debt that could derail your financial goals.
A general rule of thumb is to have six to 12 months’ worth of living expenses stashed away for the unexpected. If you already have an emergency fund but it has been partly or fully depleted, you’ll want to prioritize replenishing it to maintain financial security.
Consider setting up automatic transfers into savings to build your emergency fund consistently. Keep these funds in a liquid, easily accessible account, such as a high-yield savings account, to ensure you can access the money quickly when needed.
2. Manage Your Debt
Debt management is a crucial aspect of financial planning at any age, but it becomes even more critical in your 40s. Since high-interest debts, like credit card balances, can significantly hinder your ability to save and invest for the future, you’ll want to prioritize paying them off as quickly as possible.
One strategy that can help is the avalanche payoff method. Here, you list your debts in order of interest rate from highest to lowest, then put extra money toward the highest-interest debt, while continuing to pay the minimum on the others. Once that debt is paid off, you put your extra funds toward the debt with the next-highest rate, and so on.
Alternative approaches to paying down high-interest debt include getting a low- or no- interest balance transfer credit card or taking out a personal loan for debt consolidation with a lower rate than you are paying on your cards.
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3. Revisit Retirement Saving
In your 40s, you’re roughly at the midpoint between entering the workforce and traditional retirement age. How you invest and save for retirement at this point in your career can strongly impact your future assets and ability to one day retire comfortably.
If you’re not currently contributing to a retirement plan, such as a 401(k) or individual retirement account (IRA), now’s a good time to start. If you have been, it’s time to assess your progress. Consider how much of a nest egg you will need to retire and, using an online retirement calculator, whether your current plan will get you there.
If you’re behind on your savings, consider stepping up your contributions or, if you’re already contributing the max allowed, making “catch-up” contributions down the road. Starting at age 50, the IRS allows higher maximums designed to help people catch up on their retirement savings goals.
4. Plan for Childrens’ College Expenses
If you have kids, planning for their future education expenses may be top of mind. College costs continue to rise, and early planning can alleviate future financial stress. If you haven’t started saving for college expenses, you may want to explore opening a 529 college savings plan, which offers tax advantages and can be a flexible way to save for educational expenses.
An online college cost estimator can help you determine how much you need to stash away each month or year, based on the year your child will likely attend college and the type of school they might choose.
Just keep in mind that it’s important to balance college savings with other financial goals, like retirement. As kids get closer to leaving the nest, you may also want to encourage them to apply for scholarships and grants, and explore financial aid options.
5. Choose or Reevaluate Insurance Coverage
Insurance is an important component of financial planning in your 40s. You’ll want to evaluate your current insurance coverage and make sure it’s adequate to meet your family’s needs. This includes not only health and home insurance, but also life and disability insurance.
Life insurance provides financial security for your family should you die prematurely. If you don’t currently have a life insurance policy, consider purchasing one. If you do have one, you’ll want to make sure your policy’s coverage amount is sufficient to cover your family’s current living expenses, outstanding debts, and future financial needs, such as college tuition for your children.
It’s also a good idea to review your disability insurance, which protects your income if you’re unable to work due to illness or injury. Many companies provide a policy through work. However, you may want to consider supplementing employer-provided coverage or, if you’re self-employed, getting your own policy. This offers a different, but equally important, safety net for you and your family.
Recommended: Which Insurance Types Do You Really Need? Here Are 6 to Consider
6. Invest Outside of Retirement
While retirement accounts are crucial, investing outside of retirement can diversify your portfolio and help you achieve goals that may be five or 10 or more years away, such as a downpayment on a vacation home or a child’s wedding.
Though investing carries risk and can be volatile in the short term (which is why you generally don’t want to invest funds you’ll need in the next few years), an investment account has the potential to grow more than other types of accounts over the long term. Consider taxable investment accounts that align with your risk tolerance and financial objectives.
7. Meet with a Financial Professional
Getting expert advice on managing your finances can be invaluable at this stage of life. Whether you opt for regular meetings or simply go for a one-time consultation, a financial professional can provide valuable insights and help you navigate complex financial decisions.
An advisor will typically look at your whole financial picture and assist you with creating a comprehensive financial plan. This may include optimizing your investment strategy and ensuring you’re on track to meet your goals, including retirement, investments, and college savings.
The Takeaway
It’s never too late to take control of your finances. In your 40s, you are likely entering your prime earning years, so it’s a good time to focus on paying down debt, preparing for the next chapter of your children’s lives, and saving and investing for your future retirement. With some wise money moves, you’ll be set to make the most of this decade and beyond.
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FAQ
What financial goals should a 40-year-old have?
Ideally, a 40-year-old will want to focus on several financial goals. These include:
• Establish or maintain an emergency fund with three to six months’ worth of essential living expenses.
• Reduce financial burdens by paying off high-interest debt.
• Ensure you’re on track with retirement savings by maximizing contributions to retirement accounts.
• Start or continue saving for children’s college expenses through plans like 529s.
• Consider investing outside of retirement to diversify your portfolio and build wealth.
How much should a 40-year-old have saved?
By age 40, financial advisors often recommend having three times your annual salary saved for retirement. This benchmark ensures you’re on track to meet long-term financial goals and maintain your desired lifestyle in retirement.
In addition, you’ll want to maintain an emergency fund with three to six months’ worth of living expenses.
Savings outside of emergency and retirement, such as investments in taxable accounts, can further enhance financial security. The exact amount can vary based on individual circumstances, income, lifestyle, and future goals.
How can I build my wealth in my 40s?
To build wealth in your 40s, you’ll want to focus on several strategies:
• Maximize retirement account contributions, taking full advantage of employer matches.
• Pay off high-interest debts to free up resources for savings and investments.
• Establish or maintain an emergency fund to cover unexpected expenses without derailing financial goals.
• Consider additional income streams, such as side businesses or rental properties.
• Diversify investments across stocks, bonds, real estate, and other assets to balance risk and growth potential.
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Inside: The answer is so obvious! Stop the assumptions with the 3 percent or 4 percent rule of retirement. Learn how much money to save for retirement today.
We all know that saving money for retirement is something we should do.
Maybe you are contributing the minimum to your 401K through work to get the match. Possibly saving money in a Roth IRA.
But, are you truly saving enough for retirement?
More than likely not.
Don’t feel like you are alone. According to a new study, only half of households actually have money saved in retirement accounts. The good news for those who have saved is the dollar amount saved for retirement has been increasing in the past 10 years.
Here is the real reason you don’t save for retirement… you have absolutely no clue how much money you need to be saved to retire.
You have tried to use all of the online retirement calculators from all of the big companies. Your results are millions of dollars different. You have no clue where to start, or what to believe.
And then you just get unmotivated because you’re like there’s absolutely no way I can make that dollar amount work.
So, What is Our Retirement Number
Personally, I completely get it this is a conversation. My husband and I have had it for years.
What is our retirement number?
What amount do we need to retire with?
And honestly, even can I actually save that much before I am too old to work?
It is all a complete unknown, it is a best-guess scenario.
There is absolutely no way for you to truly understand how much you need because there are so many things that go into it, including inflation, your savings rate, your withdrawal rate, and your anticipated expenses. So there’s a lot of variables and that’s when the variables get too confusing you don’t know which way to start.
One Guaranteed Truth…
The financial advisors believe they are the know-all-be-all with their calculations while charging you an asset management fee that is putting a drag on your overall portfolio.
And then October 27, 2020, Bill Bengen announced that instead of using the 4% rule is outdated, and now you can use a 5% rule. (Bill Bengan is a financial advisor who made the 4% rule of thumb famous 25 years ago.) So, this latest information just throws a curveball into everything that has previously been used for the past 25 years, and now you’re left wondering…
Well, I have no idea what is the proper amount I need to save for retirement.
Do you know what the amount that you need to save for retirement is?
So, let’s dig in for a little bit and we’re gonna talk about the three different percentages that are talked about the most. It’s the 3% rule, the 4% rule, and the 5% rule is one better than another. We’ll debate that and shortly.
How does Withdrawal Rate work?
But first of all, you have to realize that not everything works the way you want, so let’s show some examples before we dig into the specifics of the different rules.
Basically, the whole concept is if you save $1 million and you start withdrawing either 3%, 4%, or 5%. That withdrawal amount is the amount of income that you would live on each and every year, while the rest of your portfolio is continuing to grow and increase in value.
The ultimate, perfect-scenario goal is that you would withdraw as much as you possibly could without depleting the portfolio.
Withdrawal Rate Example:
Here are the assumptions:
Plan to spend $50,000 a year
7% rate of return on your money
Age doesn’t matter and not accounting for taxes or inflation (we want to keep this simple)
The amount you would need to save based on each of the withdrawal rates:
3 percent rule, you would need: $1,666,667
4 percent rule, you would need: $1,250,000
5 percent rule, you would need: $1,000,000
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The Withdrawal Rate Confusion
In our example, we used simple calculations that don’t account for age, taxes, or inflation and the amount you need to save for retirement is $666,667 different.
The numbers are too much for the average person to understand and have faith in.
This is why the confusion on how much to save for retirement and what model and which retirement calculator is the best.
Shortly, we are going to give you the simple answer of how much to save for retirement. But, first, a little background on the various percent rules for retirement.
3 Percent Rule
The 3% rule has gotten very popular with the FIRE movement.
The FIRE movement is Financial Independence Retire Early.
Because most of these people aren’t looking at retiring in the normal typical retirement age of 60s, they’re looking to retire in their 30s or 40s. They feel like they need to be super conservative because they are trying to estimate how much they need each month to live off their money for possibly the next 50 years.
That’s a lot of variables that you have to take into account.
The good news is you can always learn and figure out ways to make money in retirement so it’s not a complete waste, you can always go back to work because you are younger, and have youth on your side. So, is 3% a safe withdrawal rate?
The golden advice is you want to plan for the worst but hope for the best. The goal is that 3% would cover all of your necessities and basic expenses.
4 Percent Rule
Is the 4 percent rule viable?
The 4 percent rule of retirement was made famous by Bill Bengen 25 years ago (and just recently he said that number is outdated.)
The assumptions were if you withdraw 4% of your investment account every year, you will still have enough to live on throughout retirement.
This was based on what has happened in the markets, accounted for inflation, and the age you want to retire. He conducted many possible case scenarios and concluded that by only withdrawing 4 percent will make sure your money lasts. That is why it has been what is called a golden rule for retirement.
How long will my money last using the 4% rule? If you do all the calculations, it should last for at least 30 years. Obviously, you are looking at many variables of the stock market doing well and your living expenses staying low. Once again, the other big factor is what inflation will do in the future.
So, is the 4% rule that much better?
5 Percent Rule
And then, October 2020 rolls in. The breaking news is that Bill Bengen announced the 4 percent rule for retirement is too conservative and now you can actually use 5%.
So, that leaves the average person going… Okay. My head is spinning. I’m not sure how much I need to save for retirement. What is a good number?
Can I safely withdraw 5% of my investment accounts and still have enough money? That means I need less money to retire.
This is where people quit investing and saving for retirement becomes too hard.
Real truth from real people
Can you Overcome Why Most People don’t save for Retirement?
There are too many variables, there are too many unknowns, and they don’t understand how it all works.
That is the real reason people don’t save for retirement.
I get it. I’m there with you. I feel it. I hear it from readers. But, we are going to break down some of the key items so that way you know how much you need for retirement.
And just remember, even if you messed up your numbers, the market went down, or you want to spend more in retirement than you are, then you could always go back to work. Even better, learn how to make money online for beginners, pick up a side hustle, make a little bit of extra money, and actually do something that you truly enjoy doing.
Learn how much money should I have saved by 30.
How Much do I need to Retire?
The simple answer… aim for $1,000,000 in investment accounts.
You may be able to aim lower depending on some variables which we cover shortly.
Investment accounts can include any of the following:
401K
Roth IRA
IRA
HSA (health saving account)
Brokerage Accounts
High-interest bank accounts
Real estate
You want accounts with liquidity. Things that can be bought and sold for cash. Those are the assets we are counting on how much to retire with.
Don’t use equity in your house because you need a place to live. If you want to use equity, that is fine, but your calculations just become slightly more difficult. We want simplicity.
Right now, your money goal is to reach $1,000,000 in investment accounts. Specifically in liquid net worth.
(Of course, this number may be lower if you live in a low cost of living area, plan to move with overall lower costs or another country, or have good options with lower health care costs. There have been plenty of people who retired with less and love life.)
Based on these variables, you may just need $500,000 to retire. Or somewhere in that range.
Realistic Retirement Savings for Motivation
We shared what a realistic retirement savings amount of $1 million dollars is. Is your first reaction – yikes, there is absolutely no way I can reach that amount.
However, you can!
Just break it down into smaller chunks.
For instance, make your next goal to save $100,000. You do that 10 times and you hit that realistic retirement savings amount.
If that seems like a stretch, then break it down even further. To stay motivated you can strive to save $50K or even $20K.
Break it into bite-sized manageable pieces to help you save for retirement and stay on track.
Learn what happens if you don’t save for retirement.
Best Ways to Save for Retirement
This is the basics to start saving for retirement.
You already know much should you really save for retirement. Now, you just to need to do it.
Here is the safest way to save for retirement. First, open up one or all of these accounts (pending where you are on your money journey). Then, look at investing in S&P 500 Index funds. The most highly recommended index fund for beginners is VTSAX.
1. Contribute to 401K
This is the simplest way to start saving.
Make sure you are contributing at least the minimum to your employer’s 401K.
Every year you can contribute up to a maximum amount. In 2023, an employee can contribute $22,500 to their 401k (the employer is eligible to contribute as well for a combined amount not to exceed $66,000 or 100% of your compensation, whichever is less). For the latest contribution limits, check out the IRS site.
Each year, increase your percentage by 1%. A simple way to reach maxing out your 401K.
Pro Tip: Check if your employer offers a ROTH IRA option. These are becoming more and more popular with companies. A Roth 401K will let your money grow tax-free because you pay taxes when you contribute money. If they don’t offer one, pester the human resources department.
2. Open Roth IRA
The next best option is the ROTH IRA. You want to contribute to a Roth IRA because you pay taxes upfront rather than at withdrawal like a traditional IRA.
Since ROTH IRAs have tax advantages, there are also contribution limits set by the IRS. The contribution amounts have remained the same for a couple of years now. The annual contribution limit is $6,000 per year, or $7,000 if you’re age 50 or older.
The downside to Roth IRAs… the amount you can contribute may be limited based on your income and filing status. However, for the average American, you should be able to max out the amount you can save each year.
Learn if can you have multiple Roth IRAs as it may be a smart financial move.
Pro Tip: Even if one spouse is a stay-at-home parent, you can still contribute to a Roth IRA for the non-working spouse.
3. Health Savings Account
Say what? Yes, a health savings account is on the list as a way to save for retirement. It is a great way to grow your money tax-free going in and on withdrawals.
You must have a High Deductible Health Insurance Plan to open a health savings account.
This is something you want to do and contribute the maximum amount each year. For 2023, you can contribute $3,850 for individuals and $7,750 for family coverage. Typically, the limits go up $50 each year, which helps you save more every year.
Pro Tip: This account will stay with you even when you leave your current employer and insurance. Plus you can use the HSA funds forever – even to pay Medicaid premiums. (Hopefully, nothing changes on these tax-advantaged accounts).
4. Traditional Brokerage Account
The last avenue has no tax benefits, but you are still saving money to be used later. That is what really matters.
Since there are no tax advantages to these basic brokerage amounts, there also are no limits on how much you can contribute.
This is where you would save the remaining money after you exhausted all the other methods listed above.
Side Note…
Yes, there are other ways to save for retirement. For this post and the average investor, the above-mentioned accounts are a great place to start. Once you become savvier and want to invest more money, then you can look at back door IRAs, 529s, or whole life insurance.
Saved $1 million for retirement, Now What?
Once you reach that 1 million dollars retirement mark, congratulations!!
That is a huge milestone that many people never reach. So, what is the next step?
Now, that you are closer to finally being able to live off your investments, you must start to look at the retirement calculators more seriously and factor in all of those variables (age, taxes, and inflation). It is much easier to predict the future once you have built a solid nest age and are closer to living off your investments.
Everyone started the financial independence journey at a different age and will reach their million-dollar mark at different times.
For the average person, you know learned how to save for retirement. You know what you need to do and where to start.
In this post, we took out all of the confusion on how much to save for retirement. Don’t worry about is the 4 percent rule is viable – or if it should be the 3 percent rule or the new 5% rule. The assumptions and variables will hold you back from starting. You know the dollar amount to start with, move on with that.
This simple advice for hitting your first milestone is the motivation to keep you going. Along the way, you will become savvier with finances and investing.
When it is time to move to the question of “can I retire” at such and such age, you have already taken out many of the variables, and the decision becomes more and more clear.
Take steps to reach that $1000000 mark today.
Get ahead now…
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The amount of money a couple needs for retirement can depend on several factors, including age, health, life expectancy, location, and desired lifestyle. There’s no exact number that represents what is a good monthly retirement income for a couple, as every couple’s financial needs are different.
Creating a retirement budget and considering what might affect your cost of living can help you narrow down how much monthly income you’ll need. You can use that as a guide to decide how much you’ll need to save and invest for retirement.
How Being a Couple Affects Your Income Needs
Being the main breadwinner in a couple usually increases the amount of income you’ll need for retirement, since you’re saving for two people instead of one. The money you save has to be enough to last for your lifetime and your spouse or partner’s, so that neither of you is left without income if you outlive the other.
Aside from differences in life expectancy, there are other factors that affect a couple’ income needs, including:
• Lifestyle preferences
• Estimated Social Security benefits
• Target retirement dates for each partner
• Part-time work status of each partner in retirement
• Expected long-term care needs
• Location
All of those things must be considered when pinpointing what is a good monthly retirement income for a couple. The sooner you start thinking about your needs ahead of retirement, the easier it is to prepare financially.
It’s also important to keep in mind that numbers to be used for the sake of comparison can vary widely. Consider this:
• According to the Pension Rights Center, the median income for fully retired people aged 65 and older in 2023 was $24,190.
• The average income after taxes for older households in 2022 was $63,187 per year for those aged 65–74 and $47,928 per year for those aged 75 and older, according to U.S. News Money.
💡 Quick Tip: When you have questions about what you can and can’t afford, a spending tracker app can show you the answer. With no guilt trip or hourly fee.
What to Consider When Calculating Your Monthly Income
One couple’s budget for retirement may be very different from another’s. A budget is simply a plan for spending the money that you have coming in.
If you’re wondering how much to save each month, it’s helpful to start with the basics:
• What do you expect your retirement expenses to be each month?
• How much income will you have for retirement?
• Where will this income come from?
It’s also important to consider how your retirement income needs may change over time and what circumstances might impact your financial plan.
Spending May Not Be as Low as You Think
Figuring out your monthly expenses is central to determining what is a good monthly retirement income. According to the Bureau of Labor Statistics, the typical household age 65 and older has annual expenditures of $72,967. That breaks down to monthly spending of about $6,080 per month. The largest monthly expense is typically housing, followed by transportation and food. If you’re planning to live frugally in retirement, spending, say, under $50,000 a year may sound achievable, but it’s not a realistic target for every couple.
For one thing, it’s all too easy to underestimate what you’ll spend in retirement if you’re not making a detailed budget. For another, inflation during retirement can cause your costs to rise even if your spending habits don’t change. That fact needs to be recognized and budgeted for.
Spending Doesn’t Stay Steady the Whole Time
It’s a common retirement mistake to assume spending will be fixed. In fact, the budget you start out with in retirement may not be sustainable years from now. As you get older and your needs or lifestyle change, your spending habits will follow suit. And spending tends not to be static from month to month even without events to throw things off.
You may need less monthly income over time as your costs decrease. Spending among older Americans has been found to be highest between ages 55 and 64 and then dip, according to Social Security reports.
It’s very possible, however, that your monthly income needs may increase instead. That could happen if one of you develops a serious illness or requires long-term care. According to Genworth Financial’s 2023 Cost of Care survey, the monthly median cost of long-term care in a nursing facility ranged from $8,669 for a semi-private room to $9,733 for a private room.
Expenses May Change When One of You Dies
The loss of a partner can affect your spending and how much income you’ll need each month. If you decide to downsize your home or move in with one of your adult children, for example, that could reduce the percentage of your budget that goes to housing. Or if your joint retirement goals included seeing the world, you may decide to spend more money on travel to fulfill that dream.
Creating a contingency retirement budget for each of you, along with your joint retirement budget, is an opportunity to anticipate how your spending needs might change.
Taxes and Medicare May Change in Your Lifetime
Taxes can take a bite out of your retirement income. Planning for taxes during your working years by saving in tax-advantaged accounts, such as a 401(k) or IRA, can help. But there’s no way to predict exactly what changes might take place in the tax code or how that might affect your income needs.
Changes to Medicare could also change what you’ll need for monthly income. Medicare is government-funded health insurance for seniors age 65 and older. This coverage is not free, however, as there are premiums and deductibles associated with different types of Medicare plans. These premiums and deductibles are adjusted each year, meaning your out-of-pocket costs could also increase.
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Common Sources of Income in Retirement
Having more income streams in retirement means you and your spouse or partner are less reliant on any single one to pay the bills and cover your expenses. When projecting your retirement income pie-chart, it helps to know which income sources you’re able to include.
Social Security
Social Security benefits may be a central part of your income plans. According to the Social Security Administration (SSA), a retired worker received $1,845 in benefits and the average spouse of a retired worker netted $886 during the most recent year reviewed.
You can expect Social Security to cover some, but not all, of your retirement expenses. It’s also wise to consider the timing for taking Social Security benefits. Taking benefits before your full retirement age, 65 or 67 for most people, can reduce the amount you’re able to collect.
Retirement Savings
Retirement savings refers to money saved in tax-advantaged accounts, such as a 401(k), 403(b), 457 plan, or Thrift Savings Plan (TSP). Whether you and your partner have access to these plans can depend on where you’re employed. You can also save for retirement using an Individual Retirement Account (IRA).
Tax-advantaged accounts can work in your favor for retirement planning, since they yield tax breaks. In the case of a 401(k) plan, you can also benefit from employer matching contributions that can help you grow your savings faster.
Annuities
An annuity is a contract in which you agree to pay money to an annuity company in exchange for payments at a later date. An immediate annuity typically pays out money within a year of the contract’s purchase while deferred annuities may not begin making payments for several years.
Either way, an annuity can create guaranteed income for retirement. And you can set up an annuity to continue making payments to your spouse for the duration of their lifetime after you pass away.
Other Savings
The other savings category includes money you save in high-yield savings accounts, money market accounts, and certificate of deposit accounts (CDs). You could also include money held in a taxable brokerage account in this category. All of these accounts can help to supplement your retirement income, though they don’t offer the same tax advantages as a 401(k) or an IRA.
Pensions
A pension is an employer-based plan that pays out money to you based on your earnings and years of service. Employers can set up pension plans for employees and make contributions on their behalf. Once you retire, you can take money from your pension, typically either as a lump sum or a series of installment payments. Compared to 401(k) plans, pensions are less commonly offered, though you or your partner may have access to one, depending on where you’re employed.
Reverse Mortgages
A reverse mortgage can allow eligible homeowners to tap their home equity. A Home Equity Conversion Mortgage (HECM) is a special type of reverse mortgage that’s backed by the federal government.
If you qualify for a HECM, you can turn your equity into an income stream. No payment is due against the balance as long as you live in your home. If your spouse is listed as a co-borrower or an eligible non-borrower, they’d be able to stay in the home without having to pay the reverse mortgage balance after you die or permanently move to nursing care.
Reverse mortgages can be used to supplement retirement income, but it’s important to understand the downsides as well. Chief among those are:
• Interest will accrue: As interest is applied to the loan balance, it can decrease the amount of equity in the home.
• Upfront expenses: Funds obtained from the loan may be reduced by upfront costs, such as origination, closing, and servicing fees, as well as mortgage insurance premiums.
• Impact on inheritance: An HECM can cause the borrower’s estate to lose value. That in turn can impact on the inheritance that heirs get.
How to Plan for Retirement as a Couple
Planning for retirement as a couple is an ongoing process that ideally begins decades before you’ll actually retire. Some of the most important steps in the planning process are:
• Figuring out your target retirement savings number
• Investing in tax-advantaged retirement accounts
• Paying down debt (a debt payoff planner can help you track your progress)
• Developing an estate plan
• Deciding when you’ll retire
• Planning for long-term care
You’ll also have to decide when to take Social Security benefits. Working with a financial advisor can help you to create a plan that’s tailored to your needs and goals.
Maximizing Social Security Benefits
Technically, you’re eligible to begin taking Social Security benefits at age 62. But doing so reduces the benefits you’ll receive. Meanwhile, delaying benefits past normal retirement age could increase your benefit amount.
For couples, it’s important to consider timing in order to maximize benefits. The Social Security Administration changed rules regarding spousal benefits in 2015. You can no longer file for spousal benefits and delay your own benefits, so it’s important to consider how that might affect your decision of when to take Social Security.
To get the highest benefit possible, you and your spouse would want to delay benefits until age 70. At this point, you’d be eligible to receive an amount that’s equal to 132% of your regular benefit. Whether this is feasible or not can depend on how much retirement income you’re able to draw from other sources.
Recommended: Does Net Worth Include Home Equity?
The Takeaway
To enjoy a secure retirement as a couple, you’ll need to create a detailed financial plan with room for various contingencies. First, determine your retirement expenses by projecting costs for housing, transportation, food, health care, and nonessentials like travel. Then consider all sources of retirement income, such as Social Security, retirement accounts, and pensions, and budget well.
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FAQ
What is the average retired couple income?
Figures vary. According to the Pension Rights Center, the median income for fully retired people aged 65 and older in 2023 was $24,190. The average income after taxes for older households in 2022 was $63,187 per year for those aged 65–74 and $47,928 per year for those aged 75 and older, according to US News Money.
What is a good retirement income for a married couple?
A good retirement income for a married couple is an amount that allows you to live the lifestyle you desire. Your retirement income should also be enough to last for your lifetime and your spouse’s.
How much does the average retired person live on per month?
According to the Bureau of Labor Statistics, the typical household age 65 and older has annual expenditures of $72,967. That breaks down to monthly spending of about $6,080 per month. Many factors, however, can impact a particular household’s spending and the amount of money they need to feel secure.
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Inside: Dream about what life could be if you didn’t have a job? If you are in the boat of I don’t want to work anymore, then you must read this post.
The reality is most people have days where they absolutely have no desire to work. Yet, you know deep down that you have to make money in order to pay your bills.
You are thinking… I don’t want a job I just want a life.
So, what happens when you don’t want to work anymore?
Well, if you don’t want to go to work today, you could take a sick day and get away with it. You can do that here and there for a while, but unfortunately, your employer is going to catch up to the quality of work that you are able to do or not do.
At this point you might be saying, you know I don’t want a job, I just want a life.
And that is very understandable if you don’t want to work in a field anymore job that you don’t love.
You want time freedom in your life!!
We will dive into the reasons for not wanting to work and how to overcome them when you need the money.
What to do if I don’t want to work?
The best thing to do is to find a job that you love and want to do on a daily basis!
Something that you can’t wait to go to work to be able to do. A way to make money that doesn’t feel like a job!
Unfortunately, too many of us feel we cannot do what we want to do when we want to do it. Thus, we want more out of life.
In this post, we are going to detail. If you don’t want to work anymore, what steps can you take to quit the job and live the life that you want?
Is it normal to not want to work?
I think each and every one of us has a desire not to work. Maybe you are thinking “I hate my job.”
This desire to work may ebb and flow based on what is going on, how you are feeling, and your current situation.
Especially if you are in a situation where you do not enjoy your boss, your co-workers, the company culture, or the current assignment, it will make going to work harder.
Whatever your job entails, if you are not enjoying what you’re doing, it is harder and harder to go to work on work every day.
As you can read on Reddit personal finance threads, there are plenty of people who have shared their stories about how they don’t want to work, seeking solace from others, and looking for ways to get out of the current situation that they’re in.
Also, if you are thinking that I can never make it until I am 55 then think about retirement. You are just sick of working and you may be in your 20s, 30s, or 40s.
It is okay to dream about not working daily!
Why We Don’t Want to Work
There are several reasons for not wanting to work.
Primarily many people do not feel engaged at their jobs, which makes them less likely to want to continue working. Gallup found that only 15% of employees feel engaged at work.1
In addition, there is an increasing amount of competition in the workforce as well as a lack of clear career paths and advancement opportunities for those who desire more freedom or flexibility with their careers. This can lead someone to think about becoming self-employed or going into a different field.
There are many reasons for not wanting to work.
People on Reddit share their stories about how they don’t want to work anymore. Some are still in school, some are retired, and others have other reasons for not wanting to work.
We all have heard about the Great Resignation with people saying “enough is enough; I don’t want to go back to work.”
1. Burnout
Burnout is when an employee begins to feel exhausted and overwhelmed by their job. They do not want to be there anymore and it negatively impacts the happiness of both the individual and their work environment.
If you want to stop working, it is okay!
Just make sure you can still be financially independent.
2. Not enjoying your job
Many people wake up and say, “I don’t really want to do the work today.” If you are not enjoying your job, it is harder and harder to go in every day.
People don’t want to work because they feel like they’re working more than is necessary, or there’s no meaning behind their job anymore.
If you find yourself not enjoying your job, it might be time to leave. Many people experience dissatisfaction with their jobs and want to retire early.
Many times this is when people leave their jobs and find success is the best revenge.
3. Mental Health
Mental health issues can be caused by outside factors, such as stress and anxiety, and can lead to feelings of wanting to avoid work.
For many, the idea of going to work can feel overwhelming and lead to feelings of anxiety and dread. It is also essential to take a step back and assess the quality of your mental health.
If this is something you have been struggling with, it is important to think about why you are feeling this way and take steps to address it.
If this persists, it is important to seek professional help. Visiting a therapist or counselor can help you identify the root causes of your negative feelings and develop a plan to overcome them. In many cases, your workplace may even cover the cost of therapy, so you don’t have to worry about paying out-of-pocket.
This is one of the good excuses to miss work.
4. Lack of Interest
When you find yourself feeling like you don’t want to work anymore, it’s important to take some time to examine the reasons why and identify potential solutions.
It could be that you’ve been in the same job for a long time and need a change of scenery.
Maybe you’re feeling overwhelmed and undervalued by your current role.
Possibly you have other things that are taking president and you don’t have the same level of interest.
Whatever the source of your feelings, they need to be addressed.
5. Support System
Friends and family can be a great source of support, offering advice and understanding. However, if they do not believe in you, it can make it even harder to find motivation.
On top of that, if you have family obligations such as childcare, it can be difficult to make the time to work or even to access the necessary resources.
Talking to your loved ones about your feelings and concerns is a great first step in getting through this tough time.
One of these family emergency excuses could help you in a pinch.
6. Lack of Appreciation
It can be incredibly disheartening to work hard and not be appreciated.
It’s easy to become discouraged and feel like you don’t want to work anymore if you’re putting in the effort and not being recognized.
When this happens it’s important to remember that you are valuable and your work does matter. It’s also important to talk to someone about how you’re feeling, whether that be a friend, family member, or therapist.
You just want someone to say to you, “I appreciate you!”
7. Thinking of Career Change
If you find yourself in a position where you don’t want to work for weeks on end, it’s important to figure out why. Are you having a hard time at your current job or do you no longer wish to pursue a career? If it’s the latter, it can be freeing to consider all the possible career changes you can make.
Many people don’t want to work anymore because:
they don’t want to pursue a career in corporate America
tired of the same job they’ve been doing for years
don’t want to continue vying for raises, bonuses, or promotions
It’s okay to dream about something else, something fresh and different.
You may find yourself researching other opportunities to put your skillset to use.
9. More Interest in Hobby to Turn into Side Hustle
For many people, having a side hustle is a great way to make extra money, explore a passion, and turn a hobby into something productive and profitable.
If you find yourself no longer wanting to go to work and feeling more fulfilled in your hobbies, it may be time to pursue a side hustle.
You can monetize your hobby and create a side gig to give yourself a new source of income.
This will provide you with the freedom to pursue what you’re interested in and make a living from it. It can also give you the option to quit your job and explore other areas of your life.
10. Wanting to make money passively
Making money passively is a goal that many people desire, but it can be hard to turn into reality.
While it is possible to make money passively in the stock market, real estate, or a small business, one can also earn passive income by doing any type of side hustle.
It is better to find ways to make passive income from something you enjoy.
You need to figure out what should I do for a living that will make passive income.
How do you make a living if you don’t want to work?
If you don’t want to work, you still need to find a way to make a living.
Passive income is the most effective way of making money without working.
It allows you to work on your business or hobby full-time and then withdraw a certain amount every month that helps pay for all of your expenses, including food, rent/mortgage, etc.
So, your first step is to create a passive income source.
If you don’t, then don’t say, “I don’t want to do the work today.”
In fact, there are many good excuses to miss work.
Can I survive without working?
Well, that completely depends on your financial situation. (Since most people are not aware of where they stand financially, here are the Money Bliss Steps to help you.)
If you are lucky enough to be a trust fund baby with somebody else managing your money, you are likely fine and can survive without working.
However, if you are like most normal folk, then you may be able to survive for a little bit without working. But over time, it will catch up to you. Not working is not a long-term solution.
While you may be on unemployment and collecting unemployment benefits, or maybe even disability payments that are not enough to make ends meet. In most cities, you can survive in the short term without working. But in the long term, it is not going to work out for you.
If you are serious about not wanting to work, you need to find the FIRE movement, which means financial independence retire early.
That is a better term for not wanting to work anymore. When you want to quit the job and do something else in life, you have to do what is called FIRE.
5 Simple Steps To Quit the Job
To quit the job or the career path that you were in, you have to take steps ahead of time to make sure that your transition (financially) is as smooth as possible.
The biggest question is how can I make money if I don’t want to work ever.
You set aside money to take care of your obligations and bills while being able to live the life that you want to live. That means you have more types of income than just a paycheck.
These are the exact steps you need to take to quit the job. Obviously, it won’t happen overnight. But, you can see the light at the end of the tunnel.
1. Make an Exit Plan
First, you have to make a plan of how finances will work without a typical paycheck. You need to learn how to FI quickly.
In order to retire early or quit the job, you must be able to financially support yourself without a consistent income coming in from a regular paycheck.
Specifically, it means you need to find ways to make passive income. That could be in the stock market, real estate, small business, side hustle hobby, or driving for Uber. There are a variety of different ways to make money; it is just better to find ways to make money doing something you enjoy.
One of the things you will quickly realize is that to make money passively, you must have money on hand to invest. That is the “Catch 22” of why people get caught in the cycle of it being too difficult to change their financial position and just give up.
If you don’t like your job and you don’t want to work anymore, then you need the mindset that something is gonna change, you are gonna make it a reality.
It will be hard for a short period of time to save up the money necessary to build the steps to be able to quit working or FIRE, but you might be surprised how you can double $10k quickly when you put your mind to it.
Motivation is a great thing, especially given the right circumstances.
Related Answers:
2. Save Money
If you don’t want to work anymore, then you have to save money to cover your bills. Period.
There is no way to get around that situation.
Your friends and family are not going to pick up the slack just because you want to quit your job.
So, you have to find all of the possible ways to save money. A great place to start is with one of our money saving challenges.
Another great way to save more money is by changing your habits.
In order to “retire early,” you must save a majority of your income at an early age to gain the benefit of compounding early. If you are thinking, “Well shoot, I missed that bucket,” then don’t worry … now is better to start than waiting too long.
Things only look up from here!
3. Cut Expenses
You have to be able to live below your means.
If you’re not interested in your job or the career that you are currently in and you don’t want to work anymore, then you need to cut your expenses in order to save more money.
One of the wisest tricks of the FIRE community is becoming a thrifty person. You know when to spend money on quality items as well as you know when to save money on frivolous expenses.
4. Pick a date.
As with any smart financial goal, you need to put a deadline on when you want things to happen.
If you are not happy with your job and your depression isn’t worth it anymore, then you have to find a date to move on and do something else.
Obviously, you’ll need some of these FIRE calculators to learn how much you need to make your dream a reality.
that happen. Here are some of the best fire calculators that you can find, to learn, how much you need to quit your job.
5. Start Hustling
Let’s face it, 2020 changed the workplace as well as our priorities. Honestly, I think it was for the better. We all realize there is more to life than just the constant line of being busy.
In addition, many of us found the extra time that we can now put to work and start to make money.
It is easier to work when you have a target goal in mind of not working anymore. You must start saving money to put to work passively.
Below you will find ideas to help you search out the best serious ways to make more money. The last thing you want to do is learn what happens when you don’t save enough for retirement.
When You Don’t Want to Work Anymore
In this post, we answered the question of how can I make money if I don’t want to work.
The secret sauce is called passive income.
You must earn money on your investments. So, yes, now is a good time to invest in stocks.
There are many ways to make passive income; it could be in the swing trading the stock market, real estate, a business venture, a side hustle, or simply long-term investing.
Unless you are massively independently wealthy and part of the 1%, with millions of dollars that you do not know what to do with, then you will want to make some money on your nest egg that you create over time.
If you are saying, “I just want a life,” then stop waiting for the magic time for your retirement. You don’t have to wait until the retirement age of 65 years old.
You are in charge of your life and can make it happen… if you put your mind to it.
Source
Gallup. “What Is Employee Engagement and How Do You Improve It?” https://www.gallup.com/workplace/285674/improve-employee-engagement-workplace.aspx#:~:text=Based%20on%20over%2050%20years,in%20the%20%22engaged%22%20category. Accessed March 11, 2024.
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
Members of Generation X are more concerned about their post-retirement ability to support the lifestyles they’ve grown accustomed to when compared with other generations — including baby boomers and millennials — according to the results of a recent survey conducted by Allianz Life.
In the company’s 2024 Annual Retirement Study, respondents indicated that 62% of Gen Xers “feel confident about being able to financially support all the things they want to do in life,” compared with 82% of baby boomers and 77% of millennials. But more than half of Gen X respondents (55%) also said they “wish that they would have saved more money for retirement,” a feeling that is more severe among Hispanic (63%) and Black (56%) members of the cohort.
“Gen Xers are reaching crunch time for retirement planning. For Gen Xers, retirement is no longer this far off idea. That can feel stressful, but by preparing now, they can create a strategy that will help them seek their ideal retirement,” Kelly LaVigne, vice president of consumer insights at Allianz Life, said in the report. “The good news is that it is never too late to prepare for retirement. You can wish you started sooner, but you’ll never wish that you waited longer.”
The most common action that the cohort is taking toward their long-term financial goals is in paying down debt (64%), building up an emergency fund (58%) and aiming to make choices that result in a material credit-score improvement (55%).
But high costs are also keeping many Gen Xers from saving more for retirement. They say that “expenses for day-to-day necessities (61%), credit card debt (40%) and housing debt (39%)” are the key culprits keeping them from saving more.
“Saving more overall is foundational to retirement,” Lavigne added. “However, Gen X may need to take this a step further and remember that a retirement strategy isn’t just about one big final number in the bank. Once you retire, you are going to need to draw from those assets for income.
”A sound retirement income strategy will help use your assets efficiently and include contingencies for risks that can cause you to spend down savings faster than anticipated. You need to ensure the money lasts.”
Despite the difference a long-term plan can make, few Gen Xers employ one, the study found. Only 35% of Gen X respondents said they use the services of a financial professional, compared to 46% of millennials and more than half of baby boomers. But Gen Xers are also thinking more about retirement than they have before, the results found.
“Nearly two in three (63%) say one of their top three goals in the next five years is to save enough and make plans to live a comfortable retirement,” the report stated. “This increased from 56% in 2023. Gen Xers who are Asian/Asian Americans (68%) were more likely to say this than white (61%), Hispanic (61%), and Black/African American Gen X respondents (55%).”
Older members of Gen X are increasingly approaching retirement age. Most researchers agree that the generation begins around the mid-1960s, and those born in 1965 will turn 59 in 2024.
While most members of the cohort are too young to qualify for a Home Equity Conversion Mortgage (HECM) through the Federal Housing Administration (FHA), several leading reverse mortgage lenders offer proprietary reverse mortgages that allow the eligible borrowing age to be as young as 55 in some states.
In regards to your recent “When to Take Social Security” article, you left something out. You can take Social Security early (say, age 62), then invest that money, and your investment will end up better than if you had waited on Social Security until age 67 or age 70.
Interesting! But does the math work? Let’s dive in. Should you take Social Security early and invest it?
What Kind of “Returns” Do You Get For Waiting on Social Security?
Let’s start by looking at Social Security. What kind of “return on investment” do you receive by delaying your Social Security decision?
There’s no easy way to do this today without a spreadsheet, so we will use this Google Sheet to show you some math. (I keep the original file pristine so all readers see the same numbers, but you can go to File –> Make a Copy to create your own copy of the file to play around with.)
For starters, we need to understand how retirees’ benefits change as they age. Depending on their birth year, today’s retirees reach their “Full Retirement Age” (FRA) at 66 or 67 years old. Depending on the age at which they apply for Social Security, they’ll receive a certain percentage of their full benefits, described in the table below.
To make the math easy, we will assume our retiree’s Primary Insurance Amount (PIA)…aka the amount you receive if you wait until FRA…is $1000 per month. So “100%” on the table above equals $1000 per mont
The longer our retiree waits, the higher their monthly payments will be. But what does that look like as an “investment?” And how does inflation factor in?
What About Inflation?
The Social Security Administration adjusts everybody’s Social Security payments yearly to account for inflation. This “cost of living adjustment” is often shortened to “COLA.”
The average COLA adjustment since 1975 has been 3.66%. We need to include that in our spreadsheet too.
Baseline Analysis – No Investments Yet
Let’s start with a baseline analysis. We’ll examine a series of retirees who collect their Social Security monthly, and immediately spend it. They make no investments with their Social Security cash flow. We could conceptualize this as hiding those dollars underneath their mattresses.
We’ll compare results by looking at the total dollar amounts collected over time. This will be our baseline analysis. You can follow along on the spreadsheet tab labeled “No Investment Return (Yet) – Nominal Dollars Only”
The results: in this scenario, early collection only makes sense for a retiree who dies before age 74. This should make sense. We know that delaying Social Security makes more and more sense the longer someone lives.
Let’s add in investment returns.
Analysis 1: Investing in a 4.7% Savings Account
Let’s consider a retiree who takes all of their Social Security income and deposits it into a savings account bearing 4.7% annual interest.
Why 4.7%? That’s the average overnight Federal Funds rate since 1960, and modern-day high-yield savings accounts tend to offer interest rates that are closely correlated to the Fed Funds rate.
Note: if your personal pile of cash isn’t in a high-yield savings account, you should ask yourself why that is…
The results: if you pass away at age 77 or earlier, collecting earlier makes sense. Otherwise, waiting until FRA or later likely makes sense. This is no different than “traditional” Social Security advice.
Analysis 2: Investing in a “Standard” 60/40 Portfolio
What if our retirees put their money in a tried-and-true 60/40 portfolio?
From 1950 until today, that kind of diversified 60/40 portfolio has returned an average of 9.3% per year.
The results: Whoa! As shown on the “A2” tab, collecting as early as possible makes sense for anyone who would pass away before age 88.
We know, on average, most 62 years olds are going to pass away well before age 88. The smart, probabilistic thing to do then, is collect Social Security as early as possible and invest it in something like a 60/40 portfolio (or, something with greater returns).
But wait…because I’ve only showed you half the story. And that’s a major problem.
Big Problem: What’s the Risk?
If we zoom out on reader DT’s idea as originally stated, we should confidently conclude: OF COURSE it makes sense! If you have sufficiently high investment returns, you should always start as early as possible.
Even if the benefit of delaying Social Security was 20% per year, but I had an investment that paid me 40% per year, I’d rather start collecting as soon as possible and get the money invested. Given sufficiently high returns, you always want to get the compound growth started.
But we must return, once again, to a foundational pillar of investing and oft-repeated maxim of The Best Interest: Risk and return are intrinsically connected.Returns are not “free.” They are compensation for taking on investment risk.
Whenever an investor compares returns alone, without also comparing the risks involved, they’re making an incomplete analysis. DT’s original question only considers return. It doesn’t consider risk.
What Comparison Makes Sense?
The benefits of delaying Social Security are guaranteed by the U.S. government. That’s very low risk. What kind of investment risk should we compare that to?
I see two viable options.
First, why does Warren Buffett invest all of Berkshire Hathaway’s extra cash into U.S. Treasuries, instead of an S&P 500 index fund? Doesn’t he know the S&P 500 has much better long-term returns?!
Answer: U.S. Treasuries are as risk-free as anything in the investing universe, backed by the full faith and credit of the U.S. government. As long as Uncle Sam pays debts, U.S. treasuries are risk-free. The S&P 500 is far from risk-free, and Buffett knows it. He wants his cash to be safe and ready for deployment at a moment’s notice. The S&P 500 cannot fulfill that need.
The first logical comparison today, then, is to use a true “risk-free” rate as our investment return. Something like a high-yield bank account (FDIC insured) or short-term U.S. Treasury is appropriate. Conveniently, we already did that in Analysis #1, where our conclusion is no different than traditional Social Security advice: the “break even” point occurs in the late 70s.
Note: this is reason for the concept of “risk-adjusted returns.”To compare only the returns of two investments is not an apples-to-apples comparison.
The second option is to show the downsides of Analysis #2. That is, to show how 9.3% per year from a 60/40 portfolio is far from a guarantee. More specifically, I’d like to show how the downside risk of a 60/40 portfolio could turn our result on its head. What happens if we suffer some bad markets during our early Social Security period?
Looking at historical returns, a 60/40 portfolio has had 10-year periods with returns below 2% per year. What if we started our Social Security timeline with that kind of low return, and then made up for it at the end of the analysis? That’s what I show on our spreadsheet on the A3 tab.
The results? The 60/40 “solution” comes with risks! In this scenario, “taking Social Security early and investing it” only worked out if our retiree died before age 75. That’s not a good outcome. Doubly so if Social Security is a safety net or backstop in your financial plan.
To Apply or Not Apply
If your Social Security is “play money” in your financial plan, and you’re ok with risking a loss, then I can see the merit and appeal of DT’s proposal. You can apply for Social Security early, invest it (reasonably), and the odds are in your favor that you’ll end up in a good spot.
But it’s no guarantee.
And the entire point of the Social Security system is to provide a guaranteed benefit to retirees. If Social Security plays even a minor role in your financial plan, I would strongly discourage putting that money at investment risk to eek out extra returns.
When we make a level comparison by using a risk-free rate, like in Analysis #1, we see there is no net benefit to taking Social Security early to invest it.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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Inside: In this guide, I reviewed all of the budget apps and compared features and costs to form the best budgeting apps list. Find the best budgeting apps to fit your needs.
The best way to become smart with your money is to actively manage your money.
Make a plan for your money. Some may call it a budget.
At Money Bliss, we like to call it a Cents Plan. This enables you to find financial freedom. Find that place Where Cents Parallel Vision. Today, there are many budgeting apps on the market.
To kick off the new year, I was determined to find the best budgeting app on the market. Guess what?
My list grew each week!! And still growing! There are so many choices.
There are money management apps. Personal finance apps. Budgeting apps. So many apps to choose from! Seriously.
Some are free budgeting apps. Others have a monthly fee. Some have one-time costs.
The key to any budgeting app (free or paid) is to learn to manage your money.
At the very bottom of the post, we will reveal the best budgeting apps available.
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.
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Start Your Free Trial.
What is a Budgeting App?
A budgeting app is a tool that helps you manage your money and keep track of how much you spend.
There are many different types of apps, and some may be free while others cost money.
However, they all make managing your finances easy by tracking where your money goes each month as well as providing tools for saving cash flow or spending more efficiently on things like groceries or travel expenses.
The end purpose of a budgeting app is to make managing your money easy.
There are many apps out there that can help you with this, including some from big brand names like Mint which just announced it is shutting down, Acorns, and Quicken. This guide will provide a list of the best budgeting apps for 2024 so you can save time and money!
Quick Answer
The preferred budget apps are YNAB, Empower, and Quicken.
What to Look for in Budgeting Apps
In order to find the best budgeting apps, you need to know what features and functions you are looking for.
The best budgeting apps are often the simplest and focus on ways to make saving a breeze.
They can help ease financial uncertainty by providing tools that allow users to save more money over time.
What’s more, how can you tell what to look for in a good budgeting app?
1. Ease of use
The best budgeting apps are easy to use and do not require manual entry. Different ways of creating a budget include handwriting it out, using a spreadsheet, or logging into an app or software program.
You want to find something that is easy for you to use. Even better, if you find the app fun to use!
2. Budgeting Capabilities
There are many types of budgeting apps; thus, each person will have budget apps they prefer over others. At the end of the day, you need something that will work for you over the long term.
Some have basic features that simply allow users to view their own spending, while others provide a number of tools for managing finances and saving money. Users should choose an app based on what they want as well as the capabilities it offers.
Many budget apps let you define your categories to track.
3. Saves Time
When you have an automatic budgeting app, it tracks how money moves in and out of your bank account automatically with ease. In addition to this, the updating process takes place automatically as well which saves more time for individuals who need it most!
Saving time with the least favorite tasks like budgeting is a win-win!
You want your budgeting app that makes managing your money a breeze.
4. Focus on Financial Goals
You need a budget app that helps you work towards your smart financial goals. This is important.
You want your budgeting app to help you with achieving your financial goals.
5. Synchronization
Synchronization is the process of returning data to a master database from one or more secondary databases. You want the budget app to synchronize accounts automatically.
Most offer automatic synchronization but may lack a feature that allows for a reconciliation of accounts such as bank accounts.
Many budgeting apps can synchronize from desktop to mobile. In addition, you can have multiple users on the same platform.
6. Price
Budgeting apps range in price from free to about $150 per year.
The app that has the most features and options is Quicken, especially given its price point.
Spending $5 a month to manage your finances is cheaper than overdraft fees and the lack of saving money.
7. App ratings
Many financial experts and personal finance gurus agree that a budget is necessary to take control of your money.
Look for budgeting apps that have at least 1,000 reviews in both the App Store (for iOS) and on Google Play (for Android), as well as a rating of 4 stars (out of 5) or higher on both platforms.
That will tell you the longevity of the app and user appeal.
8. Security
Specifically, are budgeting apps secure? Are there any security features in place to protect your data? This is a huge feature you need to verify your personal information will be intact.
On my budgeting apps, financial information is safe because they need to go through vigorous testing and pass banking regulations. There are certain vulnerabilities inherent to operating online in the cloud.
9. Additional Features
Most budgeting apps go beyond basic budgeting. Some offer advice on debt and investments, while others identify unnecessary expenses.
Most apps can track your spending and organize your expenses into categories.
The savings apps will automate savings, suggestions to save money, bill alerts, access to credit scores, and investing features.
All of the apps have a different feature set, so it’s important to find what you’re looking for.
Good Budgeting Apps will Help, But First – You Must
Before we dig into the list of good budgeting apps, we must discuss key points first.
In order to be successful, with any type of budget app, you must understand three key areas.
1. Uncover your Money Situation
You can’t hide under the sheets or with your head in the sand and expect changes.
To be successful with money, you must be active with your personal finance situation.
Take time to understand your vision. Figure out where you stand in building a foundation to the Money Bliss Steps to Financial Freedom. Understand where the pits of money are spent every month.
Not sure, where to start? Stick around here at Money Bliss; we have many resources to help you!
Must Read Help:
2. Budgeting Apps Won’t Change Habits
While personal finance or money management apps keep you on track, they are incapable of changing habits.
You have to make changes.
Just because the budget app tracks your usage on the credit card doesn’t mean that you should have spent that money. So, be willing to make changes in your spending habits and those emotional purchases to achieve financial freedom.
You must learn to manage your money.
Related Readings:
3. Still Need Paper & Pen
The first thought is “Wait, I wanted to get away from paper and pen.” Yes, that is the goal for most individuals.
However, it is key to know your net worth over time.
Also, you never know when your favorite budget app will go away. (Ugh!) Personally, I don’t like to be pessimistic, but technology is rapidly changing, and being able to adapt is key.
Keep tracking your personal finance numbers toward financial freedom in a separate place.
Okay without further ado, the full list of budgeting apps on the market.
YNAB
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Pros:
Comprehensive approach to budgeting, helping you plan monthly budgets based on your income.
Offers expert advice, making it suitable for those who require an in-depth, forward-thinking budgeting strategy.
Superior synchronization skills make it the winner in this area.
YNAB has extra features like goal setting for budgeting, shared budgeting tools for partners.
Option to manually add and upload transactions from accounts each month.
YNAB prioritizes user privacy.
Start 34 Day Free Trial
Full List of Budgeting Apps with Free Trial
The budget apps we selected for this section offer a free trial for users to test out before signing up.
Budget apps are typically inexpensive and start with a free trial.
1. YNAB (You Need a Budget) – A proven method that has helped hundreds of thousands of people break the paycheck to paycheck cycle, get out of debt, and live the life they want to live. YNAB is best for serious budgeters.
2. Simplifi – Manage your money less in 5 minutes each week. Reach your money goals with confidence! Introducing Simplifi by Quicken, the personal finance app that gives you something to look forward to.
3. Tiller Money – Your financial life is in a spreadsheet, automatically updated each day. Track all your accounts in one place, always know where your money goes, and confidently plan your financial future.
4. Rocket Money – Rocket Money is your automated financial assistant and budget tracker designed to put you back in control of your money. Truebill lets you easily track bills, cancel unwanted subscriptions, and proactively request refunds on your behalf, putting real money back in your pocket!
5. Qube Money – The cash envelope system made easy. They invented digital cash envelopes. Real-time financial awareness without the hassle of tracking expenses, updating spreadsheets, and carrying cash.
6. HoneyMoney– HoneyMoney increases your awareness about your money habits. Being fully aware of your money naturally changes how you spend it. Great way to use cash flow budgeting. Plus uses “envelopes” to budget.
7. Qapital – Free, easy way to save money. Get $5 for your first Goal if you sign up here.
8.Money Patrol – MoneyPatrol actively monitors and analyzes financial transactions, and then alerts insights about the trends, patterns, and anomalies observed.
9. Wallet– Wallet is designed to help you get your finances under control from day one, giving you ongoing insight into your financial situation, and helping you stay in control for the long term.
10. Every Dollar– EveryDollar follows the zero-based budget approach recommended by Dave Ramsey, a top personal money-management expert. Create daily and monthly budgets and track your expenses to manage and save money.
11. Expensify – Expensify is the perfect tool for anyone who needs to keep track of receipts and automate expense management.
12. Cost Track – Expense Tracker – Cost Track allows you to: use your money wisely, keep track of your personal and family budget, and quickly enter your income and expenses.
13. Easy Spending – It is a simple and convenient finance tracker that provides the most powerful and convenient daily money management for iPhone and iPad, that neatly tracks all your cash flow between different accounts that you can budget.
Making Your Budget Work for You:
Full List of Free Budgeting Apps
The budget apps we selected for this ranking are completely free! Free budget apps are good options for users who don’t want to pay monthly or a yearly fee. Just to note, the list of free apps is dwindling with each update.
Finding the best budgeting app the best ones do simple things well.
Free apps are not always better than paid ones.
Typically, the free versions of budget apps provide basic features. Plus there are many free budget apps available on the market.
1. Empower– Empower is the best app for investors. This is one of my favorite ways to analyze investment accounts. See all of your accounts in one place, which helps to see spending. Free budgeting app to use. Read myEmpower Review.
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.
2. PocketSmith – Manage your budget and forecast your finances. There are paid levels of access but you can still get basic options for the casual budgeter.
3. Zeta – AskZeta is a financial planning platform designed to help couples manage their finances collaboratively. It provides tools and guidance for setting joint financial goals, budgeting, and navigating major life events to build a secure financial future together.
4. Honeydue – A financial app designed for couples, facilitating shared money management. It allows partners to track and manage their finances collaboratively, providing insights into spending, budgeting and shared financial goals.
5. GoodBudget – Envelope budgeting for the modern world.
6.Fudget – The budget planner you can actually use.
7. Wally – Personal Finance – It helps you compare your income to your expenses, understand where your money goes and set and achieve goals.
9. CountAbout – CountAbout is an online personal finance solution that surpasses the security and ease of use of the other popular commercial solutions on the market while offering complete privacy, zero advertising, and no selling of your personal data.
10. Daily Budget Original – Daily Budget calculation, planning & saving for big spending, basic categories for expenses, backup.
11. Spending Tracker – The simple fact is, by tracking your spending you will be able to stick to a budget and therefore SAVE MONEY.
12. Money Monitor – You can track and organize all your transactions, accounts, budgets, bills, cash flow, and payees in Money Monitor by easy operation but with powerful functions.
13. Money Box – Set your money goals and track your personal savings with this app. Take control of your saving goals and spend cash wisely.
14. Dollarbird– Track and forecast your money as easily as adding events to a calendar! Dollarbird helps you make sense of your financial situation, plan ahead and manage your money together with those who matter.
15. NerdWallet – Whether you want to maximize credit card rewards, earn extra cashback, track your credit score or make budgeting easier, it’s all here.
Budgeting Resources:
16. Buddy – Designed for simplicity and efficiency, helping users easily manage their finances. With intuitive features, it enables users to track expenses, set budget goals, and gain insights into their spending habits for better financial management.
17. Banktivity – Banktivity puts you in the driver’s seat of your finances so you can do both.
18. PocketGuard – With all of your financial accounts in one place, PocketGuard helps you stay on top of your finance and make better financial decisions.
19. Budget Saved – Personal Finance – Budget Saved helps you save money by grouping expenses based on need or want. You input an expense, save it as a need or want, and then you can look back to see which purchases were really necessary. With this information, you can see exactly how much you can save.
20. Albert – Money Management – Combining human guidance with cutting-edge technology, Albert is an intuitive app that automates your financial life — so you can be free to enjoy it. Build savings, meet bills, end the overspending cycle and develop your financial IQ, right from the palm of your hand.
21. Expense IQ – Expense IQ (formerly EasyMoney) is your ultimate money manager app that combines an expense tracker, a budget planner, a checkbook register, integrated bills reminder, and more rolled into one powerful personal finance app!
22. Prism– Never miss a bill or pay late fees again! We automatically track your bills & send due date reminders, for free. See your income, account balances, & monthly expenses at a glance.
23. Coin Keeper– Download CoinKeeper — the handiest way to plan and manage your finances, created especially for smartphones and tablets.
24. Mobills– Mobills is a budget planning app that allows you to create a custom monthly budget that will help you take control of your money. You are able to manage your money, track your spending, and achieve your financial goals all in one place.
25. iSpending – iSpending helps you to track your income and spending. You can add transactions under different categories, such as income, food, and entertainment.
26. Receipt Box – The Receipt Box is a quick app that is conducive to developing a good habit of tracking spending. It indeed performs well on this one.
27. BUDGT – BUDGT will help you keep track of your Expenses in a very simple way and tell you how much money you can spend each day, taking in account what you have already spent during the current month.
Full List of Paid Budgeting Apps
A budgeting app is a type of software that helps you track your money to manage your finances. There are several different ways you can use them, including getting paid upfront or by monthly fee.
Some apps offer discounts for people who pay monthly, but this is not always the case. If an app doesn’t have the capabilities you need to better manage your budget, it’s not worth it.
App users want budget capabilities and prefer to handle bill paying on their own schedules.
1. Quicken– Quicken personal finance and money management software allows you to manage spending, create monthly budgets, track investments, retirement and more. Read my Quicken Review.
2. Moneyspire – The budget feature is very user friendly and can rollover amounts. All of the reports you need at your fingertips. Also, you can move your data from many of the top budgeting apps and Quicken.
3. PocketSmith – Manage your budget and forecast your finances.
4. MoneyDance – Moneydance is easy to use personal finance software that is loaded with all the features you need: online banking and bill payment, account management, budgeting and investment tracking.
5. CheckBook Pro – An easy & quick way to manage your daily finances, Checkbook Pro keeps track of your credit card charges, cash expenditures…etc.
6. HomeBudget – HomeBudget is an integrated expense tracker designed to help you track your expenses, income, bills due and account balances. It offers support for budgeting and allows analysis of your expenses and income, including charts and graphs.
7. Pennies – Keep track of your spending and save money with Pennies, the award-winning budgeting app for iPhone, iPad and Watch.
Enjoy guilt-free spending and effortless saving with a friendly, flexible method for managing your finances.
Start Your Free Trial.
Budgeting Apps Off the Cloud:
Due to security concerns, many budgeters prefer to keep their financial information off the cloud.
Here are the best budgeting software that are off the cloud. And if you want, they can be synced.
1. Quicken– Personally, I have used Quicken – pretty much since it was developed. Way before budgeting apps were even a thing and the cloud didn’t exist. Quicken is great for tracking how your money is being spent. Their internal budget feature is not user-friendly and has quirks. However, the cash flow reports are awesome to compare spending. The #1 reason I still recommend Quicken is because of its long history.
Read my Quicken Review.
2. Moneyspire – For those frustrated with Quicken, Moneyspire is your choice. The budget feature is very user-friendly and can rollover amounts. All of the reports you need are at your fingertips. Also, you can move your data from many of the top budgeting apps and Quicken. Start a free trial here.
3. Tiller Money – Tiller is the only tool that automatically updates Google Sheets and Microsoft Excel with your spending, transactions, and balances each day.
4. Banktivity – Get full control of your personal finance situation with Banktivity. Has all the bells and whistles you would come to expect for personal finance budgeting software. There is the ability to connect to the cloud if you prefer. Only for Mac Users.
5. MoneyDance – Moneydance is easy-to-use personal finance software that is loaded with all the features you need: online banking and bill payment, account management, budgeting, and investment tracking.
6. QuickBooks – QuickBooks is most like Quicken. It is the preferred software for most bookkeepers. The features are very helpful, but the price is significantly higher.
Expense-tracking budgeting apps
Expense-tracking budgeting apps are becoming more popular as they allow users to connect to financial accounts. They track transactions and group them into categories, making the best ones based on expense tracking systems.
Some of the top expense tracking budgeting apps include:
Simplifi: Quicken has introduced a new personal finance management solution. It is simple, smart, and intuitive money tracker tool that ensures users can keep track of their income and expenses in real-time.
YNAB (You Need A Budget): YNAB helps to reverse this pattern by living off last month’s income during current month.
Pocket Expense: This app is easy to use and has a clear interface for users who are not tech savvy. With Pocket Expense, you can input your income and expenses, set a budget, and track your progress.
Spendee – Understand your finances better with Spendee, the FREE budgeting app that tracks your spending, optimizes your budget, and helps you save money. This user-friendly app with good features for recording income and expenses as well as the ability to plan future budgets. It also lets you set goals and track progress.
Quicken: Quicken is a personal finance software application that can be installed on Windows, Mac or Linux computers and allows users to organize financial information in order for them to make financial decisions.
Learn where to load your Cash App card.
Investment/retirement planning budgeting apps
Investment/retirement planning budgeting apps are becoming more popular with consumers as the retirement age is being pushed back.
These types of apps allow users to keep track of their investments and review performance, ensuring that they’re on track to retire at the desired time.
There are numbeous different investment portfolio management tools, but most are designed for average investors looking to make changes or work towards long-term goals. Many double as budgeting apps also enable tracking expenses alongside investments in order to ensure that you’re on track to reach your goal.
Empower – read my Empower Review
Quicken
Betterment
Wealthfront
Stash
Apps to Help Save Extra Money:
Looking for easy ways to save extra money?? These budgeting apps will do just that.
1. Acorns: Invest Spare Change: This app rounds up any purchase made with a credit card to the nearest dollar and invests it in an exchange traded fund. They have four different investment portfolios from conservative, balanced, growth, and aggressive.
2. Tiller: This app automatically transfers money from any account you connect to it (like your checking or savings) into a fund of your choice every time you make a transaction.
3. Trim – Trim negotiates your cable, internet, phone and medical bills, finds and cancels unwanted subscriptions, can help you lower APRs and bank fees and more.
4. BillShark – Billshark is the easiest way to lower your bills, cancel unwanted subscriptions, and lock in the best rates for insurance.
Which Budgeting App is right for You?
Budgeting apps are becoming more popular as consumers try to make better financial planning decisions.
Budgeting apps help people with the ability to track spending, create budgets, and save money for retirement or other goals.
Budgeting apps must be paid for because they can be used across all devices and have a variety of features that can really help users save time and money.
As you can tell in this post, there are plenty of options to find your favorite budget apps.
Each of these apps can improve money management.
However, you must be able to make the changes necessary to stay within your means. That is up to you. Don’t try it and give up after a month. Stick with it. Show perseverance.
In the end, you will be happy you are stuck with using a good budgeting app.
Apps That Have Shut Down or Changed
These are budgeting app that have been on our list previously. But, when we recently updated the post, realized they are no longer offering the same services.
Mint: Personal Finance & Money – Mint is a free money management and financial tracker app that helps you get ahead and stay ahead. – Mint app shut down in 2024.
Firstly (formerly Honeyfi: Couples Finances) – The first app to help couples team up on everyday and long-term finances.
Opurtun (formerly Digit) – Digit analyzes your spending and automatically saves the perfect amount every day, so you don’t have to think about it.
mvelopes (merged with EveryDollar) – Everyone knows that cash will keep you on budget. Here is a digital option for your cash envelopes. Your first month free is to check out the budgeting system.
Olivia– Whether you identify as someone who is living paycheck to paycheck, or you’d just like to get smarter with your money in general, you’ve come to the right place! I am here to help YOU become the MASTER of your money.
Your Money Wallet – YourMoneyWallet lets you see all your accounts in one place, understand your spending, monitor your everyday spending, and see all your money transactions in a beautiful well crafted design.free
Joy – Money App– Joy is the brand new money app that will change the way you spend and save money to help you find more happiness in your life.
Advent – Budgeting Made Simple – Advent makes budgeting and tracking expenses super easy! With a very minimalistic design, you can easily maneuver around quickly.
Rolling Budget– Rolling Budget is a personal finance tracker that keeps track of your day-to-day expenses, travel, and fuel costs. Track where your money goes, plan your expenses, and create a budget that works for you!
Best Budgeting Apps
There are many apps available to help people manage their budgets.
The best app for you will depend on the type of budget you want to create and how often you want to make changes. All of these apps are mobile-friendly and work across multiple devices. They also offer additional features like budgeting tasks, reminders, and spending plans.
You can find all of these for iPhone or Android.
You can save time and money by using a good budgeting app.
This is your personal finance journey.
The ultimate goal with any budget app is to learn to manage your money. Not have your money manage you.
Now, make sure you are doing these habits to be successful with budgeting.
Which are your favorite budgeting apps?
Keep on Budgeting:
Know someone else that needs this, too? Then, please share!!
Did the post resonate with you?
More importantly, did I answer the questions you have about this topic? Let me know in the comments if I can help in some other way!
Your comments are not just welcomed; they’re an integral part of our community. Let’s continue the conversation and explore how these ideas align with your journey towards Money Bliss.
Thanks to reader Lynn, who wrote in this week with some specifics about her household’s situation and an overarching question: When should we start taking Social Security?
I’ll provide background information below, and then we’ll discuss a few common “if –> then” heuristics to help you with your Social Security planning.
Background – The Pros and Cons of Taking Social Security Early
Social Security is a government program that provides financial support to individuals who are retired, disabled, or survivors of deceased workers, funded primarily through payroll taxes. It aims to ensure economic stability and security for eligible participants by offering benefits to mitigate income loss due to retirement, disability, or death.
Today, we’re talking about retirees.
American retirees each have an “eligible benefit” from Social Security, which is based on the following factors.
They must be 62 years old or older
They’ve worked and paid into Social Security for at least 10 years (measured quarterly, for a total of 40 or more quarterly credits)
They could be eligible for additional credits based on their spouse’s work history, too.
Your eligible benefit is determined by your highest 35 years of earnings, with each year’s earnings adjusted for inflation (aka “indexed”). The higher your overall earnings, the greater your Social Security benefit will be.
Quick Example: AIME and PIA
Here’s a quick example:
Bob worked the same job from age 22 to age 62. His salary in 1984 was $25,000, and he’s received a 4% raise every year since; he’s earning $120,000 now in 2024 (his final working year).
We’d use the Social Security indexing factors to adjust each of his prior years’ earnings by rates of inflation. We’d then pick the highest 35 years, find the average, and divide by 12 to get Bob’s average indexed monthly earnings, or AIME.
Bob’s AIME is $8717. Here’s the Google sheet with the math. Feel free to make a copy.
Note 1: because only a certain percentage of income is subject to Social Security taxes, only that portion of earnings is considered for AIME. In 2024, the FICA income limit is $168,800. Even if someone earned millions every year for their entire career, their AIME would only include that smaller portion of income that was taxed by FICA. That logic is why the maximum AIME in 2024 is ~$13,100.
Note 2: if you don’t work a full 35 years, you’ll have some “zeroes” in your AIME math. This isn’t ideal. But depending on the rest of your work history, these zeroes could have a major effect or a minor effect. The PIA section below will shed more light.
Next comes PIA, or the Primary Insurance Amounts, aka what you actually receive from Social Security if you retire at “full retirement age,” or FRA. PIA is the real deal. An individual’s Social Security benefits (or PIA) are based on specific percentages of that individual’s AIME. For 2024, the PIA math is:
Take 90% of AIME below $1174
Plus 32% of AIME between $1174 and $7078
Plus 15% of AIME above $7078
If we run that math for Bob, whose AIME was $8717…
90% of his first $1174 = $1056.60
plus 32% of ($7078 – $1174) = $1889.28
plus 15% of ($8717 – $7078) = $245.85
For a grand total PIA of $3191.73per month.
You see – not all your AIME dollars count the same! The first dollars matter a lot – they’re counted at 90%! The latter dollars are only counted at 15%. And since high-earners’ latter dollars aren’t factored into AIME at all, we can think of those dollars as being counted at 0%. This concept is dubbed the “Social Security bends” or “bend points” because of how it looks when graphed out.
If you have a “zero year” in your 35 years of earnings, your AIME will certainly decrease. But if you’re already in the 0% or 15% section of the PIA graph, it might have only a tiny effect on your PIA. It’ll have a huge effect if you’re in the 90% section.
Bob had his final ~$1700 of AIME in the 15% section of the PIA graph. I ran a quick test and turned his 35th year into a zero. His AIME dropped from $8717 to $8487 – a $230 drop. His PIA dropped from $3192 per month to $3157 – a $35 drop. $35, you might guess, is 15% of $230.
PIA is Bob’s benefit if collects at “full retirement age.” But what if he collects early?
What About the Age You Start Collecting?
Social Security uses a concept called “full retirement age” (FRA) to determine how much of your eligible benefit you get to collect. Your personal FRA depends on the year you were born. The chart below shows the details:
FRA is either 66 or 67 years old for today’s new retirees. You can start collecting Social Security benefits before your FRA, but there’s a price to pay. Your benefits will be permanently reduced. But by postponing your benefits until after your FRA, your benefits will be permanently increased. The two charts below show both sides of that coin for both age 67 FRA retirees and age 66 FRA retirees.
Let’s do a quick decoder to make sure you understand how this all fits together.
If Bob was born in 1962 (and therefore is 62 years old today), he could start collecting Social Security right now. His FRA (based on his birth year) is 67, so we’ll consult the blue section of the table above. By collecting at age 62, Bob will only receive 70% of his full benefit. His PIA was $3192 per month; Bob would only collect 70% of that, or $2234 per month.
If Bob waits to collect, a few things will happen.
First, the AIME math and the PIA bends will likely change to account for inflation and other factors. On net, this will increase Bob’s PIA.
Second, Bob’s postponed filing age will increase his benefit amount, per the blue table above. If Bob waits until age 70, he’ll receive 124% of his PIA.
This begs a question: should Bob collect early to get those extra years of income, though at a discounted benefit? Or collect later, for fewer years, but at a much higher rate? When is the breakeven point?
The Breakeven Point for Collecting Social Security
When is the breakeven point for collecting Social Security? I looked at retirees with FRA = 67 years old. Here’s my Google sheet if you want to play around with it yourself.
With the bare eye, you can see the breakevens occur in the upper 70s. The joke in financial planning is, “Tell me when you’ll die, and I’ll tell you when to start collecting Social Security.” But the rough outline is:
If you die before age 77, collecting as early as possible would have been best.
If you die between ages 78-80, then all scenarios are roughly equal (all within ~6% of one another)
If you die after age 80, then waiting until at least “full retirement age” of 67 has distinct advantages
If you die after age 84, then waiting until the maximum collection age of 70 becomes optimal, and it only gets better the longer you live.
But there’s much more to consider than “how long will you live?”
So let’s get to the real meat of the article: what are some applicable thought processes, strategies, and if –> then scenarios to guide you and your family in Social Security decisions?
This is Hard to Get Right
As Annie Duke says (and I love to repeat), two things determine outcomes in our life:
the quality of our decisions, and
luck.
Or, put another way, there are things in your control and things out of your control.
Whatever decision you make regarding Social Security, you must accept that luck might strike, and your decision won’t have been the optimum one. It’s not because of the quality of your decisions. It’s because of luck. (This is “results-oriented thinking,” a bias worth breaking.)
You Want to Get This Right
This is close to a one-way gate.
Once you start collecting Social Security, you do have up to 12 months to 1) change your mind and 2) repay any benefits you’ve received so far. You get one of these “withdrawals” in your lifetime.
Once you delay collecting, though, you can’t go back in time and reclaim those missed benefits.
Ideally, you want to get this decision right.
Health, Illness, Family History, and Social Security
The most common questions surrounding Social Security revolve around your personal health and family history. We’ve determined that ages in the late 70s to early 80s are the “break even” point. You should ask: does anything in your personal or family history point you toward an early or late death?
If you’re healthy and all your relatives live to 100, it’s reasonable to assume you could have a similar fate. Postponing Social Security as long as possible (age 70) makes sense.
If you’re chronically ill, your relatives have all passed away early, etc., again, you can reasonably assume you could have a similar fate. Collecting Social Security as early as possible would make sense.
Granted, I’m not a doctor. One health phrase worth remembering is, “Genetics loads the gun, environment pulls the trigger.” In other words, you aren’t condemned to your family history. You have dials to control. Don’t forget that.
Do You Need It? It’s Longevity Insurance.
Do you need to take Social Security early? Will that extra income bridge the gap between cat food and a normal human diet? Because if you don’t need Social Security, why take it early?
Delaying your Social Security will act as “longevity insurance,” protecting against the risk that you will live to 90, 95, or beyond. The longer you wait, the higher your benefit will be, and the better your long-term outcomes will be.
Are You Still Planning to Work?
Are you planning to work while also collecting Social Security? Tread carefully! Your work income will actively eat away at your Social Security benefits.
Bob, for example, who is age 62, can only earn $22,320 in ordinary income before he hits trouble. For every $2.00 he earns above that limit, $1.00 will be deducted from his annual Social Security benefit. If Bob earns $125,000 (like he did last year) while also collecting Social Security at age 62, he effectively receives $0.00 in Social Security benefits while being permanently hamstrung by his choice to collect early. Ouch.
“He collects no Social Security because of this one stupid trick.”
That specific income limit increases to $59,520 during the year someone reaches their FRA, and the penalty ratio “lessens” to 3-to-1. The penalty disappears altogether once the FRA has been reached.
There’s always a corner case, so making a concrete rule about working while collecting is hard. That said, it’s like going into credit card debt. You really want to avoid it if you can. You really want to avoid starting Social Security benefits before full retirement age if you plan on working.
Consider Spousal Benefits
Spousal benefits are one of the many rabbit holes in Social Security planning. There are many paths, they go deep, and it’s easy to get lost. Trust me, Alice.
The upshot for basic Social Security planning is that your decision to collect Social Security not only affects you, but could affect your current spouse, your ex-spouse, and/or your future spouse or future widow.
Remember Bob? His PIA is $3192 per month. Bob is married to Sharon. Her PIA is $1200 per month. Let’s say they both opt to start collecting at FRA, and thus collect exactly 100% of their PIA each.
Sharon also gets to collect a spousal benefit. If she applies for a spousal benefit when she hits her FRA, she is eligible for 50% of Bob’s PIA (or $1596 per month). She’ll collect her $1200 benefit and then an additional $396 per month.
But if Sharon had applied for the spousal benefit at age 62, she’d only be eligible for ~35% of Bob’s PIA, or $1117 per month. Since this number is lower than her own benefit of $1200, Sharon will get no extra spousal benefit.
Now, what if Bob dies?
Notably, Sharon would step into Bob’s benefit, receiving the full $3192 per month!
If Bob had started collecting at age 62, though, his benefit would have been $2234 per month. Sharon would step into that $2234 per month benefit when he died.
If Bob had started collecting at age 70, his benefit would be $3958 per month. Sharon would step into that $3958 per month benefit when he died.
Bob’s decision doesn’t only affect his benefits. It also affects Sharon, assuming she outlives him.
Some rules of thumb when it comes to spousal benefits:
The lesser-earning spouse can start collecting Social Security as early as possible, especially if they’ll become eligible for a larger spousal benefit at FRA (e.g. just like Sharon, who jumped from her own benefit up to the spousal benefit of $1596)
The higher-earning spouse should delay Social Security to age 70 because their decision not only has a 100% chance of affecting their own benefit but also has a ~50% chance of affecting their spouse’s eventual benefit (if we assume the “who dies first?” question is a coin flip).
What About the Overall Financial Plan, and Sequence of Returns Risk?
How does Social Security fit into your total financial plan? Especially in the early years of retirement, where you’re most at risk for a sequence of returns disaster?
“Sequence of returns risk” refers to the potential that a poor-performing portfolio early in your retirement will cascade into long-term pain. If your assets are worth less early on, you’ll be forced to sell more of them than you anticipated. This leaves fewer assets in your portfolio to grow for the long run.
One way to mitigate this risk is to find alternate sources of retirement income. Social Security, perhaps?! If early Social Security is a vital part of your overall plan’s success, the failure risk introduced from delaying Social Security could be too great to bear.
Taxability Concerns
Social Security is taxable (for many retirees). It’s worth considering if your decision to collect Social Security will have taxation impacts and what your net-of-tax benefits are.
What Do Your Trusted Advisors Have to Say?
While every retirement is a unique adventure, these adventures often rhyme. Your trusted advisor(s) might have seen dozens or hundreds of successful retirements before, all of which rhyme with your plan.
Their counsel might sway you in an optimal direction.
“I’m Ready Uncle Sam!”
Are you ready for Social Security? It’s not an easy question to answer.
Hopefully, I’ve answered more questions today than created new ones. Still, don’t hesitate to reach out with any questions or concerns.
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-Jesse
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When you open an individual retirement account (IRA) or 401(k), you can generally choose from a variety of different types of investments, such as stocks, bonds, options, real estate, and more. You may also be able to put some of the money in a money market account, where it will typically earn a higher annual percentage yield (APY) than in a traditional savings account yet still remain liquid.
While you might choose to keep most of your retirement savings in potentially higher-return investments, it may make sense to keep some of your retirement funds in a money market account, since it is a relatively low-risk place to store cash. Even if the return may be lower than other investments, it’s predictable.
Another reason to have some of your retirement money in a money market account is to serve as a holding place as you sell investments or transfer money between investments.
Unlike a regular money market account, a money market account that is offered as a component of a retirement account is subject to the benefits and restrictions of those accounts. Here’s what else you need to know about retirement accounts that offer a money market component.
What Is a Money Market Account That Can Be Used for Retirement?
While there is no such thing as a “retirement money market account,” some retirement accounts allow you to keep some of your money in a money market within the account. The money market account (MMA) could be within a traditional, rollover, or Roth IRA, a 401(k), or other retirement account, which means those funds are governed by the rules of that account.
If the MMA is a component of a traditional IRA, that means you can contribute pre-tax dollars (up to certain limits), your money can grow tax deferred, and you won’t be able to withdraw funds before age 59 ½ without paying taxes and penalties.
Money held in the money market component is liquid. This is usually where money is held when you first transfer money into your retirement account, or when you sell other investments in your account. You can use the funds in the money market to purchase investments within the retirement account.
Recommended: The Different Between an Investment Portfolio and a Savings Account
What Is a Money Market Fund?
Bear in mind an important distinction: A money market fund, which is technically a type of mutual fund, is different from a money market account. A money market fund is an investment that holds short-term securities (and is not insured by the Federal Deposit Insurance Corporation, or FDIC). For example, these funds may hold government bonds, municipal bonds, corporate bonds, cash and cash equivalents.
A money market account is essentially a type of high-yield savings account and it’s FDIC insured up to $250,000.
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How Does a Money Market Within Your IRA Work?
If you are starting a retirement fund that has a money market component to it, you’ll want to make sure that you understand how these money market accounts work. One major way they differ from regular money market accounts is that they are governed by a retirement plan agreement.
This can place some limits on what you can do with the money. Typically, that will mean that you can’t withdraw the money until you have reached a certain age. But one advantage is that the money in the account will grow tax-free or tax-deferred (depending on what type of retirement account it is in).
For example, a money market account in a Roth IRA would follow different rules than money in a traditional IRA.
• You can deduct contributions to a traditional IRA, but a Roth IRA is funded with after-tax money.
• You can’t withdraw money from a traditional IRA until you’re 59 ½, except under special circumstances.
• Because contributions to a Roth are post tax, you can withdraw your contributions at any time (but not the earnings).
Advantages of a Money Market Account Held Within a Retirement Account
• Since these accounts are held at a bank, they are insured by the FDIC up to $250,000. By contrast, money held in a brokerage account is not FDIC-insured.
• The money market component can be used to store proceeds of the sales of stocks, bonds, or other investments.
• Many money market accounts offer the ability to write checks against the account (just keep in mind that withdrawals are subject to restrictions).
Disadvantages of a Money Market Account Held Within a Retirement Account
• Money market accounts offer a relatively low rate of return compared to what you might be able to earn in the market over time.
• Opening this type of money market account requires opening a retirement account.
• You may not be able to withdraw money until retirement age without paying a penalty.
Money Market Account Within a Retirement Account vs Traditional Money Market Account
The biggest difference between a money market account that is a component of a retirement account vs. a traditional money market account is where they are held. Unlike a regular money market account, the money market component is held inside a retirement account, such as a 401(k) or IRA account.
While you can generally access money in a traditional money market account at any time, early withdrawal from a money market that is part of a retirement account can trigger taxes and penalties.
Recommended: What is an IRA and How Does it Work?
What Should I Know About Money Market Accounts Held Within IRAs?
If you are wondering how to save for retirement, there are a few things to keep in mind before opening a retirement account with a money market component.
The most important is that money put into the money market component is subject to the same conditions as any other money you invest into a retirement account. You generally will not be able to access it without penalty until you retire.
You’ll also want to bear in mind that these are low-risk, generally low-return accounts. The money that you deposit, or money that is automatically transferred, is not going to provide much growth.
In some cases, when you open a retirement account, the funds will be automatically deposited in the money market component. In these instances, be sure to check that the money in that part of your account is then used to purchase the securities you want. Given the relatively low yield of an MMA, you may only want a certain portion of your savings to remain there.
Opening a Money Market Account That Is Part of an IRA
If you want to put some of your retirement savings in a money market account, you likely won’t be able to open the account separately, as you can with a traditional MMA.
Instead, you would open a retirement account with your bank, brokerage firm, or company provider. Depending on your IRA custodian, they may automatically include a retirement money market account as an investment option inside your IRA account.
Does It Make Sense to Put Retirement Funds in a Money Market?
There are many different types of retirement plans, so you’ll want to make sure to choose the options that make the most sense for you. While it might make sense to put some money into the money market component of your 401(k) or IRA, you might not want to put much money in it.
The reason for this is due to the relatively low interest rate that money market accounts pay. In some cases, the interest rate may be lower than the rate of inflation. If so, the money kept in the money market component will lose purchasing power over time.
The one exception to this rule would be retirees who are currently living off of the money in their retirement accounts. These investors already in retirement will often want to keep some of their money in money market accounts so they have to worry less about market volatility.
Alternatives to Money Market Accounts Held Within Retirement Accounts
There are any number of low-risk alternatives to money market accounts within retirement accounts, including vehicles outside a retirement account, such as a high-yield savings account. For similar alternatives within a retirement account, you could consider investing in bonds, bond funds, and other lower risk investment options.
The Takeaway
A money market account is often a component of a retirement account, such as an IRA or 401(k). This type of account has the advantages of being FDIC-insured and fairly liquid. However, it may not earn enough interest to outpace inflation. Many investors will want to keep the money in their retirement accounts in investments that can provide higher rates of return. That said, one advantage to keeping some of your retirement funds in a money market is that it can become part of the low-risk, cash/cash equivalents portion of your portfolio.
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FAQ
Can you keep some of your retirement funds in a money market account?
Yes, some retirement accounts offer a money market component. To keep some of your retirement savings in a money market account, you’ll need to open up an individual retirement account (IRA), 401(k), or other type of retirement account. Many retirement account custodians will include a money market account as one “investment“ option for your account.
What is the difference between an IRA and a money market account?
A standard money market account is similar to a regular savings account. An Individual Retirement Account (IRA) is an account that allows you to save for retirement with tax-free growth or on a tax-deferred basis. An IRA account can be used to invest in a variety of different ways. Many IRAs will have a money market component to them.
What is the difference between a money market account and a 401(k)?
A money market account is similar to a savings account in that the money is liquid and earns interest. A 401(k) is a special tax-advantaged account designed to help people prepare for retirement.
With a 401(k), contributions are typically tax-deductible and the money grows tax-deferred until retirement. By contrast, a money market account is funded with after-tax dollars, and there are no tax benefits associated with these accounts. The only exception is if the money market account is a component of a retirement account. In that case, it is governed by the rules of the retirement account it’s in.
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