According to the Bureau of Labor Statistics, the number of unemployed was 15.4 million and the jobless rate was 10 percent in November. While those numbers “edged down” from previous months, there’s no doubt that job loss and unemployment are hot topics, and people are worried.
Some of those lucky enough to hang onto their jobs have experienced salary reductions, reduced hours, or withheld bonuses.
Even if your income has remained unaffected, hearing stories on the news and witnessing friends and family members experience job loss can make a person nervous. It’s why car dealerships and travel companies are offering job loss insurance, reassuring consumers that it’s okay to buy a new car or book a cruise.
But wiggling out of a major purchase means little if you still can’t afford to pay your mortgage after job loss.
Worst-case scenario planning This made me think about what my financial situation would look like if I lost my job, if my husband lost his, or if somehow we both found ourselves unemployed. What is our worst-case scenario? Could we cover the essential bills? And for how long?
This is the process I used to create a worst-case scenario snapshot of our finances. I’ll use fictional couple Michael and Kay as an example. Their combined monthly income after taxes is $5,000. Michael makes $2,000 per month, and Kay brings in $3,000 per month. They have an emergency savings fund of $10,000.
Step one: Assess current expenses First, they’ll look at their current monthly budget:
Mortgage: $1,100
Food & Dining: $500
Bills & Utilities: $325
Gas & Fuel: $300
Vacation Savings: $200
Massage Therapy: $150
Gym: $100
Property Tax: $100
Health/Prescriptions: $140
Clothing: $100
Auto Insurance: $45
Home Insurance: $30
Donations: $30
Netflix: $18
Personal Care: $25
Misc: $120
Retirement Savings: $834
Other Savings: $883
Step two: Cut expenses Next, Michael and Kay examine their fixed and discretionary expenses and determine where they could cut back, if needed. They eliminate savings and clothing from the budget right away. They decide that they could cut back on food by $100 if they quit eating out, and they could live without massage therapy and gym memberships. This lowers their monthly expenses to $2,633.
Mortgage: $1,100
Food & Dining: $500 $400
Bills & Utilities: $325
Gas & Fuel: $300
Vacation Savings: $200
Massage Therapy: $150
Gym: $100
Property Tax: $100
Health/Prescriptions: $140
Clothing: $100
Auto Insurance: $45
Home Insurance: $30
Donations: $30
Netflix: $18
Personal Care: $25
Misc: $120
Retirement Savings: $834
Other Savings: $883
Step three: Evaluate possible scenarios If Michael lost his job, their monthly income would be $3000. With monthly expenses of $2,633, they’d have $367 left at the end of the month and wouldn’t have to dip into the emergency fund except in case of emergencies.
If Kay lost her job, their monthly income would be $2000. They’d either need to cut back more, or use the emergency fund to make up the $633 difference. If they used the emergency fund, it would last for about 15 months — barring any unforeseen expenses.
If both Michael and Kay lost their jobs and had to live off of the emergency fund, their savings would last for about three months.
Other expenses and income In a real-life scenario, you’ll also need to account for health insurance. Whether you’d get coverage under your spouse’s plan, an individual policy, or through COBRA, you’ll need to add the premium into your financial game plan.
Unemployment benefits, if you qualify, are another factor in your worst-case scenario budget. Don’t forget that unemployment benefits are taxable. To avoid a ginormous tax bill on April 15, have federal income taxes withheld or pay quarterly estimated taxes on your unemployment income.
Next steps Depending on your outcome from this exercise, you might decide it’s not time for a new car or a cruise because you need a bigger emergency fund. Or maybe you can relax because you’re right on track with your savings goals.
Either way, it’s a good idea to know where you stand and what your game plan will be if you were to experience job loss.
Have you created a worst-case scenario budget? Do you feel prepared to weather a job loss (either your own job or your partner’s)?
Medicare coverage gives good health care coverage to any senior that is over the age of 65. The government program has allowed millions of Americans to get the health care that they wouldn’t be able to afford through a private insurance company.
The program with Medicare is that it doesn’t pay for everything. In fact, there are plenty of major health care expenses that the program won’t pay for, and those bills could drain your savings account. The two Parts of Medicare will pay for things like inpatient care, services from doctors, and preventative services, but there are dozens of gaps in the coverage, and that’s where Medicare Supplemental plans come in. These insurance policies give you additional coverage that could protect your retirement savings accounts.
What is a Medicare Supplement Plan?
There are several ways that you can protect yourself from expensive hospital bills, but a Medigap plan is one of the best ways to do that. These policies are sold by private insurance companies, and they fill in all of those holes that original Medicare doesn’t cover. When you’re shopping for additional health care, it’s vital that you make the best decision for your family.
There are ten different Medigap plans that you can choose from (depending on which state that you live in), and all of them are going to cover different expenses or a portion of expenses that Parts A and B don’t cover. Medigap plans will plug in the holes of Medicare. It can be confusing trying to decide between the ten available plans, but it’s vital that you get the perfect supplemental coverage for you and your loved ones.
These Medigap plans don’t replace your traditional Medicare coverage. You will still have to pay the premiums for your traditional coverage. These plans work in addition to your coverage, unlike Part C Medicare, which replaces your plan and you only pay one premium.
Medigap Plan A Explained
Now that we have discussed the basics, we can start looking at the specifics of Medicare Supplement Plan A. I know that shopping for insurance coverage can be a confusing and frustrating task, especially when you’re dealing with anything related to Medicare, but that’s why I am here to help.
Medigap Plan A is going to be the most basic of the options. Plan A is going to leave behind more coverage gaps than the other options available. One of the advantages of Plan A is that it’s going to be the most affordable plan. It gives less protection, but it keeps more money in your pocket.
With Plan A, you’ll get the basic supplemental coverage that every plan offers, like paying for Part A coinsurance and an additional 365 days of hospital costs after your original Medicare benefits have been used up. If you’ve ever had a stay in a hospital, you know that it can be a massive bill. In fact, having to stay in the hospital for a day or two can easily equal thousands and thousands of dollars. If you ever have an extended stay, you could easily rack up tens of thousands of medical bills.
Part A will also cover any Part B copayment or coinsurance fees that you would be responsible for. Some of the plans, like Plan K or L, will only pay for half or 75% of those coinsurance fees, but Plan A will cover all of them. In most cases, that will not be a huge expense, but it could add up to a dangerous bill the more that you use your Medicare Part B coverage. Similarly, Plan A will also pay for any Part B preventative care coinsurance bills that you would encounter. Medicare Part B pays for preventative care treatments, like depression screenings, HIV screenings, Diabetes screenings, and much more. If you have additional Medicare supplemental coverage, then you won’t’ be required to pay the copayments, those will be paid for you. In most cases, the copayments would only be around $20, but that’s, more money in your pocket.
The other coverage areas of Medigap Plan A are, the first 3 pints of blood and Part A hospice care coinsurance. All of the other gaps in Medicare won’t be covered by Plan A. As you can see, Plan A can be an excellent insurance plan to have, but there are plenty of services and treatments that you will still have to pay for out-of-pocket.
One of the most notable portions that Plan A doesn’t cover is Medicare part B excess charges. Whenever you go to the doctor and get any treatment or service, there is a pre-approved amount that Medicare will pay for. Legally, the doctor or hospital is allowed to charge 15% more than what Medicare has approved, and that rate above the approved amount is the excess charges. If you don’t have Medigap coverage, then you would be responsible for those bills. In most cases, excess charges are not going to be a huge financial strain., but you never know what treatment that you will need.
Choosing a Medigap Policy
Deciding between the ten plans can be difficult. You want to ensure that you have quality health care, but you don’t want to pay for additional coverage that you don’t need. There are several key categories that you will need to consider to ensure that you’re getting the best plan possible.
The first thing that you should look at is your finances and your budget. The goal of your Medigap policy is to ensure that your retirement savings aren’t drained by medical bills, but your supplemental insurance policy shouldn’t break your bank every month. Before you apply for any Medigap plan, you should take a long and hard look at your budget to determine how much you can afford every month.
The next thing that you should look at is your health and family history. The older that you get, the more money that you’re going to spend on health care and medical costs. Before you purchase any Medigap plan, you should look at your chances of having any severe health problems. If you have a family history of poor health or severe health problems, then you will should invest in a more comprehensive Medigap plan, like a Plan F. On the other hand, if you’re in decent health and you have a healthy family tree, then you can consider taking a risk by purchasing a small Medigap policy.
Enrolling in a Medicare Supplemental Insurance Plan
Once you’ve to decide when kind of policy that you want, enrolling is easy. All that you will need to do is contact a Medigap insurance agent, and they will walk you through the process. The WHEN you apply is going to be the most important factor.
It’s vital that you take advantage of the Medigap Open Enrollment period, which is a 6-month window that starts the month that you turn 65. During this period, the insurance company can’t reject your application, regardless of your health. During open enrollment, the plans are guaranteed acceptance. If you’re in poor health, this could be your only option to get supplemental coverage.
Another benefit of enrolling in the six months is that the insurance company can’t charge your more for your coverage. Typically, the insurance company is going to review your health and any conditions that you have, and depending on your health, they could charge you much higher premiums. During the Open Enrollment Period, you’ll get the lowest rates, regardless. Open enrollment can save you thousands of dollars every year.
If you’ve already missed that window, don’t worry, there is still an excellent chance that you can get affordable Medigap coverage. You can’t put a price on the peace of mind that supplemental coverage will give you.
Any Questions?
I know that navigating the Medicare waters can be difficult, especially because they keep changing. If you have any questions about Medigap Plan A or any of the other plans, you should check out my other posts. I have plenty of information about Medigap and supplemental coverage. It’s vital that you have all of the information that you need to make the best choice for your health care needs.
If you’re still confused, you can contact me or an experienced Medigap insurance agent. Those agents can answer any questions that you can or point you in the right direction.
By Peter Anderson4 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 9, 2012.
We’re in the midst of tough economic times and a lot of people are finding themselves in situations where they need to come up with money quickly in order to pay for one debt or another. Whether it’s IRS tax debt or needing to replace a broken water heater, there are times when people find themselves with a large bill with no emergency fund to pay it. So what do you do in a situation like that? For many people the answer is to take out a 401(k) loan. Up to 3/4 of company 401(k) plans have a provision available to do a 401(k) loan, and up to 30% of people with one of those plans have taken advantage of that and taken out a 401(k) loan.
Taking out a 401(k) loan can be a legitimate road to take if you’re dealing with a serious financial situation like IRS debt or a foreclosure. You should also be aware, however, that there are risks to taking out a 401(k) loan.
How 401(k) Loans Work
Before we get too far into talking about the pros and cons of the 401(k) loan, let’s look at how they typically work. Different plans may have different rules and regulations surrounding 401(k) loans, but typically they’re pretty similar.
Minimum withdrawals: Most plans will have a minimum amount that you can take out when doing a 401(k) loan, typically anywhere from $500-1000. They do that in part to try and discourage people from taking out small amounts from time to time to pay for smaller bills, to discourage people from short-circuiting their investment gains.
Maximum loan amounts: Typically you’re allowed to borrow up to 50% of your vested balance in your 401(k) account, but no more than $50,000. Also keep in mind that quite often you won’t be able to borrow from your vested company matching funds, but only personally deposited and vested funds.
Payment terms: Usually 401(k) loans have a 5 year payment term, and the interest rates are usually set at prime rate plus 1%. If you’re taking out the loan to buy a home, longer terms may be available.
Fees to process your loan: Many plans will charge a fee just to process your loan – a fee anywhere from $50-100.
When taking out a 401(k) loan be sure to know what the provisions and stipulations of doing one are with your company’s 401(k). Depending on what the fees are, maximum or minimums may be, you may not want to go down that road.
Pros Of Doing A 401(k) Loan
I’m not a huge proponent of doing a 401(k) loan just because I think it short-circuits the gains you could see in your retirement account, and it carries some significant risks. That being said, there are some situations where I might consider doing one.
For example, if you’re in a situation where you’ve got a large IRS debt that you need to pay, I think a 401(k) loan might be preferable to getting in trouble with the IRS. You don’t want to go to prison. Or if you’re in danger of going into foreclosure, or losing a vehicle to repossession, you may want to consider it. Just know the risks.
Here are some reasons why a 401(k) loan can be a good thing.
Very little paperwork needed: Typically a 401(k) loan requires very little paperwork and can be done regardless of if you have an actual need. In many cases it’s as easy as making a phone call or clicking a few links in your online account. The only time you may need additional paperwork is if you’re using it for a home loan.
Paying yourself interest: When you get a loan from your bank or a credit card you’re going to be paying interest to them on the loan proceeds. With a 401(k) loan you’re paying yourself interest. Sounds like a good deal right?
Easy repayment: Quite often a 401k loan repayment comes directly out of your paycheck. That makes paying your loan back easy – it comes directly out of your paycheck so you never see the money and feel the pinch of losing it.
While I don’t typically suggest a 401(k) loan, it can be an option if you’re in a pinch and you have to pay off a pressing debt right away. There are some positives of doing one, but you also have to be aware of the significant risks – which we’ll look at next.
Cons Of Doing A 401(k) Loan
There are some considerable risks to be aware of when doing a 401(k) loan. If you’re not careful they could come back to haunt you.
Fees, fees, fees: If you’re not careful you could be losing quite a bit of money to fees. There can be loan origination fees, and in some cases annual maintenance fee. So for example, if you take out a $1000 loan, and then have a $75 origination fee and $25 maintenance fee on a 5 year loan, you would end up paying $200in fees – or 20%. That’s a steep price to pay. Be careful to know what fees your plan charges.
Defaults, penalties and taxes: If you go into default on your loan for one reason or another it will mean that the money will be taxed at your normal rate, and you’ll be charged a 10% early withdrawal penalty. That could mean a huge tax payment when it comes to tax time, something most folks may not be prepared for, especially if the money is already spent.
Money taxed twice: When you repay your 401(k) loan, you’re using post-tax money to repay it. But since the money is then going back into a pre-tax account, it will then be taxed again when a distribution is taken in retirement. Double taxation!
Moving jobs or being fired means loan comes due: If you end up deciding to move to a new job, or if you get let go from your current job, the 401(k) loan will automatically come due in full – although usually there is a grace period of 60-90 days. If you can’t pay in that time you’ll be subject to a 10% penalty and your normal tax rate just like a normal default. That can mean upwards of 35-40% in taxes and penalties. So when tax time comes, you may have a big tax bill at a time when you can least afford it!
Lost retirement gains: When you take money out of your 401(k) you’re taking away from any gains that your retirement funds may have made during the interim. The cost can be especially great if you take the money out at the bottom of the market and it isn’t returned to the account until later when the market is higher. You lose out on any gains your money may have made.
So as you can see there are a ton of cons associated with taking out a 401(k) loan. There are risks associated with the fees charged, penalties if you default or lose your job and can’t pay in full, and the lost opportunity cost of not realizing investment gains. Those are some pretty serious things to consider.
Try Considering Other Options First
My suggestion when it comes to taking out a 401(k) loan is to avoid it if you can and try other options first. What are some other options?
Try saving up an emergency fund in advance so that when you have a need for a large chunk of cash you’ve already got it saved and ready to go. That’s what I’ve done with our 12 month emergency fund – so that when big bills come due, like my recent $5000 tax bill, it wasn’t a problem because we’d planned ahead.
Another option is to open and use a Roth IRA account for your retirement savings instead. When you use a Roth, you can withdraw your Roth IRA contributions at any time without any tax penalties, so you can avoid those risks of the 401(k) loan. You’ll still be having the risk of losing out on investment gains, but at least you won’t be paying taxes or penalties.
If and when you decide to go down the road of a 401(k) loan, however, make sure that you’re doing your homework. Go run the numbers using a 401(k) loan calculator and see just what interest rates you’re actually paying. That may help you to decide if it’s actually a good deal.
Have you ever taken out a 401(k) loan? If so, how did it turn out, did you pay it all back, or did you face paying taxes and penalties? Tell us your 401k loan experience in the comments.
There is a lot of questions about Medicare and the coverage that it provides. It’s a confusing program that has left millions of seniors with confusion about their health care and the services that they cover. While you may not know it, your Medicare Parts A and B don’t pay for all of the expenses that you may encounter. In fact, there are about a dozen different categories that original Medicare doesn’t pay for, and those categories could leave you with some massive bills.
There is nothing that you can do about the rising cost of health care, but there are some ways that you can protect yourself from having your savings account drained. One of the most popular ways to protect yourself is to purchase a Medigap insurance plan. These policies will give you additional coverage and help will in the holes left behind by Medicare.
What is a Medigap Plan?
Before we look at the specifics of Medicare Supplement Plan B, let’s take a broad view of Medigap plans and how they operate. These additional insurance plans are sold by private insurance companies, and the goal of these plans is to give you additional coverage that traditional Medicare doesn’t.
There are ten different plans that you can choose from, and they are all denoted by a letter of the alphabet, A – N. These policies are standardized by the government, which means that they are going to be identical, regardless of which company that you purchase them from.
The older that you get, the more money that you’re going to spend on medical expenses and health care, and those expenses could quickly drain your retirement savings and turn your retirement dreams into a nightmare, but that’s where these Medigap plans come in.
Because these plans are sold by private insurance companies, the available options and the prices are going to differ depending on where you live and the company that you choose. Because they are standardized, the only difference in companies is going to be the premiums amount. It’s easy to see why you should compare dozens of companies before you pick the one that’s going to work well for you.
Medigap Plan B
Now that we’ve looked at the basic of Medicare supplemental plans, we can look at the details of a Medigap Plan B. Each of the available plans is different, and some of them provide more coverage than others. Plan B is one of the most basic plans, which is going to leave more coverage gaps. Because it provides less coverage, they are also going to have cheaper premiums. Plan B is an excellent way to get additional support without paying the larger premiums.
Plan B is going to cover the basic expenses like Medicare Part B copayments and coinsurance fees. This is one category that every Medigap plan is going to pay. It’s not a massive expense, but having those copayments paid for can keep hundreds of more dollars in your pocket depending on how often you go to the doctor.
Another expense that is coverage by Medigap Plan B is the first three pints of blood that you get if as a hospital inpatient or outpatient treatment. Your traditional Medigap Plan should cover the blood after the first three, which means that the blood will be completely covered if you’re ever in need.
Medigap Plan B will also pay for several Medicare Part A expenses that enrollees would be responsible for otherwise. Supplement Plan B will pay for the Medicare Part A deductible (which you probably wouldn’t be paying otherwise) and Medicare Part A hospital coinsurance for up to 365 days after your Medicare benefits have expired. If you’ve ever spent a night or two in the hospital, you know that it can be an expensive stay. If you’re stuck in the hospital for more than a few days, then it can be a massive bill at the end, but thankfully, your Plan B Medigap policy can offset those bills.
The last portion that your Plan B will pay for is any hospice care coinsurance or copayments. Once again, this would probably be a relatively small fee that you would encounter, but having your Medigap plan cover, it is going to keep some extra money in your pocket.
What Plan B DOESN’T Cover
Because Plan B is going to be one of the smaller plans, there are a few key categories that it won’t cover. It’s important to take note of these before you purchase one of these plans. One of the most notable is the Medicare Part B excess charges. When you go to the doctor and receive a service or treatment, there is a pre-approved amount that Medicare is going to pay for that service. Legally, the doctor is allowed to charge 15% more than that pre-approved amount, and any money above that amount is considered excess charges. Not every doctor or hospital is going to have these excess charges, but if you run into any of them and you have a Medigap Plan B, then you have to pay for these expenses out-of-pocket.
Another key coverage gap with Medigap Plan B is the foreign travel emergency care. If you plan to do a lot of traveling in retirement, then it’s important that you get a supplemental plan that covers foreign emergency care. In the vast majority of cases, traditional Medicare plan is not going to pay for any of those hospital fees if you’re outside of the United States, which can lead to massive hospital bills and a ruined vacation. If you have a comprehensive Medigap Plan, like a Plan F, then some of these expenses will be covered. None of the plans will pay 100% of it, but you can get some protection.
Deciding Which Medigap Plan is Right for You
It’s important that you pick the perfect supplemental coverage for you and your health care needs. There are several different key factors that you should review before you purchase any Medigap plan.
The first thing that you should do is calculate your budget and decide how much you can spend on supplemental coverage every month. The purpose of your Medigap plan is to protect your savings account, but your insurance plan shouldn’t break your bank every month. Make sure that you get a plan that will fit comfortably in your budget without stretching your finances.
The next thing you should look at is your health and family history. If you’re in poor health or you have any pre-existing conditions that could cost you massive medical expenses, then you should consider investing in a larger comprehensive supplemental plan. On the other hand, if you’re in good health and your family history doesn’t have a trend of poor health, then you could risk buying a smaller plan that leaves more coverage gaps but saves you money.
Open Enrollment Period
After you’ve decided which type of plan that you’re going to purchase, you will need to enroll in that plan. That’s easy to do. All you have to do is contact a Medigap agent, and they will take care of the application process for you. It’s a simple process, that is similar to purchasing a life insurance policy.
What’s important is the WHEN you apply. It’s vital that you sign up during your Medigap Open Enrollment period. This is a 6-month window that begins the month that you turn 65. During this period, the insurance company can’t decline your application, regardless of how poor your health is or any health problems that you have. During these six months, any Medigap plan that you want to purchase is guaranteed acceptance.
Additionally, if you purchase a Medigap plan during these six months, the company can’t charge you higher premiums, even if you aren’t in great health. After the open enrollment period is over, then your application will be treated as a normal application, which means that you could get much higher rates for your coverage. Taking advantage of the six months could save you thousands of dollars.
Questions or Concerns?
These Medigap plans are one of the best ways to get additional coverage that Medicare doesn’t offer. While Plan B might not be the best supplemental coverage for you, it’s important that you find the plan that will. I have reviewed all of the options that you can choose from.
If you have any questions about Medigap plans or supplemental coverage, feel free to contact me, or you can contact a Medigap agent. They can answer any of those questions that you may have and ensure that you’ve got all of the information that you need.
Save more, spend smarter, and make your money go further
Most of us have heard it before — newly released data on the net worth of CEOs well into the millions, or even billions.
Take Jeff Bezos for example, whose net worth is estimated to be roughly $144 billion as of October 2022. As you may suspect, that’s certainly not representative of most Americans’ wealth. In fact, the average net worth by age in the United States is $746,820, though many argue that median net worth by age — which is $121,760 — paints a more useful picture.
So what is net worth? Net worth is a calculation used to gauge your overall financial health, but it’s a benchmark that tends to uncover more questions than answers. What does net worth mean, what factors determine its value, and what is a “good” net worth by age, anyway?
Here, we’ll unpack the average net worth by age in America, learn how to calculate your net worth, and reveal how to increase net worth so that you can set — and achieve — your personal finance goals.
Key Findings
The average net worth by age in America is $746,820.
The median net worth by age in America is $121,760.
Net worth is calculated by subtracting the total value of your debts from the total value of your assets.
Average Net Worth by Age
Age
Average Net Worth (Mean)
Younger than 35
$76,340
35–44
$437,770
45–54
$833,790
55–64
$1,176,520
65–74
$1,215,920
75 or Older
$958,450
Source: Federal Reserve
The average net worth by age in America is $746,820, according to the Federal Reserve’s 2020 Survey of Consumer Finances, which includes data from 2016 to 2019.
It may come as no surprise to learn that older Americans tend to have a greater average net worth than younger Americans. After all, their financial assets have had years — if not decades — to appreciate in value. Average net worth by age peaks somewhere between 65 and 74 years. This is also roughly the age when most Americans retire. At age 75 and older, when sources of income tend to be fixed, average net worth begins to decrease.
Median Net Worth By Age
Age
Median Net Worth
Younger than 35
$14,000
35–44
$91,110
45–54
$168,800
55–64
$213,150
65–74
$266,070
75 or Older
$254,900
Source: Federal Reserve
The median net worth by age in America is $121,760, approximately a 17 percent increase from the previous survey conducted in 2016. The median — or middle number in a set of data — is the halfway point between the largest and smallest net worth.
Median values tend to be less affected by outlier data points — like the net worth of billionaires — than averages. For that reason, some argue that median net worth offers a clearer picture of and benchmark for wealth in America.
What Does Net Worth Mean?
What is net worth, and what does it mean? Your net worth is your total assets minus your liabilities. In simple terms, it’s the cost of everything you own after subtracting your debts.
It can be dangerous to measure your financial health solely by what you earn, especially since you might not save or use your income towards investments. Your net worth will keep you in check, allowing you to be cognizant of your worth and how much you should be saving until you reach retirement.
What Net Worth is Considered “Rich?”
You may wonder what net worth qualifies as “wealthy” in America — and how far off you are. According to a 2022 survey, Americans consider an average net worth of $2.2 million to be “wealthy.” However, perception of wealth may look very different at the state and city levels, as average household income and cost of living tend to fluctuate dramatically based on geographic location.
For example, people who live in Denver say that an average net worth of $2.2 million is enough to be considered wealthy, whereas people in San Francisco say that you’d need more than double that amount —- an average net worth of $5.1 million.
How to Calculate Net Worth
1. Add Up Your Assets
The first step to calculating your net worth is adding up the total value of your assets. This includes the current market value of your investment accounts, retirement savings, home(s), vehicle(s), items of significant value (art, jewelry, furniture, etc.), and the cash value of your checking, savings accounts, and insurance policies.
2. Add Up Your Debts
Next, you’ll want to add up the total value of any debts you owe. This includes your mortgage(s), car loan(s), student loans, personal loans, credit card debt, and any other form of debt.
3. Subtract Your Debts From Your Assets
Once you subtract your debts from your assets, the resulting value is considered your personal net worth. Your total could result in a positive net worth or a negative net worth.
Don’t panic if you find yourself in the negative net worth category. It’s normal for young professionals fresh out of high school or college to have low or negative net worth, especially if they’re still paying down student loans, recently purchased a home, or are just starting a plan to build their savings.
What is a “Good” Net Worth By Age?
Your age plays a significant role in calculating your net worth, especially as you get closer to retirement age. To help you understand how you stack up, we took a look at the average and median net worth of every age group to reveal what you should aim for at each milestone.
Average Net Worth by Age 35
Your 30s should be mostly devoted to laying your financial foundation so that you can achieve your desired net worth by retirement. At this age, it’s important to set a budget for you and your family, and stick to it.
The Benchmark
The average net worth for families in the U.S. under the age of 35 is $76,340, where the median net worth is $14,000; a helpful reminder that the average can be easily distorted by a small percentage of the wealthiest Americans. With the average student loan debt at about $35,000 per person, it’s no wonder why people might have a lower net worth in their 30s.
How to Increase Net Worth
Your 30s are a perfect time to set yourself up for a bright financial future — even if your net worth is still relatively low. If you haven’t started already, consider contributing to your retirement at this point, especially if your employer offers a company match to your 401(k) or 403(b).
A goal to aim for is to have the equivalent of half your annual salary saved in your retirement account by the time you’re 30, but don’t worry if you’re not there yet. At this time in your life, it’s most common to focus on making progress on paying back your debt, which can lead you towards financial security.
Average Net Worth by Age 45
The Benchmark
The average net worth for American families ages 35 to 44 is $437,770, and the median net worth is $91,110. This demonstrates a natural progression as Americans begin to spend time in their careers, making higher salaries than those they earned fresh out of high school or college. They’ve had ten years at that point to pay down some debt, and perhaps save for the purchase of a first home.
How to Increase Net Worth
By the time that you’re in your 40s, your goal is to have a net worth of two times your annual salary. For example, if your salary is $75,000 in your 30s, you should aim to have a net worth of $150,000 by the time you’re 40 years old.
It’s common for people in their 40s to increase their net worth by investing in real estate and continuing to grow their retirement savings. Owning a home is an asset that could greatly increase your net worth since it can appreciate over time.
Average Net Worth by Age 55
By your 50s, you should begin to see significant progress made toward your net worth based on real estate investments, contributions to your retirement plan, and other investments. By the time you’re 50, your goal should be a net worth of four times your annual salary. For example, if you’re currently making $90,000 per year, your net worth should be at $360,000.
The Benchmark
The average net worth for Americans between the ages of 45 and 54 is $833,790, while the median net worth is $168,800.
How to Increase Net Worth
At this point, consider becoming more aggressive when it comes to building your net worth. To do this, consider maxing out your 401(k), meaning that you contribute as much as is legally allowed. And, if you haven’t already, this may be a good time to contribute to an IRA, an account that allows you to save for retirement with tax-free growth or on a tax-deferred basis.
If you have children, you may also want to consider contributing to a 529 college savings plan, a tax-advantaged savings plan for education costs, but make sure to prioritize your retirement first.
Average Net Worth by Age 65
In your 60s, your goal is to have a net worth of roughly six times your salary. For example, if your salary is $120,000, you should aim to have a net worth of $720,000. At this point in your life, your net worth will help you understand how much wealth you’ll have once it’s time to retire — and how early you can.
The Benchmark
The average net worth for Americans between the ages of 55 and 64 is $1,176,520, while the median net worth is $213,150, according to the most recent data from the Federal Reserve.
How to Increase Net Worth
To help you reach your goals, you may want to begin thinking about how you can lower your cost of living and capitalize on your investments. If you live in a house, but no longer need all of the space, could you consider downsizing? No need to make any immediate decisions, but with retirement only a few years away, you’ll want to begin looking at how you are going to benefit from your investments.
You’ll also want to consider purchasing disability insurance dependent on your health and genetics. If you’re unable to work during these final years leading up to retirement, disability insurance can help replace the income that you lost without decreasing your net worth.
Average Net Worth by Retirement
By the time you’re ready to retire, you should aim to have a net worth of roughly six times your annual salary.
While it’s impossible to know exactly how many years following retirement you’ll need to plan for, it’s one of the many reasons it’s so important to start saving as early as possible. It can even lead to some deferring retirement and working beyond the normal retirement age.
The Benchmark
The average net worth for Americans between the ages of 65 and 74 is $1,215,920, however, the median net worth is $266,070.
Use the resources that you built throughout your life to fund retirement. You’ll also want to consider what age you want to start receiving your Social Security since the longer you delay it, the more your monthly income will be.
How to Increase Net Worth
From investments to saving, there are many ways to increase your net worth. Once you calculate your current net worth, use these general tips to help set you up for success by the time you retire:
Cut Expenses: The less that you’re spending, the more that you’re growing your net worth. See if there are bills or spending habits that you can reduce. Even if it’s only a few dollars, you’d be surprised by how much that can add to your net worth over the years.
Reduce Debt: Your debt is what could be holding you back from growing your wealth, and with high interest rates, it could be taking longer than expected. Making higher monthly payments or consolidating payments could help reduce your debt faster.
Pay Off Your Mortgage: Owning a home can become your biggest asset, so paying it off will help increase your net worth.
Make Investments. It may not be ideal to just let your money sit in savings. Consider investing part of your paycheck with a goal to reap the benefits when you reach retirement age.
Max Out Retirement Contributions: Make the most of tax-advantaged retirement plans even in your lower-earning years. If you start investing now, your net worth may increase at a much faster pace.
Set Goals: It may sound simple, but it’s easy to become passive about investing in the future if you don’t have hard goals set in place. Create a plan as to how you’re going to grow your net worth over the next 10, 20, or even 30 years — and stick to it.
Once you make a plan to build your net worth, check in with yourself and calculate how you’re pacing against your goals on a regular basis. And, before making a big purchase or an investment, keep this number in mind to make sure you’re making the right financial move.
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Can you use your Roth IRA to pay for higher education expenses?
Yes. Under IRS rules, you can withdraw funds from your Roth IRA early and avoid the 10% early withdrawal penalty if you’re using the funds to pay for qualified education expenses.
According to the IRS, such withdrawals must meet three criteria:
1) They must go toward paying qualified higher education expenses,
2) Those expenses must be incurred at a qualified educational institution, and
3) Those expenses must be for an eligible member of your family.
If you need to pay for education expenses which meet these criteria, then more than likely, you’re eligible to make an early, penalty-free withdrawal from your Roth IRA.
Early Withdrawals From Your Roth IRA
First, it’s important to remember that you can always withdraw your original Roth IRA contributions tax-free and penalty-free at any time and for any reason.
Only your Roth IRA earnings (such as interest, dividends, and capital gains) trigger taxes and penalties if you withdraw them early. So what constitutes an early withdrawal? Any withdrawal of earnings which is made prior to meeting the Roth IRA 5 year rule and prior to reaching age 59 ½.
For instance, let’s say you’re 40 years old with $20,000 in your Roth IRA. Your $20,000 balance is composed of $14,000 in original contributions and $6,000 in capital gains. Under the Roth IRA withdrawal rules, you can withdraw up to $14,000 tax-free and penalty-free. But if you withdraw the remaining $6,000 in capital gains, that $6,000 is subject to income taxes and a 10% early withdrawal penalty.
So if you need to withdraw funds from your Roth IRA to pay for educational expenses, then you would first withdraw any original contributions you’ve made – which are withdrawn tax-free and penalty-free.
But if you need to make an early withdrawal of earnings from your Roth IRA, you can avoid the 10% penalty (but not the income taxes) if you use the funds to pay for qualified higher education expenses at an eligible educational institution for an eligible family member.
Qualified Education Expenses
So what constitutes a “qualified higher education expense”? According to the IRS, all of the following are “qualified higher education expenses”:
Tuition
Institutional fees
Books
School supplies, and
Equipment required for enrollment or attendance
Room and board only counts as a qualified higher education expense for special needs students who are enrolled as at least half-time students.
For instance, if your daughter is attending college, her tuition counts as a qualified higher education expense. So does the cost of her books, enrollment fees, and the laptop computer she’s required to have. But her rent and utilities at a local apartment complex don’t count.
Once you identify your qualified higher education expenses, you need to make sure they’re incurred at an eligible educational institution.
An Eligible Educational Institution
So what consitutes an “eligible educational institution”?
According the IRS, such an institution is:
“Any college, university, vocational school, or other postsecondary educational institutional eligible to participate in the student aid programs administered by the U.S. Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions.”
This is the easiest to meet of the three criteria. Most postsecondary educational institutions meet this definition, from your local community college and state university to online, for-profit university programs. But if you’re not sure, just ask. Your school will know the answer.
Once you establish that you have a qualified higher education expense incurred at an eligible educational institution, then you only need to make sure the expense is paid on behalf of either yourself or an eligible family member.
Eligible Family Members
So who are eligible family members?
Only the following people are eligible to pay qualified higher education expenses with a penalty-free early withdrawal from your Roth IRA:
Yourself
Your Spouse
Your Children
Your Grandchildren
Your Spouse’s Children or Grandchildren
Brothers, sisters, and second cousins don’t qualify. Only the direct descendants of either yourself or your spouse.
Exceptions
So do all qualified higher education expenses incurred at an eligible education instition on behalf of an eligible family member avoid the 10% penalty if you make an early withdrawal from your Roth IRA?
Unfortunately, no. If you’ve already paid the bill for your qualified higher education expenses, and you’re looking to make an early withdrawal in order to reimburse yourself, you may not qualify.
Under IRS rules, you can only reimburse yourself for qualified higher education expenses you’ve already paid using these types of funds:
Payment for services, such as salary and wages
Gifts
Loans
An inheritance given to either yourself or the student
Withdrawals from personal savings
Withdrawals from a qualified tuition savings program
But if you’ve used any of the following types of funds to pay for qualified higher education expenses, you will owe a 10% penalty on any early Roth IRA withdrawals:
Pell grants
Employer-provided tuition assistance
Tax-free withdrawals from a Coverdell Education Savings Account (ESA)
Tax-free scholarships
Tax-free fellowships
Tax-free educational assistance for veterans
Other tax-free payments received as educational assistance (other than gifts)
That’s a lot of fine print to take in, so let’s use an example to illustrate.
Let’s say you’re 45 years old, you’re in the 25% tax bracket, and you have $36,000 in your Roth IRA – $14,000 in original contributions and $22,000 in capital gains. Your 19 year old son just finished his sophomore year in college incurring qualified higher education expenses of $18,000. He received a $2,000 tax-free scholarship, while you paid the rest of his tuition and book expenses for a grand total of $16,000 in out-of-pocket expenses.
You can use your Roth IRA to reimburse yourself for these out-of-pocket expenses. In fact, you can withdraw up to $14,000 tax-free and penalty-free. Why? Because in doing so, you’re simply withdrawing your original after-tax Roth IRA contributions.
However, the next $2,000 you withdraw is subject to income taxes, but NOT the 10% early withdrawal penalty. Why? Given your age, a withdrawal of earnings consitutes an early withdrawal, so it’s subject to income taxes at your current rate of 25%. However, because you’re using the funds to pay for qualified higher education expenses, you avoid having to pay the 10% early withdrawal penalty.
If you try to withdraw an additional $2,000 for a grand total of $18,000, you’ll owe income taxes AND the 10% early withdrawal penalty. Why? Even though $2,000 was used to pay for qualified higher education expenses, those expenses were already covered in the form of a $2,000 tax-free scholarship. So any additional funds beyond the $16,000 you’ve already withdrawn from your Roth IRA will be treated the same as any other non-qualified early withdrawal. And non-qualified early withdrawals are subject to income taxes and a 10% early withdrawal penalty.
Summary
If you or a qualified family member incur qualified higher education expenses, you can use your Roth IRA savings as college savings to pay for those expenses and avoid the 10% early withdrawal penalty if applicable.
While a Roth IRA is primarily intended as a vehicle for retirement savings, each individual circumstance is different. As such, you might want to look into using this special IRS provision to help out with your higher education expenses.
This is an article from Britt at http://www.your-roth-ira.com, the Web’s #1 resource for Roth IRA information.
Save more, spend smarter, and make your money go further
It’s often difficult for us to clearly picture where we’ll find ourselves in five to ten years. Opportunities and experiences that we never even dreamed of can pop up a year from now – or even next week – and completely change the course we’re currently on.
With that being said, it can seem downright silly to start planning for something as far off as retirement. For today’s 20- and 30-somethings, that can be multiple decades away. Fully retiring is so far in the future for most of us that it might as well be as far away as the stars in the sky.
When it comes to retirement planning, you have to be strategic.
But if you’re bringing in an income, the reality is that it’s never too early to start planning and saving for retirement. So how do you do that?
You don’t need to be able to fully envision every detail of what your retirement days will look like to start laying the groundwork to build your nest egg. Here are some actionable tips you can put into place right now – even if retirement seems light years away.
Understand the Power of Compound Interest
Compound interest can turn a single penny into 10 million dollars (don’t believe it? Check out this post to see for yourself). Of course, it’s unlikely that any money you invest will provide a 100% return every single day, but it doesn’t need to.
Need more convincing? Here’s another example that talks about two people: person A maxes out their 401(k) for the first 10 years of their career and never contributes another cent, and person B doesn’t contribute anything for the first 10 years of their career and then maxes out for the next 33 years until they retire. Who do you think will come out ahead?
You guessed it: Person A wins by a couple hundred thousand despite contributing $400,000 less over their lifetime.
Explore Your Options
Knowing you need to start saving (even if it’s just a little bit) to take advantage of the combined power of time and compound interest isn’t enough to get started. You need to know where to actually put that money.
Make sure you’re enrolled in a retirement plan from your company if it’s offered, and contribute enough to secure any employer match that may be available. Next, open a Roth IRA and make regular contributions. It’s important that you start developing good savings habits now, so you can maintain them as your income grows.
Avoid Lifestyle Inflation
That brings us to another critical step you need to take in order to start planning for your retirement. If you can only save a little now because of a limited income, that’s okay. But as your income grows, your savings should increase along with it – not your spending.
You need to guard against lifestyle inflation if you want to build a significant nest egg that will see you through all your years after you quit actively earning an income.
You want to add eggs to this nest – not take them away.
Delve into Details
It might be obvious at this point, but planning for retirement starts with developing good habits. Once you have these habits in place, it’s time to start considering the details. While nailing down a precise figure for how much you’ll need in order to retire is difficult, you can start refining your estimations.
Consider what your future goals are. What does your ideal retirement to look like? What level of lifestyle would make you happy? When do you want to stop relying on work for your income and switch to living off your investments?
Your answers to these questions may change, so revisit them on a regular basis. They’ll help inform you about what that magical retirement number looks like for your unique situation.
Remember, it’s never too early to start planning for retirement. When you plan, you’re prepared – and when you know what you need to do, you’re halfway there to making your retirement dream into a reality.
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The earlier you begin investing, the better off you’re likely to be in the long term. Here’s how you can get started if you’re still in your 20s. It’s never too early to start investing—as long as you do so wisely. It’s important to make a proper plan so that your investments actually help you reach your goals. Here are six tips you can implement if you want to start investing in your 20s. A financial advisor can help you manage your investment portfolio.
1. Focus on Retirement
Your first investment move should be to use tax-advantaged accounts to save for retirement. Many employers offer 401(k) plans with matching. If you can afford to, max out the match to capture the greatest retirement savings. So if your employer will match 50% of your 401(k) contributions up to 6% of your paycheck, contribute at least 6% to get the full employer match.
If you don’t have retirement savings options through your employer, there are some tax-advantaged options outside of a job. If you’re self-employed, you can set up a solo 401(k) plan. You can also set up a traditional or Roth IRA on your own and contribute up to $6,500 in 2023.
While retirement savings aren’t the sexiest investment option and you won’t normally be able to access the money without a hefty penalty until the age of 59 ½, they are still the best place to start. You can set yourself up for a secure retirement by starting to build your nest egg now. Being able to take advantage of employer matches and saving on your taxes is the icing on the cake.
2. Build Liquid Savings
While investing for the future is important, it’s still wise to have some liquid savings that you can access quickly if needed. Say you lose your job unexpectedly. If your savings are locked up in a CD for another year, you’ll have to pull them out and lose some or all of the interest you had earned.
While this isn’t the end of the world, it does set you back on your investing goals. The same is true if your money is tied up in stocks—you may have to cash out at an inopportune time from an investment perspective, losing earnings.
So after you’ve set up your retirement accounts, start building an emergency fund. A good goal is to save up enough money to cover your expenses for six months. So if you need $3,000 each month for rent, utilities, transportation, food and other necessities, aim to keep $18,000 in liquid savings.
This money should sit in an account where it’s earning interest. Take a look at high-yield savings accounts, money market accounts and money market funds where your funds can generate interest while still remaining instantly accessible.
3. Start Investing With a Brokerage Account
Once you have retirement funds and an emergency savings account, you can start investing in the market. It’s time for you to set up your own brokerage account so you can buy and sell stocks, bonds, exchange-traded funds (ETFs) and mutual funds.
Many brokerage accounts can be set up and managed completely online. Shop around and see which one is right for you. Some important things to consider are whether they require a minimum initial investment, what their fees and commissions may be and whether they offer helpful tools for analyzing investments.
You might start by investing in mutual funds and ETFs, which bundle different kinds of stocks and bonds. Make sure the operating expense ratio of a fund is not excessive, such as more than 1%. You can also buy stocks and bonds directly—but first research the companies you’re considering to see if they’re a solid investment. For example, government bonds are generally a safe investment, but some corporate bonds can be quite risky. And it’s possible for a company’s stock to crash, taking your money with it.
4. Understand the Risk/Reward Trade-Off
For any investor, diversification is the name of the game. Even if you think you’ve found the most profitable stock of all time, you shouldn’t put all your eggs in the same basket. By diversifying the things you invest in, you can set yourself up for lower risk overall.
A strong understanding of risk can help you avoid meme stocks and other unwise investment maneuvers. The younger you are the higher the portion of your portfolio should be in equities, which are riskier than fixed-income securities like bonds. For example, if you’re in your 20s an 80/20 (equities/bonds) allocation might be a reasonable option for you. Use an asset allocation calculator to help you create a diversified portfolio that matches your risk tolerance.
5. Work With an Expert
If tax planning and the other complications of investing leave you with a lot of questions, you might consider working with a financial advisor to get expert advice. While there are plenty of resources out there for a beginning investor, sometimes talking to someone with deep financial knowledge can quickly pay for itself.
6. Let Your Investment Plan Grow and Evolve with You
As you age, your financial needs will change too. Generally speaking, younger investors are advised to take more aggressive and riskier financial positions because they have time to ride out the highs and lows before they’ll need to cash out. On the other hand, older investors are nearing retirement and have less time for their investments to recover if there’s a market downturn.
As you get older, you might have different financial goals than you had at 20. You might be thinking about buying a home, starting a family or starting your own business—any of which would likely change your investment strategy. Take a look at your investment portfolio at least once a year to make sure your strategy is still working for you.
The Bottom Line
Young investors can start by building retirement savings, creating an emergency fund and opening a brokerage account. Savvy investors will understand the risk/reward relationship, revise their investment strategies as their financial needs and goals change and work with a financial advisor when they need expert advice.
Tips on Investing
As you build a portfolio, you might benefit from working with a financial advisor, who can offer both investment insights and tax advice. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Success in investing is partly about your portfolio’s asset allocation. SmartAsset has an asset allocation calculator that will assist you in picking the right asset allocation for you.
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A reader on the Mint.com Facebook page writes:
What are the best retirement savings tools for Americans living abroad? I can’t invest in an IRA or 401(k) with foreign-earned income. But I’m young, I have disposable income, and I’d like to get started now.
Good for you.
The reader didn’t specify his job or which country he’s working in, so I’m going to imagine he teaches English to Tokyo hipsters by day and tends bar in the Caribbean at night.
The Foreign Earned Income Exclusion (FEIE)
If you work abroad all year long, you’re eligible for the Foreign Earned Income Exclusion (FEIE). Basically, the IRS figures that if you live and work outside the US, you shouldn’t have to pay taxes on the first $92,900 of your income, plus an additional allowance for housing.
The rationale for this juicy deal is:
You’ll probably be paying income taxes in the country where you work.
You won’t be able to take advantage of most of the services paid for by US taxes, anyway.
The only downside to the FEIE is that if you exclude all of your income from U.S. taxes (as your average English teacher/bartender will), you can’t contribute to a traditional or Roth IRA or 401(k), all of which require non-excluded earned income.
Furthermore, U.S. citizens who participate in a retirement plan in another country are likely to end up with ongoing tax headaches.
So we’re back to the original question: what should our international playboy do?
Save like an international man (or woman) of mystery
The best move for a U.S. citizen working abroad who intends to return to the U.S. is to open a taxable brokerage account with a U.S.-based brokerage or mutual fund company. “Taxable account” just means “not an IRA.” You can still use the money for retirement, of course, even though it’s not in an officially designated retirement account.
This, unfortunately, is easier said than done. If you’re a foreign resident and aren’t rolling in cash, most US brokerages will consider you high-maintenance — at best. Vanguard doesn’t want your money at all. Schwab makes a special effort to reach non-U.S. residents, but they have a minimum opening balance of $25,000.
TD Ameritrade is open to residents of most, but not all, countries and they don’t require any special procedures or minimum balances. Roughly 30 to 40 countries are on a blacklist, however, and TD doesn’t publish it; you just have to ask. And we’re not necessarily talking about Axis of Evil-type countries; I was able to determine that Japan is on the blacklist.
Now, I am not explicitly suggesting anyone do this, but I suspect the way most foreign residents get around these restrictions is to link their brokerage account to a U.S. bank account (which they established before leaving the US), provide a U.S. mailing address to the brokerage, and sign up for online statements.
However you manage to establish an account, whatever investments you would have made in your IRA, you can make in your taxable account, with no maximum contribution. Those investments might include mutual funds, ETFs, or individual stocks and bonds.
The interest, dividends, and capital gains from those investments are not considered earned income and will be taxable, but because you’ll be in a low tax bracket, the taxes will be minimal, at least until you have a very large investment account.
This leaves the question of how to get the money to the U.S. and into U.S. dollars without spending a fortune on wire transfer and currency conversion fees.
If you work with a brokerage used to dealing with international residents, they can probably help by providing an international bank account where you wire the money and it automatically ends up in your U.S. brokerage account within a couple of days. (Schwab offers this service; TD Ameritrade doesn’t.) Or, if you need to get money into your US checking account as an intermediate step, you can use a low-cost international wire service like XE.net or OANDA.
Trouble in paradise
I’ve glossed over a variety of other issues you may run into. Border straddling of any kind makes governments nervous, especially when money is involved. It’s hard not to get the feeling that everyone assumes you’re a smuggler or a wealthy elite trying to pay zero taxes.
The IRS is not the only taxman in the world. The country you live and work in may want to know why you’re keeping all this money “offshore,” and might want a cut. This is more likely to come into play when you’ve amassed enough money to be worth going after—but I’m not promising anything. The details vary from country to country.
Speaking of the IRS: they are generally intolerant of U.S. citizens investing in foreign mutual funds and similar investments. Unless you want to learn a whole lot about “passive foreign investment companies” and all the red tape involved, avoid investing in funds local to your host country, even if they’re denominated in U.S. dollars.
The U.S. Treasury (not the IRS this time!) wants to know about your foreign accounts (bank, brokerage, or otherwise). If the total balance exceeds $10,000, then you have to file an annual form with Uncle Sam.
The best advice I can give is: talk to members of your expat community. Admittedly, if we’re talking about 24-year-olds teaching English in Japan, they’re probably not sending any money home or putting anything away for retirement. Fine. Seek out ”the suits” in your expat community and hire a pro to do your taxes the first year or two, or until you understand how all the moving parts work.
None of these hurdles are legitimate excuses for failing to save for retirement—and I know the reader knows that, or he wouldn’t have asked.
Oh, and if you think this sounds like a reeking can of worms, it could be worse: you could be a non-citizen working in the U.S., trying to abide by our rules. More on that in a few weeks.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Do you have an investing question for Matthew Amster-Burton? Head over to the Mint.com Facebook page and ask away!
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There are countless programs out there aimed at paying down the mortgage as quickly as possible, but they often highlight the interest savings without properly disclosing the risks involved.
While it may sound extremely enticing to pay down your mortgage in “half the time,” or “save $50,000” via some kind of payment accelerator, it doesn’t always work out exactly as planned. Or even close to it.
This harsh reality was revealed in a first person account over at the Yahoo! Contributor Network, in which Laura Quinn blamed her extra mortgage payments for getting her into even “deeper debt.”
Larger Mortgage Payments = More Debt
Ironically, extra payments to principal are intended to reduce debt and interest expense, but Quinn managed to accomplish the exact opposite.
While it sounds great on the surface, that money has to come from somewhere. And if it dries up your liquidity in the process, you could put yourself in a bind.
Quinn experienced this first hand after she and her husband set a lofty goal to pay off their mortgage by 2020.
When they first purchased their home in 2005, they had an initial monthly payment of $1,100 on a 30-year fixed, despite setting a goal to pay off the mortgage in 15 years by making payments of roughly $1,500.
Then they refinanced from a 30-year loan to a 15-year loan (at no cost), which increased their payment to $1,230. By the way, no cost loans mean higher interest rates, so another mistake was made here if their intention was to pay off the mortgage with the least amount of interest.
After that mortgage refinance, they refinanced again to lower their monthly payment to just $930, though they continued to pretend that they needed to pay $1,500 each month.
And if they ever experienced a windfall or came into some money, such as a tax refund, they’d throw that toward the mortgage balance one month early to ensure they could continue making the extra large payments if anything else came up.
Quinn seemed to be pretty happy with her progress back in late May of this year, and proclaimed that she and hubby couldn’t “wait to finally be free of our mortgage.”
Then the Unexpected Happened
As expected, something unexpected came along. They had some medical bills, and were forced to put $10,000 on a credit card while also taking out a $5,000 401(k) loan.
After all, she didn’t believe in maintaining an “emergency fund,” and was never good at setting aside cash for a rainy day, which she felt would just be a self-fulfilling prophecy.
For the record, the 15-year mortgage is set at a ridiculously low 2.75%, while the credit card’s APR is a much less attractive 15.24%. The 401(k) loan probably wasn’t cheap either, and it meant she couldn’t contribute to her retirement savings while paying it back.
Fortunately, she was able to pay off the 401(k) loan in one lump sum, and is now using the extra mortgage payment money to pay off the outstanding credit card debt.
So in essence, her quest to reduce her debt led to even more debt, despite holding a fixed-rate mortgage that could never surprise her.
[Do biweekly payments make sense?]
The New Goal Is to Set Aside Cash
As a result of her unfortunate series of events, Quinn has created a new goal to set aside $50,000 by the time the mortgage balance reaches $50,000.
The idea is that they’ll have cash on hand for any emergencies or unexpected costs, and save up enough to pay off the mortgage overnight if they feel like it. Still sounds like they can’t let that dream go.
Of course, first they have to tackle their credit card debt…
This personal story illustrates the risks involved with fixating oneself on paying down the mortgage.
Interestingly, the most unfortunate aspect of all of this is that it came at a time when mortgage rates were at record lows, meaning it’s the best time to hold a mortgage to term, not get rid of it.
Read more: Should you pay down your mortgage or invest instead?