retirement savings
Dear Penny: Should I Forgive the $28K My Bankrupt Parents Owe Me?
Dear Penny, I lent my parents about $21,000 about eight months ago, and another $11,000 about four months ago. The $21,000 was supposed to be âlong termâ to help my parents consolidate debt (about two years in my mind), and the $11,000 was supposed to be for one month. They’ve repaid $4,000, but nothing since [â¦]
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Your Guide to Keogh Plans and How They Work
Keogh retirement plans are one type of tax-deferred retirement plan that self-employed individuals and their employees use to invest and grow their savings. Although theyâre relatively uncommon today, Keogh plans are still an option that some high-income savers may use to save for their golden years, however a tax law change in 2001 that made […]
The post Your Guide to Keogh Plans and How They Work appeared first on SoFi.
Digit App Review 2022: Is the Automated Neobank Right for You?
This Penny Hoarder (and self-proclaimed Bad Saver) shared his honest Digit review, and how it helped him passively save $4,300 in a little over two yearsâ¦
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Understanding the Employee Retirement Income Security Act (ERISA)
If private sector employers choose to offer retirement plans to their employees, those plans must follow standards established by the federal Employee Retirement Income Security Act, better known as ERISA. ERISA guidelines require that workplace retirement plans meet certain minimum standards regarding plan information and the protection of plan assets. The Act also grants certain […]
The post Understanding the Employee Retirement Income Security Act (ERISA) appeared first on SoFi.
What Is a Debt Consolidation Loan and How Does It Work?
Solving the Income Challenge
For many people, one of the most daunting financial challenges in life is figuring out how to pivot into retirement. Itâs quite a leap to move from making a regular paycheck to being responsible for generating your own stream of income and regulating how to spend down your savings.Â
A recent Schwab study found that nearly three out of four people (72%) within five years of retirement are worried theyâll outlive their savings, and nearly six in 10 (57%) feel overwhelmed about determining how much they can spend in retirement.
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This uncertainty can be paralyzing. The average retiree still has 80% of their savings after 20 years of retirement, according to research. In one way that shows impressive discipline. In another it could show that fear is driving decision-making during a period of life when people should be enjoying what theyâve worked hard to earn.
With a retirement income plan, the challenge is how to get it right, and the good news is thereâs no shortage of products, tools and resources to help. Many providers â including Schwab â offer a range of income-focused solutions to meet different clientsâ needs and preferences. Some deliver guaranteed income, such as annuities. Others, such as bonds and managed accounts, can be utilized within a plan to generate income streams. There are also digital tools that automate the process and offer a flexible, low-cost way to generate income from a portfolio.
Itâs most important to recognize that this is not an either/or decision. In fact, sometimes a combination of these solutions is optimal, depending on your unique financial picture. Letâs break down a few options, as well as how they can work together.
If you like certainty and are comfortable handing over the reinsâ¦
Annuities can be a good starting point for your retirement income plan. There are many types of annuity products, but at their core they take the guesswork out of things by guaranteeing an income stream either over a specified period or a lifetime. That often comes at the cost of giving up control of your assets and turning everything over to an insurance company, which backs these products and their guarantees.
Thereâs a lot to like about annuities. They can provide you with confidence that you have a guaranteed income for the rest of your life or a period you choose. Depending on the type of annuity you choose, you can take payments immediately or defer them to a date down the road, and you donât have to worry about things like the stock market dropping at the wrong time.
As far as some cons to consider, the current or potential costs for annuities tend to run higher than some other options, and they generally require long-term commitments, which can make them less flexible if your retirement circumstances change. For some annuities, there can be general fees, as well as other costs associated with optional annuity riders. There may be additional charges for making early withdrawals. For income annuities that have no fees, the opportunity cost of what you could have earned if you invested elsewhere or donât live as long as the average retiree can be substantial. However, the guarantees that annuities provide can be worth it for many people.Â
If you want greater flexibility and are most comfortable having controlâ¦
Consider an automated income solution. Automated income solutions use technology to provide an easy way to pay yourself from your investment portfolio, typically at a low cost. One example is Schwab Intelligent Income®, a feature available with Schwab Intelligent Portfolios®. An automated solution can help you answer hard questions, such as how much to withdraw, how to invest based on individual goals and time horizons, and how to withdraw from a combination of taxable, non-taxable and Roth accounts in a tax-smart and efficient way.
- SEE MORE The 4 Phases of Retirement
People like automated income tools for a range of reasons. Generally, theyâre inexpensive and allow you to retain control over your money and portfolio. With Schwab Intelligent Income, for example, you can start, stop or change the withdrawal amount, frequency and deposit location however you want. You can stay in the market, so your capital has the potential to continue to appreciate and choose an asset allocation that aligns with your risk tolerance. While not guaranteed, we believe the flexibility of the withdrawal rate that you get with Schwab Intelligent Income (which leverages a Lifetime Adjustable Income approach), positions you to help achieve your income in average or better markets. The advanced technology behind the offering also provides ongoing monitoring and alerts guiding investors to make updates if needed (such as reviewing your withdrawal rate). Additionally, the offering is designed to help manage your tax liability.
Automated income tools donât come with guarantees, however, and they can be considered mainly for clients who are comfortable with technology and a degree of automation.
Itâs also worth noting that for those who like automated income tools, these tools can often be used for income needs other than retirement too â for example, if you want to help satisfy an income need to support an aging parent or a child at college.
When a combination is optimal
The range of income solutions available today is great news for investors. In reviewing your choices, you may find that a combination of both annuities and an automated income solution might make the most sense. So how do you get started?
When it comes to the annuity portion of the equation, most investors generally have at least one type of âannuityâ providing predictable income as part of their retirement tool set already â Social Security. Adding additional forms of predictable or guaranteed income, such as a relatively efficient single premium immediate annuity (SPIA), in addition to a portfolio can provide both income flexibility for a portion of savings, and a floor of guaranteed income. In this scenario, the guaranteed income from annuities or predictable income from Social Security could be used to cover ongoing core expenses, such as medical costs, housing and utilities.
One important thing to know about SPIAs is that most donât provide payments that increase with inflation, depending on the payment option you choose. This is another reason an investor might consider adding a solution like Schwab Intelligent Income to their retirement income plan, as the offering is designed to consider inflation as it evaluates withdrawal rates, while providing flexibility for the investor to increase or decrease withdrawals if needed or desired.
By adding an automated income solution (such as Schwab Intelligent Income) to the mix, investors have the additional benefit of flexible, adjustable income from a portfolio. A good way to use this is for supplemental income for more discretionary expenses a retiree may have, including travel or entertainment. During strong markets, an investor might want to increase withdrawals from Schwab Intelligent Income to enjoy more leisure or travel expenses. When the markets decline, they have the flexibility to reduce income from Schwab Intelligent Income along with reducing these discretionary expenses. Additionally, Schwab Intelligent Incomeâs ongoing monitoring and alerts can help guide these decisions in real-time.
By combining annuities with an automated income solution, such as Schwab Intelligent Income, investors can balance income and expenses in multiple ways, and update that balance as their situation changes. Of course, it’s often a good idea to speak with a financial professional who can help talk through the options and trade-offs within any diversified retirement income plan.
The choice is yours
Solving the income challenge is complicated, but there is an array of solutions that can help. Whether you prefer the guaranteed income offered by an annuity or the flexibility of leaning on an automated solution (or a combination of both), there is a choice thatâs right for you. And remember that human advisers can play an important role too, especially for more complex needs and circumstances.
Please read the Schwab Intelligent Portfolios Solutions⢠disclosure brochures for important information, pricing and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium® are made available through Charles Schwab & Co. Inc. (âSchwabâ), a dually registered investment advisor and broker dealer.
Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.
Schwab Intelligent Income® is an optional feature for clients to receive recurring automated withdrawals from their accounts. Schwab does not guarantee the amount or duration of withdrawals, nor does it guarantee meeting Required Minimum Distributions. You may incur IRS penalties for early withdrawal of funds depending on the account type.
Annuity guarantees are subject to the financial strength and claimsâpaying ability of the issuing insurance company.
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Target Date Funds: How to Evaluate If Yours Is a Good Fit
Fabulously wealthy people can walk into a car dealership or clothing store and buy a custom-made product whether they need it or not. But assuming youâre not Jeff Bezos or Elon Musk, the decision to spend more on a bespoke alternative to what is on the showroom floor needs to be carefully weighed. And in the world of 401(k) plans, what factors should you consider before deciding to purchase a customized asset allocation for your plan balances?Â
For participants who want a do-it-for-me approach to allocating their plan balances, more than 80% of 401(k) plans now offer a suite of target date funds (TDFs). These are prepackaged, age-appropriate investment strategies that are intended to help support post-employment income needs while reducing investment risk near and through retirement. This is accomplished through use of a âglide pathâ in which the fundâs asset allocation changes over time based on the participantâs retirement age.
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Each target date fund makes certain assumptions about the average participant: These include assumptions about other benefits, such as Social Security, risk preferences, salary levels, saving behaviors, work spans, life spans and post-retirement spending behavior. In most plans, TDFs serve as the planâs default option and contributions are automatically directed â unless the participant elects elect otherwise â into the fund with year closest to their assumed retirement date at age 65. (For instance, someone born in 1970 would be defaulted into a Target Date 2035 Fund.)
Alternatively, around 40% of plans (higher for employers with more than 1,000 employees) also offer a service known as managed accounts. Managed accounts customize your asset allocation within a planâs investment options based on your unique financial situation. In addition, many managed account services offer additional guidance on savings levels, when to start receiving Social Security payments and a sustainable decumulation strategy. But delegating the asset allocation and fund elections of a participantâs balance is at the heart of the service.
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Fees for managed accounts vary but typically range from 20 to 50 basis points on top of the investment expense of the underlying plan funds. This can really add up over an extended period. For example, if you put $10,000 per year in a 401(k) plan over the course of a 30-year career at a 6% return, an additional 30 basis point fee will cost approximately $50,000 over the period.
For more on whether you are a good candidate for a managed account, please read âShould Your 401(k) Be âCustom Madeâ?â
Evaluating the target date investment strategy
To make a high-level determination regarding whether your planâs target date fund is appropriate for your situtation, you need to understand the managerâs investment strategy. This is far easier than it sounds as you can typically find what you need on the fund fact sheet or in a summary prospectus. And if you cannot find it on your own, you can contact your plan recordkeeper for the information.
Participant profile
First look for the section that describes the assumptions being made about the average investor. To illustrate, here are a few sentences drawn from the summary prospectus of one of the largest target date funds offered in defined contribution plans:
âThe fund is managed based on the specific retirement year (target date) included in its name and assumes a retirement age of 65. The target date refers to the approximate year an investor in the fund would plan to retire and likely stop making new investments in the fund. The fund is primarily designed for an investor who anticipates retiring at or about the target date and who plans to withdraw the value of the account in the fund gradually after retirement.â
Just in these three sentences you can glean some key assumptions used in shaping the fundâs investment strategy:
- Participant will continue to contribute to the fund up until age 65 and then begin the drawdown process.
- Participant will avoid any large withdrawals during their working years, dedicating these balances to providing post-retirement income.
- Participant will gradually withdraw their balances over time, eschewing any large distributions at retirement.
A fund manager working under these assumptions would assume that fund investors can withstand higher levels of volatility, because they have a longer period to recoup any losses incurred during their working life. So the manager would focus on asset accumulation by investing a high percentage of fund assets in equities prior to retirement and then shifting to a more conservative approach in the post-employment period. Â
So what happens if you anticipate operating under a different set of assumptions? For instance, you may plan on terminating employment at age 55 and using these funds to purchase a new home or pay for educational expenses. In this case, you may prefer a more cautious investment strategy than this fund offers. Alternatively, you may have sufficient assets to avoid withdrawals before the required minimum distribution date of age 72. In that case, you may not want to shift to a more conservative allocation at age 65 but instead continue with a more growth-focused strategy given your longer timeframe.
Glide path
You also need to review the fundâs glide path, specifically the percentage of assets held in equities or other higher risk asset classes at different ages. Here is a sample glide path borrowed from one of the largest target date fund series offered in defined contribution plans:
Source: T. Rowe Price Glide Path Comparison
As one would expect based on the stated investment strategy, the glide path starts off almost entirely invested in equities and remains at 55% even at the assumed retirement age. And while declining after retirement, it still remains at 30% equities even at age 90 and later.Â
So, just based on this basic information, you can consider whether this approach is appropriate for your financial situation. For example, if you are a conservative investor with a low risk tolerance, either due to temperment or financial situation, this fund might not be appropriate given its percentage of equity holdings. (FYI this glide path is not out of line with the approach of all the major target date funds used in defined contribution plans.)Â
Hacking the decision
There is a simple shortcut, or hack, you can use if you have concerns about the default target date fund in your plan but donât want to pay the additional cost for a more customized solution.Â
As a reminder, you are typically defaulted to the fund where the year included in the fund name is closest to when you turn age 65. For example, someone born in 1961 would be defaulted into target date fund 2025. But you can pick a different fund based on your risk preferences. So regardless of your birth year, if you want a substantially lower level of risk, consider a fund maturing at an earlier date (target date 2015, 2020, et al.).
The opposite applies if you want to focus more on asset appreciation than your default fund allows. And remember, your initial election is in no way permanent. If your financial situation charges (for example, acquiring substantial equity holdings through your job), you can dial down the equity holdings in your 401(k) plan by picking an earlier maturity date from the series.Â
Conclusion
This is obviously only a basic guide to evaluating target date funds as more complex issues like the type of equity assets, credit quality and duration of fixed income holdings, inflation hedging, use of alternative asset classes, or active versus passive fund management can all come into play.
For the typical investor considering whether to abandon their planâs default target date fund for a customized option, reviewing the basic assumptions of a TDF is a good place to start.
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Financial Situation Changed Due to COVID? Professional Advice Can Help
After almost two years, the pandemic has brought major life changes clouding the path to a stable retirement for many individuals. Americans are struggling with key decisions on investments and estate planning strategies, according to a recent Hearts & Wallets report, while the National Institute for Retirement Security says more than half of Millennials and Gen Xers are more worried about their retirement security than before COVID hit.
Add in significant changes in the employment market, with women being disproportionally affected than men and unprecedented numbers of workers taking part in the âgreat resignationâ along with continued market volatility, and itâs no wonder retirement security feels unattainable for many.
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But there is hope. Making some smart money moves right now can get you on solid footing for your retirement. Donât know where to start? Professional advice â whether from a local financial professional or one offered through your workplace, a phone-based or virtual financial professional, or even digital advice tools â can help.
Where to start depends on your personal goals and how the pandemic may have impacted your progress. Hereâs what to consider:
If you quit your job as part of the âGreat Resignationâ â¦
⦠Youâll need to make sure the career change doesnât derail your retirement plan. Think twice before cashing out of your previous workplace retirement plan, which can cost you big in taxes and penalties. Once youâve landed in your next role, opt into the workplace retirement plan as soon as youâre eligible, contributing at least enough to get an employer match â more if you can. And carefully consider the options for your old 401(k) or similar savings plan.
If your new plan provides access to professional advice, take advantage of it. Or consider speaking to someone outside of the workplace who can provide you advice based on your entire situation.
If you put off milestones, such as buying a house or getting married during the pandemic â¦
â¦Â Itâs time to get back on track, but be careful not to overspend to make up for lost time. A financial professional can help look at your current financial picture to create a financial strategy that will help you reach both your short- and long-term goals, or readjust them, as needed.
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For newlywed (or soon-to-be-married) couples, a financial professional can serve as a third party to help you set financial goals and navigate the sometimes-tricky waters of combining â or not combining â your finances as you begin building a life together and planning for the future. Financial professionals can also help you make sure youâre adequately protecting yourself from a variety of risks.
If you want advice but arenât ready for an in-person meeting â¦
…The virtual environment provides you with a wonderful opportunity to redefine how you would like to interact with your future financial professional. Many workers have come to appreciate the hybrid or completely remote work environment during the pandemic. Consider a professional advice model where you can engage by phone to talk about retirement planning or other financial challenges youâre facing.
If stimulus checks and a less active social life have boosted your savings account â¦
â¦Youâll want to make sure youâre reviewing and making progress on your financial goals. If youâve paid down debt, built adequate emergency savings and are maxing out your retirement savings, you may want to look at your financial wish list â maybe starting a business, buying a second home or retiring early. Either way, you may also want to put your extra cash in savings into investments that match your goals.
Unsure what to do first? If all you need is investing guidance, digital tools can be a good place to start. We have a calculator and be sure to check out the suite of tools on this resource center page. A financial professional can help you prioritize and achieve your goals and, if appropriate, help you allocate your investments.
If COVID forced you into retirement â¦
⦠Professional advice can help you stretch your nest egg as far as possible. A financial professional can work with you to determine your best withdrawal strategy, after factoring in the size of your retirement savings, the types of accounts you have (taxable or non-taxable), Social Security and other income sources, and your expenses. They can also talk to you about whether it makes sense to consider working part time or using a guaranteed income product to ensure you never run out of money in retirement.
Remember, regardless of how you arrived at your current situation, taking the right steps now can help you feel confident that a financially secure retirement is in your future. Start today with getting the advice you need.
The Prudential Insurance Company of America, Newark, NJ.
1056430-00001-00
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401k Tax Rules on Withdrawals and Contributions
Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. A little more than half of employees participate in a retirement plan at work, according to the Bureau of Labor Statistics. So itâs important for participants to understand how 401(k) taxes work. With a traditional 401(k) plan, employees can […]
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