How Could I Be Indebted To My Employer
Some examples of causes for indebtedness include:
- Outstanding travel advances
- Indebtedness for failure to return government property or for damage to government property
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Are Retirement Savers Actually Changing Course
To answer this question, we looked at the behavior of 401 participants during the first half of 2022 from T. Rowe Prices recordkeeping data. Using collective and anonymized data, we analyzed their exchange activity and changes in their deferral rates during this volatile period.
In general, 401 participants have been staying the course. Based on our research, over 95% of 401 participants have not made any investment exchanges during the first half of 2022. But underlying that, there are some noticeable trends.
Apart from exchanges, 401 participants can also change their deferral rates in response to market conditions, but other factors may also be at work. For most of the first half of 2022, average deferral rates stayed relatively stable. More recently, though, the average has trended downward, suggesting that cutting back on contributions is one way workers may be coping with inflation at fourdecade highs. If high inflation persists and the downward trend in deferral rates is prolonged, then it could become problematic because retirement savings might fall.
Average Deferral Rate Has Remained Stable
Weekly average deferral rate during the first and second quarter of 2022
As of July 1, 2022.401 participants of plans with approximate assets> $25m. during the first half of 2022 from T. Rowe Prices record-keeping data.Source: T. Rowe Price.
What Can Investors Do To Adapt To Market Turmoil
Review Their Spending Expectations
Our research2 indicates that a conservative withdrawal approach is an important way to navigate an uncertain market environment, especially at the onset of retirement. To gain insight on portfolio sustainability, we tested the 4% rule of thumb in three past market environments, each starting with a bear market at the onset of retirement. The 4% rule of thumb suggests that an individual withdraw 4% of their retirement portfolio in the first year of retirement. That amount is assumed to increase with inflation each year over the retirement horizon.
We assumed a beginning balance of $500,000 and an initial withdrawal amount of $20,000 in the first year . We considered three historical time periods that begin with significant market selloffs: retirements beginning in 1973, 2000, and 2008. In each scenario, we considered the historical performance of a portfolio consisting of 60% stocks and 40% bonds using index data and increased the initial withdrawal amount by the actual inflation rate3 at that time to maintain purchasing power.
A Conservative Withdrawal Approach Is Part of a Sustainable Spending Plan
Hypothetical portfolio balances over three retirement horizons that begin with a bear market
We have also examined actual spending patterns in retirement4 and found that, on average, inflationadjusted spending declines by 2% annually after age 65.
Sample Asset Allocation by Age for Retirement Savers
Build Up Cash Reserves
Investment Risks:
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Which Retirement Plan Is Best For You
In many cases you simply wont have a choice of retirement plans. Youll have to take what your employer offers, whether thats a 401, a 403, a defined-benefit plan or something else. But you can supplement that with an IRA, which is available to anyone regardless of their employer.
Heres a comparison of the pros and cons of a few retirement plans.
Estimate Your Retirement Income
You can generally plan for your annual retirement income needs to be 70 to 80 percent of your pre-retirement income. When youre further away from retirement, it can be hard to project how your income might change over the years so it’s okay to make an educated guess.
To generate income in retirement, you may rely on a combination of savings, Social Security and pensions:
Once you have an idea of your retirement vision and income, its important to revisit your goals and projections annually with a financial advisor.
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See How You Could Benefit From Expert Advice
We believe anyone can be a successful investor by following some basic principles.
But even if you’ve been investing solo for decades, think about whether you might benefit from advice as you begin planning for retirement. During this time, you’ll be making some very important decisions that could make or break your retirement timeline.
How To Invest For Retirement
Years ago, retirement-focused investors would have likely put their money in a balanced mutual fund, which typically consists of 60% equities and 40% bonds. While that asset mix is still popular among savers today you get some growth from stocks and some protection from bonds investors now have more choice.
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Things To Keep In Mind When Getting Started
This is your current budget, which takes into account all of your present-day income and expenses. While you should have some idea as to what you’ll need to save per month based on your retirement goals, you also need to make sure that you have that money to save. It’s a good idea to put retirement savings as a line item in your budget, just like food and shelter costs, so that you can set aside those funds every month.
This is a tool you can set up between your checking account and your retirement account so you don’t forget to save. Set it up so that on the same day every month maybe it’s the day you get paid funds you’re earmarking for the future go from your bank account into your investments. By doing it this way, there’s no risk of you spending that money.
Having a separate emergency account usually with about three to six months of salary saved up will allow you to cover any unexpected costs without throwing your retirement plans out of whack.
One goal for everyone should be to reach 65 debt-free. That includes credit card debt and especially the high-interest reward card kind car and mortgage loans, any student and other big loans. The reason is simple: you don’t want to be going into your non-earning years owing money.
Selling Investments In Tax
When selling assets, a general guideline is to tap investments in taxable accounts before taking money from tax-deferred or tax-free accounts, such as a traditional or Roth individual retirement account or a 401.
That’s assuming you have enough retirement savings in taxable brokerage accounts and haven’t yet reached age 72 , the age when the IRS requires you to begin taking required minimum distributions from traditional IRA or 401 accounts.
Tapping your IRA earlier means losing potential opportunities for tax-deferred compound growth. A possible exception is if your IRA balance is very large relative to other savings or if you need the money sooner. In that case, you might want to start taking distributions before you reach age 72.
Otherwise, when you start taking RMDs after age 72, you might be bumped up to a higher tax bracket. Withdrawals of pre-tax contributions and income from traditional IRAs and 401s are treated as ordinary incomewhich is typically taxed at a higher rate than long-term capital gains in taxable accounts.2
Talk with your advisor or a tax professional to time your retirement income distributions wisely.
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Consider An Encore Job
Who says that retirement from one job has to mean leaving the workforce entirely? A number of folks try out a less-stressful secondary career, perhaps one thats part-time, after leaving their longtime industry.
Research finds that retirees who got a bridge job, another term for this type of work, are often in better health, both mentally and physically, and report higher levels of life satisfaction. So look around your community for jobs that you might enjoy doing during retirement.
Identify All Sources Of Income
You will draw income from a variety of sources in retirement, so it’s important to be aware of how taxes will impact the net income generated from each:
- Taxable or tax-preferred accounts: Your savings and certain investment accounts can provide income that may be taxable or in some cases, are sources of income where taxes have already been paid. Social Security benefits may be subject to taxation depending on your circumstances.
- Tax-deferred accounts: Traditional IRAs, workplace savings plans such as 401s, pension plans, deferred compensation payouts and annuities provide income that is subject to current tax.
- Tax-free accounts: Income from municipal bonds, Roth IRAs, life insurance cash values and Health Savings Accounts are all available on a tax-free basis, assuming certain requirements are met.
You’ll ideally be able to draw income from all three of these categories. That will help you more effectively manage your tax burden and may help you meet income needs throughout your life. Read more about tax diversification and investing.
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How To Get Started
With some of these retirement plans , youll have access to the plan through your employer. So if your employer doesnt offer them, you really dont have that option at all. But if youre self-employed or earn any income, then you have options to set up a retirement plan for yourself.
First, youll need to determine what kind of account youll need. If youre not running a business, then your option is an IRA, but youll need to .
If you do have a business even a one-person shop then you have a few more options, and youll need to come up with the best alternative for your situation.
Then you can contact a financial institution to determine if they offer the kind of plan youre looking for. In the case of IRAs, almost all large financial institutions offer some form of IRA, and you can quickly set up an account at one of the major online brokerages.
In the case of self-employed plans, you may have to look a little more, since not all brokers have every type of plan, but high-quality brokers offer them and often charge no fee to establish one.
What To Consider When Planning For Retirement
Here are a few key questions to ask yourself as you think about a retirement plan:
- When do you want to retire? Are you planning to work until age 65 or until you are older than that? Do you have a goal of retiring early? How many more years you plan to spend in the workforce significantly affects how much money you are likely to need. If you choose to work until you are older, not only do your investments have more time to grow, but the number of retirement years you need to fund is slightly reduced.
- Where do you want to live? Are you going to stay in your current home or downsize? Do you want to stay in the same area or retire somewhere warm or closer to relatives? The cost of living in the area where you’d like to live as a senior citizen is another major factor impacting how much money you will need in retirement.
- How will you pay for your living expenses? Your Social Security retirement income isn’t likely to be enough to cover all of your expenses, so will you also have a pension? A 401? Will you need to save or invest money as well? Another factor to consider is the magnitude of your living expenses themselves. Whether you own or rent property in retirement can significantly change the amount of your living expenses.
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Select Your Retirement Investments
Retirement accounts provide access to a range of investments, including stocks, bonds and mutual funds. Determining the right mix of investments depends on how long you have until you need the money and how comfortable you are with risk.
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Generally, the idea is to invest aggressively when youre young, and then slowly dial back to a more conservative mix of investments as you approach retirement age. Thats because early on you have a lot of time for your money to weather market fluctuations a few bad years wont ruin you, and your nest egg should benefit greatly from the stock markets history of long-term growth. Investing for retirement evolves alongside you as you change jobs, add to your family tree, endure stock market ups and downs and get closer to your retirement due date.
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Your investments don’t necessarily require constant babysitting. If you want to manage your retirement savings on your own, you can do it with just a handful of low-cost mutual funds. Those who prefer professional guidance can hire a financial advisor.
Invest For The Long Term
Fear, anxiety and impulsivenessthose are the three biggest enemies youll face while trying to invest and plan for retirement. Not only will they cause you to panic and make dumb decisionslike pulling all your money out of your 401 when the stock market has a bad daybut theyll also keep you from investing all together.
To build wealth and invest with success, you need patiencelots and lots of patience. Slow and steady wins the race every time. There are no shortcuts.
Remember, investing is a marathon, not a sprint. And its not for the faint of heart. The stock market is a roller coaster thats going to go up and down, but youve got to be strong enough to stay on the ride through all the twists and turns that pop up.
Keep in mind that as you approach age 60, youll want to purchase long-term care insurance. LTC insurance will protect the money youve saved for retirement by helping to pay for a nursing home or in-home care if you need it. So, make sure to factor in LTC insurance as you estimate your retirement budget. Its a necessity!
Also, until youre self-insured, term life insurance needs to be part of your plan to cover those who depend on you.
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Keep Your Brain Active
Besides being socially and physically active. Keeping your brain active in retirement makes your chances of enjoying your retirement as long and as healthy as possible a lot bigger. The key to a successful retirement is having a combination of social, physical, and mental activities.
For example, meditation is a great way to start your day with a clear and peaceful mind. With meditation, youre training your mind in awareness. Its not about turning off your thoughts or feelings. You learn to observe them without judgment. And with daily meditation sessions, you will have a better understanding of your thoughts and feelings. You can fit this into your everyday schedule in retirement and make it a routine to help you stay in the right mind state.
Besides meditating there are all sorts of other ways to keep your brain active. Activities that are healthy for your brain but also fun. You can find these tips in my ebook: Five Steps To Happiness In Retirement.
What Funds Should You Buy
There are a variety of funds types to consider when saving for retirement. Here are the most popular options.
Actively managed mutual funds
These funds have been around for decades and are still the most-popular kind of security among retail investors. They hold a variety of stocks or bonds, and sometimes both, in one investment vehicle. Mutual funds are ideal for people who don’t want to choose their own stocks. Instead, a professional fund manager can do it for you. If you want to own a bunch of international stocks, but don’t want to pick individual companies, then buy an international stock fund. The same goes for tech stocks, U.S. stocks and corporate bonds there’s a fund for everything. The main drawbacks are fees and flexibility. Because someone else is doing the stock picking, fees are higher on actively managed mutual funds than on other kinds of investment vehicles. You also can’t buy or sell them during the day as they’re only priced after the market closes.
Index funds
Exchange-traded funds
Target date funds
Build your portfolio
A lot of people like investing on their own, but when it comes to retirement savings it’s a good idea to work with a financial advisor who has a certified financial planning designation. Here are a few things to look for in a good advisor.
Think about fees
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Do You Want A Simple Retirement Or A Lavish One
When you picture yourself in retirement, do you see yourself in your current home? With your current car? Are you debt-free, or will you still have items to pay off? Are you content with doing inexpensive activities, or do you want to travel the world, dine out at restaurants, or buy a vacation home?
How little or how much you want to do in retirement is the biggest factor when it comes to the money you need to be saving now. While many experts say you should set aside 10% to 15% of your income starting in your 20s, if you plan on living simply, you might not need to save 15%. On the other hand, if you plan on living large, youll probably need more than 15%.
Determine Your Retirement Spending Needs
To financially plan for retirement income, consider how much money youll be spending once you leave the workforce. Having realistic expectations about your retirement costs, spending habits, and income can help you navigate your financial life in retirement. Some points to ponder include:
- What are your estimated costs for your planned retirement activities such as travel, unexpected expenses, and medical costs?
- What is the status of your investment portfolio and retirement accounts? When you retire, you will be making a switch from saving to spending. Will assets have some growth potential due to inflation? You may also consider minimizing investment risk to better protect your portfolio.
- What is your expected income during retirement? This may include Social Security, pensions, annuities, money from a part-time job, or income from a rental property you may own.
- How long will your savings last? You may outlive your savings, so factor in that possibility to help prevent the well from running dry.
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