Dont Forget About Taxes
Finally, as you tote up your retirement savings, remember that not all of that money is yours to keep. When you make withdrawals from a traditional 401-type plan or traditional IRA, the IRS will tax you at your rate for ordinary income .
So if youre in the 22% bracket, for example, every $1,000 you withdraw will net you just $780. You may want to strategize to hold onto more of your retirement fundsfor instance, by moving to a tax-friendly state.
You’ll Do Anything For The Highest Insured Yield
High-yield-reward checking accounts offer relatively high interestcurrently as much as 5.00 percent APYand are federally insured for up to $250,000. But the community banks and credit unions that offer them make account holders jump through hoops. While initial deposits and minimum balances are either nonexistent or very low, you typically must make six to 12 debit-card transactions per month, arrange for at least one direct deposit monthly, and sign up for electronic statements. There may be other rules, too.
With these accounts, youll get the top rate on high-yield checking up to a certain balance above that limit, the interest drops sharply. Many such accounts, also called rewards checking, limit their high rates to balances of $10,000 or less.
Consumers Credit Union of Illinois Free Rewards Checking, for instance, has a current APY of 5.00 percent on the first $10,000 in savings and 0.20 percent to 0.1 percent after that. You also have to join the credit union and agree to receive all-electronic documents. And each month you must make at least 12 debit-card transactions totaling $100 or more have $500 or more in direct deposits, mobile check deposits, or ACH credits and spend $1,000 or more with a CCU Visa card.
Tumin says some of his website readers report having a dozen or so of these accounts at a time, each account holding just under the maximum to get the top rate.
You Want High Returns And Convenience In Exchange For Some Risk
Money market funds are a good option as a secondary savings account or to hold a portion of your emergency money. Theyre offered by mutual funds and investment companies.
The funds invest in debt: super-safe, short-term Treasury bills, plus short-term municipal and corporate debt . While convenient to use if you also have a brokerage account, unlike savings and money market accounts, theyre not insured.
Still, theres a potential benefit: Money market funds typically respond quickly to changes in interest rates, as do savings accounts.
The trade-off is that although these funds are relatively safe, youre taking on an incremental amount of risk overinvesting in high-yield savings accounts, says Eric Bronnenkant, head of tax at Betterment, an online investment company in New York City.
For greater safety, you can consider a fund that focuses on U.S. government-backed issues rather than those that invest in corporate debt, says Allan Roth, chief executive of Wealth Logic, a financial planning firm in Colorado Springs, Colo.
For example, the Vanguard Treasury Money Market fund, recently yielding 2.13 percent, mainly holds Treasury bills. That rate is likely to increase, Roth says. As a bonus, income from Treasury securities is exempt from state and local income tax.
Check the net expense ratio, which should be well below 0.25 percent.
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What Causes Bear Markets
There is no one cause for bear markets, which is why trying to predict them tends to be futile. Here are the general culprits that tend to unleash the bear.
- Rising interest rates. Lenders, whether they are giving you a home mortgage or financing a mega-million-dollar bond offering, like to get their money back. They also want a rate of return thats higher than inflation. If they think inflation will rise, lenders start raising their interest rates. After all, if you earn 3 percent on an investment and inflation averages 4 percent, youve lost a percentage point.
Why is that bad for stocks? Bonds are loans to corporations, municipalities and the U.S. government. If investors can get a relatively good rate on a bond, they will tend to move money out of stocks and into interest-bearing investments, such as government bonds. In addition, higher rates mean that businesses have to pay more for loans, which reduces corporate earnings.
- Sobriety. The stock market is a place for optimists: You buy stocks because you think corporate profits will increase, the economy will be healthy and prices will rise. Every so often, however, stock investors get too optimistic, making big bets on stocks that dont deserve all that money. In 2000, for example, investors made huge bets on online companies such as the now-defunct Pets.com. Eventually, investors wised up and realized that those companies were never going to make money, and that started the big bear market of 2000.
Add To Your Emergency Fund
When youre retired, life still goes on. Surprises still come up. You still need to contribute to an emergency fund to have a cushion to pay those expenses. In fact, in retirement, an emergency fund is even more important, since you wont generally have as large of an income to cover unexpected costs.
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Guide To Financial Planning In Your 40s
Now that youâre on good financial footing, itâs time to make sure your plan is growing with you.
Establishing these good money habits means you laid down a good financial foundation. In the short term, you may be thinking about how youâll start paying for your kidsâ college and paying down your mortgage . And while retirement is still a way off, itâs getting closer.
As you move through your 40s, additional priorities are likely to surface. So now is a great time to check in on the plans youâve put in place and get more strategic about how to meet your short-, mid- and long-term financial goals.
To make sure youâre on track to meet your financial goals, weâll guide you through the important steps to help you make strategic decisions about how to manage financial planning in your 40s.
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.
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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Here Are Some Things You Should Factor Into Your Calculations:
Housing costs, including rent or a mortgage, heating, water and maintenance
Day-to-day living, such as food, clothing, transportation
Entertainment, including restaurants, movies, plays
Travel, including flights, hotels, gas if driving
Possible life insurance
What’s the magic number to hit for a golden retirement?
Over the years, finance experts have said that people need to save $1 million that’s recently climbed to $2 million as the cost of living and age demographics have changed. Some advise that you need to save 80% to 90% of your annual pre-retirement income, or that you need to save 12 times your pre-retirement salary. Those numbers and formulas can be a guide, but they’re not gospel everyone’s situation will be different.
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.
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Update Your Estate Plan
If you created an estate plan in your 30s, make sure it is up to date. Major life changes â both personal or professional â can influence decisions for the future of your estate. Review your will or trust to make sure the terms still reflect your situation, and confirm that youâve designated the right beneficiaries for your life insurance policies and financial accounts, as these trump whatâs in a will. In addition, look at your financial and health care powers of attorney to make sure youâre still happy with the person youâve named in those documents. If you havenât yet developed an estate plan, now is a great time to get those plans in order.
How Much Should You Have Saved
By this point youâre likely making contributions to a retirement account like a 401 and are building a healthy nest egg. Thatâs great. But are you saving enough? Ultimately, everyoneâs ânumberâ will be different based on the lifestyle they want in retirement. There are several general rules for retirement savings. A good starting point is the 4 percent rule, which says you can withdraw 4 percent of your savings each year in retirement . The opposite of this is to simply multiply the amount of income you want by 25. So, if you want your savings to generate $100,000 a year in retirement, you need to have $2.5 million saved by the time you retire . However, itâs important to remember that this is just a general rule. A financial advisor can help you hone in on a number based on your situation.
If youâre feeling a little behind on your goal, thatâs OK you have plenty of time to catch up on retirement savings. And if youâre in a good spot, thatâs great. It should free you to spend more on the things you want today.
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Dont Try To Time The Market
Theres a reason why you may have heard this many times: Investment professionals show that timing the market or trying to guess when stocks are at their top or bottom is nearly impossible. Research has shown that people who dump stocks during a market downturn are likely to miss the days when the market rises sharply, and that can make a dent in long-term returns.
For instance, one study published by the investment organization CAIA found that a buy-and-hold investor would have an annual return of almost 10% from 1961 to 2015. But an investor who tried to time the market and missed the 25 best days during that period would have an annual return of less than 6%.
To be sure, if an investor managed to avoid the worst 25 days during that period, their annualized return would have been more than 15%. But predicting both the worst and best days of the market is notoriously difficult, which is why investment pros recommend sticking with the buy and hold strategy.
Start A Business Or Side Gig
In retirement, youre likely to find that you have more free time to devote to your hobbies and passions. There might be no better time to invest in a side gig or part-time business. Draft a business plan, speak to your local chamber of commerce or state licensing board and figure out how much it will cost to launch your new project. Whether you follow your dream for your own fulfillment or to turn a profit, this could end up being a satisfying use of your retirement funds.
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Question: Whats The Next Best Place To Put Retirement Savings After Maxing Out My 401
Answer: First of all, nice work prioritizing your 401. Youre making the most of one of the best wealth-building tools available, especially if your employer matches your contributions.
But step back for a moment and look at how much youre paying in fees. 401s are expensive for companies to maintain and some of that cost trickles down to the investor. Maxing out a 401 has become a sort of gospel in personal finance, but throwing every last dollar at yours might not be the most cost-effective strategy.
You cant avoid fees charged by the investment funds themselves, but if your 401 administrator charges more than 2% just to manage your account, you might want to direct some savings elsewhere .
Enter: IRAs. IRAs are tax-advantaged accounts operated by banks and brokerages, rather than your employer, and come in two forms traditional and Roth. The main difference between the two is tax treatment.
Heres a quick rundown of the popular retirement accounts:
|Are there restrictions on who can contribute?||No amount you can deduct varies based on income, marital status, and whether you or your spouse have a work retirement plan||Yes to contribute the full amount in 2021, you must earn < $125,000 if single and < $198,000 if married. Earning above those limits will reduce the amount you can contribute||No Your employer may have requirements before youre eligible to contribute or qualify for a match|
*Combined annual contribution to a Roth IRA and traditional IRA.
Open Accounts Or College Funds For Grandchildren
If you feel like your retirement is set and you dont need to sock away more money for yourself, how about starting some investments for those you love? You can open regular investment accounts for your children, grandchildren or other relatives, or you can open specialized educational accounts such as a 529 plan. An added benefit of a 529 plan is that you can change your beneficiary at any time even making yourself the beneficiary.
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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.
Check Your Other Options
To me, an IRA is a smart and simple way to get started, but there are a couple of other ways to save depending on your circumstances:
- If you’re self-employedSEP and SIMPLE IRAs and Individual 401s offer sole proprietors and small business owners a way to increase the amount of money they can contribute to retirement each year. Each is relatively easy to set up, has higher contribution limits, and offers a lot of flexibility.
- If you have a high-deductible health planIf your health plan has a high annual deductible , you may qualify for a Health Savings Account . Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks. It’s a way to save for current healthcare costs as well as for the future and can be a great complement to an IRA.
- If your state offers an auto-IRASeveral states have recently implemented retirement programs to help workers save, including auto-IRAs, retirement marketplaces, and multi-employer plans. Auto-IRAs require employers who don’t offer retirement plans to automatically enroll their employees in a Roth IRA and deduct contributions directly from their paychecks, similar to a 401. Workers can decide to opt out once enrolled. Some programs are entirely voluntary for workers. Check to see what type of retirement savings program your state may offer if you don’t have one at work.
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Keep Money In Your 401 As Long As You Can
Though not all employers will allow this, keeping your money in your old employers 401 plan as long as possible can be a great strategy for retirees. For starters, your money will remain in its tax-deferred wrapper. Even better, youll still have access to all of the 401 options of your former employer. Assuming you were in a good plan, this can be a lot less stressful and more convenient than having to roll over your 401 plan into an IRA and start your whole investment program over from scratch.