Once upon a time, when you hit retirement age, you could retire. It doesn’t work like that anymore. No longer is the question: “am I old enough to retire?” Now, the question is: “how am I possibly going to afford life after work?”
Reports claim that 10,000 Baby Boomers are retiring every day. But many of them are retiring into a standard of life that is significantly less ideal than they imagined. You don’t want that for you.
Don’t worry. If you’re smart, retirement will be a breeze. It just boils down to asking the right questions.
One of the biggest fears people have about retirement is that they’ll retire broke. The problem with this way of thinking is that retirement isn’t an event. Rather, it’s a process that starts even before you reach your prime working years.
Unfortunately, more than half of Americans go into retirement broke, with nothing to show for the 35+ years they’ve been working. According to a GoBankingRates research, there is a significant chunk of the population that has less than $10,000 saved for retirement. Worse, many don’t have any savings at all.
A survey by Bank of America Merrill Lynch revealed that about 81% of Americans don’t even know how much they need to save for retirement.
Below are 3 questions to help you be more proactive in how you handle the retirement process.
1. “Can you afford it?”
The current economic environment has led to a rise in the number of people who are ready to retire but can’t. The common phenomenon is a hybrid; people are in retirement but they’re still working.
So, how much money do you need to avoid this situation?
To be able to answer that question, it boils down to one simple idea: your expenses need to be less than your income. There’s more to it, but that’s the basis.
Being retired means living on a fixed income without a possibility of salary increment. Also, your expenses won’t always be fixed: healthcare goes up, taxes fluctuate, and things cost more in general over time. There are assumptions you’ll need to make when saving up.
As a guideline, many financial planners advise you to start saving up to 15% of your income while you’re still in your 20s. If you want to know the exact amount, professionals estimate that you should have at least 10 times your last full-year income by retirement. Thus, if you make $100,000 in your last year of work, you’ll need at least $1,000,000. Use this online calculator to estimate how much you need.
To increase your income, start saving and investing as early as possible. Take advantage of accounts such as Roth 401(k)s and Roth IRAs.
2. “Where should you retire?”
Another thing most people overlook is the impact where they live has on their income. For instance, did you know that 13 states tax Social Security benefits while 37 don’t? Of the 13, 9 exempt tax up to a certain limit. The remaining 4 (Minnesota, Vermont, North Dakota and West Virginia) tax your benefits, no exemption.
Also, different states have different laws regarding estate and inheritance taxes. Some states have estate tax while others have inheritance tax. Yet, New Jersey and Maryland have both taxes.
You may also want to understand the different property tax rates across states. This will be crucial in helping you understand how you spend your money once you retire.
Bottom line: Understand the tax implications of your retirement state or city to save yourself from unnecessary surprises.
3. “Do you know how to maximize your Social Security benefits?”
A MassMutual quiz aimed at testing how much Americans know about the Social Security retirement benefits asked over 1,500 adults 10 basic Social Security questions and only one answered all correctly. Only 28% got seven or more questions right––this was the passing grade.
Will you be part of the many that retire without understanding how they can maximize their Social Security Benefits?
Although Social Security is designed to cover the disabled and survivors of deceased workers, is primary purpose is to assist retired workers with their monthly expenses and without it, most retirees would probably be in big trouble. According to a Gallup report, more than half of the retirees says Social Security is a major source of income.
While the Social Security benefits at Full Retirement Age (FRA) are capped at $2,687 a month in 2017, there are a number of ways that a retiree could use Social Security to boost benefits.
For instance, there’s a “Social Security secret” you can use to get an additional $15,978 each year. Retirees can influence the amount they are paid in Social Security by choosing when (what age) to claim their benefits. At FRA, a retiree is entitled to 100% of their benefits. Retiring before reaching the FRA reduces the monthly benefit. However, holding off filing for the benefits by a year increases your benefit by about 8%. This method works so well that 23% of retirees regret not waiting longer before filing.
Depending on how “lavish” you plan your retirement being, you might need a little more or less money. When in doubt, always opt for the higher amount. You never want to be surprised by post-retirement costs, and you always want to be ready.
Student debt is at an all-time high; about 44 million Americans hold almost $1.4 trillion in outstanding debts. The issue was hotly debated during the presidential elections, and higher education institutions have been soul-searching for innovative ways to help students deal with rising costs of education.
While the topic has gotten a lot of attention, though, the perception of those affected usually fits a certain stereotype: young millennials just starting down the road to a long-term career, with many years ahead of them to pay down their debt. The reality is more complicated. Currently, 6.4% of student loan borrowers are age 60 or older. That number is expected to grow as young Americans carry their debt further into their futures. Borrowers would do well to understand the resulting implications and the best ways to approach student debt as they get older.
Setting favorable terms for loan repayment
Some borrowers mistakenly think that their student debts will automatically be forgiven after a certain age. There is indeed precedent for this line of thinking; in the U.K., for example, federal student loans are forgiven when the borrower reaches age 65. This is not the case in the U.S., and federal loans are only cancelled upon the borrower’s death.
While this fact may be grim, it can still be used to the borrower’s advantage. Because older Americans are usually living on a set fixed income and federal loans are nullified upon death, it often makes sense to reduce monthly payments by arranging to stretch out the loan term. While this increases the total amount of interest paid, it serves to keep monthly payments to a minimum which can assist with budgeting purposes. Also, if the borrower passes away before the loan is completely paid off, the resulting loan forgiveness would end up reducing the total lifetime costs.
Additionally, borrowers should be aware that some loan servicer providers automatically enter borrowers into a repayment plan where costs start low and increase gradually, in anticipation of a recent graduate starting with a lower salary and slowly increasing their income. This arrangement clearly does not make sense for older borrowers on a fixed income, who should work with their servicer to arrange an alternate agreement that is a better fit for their predicted future income.
Forgiveness programs do exist
Although an automatic, one-size-fits-all forgiveness program does not exist, borrowers should be aware that there are still other avenues to help lessen their debt. Some older borrowers may be eligible for programs that help limit total payments.
While three-fourths of older borrowers with student loan balances are only holding balances on their own education, the remainder are holding balances on a child or other relative’s education. The latter may be eligible for an Obama-era repayment program called the Pay as You Earn PAYE program, which limits required payments based on earnings. Borrowers can check on the Federal Student Aid website to determine eligibility.
Another federal program of interest is the Income-Based Repayment (IBR) program, which caps maximum monthly payments at 15% of discretionary income. One of the most appealing aspects of this program is that after 25 years of continuous repayments, borrowers may be eligible for loan forgiveness for the remaining balance.
Be prepared to pay a Social Security offset
In 2005, the U.S. Supreme Court upheld the principle of “administrative offsets” that allow the government to collect on unpaid student loan debts by withholding Social Security benefits. The amount of the offset can range up to 15% of the borrower’s disability and retirement benefits, which may come as a surprise to elderly Americans who are depending on the income.
Many people are caught off guard is that Social Security used to be off limits for student loan offsets. Until 1991, there was a 10-year time limit on the government’s ability to collect student loan debt through administrative offsets. And until 1996, those offsets could not include Social Security. Now, though, 173,000 Americans received reduced Social Security checks because of unpaid student loan debts.
These factors are important to consider early so that Americans with student loan debt can be aware of the costs that may lie ahead.
Communicate with your loan servicer
The best repayment arrangement always depends on the specific circumstances of each individual borrower. To avoid getting lumped into terms that may not be the best for you, make sure to communicate with your loan service provider frequently and update them on any major changes. Open and frequent communication is the best way to help them help you.
Many economists agree that the personal savings rate in America is too low. Even though it climbed to 5.7% in late 2016, it’s still behind most other developed countries.
For instance, Switzerland households save 13.4% of their income. In Japan, workers have averaged a savings rate of 11.74% from 1970 to 2016.
For those looking to save more, what’s the solution? Obviously, making more money helps, but that may not be entirely possible for everybody.
What anyone can do right now is manage their budget better. Smarter spending equals higher savings—a good step towards ensuring a secure financial future. Here are 4 reasons why considering the impact of spending is just as important as saving.
1. A penny saved is still a penny earned
Benjamin Franklin’s famous quote is simple but profound. Anybody that’s worried about their financial well-being should remember it. Say it out loud, “A penny saved is a penny earned.”
Though most are familiar with this quote, it’s not being put into practice the way it should be. According to research from GOBankingRates, one in three Americans don’t have any retirement savings.
Cameron Huddleston, an expert columnist at GOBankingRates, believes this can be fixed. “There are plenty of obstacles Americans claim are in their way when it comes to saving for retirement,” she says. But things likes student loan debt, low wages, and a child’s education “don’t necessarily make it impossible to save for retirement.”
For those on a strained budget, the best way to save more money is to look at how you’re spending. There are many easy ways to save a few or even hundreds of dollars a month, from cutting the cord on cable to bargaining at flea markets.
2. Overspending carries future financial consequences
According to a study published in the Journal of Consumer Research, consumers overspend due to impatience and not thinking about long-term consequences. Examples of this play out every day.
For instance, 30-year olds probably don’t think about how buying a super-expensive TV today could negatively impact their quality of life at 65. That’s just so far away, and that TV can offer immediate pleasure.
This is what motivated the study’s researchers, Daniel M. Bartels and Oleg Urminsky, to look for ways to change this behavior. The two University of Chicago professors found that the solution is more complex than just thinking about one’s future self. While spending money, people must also care about their financial future. If someone doesn’t care, then spending less and saving more becomes less likely.
As Bartels and Urminsky say, “The best way to help consumers avoid overspending is to get them to both care about the future and recognize how their current behaviors affect the future.” Thinking and caring about the future is key to spending wisely today.
3. There is waste everywhere
Think of something like lean management in business. The core idea is to eliminate waste and improve efficiency. People should be applying this philosophy to the way they spend money.
Many may argue that saving is tough because all their income is spent on essentials, but research doesn’t necessarily support that claim. A survey by 24/7 Wall Street found that Americans spend roughly 15% on non-essentials (which means $15 out of every $100 doesn’t necessarily need to be spent).
Some common non-essentials include the following:
Eating out at restaurants
It’s worth noting that things that can be classified as “non-essentials” offer necessary relief from the stresses of life. Yet the fact remains that this is the primary area where wasteful spending occurs. Cut down any wasteful spending here and savings rates rise immediately.
4. Overspending leads to debt
It shouldn’t be a surprise that student loan debt can delay saving for retirement. It’s hard to stash away cash when lenders need those monthly payments.
For those that overspend and get caught in debt, the same idea applies. Habitual overspending makes getting out of debt—and saving—quite difficult.
It’s rather alarming that the average credit card per U.S. household is around $16,000. This indicates consumers are buying things without having the ability to pay in full. Carrying a credit card balance is necessary sometimes when the unexpected arises. But for many, high balances are simply a result of bad money management (overspending).
Also, since credit cards have higher interest rates, this means people are getting burnt by interest payments. That interest money could have been savings instead.
Saving more by spending wisely
In the end, it’s not necessarily about being stingy. It’s about spending more wisely. This means buying things at the lowest possible prices, staying away from unnecessary purchases, keeping credit card balances as low as possible, and more. If more folks start to pay attention to the impact of their spending, they’ll see their savings rise.
Providing for children when they are young is a common expectation. However, the situation gets more complex as children grow into adults but continue to need financial support. Known as “boomerang kids,” these children, aged 21 years or older, either live with their parents or continue to receive financial support even when living on their own. Parents want to help their children through the weak post-Great Recession entry level job market, but such assistance comes with the added cost of decreased savings and later retirements.
According to new data from the Pew Research Center, for the first time in 130 years, more young adults aged 18 to 34 live in their parents’ homes—32.1 percent of them—than on their own or with romantic partners. In such situations, parents often need to divert funds from retirement investing and saving to bear the added cost of providing for their adult child. A 2015 study conducted by Time Magazine revealed that, regardless of whether adult children live with their parents or not, 70 percent of parents polled spent up to $5,000 per year supporting an adult child, with 38 percent reporting having spent at least $1,000. Two-thirds of respondents aged 50 and older also indicated that they had provided financial support for a boomerang child within five years prior to taking the survey.
Such amounts may seem small, but they add up quickly, especially at a time when parents should be actively working on accumulating wealth and diversifying their income streams as part of their retirement strategy. Although parents and adult children both feel that assistance should not go on for long, the reality is that it stretches over longer periods of time than anyone is comfortable with. Even if parents spend just $1,000 on their adult child per year, the sum they lose from their retirement savings is even greater when they account for the loss in market-tracking index growth should that sum have been invested instead.
In addition to decreasing the amount of investments and savings, spending money to help adult children also results in people putting off their retirement. A study by Hearts and Wallets revealed that parents aged 65 and older who have financially independent adult children are twice more likely to be retired than their counterparts who are supporting adult children.
To help offset the financial burden of supporting a boomerang child, parents can set expectations and boundaries. Parents can ask boomerang children who live with them to pay rent or contribute to household spending in other ways. Regardless of whether their children live with them or not, parents can also help themselves and their children by assisting their kids with networking so that they can find a well-paying job and become financially independent. Setting boundaries and creating a plan for when a child will move out or assume increased financial responsibility can also be helpful in keeping parents’ spending in check. Finally, assigning household maintenance responsibilities or other chores may free up parents’ time to turn to turn their attention to financial matters.
Of course, each situation is unique, so there is no one size fits all strategy. Some boomerang children may be unable to secure a well-paying job while others are crushed by crippling student loan debt. Nevertheless, parents should strive to keep their retirement strategy in focus so they don’t run the risk of outliving their assets or having to ask their adult children to care for them later in life because parents spent their retirement savings providing for their adult children today.
photo credit: Wikidpedia
Even as they enter their 50s and 60s, couples tend to avoid discussing their retirement. Although the subject can be uncomfortable because it touches on the end of life, not talking about retirement often leads to problems, both financial and domestic. To ensure that you and your partner are both well taken care of when you choose transition from the workforce, we recommend that you discuss the topics outlined below as early as you can.
- When do you plan to retire?
Because this question impacts both finances and lifestyle, it can often be the most difficult one for couples to resolve. Your partner may wish to retire early after a prosperous career, but you still feel satisfied in your work and are not yet ready to leave it behind.
The best way to get past a potential roadblock is to examine the impact one partner’s earlier retirement will have on your mutual financial situation. Having one partner remain in the workforce can increase retirement savings, grow your employer-sponsored pension, and delay taking out social security benefits, which can be helpful in making sure that neither of you run out of money once you’re both fully retired. Having one partner keep working may be especially beneficial in light of the fact that women are expected to live as much as 10 years longer than men, which could result in their living past their retirement savings.
- Where do you plan to retire?
This question impacts the kind of lifestyle you and your partner might want. Talk about your interests and the activities you wish to pursue in your free time. Depending on whether you’d like to live in a pricier urban setting or somewhere less expensive and more rural, the answer will also impact your finances. State income and property taxes, which vary widely, can also affect your decision. Whether to live in a house—which can require financial investments for upkeep as it ages—or to downsize to a condominium to free up more cash and have less maintenance activities to worry about is another key point to consider.
- What does retirement mean to you / how will we spend our time?
If you’re both retiring around the same time, do you or your partner plan to work part-time, whether to make extra money or simply to remain active, as many retired professionals increasingly do today? If one of you chooses to retire early, will that partner help the other in his or her professional career? Would you or your partner be happy spending your days pursuing exclusively non-professional interests? What do those interests include? Consider the costs of travel, theatre, family time, etc.
Developing a financial plan for retirement can help answer these questions. It is recommended that each partner prepare to answer these questions separately, as that will make your discussion more productive when you come together to merge your ideas into a unified plan. Do not let yourselves get frustrated if you cannot find common ground right away. Plans of this nature often take months of negotiation before they are set.
- Whose investment style will we follow to meet our mutual goals?
You or your partner may manage your own 401(k)s or IRAs as you move through your careers. This individualized approach does not need to change. However, the two of you should choose a financial advisor that can guide both of your individualized efforts to work together in an overall portfolio that serves your mutual goals. You should also discuss ways to keep your investment funds growing even after you begin drawing on them.
- Will we leave any money to our children and/or to charity?
If you’ve come to this point in your retirement discussion, it is likely that you have agreed upon the points outlined above to your mutual satisfaction. Still, this topic can also produce passionate discussion, depending on your family situation. After you agree upon the best ways to serve your family and legacy, we recommend working with a financial advisor to learn about the many different tools for passing on wealth to heirs or the charitable organization(s) of your choice.