What if the 4% Rule is Wrong

There is much debate about whether the 4 percent rule is still valid. What is the 4 percent rule? It is a rough way to calculate how much you can withdraw from your savings at the start of your retirement and have your money last for at least 30 years. It is a guide post to letting you know whether you’re saving enough. So if it’s wrong there are implications.

The debate stems from expected investment returns. Most investment analysts expect future investment returns to be lower than historical returns. Interest rates are lower than when the 4 percent rule was originally developed and the stock market is at all time highs. So the expectation is the future can’t be as good as the past. I recently saw an article that suggested the new rule should be 2.98 percent.

That is putting a very fine point on something that is completely unknowable. The truth is we can only make an educated guess about what will happen in the future. It is important to have a guess, but you must get used to the idea that it is just that.

There are two sides to the guess. One is the investment return you might expect and the other is the inflation rate on your lifestyle. If your initial savings withdrawal in retirement is 4 percent of your balance, it is assumed it will increase with inflation throughout your remaining life. If your first year’s withdrawal was $20,000 and inflation were 3 percent, your second year’s withdrawal would be $20,600, and so on.

It doesn’t really matter what the specific investment return or inflation rate is, as long as the investment return is higher than the inflation rate by enough to give you some time before your withdrawals start outpacing your investment gains. If low investment returns are accompanied by low inflation rates, the 4 percent rule should still work. It so happens that historically, with the exception of the stagflation years of the early 1980’s, inflation has remained below long-term return expectations.

In 2012, William Bengen, the author of the 4 percent rule, revisited his work to see if it was still valid. If you lived through periods such as the financial crisis or the tech bubble, would your savings still last? He found that his original conclusion was still correct. Even with the impact of dramatic market down-turns in the mix, an initial 4 percent withdrawal rate was still reasonable. That was because the lower market returns were accompanied by lower inflation.

But the real problem is not whether the rule should be 4 percent or something less. The real problem is people are not saving nearly enough to come close to being able to live off 4 percent of their savings. If you have saved enough that your initial withdrawal rate is just 4 percent of your savings, I’m not worried about you. You’ll find a way to make your money last, and it likely won’t even involve painful choices.

The fact is, for your savings to last, your withdrawals must be small relative to your total balance. That is intuitive. Your going to be living on your savings for many years. It’s obvious that if you take a lot out each year, it won’t last. Financial rules of thumb are good guide posts, and give you something concrete to work toward. So pick one. If you save enough to meet it, you’ll be fine.


Photo by Ivan Vranić on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Should You Save with OregonSaves?

With the start of a new year, many of you are making resolutions to contribute to a retirement savings account. Those who have a retirement savings plan through work, are far more likely to save for retirement than those who do not. Unfortunately only about half of Americans have access to a workplace retirement plan.

Oregon, as well as Illinois and California, is addressing this shortfall by offering a state sponsored plan. If Oregon businesses do not currently offer a retirement plan, they will be required to offer OregonSaves this year.

OregonSaves is a Roth IRA option. All the Roth IRA rules apply. You can only contribute up to the IRA limit, which is $6,000 for most and $7,000 if you are fifty or older. If you have a high income (more than $124,000 for singles and $196,000 for married couples), your ability to contribute at all will be curtailed.

However the program has put together a handful of investment options, and set up rules that require participants to opt-out rather than opt-in. Initial default contribution rates are 5 percent of salary, subject to the IRA limits. You’ll be able to select from a suite of target retirement date funds, a money market option and a growth fund. If you do not opt-out, you will be automatically enrolled in the program, without having to do a thing.

The result will be that more Oregon workers will have access to a convenient way to save, and hopefully savings rates will increase. But the fact of the matter is, you can do all of this yourself and do it at a lower cost. OregonSaves will collect 1 percent of your account value every year to cover investment and administrative expenses. That is high, given that plenty of fund companies offer similar investments at a lower cost.

The investments offered are all index funds, the type which can be had from most institutions. Vanguard, for example, offers a suite of target retirement date funds with an expense ratio of around 0.14 percent. That means you’ll keep an additional 0.86 percent of return every year over the similar investment options in OregonSaves. Over ten years, your account value would be about 9 percent bigger with Vanguard than OregonSaves on just the expense savings alone.

The automatic contributions with OregonSaves is definitely appealing, but you can arrange for that yourself too. Most employers allow you to have your paychecks direct deposited, and you can usually split your deposits among multiple institutions. There is no reason why you cannot set up a direct deposit to a Roth IRA account at any institution. If for some reason you don’t have that option, you can arrange for an automatic transfer from your bank to a Roth IRA to correspond with the deposit of your paychecks.

OregonSaves is a fine way for employers to offer a retirement savings option to their employees. It doesn’t cost them a thing, except for a bit of set-up upfront. However, it isn’t a great way for employees to save. If your employer will be signing up with OregonSaves this year, use the opportunity to take matters into your own hands. Open a Roth IRA account at your favorite mutual fund company, select a target date retirement fund that fits with your timeline, and have a portion of your pay direct deposited to it. You’ll accomplish better than the same thing as an account with OregonSaves.


Photo courtesy of Sharon McCutcheon on Unsplash.com

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

If Only Twelve Days Was All You Needed

Its that time of year again folks! Time for my annual repost of my version of the Twelve Days of Christmas. May your holidays be bright, and the new year bring you happiness, peace and security.


On the first day of Christmas my true love gave to me a fund for emergencies

On the second day of Christmas my true love gave to me a budget for expenses and a fund for emergencies

On the third day of Christmas my true love gave to me a maxed out retirement, a budget for expenses and a fund for emergencies

On the fourth day of Christmas my true love gave to me a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the fifth day of Christmas my true love gave to me a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the sixth day of Christmas my true love gave to me full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the seventh day of Christmas my true love gave to me insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the eighth day of Christmas my true love gave to me a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the ninth day of Christmas my true love gave to me a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies

On the tenth day of Christmas my true love gave to me a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the eleventh day of Christmas my true love gave to me a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

On the twelfth day of Christmas my true love gave to me, a pledge to be mortgage free, a long-term care policy, a sound investment strategy, a pay-down on my student loans, a 529 for my kids, insurance for disabilities, full estate planning, a Roth IRA, a pay-down on my visa, a maxed out retirement, a budget for expenses and a fund for emergencies.

Happy Holidays Everyone!

Photo by Clem Onojeghuo on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Nothing Happens Without a Plan

October is Financial Planning Month. Of course it’s also Adopt a Shelter Dog Month, Breast Cancer Awareness Month, Global Diversity Awareness Month, National Bullying Prevention Month, and about ten other awareness, appreciation and support worthy causes month. But since Financial Planning is in there, there is no time like the present to do something important for you.

Rarely anything happens without a plan. Even your daily to-do list is essentially a plan. If something isn’t on that list, the chances of it getting done go down dramatically. So your financial security certainly isn’t going to happen without your attention. It won’t happen when you get a raise. It won’t happen when the kids are out of day care or college. It simply won’t happen unless you make a plan to make it happen.

Recently I’ve been speaking with a few couples who have just gotten started on their plan. They are in their sixties. They have saved a bit along the way, because they knew they were supposed to, but they haven’t followed a plan. As a result, they had not saved enough to support their lifestyles after they leave work. And in all cases, they are mentally ready to leave work.

Fortunately, because they have saved some, and they have equity in their homes, they are still going to be able to support themselves. But their lack of planning earlier means they will have to make significant changes to their lifestyle, even if they plan to work until they are in their seventies.

Now of course, if you are not currently saving, or saving enough, saving more will require a change in your lifestyle, even if it’s only being more conscientious with how you spend. It’s never too late, but the sooner you start the less dramatic and painful those changes will be.

The start of any plan is a goal. Some goals are far away and as hard to imagine as they are easy to put off. Typical savings metrics are uninspiring. You need three months of expenses in an emergency fund. You need 25 times your income in savings before you can retire. Both of these are daunting and unimaginable.

Savings goals aren’t actually about the money, but rather what you want to do with the money. So rather than save an emergency fund, a better stated goal would be to protect yourself from a financial setback, such as a job loss. Rather than saving for retirement, save for the freedom to choose whether to work and who to work for.

The next piece of a good plan is to define your goal, and this is where the money comes in. Your goal isn’t about the money, but it does have a price tag. If you find saving hard, simply start with a dollar figure you can live with. However ultimately you will want specific targets, especially for your long-term goals. And you’ll want to break those goals down into shorter more manageable targets, like how much you want to save this year, in the next three years, and so on. The rules of thumb can be a good place to start, but you know your circumstances, so make your own targets. For some free calculators to help you get started, check out my resource page.

With your goal defined, you can develop your strategy. Be very specific. Decide exactly what you will change on a daily, weekly and monthly basis in order to achieve your goal. Think about what might go wrong and how you will adapt, and if you can’t do all you want to now, think about how you can do more later. If you have a significant other, you have to work together on this. It will be hard to make progress if you both aren’t all in. Decide together on your goals and your strategy, and hold each other accountable.

I try to limit promotion of my book, Save Yourself, to the footer of my blog, but given the topic I’ll make an exception. My book provides a step by step guide to creating your own financial plan from developing goals and defining them to creating a strategy to achieve them. The final chapter walks through the development of a real couple’s financial plan. There are worksheets and references to calculators throughout. It’s available on Amazon and BarnesandNoble.com.

I hope you’ll take some time during Financial Planning Month to get started on your own path to creating your plan. Nothing happens without a plan, and that goes for your financial security too.


Photo by Ben Regali on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Time to Retire Retirement and Bring Out Financial Freedom

These days, it’s easy to find advice that says you should never retire. There is evidence that maintaining some structure and the social network that work provides is good for your physical, mental and financial health. And there is nothing wrong with putting a positive spin on the necessity that far too many face; the need to keep working to pay the bills well beyond the normal retirement age.

Unfortunately, this line of thought is being used to justify not saving for retirement. That is a mistake. Even if you love your job, there is a good chance that you won’t be able to do it forever. The older you get, the more health issues can sabotage your plans, whether the issues are your own or a loved one’s. Older workers face higher unemployment, and it’s more difficult to get a job after the age of fifty-five.

But while you are young, and have the time to save for retirement, these eventualities seem remote and certainly not your own. So it may be a good time to start thinking about your life beyond work in different terms. While retirement conjures visions of white haired people playing endless golf and gardening, having enough money to be able live without a paycheck has a much more important benefit – financial freedom.

That is why I left work at the age of 51. My husband and I had saved enough money to support our lifestyle for the rest of our lives. He had retired the previous year. We didn’t need to work for pay anymore. While I liked my work, which was challenging, I had become tired of catering to other people’s demands. I figured if I didn’t like retirement, I could always go back to work. Because we had saved, we had choices.

I have never looked back. Since leaving work, my husband and I have done the things that are important to us. I began this blog and wrote a book to help others learn how to save and invest for their own financial security and retirement (you can find it on Amazon). I’ve personally helped dozens plan for their retirement and get their financial houses in order, all for free, because I think its important and I like doing the work.

I also serve on the boards of a few non-profits where I do volunteer bookkeeping and offer my expertise. That includes the non-profit my husband started to coordinate services to low income and homeless individuals and families. He is building a mobile shower unit to serve the homeless in our county. You can read about the project here. The proceeds from my book have gone to fund this effort.

So, as you can see, our time is filled with activities that have meaning and that we value. The money we saved for retirement gave us financial freedom to do what is important to us. It gave us the power to choose what we do with our days, and the freedom from fear of losing a job.

What would you do, if it didn’t matter whether you brought home a paycheck? Start a business? Create art? Help a family member or neighbor in need? Leave me a comment if you’re willing to share. You may not know right now what you would do with your financial freedom. But wouldn’t it be nice to have choices?

Maybe it’s time to retire the word “retirement” and replace it with financial freedom, as in, “I’m saving for my financial freedom.” That might just be motivating enough to get you to start working toward it today.

Photo by Fuu J on Unsplash


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

When to Kick the Life Insurance Habit

When my husband, Jeff, and I retired, we dropped our life insurance policies. Even though our daughter was still in high school, we had already saved all we were going to save. The income generated by our savings would be there regardless of whether we were alive, and we had no work related income to replace.  We didn’t need life insurance any more.

I have had the pleasure of telling a few friends they could cut their expenses by dropping their life insurance policies. Initially the reaction is a small gasp. It seems somehow sacrilegious to give it up if you are trying to live a financially sound lifestyle. But for these individuals, who happened to be single women with adult children, life insurance wasn’t a necessity. The kids were out of the house, and they didn’t need Mom to provide for them anymore.

Not everyone needs life insurance. Now you don’t see that statement very often. More often you see gloomy statistics, like less than 60 percent of Americans have life insurance, from a 2015 BankRate.com survey. Of the 40 plus percent of those who don’t have it, for some at least, there is a good reason.

You don’t need life insurance if you don’t have anyone depending on your income for support. The purpose of life insurance is to replace your income if you pass away. If any of these situations sound like you, you don’t need life insurance:

You are single and have no children to provide for. While many will miss you if you are gone, no one will miss your income.

You are single with adult children. The same goes here. Your children are grown and they can get along without you providing them with a life insurance benefit.

You are nearing the end of your career and you have the savings you need. As you get older, your savings grow and you have more equity in your home. These assets will help provide for those you leave behind. Therefore as you get older, assuming you are saving as you should, you need less and less life insurance, until eventually you need none.

You are a child. Children don’t need life insurance. They don’t have an income to replace. Some insurance companies sell policies pitched as a way to save for college. These policies are whole life policies that have a savings element. They develop a cash value over time which can be borrowed when your child is ready for college. But you would be better off just investing the amount of the premium in your state’s college 529 plan. All of the money will go to savings rather than providing a profit to the insurance company and life insurance coverage that you don’t need.

If none of these situations is you, you probably need some life insurance, but the amount you should have could be different depending on your situation.

You have young children. Those who have young children need the most life insurance. And they are most likely to be under insured. The life insurance provided by your employer will definitely not be enough. You will want your children to be raised with the comfortable lifestyle that you hope to provide for them, and you don’t want to make life financially difficult for your spouse or their guardians. The younger your children are, the more financial support they will need. LifeHappens.org has a good calculator that takes into account all of the relevant information to help you determine how much life insurance you will want to put in place.

For this situation, term life insurance is all that you need. Term life insurance provides coverage for a specific period, like ten or twenty years. Your premiums will be the same throughout the term. At the end of the term you can renew or allow your policy to lapse. You can also cancel your policy at any time without penalty. Term policies are the lowest cost form of life insurance. They are perfect for most people, whose need for life insurance declines over time.

Do not make your minor children beneficiaries of your life insurance policy. Insurance companies won’t pay out a benefit to anyone under the age of 18. Name your spouse, your children’s guardian or a family trust as the beneficiary instead.

You are married and your lifestyle is dependent on your income. It is worth having a discussion with your spouse about how he or she would want to live if you were gone. Would he want to stay in the house, or downsize? Are there debts to pay off? What income could he expect from working? If your spouse could not maintain his or her lifestyle without your income, even if you don’t have children, you need life insurance. If your spouse is working or reasonably could work if you were gone, you won’t need as much. If you have debt that will need to be paid off, you may need more. Term life insurance will do in this case as well.

You have outstanding private student loans.  If you have outstanding private student loans, someone may be liable for their payment after you die. If a parent, grandparent or someone else cosigned for your loan, they may still have to pay the debt after your death. If you live in a community property state and took on the loans after you married, your spouse may still have to pay. You should have enough life insurance to cover the repayment of those outstanding loans. If you are a parent cosigner, you can take out a life insurance policy for the amount of the loan on your student. Again a term policy will work just fine here.

Not everyone needs life insurance. As our kids grow up and our savings build, our need for life insurance gradually declines until it no longer exists. For the time that you do need life insurance, for most people a simple low cost term life insurance policy is all that you need. Don’t spend any more money, or spend it any longer than necessary, on life insurance.


Photo by Jason Briscoe on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Doomsday Believers Still Need to Save

I recently spoke with a young woman who questioned whether saving for retirement was really a good use of your money. Her concern was that climate change would end life as we know it, and as a result, there was no point.

Impending doom has always been used as a reason to not save. The threats of nuclear war, a chemical weapons attack, or the spread of a mutant virus can make you wonder whether there actually will be a future. But climate change seems to me to be weak excuse.

With climate change, the demise of our planet is slow moving. Severe weather, new crop diseases, the loss of natural animal and plant life, and rising sea levels are all serious threats. But they won’t end the human race very quickly.

What they will do is make things much more expensive. Food will be more expensive to produce. We may face greater risks to our health and, therefore, higher medical bills. As we try to minimize the damage, taxes may increase. All this adds up to needing more money in savings when we can’t work for pay anymore. Not less.

Doomsday scenarios are not a good excuse to give up on saving money. Sure, something really bad could happen. There are no guarantees in life. But it’s far more likely that you will live to a ripe old age. The real disaster would be for you to spend those years in utter poverty because you didn’t have any savings.

The most recent life expectancy table from the Social Security Administration is revealing. The following table shows how much longer you are likely to live at different ages.

AgeRemaining Years
for Men
Age Remaining Years
for Women
Age
6517.9282.9220.4985.49
7014.4084.4016.5786.57
7511.1886.1812.9787.97
808.3488.349.7489.74

As you can see, there is a good chance you will live a long time beyond the normal retirement age. Some estimates put the number of people living to the age of 100 in the United States by 2050 at 1 million. To support yourself for such a long time, you will need to have saved $100,000 for every $333 you spend in a month.

Yes, the future is uncertain. The political tensions in the world and the growing consequences of climate change should have us all worried. But the answer does not lie in spending all your money now. The one thing that is completely within your control is how you prepare for a likely long life. No matter what happens, you will never regret saving money for your future.


Photo by Josep Castells on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

If You Ignore Your Money, It Will Go Away

Your money is like anything else important in your life. It takes time and effort to make it do what you want. But our world makes it easy to ignore your money for a very long time until, finally, you simply can’t ignore it any longer.

Saturday, I spent a few hours with my book at a book fair showcasing local authors. It’s always interesting to talk about money with total strangers. I usually learn something about human nature and the financial predicament of too many Americans.

One woman stood out to me. She told me she really needed a book like mine, but she knew she would never read it if she took it home. She said she was 47, and only had $16,000 in retirement savings. She probably was right on both counts.

She is not unusual. Only a little more than a third of Americans have ever even attempted to figure out how much money they will need in retirement. Those who do are far more likely to build enough savings to at least be comfortable when they can no longer work for pay. Like any problem, if you understand it, you are much more likely to be able to solve it.

But money is easy to ignore. You can buy just about anything, anywhere without cash. Some stores don’t even want to take it anymore. You can travel the world on a credit card, send your children to school with student loans, and buy a house with no money down.

When you pay with a credit card, it doesn’t feel like you are spending money, and it’s harder to keep track of what you do spend. Before you even realize it you’ve spent your future income well before it arrives. Eventually, debt payments crowd out other things you can do with your money, and you have no other choice but to finally give your money the attention it deserves.

One friend said to me, “It’s like exercising. You don’t really want to, but you have to if you want to stay in shape.” If you want to stay in financial shape you have to pay attention to your money.

Start by planning how you will spend your money. Rather than waiting until the end of the month to see what you have left, start at the beginning of the month and plan what you will have left.

Create financial goals. Contrary to their name, they are not about money, but instead, what you will do with the money. What do you want to do with your money? Three financials goals everyone should have are:

  • Protect yourself from financial setbacks
  • Support yourself when you can no longer work for pay
  • Take care of your family if you die or cannot speak for yourself

These types of goals can inspire you, because you make them about things you care about. Once you have your goals in mind, you can introduce money as a way to measure whether you are meeting your goals. For example, you can protect yourself from a financial set-back if you have a few months worth of expenses saved in an emergency fund.

Start small. Anything and everything you do is worthwhile and will make a difference in the end. You can do more as you get the hang of paying attention to your money and your situation improves.

Don’t let a setback keep you from moving forward. Sometimes it’s two steps forward and one step back. If you have goals and a plan you are much farther ahead than if you only have a hope and a dream.

You have to pay attention to your money the way you pay attention to your career, your family and anything else you care about. Without care and feeding, your finances will whither and die like the houseplant you forgot to water. No one else will take care of it for you. You have to take care of it yourself.


Photo by Lauren Ferstl on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

It’s Never Too Late

The other day I was at Home Depot. The gentleman who checked out my purchases (I almost said checked me out), was in his late sixties at least. He might have been seventy or older. He asked if I needed help getting my potting soil into my car, and I declined. He said, “Are you sure? I couldn’t do it.”

This guy, who couldn’t lift a bag of potting soil, was on his feet all day on concrete. It seems a grueling way to spend your day. According to the Bureau of Labor Statistics, about 25 percent of men over the age of 64 are working, and about half of them are in physically demanding jobs. Now, I’m assuming he wasn’t doing it for fun, though it’s possible I’m wrong on that front.

Does your future hold a Home Depot job? For too many, the answer may be yes. The median net worth (half are below, and half are above) of those aged 65 to 74 is just $224,000, and that includes the equity in their homes. Net worth is the value of all your assets, including your home and retirement accounts, minus the value of all your debt, including your mortgage. That is not nearly enough to live on, especially if you are living in part of it.

And it isn’t just those with low incomes. I’ve recently spoken to a few couples in their mid-fifties with high paying professional careers, but a negative net worth, meaning they owe more than they own.

But you can do something about it. The younger you are, the less you will need to change, but you can find a solution. A friend of ours, Gene, made a course correction at the age of 61. He really wanted to retire. He was tired of his commute and the office politics. But he had little saved.

He took a good hard look at his expenses to understand what kind of income he and his wife, Roberta, needed to live comfortably. Then he found out what he could expect from Social Security at the various filing ages. With this information, he was able to make some decisions.

First, he needed to get rid of his mortgage payment. That wasn’t going to happen soon enough if he stayed in his San Francisco Bay Area home. Gene and Roberta agreed they would retire to a lower cost area. They would sell their current home and with the equity be able to buy another home for cash. They expected they would even be able to bank some of the profits from the sale, given California real estate prices.

He knew he had little choice but to wait until he was 70, when his Social Security benefit was at it’s highest to retire. In the mean time, he saved as much of his income as he could, about 40 percent. His budget was the minimum he and Roberta could get by on.

The investment and housing markets were kind to Gene and Roberta. It turns out they will be able to retire to another state at 67 instead of 70. Gene righted his ship just in time. Had his income been lower, he might not have been able to save so much, and his future would have been far less comfortable.

The key to Gene’s success was he faced his problem head on and looked for alternatives that he and Roberta could live with. Wherever you are today, I urge you to do the same. The sooner you do, the more options you will have. You don’t want working at Home Depot into your seventies to be the only one you have left.


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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

Your Retirement Savings Account is Not an ATM

There it is. It’s just sitting there, and you need it. Why not take advantage of it. It’s your money after all. If you need money, and you have money in your retirement account, it can be very tempting to borrow from it.

Most retirement plans allow participants to borrow against their balances. About one in five 401(k) participants have an outstanding loan, and over a five-year period, almost 40 percent of participants borrow from their account at some point. Most loans are taken to pay off debt, usually of the credit card variety.

That can make some sense, since the loan rate on a 401(k) loan is lower than rates on credit cards. But there are other costs beyond the interest rate. While you are essentially borrowing from yourself, there are several consequences to taking the loan that make this a bad idea.

  1. While your loan is outstanding, your money is not invested in the market. You are earning the interest on the loan to yourself, but you are missing out on the greater growth you could get from stock market-oriented investments. The market rate of return is the true cost of your loan. Historically the stock market has returned on average 10 percent per year.
  2. Some employers don’t allow you to make contributions while you have a loan outstanding. If that is the case with your plan, you will miss out on the opportunity to grow your retirement account balance. If your employer matches contributions, you will also miss out on that.
  3. Your loan is repaid with after-tax dollars. When you retire, the money you repaid, like the rest of your balance, will be taxed when you take it out to meet your living expenses. So your loan will be taxed twice.
  4. If you leave or are let go from your job, you will only have sixty days to repay the loan or it will be considered a distribution. The distribution will be taxed as ordinary income in the year you take it, and you will pay an additional 10 percent penalty.

Instead of taking out a loan from your retirement account, consider what other options you have. If you are consolidating debt, have you considered taking advantage of a zero or low interest promotion on a credit card? Instead of adding to your debt, can you reduce your spending either by cutting discretionary expenses or by making bigger changes to lower the cost of where you live or how you get around?

To avoid using your 401(k) as an ATM, make sure you have an emergency fund. You should have at least three months of mandatory expenses saved in an easily accessible account, such as a bank savings account or a money market mutual fund. If you have a high deductible health care plan, work toward saving enough to cover at least the deductible. And make sure you are setting aside money for those big expenses, like home and auto repairs, that you know will come up, but you don’t know when.

In some cases, a loan on your retirement account may be the best of a few bad options, but that doesn’t make it a good one. There are costs that aren’t obvious, and they put you at risk of a big tax bill if you lose your job. Avoid having to make the choice by saving ahead for emergencies and other big expenses.


Photo by 🇨🇭 Claudio Schwarz | @purzlbaum on Unsplash

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For a comprehensive, step-by-step guide to building your own financial plan, pick up my award winning book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security.  It is available on Amazon.

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