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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 book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security. It is now available on Amazon.

5 Things To Demand From Your Financial Adviser

What do you do when you’re eighty-two and run out of money? It’s a frightening thing to be looking down the barrel of an empty bank account. It’s worse when the decline in your funds was due to the actions of a financial adviser that you trusted.

Gerry had been relying on her adviser for a long time. She and her husband, John, were in their mid-sixties when John passed away unexpectedly almost twenty years ago. Gerry was heart broken. John was her life.

Their’s was a traditional relationship for their time. Gerry raised their four boys, while John managed his business and their money. When John passed, Gerry put her faith in the financial adviser John had used for years. She didn’t know anything about investments, nor did she care. John had provided well for her, so she didn’t worry about money.

Gerry lived her life, enjoying her friends and a bit of travel. Her financial adviser was busy doing his thing. She didn’t know what. When the financial crisis hit, she was concerned that her account value declined so much, but what could she do?

While the investment markets recovered, Gerry’s account did not. She saw what should have been enough money to last her life dwindle to an alarmingly low level. She finally asked me to have a look.

What I saw was shocking. Her account had declined to just enough to cover a few remaining years of expenses. What’s worse, the investments were all wrong for someone living on their savings, with little savings left.

All of her money was invested in less than a dozen stocks, mostly in the energy field. There was no diversification and no pool of conservatively invested money to cover her monthly withdrawals. Amid a strong stock market, her holdings steadily declined in value. Every month the adviser sold some of her holdings to generate the cash for her monthly expenses. Because the value of the stocks he sold was down, the sales were doing more and more damage to the viability of her portfolio.

I was shocked. I naively believed that nearly all advisers had their clients best interests at heart. I never thought I’d see investment management this egregiously bad. This guy was simply trying to generate commissions on Gerry’s account. His behavior was serving no one but himself and was in fact illegal. His activity is known as prohibited conduct. In the financial services industry, investments must be prudent and suitable for the account owner.

Gerry didn’t want to take legal action, though she certainly had a very good case. She did sell her holdings to salvage what little money she had left. She’ll have to sell her beautiful house in the next year or so. She needs the equity to live on. Fortunately the equity will be enough for her to maintain her lifestyle for the rest of her life, but she’s devastated that she’ll have to leave her home that she loves so much.

You can’t just give your money to someone and assume they’ll do what’s right. While most financial advisers are good people, this story illustrates that it’s not true for all. Even an adviser with your best interests in mind, can’t know whether their strategy is still good for you unless you engage with them. Here are the things you should be discussing with your adviser on a regular basis:

  1. Update your financial information beyond the investments your adviser is managing. This should include total savings, total debt, and income.
  2. Reiterate or update your financial goals.
  3. Discuss whether you are saving enough, or if you’re closer to retirement, a plan for withdrawals that will help your money last and minimize your tax burden.
  4. Discuss how the investment strategy aligns with your goals, and how you can expect it to change over time.
  5. Ask to be educated on any concepts you don’t understand.

If your adviser isn’t willing to talk with you about these topics, find another one. Seriously consider someone with a Certified Financial Planner (CFP) designation. These professionals must demonstrate their skills before a governing board and practice for at least three years before they can use the designation. You can find CFP professionals in your area at letsmakeaplan.org or napfa.org.

Advisers gain a great deal of control over your savings. That can relieve you of making decisions you’re neither qualified nor comfortable in making. But you can’t just walk away. Review your monthly statements to make sure your adviser is doing what she said she would. And to make sure she is working toward the same goals as you, demand a detailed discussion with her at least annually.


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

I Want it All

GrubHub has a new TV ad that features the song lyrics by Queen “I want it all and I want it now.” This ad seems to sum up our consumer culture and precisely why so many people with good incomes can’t seem to get a grip on their financial situations.

Americans of all income levels struggle with unexpected expenses and debt, and, as a result, find it difficult to even have financial goals, let alone achieve them. Just this week, it was reported that the famous lawyer, Michael Avanatti, is accused of embezzling nearly $2 million from a client’s settlement to pay for his “own expenses and debts.” How can a guy like that run out of money?

A 2015 study by the Center for Retirement Research found that of those in the top one-third by income, one in three reported having difficulty covering regular expenses. I’ve seen it myself. I recently spoke with a couple making $400,000 a year, but going further into credit card debt with each passing month.

This couple seemed confused. They made so much money but couldn’t understand why they weren’t getting ahead. Eating out twice a day, designer clothes, and weekend getaways had something to do with it, but they hadn’t tallied their expenses. They also weren’t paying their debt down, which caused them to wrack up extra interest charges, and their careless approach to paying their bills resulted in unnecessary late fees. They simply weren’t paying attention.

It could be that high income people like these simply believe they don’t have limits. They make enough money, they shouldn’t have to worry about how they spend it. They want it all and they want it now. But that mindset is a trap. It can keep you on a treadmill of always needing to make more money, or in the case of Avanatti, to steal it.

There is always a limit. No matter how much money you make, if you want financial security, you actually have to do something about it. You must always pay attention to how you spend your money, and save for your financial goals. And you don’t even need to make a lot of money to do it.

Alan Naiman, a Seattle social worker who died last year at the age of 63, managed to save enough to give a small fortune to charity when he passed. By living an extremely frugal life, he was able to save and invest enough to have several million dollars in his own estate, and to his own savings he added his parent’s estate. All tolled, he donated $11 million.

Of course, these stories are extremes. You are probably not spending your way to bankruptcy despite a top 1% income, nor are you willing to hold your shoes together with duct tape in order to reach your financial goals. But they do illustrate the possibilities and what is required. While it may be true that you can have anything you want, you can’t have everything you want. You will always have to make choices. Choose wisely.


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

Photo by freestocks.org on Unsplash

How to Go From Happy to Desperate in 6 Weeks or Less

Last week GoBankingRates published an article on how to get your grown kids out of the house. After seeing it, I thought I better come clean. Our daughter, Kaye, has been back living with us for about a year after being mostly on her own for about two. She’ll be moving out again sometime this summer in a much better position, but it took a catastrophic fall to get her to learn how to manage her money.

Kaye made a series of decisions that, had we not been able to help her out, would have led to her becoming homeless. It was a serious eye opener and highlighted how vulnerable you can become.

In March of last year, Kaye moved into an apartment with her girlfriend. Both were making minimum wage. Kaye was busing tables at a big chain restaurant, and her girlfriend was working two jobs part time. They didn’t make much, but between the two of them, if they were smart about their decisions, they would have been all right.

There are several apartment complexes near us that offered relatively cheap rent for the Portland Metro area. They’re close to public transportation, which was important since neither owned a car. If they had picked one of those, their rent would have been about $500 a piece. It would be tight, but with no other big bills, they could have swung it.

They didn’t do that. They rented a much more expensive place that wasn’t nearly as accessible by public transit. Kaye’s girlfriend bought a car. Not a cheap used car but a nearly new mid-sized sedan. The payments and insurance were $500 a month. Well, they might still have been able to swing it, if the two of them picked up extra shifts.

They didn’t do that. Kaye’s girlfriend had a dispute with one of her bosses and quit. And then didn’t do much to get another job. Meanwhile, Kaye wasn’t getting enough shifts to even work 40 hours a week. The restaurant was sending her home when business was slow. She couldn’t get a second job, because she was scheduled 40 hours, but she wasn’t actually working them.

Through the month of March, we heard about spending that was extravagant, even for people who had money. They had a spa day together, and Kaye’s girlfriend had her hair done in dread locks to the tune of $300. They went out to nice dinners. I had no idea where the money was coming from.

And I’m just watching, knowing my daughter is going down in flames. She wouldn’t listen to me when I tried to show her how to make ends meet. She would barely sit still as I explained what she could really afford. She thought because she had made it on her own for a bit, she knew better. It was clear she was not going to take any of my advice.

It was tearing me up. After all, I wrote a book about this stuff. How had I screwed up with her to the point that she wouldn’t listen to me on the one thing I’m really good at? Nothing I said was getting through.

So, I shut up. My husband and I could only stand by and hope they figured it out.

Then Kaye got good news. She was offered a new job, with higher pay, benefits, and paid leave. We were all thrilled. She was to start on April 15th. She gave notice at the restaurant. I cautioned her to make sure she worked until she started the new job. She was going to need the money.

She didn’t do that. She left her restaurant job as soon as she could at the end of March. It left two weeks before she started her new job, and it would be another three weeks before she would be paid again. Five weeks total without a paycheck. Her girlfriend working 20 hours a week at minimum wage. Things were getting very dark.

Meanwhile her relationship with her girlfriend was deteriorating quickly. By the end of April, they were breaking up. They had no money. Kaye had sold a few pieces of jewelry to scrape together money for food. There was no way they were going to be able to pay rent in May. She finally came to us for help. All told, it took only about six weeks for them to crash and burn.

With the caveat that Kaye would pay us back, we covered the May rent, giving Kaye’s girlfriend the time to find another place to live. She ultimately went back home to her own parents. We also covered the fee to break the lease, so neither would have a hit to their credit. All in we paid over $3,000.

Kaye moved back in with us with the understanding that while she lived with us, she had to attend the Mom school of basic money management. The first thing she and I did was create a budget. We researched what she’d pay for rent and utilities in a roommate situation by searching Craigslist roommate wanted ads. We estimated the cost for food, laundry and toiletries. Since she needed a car for work, we agreed to sell her one of ours over time. So, car insurance was added to the list of mandatory expenses.

Each month Kaye gave us the money to cover these expenses, and we put it in a money market account for her. These were bills she would have to pay if she lived on her own. In addition, Kaye covered other costs out of her remaining money. Things like gas for the car, haircuts, her phone and any other spending came out of what was left after she paid these mandatory expenses.

To make sure she didn’t overspend, I asked Kaye to sit down and write out how she would spend every dollar of her paycheck before she spent any money. She simply wrote it in a ledger. She itemized the expenses and planned out how she would spend her remaining money. To help break her impulsive spending habits, she left her money and debit card at home, unless she had a planned expense to pay.

One year later, Kaye routinely plans how she’ll spend her money. By making the payments to us, she has saved enough money to cover three months of living expenses and more than enough to cover move in costs when she is ready to move out. In just a few months, she will have paid enough to buy the car from us. Of course, she couldn’t have made so much progress so quickly if she didn’t live at home. But it’s still a big accomplishment.

On her own, she’s also saving money to maintain her car, and cover her healthcare plan deductible and some potential out of pocket healthcare expenses. She saved enough money to have a short vacation in January and is saving for another trip in October. When she does move out, I believe she will have the skills she needs to stay afloat. She gave me permission to write this story about her experience, in case it would help someone else.

It didn’t take long for Kaye to appreciate her planning routine. She feels in control of her money and now uses it to do what she wants within what her income will support.


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

This is Not Us

One of my favorite shows on television is the NBC series “This is Us“. It tells the story of three siblings, two of them twins, the third adopted, coping with life under the backdrop of the death of their father twenty years earlier, when they were teenagers. It’s one of those emotional roller coasters of pain and elation as the characters face and overcome heart wrenching challenges.

But I’m worried about the characters’ finances. They live lavish lifestyles with seemingly no regard for where their next dollar will come from. For two of the siblings, Kevin and Kate, there may be plausible explanations for the way they live, but they are a stretch. The one I’m really concerned about is Randall.

Early in the show, Randall worked for a hedge fund as an weather derivatives trader. He had a nervous breakdown after the death of his biological father with whom he’d recently reconnected, and wasn’t able to return to work. His wife, Beth, was a city planner, but was laid off.

They have a large home in Alpine, New Jersey. A Zillow search suggests a home like their’s in that area would be worth at least $1.6 million and probably as much as $3.5 million. At $1.6 million, with a 20 percent down payment, their monthly mortgage would be over $6,000. At $3.5 million, the payment is over $13,000 per month.

For much of the second and third season, neither had a job. Meanwhile they bought an apartment building in Philadelphia, which required a significant investment for maintenance and repairs, and Randall ran for city council there. We’re not sure where the money came from for that.

So while the two were finding themselves, we can only assume they were burning through their savings like mad. Though neither seems to be worried about money. Randall’s new gig as a city council member will at most pay $150,000, or $12,500 a month. That means the mortgage payment alone will eat up two thirds to more than all of his take home pay.

Beth recently took a job as a dance instructor. That job pays about $25 an hour in New Jersey. That will give her $2,000 to $3,000 a month in pay, depending on how many hours she works. Maybe they’ll be able to cover the mortgage between the two of them. But who knows how they’ll pay their other bills.

The lifestyles of our favorite TV characters, like Randall and Beth, can distort our ideas about what is a “normal” lifestyle. The characters’ implied spending can be far above what families in similar income brackets can really afford. That world is simply not the real world, and trying to live up to it can be a dangerous trap.

While it’s natural to compare yourself to others, don’t do it. Instead consider a different comparison; where you stand relative to your savings goals. Having a savings goal and working toward it can be an effective way to overcome your concern that your lifestyle is somehow not up to par. Keeping track of your progress and comparing where you are to where you were is much more satisfying than comparing what you have to what someone else has, especially if they aren’t real.


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

How to Keep Medical Expenses From Wrecking Your Plans

Medical expenses may be one of the biggest budget busters. Even with health insurance, there are deductibles that must be met. After the deductible you will still have coinsurance to pay, at least until you reach your annual out-of-pocket maximum.

Today’s insurance plans often have very high deductibles and out-of-pocket maximums. If you are having a terrible year, medically speaking, you can easily rack up several thousand dollars in out-of-pocket expenses. And for some, it can make meeting your other financial obligations difficult.

My go-to advice for expenses like these is to save ahead for them. Everyone gets sick from time to time, so you’re going to have some medical expenses. Saving up enough money to cover at least your deductible, will ensure you don’t have to adjust your monthly spending plan should a doctor’s bill come in.

If your healthcare plan offers a health savings account, put your healthcare savings there. Your employer may even help you by making a contribution to it as well. Contributions are made before tax and withdrawals for eligible medical expenses are tax free. The account is yours, so you don’t have to worry about spending all the money in the year you contribute, and you can continue to hold it or roll it over to a new provider if you are no longer with your current company.

However, if you’re worried you’ll have a significant expense before your savings are built up, there is a product that can help you. Supplemental health insurance can help you cover your deductibles, copays and coinsurance. You can add the coverage at any time. Whether it’s a good deal depends on the coverage you select and your core healthcare plan.

For example, a thirty-year-old woman could get a plan that will pay $7,500 if she were in an accident or came down with a critical illness for about $40 per month. That would cover most of the maximum out-of-pocket expenses under those circumstances for any healthcare plan. For broader coverage, that includes hospital stays, surgeries, and doctors visits, the same age person could pay $130 per month. Prices go up for older ages.

You would need to save much more than $130 per month, to have $7,500 set aside in a reasonable time frame. If you just saved the $130, it would take you nearly five years, and a lot can happen in that time.

If you are interested in a supplemental insurance plan, you can search online for policies available in your area by entering “metal gap insurance” in your search engine. Metal gap refers to the plan categories under the Affordable Care Act (bronze, silver, and gold). Before you buy a policy, pay attention to the details of the coverage. Make sure you understand what constitutes an “accident” or “critical illness”.

There are drawbacks to these plans. They are not subject to the same regulations as core healthcare plans. You can be denied coverage for pre-existing conditions. And if you develop a chronic condition, your coverage may not be renewed. Saving for your medical expenses will always be less expensive than paying for insurance. However, if you don’t have adequate savings now, a supplemental insurance plan may help keep your financial plans on track.

Photo by rawpixel on Unsplash

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

The #1 Tool For Getting Help Paying for College

March is nearly here, and the end of the school year is in sight. If you have a high school senior at home, that means you have just a few short months to figure out how you’re going to pay for college.

A little more than half of parents of eighteen year-olds have saved for college. The average savings for those who have it is $28,000, about enough to cover the full cost of one year at a public university. Most students will turn to debt to pay for at least some of their education.

Debt among eighteen to twenty-nine year-olds is at a ten year high, thanks mostly to growing student loan debt. Yet many students are missing out on valuable financial aid because they failed to file the Free Application for Federal Student Aid, or FAFSA.

About a third of students who don’t file the FAFSA are eligible for Federal Pell grants, which is financial aid that doesn’t have to be paid back. Of those who would have qualified for the grant, half could have gotten the maximum amount, which was over $6,000 for the 2018-2019 school year.

Nearly half of private student loan borrowers could have qualified for lower cost federal loans had they filed the FAFSA. And the FAFSA isn’t just for federal aid. State and college financial aid programs and many private scholarships rely on information from the FAFSA.

The biggest reason sited for not submitting the FAFSA was that families thought they weren’t eligible for aid. Some form of financial aid is available to anyone with an annual household income of $250,000 or less. Only about 5 percent of American families don’t qualify for any form of financial aid.

And financial aid is available beyond traditional four year institutions. If you have your eye on a community college or certificate program you may still be eligible for financial aid.

Timing is important. Some forms of aid are granted to the eligible that apply first, and when the money is gone, it isn’t available again until the next school year. Some grants and scholarships have early deadlines. But if you haven’t filed your FAFSA yet it isn’t too late. There are still options open.

Applying for financial aid can seem daunting. The FAFSA asks for a lot of information. Often you’ll need to fill out supplementary forms for financial aid or scholarships beyond the aid available from the Federal government. You might think it isn’t worth it.

But if you think in terms of your hourly rate to apply, it might seem more worthwhile. Say you find an opportunity for $1,000 in government or private aid or scholarships. If you put in four hours of work to get it, that’s an hourly rate of $250. Most don’t make that in their professional jobs.

College is too expensive to assume you can’t get some help with it. Fill out the FAFSA annually. If it’s too late to get some forms of aid for this fall, you may still qualify in the following year. Most don’t have the luxury of fully paying for their children’s education, but help is available if you file the form.

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

How Marie Kondo Can Help You Meet Your Financial Goals

The new Netflix series, Tidying Up with Marie Kondo, is getting rave reviews. Marie Kondo is the best selling author of The Life-Changing Magic of Tidying Up. The Netflix series brings Kondo into American family homes, where she teaches them the fundamentals of organizing their stuff.

Organizing your stuff and managing your finances have much in common. They both require you to evaluate your situation, think ahead and make choices. The foundation of Kondo’s approach to decluttering is to choose the things that “spark joy”, and jettison the possessions that don’t. This particular focus on the things that make you happy is also a good way to manage how you spend your money.

If you are not making the progress on your goals that you want, you need to change something. To save more, you must spend less. For many, this simple truth keeps them from facing their financial situation and taking a step toward a more secure future. It simply doesn’t seem like any fun to spend less.

Yet many of us spend money on things that are not important to us. Takeout food eaten on the go, clothes that never get worn, TV channels that never get watched are all expenses that do not enrich our lives.

For most, your choice is not between doing what you love and financial security. It’s more about not doing what you don’t love. If you approach freeing up room in your monthly spending to save more with this in mind, you may find that it is a fun challenge to weed out those wasted expenses.

Some friends, Lisa and Candice, asked me to help them get started on a strategy to meet their financial goals. The two love music, and going out to dinner. This type of entertainment really made them happy. But they thought they would have to give it up if they wanted to make progress on their goals.

However, a review of their spending revealed some expenses that were neither necessary or making their lives better. For one, they were subscribed to a home security service, but in fact never actually engaged the alarm system. This is clearly an expense they could avoid. Other expenses that didn’t “spark joy” were daily coffee runs and takeout lunches that they consumed at their desks alone.

It may not be just the small stuff either. Maybe you have an expensive car, where a lower cost model would do just as well. Or you have extra room in your home that doesn’t make you happy just sitting there empty.

It may be that you can’t fully meet your savings goals by getting rid of expenses that don’t bring meaning to your life. You may need to get creative, and perhaps you ultimately do need to cut back on the things you love doing. But that doesn’t mean you have to stop doing them altogether. You won’t be successful long-term if your only tool is to deprive yourself of the things that are important to you.

Short of earning a bigger income, you only have so much money to go around. You have to make choices about what you do with it. Make them intentionally. Choose the things that bring you safety, security and joy, and give up the things that don’t. Make sure saving for your financial goals is one of those you keep.

Photo by Preslie Hirsch on Unsplash

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

How Life on the Average 401(k) Balance Will Look

America’s retirement savings balances continue to be alarming. In a 2014 study, the Employee Benefit Research Institute (EBRI) estimated that 40 percent of us would not be able to cover basic expenses once we are no longer earning a paycheck. The situation has not improved.

The following table shows average and median retirement savings by age from the Vanguard How America Saves 2018 study.

Age Range Average Balance Median Balance
Less than 25 $4,773 $1,509
25 to 34 $24,728 $9,227
35 to 44 $68,935 $25,800
45 to 54 $129,051 $46,837
55 to 64 $190,505 $71,105
65 and over $209,984 $64,811

Average balances are skewed high by a small number of large accounts. The median balance indicates that half of near retirees have $71,000 or less in savings.

Of course there are issues with these numbers. Vanguard’s study is based on participant balances in Vanguard retirement saving plans. It is possible that participants have balances elsewhere in prior employer savings plans or in individual retirement accounts. Participants who have worked at their jobs longer do tend to have higher balances. But the EBRI’s study indicates missing accounts probably isn’t the primary reason for the low balances.

Using the 4 percent rule, with the average balance for the 55 to 64 set of $190,505, you could reasonably withdraw about $635 per month and have your savings last through your retirement. At the median balance you could withdraw about $216 per month.

Social security will provide some help. The average Social Security check after the recent cost of living increase is $1,461 per month. Between the average savings and the average social security check, you would have just over $2,096 per month to live on. With the median savings you would have $1,677.

If you are a couple, and you are both getting the average Social Security check and you each have the average in retirement savings, your monthly income would be around $4,200. That might be reasonably comfortable if you’ve paid off your mortgage. The Massachusetts Institute of Technology Living Wage Calculator indicates that amount covers basic living expenses in Portland, Oregon, is generous in Cleveland, Ohio, and not nearly enough in San Francisco, California. If you’re both at the median savings, of these three cities, you’d only be OK in Cleveland.

But savings balances for women tend to be only two thirds that of men, and women’s Social Security benefit is also lower on average. Women often work in lower paying jobs, and many have periods with no earnings, because they stayed home to take care of children or other family members. These factors lower both their savings and their benefits. So an average or median couple’s available income may be lower than double the individual average or median.

How do these numbers stack up to what you’re currently spending? According to University of Minnesota data, median household income in 2017 was about $5,167 per month before taxes. At the median savings rate, with Social Security (assuming both you and your spouse have the same savings and Social Security benefit), your retirement income would be about two thirds of your current income.

Of course you are neither average or median. Your situation is unique, but poverty in retirement is becoming more and more common. If your savings are falling short of what you need, what can you do?

The first step is to get a handle on what you have.

  • Understand your total savings balances for retirement and how that stacks up to the cost of your current lifestyle.
  • Find out what your other sources of income will be. You can estimate your Social Security benefit at www.ssa.gov with either their quick calculator or by setting up your own account.

The next step is to develop a strategy for closing any gap you may have.

  • Can you save more money? If you can, you’ve already taken a step closer, because you’ve reduced the cost of your lifestyle.
  • Can you reduce your cost of living in retirement, by making changes in your lifestyle or changing where you live?

The key to ensuring you have a comfortable life when you stop working for pay is to know what you need to do. Even if you have work to do and limited time, your confidence will rise simply by making a plan. There is no time like the present to get started. Wherever you are, you will have the most options for a better future if you start today.

Photo by Matthew Bennett on Unsplash

SaveYourself-front-cover-thumbnail-1
For a comprehensive, step-by-step guide to building your own financial plan, pick up my book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security. It is now available on Amazon.

If You Don’t Do This, You Could be Paying on Your Student Loans for Most of Your Career

In my last post, I demonstrated how taking just $5 dollars per day from spending and putting it toward paying down your debt could have you out of debt in a surprisingly short time. One reader wrote back that she would never put extra money toward paying off her student loans. She wasn’t able to break even with her payments, and she felt paying extra on the them was like simply lighting her money on fire.

I could see both the frustration and despair in her words. And it was clear that she couldn’t see how the extra payments could make a difference.
The huge balances some carry can make it seem like you’ll never get out from under your debt.

Student loans are complex, and the myriad of repayment plans can make it harder to make a dent in your balances. In 2007, new student loan repayment plans were introduced on federal loans to help indebted graduates better afford their payments. These plans are based on a percentage of your income, and extend the repayment period. The payments are lower than the standard ten-year repayment term.

But in some cases, these extended payment plans can have you paying less than the total interest that is accruing on your loan. You aren’t making any progress on reducing your loan amount, and interest continues to grow. That was the case with the reader who wrote to me.

The Consumer Financial Protection Bureau found that half of student borrowers are in their mid-thirties before they begin repaying their loans and 30 percent are not reducing their balances after five years of payments. Unless you want to make payments on your student loans for much of your working life, you eventually need to be paying enough to cover all the interest and some principal every month.

Debt payments take away your flexibility. You must maintain a larger emergency fund, because your monthly obligations are larger. You may find it difficult to do other important things like save for retirement or college for your own children. Your financial security rides on you getting out of debt.

So it is worthwhile to make extra payments on your student loans. If you can’t afford the payments under the ten-year standard repayment plan, and therefore need a longer repayment schedule, pay as much as you possibly can anyway. Your goal is to cover all the interest and some principal.

With each principal payment the next month’s interest will be lower, and your next payment will include more principal. With more principal covered, the next month’s interest will be lower still. It becomes a virtuous cycle that get’s better with each passing month.

If you can direct windfalls, like a tax refund or bonus from work, to pay down your principal, you can give your repayment plan a boost. If you can increase your extra payments over time as your income increases, you can make even faster progress.

You may be thinking, why bother. These income based repayment plans come with debt forgiveness after twenty years. Why should I make extra payments?

Aside from the advantages of eliminating debt payments from your monthly budget, the forgiven loans will still cost you. While the student loan arm of the government may forgive your debt, the IRS will not. The full outstanding balance will be considered income in the year it is forgiven, and you will owe income taxes on the forgiven amount.

There is one exception to all of this. If you qualify for the Public Service Loan Forgiveness program, your loan will be fully discharged after ten years with no tax implications regardless of how much principal is remaining. So if you are in this program and can stay in public service for the full ten years, there is no reason to make extra payments on your student loans.

For everyone else? Pay as much as you can. Take drastic measures if you need to, but cover all the interest and at least some principal with each loan payment. Paying extra is not futile, it is necessary. Your financial freedom depends on you getting out of debt.

Photo by JESHOOTS.COM on Unsplash

SaveYourself-front-cover-thumbnail-1
For a comprehensive, step-by-step guide to building your own financial plan, pick up my book, Save Yourself; Your Guide to Saving for Retirement and Building Financial Security. It is now available on Amazon.

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