Everyone knows that raising kids can put a serious squeeze on your budget. Beyond covering day-to-day living expenses, there are all of those extras to considerâsports, after-school activities, braces, a first car. Oh, and don’t forget about college.
Add caring for elderly parents to the mix, and balancing your financial and family obligations could become even more difficult.
“It can be an emotional and financial roller coaster, being pushed and pulled in multiple directions at the same time,” says financial life planner and author Michael F. Kay.
The “sandwich generation”âwhich describes people that are raising children and taking care of aging parentsâis growing as Baby Boomers continue to age.
According to the Center for Retirement Research at Boston College, 17 percent of adult children serve as caregivers for their parents at some point in their lives. Aside from a time commitment, you may also be committing part of your budget to caregiving expenses like food, medications and doctor’s appointments.
When you’re caught in the caregiving crunch, you might be wondering: How do I take care of my parents and kids without going broke?
The answer lies in how you approach budgeting and saving. These money strategies for the sandwich generation and budgeting tips for the sandwich generation can help you balance your financial and family priorities:
Communicate with parents
Quentara Costa, a certified financial planner and founder of investment advisory service POWWOW, LLC, served as caregiver for her father, who was diagnosed with Alzheimer’s disease, while also managing a career and starting a family. That experience taught her two very important budgeting tips for the sandwich generation.
First, communication is key, and a money strategy for the sandwich generation is to talk with your parents about what they need in terms of care. “It should all start with a frank discussion and plan, preferably prior to any significant health crisis,” Costa says.
Second, run the numbers so you have a realistic understanding of caregiving costs, including how much parents will cover financially and what you can afford to contribute.
17 percent of adult children serve as caregivers for their parents at some point in their lives.
Involve kids in financial discussions
While you’re talking over expectations with your parents, take time to do the same with your kids. Caregiving for your parents may be part of the discussion, but these talks can also be an opportunity for you and your children to talk about your family’s bigger financial picture.
With younger kids, for example, that might involve talking about how an allowance can be earned and used. You could teach kids about money using a savings account and discuss the difference between needs and wants. These lessons can help lay a solid money foundation as they as move into their tween and teen years when discussions might become more complex.
If your teen is on the verge of getting their driver’s license, for example, their expectation might be that you’ll help them buy a car or help with insurance and registration costs. Communicating about who will be contributing to these types of large expenses is a good money strategy for the sandwich generation.
The same goes for college, which can easily be one of the biggest expenses for parents and important when learning how to budget for the sandwich generation. If your budget as a caregiver can’t also accommodate full college tuition, your kids need to know that early on to help with their educational choices.
Talking over expectationsâyours and theirsâcan help you determine which schools are within reach financially, what scholarship or grant options may be available and whether your student is able to contribute to their education costs through work-study or a part-time job.
Consider the impact of caregiving on your income
When thinking about how to budget for the sandwich generation, consider that caring for aging parents can directly affect your earning potential if you have to cut back on the number of hours you work. The impact to your income will be more significant if you are the primary caregiver and not leveraging other care options, such as an in-home nurse, senior care facility or help from another adult child.
Costa says taking time away from work can be difficult if you’re the primary breadwinner or if your family is dual-income dependent. Losing some or all of your income, even temporarily, could make it challenging to meet your everyday expenses.
“Very rarely do I recommend putting caregiving ahead of the client’s own cash reserve and retirement.”
When you’re facing a reduced income, how to budget for the sandwich generation is really about getting clear on needs versus wants. Start with a thorough spending review.
Are there expenses you might be able to reduce or eliminate while you’re providing care? How much do you need to earn each month to maintain your family’s standard of living? Keeping your family’s needs in focus and shaping your budget around them is a money strategy for the sandwich generation that can keep you from overextending yourself financially.
“Protect your capital from poor decisions made from emotions,” financial life planner Kay says. “It’s too easy when you’re stretched beyond reason to make in-the-heat-of-the-moment decisions that ultimately are not in anyone’s best interest.”
Keep saving in sight
One of the most important money strategies for the sandwich generation is continuing to save for short- and long-term financial goals.
“Very rarely do I recommend putting caregiving ahead of the client’s own cash reserve and retirement,” financial planner Costa says. “While the intention to put others before ourselves is noble, you may actually be pulling the next generation backwards due to your lack of self-planning.”
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Making regular contributions to your 401(k), an individual retirement account or an IRA CD should still be a priority. Adding to your emergency savings each monthâeven if you have to reduce the amount you normally save to fit new caregiving expenses into your budgetâcan help prepare you for unexpected expenses or the occasional cash flow shortfall. Contributing to a 529 college savings plan or a Coverdell ESA is a budgeting tip for the sandwich generation that can help you build a cushion for your children once they’re ready for college life.
When you are learning how to budget for the sandwich generation, don’t forget about your children’s savings goals. If there’s something specific they want to save for, help them figure out how much they need to save and a timeline for reaching their goal.
A big part of learning how to budget for the sandwich generation is finding resources you can leverage to help balance your family commitments. In the case of aging parents, there may be state or federal programs that can help with the cost of care.
Remember to also loop in your siblings or other family members when researching budgeting tips for the sandwich generation. If you have siblings or relatives, engage them in an open discussion about what they can contribute, financially or in terms of caregiving assistance, to your parents. Getting them involved and asking them to share some of the load can help you balance caregiving for parents while still making sure that you and your family’s financial outlook remains bright.
The post Budgeting Tips for the Sandwich Generation: How to Care for Kids and Parents appeared first on Discover Bank – Banking Topics Blog.
Saving for retirement is an important financial goal and there are different options when it comes to where to invest. A qualified retirement plan can make it easier to build wealth for the long term, while enjoying some significant tax benefits.
Qualified retirement plans must meet Internal Revenue Code standards for form and operation under Section 401(a). If you have a retirement plan at work, it’s most likely qualified. But not every retirement account falls under this umbrella and those that don’t are deemed “non-qualified.”
So just what is a qualified retirement plan and how is it different from a non-qualified retirement plan?
Understanding the nuances of these terms can help you better shape your retirement plan for growing wealth.
What Is a Qualified Retirement Plan?
Qualified retirement plans allow you to save money for retirement from your income on a tax-deferred basis. These plans are managed according to Employment Retirement Income Security Act (ERISA) standards.
The IRS has specific rules for what constitutes a qualified retirement plan and what doesn’t. Public employers can set up a qualified retirement plan as long as these conditions are met:
• Employer contributions are deferred from income tax until they’re distributed and are exempt from social security and Medicare tax
• Employer contributions are subject to FICA tax
• Employee contributions are subject to both income and FICA tax
Following those guidelines, qualified retirement plans can include:
• Defined benefit plans (such as traditional pension plans)
• Defined contribution plans (such as 401(k) plans)
• Employee stock ownership plans (ESOP)
• Keogh plans
Section 403(b) plans, which you might have access to if you’re a public school or tax-exempt organization employee, mimic some of the characteristics of qualified retirement plans. But because of the way employer contributions to these plans are taxed the IRS doesn’t count them as qualified plans. The same is true for section 457(b) plans, which are available to public employees.
Defined Benefit vs. Defined Contribution Plans
When talking about qualified retirement plans and how to use them to invest for the future, it’s important to understand the distinction between defined benefit and defined contribution plans.
ERISA recognizes both types of plans, though they work very differently. A defined benefit plan pays out a specific benefit at retirement. This can either be a set dollar amount or payments based on a percentage of what you earned during your working career.
This type of defined benefit plan is most commonly known as a pension. If you have a pension from a current (or former) employer, you may be able to receive monthly payments from it once you retire, or withdraw the benefits you’ve accumulated in one lump sum. Pension plans can be protected by federal insurance coverage through the Pension Benefit Guaranty Corporation (PBGC).
Defined contribution plans, on the other hand, pay out benefits based on how much you (and your employer, if you’re eligible for a company match) contribute to the plan during your working years. The amount of money you can defer from your salary depends on the plan itself, as does the percentage of those contributions your employer will match.
Defined contribution plans include 401(k) plans, 403(b) plans, ESOPs and profit-sharing plans. With 401(k)s, that includes options like SIMPLE and solo 401(k) plans. But it’s important to note that while these are all defined contribution plans, they’re not all qualified retirement plans. Of those examples, 403(b) plans wouldn’t enjoy qualified retirement plan tax benefits.
What Is a Non-Qualified Retirement Plan?
Non-qualified retirement plans are retirement plans that aren’t governed by ERISA rules or IRC Section 401(a) standards. These are plans that you can use to invest for retirement outside of your workplace.
Examples of non-qualified retirement plans include:
While these plans can still offer tax benefits, they don’t meet the guidelines to be considered qualified. But they can be useful in saving for retirement, in addition to a qualified plan.
Traditional and Roth Individual Retirement Accounts
Traditional and Roth IRAs allow you to invest for retirement, with annual contribution limits. For 2020 and 2021, the maximum amount you can contribute to either IRA is $6,000, or $7,000 if you’re over 50.
Traditional IRAs allow for tax-deductible contributions. These accounts are funded using pre-tax dollars. When you make qualified withdrawals in retirement, they’re taxed at your ordinary income tax rate. IRAs do have required minimum distributions (RMD) starting at age 72.
Roth IRAs don’t offer the benefit of a tax deduction on contributions. But they do allow you to withdraw money tax-free in retirement. Unlike traditional IRAs, Roth IRAs do not have RMDs, meaning you donât have to withdraw money until you want to.
A self-directed IRA is another type of IRA you might consider if you want to invest in stock or mutual fund alternatives, such as real estate. These IRAs require you to follow specific rules for how the money is used to invest, and engaging in any prohibited transactions could result in the loss of IRA tax benefits.
Advantages of Qualified Retirement Plans
Qualified retirement plans can benefit both employers and employees who are interested in saving for retirement.
On the employer side, the benefits include:
• Being able to claim a tax deduction for matching contributions made on behalf of employees
• Tax credits and other tax incentives for starting and maintaining a qualified retirement plan
• Tax-free growth of assets in the plan
Additionally, offering a qualified retirement plan, such as a 401(k), can also be a useful tool for attracting and retaining talent. Employees may be more motivated to accept a position and stay with the company if their benefits package includes a generous 401(k) match.
Employees also enjoy some important benefits by saving money in a qualified plan. Specifically, those benefits include:
• Tax-deferred growth of contributions
• Ability to build a diversified portfolio
• Automatic contributions through payroll deductions
• Contributions made from taxable income each year
• Matching contributions from your employer (aka âfree moneyâ)
• ERISA protections against creditor lawsuits
Qualified retirement plans can also feature higher contribution limits than non-qualified plans, such as an IRA. If you have a 401(k), for example, you can contribute up to $19,500 for the 2020 and 2021 tax years, with an additional catch-up contribution of $6,500 for individuals 50 and older.
If you’re able to max out your annual contribution each year, that could allow you to save a substantial amount of money on a tax-deferred basis for retirement. Depending on your income and filing status, you may also be able to make additional contributions to a traditional or Roth IRA.
Making Other Investments Besides a Qualified or Non-Qualified Retirement Plan
Saving money in a qualified retirement plan or a non-qualified retirement plan doesn’t prevent you from investing money in a taxable account. With a brokerage account, you can continue to build your portfolio with no annual contribution limits. The trade-off is that selling assets in your brokerage account could trigger capital gains tax at the time of the sale, whereas qualified accounts allow you to defer paying income tax until retirement.
But an online brokerage account could help with increasing diversification in your portfolio. Qualified plans offered through an employer may limit you to mutual funds, index funds, or target-date funds as investment options. With a brokerage account, on the other hand, you may be able to trade individual stocks or fractional shares, exchange-traded funds, futures, options, or even cryptocurrency. Increasing diversification can help you better manage investment risk during periods of market volatility.
While a qualified retirement plan allows investors to put away pre-tax money for retirement, a non-qualified plan doesnât offer tax-deferred benefits. But both can be important parts of a retirement saving strategy.
Regardless of whether you use a qualified retirement plan or a non-qualified plan to grow wealth, the most important thing is getting started. Your workplace plan might be an obvious choice, but if your employer doesn’t offer a qualified plan, you do have other options.
Opening a traditional or Roth IRA online with SoFi InvestÂ®, for example, can help you get a jump on retirement saving. Members can choose from a wide range of investment options or take advantage of a custom-build portfolio to invest.
Find out how an online IRA with SoFi might fit in to your financial plan.
SoFi InvestÂ® The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individualâs specific financial needs, goals and risk profile. SoFi canât guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term âSoFi Investâ refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated InvestingâThe Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (âSofi Wealthâ). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (âSofi Securities). 2) Active InvestingâThe Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation. 3) Digital AssetsâThe Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business. For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances. Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market. External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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When it comes to making a 401k early withdrawal, there are a number of reasons why it might be tempting. With millions still unemployed due to the pandemic, unexpected expenses are taking a particularly hard toll. One reason why early withdrawal isnât uncommon in the U.S. might be because itâs easy to assume youâll have time to rebuild your 401k nest egg.
However, is the benefit of withdrawing your retirement savings early truly worth the cost? For many people, their 401k is their primary method of investing in their financial future. Before making a decision about early withdrawal, itâs important to consider the penalties and fees that could impact you. Read on to learn exactly what happens when you decide to dip into your 401k so you wonât be surprised by the repercussions.
How Much Are You Penalized for a 401k Early Withdrawal?
On the surface, withdrawing funds from your 401k might not seem like a bad option under extenuating circumstances, but you could face penalties. Young adults are especially prone to early withdrawals because they figure they have plenty of time to replace lost funds.
If youâre not experiencing a significant hardship, 401k early withdrawal probably isnât the right choice for you. Ultimately, you could lose a substantial portion of your retirement savings if you choose to withdraw your 401k early to use the money to make other risky financial moves. Below, letâs delve further into the penalties that usually apply when you withdraw early.
1) Your Taxes Are Withheld
When you prematurely withdraw from your retirement account, your first consideration should be that youâll have to pay normal income taxes on that money first. This means youâre losing at least roughly 30 percent of your savings to federal and state taxes before additional penalties.
Even if you only have $10,000 you want to withdraw, consider that youâre automatically giving $3,000 of your cash to the government. In the best case scenario, you might receive some money back in the form of a tax refund if your withholding exceeds your actual tax liability.
2) You Are Penalized by the IRS
If you withdraw money from your 401k before youâre 59 Â½ , the IRS penalizes you with an extra 10 percent on those funds when you file your tax return. If we use the example above, an additional $1,000 would be taken by the government from your $10,000 â leaving you with just $6,000. If youâre 55 or older, you could try to get this penalty lifted by the IRS through the Rule of 55, which is designed for people retiring early.
Also, there are exceptions under the CARES Act, which is designed to help people affected by the pandemic. There are provisions under the act that state individuals under the age of 59 Â½ can take up to $100,000 in Coronavirus-related early distributions from their retirement plans without facing the 10 percent early withdrawal penalty under certain conditions.
3) You Lose Thousands in Potential Growth
Even if youâre not deterred by tax penalties, think twice before you sabotage your long-term retirement savings goals. When you withdraw money early, youâll miss out on potential future savings growth because you wonât gain the perks of compound interest. Compounding is the snowball effect resulting from your savings generating more earnings â not only on your principal investment but also on your accrued interest.
Also, if you make a 401k early withdrawal while the market is down, youâre doing yourself a disservice because youâll be leaving thousands on the table. Itâs unlikely youâll fully recover the lost years of compound interest you would have benefited from. You might need to get creative with a passive income stream to help support you later in life.
When Does a 401k Early Withdrawal Make Sense?
In certain cases, it actually might be strategic to move forward with 401k early withdrawal. For example, it could be smart to cash out some of your 401k to pay off a loan with a high-interest rate, like 18â20 percent. You might be better off using alternative methods to pay off debt such as acquiring a 401k loan rather than actually withdrawing the money.
Always weigh the cost of interest against tax penalties before making your decision. Some 401k plans do allow for penalty-free early withdrawals due to a layoff, major medical expenses, home-related costs, college tuition, and more. Regardless of your strategy to withdraw with the least penalties, your retirement savings are still taking a significant hit.
401k Early Withdrawal, Hardship, or Loan: Whatâs the Difference?
Knowing the differences between a 401k early withdrawal, a hardship withdrawal, and a 401k loan is crucial. Due to the many obstacles to make a 401k early withdrawal, you may find you want to keep it untouched. If youâre convinced you still need to use your 401k for financial assistance, consult with a trusted financial advisor to figure out the best option.
When Does ThisÂ Apply?
Your funds are withdrawn to pay off large debts or finance large projects.
Your 401k fund is typically subject to taxes and penalties.
Youâre only eligible for this type of withdrawal under circumstances such as a pandemic or natural disasters.
Withdrawals canât exceed the amount of the need and the funds are still subject to taxes and penalties.
The loan must be paid back to the borrowerâs retirement account under the plan.
The money isnât taxed if the loan meets the rules and the repayment schedule is followed.
If youâve left a job and donât know what to do with your Roth IRA, a 401k transfer is a good option. Most likely, you will save money and have a wider range of investment options when you transfer your funds. 401k fees can be high, and rolling over your funds to a Roth IRA account could be wise in the long run. Also, be aware that the process is more complicated for indirect rollovers.Â
If youâre one of the millions of Americans who rely on workplace retirement savings, early 401k withdrawal may jeopardize your future financial stability.
There are very few instances when cashing out a portion of your 401k is a smart move.
In most cases, any kind of early 401k withdrawal is detrimental to your retirement plans.
Stick to your budget and bulk up your emergency fund to stay one step ahead.
In short, 401k early withdrawals are usually counterproductive. Prevent compromising your hard-earned savings by using a free budgeting tool that will set you up for success. After all, being prepared and informed are two of the most important parts of maintaining financial health.
The post 401k Early Withdrawal: What to Know Before You Cash Out appeared first on MintLife Blog.
This weekâs Mint audit helps out a couple, Pasquale, 46, and Jillian, 39, who are starting a new life together after each experiencing divorce. Both work in software sales earning roughly the same income. When combined, their earnings average $450,000 a year.
The New Jersey couple shares a new mortgage and a savings account. They recently purchased a home together and pool a fraction of their incomes together into a joint account to pay for shared expenses such as the home loan, property taxes and utilities.
Pasquale and Jillian also arrived at the relationship owning their own properties. Pasquale has held onto his townhome in a nearby town that he bought after his divorce. He rents it out, earning a nice $500 monthly profit. Jillian also has a home in Florida, which she rents out. She more or less breaks even every month.
They would like advice related to managing their rental properties (should they sell them?), possibly buying a vacation home in the $250,000 to $350,000 range and, for Pasquale, saving up to help send his two daughters (ages 13 and 17) to college. Theyâre also wondering if theyâre saving âenoughâ for retirement.
They had lots of good questions, and after an hour on the phone and a review of their finances, I was able to fit together some of their puzzle pieces.
First, hereâs a break down of some their finances:
Pasquale: Contributes 5% to 401(k) and has about $500,000 in it. He also invests 15% in companyâs ESPP (Employee Stock Purchase Plan)
Jillian: Contributes 5% to a 401(k) plus employerâs match, totaling 10%. She has about $200,000 saved. She also invests 11% in her companyâs ESPP.
If they were to both cash out their ESPPs today, theyâd have about $250,000 in gains, which are subject to income tax.
Child Support Payments
Pasquale: $4,000 per month
Debt (Credit Cards and Student Loans)
Pasquale: $18,000 in student loans
Jillian: $40,000 in student loans
Real Estate Holdings
Each of their individual properties has about $80,000 in equity.
Here are my top 3 recommendations:
Max Out the 401(k)s
The couple is doing fairly well with their retirement savings, but I think they are too exposed to their ESPPs. They contribute more to their ESPPs than their 401(k)s, which is very risky, considering an ESPP puts all your money in a single stock. A 401(k) is far more diversified.
They may benefit from reallocating some of those dollars back into their company 401(k). In doing so, I recommend they both aim to max out their 401(k)s, which also means a bigger tax deduction. This yearâs maximum contribution is $18,500.
Transfer Some ESPP Earnings to College Savings
Every six months, each receives the chance to cash out some or all of the money in their ESPP. I recommend striking at the next opportunity to reduce their exposure to a market downfall and help pay for future college expenses. Taking 20 or 30 percent off the table and placing the dollars into a safer haven like a CD creates less risk.
For Pasquale, specifically, Iâd look into selling some of his shares at the next opportunity and placing it into a plain vanilla savings account to cover at least the first two years of his daughterâs education. His daughter will choose a school soon and expects to receive some grants and scholarships to reduce the cost. At that point Pasquale can better estimate how much to withdraw from the stock plan.
For his youngest daughter, itâs not too late for Pasquale to open a 529-college savings account. That money can later be used for higher education costs without being subject to taxes. Investing $500 a month in a 529 starting today could help to afford at least the first year or two of school, depending on where she lands. Pasquale may even consider using some of the ESPP gains to fund the new 529 for daughter #2, if his eldest doesnât need it.
Sell Rentals to Purchase a New Second Home
How emotionally tied are they to their individual properties? Pasquale said he could take it or leave it. The $500 cash flow is nice, but heâs open to selling it. Jillian, however, would be sad to part ways with the Florida home. While its rental income is just enough to cover the carrying costs, she likes the idea of keeping it. Sheâs always wanted to have a house by the water.
But I propose a scenario: What if they sold both rental properties and pooled the equity ($160,000) to afford a new second home that theyâd both own? Theyâre eyeing a cabin near the Poconos in Pennsylvania. The estimated cost for a home that suits them is between $250,000 and $300,000. A 50% down payment on a $300,000 home would mean that their monthly mortgage would be roughly $700 per month, given todayâs average interest rate of about 4.50% (or possibly higher for second homes.)
From selling the two properties they achieve their goal of affording a second home. Located in a popular resort area, they can also rent it out from time to time for more than $700 a week. Renting the place for just 8 or 10 weeks out of the year would probably cover the annual mortgage.
From there, any extra cash flow could be used to save more for retirement, travel, college, or whatever they wish.
Farnoosh Torabi is Americaâs leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, sheâs become our favorite go-to money expert and friend.
The post Money Audit: Should We Hold on to Our Rental Properties? appeared first on MintLife Blog.
You probably donât need us to tell you that the earlier you start saving for retirement, the better. But letâs face it: For a lot of people, the problem isnât that they donât understand how compounding works. They start saving late because their paychecks will only stretch so far.
Whether youâre in your 20s or your golden years are fast-approaching, saving and investing whatever you can will help make your retirement more comfortable. Weâll discuss how to save for retirement during each decade, along with the hurdles you may face at different stages of life.
How Much Should You Save for Retirement?
A good rule of thumb is to save between 10% and 20% of pre-tax income for retirement. But the truth is, the actual amount you need to save for retirement depends on a lot of factors, including:
Your age. If you get a late start, youâll need to save more.
Whether your employer matches contributions. The 10% to 20% guideline includes your employerâs match. So if your employer matches your contributions dollar-for-dollar, you may be able to get away with less.
How aggressively you invest. Taking more risk usually leads to larger returns, but your losses will be steeper if the stock market tanks.
How long you plan to spend in retirement. Itâs impossible to predict how long youâll be able to work or how long youâll live. But if you plan to retire early or people in your family often live into their mid-90s, youâll want to save more.
How to Save for Retirement at Every Age
Now that youâre ready to start saving, hereâs a decade-by-decade breakdown of savings strategies and how to make your retirement a priority.
Saving for Retirement in Your 20s
A dollar invested in your 20s is worth more than a dollar invested in your 30s or 40s. The problem: When youâre living on an entry-level salary, you just donât have that many dollars to invest, particularly if you have student loan debt.
Prioritize Your 401(k) Match
If your company offers a 401(k) plan, a 403(b) plan or any retirement account with matching contributions, contribute enough to get the full match â unless of course you wouldnât be able to pay bills as a result. The stock market delivers annual returns of about 8% on average. But if your employer gives you a 50% match, youâre getting a 50% return on your contribution before your money is even invested. Thatâs free money no investor would ever pass up.
Pay off High-Interest Debt
After getting that employer match, focus on tackling any high-interest debt. Those 8% average annual stock market returns pale in comparison to the average 16% interest rate for people who have credit card debt. In a typical year, youâd expect aÂ $100 investment could earn you $8. Put that $100 toward your balance? Youâre guaranteed to save $16.
Take More Risks
Look, weâre not telling you to throw your money into risky investments like bitcoin or the penny stock your cousin wonât shut up about. But when you start investing, youâll probably answer some questions to assess your risk tolerance. Take on as much risk as you can mentally handle, which means youâll invest mostly in stocks with a small percentage in bonds. Donât worry too much about a stock market crash. Missing out on growth is a bigger concern right now.
Build Your Emergency Fund
Building an emergency fund that could cover your expenses for three to six months is a great way to safeguard your retirement savings. That way you wonât need to tap your growing nest egg in a cash crunch. This isnât money you should have invested, though. Keep it in a high-yield savings account, a money market account or a certificate of deposit (CD).
Tame Lifestyle Inflation
We want you to enjoy those much-deserved raises ahead of you â but keep lifestyle inflation in check. Donât spend every dollar each time your paycheck gets higher. Commit to investing a certain percentage of each raise and then use the rest as you please.
Saving for Retirement in Your 30s
If youâre just starting to save in your 30s, the picture isnât too dire. You still have about three decades left until retirement, but itâs essential not to delay any further. Saving may be a challenge now, though, if youâve added kids and homeownership to the mix.
Invest in an IRA
Opening a Roth IRA is a great way to supplement your savings if youâve only been investing in your 401(k) thus far. A Roth IRA is a solid bet because youâll get tax-free money in retirement.
In both 2020 and 2021, you can contribute up to $6,000, or $7,000 if youâre over 50. The deadline to contribute isnât until tax day for any given year, so you can still make 2020 contributions until April 15, 2021. If you earn too much to fund a Roth IRA, or you want the tax break now (even though it means paying taxes in retirement), you can contribute to a traditional IRA.
Your investment options with a 401(k) are limited. But with an IRA, you can invest in whatever stocks, bonds, mutual funds or exchange-traded funds (ETFs) you choose.
If you or your spouse isnât working but you can afford to save for retirement, consider a spousal IRA. Itâs a regular IRA, but the working spouse funds it for the non-earning spouse.Â
Avoid Mixing Retirement Money With Other Savings
Youâre allowed to take a 401(k) loan for a home purchase. The Roth IRA rules give you the flexibility to use your investment money for a first-time home purchase or college tuition. Youâre also allowed to withdraw your contributions whenever you want. Wait, though. That doesnât mean you should.
The obvious drawback is that youâre taking money out of the market before itâs had time to compound. But thereâs another downside. Itâs hard to figure out if youâre on track for your retirement goals when your Roth IRA is doing double duty as a college savings account or down payment fund.
Start a 529 Plan While Your Kids Are Young
Saving for your own future takes higher priority than saving for your kidsâ college. But if your retirement funds are in shipshape, opening a 529 plan to save for your childrenâs education is a smart move. Not only will you keep the money separate from your nest egg, but by planning for their education early, youâll avoid having to tap your savings for their needs later on.
Keep Investing When the Stock Market Crashes
The stock market has a major meltdown like the March 2020 COVID-19 crash about once a decade. But when a crash happens in your 30s, itâs often the first time you have enough invested to see your net worth take a hit. Donât let panic take over. No cashing out. Commit to dollar-cost averaging and keep investing as usual, even when youâre terrified.
Saving for Retirement in Your 40s
If youâre in your 40s and started saving early, you may have a healthy nest egg by now. But if youâre behind on your retirement goals, now is the time to ramp things up. You still have plenty of time to save, but youâve missed out on those early years of compounding.
Continue Taking Enough Risk
You may feel like you can afford less investment risk in your 40s, but you still realistically have another two decades left until retirement. Your money still has â and needs â plenty of time to grow. Stay invested mostly in stocks, even if itâs more unnerving than ever when you see the stock market tank.
Put Your Retirement Above Your Kidsâ College Fund
You can only afford to pay for your kidsâ college if youâre on track for retirement. Talk to your kids early on about what you can afford, as well their options for avoiding massive student loan debt, including attending a cheaper school, getting financial aid, and working while going to school. Your options for funding your retirement are much more limited.
Keep Your Mortgage
Mortgage rates are historically low â well below 3% as of December 2020. Your potential returns are much higher for investing, so youâre better off putting extra money into your retirement accounts. If you havenât already done so, consider refinancing your mortgage to get the lowest rate.
Invest Even More
Now is the time to invest even more if you can afford to. Keep getting that full employer 401(k) match. Beyond that, try to max out your IRA contributions. If you have extra money to invest on top of that, consider allocating more to your 401(k). Or you could invest in a taxable brokerage account if you want more flexibility on how to invest.
Meet With a Financial Adviser
Youâre about halfway through your working years when youâre in your 40s. Now is a good time to meet with a financial adviser. If you canât afford one, a financial counselor is typically less expensive. Theyâll focus on fundamentals like budgeting and paying off debt, rather than giving investment advice.
Saving for Retirement in Your 50s
By your 50s, those retirement years that once seemed like they were an eternity away are getting closer. Maybe thatâs an exciting prospect â or perhaps it fills you with dread. Whether you want to keep working forever or retirement canât come soon enough, now is the perfect time to start setting goals for when you want to retire and what you want your retirement to look like.
Review Your Asset Allocation
In your 50s, you may want to start shifting more into safe assets, like bonds or CDs. Your money has less time to recover from a stock market crash. Be careful, though. You still want to be invested in stocks so you can earn returns that will keep your money growing. With interest rates likely to stay low through 2023, bonds and CDs probably wonât earn enough to keep pace with inflation.
Take Advantage of Catch-up Contributions
If youâre behind on retirement savings, give your funds a boost using catch-up contributions. In 2020 and 2021, you can contribute:
$1,000 extra to a Roth or traditional IRA (or split the money between the two) once youâre 50
$6,500 extra to your 401(k) once youâre 50
$1,000 extra to a health savings account (HSA) once youâre 55.
Work More if Youâre Behind
Your window for catching up on retirement savings is getting smaller now. So if youâre behind, consider your options for earning extra money to put into your nest egg. You could take on a side hustle, take on freelance work or work overtime if thatâs a possibility to bring in extra cash. Even if you intend to work for another decade or two, many people are forced to retire earlier than they planned. Itâs essential that you earn as much as possible while you can.
Pay off Your Remaining Debt
Since your 50s is often when you start shifting away from high-growth mode and into safer investments, now is a good time to use extra money to pay off lower-interest debt, including your mortgage. Retirement will be much more relaxing if you can enjoy it debt-free.
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Saving for Retirement in Your 60s
Hooray, youâve made it! Hopefully your retirement goals are looking attainable by now after working for decades to get here. But you still have some big decisions to make. Someone in their 60s in 2021 could easily spend another two to three decades in retirement. Your challenge now is to make that hard-earned money last as long as possible.
Make a Retirement Budget
Start planning your retirement budget at least a couple years before you actually retire. Financial planners generally recommend replacing about 70% to 80% of your pre-retirement income. Common income sources for seniors include:
Social Security benefits. Monthly benefits replace about 40% of pre-retirement income for the average senior.
Retirement account withdrawals. Money you take out from your retirement accounts, like your 401(k) and IRA.
Defined-benefit pensions. These are increasingly rare in the private sector, but still somewhat common for those retiring from a career in public service.
Annuities. Though controversial in the personal finance world, an annuity could make sense if youâre worried about outliving your savings.
Other investment income. Some seniors supplement their retirement and Social Security income with earnings from real estate investments or dividend stocks, for example.
Part-time work. A part-time job can help you delay dipping into your retirement savings account, giving your money more time to grow.
You can plan on some expenses going away. You wonât be paying payroll taxes or making retirement contributions, for example, and maybe your mortgage will be paid off. But you generally donât want to plan for any budget cuts that are too drastic.
Even though some of your expenses will decrease, health care costs eat up a large chunk of senior income, even once youâre eligible for Medicare coverage â and they usually increase much faster than inflation.
Develop Your Social Security Strategy
You can take your Social Security benefits as early as 62 or as late as age 70. But the earlier you take benefits, the lower your monthly benefits will be. If your retirement funds are lacking, delaying as long as you can is usually the best solution. Taking your benefit at 70 vs. 62 will result in monthly checks that are about 76% higher. However, if you have significant health problems, taking benefits earlier may pay off.
Use Social Securityâs Retirement Estimator to estimate what your monthly benefit will be.
Figure Out How Much You Can Afford to Withdraw
Once youâve made your retirement budget and estimated how much Social Security youâll receive, you can estimate how much youâll be able to safely withdraw from your retirement accounts. A common retirement planning guideline is the 4% rule: You withdraw no more than 4% of your retirement savings in the first year, then adjust the amount for inflation.
If you have a Roth IRA, you can let that money grow as long as you want and then enjoy it tax-free. But youâll have to take required minimum distributions, or RMDs, beginning at age 72 if you have a 401(k) or a traditional IRA. These are mandatory distributions based on your life expectancy. The penalties for not taking them are stiff: Youâll owe the IRS 50% of the amount you were supposed to withdraw.
Keep Investing While Youâre Working
Avoid taking money out of your retirement accounts while youâre still working. Once youâre over age 59 Â½, you wonât pay an early withdrawal penalty, but you want to avoid touching your retirement funds for as long as possible.
Instead, continue to invest in your retirement plans as long as youâre still earning money. But do so cautiously. Keep money out of the stock market if youâll need it in the next five years or so, since your money doesnât have much time to recover from a stock market crash in your 60s.
A Final Thought: Make Your Retirement About You
Whether youâre still working or youâre already enjoying your golden years, this part is essential: You need to prioritize you. That means your retirement savings goals need to come before bailing out family members, or paying for college for your children and grandchildren. After all, no one else is going to come to the rescue if you get to retirement with no savings.
If youâre like most people, youâll work for decades to get to retirement. The earlier you start planning for it, the more stress-free it will be.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of thatâbut that freedom can vanish quickly if you don’t handle your expenses correctly.
“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”
Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.
“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”
Most people who freelance for the first time don’t realize that everythingâfrom taxes to office supplies to setting up retirement plansâis on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”
What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexingâtaxes:
1. Taxes: New rules when working on your own
First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.
For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.
That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFPÂ®, tax preparer and founder of FreelanceTaxation.com.
When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.
“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”
After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.
To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.
2. Business expenses: Get a handle on two big areas
The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:
Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.
If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.
Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.
There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.
The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”
Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.
When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.
3. Health insurance: Harnessing an inevitable cost
Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidiesâor a reduced premium based on incomeâwas $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.
“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFPÂ®, at Bridgeworth Financial.
A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premiumâwhich is how much you pay each month to have your insuranceâis a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.
When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:
Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.
Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.
4. Retirement savings: Learn to “set it and forget it”
Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.
“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.
He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.
Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.
5. Continually update your rates
One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.
Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.
“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”
Have confidence in your freelance career
Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.
“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”
The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.