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Tag: priorities

From Your 20s Through Your 60s: Retirement Savings Mistakes to Avoid

13 Jan 2021 Lucas Porter

Whether you’re just entering the workforce and kick-starting your retirement savings or cruising toward the finish line and retirement bliss, making the wrong financial move could have a big impact on your future plans.

Avoid these common retirement savings mistakes now and enjoy your golden years

Just ask Sharon Marchisello. When she was in her twenties, she made a significant retirement savings mistake. She was a social worker for the state of Texas and resented the fact that part of her monthly paycheck went toward the state’s retirement fund. She thought retirement was too far off for her to worry about.

“I quit that job after only two years,” she says, “and since I was not yet vested in the plan, my retirement contributions were returned to me when I left. I promptly spent them on something else.”

That retirement savings mistake meant that Marchisello, now 64, would have to put away more money later in life for her retirement, since she didn’t benefit from compound interest growing her savings throughout her 20s. She was able to recover from that misstep by saving aggressively and consistently later on. She contributed 15 percent of her income to an individual retirement account (IRA) each year and later maxed out all of her potential contributions to her company’s 401(k). Marchisello now blogs at Countdown to Financial Fitness to ensure others don’t fumble their retirement planning the way she did—whether in their 20s or at any other age.

In order to help keep your retirement savings on track, review these common retirement savings mistakes to avoid by decade:

Your ‘get started’ 20s

Marchisello isn’t the only one to make a retirement savings mistake in her 20s. Ian Atkins, 32, an analyst and staff writer for the online publication Fit Small Business with experience in personal finance, also made some retirement planning mistakes. He thought saving for retirement was something people did once they checked off all the other things on the journey to becoming a financial “grown-up,” like buying a car and a home.

When you're in your 20s, not taking advantage of time is one of the major retirement planning mistakes

“This meant that saving for retirement was dependent not on my income,” he says, “but on some ever-shifting idea of what ‘grown-up’ would look like.”

Atkins ended up waiting until later in his 20s to start saving and thus, like Marchisello, missed out on the benefits of several years of compound interest had he started earlier. Compound interest is what happens when the interest earned on the amount you save starts earning its own interest. The more time you have to save your money, the more compound interest can boost your savings. Without the benefit of compound interest, Atkins had to save more, for longer, to make up for lost time.

This retirement planning mistake is something Marchisello sees all of the time among 20-somethings. Some, she believes, aren’t focused on saving for retirement because they are determined to pay off student loans and start a family first. While certainly important priorities for many at this point in life, so too is allowing as much time as possible for your retirement fund to grow.

“The earlier you start, the easier it is to build a sizable nest egg,” she says.

Many millennials may not be signing up for their company’s 401(k) plans when they aren’t auto-enrolled, and some may not be contributing the recommended percentage of their income to the plan. Not contributing to your 401(k) in your twenties might also mean that you miss out on matching money from your employer. Many millennials may also not be fully taking advantage of their company’s matching contributions. Add this to your list of retirement savings mistakes to avoid. Why turn down matching money?

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Your ‘busy’ 30s

While you might feel older, wiser and more mature when you hit your 30s, you may still be making some retirement planning mistakes.

Atkins thinks the biggest retirement savings mistake made by people in their 30s is contributing just a small amount toward their retirement.

“They think if they are making some contributions to a 401(k), they’re fine,” he says. But, depending on your retirement dreams and the amount that you’re contributing, that might not be enough.

To stay clear of this retirement savings mistake, Atkins suggests maxing out your 401(k) contributions. For the 2020 tax year, the IRS set a $19,500 maximum 401(k) contribution limit (those 50 and older are eligible for catch-up contributions of an additional $6,500). You can also consider looking into other savings vehicles that offer tax incentives. Those could include IRAs and a health savings account (HSA), which allow you to put away pre-tax money.

Another retirement savings mistake to avoid is being too conservative in your investment strategy in your 30s. Many people see this as a time when you can take more investment chances in order to benefit from the increased growth potential of riskier stocks.

“When you’re in your 30s,” Marchisello says, “you still have many years ahead to recover from market downturns.”

Your ‘get serious’ 40s and 50s

People in their 40s and 50s who have fallen behind on their retirement savings often make the retirement savings mistake of letting their worries get the best of them, Atkins says. Rather than starting early with a slow, consistent and reliable approach to saving for retirement, they become desperate to catch up. Like the hare that sprints to catch up to the tortoise at the end of the race after procrastinating for most of it, some may run out of time.

Don't let your worries get the best of you-- it's one of the retirement savings mistakes to avoid in your 40s and 50s

Marchisello agrees. “People in their 40s and 50s,” she says, “might try to take shortcuts and invest too aggressively to make up for not having saved enough.”

But as you age, you have less time to correct for market downturns. So, if you use an aggressive strategy, you could risk losing savings without the chance for recovery. Instead, this is the period during which you might want to consider slowly shifting your assets into more conservative investments, Marchisello says.

Other retirement savings mistakes to avoid include going into too much debt, either by taking on student loans for children or an outsized mortgage, or taking money out of retirement accounts to pay for major expenses like children’s weddings, college, unexpected bills and renovations projects. This may trigger early withdrawal penalties and taxes and could diminish your retirement account’s value, even if you pay the amount back. That’s because you will have missed out, again, on the compound interest the money you withdrew might have earned.

“This setback could erase much of their effort,” Marchisello says.

Your ‘now or never’ 60s

One of the biggest retirement savings mistakes to avoid in your 60s? Marchisello often sees people file for Social Security as soon as they’re eligible to start receiving retirement benefits at age 62.

“You’re better off waiting until you reach full retirement age,” she says, “because your benefit checks will be larger. If you can wait until age 70, even better.” According to the Social Security Administration, in 2020, full retirement age for those born between 1943 and 1954 is 66.

There are steps you can take to overcome your retirement planning mistakes

Meanwhile, a common retirement savings mistake that Atkins sees people in their 60s make is not cutting back on their expenses as they get ready for retirement.

“Adjusting your living expenses to better align with your available savings,” says Atkins, “is not something that should be ignored.”

He suggests that you consider more drastic moves like downsizing to a smaller house or moving to a place with a lower cost of living. But, if you can’t—or don’t want to—do that then it’s important to reduce other expenses. That might mean cutting back on travel, getting rid of a second car or decreasing how much you spend on dining out and entertainment.

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“The realization that you need to make changes in order to enjoy a comfortable retirement actually puts you ahead of most folks. Now it’s time for you to steadily build on that lead.”

– Ian Atkins, analyst and staff writer for Fit Small Business

You can recover from retirement planning mistakes

Even if you’ve made one or more retirement planning mistakes, it’s important to know that it’s not the end of the world. After all, Marchisello was able to recover from her missteps and now says she has enough to cover her daily expenses and any medical problems she may encounter. She’s also able to travel throughout her retirement.

If you do find yourself behind, Atkins believes you shouldn’t spend your time worrying.

“The realization that you need to make changes in order to enjoy a comfortable retirement actually puts you ahead of most folks,” he says. “Now it’s time for you to steadily build on that lead.”

You can do that by starting to save immediately, or by putting a larger percentage of your salary in your retirement accounts.

“The goal isn’t to become the hare,” Atkins says. “It’s to become the tortoise as soon as possible.”

Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.

The post From Your 20s Through Your 60s: Retirement Savings Mistakes to Avoid appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

13 Jan 2021 Real Estate, Retirement 401(k), All, Banking, big, Business, Buying, buying a car, car, Children, Compound Interest, Debt, Entertainment, Finance, Financial Wize, FinancialWize, Grow, Home, house, invest, IRA, job, Life, Loans, Make, market, millennials, money, More, mortgage, Move, moving, Personal, Personal Finance, priorities, Retirement, Retirement Basics, Retirement Planning, retirement savings, Salary, save, Saving, Saving for Retirement, savings, savings account, Savings Strategies, security, Small Business, social security, Student Loans, tax, taxes, Travel

Struggling with money anxiety and finding balance

13 Jan 2021 Lucas Porter

On Saturday evening, I had a chance to chat with my friends Wally and Jodie. You might remember them from a reader case study from last August. They’re the couple that wants to get their finances in order but they’re worried because they’re starting with less than zero.

When we chatted in August, Wally and Jodie had over $35,000 in debt. They had variable incomes, but somehow seemed to spend exactly what they earned — about $3000 per month after taxes. Worst of all, they were behind on some payments.

Now, eight months later, their situation has improved.

Over smoked German sausage and beer, Wally and Jodie told me about their progress. (My dog, Tahlequah, was eager to take part in the conversation. Or maybe it was the sausage she wanted?)

Jodie, Tally, and Wally

Taking Baby Steps

“Based on your advice, we’ve worked hard to increase our incomes,” Jodie told me. “We’ve both been picking up extra shifts whenever possible. And I started a second job that pays pretty well.”

“So, you’ve been able to get a gap between your income and your spending?” I asked.

“You bet,” said Wally. “By working more, we don’t have time to spend much money. In August, we didn’t have any gap between our earning and spending. Our gap was zero. Now our gap is almost $2000! And we’ve been using the debt snowball method to get out of debt. We’ve already paid off a bunch of smaller stuff and now have $438 extra per month for debt payoffs. Plus, we have an emergency fund.”

“This all sounds amazing,” I said. “Great work!”

“It is amazing,” Wally said. “This is the best shape I’ve ever been in financially. But we’re struggling to figure out what to do next.”

“What do you mean?” I asked.

“Well,” said Jodie. “We’re getting married in September. We don’t know how much to budget for that. Meanwhile, we still have a lot of debt. We owe about $10,000 on Wally’s car. We had to replace my Mini Cooper last winter, and that brought us another $10,000 of debt. Plus, I still owe on my school loans.”

I did some mental math. While the couple’s cash flow has improved, I was a little nervous that they hadn’t actually decreased their debt since the last time we talked about money. That said, I know Jodie’s old car had been a thorn in their side. And they have paid down nearly $10,000 in miscellaneous debts.

“The real issue is that we can’t seem to find balance,” Wally said. “We’re burned out. We’ve been working so much that we never have time for ourselves. Or each other. It’s affecting our moods and our attitudes.”

“Yeah,” I said. “That’s tough.”

Wally nodded. “Now I have a friend who wants us to fly out to his wedding,” he said. “We’ve done the math, and we can’t afford it. He’s offered to pay for the trip, but we don’t know how we feel about that. We want to go, but even if we do accept his help, it’ll cost us a few hundred bucks — plus whatever income we lose while we’re gone.”

“What should we do?” Jodie asked. “We thought saving more would reduce the stress, but we’re just as anxious as ever. Well, maybe not anxious in the same way, I guess, but still. We’re worried about money — even with a $2000 gap each month.”

“Trust me,” I said. “The money worry never goes away. Everybody has money anxiety, no matter how much they earn, no matter how much they have saved.”

Worrying About Money

“Do you worry about money?” Wally asked.

“Yes, of course,” I said. “I’m basically financially independent, but I still have money anxiety. In fact, I’m so worried about it that this year I’m tracking every penny I earn and spend. And, just like you, there always seems to be something that comes up for me to spend on. There’s my heart-attack scare, which now looks like it’ll cost me $7500. I just paid a huge tax bill. And there’s all of this travel I’ve committed to this year. It’s always something.”

“Should we fly to my friend’s wedding?” Wally asked. “I haven’t seen him in a long time. I can tell it’s important to him for us to be there.”

“That’s a tough call,” I said. “And it’s an example of how personal finance isn’t just about the numbers. There are relationships and emotions to consider too.”

“From a financial perspective, I don’t think you should go. But it’d be hypocritical of me to tell you that. My cousin Duane is still fighting cancer, but he wants to make another trip to Europe next month. At first, I was reluctant to join him. Like I said, I’m trying to cut expenses this year because I feel like I’m spending too much. But you know what? I’m going. So, you see, my advice and my actions are at odds here.”

I didn’t know how to tell Wally and Jodie, but my biggest concern with their situation is that it seems like they’re getting ready to stop the race when they’ve barely begun. They’re not out of debt yet. They’ve made some excellent progress, but there’s still a long way to go.

They’ve spent eight months on this project. From the looks of it, they have another eighteen months to go — but that’s if they use the gap they’ve created to accelerate their debt payments. If they don’t choose this route, it’s going to take them even longer.

At the same time, I get where they’re coming from about feeling cramped. Sure, there’s a finite amount of time until they get the debt paid off, then they can loosen up. But when you’re in the thick of it, eighteen months can feel like eighteen years.

Finding Balance

The key, of course, is to find balance. And I think that’s what Wally and Jodie are trying to do.

They’re not trying to quit the race early. They don’t want to get behind on payments like they used to be. They don’t want to spend their emergency fund or to stop their debt snowball. What they want is to find a balance between today and tomorrow.

I didn’t mention it to them at the time, but I think they should look at the balanced money formula from Elizabeth Warren and Amelia Tyagi’s excellent All Your Worth.

The Balanced Money Formula

Warren and Tyagi argue that in order to achieve financial balance, your after-tax spending should be allocated like this:

  • At least 20% should go to Saving (which includes debt reduction).
  • No more than 50% should be allocated to Needs (which includes housing, utilities, healthcare, basic food, and basic clothing).
  • The rest — around 30% — should go to Wants (which is everything else).

Warren and Tyagi are adamant that less than half your budget should go to Needs. If you pour too much toward necessities, you don’t have room in your budget for fun or the future.

The authors are just as insistent that you should build room into your budget for Wants. “You should ask yourself,” they write, “are you making enough room for fun?”

Wally and Jodie aren’t spending much on Needs at the moment, but they’re not spending much on Wants either. They’ve been pumping most of their money into Saving (in the form of debt reduction). This is a Good Thing. But maybe it’s too much of a good thing?

Making a Plan

On Sunday morning, Wally sent me an email. After meeting with me, he and Jodie formulated a plan:

  • Until their wedding in September, they’ll keep their debt snowball where it is today: minimum payments plus the $438 they’ve freed from satisfied debts.
  • They’ll use an envelope-like budget for entertainment, travel, gifts, dates, and personal items.
  • With the rest of their monthly gap, they’ll create a dedicated savings account for their wedding. After the wedding, they’ll throw this money at debt.

This seems like a good, purposeful plan to me. It balances today and tomorrow. And you can be sure that I’ll follow up with them in the fall to make sure they’ve stuck to the plan — that they’ve remembered to prioritize their debt snowball again.

In the meantime, I sent Wally this Reddit post in which a young guy realized that by pushing for a 65% saving rate, he was miserable. He writes:

I’m currently shooting for a 55% saving rate and I cannot tell you how much more I enjoy life. I went from feeling like I couldn’t spend a dollar that wasn’t strictly budgeted, to travelling with friends, going to concerts, and enjoying the pleasures of life. That 10% made all the difference in the world

As for me, I still feel anxious. I’ve done a good job of controlling my small, everyday expenses this year, but the big stuff is still stressing me out. I need to heed my own advice and find better balance. That will come, I think, as I consciously make better decisions about future large expenses — and as I work to increase my own income.

Source: getrichslowly.org

13 Jan 2021 Budgeting, Debt, Money Basics All, balanced money formula, big, Budget, Budgeting, car, Debt, debt snowball, Emergency Fund, Entertainment, Finance, Financial Wize, FinancialWize, fun, housing, How To, items, job, Life, Loans, Make, money, More, Personal, Personal Finance, priorities, Psychology, real, Saving, savings, savings account, School, Spending, tax, taxes, Travel, winter, work

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