MONEY 401(k)s

The Painless Way New Grads Can Reach Financial Security

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Steve Debenport—Getty Images

You don’t need to be sophisticated. You don’t need to pick stocks. You don’t need to understand diversification or the economy. You just need to do this one simple thing—now.

A newly minted class of college graduates enters the work world this summer in what remains a tough environment for young job seekers. Half of last year’s graduates remain underemployed, according to an Accenture report. Yet hiring is up this year, and as young people land their first real job they might keep in mind a critical advantage they possess: time, which they have more of than virtually everyone else and can use to build financial security.

Saving early is a powerful force. But it loses impact with each year that passes without getting started. You don’t need to be sophisticated. You don’t need to pick stocks. You don’t need to understand diversification or the economy. You just need to begin putting away 10% of everything you make, right away. And 15% would be even better.

Consider a worker who saves $5,000 a year from age 25 to 65 and earns 7% a year. Not allowing for expenses and taxes, this person would have $1.1 million at age 65. Compare that to a worker who starts saving at the same pace at age 35. This worker would amass half that total, just $511,000. And now for the clincher: If the worker that started at age 25 suddenly stopped saving at age 35, but left her savings alone to grow through age 65, she would enjoy a nest egg of $589,000—more than the procrastinator who started at age 35 and saved for 30 more years.

That is the power of compounding, and it is the most important thing about money that a young worker must understand. Those first 10 years of a career fly by quickly and soon you will have lost the precious early years of saving opportunity and squandered your advantage. That’s why, if possible, I advise parents to get their children started even before college.

Once you start working, your employer will almost certainly offer a 401(k) plan. More than 80% of full-time workers have access to one. This is the easiest and most effective way to get started saving immediately. Here are some thoughts on how to proceed:

  • Enroll ASAP Some companies will allow you to enroll on your first day while others require you to be employed for six months or a year. Find out and get started as soon as possible. Most people barely feel the payroll deductions; they quickly get used to making ends meet on what is left.
  • Have you been auto enrolled? Increasingly, employers automatically sign you up for a 401(k) as soon as you are eligible. Some also automatically increase your contributions each year. Do not opt out of these programs. But look at how much of your pay is being deferred and where it is invested. Many plans defer just 3% and put it in a super safe, low-yielding money market fund. You likely are eligible to save much more than that and want to be invested in a fund that holds stocks for long-term growth.
  • Make the most of your match A big advantage of saving in a 401(k) is the company match. Many plans will match your contributions dollar for dollar or 50 cents on the dollar up to 6% of your salary. This is free money. Make sure you are contributing enough to get the full match.
  • Keep it simple Choosing investment options are where a lot of young workers get hung up. But it’s really simple. Forget the noise around large-cap and small-cap stocks, international diversification, and asset allocation. Most plans today offer a target-date fund that is the only investment you’ll ever need in your 401(k) plan. Choose the fund dated the year you will turn 65 or 70. The fund manager will handle everything else, keeping you appropriately invested for your age for the next 40 years. In many plans, such a target-date fund is the default option if you have been automatically enrolled.
  • Take advantage of a Roth Some plans offer a Roth 401(k) in addition to a regular 401(k). Divide your contributions between both. They are treated differently for tax purposes and having both will give you added flexibility in retirement. With a Roth, you make after-tax contributions but pay no tax upon withdrawal. With a regular 401(k), you make pre-tax contributions but pay tax when you take money out. The Roth is most effective if your taxes go up in retirement; the regular 401(k), if your taxes go down. Since it’s hard to know in advance, the smart move is to split your savings between the two.
  • Get help An increasing number of 401(k) plans include unbiased, professional third-party advice. This may be via online tools, printed material, group seminars, or one-on-one sessions. These resources can give you the confidence to make decisions, and according to Charles Schwab young workers that seek guidance tend to have higher savings rates and better ability to stay invested for the long haul in tough times.

Read next: 6 Financial Musts for New College Grads

 

 

MONEY retirement planning

9 False Moves That Could Derail Your Retirement

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Biehler Michael—Shutterstock

For many of us, retirement is a great unknown. In your 20s, it seems so far away that it’s easy to figure you’ll start saving when you have more money. Of course, if you wait until you have “extra money,” you might never start at all.

But 20-somethings aren’t the only ones who do things that sabotage their retirement. Their parents may be putting their own retirement at risk by, for example, borrowing money to pay for a wedding, just when they should be turbocharging their own savings, especially if they started late.

So what are we to do? We don’t know that we’ll live to be 85 and still healthy enough to travel, or that the stock market will crash just before we retire. And yet we hope to plan as if we do know. Some of us dream about retirement — and many of us sabotage it at the very same time. Here are some money moves you may regret down the road.

1. Raiding Your Home Equity

Home equity can seem like a a piggy bank when you’re short on cash. And a “draw period” on a home equity line of credit before repayment of principal is due can make it feel almost like free money. Worse, it feels like you are borrowing from yourself. After all, you built up that home equity, right? But if you spend it now, you won’t have it later. And should you decide you want to sell or get a reverse mortgage at some point, that decision can come back to haunt you. You will walk away with less from a sale or be eligible for lower payments from a reverse mortgage. Either way, Retired You could suffer from the decision.

2. Unplanned Roth IRA Withdrawals

Some experts recommend Roths as vehicles to save for a first home or as a place to park an emergency fund because the money grows tax-free. If you have planned to use the money for a first home, you can withdraw up to $10,000. It can also come to your rescue for unforeseen expenses (particularly tempting because, after five years, you can withdraw principal penalty-free). Its flexibility is both an advantage and a temptation, since raiding your retirement account now robs you of those funds and their compounding interest down the road.

3. Failing to Put Away Anything

For many of us, it’s easier to wait to save until we’re “more established” or until we’re making a little more money. Why aren’t we saving? Because there’s no extra money! The problem, of course, is there may well never be any extra money. Most of us don’t come to the end of the month and try to figure out what to do with all the money that’s left. Saving needs to be in the budget from the beginning. It’s often easiest to automate this.

4. Helping Adult Kids Financially

But they’re your children. And everyone makes mistakes. (Or maybe they think you did when you didn’t save thousands for a wedding.) There are exceptions, of course, but if you do help out financially, be sure you minimize your own costs or that you do not jeopardize your own retirement. It’s not usually a good idea to let them grow accustomed to a parental supplement. Relationships and money can be fraught, too. So think very carefully before you make your help monetary.

5. Co-Signing for a Child or Grandchild

They are just starting out and don’t have much of a credit history. Or they want to take out private student loans, and all that’s standing between them and next semester is your signature. The car they are financing, the lease they are signing … if your signature is on it, you are on the hook. If they pay late, your credit could be affected. And should you need a loan, this obligation will count as your debt for purposes of determining eligibility. Student loans can be particularly risky. In many cases, they can’t be erased in bankruptcy. If you have already co-signed on a loan, it’s important to check your credit regularly to see how it’s affecting your credit.

6. Failing to Have a Plan B

You probably hope or assume your good health (and that of your spouse, if you are married) will continue. You may be planning to stay with your current employer until you reach full retirement age. But people fall ill, or they get laid off before they planned to leave the workforce. Do you have a reserve parachute? Your standard of living won’t be as high, but knowing that you have a plan can make the situation a little less worrisome.

7. Poor Investment Choices

Even if you’ve managed to sign up for the 401(k) at work or to open an IRA for yourself, choosing the wrong funds or failing to diversify can set you up for failure. A target-date fund can be useful, but only if you choose the appropriate target. (If you’re in your 50s and choosing a 2050 target retirement date, you may get really lucky and see big gains — but you could also see big losses and not have much time to recoup them.) Likewise, it’s smart not to put all your nest eggs in the same investment basket. Do your own research or find a planner to find a mix you are comfortable with and that is appropriate for your age and goals.

8. Not Making Changes When Needed

Are your investments changing with your goals? And are you keeping track of all of your investments? If you’ve had several jobs (and several 401(k)s), it’s a good idea to do some consolidation. Keeping track of funds in several investment houses can make figuring out minimum withdrawals much more difficult once you are retired. Keep accounts organized.

9. Taking Social Security As Soon As You Can

In many cases, it’s better to wait. Your payment will be higher, although if you take it younger, you will get it for more years. Claiming it the minute you can may be tempting, but if you come from a family with a history of people living well into old age, consider whether you think the smaller checks will be worth it. (You can calculate a “break-even” age of how long you would have to live to collect as much as you would have had you started younger — so that checks from then on truly are additional money.) Conversely, if no one in your family has ever turned 80, you may want to opt for the earlier payout. And, of course, your financial situation when you retire will have a say. If you can’t make ends meet without Social Security, then you should take it.

Another mistake? Making all your plans — including retirement — for later. A life of sacrificing for a “later” that may or may not come is not much of a life. They key is balance. We’re not suggesting you never take a vacation, never give to a cause that is close to your heart or buy the car you’ve desperately wanted (and can now afford) so that years of self-denial will pay off someday … maybe. But it is good to know that if you live a long life, you’ll have the financial resources you need.

Read next: Can You Pass This Retirement Quiz?

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MONEY Social Security

Can You Pass This Retirement Quiz?

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Carl Smith—Getty Images/fStop

If so, you're in the minority of Americans who know the right answers.

Ready for a quick quiz on how Social Security benefits work?

You should ace it. After all, Social Security is the most important retirement benefit for most Americans, and understanding the rules is critical for getting the most out of the program.

So here we go with a few questions:

  1. At what age can you receive your full benefit?
  2. Can you keep working while collecting a full benefit?
  3. If you are divorced, can you collect a benefit based on your ex-spouse’s earning history?
  4. Can you receive a benefit even if you are not a U.S. citizen?

Only 28% of Americans can give enough correct answers to questions like these to get a passing grade, according to a new survey by Massachusetts Mutual Life Insurance Co.

Just one in 1,500 respondents correctly answered all 12 questions, and only 38% got more than half of the answers right.

The findings are disturbing. 90% of Americans over age 65 receive Social Security benefits, and, for 65%, the program provides more than half of total income, according to the National Academy of Social Insurance. For 36%, Social Security is the entire retirement income ballgame.

“We didn’t expect everyone to get a 100% score, but what shocked us was that only 28% got a passing grade,” said Michael R. Fanning, executive vice president of MassMutual’s U.S. Insurance Group.

The silver lining is that the retirement industry has ramped up efforts to educate workers about Social Security. Information and tools about benefits are cropping up in many workplace 401(k) plans, and much media coverage of the program has shifted of late away from political rants to useful information.

So how did you do? Here are the answers:

Full Benefit Age

Most people got this wrong. Some 71% of respondents think 65 is still the full retirement age for Social Security. But it is 66 for today’s retirees and will be 67 for people retiring in 2022.

Only 57% of respondents were aware that the timing of their claim affects the monthly benefit amount.

Working While Receiving Benefits

Slightly more than half missed this one, believing people can continue to work while collecting a full Social Security retirement benefit. But that is true only if you have reached your full retirement age.

This year, an early Social Security filer with income of more than $15,720 from work (employment or self-employment) will pay a penalty. One dollar will be deducted from benefit payments for every $2 earned above that limit.

Collect From an Ex-Spouse

Just 45% think that it is possible to claim a benefit on the record of an ex-spouse. They are correct, and it does not matter if that ex-spouse has remarried.

This can boost benefits dramatically, since spousal and survivor benefits are among the most valuable features of Social Security.

You can claim half of an ex-spouse’s benefit if you are at full retirement age (currently 66), had been married for at least 10 years, and if that benefit works out to be higher than your own. You are entitled to 100 percent of a deceased ex-spouse’s benefit .

Citizenship

Three-quarters of survey respondents think that being an American citizen is necessary to receive Social Security retirement benefits. But the main eligibility requirement to receive benefits is paying into the system.

You must have contributed payroll taxes for a cumulative total of at least 40 quarters (10 years). Along with citizens, individuals who are “lawfully present” in the United States, including permanent residents, refugees and asylum seekers, are eligible for benefits.

Read next: Why Retiring Early May Be More Affordable Than You Think

MONEY Retirement

What Italy and Germany Show Us About the Future of Social Security

woman holding Italian and German flags
Shutterstock

Families, not government, may be what rescues retirement.

One of the big questions facing retirement planners is how much to count on Social Security in the decades ahead. The number of Americans past age 65 will double by 2050, part of the longevity revolution that threatens to leave Social Security insolvent by 2033.

That doesn’t mean benefits would stop abruptly. Under the current system, enough funding would be in place to continue benefits at 77% of the promised level. Of course, anything is possible if laws change. But cuts probably are coming.

Most Americans get that. Among those that have not yet retired, just 20% believe they will receive full benefits when they retire, according to a Pew Research report. Some 31% expect reduced benefits and 41% expect no benefits at all. Presumably, these findings skew along age lines. Most experts believe benefits adjustments will be phased in. Those currently 55 or older likely will see minimal change to their benefits while those under 30 likely will see big change.

The longevity revolution is a global phenomenon, and government pensions are in trouble around the world. Two of the oldest nations on the planet are Germany and Italy and, demographically speaking, they are now where the U.S. will be in 35 years: a fifth of their population is older than age 65. If you think Americans are glum about prospects for collecting Social Security, these nations offer a glimpse of what’s coming.

In Germany, just 11% think they will receive benefits at current levels, 45% think they will receive benefits at reduced levels and 41% expect to get no benefits at all, Pew found. In Italy, only 7% believe they will get full benefits, 29% expect benefits at reduced levels and 53% think they will get no benefits at all. Interestingly, Germans and Italians are twice as likely as Americans to believe this is primarily a problem for government to solve. In the U.S., there is a strong belief that this is a problem for families and individuals to fix, Pew found.

Just 23% of Italians are putting anything away for retirement, vs. 56% of Americans and, perhaps because austerity is in their DNA, 61% of Germans. The most important statistic, though, may be the percentage of young adults (ages 18-29) that are saving. This is the group most likely to see reduced or no benefits in retirement but which still has 40 years or more to let savings grow. In the U.S., 41% of young adults are saving for retirement. In Germany, the figure is 44%. In Italy, just 13% are saving.

What will fill the gaps? Pew found a strong sense of families as backstops in all three countries. Nearly nine in 10 Italians view financial assistance for an aging parent in need as their responsibility. The figure is 76% in the U.S. and 58% in Germany. This sense runs deepest among young adults, perhaps because their parents are now assisting them through an extended period of dependence known as emerging adulthood.

In all three countries, financial help is more likely to flow down to adult children than up to aging parents: about half or more of adults with grown children have helped them financially in the last 12 months. That many or more have assisted grown children in non-monetary ways as well, helping with errands, housework, home repairs or child care. The vast majority says this assistance is more rewarding than stressful; they value the time together.

So family support looms as a large part of future retirement security for many people in graying nations, and that’s fine for families with the wherewithal. But young adults, especially, don’t have to feel victimized by the decline of government pensions. They have many opportunities for tax-advantaged saving through an IRA or 401(k) plan, and decades to let compound growth solve their problems. Workers past 50 can take advantage of catch-up contributions, and for guaranteed lifetime income use a portion of their savings to buy a fixed annuity. Like it or not, personal savings is the key to retiring comfortably—self security in place of Social Security.

 

 

MONEY mutual funds

This Is The Absolute Easiest Way to Invest for Retirement

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Andy Brandl—Getty Images/Moment RM

Stay on track by keeping things simple.

Most people know they need to save for retirement, but many are intimidated by the complexity of the investing world. To make investing for retirement simpler, many financial companies have created target date mutual funds that combine a number of different investments into a single package. The Vanguard Target Retirement Fund series is one such fund, created by the Vanguard Group as a way for people to get everything they need to save for retirement in a single investment. Let’s look at the Vanguard Target Retirement Fund and why it could be the simplest way to long-term riches for you.

The basics of Vanguard’s Target Retirement Fund
The first thing to know about the Vanguard Target Retirement Fund is that you actually have 12 different mutual funds from which to choose. Funds corresponding to target dates every five years ranging from 2010 to 2060 make up the bulk of the offerings, and a single fund aimed at providing income for those already in retirement closes out the list.

The idea behind the Vanguard Target Retirement Fund is that investors should pick the fund that corresponds to the year they expect to retire. Over time, the fund goes from a more aggressive mix of assets when you’re young and still have a long time before retirement to a more conservative asset allocation as you grow older and approach the end of your working life. For instance, the 2060 fund is composed of 90% stocks and 10% bonds, while the 2020 fund has a much larger 40% bond allocation and just 60% in stocks.

Vanguard isn’t the only company offering target date funds, but the advantage of using Vanguard is that you gain access to the low-cost funds the index fund pioneer is famous for promoting — with index funds connected to the stock and bond markets both within the U.S. and internationally. The funds tend to favor domestic investments but still have significant foreign exposure, giving investors diversification. Another benefit of using Vanguard’s index funds as underlying investments is that the expense ratios on the Vanguard Target Retirement Fund are very low, ranging from $16 to $18 per year for every $10,000 you have invested.

The downsides of the Vanguard Target Retirement Fund
All that said, Vanguard’s target date funds are far from perfect. One criticism is that you can duplicate the funds’ portfolios yourself by buying the underlying index funds directly and save some expenses. With those component funds charging between $5 and $19 annually per $10,000 investment — and most of the allocated money going to the cheaper part of that range — wealthy investors can save hundreds or even thousands of dollars each year just by monitoring their balance on their own.

Also, not all investors agree that index funds are the best strategy for long-term investing. Some competing target date funds offer actively managed mutual funds rather than index funds; while they’re more expensive, top funds can sometimes earn a sufficient extra return to offset higher costs.

Finally, like any other target date fund, the Vanguard Target Retirement Fund takes the decision about asset allocation out of your hands and puts it squarely on Vanguard’s shoulders. That’s fine when things work out, but during the financial crisis many target date funds took heat for being too heavily invested in stocks. If you’re not comfortable with the level of risk that Vanguard’s target date funds take, then you’ll probably prefer to create a do-it-yourself mix of funds on your own.

The Vanguard Target Retirement Fund series isn’t the only way to invest for retirement, but it is one of the simplest. With basic exposure to the most important investments you’ll need and extremely low costs, a Vanguard Target Retirement Fund can be a great way to build up your retirement savings over time.

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MONEY Social Security

Are Social Security Benefits Taxable?

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Rubberball/Mike Kemp—Getty Images/Rubberball

Your marital status, total income and location all come into play.

Saving for retirement is a crucial part of preparing for your financial future — but that doesn’t mean you shouldn’t plan for Social Security benefits. You can calculate what your Social Security income will be to help provide an estimate of your benefits and what other savings you will need to lead the lifestyle you want in retirement. While you may have heard about a time when these payouts were tax-free, that is no longer the case. In short, Social Security benefits are taxable. But in reality, it is not that simple — taxability depends on marital status, total income and location. If you have some additional retirement income, besides Social Security, coming from a salary, pension, IRA or 401(k), you will likely be over the income limits and can expect that up to 85% of your Social Security benefits will be taxable.

Income Limits

The portion of your benefits you are taxed on depends upon your income. The Internal Revenue Service sets limits for calculating tax liability every year. In 2015, you will pay income taxes on up to 50% of your benefits if you are filing as an individual with combined income between $25,000 and $34,000. If you have more than $34,000 in combined income, you could be subject to taxes on up to 85% of your benefits. For couples, the amounts are $32,000 and $44,000 for up to 50% and about $44,000 for up to 85%. In this case, “combined income” means the total of your adjusted gross income, the nontaxable interest and half of your Social Security benefits. If Social Security benefits are your only source of income and your total is below $25,000, your benefits will not be taxed at all — but you may not have the comfortable retirement you imagined.

Federal & State Taxes

If you will have to pay taxes on your benefits, up to 85% every dollar of income you make over the limit will be subject to federal income tax. This can get complicated to predict, so the IRS offers a worksheet and e-file software to help you calculate your Social Security tax liability. It’s a good idea to check with your local tax pro or an accountant about state and local taxes because the rules vary by location. Some states offer exemptions and credits based on age or income and at least some Social Security is tax-exempt in most states, but there is usually a range.

Simplifying the Process

You can make the tax burden on your Social Security benefits simpler by paying these costs gradually throughout the year instead of all at once. You can either ask the Social Security Administration to withhold taxes from your benefit check by submitting a W-4V or pay quarterly estimates. If you are very concerned about tax burden in retirement, it’s a good idea to start saving early and generously with a Roth IRA, as this account uses after-tax dollars. You will never have to take required minimum distributions and you will not have to pay taxes on payments down the road because you already have.

Retirement can be tricky, so it’s important to stay on top of your finances and look for ways to improve your Social Security benefits. Check regularly to ensure you are saving enough for retirement in other ways like a 401(k) or IRA to supplement the money you can expect from Social Security. While paying taxes may not be enjoyable, this is an indication that you have saved sufficiently and will not have to live solely on these Social Security payments.

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MONEY Longevity

Will Living Too Long Ruin Your Retirement?

cupcake ruined by excessive amount of melting candles
D. Hurst—Alamy

Our life spans are getting longer, but we won’t all make it to 95.

“Longevity risk”—the possibility that people will live longer than expected, putting a strain on Social Security, Medicare, public and private pension funds, their own retirement savings, and the planet in general—has become a hot topic recently. Former hedge fund manager and Soros strategist Stanley Druckenmiller recently predicted that the aging population will precipitate a major economic crisis, while the Wall Street Journal took a more sanguine approach by devoting a whole section to “How to Add Life to Longer Lives.”

But before you start reciting “The first person to live to 150 has already been born”—a highly speculative prediction by Aubrey de Gray that Prudential decided to turn into a billboard—it’s worth taking a step back to see how longevity might impact your own retirement plan.

First off, according to the Society of Actuaries, which released new mortality tables late last year to help pension plans more accurately estimate their payouts, people are only going to live about two years more than had been previously thought. (For men who make it to 65, overall longevity rose from 84.6 in 2000 to 86.6 in 2014; for women age 65, longevity rose from 86.4 in 2000 to 88.8 in 2014.)

These figures are broad averages, so can be used as a starting point in trying to figure out your time horizon, but there are many other variables to consider, such as, are you single or married? Single people don’t live as long as married people. For that matter, is your retirement plan based on how long either member of a couple might live—or the more likely scenario of just one person being alive for a certain portion of retirement? As financial planner Michael Kitces has pointed out, planning for the former can lead to overly conservative projections.

Your job also has an effect on how long you’re likely to live. As a new paper by the Center of Retirement Research points out, public sector workers live longer than private sector workers because the former, on average, tend to be more highly educated, which is another predictor of life span. At the same time, white collar workers, not surprisingly, live longer than blue-collar workers with physically demanding jobs. Rich white collar workers live longest of all, which suggests in some horrible Darwinian way that longevity risk may somehow take care of itself.

But the biggest factor of course is your family health history, and while that’s not something we can control, it’s certainly worth doing a bit of research to find out what kinds of diseases felled your relatives, as well as taking a hard look at your own exercise and eating habits. The issue of life span is really more a medical than a financial question, so you’d probably be better off addressing it with your doctor or a gerontologist than a financial advisor. With proper planning, you can turn longevity from something that’s currently being framed as a “risk” back into something to look forward to.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

MONEY psychology of money

Don’t Make These Common Mistakes If You Plan To Retire Soon

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Alamy

Procrastination can undermine your retirement.

When it comes to the downside of procrastination, most people focus on the danger of getting a late start on saving. Indeed, TIAA-Cref’s Ready-to-Retire Survey shows that’s a major regret. But you can also put your retirement in jeopardy by putting off certain key tasks in the years just before retirement. And the cost can be just as devastating as procrastinating earlier in life.

We all know by now (or should) that putting off saving for retirement comes with a high cost. As I’ve shown before, a 25-year-old who earns $40,000 a year, gets 2% annual raises, and contributes 15% of his salary to a 401(k) or similar plan each year, earns 5.5% a year on investments, and follows that regimen for 40 years would end up with a nest egg of roughly $1.1 million. Were that same hypothetical 25-year-old to wait until age 30 to start saving, his projected nest egg’s value would drop to $875,000. And it falls to $680,000 if he procrastinates until age 35.

But procrastination during the home stretch to retirement, or even after retiring, can also be costly, although it may be harder to put a specific number on.

What kind of procrastination am I talking about?

Well, for starters, many people don’t transition early enough from investing for long-term growth to creating a portfolio more geared toward generating income that will support them throughout retirement. Making such a shift doesn’t mean you should dump stocks wholesale or load up on “income investments.” Rather, it’s mostly a process of refining your stock-bond mix to be sure it reflects the level of risk you’re comfortable with as you enter retirement. Failing to go through such a re-assessment could leave you with a stock-heavy portfolio that, in the event of a major market downturn, could significantly reduce the amount of money you can safely draw from your portfolio each year and lower the chances that your savings will last as long as you do.

Another area where pre-retirees delay is getting a fix on the expenses they’ll face when they retire. You can’t forecast outlays precisely; there will always be wildcards. But you can come up with a reasonable estimate that you can update periodically by going to an online budget tool like the Retirement Expenses Worksheet in Fidelity’s Retirement Income Planner calculator. It suggests dozens of expense items and also has room for custom expenses you create, making it unlikely you’ll overlook anything. This worksheet also allows you to designate each expense as essential or discretionary, so you can more easily see where you can cut back, if necessary. One cost of foregoing such an analysis is that you might pull the trigger on retirement before you’ve accumulated the resources you need, which could mean you’ll have to live a more frugal retirement than necessary or, in some cases, even “unretire” to avoid depleting your nest egg.

Many people don’t engage as early as they should in figuring out what they can expect from Social Security. Certainly by your late 50s, you (and your spouse if you’re married) should be checking out Social Security’s Retirement Estimator to see what sort of benefits you may qualify for at different retirement ages. And by your early 60s, you’ll want to go to a tool like Financial Engines’ Social Security calculator, which can show you how you may be able to boost the amount you receive over your lifetime by delaying taking benefits (an instance when procrastination of a sort can make sense) or engaging in a variety of “claiming strategies” that can boost benefits.

In this instance, it’s actually possible to come up with a potential cost of procrastination. In a recent column I showed how a married man earning $100,000 a year and his wife who earns $60,000 might lose $300,000 in joint lifetime benefits if they both start taking payments at 62 instead of coordinating their filing to maximize their payout.

There are plenty of other key issues you should be looking into as you approach the final five to ten years of your career. Will your nest egg last a good 30 or so years in retirement? No reason for that to be mystery. You can get a decent sense of how long your savings might support you by plugging your account balances and other financial info into a good retirement calculator like T. Rowe Price’s Retirement Income Planner. What are the pros and cons of reverse mortgages and what kind of income might one provide? You can and should research such questions before pulling the trigger on retirement by checking out The Mortgage Professor and AARP sites. And while you’re at it, take the time to do some broader retirement lifestyle planning—that is, taking a hard look at how you’ll actually spend your time after leaving your job and investing such issues as whether to relocate or downsize.

Retirement planning is tough. You’ve got to get an early start and then push on throughout your career, even when you face lots of other demands on your time and finances. It would be a shame to get that part of the process right, and mess things up by dropping the ball just as the finish line is within sight.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY retirement savings

Women Are Better Retirement Savers Than Men, but Still Have a Lot Less Money

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It's all about the difference in wages.

Income inequality doesn’t end when you quit working. A report out Tuesday finds that women lag far behind men in retirement savings, even though women save at higher rates and take fewer risks with their investments.

According to Vanguard’s How America Saves report, women are more likely than men to be in a 401(k) plan: 73% of women vs. 66% of men. The difference is even larger at higher income levels. Last year, 81% of women earning $50,000 to $75,000 a year participated in their 401(k) vs. 62% of men. Among people earning $75,000 to $100,000, 86% of women put away money in a 401(k) vs. 70% of men.

Women also save at higher rates than men: Women put away 7% to 16% more of their income than men. And women are less likely to engage in risky investment behavior, such as frequent trading.

Despite those good habits, women are significantly behind men in the amount they have put away. Men have average account balances that are 50% higher than women’s. The average account balance for a man last year: $123, 262, compared with $79,572 for women.

“Women are better savers, but the difference in account balances comes down to the difference in wages,” says Jean Young, senior research analyst at the Vanguard Center for Retirement Research and the lead author on the report. “It’s not surprising. Women typically earn less than men do.”

Still, Young says, the Vanguard report revealed a lot of positive trends among retirement savers.

Among the findings:

  • More people are enrolled in 401(k)s. One-third of companies have auto-enrollment programs that automatically put new employees into 401(k)s unless they choose to opt out. That’s up from 5% a decade ago. Among large companies, 60% have auto enrollment. More companies are doing this not just for new hires but about 50% of plans with auto enrollment are also “sweeping” existing employees into plans during open enrollment, with a choice to opt out. Auto-enrollment has been criticized for enrolling people at very conservative deferral rates, typically 3%. That’s changing slowly: 70% of companies that have auto enrollment also automatically increase contributions annually, typically 1% a year. And, while 49% of plans default people to a 3% deferral rate, 39% default to 4% or more vs. 28% in 2010.
  • More retirement savers are leaving it to professionals. Thanks to the rise in target date funds and automatic enrollment (which typically defaults people to target date funds), 45% of people in Vanguard plans have professionally managed accounts vs. 25% in 2009. The number of people in such accounts is expected to surpass 50% this year, and that’s a good thing, says Young. According to Vanguard, people in professional managed accounts have more diversified portfolios than those who make their own investment decisions.“A professional helps you find the appropriate asset allocation, rebalance, and adjust the portfolio to your life stage,” says Young.
  • The bull market continues to deliver. The median total one-year return for people in Vanguard 401(k) plans was 7.2% in 2014. Over the past five years, 401(k) participants returns averaged 9.9% a year.
  • Few people max out. Only 10% of 401(k) participants saved the maximum $17,500 allowed in 2014. But the number rises with higher earners: One-third of people who earn $100,000 or more a year max out.
  • Savers are doing better than you think. Most financial planners recommend putting away 12% to 15% of annual income to save enough for a comfortable retirement. While the average 401(k) deferral rate is just 6.9%, combined with employer contributions, it’s 10.4%, close to that mark.

That doesn’t mean that most people are all set for retirement. Vanguard reports little change in account balances: The average 401(k) balance is $102,682, while the median is $29,603. The typical working household nearing retirement with a 401(k) and an IRA has a median $111,000 combined, which would yield less than $400 a month in retirement, according to a recent report by the Boston College’s Center for Retirement Research. But those who have access to a 401(k) and contribute regularly are in much better shape, regardless of whether you are a man or a woman.

MONEY Kids and Money

The Risky Money Assumption Millennials Should Stop Making Now

man walking tightrope
Kazunori Nagashima—Getty Images

Nearly half of millennials believe family will ride to the rescue if they don't save enough to retire. Here's a better plan.

As if we needed more evidence that millennials have been slow to launch, new research shows that a heart-stopping 43% are counting on financial assistance from loved ones if things go poorly with their retirement savings.

It’s not clear exactly who these loved ones may be—their boomer parents, or perhaps successful friends or even their own children. But counting on others for retirement security is almost always a mistake. No other generation has anywhere near this level of expectation for family aid, according to a Merrill Edge survey of Americans with investable assets of $50,000 to $250,000. Just 9% of those outside the millennial generation are counting on a friends-and-family backstop, the survey found.

Boomers are famously under-saved; many will struggle themselves to keep from becoming a financial burden to others. Yet their millennial offspring, accustomed to unprecedented support from Mom and Dad that spawned a new life phase called emerging adulthood, continue to believe they have a rock-solid back-up strategy. In a MONEY poll this spring, 64% of millennials said before marrying it is important to discuss any potential inheritance with a mate. Only 47% of boomers agree.

Certainly, some millennials will inherit financial security. Wall Street estimates about $30 trillion will flow in their direction the next few decades. But the average millennial will receive almost 10 times less than they expect—and many won’t receive a thing, and So the best retirement backstop is one they build for themselves.

Fortunately, the current crop of retirees has left a blueprint, according to the Merrill Edge report. Both retirees and pre-retirees overwhelmingly describe the ideal retirement as one that is stress free and financially stable. Yet 66% of Americans expect to be stressed about money in retirement because of the way they have saved during their working years. Those who are already retired express less concern; nearly three quarters believe they will have enough money to last through retirement. Only 57% of folks still working feel that way.

Retirees say that contributing to a retirement account (63%) and paying down debt (68%) while working were among the most important parts of their life strategy. Working Americans today are engaged in these activities at a lower level: 57% contribute to a retirement account and 54% are paying down debt, Merrill Edge found. Meanwhile, 42% of today’s retirees also invested outside their retirement accounts, vs. just 24% of workers today.

Another source of stress: Workers today have less confidence in a government solution, probably reflecting their more pessimistic view of Social Security. Only 28% of workers are counting on help from the government when they retire, vs. 41% of retirees who now say they rely on government assistance.

Three quarters of workers say they will rely on their own savings to fill financial gaps in retirement. Yet it is unclear they will have enough to make a big difference. In the survey, about one in three workers say they would be embarrassed if close friends knew the details of their finances. Much of this points to millennials’ overriding belief that Mom and Dad will make it all okay—and that might be the case for some. But to be safe, young workers should start now saving 10% of everything they earn. Four decades of compound growth is the only backstop they’ll ever need.

 

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