MONEY

25 Ways to Get Smarter About Money Right Now

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John Lund—Getty Images

Small steps that can make a big difference.

Retirement planning is serious business that requires diligence and patience. But a quick tip, or even an irreverent one, can sometimes be helpful, too. Here are 25 observations from my 30 years of writing about retirement and investing that may spur you to plan more effectively (or to start planning if you’ve been putting it off).

1. If you’re not sure whether you’re saving enough for retirement, you probably aren’t. You can find out for sure pretty easily, though, by going to this Am I Saving Enough? tool.

2. There’s an easy way not to outlive your money: die early. But I think most people would agree that coming up with a realistic and flexible retirement income plan is a more reasonable way to go.

3. If your primary rationale for doing a Roth 401(k) or Roth IRA instead of a traditional version is that “tax free is always better than tax-deferred,” you need to read this story before doing anything.

4. Some people put more thought into whether to have fries with their Big Mac than deciding when to claim Social Security benefits. Unfortunately, giving short shrift to that decision may put those same people at greater risk of having to work behind a fast-food counter late in life to maintain their standard of living.

5. Yes, stocks are risky. But if they weren’t, they wouldn’t be able to generate the high long-term returns that can help you build a sizeable nest egg without devoting a third or more of your income to saving.

6. Just because the mere thought of an immediate annuity makes your eyes glaze over doesn’t mean you shouldn’t consider one for your post-career portfolio. When it comes to retirement income, boring can be beautiful.

7. What do rebalancing your retirement portfolio and flossing have in common? We know we ought to make both part of our normal routine, but many people don’t get around to either as regularly as they should.

8. Lots of people (especially in the media) complain that we’d all be better off if companies would just go back to giving workers check-a-month retirement pensions instead of 401(k) plans. But that’s not gonna happen. So focus your efforts on how to maximize your 401(k) or other savings plan.

9. Target-date funds’ stock-bond allocations can’t match your risk tolerance exactly. But guess what? You don’t need an exact match to invest successfully for retirement. And for most people an inexact target-date portfolio is a lot better than anything they’d build on their own.

10. A really smart fund manager can beat an index fund. Problem is, there’s no way to tell in advance whether a manager is one of the handful who’s truly smart or one of the many who look smart but are just lucky or having a few good years. That’s why you’re better off going with index funds in your retirement portfolio.

11. Your employer’s 401(k) match isn’t really “free.” It’s part of your compensation. Which makes it all the more puzzling why anyone wouldn’t contribute at least enough to his 401(k) to get the full company match.

12. Investing in a fund with high fees is like betting on a racehorse being ridden by a fat jockey. Sure, the horse could still be good enough to win. But do you want to put money on it? A low-cost fund effectively allows you to boost your savings rate and gives you a better shot at building an adequate nest egg and making it last throughout retirement.

13. Every time you move to a new house or apartment do you leave all your furniture and other possessions behind? Then why do so many people fail to consolidate their old 401ks into their current plan or a rollover IRA? (Okay, if the old plan’s investing options are unmatchable, that’s a reason. But seriously, how often is that the case?)

14. A reverse mortgage can be a good option to supplement retirement income if your other resources are coming up short. But be sure to consider a trade-down as well. In fact, you may be able to trade down and then do a reverse mortgage in the future.

15. No rule of thumb can be a substitute for detailed retirement planning. But some rules of thumb are better than no planning at all. And going with a rule of thumb may at least help you get on track toward a secure retirement until you decide to get more serious about your planning.

16. Many people are skittish about investing in bonds these days because they’re worried they’ll get clobbered when interest rates rise. But you know what? Pundits have been predicting bond Armageddon for years and it hasn’t happened. Besides, as this research shows, even at today’s low yields bonds remain an effective way to hedge equity risks and diversify your portfolio.

17. People peddling high-cost variable annuities know that retirement investors love the word “guaranteed.” Which is why as soon as you hear that alluring word, you should ask what, exactly, is being guaranteed and who is doing the guaranteeing? Then ask how much you’re paying for that guarantee and what you’re giving up for it. The answers may surprise and enlighten you.

18. No retirement calculator can truly tell you whether you’re on track for a secure retirement because no tool can fully reflect the uncertainty and complexity of real life. Of course, the same goes for the most sophisticated software and human advisers, too. The reason to fire up a good retirement calculator isn’t to come away with a projection that’s 100% accurate. It’s to get a sense of whether you’re on the right course and see how different moves might improve your prospects.

19. You don’t have to be a financial wiz to invest successfully for retirement. But understanding a few basic principles can improve your investing results. Try this investing quiz to see how much you know.

20. Getting fleeced by an unscrupulous adviser or ravaged by a severe bear market can certainly wreak havoc on your retirement plans. But for most people it’s basic lapses in investing and planning that diminish their retirement prospects the most.

21. Many experts say the 4% rule is broken, that it no longer works in today’s low-return world. Fact is, the 4% rule was never all it was cracked up to be. To avoid running out of money in retirement, plug your spending, income, and investing info into a retirement income calculator capable of assessing the probability that your money will last—then repeat the process every year or so to see if you need to adjust your spending.

22. Diversifying your portfolio can lower risk and boost returns. But if you try to get too fancy and stuff your portfolio with investments from every obscure corner of the market and all manner of arcane ETFs, you may end up di-worse-ifying rather than diversifying.

23. Many retirees pour their savings into “income investments” like dividend stocks and high-yield bonds when they want to turn their savings into reliable income. But such a focus can be dangerous. A better way to go: create a low-cost diversified portfolio that generates both income and growth, and then get the income you need from interest, dividends, and periodic sales of fund or ETF shares.

24. The next time wild swings in the market give you the jitters, don’t look to bail out of stocks and huddle in bonds or cash. Market timing doesn’t work. Instead, do this 15-minute Portfolio Check-Up, and then take these 3 Simple Steps to Crash-Proof Your Portfolio.

25. Financial security is definitely important, but retirement satisfaction isn’t just a question of money. Lifestyle matters, too. Among the lifestyle factors that make for a happier post-career life: maintaining your health, staying active and engaged through occasional work or volunteering, cultivating a circle of friends…and, yes, regular sex.

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.

More from RealDealRetirement.com:

Social Security: Your 3 Most Pressing Questions Answered

5 Questions To Ask Before Hiring A Financial Adviser

How To Tell If You Can Afford To Retire Early

 

 

 

MONEY Retirement

Here’s the Key to Retirement Security

golden egg with map of US on it
Robert George Young—Getty Images

Retirement wellness in the U.S. lags 18 other countries largely because income inequality prevents many from getting the services they need, a report finds.

Workers in 18 countries enjoy greater retirement security than in the U.S., new research shows. The ranking looks at 150 nations and places the U.S. behind South Korea and France, among others, and one notch above Slovenia.

Northern Europe dominates the top of the list with Switzerland (1), Norway (2), Iceland (4), Netherlands (5), Sweden (6), and Denmark (7) all making the top 10. These nations have relatively high tax burdens. But they also have high per capita income and a narrow or improving gap in income equality, key metrics in the 2015 Global Retirement Index from Natixis, a global asset manager. Universal healthcare and sound government finances also boost scores in Switzerland and Norway.

Australia (3) and New Zealand (10) score highly based largely on mandatory retirement savings programs that have put their pension systems on firm footing. Austria (8) and Germany (9) round out the top 10. Researchers note that all the countries at the top of the list share three important traits:

  • A growing industrialized economy with a strong financial system and regulations;
  • Broad access to healthcare and other social services; and
  • Substantial public investment in infrastructure and technology.

The ranking looks at four chief areas: good health and access to quality health services, enough material means to live a comfortable life, access to quality financial services, and a clean and safe environment in which to live.

Part of what holds the U.S. back is growing income inequality, which means resources aren’t available to all Americans, the report concludes. The U.S. also has fewer doctors and hospital beds relative to population than many developed nations.

The report’s ranking criteria are far from perfect. The healthcare spending and social services components that give European countries a lift may not be not sustainable given demographic shifts that have more older people living longer. Meanwhile, healthcare spending doesn’t directly correlate with health in retirement.

Still, the report makes a valuable point: Much of what makes for a secure retirement is out of the control of individuals, who can’t build a hospital, balance the federal budget or fix the pension system. What individuals can and should do, though, is beef up personal savings. Personal responsibility will become increasingly important everywhere as populations age and strain state budgets around the globe.

Yet a lot of people aren’t up to the challenge, the survey concludes. Only 16% of individuals surveyed in 14 countries had a very strong understanding of the annual income they will need to live comfortably in retirement. Another 37% had no knowledge of their retirement income goal. More than half do not have clear financial goals and 78% say that when making investment decisions they rely on gut instincts alone.

 

 

 

MONEY retirement income

Forget About Retirement Planning for Millennials

piggy bank with locks for earrings
YAY Media AS—Alamy

The goal of achieving financial independence is more appealing than the idea of saving for a retirement that's decades away.

When it comes to millennials and money, many financial planners are focusing on the wrong issue.

The retirement advice most financial professionals provide was designed for Baby Boomers. Gen Y’s situation, however, looks nothing like this 30-year-old norm.

Few members of Gen Y get excited about the idea of working for the next 40 to 50 years, doing all the heavy lifting when it comes to ensuring they’ll have enough savings for the future, and then retiring to a life of no work and no purpose shortly before expiring.

Yet traditional retirement planning asks people to do just that. This doesn’t make sense for millennials — but that doesn’t mean they should throw their financial security to the wind and have no plan at all, either.

Instead, we planners should shift the focus from the nebulous concept of “retirement” to something concrete and accessible. It should be something that millennials can take real action to achieve in the short-term, not something that won’t matter for 40 years.

We should focus on preparing Gen Y for financial independence.

What Is Financial Independence?

Financial independence refers to a situation where an individual can generate enough income to pay all expenses for the rest of his or her life. Typically, that refers to passive income that comes from savings and investments, but it might also come from a side business, real estate assets, or royalties from past work.

Financial independence frees individuals from the obligation to work a particular job in order to secure a specific paycheck. It’s possible when you’re in your 20s to start building the income streams that will meet your needs for life and help you reach independence. Creating a side job that earns $500 a month today could build to provide $1,000 a month in a few years and $2,000 a month in five or 10 years.

Don’t believe it? You must not get around the blogosphere much.

Financial bloggers — not advisers or planners — have been championing this concept for years. The idea of financial independence is gaining traction thanks to bloggers popularizing it — and succeeding at it themselves.

One example: Mr. Money Mustache, a financial blog run by a man who reached financial independence in his 30s. By investing 50% to 75% of his income during his working career in his 20s and early 30s, he reached financial independence before 40.

Other bloggers have reached financial independence by building and selling a business or investing in multiple real estate properties that generate monthly income.

But the most popular way is probably the most accessible: save huge percentages of income. Bloggers, even the ones not as Internet-famous as Mr. Money Mustache, frequently report saving anywhere between 30% and 70% or more of their income. The majority of this group then invests that money in inexpensive, passively-managed index funds.

They don’t need $1 million to $3 million in the bank when they’re 63 years old. Instead, they may need to reach an investment goal of $250,000 or $500,000 in assets before they can start withdrawing 3-4%, because along with other income streams this is enough to cover their expenses each year for life.

Why Financial Independence Is the Financial Planning Answer for Gen Y

Financial independence makes sense for Gen Y because it’s more realistic, and it’s something that people don’t have to wait until they’re 60 or 70 years old to achieve.

Building income streams allows individuals to achieve financial independence within years, if those income streams are sound and stable. Even working toward financial independence via saving and investing can be accomplished in a fraction of the time it normally takes people to achieve retirement goals. Invest 50% of your income, for example, and you’ll reach financial independence in 17 years; save 75% and you’ll be there in 7 years.

And financial independence allows you to experience the kind of freedom that “retirement” does not. Free from the obligation of working a job because it’s necessary to pay bills allows financially independent people to explore new work, projects, businesses, and opportunities. It enables individuals to try new hobbies or go new places that old age and ill health may eliminate in traditional retirement after a decades-long working career.

We shouldn’t focus on traditional retirement planning for millennials. Instead, let’s give them the tools and knowledge they need to reach financial independence.

———-

Alan Moore, CFP, is the co-founder of the XY Planning Network, where he helps advisers create fee-only financial planning firms that specialize in working with Generation X & Generation Y clients.

MONEY 401k plans

The Number of 401(k) Millionaires Has Doubled. Are You on Track to Be One?

It takes steady saving and lots of time—but it can be done. If you're on track to reaching the million-dollar mark, share your secrets with us.

The six-year-old bull market is boosting the ranks of newly-minted millionaires. Fidelity Investments reports that the number of workers with $1 million or more in a 401(k) retirement account has more than doubled over the past two years. Granted, those 72,379 accounts represent a small fraction of savers, but the growth has been big: Two years ago, Fidelity, one of the largest 401(k) plan providers, managing some 13 million accounts, reported only 34,920 one-million-dollar-plus balances.

To be sure, with an average salary of $359,000, a lot of these workers are big earners. (Still, more than a thousand earn less than $150,000 a year.) But good savings habits are helping them get them to the $1 million mark too. The average annual contribution for 401(k) millionaires was $21,400, vs. $6,050 for people with less than $1 million in their accounts. Betting heavily on stocks during this bull market has been a boon as well. The group holds 72% of their accounts in stocks on average. And they are disciplined about not raiding their plans early.

This $1 million mark may seem daunting—even unreachable—but remember that the average age of a 401(k) millionaire is 60. Reaching $1 million takes a career’s worth of saving money. You could be on track to become a 401(k) millionaire by the time you retire if you have $90,000 in your 401(k) at age 40, or $350,000 as late as 50. Consistently saving 15% of your pay a year is a good first step.

Are you a 401(k) millionaire—or on the road to becoming one by the time you retire? Let us know how you are doing it. Are you putting away the max in your 401(k) year in and year out? Are you socking away all your raises? Are you power saving when a big expense like paying college tuition for your kids falls away? What’s your investing strategy?

Tell us your story, and we might use it in an upcoming issue of MONEY magazine. Use the form below to tell us about how much you’ve saved so far, what you do and roughly what you make, and what your saving strategy is. We’ll be in touch for more information if we’re considering your story for publication. We look forward to learning your secrets of becoming a millionaire!

 

MONEY Retirement

POLL: Will You Save More for Retirement This Year?

large golden egg with coin slot
Joe Clark—Getty Images

Planning to really sock it away in 2015? Or, maybe you have other plans for your cash. Tell us about it.

MONEY retirement planning

The Right Way to Tap Income in Retirement

Ken and Jeanne Musolf
Peter Bohler Jeanne Musolf would like to join husband Ken in retirement in three to six years.

A couple working on their retirement plan needs help making the transition from saving to taking income. Here are three key steps to follow.

Over the past four decades, Ken Musolf, 63, has carefully plotted out an investment strategy for him and his wife, Jeanne, 59. His financial acumen has helped the couple accumulate $1.1 million in retirement funds.

Though Ken retired in 2012 after 35 years as a construction electrician, he and Jeanne have yet to tap that nest egg. He gets three pensions and Social Security, totaling $48,840 a year; and until December, she had been earning $100,000 as a department manager at a hospital. But they’ll need to start drawing down soon: Jeanne is scaling back her hours and job duties in January and plans to retire in three to six years.

Ken admits to being at a loss on this next phase: How do they transition from saving to taking income? With a portfolio across seven accounts that’s 66% stocks, 30% bonds, and 4% in cash, he says, “our quandary is that we have a basketful of investments and want to consolidate them in a sensible allocation that allows for growth and safety.”

Their only debt is a $43,000 home-equity loan and a $26,000 car loan. So the Musolfs have been living very comfortably on $8,500 a month, leaving them room to make extra debt payments, give $600 a month to charity, and splurge on their three grandkids. And Jeanne has been saving 20% of her pay in her 403(b). As she starts her new job, her salary will drop to $65,000.

The Musolfs can absorb that pay reduction and avoid dipping into their retirement funds by cutting back on overpayments on their mortgage and car loan, says Kay Allen of Aspen Wealth Management in Colleyville, Texas. The bigger challenge will be managing Jeanne’s retirement—when to quit and when to take Social Security—to minimize the impact on their portfolio. Depending on their choices, the couple could need to withdraw from $35,000 to $80,000 a year, Allen says. “The Musolfs are doing well,” she notes, “but it’s critical that they handle this transition carefully.”

The Advice

Reallocate to reduce risk: Ken can better manage their seven retirement accounts by consolidating them into four: one rollover IRA for each, Jeanne’s 403(b), and an IRA Jeanne inherited from her mother.

Next they should shift their allocation from a 66% stocks, 34% fixed-income mix to a 60%/40% mix. “This will enable them to better withstand market volatility,” says Allen. “At 60/40, they would have suffered a 22% loss during the Great Recession, requiring a 28% gain to catch up. With their current allocation, they’d have lost 30%, requiring a 43% gain. That is not something you want to experience in retirement!”

The mix she suggests (see illustration below) introduces shorter-term bonds for 12% of the portfolio via Vanguard Short Term Bond Index VANGUARD SHORT-TERM BOND INDEX INV VBISX 0.1% and 2% emerging-markets stock through Vanguard Emerging Market Index ­VANGUARD EMERGING MARKETS STOCK IDX INV VEIEX -0.24% for diversification. Allen also suggests always keeping a year’s living expenses in cash and four years’ in bonds to cushion against market turmoil.

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Money

Tally up expenses: To determine an income strategy, the Musolfs needed to figure out their retirement budget. If she retires before Medicare kicks in at 65, Jeanne will have to pay for health insurance ($1,000 a month). Allen also wants the Musolfs to get long-term-care insurance ($500 a month), plus a Medigap policy for Ken once he turns 65 ($175 a month). Since the Musolfs want to travel more, Allen helped them come up with an annual vacation budget of $15,000. All told, the couple will have $146,000 in yearly inflation-adjusted expenses if Jeanne retires at 62, or $127,000 if she waits till 65.

Strategize withdrawals and Social Security together: Normally, retirees are advised to draw down at a rate of no more than 4% the first year, adjusting only for inflation annually, for the best chances of portfolio longevity. But if Jeanne retires at 62 and doesn’t take Social Security right away, the couple will need to replace $85,000 in income, for a whopping 7.6% withdrawal.

So if Jeanne does want to retire on the early end, Allen suggests she take a check from the government immediately. The couple would then initially have to draw 5.5% to get the $61,000 they’d need. But that’s okay, says Allen—three years later Jeanne qualifies for Medicare and won’t need health insurance, so their withdrawal rate will fall to 3.4%.

This way their money should last at least to their life expectancies, with some left for heirs. “Jeanne is con­cerned about retiring—she wants to know if she really can do it,” says Allen. “If they follow these steps, the answer will definitely be yes.”

Read more Retirement Money Makeovers:
Married 20-somethings With $135,000 in Debt
Freelancers With a Toddler, No Plan, and No Cash to Spare
30 Years Old, and Already Falling Behind

Read next: Why You Should Think Twice Before Choosing a Roth IRA or Roth 401(k)

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MONEY retirement planning

How to Keep Risk From Draining Your Retirement Savings

Maurice Greer
Peter Bohler—Peter Bohler Maurice Greer wants to be on the final sprint to retirement.

An overly aggressive investing strategy threatened to derail Maurice Greer's retirement plans. Here's how he can get back on track without blowing his timeline.

Maurice Greer, 53, was a late starter in saving for retirement.

After a decade in the Air Force and eight years in retail—during which he’d saved $10,000 in a 401(k) but spent it when a sports injury threw him out of work—he de­cided in 2000 to start taking classes toward a certification in information technology. “I didn’t like the idea of getting old and having no money, so I had to catch up,” he says.

At age 40, newly minted with the tech credential, he moved to the Washington, D.C., area for an entry-level IT job with a Pentagon contractor. Thirteen years and five government jobs later, he earns $103,000 a year helping run the FBI’s computer systems. Along the way, he’s piled up $261,000 for retirement and $43,000 in the bank.

His aggressive investing style (80% in stocks) and savings plan (20% of pay) have brought him far. Now he wants to up the ante.

Greer, who has the government’s second-highest security clearance, has grown weary of the demands of the job, not to mention the polygraph tests and intrusive security checks the FBI requires. “My work is very stressful,” he says. “Life is short, and I want to enjoy it.” To travel more and pursue his photography passion, Greer wants to retire in seven to 10 years—the sooner the better.

In hopes of growing his money faster and making his dream a reality, Greer is considering buying individual stocks, perhaps big brand names like Coke and McDonald’s.

Investment adviser Riyad M. Said of TA Capital Management in Washington, D.C., doesn’t think that’s wise. With such a short time horizon, Greer should dial back (rather than crank up) the risk in his portfolio, Said says. “If he were 20 years from retirement, I’d say fine, stay aggressive,” he notes. “But when you’re seven to 10 years away, there’s a big risk that your portfolio could take a huge hit right when you want to take money out.”

The Advice

Reduce risk: Said suggests Greer turn down his equity exposure to 60% of his portfolio, with 40% in domestic and 20% in international funds. A quarter of Greer’s portfolio should go into fixed income, with 15% in U.S. bonds through MetWest Total Return METROPOLITAN WEST TOTAL RET BD M MWTRX 0.27% and 10% international through SPDR Barclays International Treasury Bond ETF SPDR SERIES TRUST BARCLAYS INTL TREAS BD ETF BWX 0.09% . Another 10% should go into alternatives—Said suggests Baron Real ­Estate Fund BARON REAL ESTATE RETAIL BREFX 0.94% and ­Alerian MLP ALPS ETF TRUST ALERIAN MLP ETF AMLP -0.18% —and 5% in cash.

150121_MAK_PedalBack
Money

Aim for a target: Greer’s ex­penses are modest: With a mortgage payment of $900 on his condo and no other debt, he spends only about $2,700 a month. At that rate, he’ll need $800,000 to retire in seven years or $730,000 to retire in 10, assuming that he takes Social Security at 63. To reach these goals, he will need to save $44,000 or $24,000 per year, respectively, based on a 6% to 6.5% average return.

Invest tax-efficiently: A disciplined saver, Greer sets aside $20,000 a year in his 401(k)—on which he gets a $2,000 match—and $10,000 a year in a savings account.

Rather than sock away so much in the bank, he should take full ­advantage of 401(k) catch-up provisions for those aged 50-plus to contribute a total of $24,000 a year to that account. Then he should put the remaining $6,000 in a new brokerage account invested in an index fund or ETF of dividend-paying stocks (the tax consequences will be modest, and he can reinvest the dividends). One option: PowerShares S&P 500 Low Volatility ETF POWERSHARES ETF II S&P 500 LOW VOLATILITY PORT SPLV 0.29% . These steps will let him save enough to retire in 10 years and get him started toward an earlier quit date.

Greer currently overpays $425 a month on his mortgage; if he stops doing that, he can free up $5,100 more a year. Additionally, he will earn his bachelor’s degree in cybersecurity soon, which would qualify him for positions that could increase his salary by 30%. Making a job change and putting all his extra earnings in the dividend fund should allow him to save enough to retire in seven years—though a new position could be more stressful than his current one. “If that would increase my chances of retiring early,” Greer says, “the trade­off would be well worth it.”

Read more Retirement Money Makeovers:
Married 20-somethings With $135,000 in Debt
Freelancers With a Toddler, No Plan, and No Cash to Spare
30 Years Old, and Already Falling Behind

MONEY Financial Planning

The Most Important Money Mistakes to Avoid

iStock

Smart people do silly things with money all the time, but some mistakes can be much worse than others.

We asked three of our experts what they consider to be the top money mistake to avoid, and here’s what they had to say.

Dan Caplinger
The most pernicious financial trap that millions of Americans fall into is getting into too much debt. Unfortunately, it’s easy to get exposed to debt at an early age, especially as the rise of student loans has made taking on debt a necessity for many students seeking a college education.

Yet it’s important to distinguish between different types of debt. Used responsibly, lower-interest debt like mortgages and subsidized student loans can actually be a good way to get financing, helping you build up a credit history and allowing you to achieve goals that would otherwise be out of reach. Yet even with this “good” debt, it’s important to match up your financing costs with your current or expected income, rather than simply assuming you’ll be able to pay it off when the time comes.

At the other end of the spectrum, high-cost financing like payday loans should be a method of last resort for borrowers, given their high fees. Even credit cards carry double-digit interest rates, making them a gold mine for issuing banks while making them difficult for cardholders to pay off once they start carrying a balance. The best solution is to be mindful of using debt and to save it for when you really need it.

Jason Hall
It may seem like no big deal, but cashing out your 401(k) early has major repercussions and leads you to have less money when you’ll need it most: in retirement.

According to a Fidelity Investments study, more than one-third of workers under 50 have cashed out a 401(k) at some point. Given an average balance of more than $14,000 for those in their 20s through 40s, we’re talking about a lot of retirement money that people are taking out far too early. Even $14,000 may seem like a relatively easy amount of money to “replace” in a retirement account, but the real cost is the lost opportunity to grow the money.

Think about it this way. If you cash out at 40 years old, you aren’t just taking out $14,000 — you’re taking away decades of potential compound growth:

Returns based on 7% annualized rate of return, which is below the 30-year stock market average.

As you can see, the early cash-out costs you dearly in future returns; the earlier you do it, the more ground you’ll have to make up to replace those lost returns. Don’t cash out when you change jobs. Instead, roll those funds over into your new employer’s 401(k) or an IRA to avoid any tax penalties, and let time do the hard work for you. You’ll need that $100,000 in retirement a lot more than you need $14,000 today.

Dan Dzombak
One of the biggest money mistakes you can make is going without health insurance.

While the monthly premiums can seem like a lot, you’re taking a massive risk with your health and finances by forgoing health insurance. Medical bills quickly add up, and if you have a serious injury, it may also mean you have to miss work, lowering your income when you most need it. These two factors, as well as the continuing rise in healthcare costs, are why a 2009 study from Harvard estimated that 62% of all personal bankruptcies stem from medical expenses.

Since then, we’ve seen the rollout of Obamacare, which signed up 10.3 million Americans through the health insurance marketplaces. Gallup estimated last year that Obamacare lowered the percentage of the adult population that’s uninsured to 13.4%. That’s the lowest level in years, yet it still represents a large number of people forgoing health insurance.

Lastly, as of 2014, not having health insurance is a big money mistake. For tax year 2014, if you didn’t have health insurance, there’s a fine of the higher of $95 or 1% of your income. For tax year 2015, the penalty jumps to the higher of $325 or 2% of your income. While there are some exemptions, if you are in a position to do so, get health insurance. Keep in mind that for low-income taxpayers, Obamacare includes subsidies to lower the monthly payments to help afford health insurance.

MONEY retirement planning

Money Makeover: Freelancers With a Toddler, No Plan, and No Cash to Spare

The Larsons
Peter Bohler With 30-plus years to retirement, David and Ashlene Larson can afford to take more investing risk.

Managing new businesses and a new baby left one young couple with little to save for retirement. Here's the advice they need to get their finances on track for the future.

David and Ashlene Larson know how important it is to save for retirement. The problem is they don’t have much cash to spare, as they are new parents—daughter Rosalie is 18 months—who are both starting new businesses. David, 33, took his sideline ­video-production company full-time in June, and Ashlene, 32, left her job at a PR firm in July to freelance.

The Larsons have more stable income than many self-employed workers, with $9,000 coming in monthly from two regular clients and twice that in a good month. But after payments for a mortgage, day care, car lease, and $25,000 in student loans—and after plowing some profits back into David’s growing business—they can put only $200 a month in Ashlene’s Roth IRA and $100 in a 529 savings plan for Rosalie’s college. Total savings rate: 3%. “It’s nerve-racking,” David says.

Meanwhile, they don’t know what to do with the $27,500 they’ve saved for retirement. Nor do they have any idea how to deploy the pile of savings bonds—worth $42,000 and earning 1.49%—that David’s grandparents gave him as a kid. “Our investments are all over the place,” says Ashlene.

Matt Morehead of Greenspring Wealth Management in Towson, Md., says that the Larsons’ overall allocation for retirement—73% stocks, 27% fixed income—is a tad conservative for their ages. But worse, Ashlene inadvertently has $15,000 in an old 401(k) invested in a 2025 target-date fund that will move to 50% bonds in 10 years, hampering its growth potential. Another concern: They have no cash in the bank. “The Larsons are stuck in the ‘foundation phase’ because they have debt and not enough emer­gency funds,” says Morehead. “They need to take care of those issues before sinking money into retirement.”

The Advice

Build in a shock absorber: Since they’re both self-employed, the Larsons should keep a reserve fund of at least nine months of expenses to prevent them from having to tap retirement funds if business slows, says Morehead. With basic costs of $6,000 a month, that’s $54,000.

David’s savings bonds are a good headstart, since these can be redeemed anytime without penalty—though taxes will drop their value to about $39,000. To make up the difference, the Larsons should redirect their $300 monthly retirement and college savings to a savings account. Plus, 40% of any monthly earnings over their base pay of $9,000 should go to the cash stash (another 35% to student loans, 25% to taxes).

Consolidate with the right target-date fund: David should open a Roth IRA for himself at a low-cost brokerage; Ashlene should move her accounts there too. Morehead suggests they go all in on Vanguard’s Target Retirement 2045 Fund time-stock symbol=VTIVX]. This bumps their stock stake to about 89% and gives them broad market exposure. Plus, the fund automatically rebalances until reaching a 50%/50% mix in 30 years. “This is a great way to invest for a young couple who don’t have time to monitor their portfolio,” Morehead says.

Beef up retirement savings: When their reserves are established, that 40% of additional income can go to their IRAs. Once they max out these regularly (each can put in $5,500 in 2015) or exceed the income limits ($193,000 modified AGI for couples filing jointly), Ashlene can open a SEP-IRA and David can start a 401(k). Only when they’re saving 15% of pay should they return to funding Rosalie’s 529. “You can always borrow for college,” says Morehead. “But you can’t borrow for retirement.”

Read more Money Makeovers:
Married 20-somethings with $135,000 in debt
4 kids, two jobs, and no time to plan
30 years old and already falling behind

MONEY alternative assets

How to Boost Returns When Interest Rates Totally Stink

People climbing over wall to greener yard
Mark Smith

With bond rates looking bare, income investors are eager to grab greener options. Higher payouts are out there, but watch your step: Some are riskier than others.

This is the first in a series of five articles looking at the most popular bond alternatives and the safest ways to use them to improve your income prospects when rates are low. Adapted from “Reaching for Yield” in the January/February issue of MONEY magazine.

Falling oil prices have sent shudders through the financial markets lately, but if you’re investing for income, this development could actually spell opportunity. Over the past few years, as rates shriveled on traditional bonds, yield-starved investors poured billions into higher-yielding alternatives, including dividend stocks, real estate investment trusts, energy partnerships, and new “go-anywhere” bond funds. That paid off handsomely if you got in early enough but has been problematic lately: All that money flooding in caused prices to rise sharply on bond alternatives, which sent yields plummeting. As a result, many of these securities by late last fall were paying out half as much as they usually do—or less.

That is, until recently. Jitters over what sharply declining energy prices might mean for the economy have ­prompted a rush back into government bonds and other “safe” securities. As a result, yields on some alternative assets are rising—and you can once again find payouts ranging from 4% to more than 6%, compared with the measly 1.9% rate on 10-year Treasuries.

To get to greener payouts, though, you have to climb a wall of risk. Historically, when market conditions turn sour, alternative assets lose more money, sometimes a lot more, than traditional fixed-income investments. That’s why financial advisers such as Mitch Reiner, chief operating officer of Capital ­Investment Advisers in Atlanta, recommend limiting the amount you invest in them to 5% to 25% of your portfolio, depending on how much income you need and whether you could let losses ride during market setbacks.

Also recognize that while these alternative assets can help boost your yield, the strategy isn’t a cure-all. Shifting 20% of a portfolio split fifty-fifty between stocks and traditional bonds into a mix of higher-paying alternatives might raise your yield from about 2% to 2.6% with little additional risk, says Geoff Considine, who runs the portfolio modeling firm Quantex. If you’re retired, that means you’ll still probably have to rely on principal and capital gains to fund at least some of your living expenses.

What follows is the first in a series of five articles looking at the most popular bond alternatives—in this case dividend stocks—and the safest ways to use them to improve your income prospects.

Dividend stocks: Go global and preferred

High-quality stocks that return a hefty portion of profits to shareholders via dividends are a favorite of income investors when bond yields are low. That’s been especially true over the past few years, when many blue-chip and even some tech companies were yielding as much as or more than Treasury bonds. The same payouts with real growth potential—slam dunk, right?

Not so much anymore. Yield-hungry investors have been bidding up prices on dividend payers since the financial crisis, and despite the market’s recent slide, they still look expensive relative to their earnings. For instance, the average stock in the SPDR S&P Dividend ETF, which tracks an index of companies that have boosted payouts consistently over the past 20 years, was recently selling at more than 18.6 times projected earnings. The price/earnings ratio for the Standard & Poor’s 500, which historically has commanded a higher multiple than slower-growth dividend stocks: about 16.

The more stock prices race ahead of earnings, the more likely they are to fall, warns James Stack, president of InvesTech Research of Whitefish, Mont.  “We are in the sixth year of a bull market,” he warns, adding: “A retirement portfolio can be destroyed reaching for yield.” And while high-dividend shares typically drop less than the average stock during downturns, their losses are still substantially more on average than you could expect with bonds.

Your best strategy: Rather than seeking out the highest yields, zero in on companies that consistently raise dividends. And don’t overpay. To avoid that, look for dividend payers overseas, where stocks have been less inflated than in the U.S.  A good option: PowerShares International Dividend Achievers ETF POWERSHARES INTERNATIONAL DIVIDEND ACHIEVERS PORTFOLIO PID -0.68% , a MONEY 50 pick that invests in foreign companies that have hiked dividends for at least five years straight. It paid out 3.9% over the last year yet has a modest average portfolio P/E of 14.

Preferred stocks offer even higher yields, recently averaging 6%. These shares can be traded like regular stocks but have more in common structurally with bonds: Their payments tend to be fixed over time, and their shareholders are ahead of common stock owners in the pecking order of whom companies must pay first. What you give up in exchange for that reliable income: a shot at much appreciation, because preferred shares, like bonds, have set redemption prices. And like bonds, preferreds are also sensitive to interest rates. If rates jumped, your shares could lose value, as they did in 2013.

Preferreds also lack diversification; almost 90% of them are issued by financial institutions. To reduce your exposure to banks, James Kinney, an adviser in central New Jersey, suggests splitting your preferred stake between iShares U.S. Preferred Stock ETF ISHARES TRUST U.S. PREFERRED STOCK ETF PFF 0.03% and Market Vectors Preferred Securities ex-Financials MARKET VECTORS ETF PFD SECS EX FINLS ETF PFXF -0.19% , which counts blue chips like United Technologies and Tyson Foods among its top holdings.

More in this series:
High-Yield Bonds: Where to Look for Quality Junk

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