MONEY Ask the Expert

Why a High Income Can Make It Harder to Save for Retirement

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: My employer’s 401(k) plan considers me a “highly compensated” employee and caps my contribution at a measly 5%. I know I am not saving enough for retirement. What are the best options to maximize my retirement savings? I earn $135,000 a year and my wife makes $53,000. – E.O., Long Island, NY

A: It’s great to have a six-figure income. But, ironically, under IRS rules, being a highly compensated worker can make it harder to save in your 401(k).

First, some background on what it means to be highly compensated. The general rule is that workers can put away $18,000 a year in pre-tax income in a 401(k) plan. But if you earn more than $120,000 a year, or own more than a 5% stake in your employer’s company, or are in the top 20% of earners at your firm, you are considered a “highly compensated employee” (HCE) by the IRS.

As an HCE, you’re in a different category. Uncle Sam doesn’t want the tax breaks offered by 401(k)s only to be enjoyed by top executives. So your contributions can be limited if not enough lower-paid workers contribute to the plan. The IRS conducts annual “non-discrimination” tests to make sure high earners aren’t contributing disproportionately more. In your case, it means you can put away only about $6,000 into your plan.

Granted, $120,000, or $135,00, is far from a CEO-level salary these days. And if you live in a high-cost area like New York City, your income is probably stretched. Being limited by your 401(k) only makes it more difficult to build financial security.

There are ways around your company’s plan limits, though neither is easy or, frankly, realistic, says Craig Eissler, a certified financial planner with Halbert Hargrove in Houston. Your company could set up what it known as a safe harbor plan, which would allow them to sidestep the IRS rules, but that would mean getting your employer to kick in more money for contributions. Or you could lobby your lower-paid co-workers to contribute more to the plan, which would allow higher-paid employees to save more too. Not too likely.

Better to focus on other options for pumping up your retirement savings, says Eissler. For starters, the highly compensated limits don’t apply to catch-up contributions, so if you are over 50, you can put another $6,000 a year in your 401(k). Also, if your wife is eligible for a 401(k) or other retirement savings plan through her employer, she should max it out. If she doesn’t have a 401(k), she can contribute to a deductible IRA and get a tax break—for 2015, she can contribute as much as $5,500, or $6,500 if she is over 50.

You can also contribute to an IRA, though you don’t qualify for a full tax deduction. That’s because you have a 401(k) and a combined income of $188,000. Couples who have more than $118,000 a year in modified adjusted gross income and at least one spouse with an employer retirement plan aren’t eligible for the tax break.

Instead, consider opting for a Roth IRA, says Eissler. In a Roth, you contribute after-tax dollars, but your money will grow tax-free; withdrawals will also be tax-free if the money is kept invested for five years (withdrawals of contributions are always tax-free). Unfortunately, you bump up against the income limits for contributing to a Roth. If you earn more than $183,000 as a married couple, you can’t contribute the entire $5,500. Your eligibility for how much you can contribute phases out up to $193,000, so you can make a partial contribution. The IRS has guidelines on how to calculate the reduced amount.

You can also make a nondeductible contribution to a traditional IRA, put it in cash, and then convert it to a Roth—a strategy commonly referred to as a “backdoor Roth.” This move would cost you little or nothing in taxes, if you have no other IRAs. But if you do, better think twice, since those assets would be counted as part of your tax bill. (For more details see here and here.) There are pros and cons to the conversion decision, and so it may be worthwhile to consult an accountant or adviser before making this move.

Another strategy for boosting savings is to put money into a Health Savings Account, if your company offers one. Tied to high-deductible health insurance plans, HSAs let you stash away money tax free—you can contribute up to $3,350 if you have individual health coverage or up to $6,650 if you’re on a family plan. The money grows tax-free, and the funds can be withdrawn tax-free for medical expenses. Just as with a 401(k), if you leave your company, you can take the money with you. “So many people are worried about paying for health care costs when they retire,” says Ross Langley, a certified public accountant at Halbert Hargrove. “This is a smart move.”

Once you exhaust your tax-friendly retirement options, you can save in a taxable brokerage account, says Langley. Focus on tax-efficient investments such as buy-and-hold stock funds or index funds—you’ll probably be taxed at a 15% capital gains rate, which will be lower than your income tax rate. Fixed-income investments, such as bonds, which throw off interest income, should stay in your 401(k) or IRA.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Regular Retirement Saving Can Improve Your Health

MONEY Savings

Why Regular Retirement Saving Can Improve Your Health

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iStock

More workers who make saving a habit report better health than those who do not. And it's not just about having a high income.

People who save money out of habit are more confident about retirement and better prepared financially, as you might expect. But there’s a sleeper benefit, new research shows. Consistent savers also are in better health—no small matter as longevity stretches out life spans and means you likely will live in retirement more years than you did in childhood.

Three in four regular savers rate their health as excellent or good, compared to 62% of those who do not save regularly, according to the Aegon Retirement Readiness Survey 2015. This might have to do with the lower stress that comes from being financially secure. Meanwhile, 77% of those in excellent health expect to live comfortably in retirement, vs. just 49% of those in poor health, Aegon found.

Given the active aspirations of today’s retirees, the longevity revolution has elevated the role that health plays in later life. Half of those in the Aegon survey would like to pursue new hobbies; two-thirds would like to travel more, and 1-in-6 would like stay at work in their retirement years.

Saving regularly, then, not only helps provide financial wherewithal but also seems to contribute to remaining healthy enough to pursue such activities. Yet just 39% of workers are “habitual savers,” Aegon found in a survey spanning 15 nations. Habitual savers are those who are always putting away money for retirement, including regular payroll deductions for a 401(k) or other automatic savings plan.

In the U.S., 52% of workers are habitual savers while 20% save some of the time; 11% are aspiring savers, who expect to begin saving soon. It’s easy to see why those who save out of habit are more confident. Globally, 79% of habitual savers have a retirement plan, vs. just 14% of aspiring savers. Nearly half of habitual savers also have a backup plan, should they be hit with job loss or poor health, vs. just 13% of aspiring savers.

Saving money regularly is not about high incomes. The average habitual saver earns $41,000 a year, Aegon found. Among habitual savers in the U.S., the average income is $73,000. How can we get people to save regularly? About half of workers said it would help if they got a pay raise and 33% said it would help if they got more of tax break; 20% said it would help if they had simpler investment options.

The real answer, though, is probably broader access to employer-sponsored savings programs. Today’s no-decision 401(k) plans increasingly incorporate features like auto enrollment, auto escalation of contributions and simple asset allocation and diversification through target-date mutual funds. Some 60% of aspiring savers like these features and would not opt out of plans that automatically contributed 6% of their pay, Aegon found.

That’s important because the hardest part of saving regularly is getting started, and the earlier you get started the less you have to save. Consider a worker making $41,000 a year, saving 8% of pay, and earning a return 4 percentage points above the inflation rate. If this worker begins saving at age 20, at age 65 she will have retirement income of $29,000 a year—equal to 71% of pre-retirement income and in a range most advisers find acceptable, Aegon found. If the same saver begins at age 30, she will have retirement income of $18,000-equal to just 43% of pre-retirement income.

Read next: How the New-Model 401(k) Can Boost Your Retirement Savings

MONEY consumer psychology

83 Questions Every Successful Person Asks

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"What am I really good at?"

One of the things that stood out from my Rich Habits Study was how important thinking was to self-made millionaires. I tracked 10 different types of thinking habits these millionaires engaged in frequently, if not daily. From my research, it was so evident that thinking was fundamental to their success that I decided it needed to become one of what I call the 10 Keystone Rich Habits.

When self-millionaires think, they do so in isolation, closed off from the world. Most engaged in their daily thinking habits in the morning, some during their commute in their car, others in the shower, and still others at night. Morning seemed to be the most dominant time frame, however. Typically, immediately upon waking, these self-made millionaires would find a quiet space and think for about 15 to 30 minutes.

What did they think about? Well, they thought about a lot of things and when they thought, they thought in a way that most would refer to as brainstorming. They spent time every day brainstorming with themselves about numerous things. I was able to boil down those brainstorming sessions into 10 core Rich Thinking Habit categories. Here they are, and the corresponding 83 questions the rich ask themselves.

1. Career

Some of the questions they asked themselves included:

  • What can I do to make more money?
  • How can I increase my value to my clients, customers or my employer?
  • What do I need to do in order to gain more expertise?
  • What additional skills do I need?
  • What things should I be reading more about?
  • Do I like what I do?
  • What do I love to do?
  • Can I make money doing what I love to do?
  • Should I change careers?
  • Should I work more – or fewer — hours?
  • Do I work hard enough?
  • Am I lazy?
  • What am I really good at?
  • What am I really bad at?
  • Does my job make me happy?

2. Finances

When it comes to their money, here are some of the questions they contemplated:

  • Do I spend too much money?
  • Am I saving enough money?
  • Will I have enough to retire on?
  • How much will I need to retire on?
  • Do I have enough set aside for college for my kids?
  • How much do I actually spend each month?
  • Should I create a budget?
  • Should I revise my budget?
  • Am I doing a good job investing our money?
  • Is my spouse doing a good job investing our money?
  • Am I paying too much in taxes?
  • Do I have enough life insurance?
  • Should I set up a trust for my kids?

3. Family

They also asked themselves:

  • Do I spend enough time with my family?
  • Can I work less and spend more time with my family?
  • Are we spoiling our kids?
  • Are we too hard on our kids?
  • Can I get away for a family vacation this year?
  • Are we doing enough to help our kids succeed?
  • How can I improve my relationship with my spouse, my kids?

4. Friends

Social life is also an important part of the equation, and among the things they considered:

  • Do I have as many friends as I should?
  • Do I spend enough time with the friends I have?
  • Why don’t I have many friends?
  • How can I make more friends?
  • Is my work interfering too much with my social life?
  • Do I call my friends enough?
  • How often should I stay in touch with my friends?
  • Who haven’t I spoken with in a while?
  • Do I have good friends?
  • How can I end my friendship with so-and-so?
  • Should I help my friends financially?

5. Business Relationships

Of course, business is also a prominent concern, and they continued to ask themselves the following:

  • What can I do to improve my business relationships?
  • Am I staying in touch enough with my key customers, clients?
  • How can I develop a business relationship with so-and-so?
  • Which business relationships should I spend more time on and which ones should I pull away from?
  • Do my customers/clients like me?
  • Do they think I do a good job?

6. Health

They also focused on health issues, asking:

  • Am I exercising enough?
  • Should I lose more weight?
  • Do I eat too much?
  • Am I eating healthfully?
  • Should I get a physical?
  • Should I take vitamins/supplements?
  • Should I schedule a colonoscopy?
  • Are my arteries clogged?
  • Do I get enough sleep?
  • Do I drink too much?
  • What can I do to stop smoking?
  • How can I cut back on junk food and eat more vegetables?

7. Dream-Setting & Goal-Setting

Most of the brainstorming involved their personal, financial, family and career dreams and goals, including dreams of retiring on a beach, buying a boat, expanding their business, buying vacation homes, etc.

  • What are my dreams and goals for the future?
  • What do I need to do to get there?

8. Problems

Here they brainstormed primarily about finding solutions to those problems that were causing them the most stress at the moment. Most were immediate problems related to their jobs and family. Some were longer-term and related to preempting future potential problems they were anticipating down the road most often related to their careers.

9. Charity

They also try to make sure they’re giving back to their community, so they asked themselves:

  • What other charities can I get involved in?
  • Am I doing enough for my church, business group, synagogue, etc.?
  • How can I best help my community?
  • What can I do to help my grammar school, high school, college, etc.?
  • Should I start a scholarship?
  • Should I contribute more money to my school or church?
  • Who can I help?

10. Happiness

Finally… the ever-important happiness factor. They checked in with these questions:

  • Am I happy?
  • What is causing me to be unhappy?
  • How can I eliminate those things that are making me unhappy?
  • Is my spouse happy?
  • Are my kids happy?
  • Are my employees or staff happy?
  • How can I make myself happier?
  • What is happiness?
  • Will I ever be happy?
  • What’s making me so happy?

That’s a lot of thinking, I know. There are a lot of days in the year, however, to brainstorm with yourself. You just need to make it a daily habit. Eventually, over time you will come up with solutions to your most pressing problems. You will gain insight into what makes you tick. Planned daily thinking will help you find some meaning to your life.

Making a daily habit of thinking is what self-made millionaires do. It’s an important piece of the success puzzle. Understanding why they do it is less important than understanding that they do do it. Every day.

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MONEY consumer psychology

19 Secrets Your Millionaire Neighbor Won’t Tell You

The secret to financial freedom.

From time to time we bring you posts from our partners that may not be new but contain advice that bears repeating. Look for these classics on the weekends.

That’s right. Although having a million bucks isn’t as impressive as it once was, it’s still nothing to sneeze at.

In fact, CNBC reports that in 2013 there were 13.2 million millionairesin the United States alone.

That’s a lot of people, people. And the odds are one or two of them are living near you.

Heck, one of them might even be your neighbor. In fact, the odds are very good that it is your neighbor.

But, Len, you don’t know my neighbor. That guy doesn’t look anything like a millionaire.

Well, guess what? Your suburban millionaire neighbor called (oh yeah, we go way back) and the two of us had a nice little chat.

Here’s a few things he shared with me but apparently doesn’t want to tell you. (No offense, I’m sure.)

1. He always spends less than he earns. In fact his mantra is, over the long run, you’re better off if you strive to be anonymously rich rather than deceptively poor.

2. He knows that patience is a virtue. The odds are you won’t become a millionaire overnight. If you’re like him, your wealth will be accumulated gradually by diligently saving your money over multiple decades.

3. When you go to his modest three-bed two-bath house, you’re going to be drinking Folgers instead of Starbucks. And if you need a lift, well, you’re going to get a ride in his ten-year-old economy sedan. And if you think that makes him cheap, ask him if he cares. (He doesn’t.)

4. He pays off his credit cards in full every month. He’s smart enough to understand that if he can’t afford to pay cash for something, then he can’t afford it.

5. He realized early on that money does not buy happiness. If you’re looking for nirvana, you need to focus on attaining financial freedom.

6. He never forgets that financial freedom is a state of mind that comes from being debt free. Best of all, it can be attained regardless of your income level.

7. He knows that getting a second job not only increases the size of your bank account quicker but it also keeps you busy — and being busy makes it difficult to spend what you already have.

8. He understands that money is like a toddler; it is incapable of managing itself. After all, you can’t expect your money to grow and mature as it should without some form of credible money management.

9. He’s a big believer in paying yourself first. Paying yourself first is an essential tenet of personal finance and a great way to build your savings and instill financial discipline.

10. Although it’s possible to get rich if you spend your life making a living doing something you don’t enjoy, he wonders why you do. Life is too short.

11. He knows that failing to plan is the same as planning to fail. He also knows that the few millionaires that reached that milestone without a plan got there only because of dumb luck. It’s not enough to simply declare that you want to be financially free.

12. When it came time to set his savings goals, he wasn’t afraid to think big. Financial success demands that you have a vision that is significantly larger than you can currently deliver upon.

13. Over time, he found out that hard work can often help make up for a lot of financial mistakes — and you will make financial mistakes.

14. He realizes that stuff happens, that’s why you’re a fool if you don’t insure yourself against risk. Remember that the potential for bankruptcy is always just around the corner and can be triggered from multiple sources: the death of the family’s key bread winner, divorce, or disability that leads to a loss of work.

15. He understands that time is an ally of the young. He was fortunate enough to begin saving in his twenties so he could take maximum advantage of the power of compounding growth on his nest egg.

16. He knows that you can’t spend what you don’t see. You should use automatic paycheck deductions to build up your retirement and other savings accounts. As your salary increases you can painlessly increase the size of those deductions.

17. Even though he has a job that he loves, he doesn’t have to work anymore because everything he owns is paid for — and has been for years.

18. He’s not impressed that you drive an over-priced luxury car and live in a McMansion that’s two sizes too big for your family of four.

19. After six months of asking, he finally quit waiting for you to return his pruning shears. He broke down and bought himself a new pair last month. There’s no hard feelings though; he can afford it.

So that’s it. Now you know what your millionaire neighbor won’t tell you.

Oh, and, um, would you be so kind to keep this just between you and me? I’d hate to ruffle anyone’s feathers or cause of any kind of neighborly spat.

Please?

Thanks. You’re a peach.

More From Len Penzo dot COM:

Len Penzo blogs at lenpenzo.com, “the off-beat personal finance blog for responsible people”.

MONEY consumer psychology

4 Personality Quirks That Sabotage Your Savings

insecure girl
Grove Pashley—Getty Images

When you are your own worst enemy

They say it takes all types — but some types have a harder time saving than others. Are you allowing some of your less flattering character traits to derail your finances? Here are four personality types that sabotage saving.

1. The Insecure

In a consumer economy, advertisers work tirelessly to link products to personality. Do you drive a domestic car, or an import? Are the countertops in your home Formica or granite? Are you a Mac person or a PC person? Often, the answers don’t simply explain what we prefer — they suggest who we are, or at least who we’d like to be.

Playing upon consumers’ insecurities works like a charm. Ego sells lots of products and keeps huge swaths of the population on a treadmill of debt. Fight back by getting comfortable in your own skin and learning little ways to feel more confident every day.

2. The Impulsive

Let’s admit it: we live in a consumer-centered universe. Every screen we gaze into promises to deliver more delights to our doorstep (with free shipping and cashback rewards, of course). There are entire armies of designers, marketers, and retailers whose sole purpose is to anticipate what will tickle us next and magically make our wallets fall open.

In a consumer Candyland like ours, those who haven’t learned how to overcome impulse spending don’t have a chance. Without a dependable restraint system, they’re sure to wander toward the Gumdrop Mountains, fall into the Molasses Swamp, and never be heard from again.

3. The Impatient

Just one word separates a saver from a spender. A saver says, “I need it.” A spender says, “I need it now.” Purging that one pesky word from our consumer vocabulary can save us thousands of dollars over a lifetime. “Now” eliminates the option of shopping around for the best deal, it means we don’t have to plan and save, and it means we’ll think about the consequences to our budget later. If you’re trying to spend wisely, stop being impatient and start thinking of “now” as a hair-curling, four-letter word.

4. The Fearful

Spending wisely and saving for the future takes a bit of fortitude. To make real progress, we have to know who we are deep down, learn how to conquer fear, and take a few chances. Those who are afraid of money likely don’t understand it, or grew up in households where money was a constant source of anxiety. They might be able to pinch a few pennies, but profound success will always be elusive. The fearful wouldn’t dream of negotiating on price, they don’t feel comfortable making independent investment decisions, and they’re afraid to spend when presented with real wealth-building opportunities.

Saving money over the long term is no different than achieving any other goal. We have to duck and weave around our own insecurities and impulses and surround ourselves with like-minded people who can cheer us on and serve as role models for success. If you find yourself struggling, it might be time to take a hard look at the company you keep.

More From Wise Bread:

MONEY Budgeting

Living Paycheck to Paycheck on $75,000 a Year

couple paying bills in kitchen
Neil Beckerman—Getty Images

One-third of high earners get by this way.

If you are struggling to save money and think that a larger paycheck is the key to solving your problems, a new report suggests that may not be completely true. According to a recent survey by SunTrust SUNTRUST BANKS STI -0.62% , almost one-third of survey respondents making $75,000 per year or more live paycheck to paycheck on occasion, as do one-fourth of the respondents making over $100,000 annually. The secrets to saving are as much of a mindset issue as they are an income issue.

The survey, conducted by Harris on SunTrust’s behalf, polled 518 adult respondents (ages 18 and over) in households that brought home a combined income of $75,000 or more. One-third of those households cited insufficient financial discipline as a reason that they do not reach their goals. The survey does not say how much overlap that has with the percentage of people that sometimes live paycheck to paycheck, but it’s a solid bet that most high earners in a paycheck-to-paycheck situation have at least some lack of financial discipline.

The response to another question highlights the financial discipline aspect. Within the group that aren’t saving as much as they want to save because of their lifestyle choices, 68% said that expenses from dining out was the main reason for their lack of saving. The number was slightly higher among millennials (70%), but in general, this was true across the generations. Entertainment and clothing were also listed as reasons that saving was limited. These are all discretionary purchases related to fiscal discipline, regardless of income.

Do these results translate into long-term savings concerns? One-third of respondents living paycheck to paycheck say it probably does, and even some of those who are living more frugally have some concerns. Of the respondents from ages 35 to 44, 53% expect their savings will be adequate to help them live comfortably in retirement. Only 37% of those between ages 45 to 54 feel that way, suggesting that as one gets closer to retirement, either the optimism begins to fade or a realistic assessment of retirement costs sets in. Perhaps it’s a bit of both.

The survey is part of SunTrust’s efforts to get people to set positive goals, assuming that setting targets will help motivate people to save to meet those targets. The campaign plays on words by suggesting saving for “sunny days” instead of only for rainy days.

We think the folks at SunTrust are on to something. Fiscal discipline may be partly related to a lack of knowledge, but lack of willpower appears to be the largest culprit. Unsuccessful savings efforts fundamentally boil down to budgets. Either people aren’t making realistic budgets or they are choosing not to stick with them, and the SunTrust campaign is easing people into the concept.

Granted, it’s easy to accumulate debt through discretionary purchasing — but debt management is an important part of learning how to set a budget. If you have too much debt for the income you make, cut down on your spending and start paying down your debt. As you get used to the lower spending levels, transfer your debt reduction payments to some sort of savings.

Please consider following this philosophy if you are a high earner living paycheck to paycheck. It can be a difficult philosophy to follow, but it’s certainly not complicated. While we appreciate your single-handed efforts to save the economy with your discretionary spending, let the rest of us carry the ball for a bit.

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MONEY Workplace

Answer These 5 Questions Before You Go Freelance

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Be smart about quitting your day job

Planning to quit your day job to become a full-time freelancer can be the most exciting transition in your career. You gain control over your own schedule, and have the freedom to choose the type of projects you work on.

But with this excitement comes a lot of financial questions and planning. In order to make the leap from your day job as smooth as possible, here are five questions to ask — and answer! — before becoming a full-time freelancer.

1. How Much Should You Save?

If you have no other sources of income to pay the bills after you quit your job, how long would your savings last? Do you feel comfortable giving yourself three months to get your new freelancing career off the ground? Or is six months a more reasonable timeline? Obviously the more money you save up, the less risky your leap into freelancing will be.

There are additional factors that need to be accounted for too, like whether or not you’re the breadwinner for your family. It’s likely you’ll have to pay for your own health insurance, taxes, and fund your own retirement account. All of these things need to be calculated before you can accurately estimate how much money you should save.

Most experts suggest that you keep at least three to six months’ worth of expenses in a separate savings account to cover any emergencies or losses of income (some even suggest as much as twelve months’ worth). As a freelancer you might as well double this amount to account for the added risk of being self-employed.

2. What’s Your Bare Minimum Budget?

What’s the bare minimum amount of money you need to make in order to pay your bills each month? Make sure you add in all of your household bills (utilities, insurance, groceries,) as well as the cost of doing business as a freelancer.

When I was in the process of quitting my day job, I calculated my bare minimum budget to be $3,000 a month. This meant that I needed at least $18,000 saved up ($3,000 a month X six month savings cushion = $18,000) in order to cover my bare expenses for six months while I built my freelancing business.

Calculate how much money you need to adequately pay your bills every month, then multiply this figure by six to eight months. This is the amount you’ll need to save in a separate account to make the transition from a day job to freelancing a successful one.

3. Do You Have Passive Income Streams?

One other way to make this process much easier is creating multiple streams of income. Aside from your core freelance duties, do you have other options for creating passive income? What other assets can you leverage to bring in more money each month?

Maybe you can branch out and offer business consulting, or create an online course that teaches a specific skill based on your background and experience. Do you have investments that earn small dividends or interest?

Every little bit of income can help you save up money faster, while easing the transition of quitting your job and steady paycheck.

4. Are You Willing to Do What it Takes?

How much time do you have available to dedicate to finding work? Are you prepared to spend nights and weekends building your business? In the beginning, clients won’t come to you, so you’ll have to actively seek them out and build a solid network from scratch.

How much time you spend in the beginning will determine how quickly you’re able to replace your day job’s income. There will likely be a lot of sleepless nights and stressful days, but in the end you have to determine if the reward is worth all the effort.

Freedom is never free, and this includes financial freedom. You have to figure out if the cost is worth it.

5. Do You Have a Financial Backup Plan?

What happens if Plan A doesn’t work out? Do you have a Plan B in place? In the event that you blow through all of your savings, and are still not where you can fully pay your monthly expenses, how are you going to cope?

Create a backup plan of action for this specific event. List out the possible solutions and scenarios for how you and your family will deal with this. Are you going to find another full-time job? Will you be able to move back in with your parents?

This is another reason that having a large chunk of money stashed away in savings can really help you during the process of quitting your job to freelance full time. Calculate at least six months’ worth of your minimum budget expenses and then save money like crazy.

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MONEY financial advice

CEO of World’s Largest Mutual Fund Shares His Best Financial Advice

The CEO of the world's largest mutual fund company shares the best financial advice he ever got and reveals his biggest money mistake.

MONEY retirement planning

3 Ways to Build a $1 Million Nest Egg Despite Lower Investment Returns

Andy Roberts/Getty Images

Whether your retirement goal is six figures or seven figures, it's harder to achieve in today's market—unless you have a plan.

A new Transamerica Center for Retirement Studies survey found that $1 million is the median savings balance people estimate they’ll need for retirement. And many savers have been able to reach or exceed that goal, according a report last year by the Government Accountability Office showing that some 630,000 IRA account owners have balances greater than $1 million.

But most of these people accumulated those hefty sums in an era of generous investment returns. Between 1926 and 2014, large-company stocks gained an annualized 10.1%, while intermediate-term government bond returned 5.3% annually, according to the 2015 Ibbotson Classic Yearbook. During the go-go ’90s annualized gains were even higher—18.2% for stocks and 7.2% for bonds. Today, however, forecasts like the one from ETF guru Rick Ferri call for much lower gains, say, 7% annualized for stocks and 4% or so for bonds. Which makes building a seven-figure nest egg more of a challenge.

Still, the goal remains doable, if you go about it the right way. Here are three steps that can increase your chances of pulling it off.

1. Get in the game as early as possible—and stay in as long as you can. The more years you save and invest for retirement, the better your chances of building a big nest egg. Here’s an example. If you’re 25, earn $40,000 a year, receive annual raises of 2% during your career and earn 5% a year after expenses on your savings—a not-too-ambitious return for a diversified portfolio of stocks and bonds—you can accumulate a $1 million account balance by age 65 by saving a bit more than 15% of salary each year. That’s pretty much in line with the recommendation in the Boston College Center For Retirement Research’s “How Much Should People Save?” study.

Procrastinate even a bit, however, and it becomes much tougher to hit seven figures. Start at 30 instead of 25, and the annual savings burden jumps to nearly 20%, a much more challenging figure. Hold off until age 35, and you’ve got to sock away more a far more daunting 24% a year.

Of course, for a variety of reasons many of us don’t get as early a start as we’d like. In that case, you may be able to mitigate the savings task somewhat by tacking on extra years of saving and investing at the other end by postponing retirement. For example, if our hypothetical 25-year-old puts off saving until age 40, he’d have to sock away more than 30% a year to retire at 65 with $1 million. That would require a heroic saving effort. But if he saved and invested another five years instead of retiring, he could hit the $1 million mark by socking away about 22% annually—still daunting, yes, but not nearly as much as 30%. What’s more, even if he fell short of $1 million, those extra years of work would significantly boost his Social Security benefit and he could safely draw more money from his nest egg since it wouldn’t have to last as long.

2. Leverage every saving advantage you can. The most obvious way to do this is to make the most of employer matching funds, assuming your 401(k) offers them, as most do. Although many plans are more generous, the most common matching formula is 50 cents per dollar contributed up to 6% of pay for a 3% maximum match. That would bring the required savings figure to get to $1 million by 65 down a manageable 16% or so for our fictive 25-year-old, even if he delayed saving a cent until age 30. Alas, a new Financial Engines report finds that the typical 401(k) participant misses out on $1,336 in matching funds each year.

There are plenty of other ways to bulk up your nest egg. Even if you’re covered by a 401(k) or other retirement plan, chances are you’re also eligible to contribute to some type of IRA. (See Morningstar’s IRA calculator.) Ideally, you’ll shoot for the maximum ($5,500 this year; $6,500 if you’re 50 or older), but even smaller amounts can add up. For example, invest $3,000 a year between the ages of 25 and 50 and you’ll have just over $312,000 at 65 even if you never throw in another cent, assuming a 5% annual return.

If you’ve maxed out contributions to tax-advantaged accounts like 401(k)s and IRAs, you can boost after-tax returns in taxable accounts by focusing on tax-efficient investments, such as index funds, ETFs and tax-managed funds, that minimize the portion of your return that goes to the IRS. Clicking on the “Tax” tab in any fund’s Morningstar page will show you how much of its return a fund gives up to taxes; this Morningstar article offers three different tax-efficient portfolios for retirement savers.

3. Pare investment costs to the bone. You can’t force the financial markets to deliver a higher rate of return, but you can keep more of whatever return the market delivers by sticking to low-cost investing options like broad-based index funds and ETFs. According to a recent Morningstar fee study, the average asset-weighted expense ratio for index funds and ETFs was roughly 0.20% compared with 0.80% for actively managed mutual funds. While there’s no assurance that every dollar you save in expenses equals an extra dollar of return, low-expense funds to tend to outperform their high-expense counterparts.

So, for example, if instead of paying 1% a year in investment expenses, the 25-year-old in the example above pays 0.25%—which is doable with a portfolio of index funds and ETFs—that could boost his annual return from 5% to 5.75%, in which case he’d need to save just 13% of pay instead of 15% to build a $1 million nest egg by age 65, if he starts saving at age 25—or just under 22% instead of 24%, if he procrastinates for 10 years. In short, parting investment expenses is the equivalent of saving a higher percentage of pay without actually having to reduce what you spend.

People can disagree about whether $1 million is a legitimate target. Clearly, many retirees will need less, others will require more. But whether you’ve set $1 million as a target or you just want to build the largest nest egg you can, following the three guidelines will increase your chances of achieving your goal, and improve your prospects for a secure retirement.

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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How the Supreme Court Just Improved Your Retirement

The Supreme Court just ruled on an obscure aspect of ERISA. It could be great news for your retirement nest egg.

The Supreme Court just handed millions of retirement savers a helping hand.

You many not know much about ERISA, the body of rules that governs retirement accounts. But chances are you have a 401(k). That means Monday’s Supreme Court decision could indirectly lower investment fees you’re paying. And that’s great news.

On Monday the Supreme Court made it easier for 401(k) investors to sue employers over needlessly costly 401(k) investments. The actual point of contention in the case, known as Tibble vs. Edison, was pretty obscure. It involved how the statute of limitations should be applied to a breach of fiduciary duty.

But because ERISA law is so complicated, companies almost always choose to fight such suits on technical grounds. This time around, the typically business friendly U.S. Supreme Court decided in favor of investors, unanimously overruling the U.S. 9th Circuit Court of Appeals. As a result, employers will be forced to think a little harder about whether similar arguments are likely to prevail in the future.

But the fact is, employers have grown increasingly proactive about regulating plan fees. The reason: Tibble vs. Edison is just a high-profile example of a series of lawsuits launched in the past decade over employers’ failure to police exorbitant retirement plan fees. And many large employers have already reacted to the threat by urging investment firms to lower fees for their employees. As a result, 401(k) plan fees have come down, and investors have had greater access to low-cost options like index funds.

With the Supreme Court weighing in on investors’ side, you can expect that trend to continue.

 

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