Is there a rule of thumb that a monthly pension payment should equal a certain amount of dollars of savings? We hear that we need X dollars for retirement, but with a pension, what might that equate to? Some of us will have pensions from previous employers and wonder what it means in terms of the amount we need to save. (For example, does $1,000 in a monthly pension = $125,000 in savings?) What are good numbers to use in planning? Thank you.
Kathie, it really all boils down to how much of your pre-retirement income you’re trying to replace. That’s what you should focus on. Recent research has shown that spending in retirement isn’t linear as previously thought. You were often told you should plan on spending 70 to 80% of your pre-retirement income in retirement. In fact, spending usually tails off after the kids go to college and leave the house and, eventually, you stop working full time. Then life gets really expensive when you hit uber old age and healthcare expenses ramp up.
That said, on average, aiming for that 80% replacement rate is probably a pretty good move. You need to head to a retirement calculator that allows you to input how much you’re expecting from Social Security and your pension as well as how much you’ve saved. The AARP’s retirement calculator – which you’ll find here – will let you do just that. It’ll run the numbers and help you figure out how much more you need to save to meet your goals.
Merrill Edge has a new mobile app, Merrill Edge’s Face Retirement. In response to research from Stanford University that found that being able to see yourself older may encourage you to save more and focus on your retirement planning, the app (and coordinating web version) encourages you to “meet the future you” by aging a picture of yourself. See my aged photo below — while I can’t say the results made me want to save more, they did make me want to buy anti-aging cream.
FORTUNE — In the last two days, I have read two newspaper stories that have me worried.
The first, from Washington Post syndicated columnist Kenneth Harney, pointed to a huge rise in the amount of debt being taken out in the form of home equity lines of credit. “New home equity credit line borrowings soared by 42% in the final three months of 2013 and were up sharply for the entire year, to $111 billion,” he wrote. As for the reasons behind the increase, Harney singled out the comeback in home prices in the last couple of years that sent equity soaring, combined with the fact that teaser rates on HELOCs make them more attractive than a cash-out refi (and that’s before you consider a refi’s closing costs).
The second story, in Monday’s Wall Street Journal, focused on the rise in people taking out student loans not because they want to earn a degree, but because they need the money — and student debt is cheaper and easier (i.e. no credit check) than getting a loan from a bank or leaning hard on your credit card. “College officials and federal watchdogs can’t say exactly how much of the U.S.’s swelling $1.1 trillion in student-loan debt has gone to living expenses,” wrote reporter Josh Mitchell. “[A report from the Education Department's inspector general] also found the schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn’t log any credits at the time.
For more head over to Fortune.com
FORTUNE — The most frightening billboard I saw in recent months ran along the Westside Highway in Manhattan. From the good folks at Prudential, it read: The First Person To Live To 150 Is Alive Today, with the subhead, Plan For A Longer Retirement. A few weeks later, our sister publication, Time Magazine, followed in tandem, asking the question on its cover: Can Google Solve Death?
We get it. From a financial (as well as, of course, a medical) perspective, longevity is very likely the issue of the century. What can you do about that? Saving more never hurts, the folks behind America Saves Week, which happens to be now, nudge us to remember on an annual basis. (If you need help saving more, check out the resources here.)
But, the longer your time horizon, the more you may also want to think about socking away in stocks. A new paper from Morningstar Head of Retirement Research David Blanchett along with Michael Finke of Texas Tech University and Wade Pfau of The American College looks at the issue of time diversification, defined as “the anomaly where equities become less risky longer investment periods.” The researchers look at 113 years of data from 20 countries and found that, yes, the longer your time horizon, the more you may want to allocate your investments to equities.
For more, head over to Fortune.
I’m excited to have John Schmoll as today’s guest poster. I met him when I spoke at FINCON — a financial bloggers conference — last year, and have enjoyed reading his blog Frugal Rules since. Today, he’s sharing his tips for saving for retirement when you’re self employed.
I have learned a lot about myself in the 18 months or so that I’ve been self-employed. I’ve learned about what truly motivates me, what I do in the face of a challenge, and how easy it can be to let things slide by.
One particular area that I’ve been guilty of letting slide by over the past year is actively saving for retirement. Gone is the 401k and the ability of getting that nice employer match – it all rests on my wife and I now. I’ve learned that even with the ups and downs of self-employment it is possible to have balance and put away money for retirement, though it takes action on your part.
Months Turn in to Years
If you run your own business, you know better than most that time is precious and there never seems to be enough of it in a day. As a result, time passes and things get delayed as you implement an “I’ll take care of it tomorrow” mindset.
The problem with this mindset, as it relates to retirement investing, is those days turn into months and thus you lose that precious time needed to grow your portfolio. This temptation to delay happens to the best of us and the best thing you can do is take the bull by the horns and actively engage with your retirement investing now.
Know Your Options
Many employers offer a solid framework you can use to save for retirement in a 401k. Often, entrepreneurs allow this lack of framework to hold them back from saving for retirement. If you’re self-employed, there are many retirement saving options you can use to create your own framework:
- SEP IRAs
- SIMPLE IRAs
- Solo 401ks
Most brokerages offer all of these options, but make sure you find the one that works best for you and has either no fees or low fees so you can have more of your money working for you.
One nice added feature is that you can invest in virtually anything in these retirement accounts vs. restrictions you might face in an employer-sponsored 401k. Thus, you have access to lower-fee index funds as opposed to being forced to choose between several higher-fee funds – which means more of your money can work for you.
Look at Your Priorities
The problem many face in their self-employment journey is fluctuating income. You could have a stellar month followed by one that is barely enough to get by. When dealing with this fluctuating income there are a number of things to look at:
- What are you spending money on each month that can be cut?
- What is your rolling average of income over a longer period of time?
- Are you sitting on too much cash?
Taking a serious look at some of these things can not only reveal what your priorities are, but it can also show you that you do have money you could set aside each month or quarter for retirement. Of course you still want to be able to live life, but you don’t want to do it at the expense of sacrificing your future for the present.
Saving for retirement while running your own business does present some unique challenges, but it’s not impossible. Making it a priority and knowing your options will set you up to succeed in the long run.
About John: John Schmoll is the founder of Frugal Rules, a blog created to help people experience financial freedom through frugality. John is passionate about budgeting, saving and investing and enjoys sharing his knowledge and experience with others so they can avoid making some of the mistakes that he made. A veteran of the financial services industry, John has an MBA in Finance and experience as a licensed stockbroker. You can find John online at frugalrules.com and follow him on Twitter at @frugalrules.
Aimee Shaffer had to make it work. After years of working as a public service news director at a radio station, her employer downsized, leaving Schaffer jobless, and unable to seek radio jobs at competing local stations (the fine lines of her contract). Left without a steady paycheck for the first time, Shaffer started saving.
By paying her bills with unemployment money, and cutting back on spending altogether, she made it work. For example, for her entertainment, Shaffer purchased a $10 pass to her local parks, and took to hiking and biking. She also steered her way onto a different career path and started her own business as a professional pet sitter. Shaffer even saved for retirement along the way. As she shared with America Saves, “I didn’t think I had enough money to save but I started by putting $25-$50 away with each paycheck and now I have a nice little fund.”
Shaffer’s story on saving, along with others’, can be found on the America Saves Week website.
As it just so happens, next week is America Saves Week (February 24th – March 1st). I know, it certainly doesn’t sound as fun as World Bartender Day, which is also next Monday, but it’s a week worth observing…and an action to start taking if you aren’t already. Since 2007, the week has been an opportunity for organizations to promote fruitful saving practices, and for individuals to confront their own savings habits (or lack there of).
Maybe your story is similar to Shaffer’s, or perhaps “saving” to you means scoring a great deal on a fabulous pair of shoes. Chances are you could be saving more. Don’t by it? The organization’s website also has a test you can take to assess your savings IQ. For instance, how much do you think the average American spent on the unexpected (i.e. emergencies) last year? Hint: It’s a lot.
For more on America Saves Week – what it’s all about, how to pledge, and above all, how to save more – head over to the organization’s site.
The Texas Daily caught up with Jean last week when she was in Dallas for the 2014 CSCUF FOCUS Summit.
Do you have appointments for individual consultations for financial planning? I live at the Jersey Shore and will travel anywhere to get the financial help I need. I am 59, a teacher and divorced with a low credit score and significant debt from a high mortgage and poor choice of loans. Facing major decisions, and I need help!!
I don’t, Sue. But you’re an excellent candidate for Money School. Specifically, you should take The Debt Diet, which is designed to help you do two of the very things you mentioned you’re struggling with: pay off debt, and increase your credit score. By the end of the class, you’ll also be prepared to start building an emergency fund, which can help keep you from falling into debt again the next time money gets tight.
A new schedule of classes can be found here — this semester’s live schedule starts on February 11. I teach these live classes via webinar, and they come with a live Q&A period at the end, as well as a week of chat-based Office Hours, so you can ask me all of your questions and come back for more info if you realize something from the lessons wasn’t clear. It looks like this:
This year, I’m also offering recorded versions of the same classes — including The Debt Diet — through an online education platform called Udemy. This is a great solution if our live course schedule doesn’t mesh with your own schedule.
And as debt is usually tied to other areas of your financial life that aren’t working, you may want to take some of the others (particularlyBudgeting Bootcamp, A Crash Course in Saving More and Spending Less, and Yes, You Can Retire) as well.
I hope that is helpful — and I hope to see you in class! If you decide to attend, I look forward to hearing what you think.
My husband and I are starting to get in control of our finances in 2014. We’ve been keeping track of our expenditures and changed our direct deposits to divert a small percentage of our income to our savings account, which is earning an anemic 0.12%. In “Make Money, Not Excuses,” you recommend Bankrate.com to research interest rates. Maybe I did it wrong, but the very best rate I could find was only 1%, and for that account, you had to have an opening deposit of $100,000. I’m finishing up my Master’s and my husband just graduated from culinary school last April — there’s no way we’ll ever be able to put that kind of money together. Meanwhile, we’re paying 6.8% on our student loans (thanks, Congress). How will we ever get our heads above water?
Elizabeth, don’t worry – you didn’t do anything wrong. Savings rates in this country are really, really awful right now. The best just about anyone can find is in the 1% range (although I have a few suggestions about where you can do just a little bit better and I’ll give them to you in a second). The step that you and your husband took to track your expenditures and save automatically is absolutely perfect. It’s exactly what I want you to do and that’s because the habit of saving is the most important thing and automating is the easiest way to make that habit stick.
As for those savings rates, they will go up. As the Fed starts to raise interest rates — which it will eventually do — savings rates will go along for the ride and you’ll benefit. In the meantime, if you want to eke out a little bit of added return on your savings, check out high interest rate checking accounts (checkingfinder.com, kasasa.com). If you’re willing to pay at least a bill or two online and use your ATM card for (typically) 10 purchases a month, you can get a fairly decent (again, comparatively) rate of interest on your checking account. These accounts have maximums, rather than minimums. Usually you can’t keep more than $25,000 or so in them.
The other place to look is a bank called Santander. Their extra20 checking product offers a return of $20 a month ($240 a year) to customers who make at least $1,500 per month in total direct deposits and pay at least two bills online from their account each month. The account doesn’t have a minimum balance requirement, nor a monthly maintenance fee. On $1,500, that $20 a month works out to an interest rate of around 16%. Granted, the more money you keep in the account the lower the rate actually is, but it’s substantially better than you’re getting anywhere else. (At least anywhere else that I’ve been able to find.)
What was your batting average this holiday season? I’m talking about gifts you’re keeping versus those going back to the stores. Last January, roughly $60 billion worth of holiday merchandise was returned, according to the National Retail Federation. Translation: If you’re sitting with a couple of items you’re still planning on taking back, you’re far from alone.
GoBankingRates.com reviewed a handful of retailers’ return policies to see which ones are the most lenient, and which ones, ummm, not so much. Because when it really comes down to it, a store’s return policy is also a reflection of how much it values you, the customer.
Topping the list of stores with customer-friendly return policies: Costco and Nordstrom. At the former, you can make returns without receipts, because Costco can look up purchases with your membership information. If you’re a nonmember, however, you will need the gift giver’s member number without a receipt. Even with all of the right information, your nearby warehouse will have the final say for accepting the gift return, according to Costco customer service. Aside from most electronics, which have a 90-day return limit, there isn’t a time frame for any other product category. Plus, you can receive a full refund in cash or check. Nordstrom is also pretty generous. Receipts aren’t mandatory, although if the product is damaged, or the store isn’t carrying the item anymore, you might not get your money back.
On the flipside: The website singled out Sears’ and Best Buy. At Sears’ you’ll have 90, 60 or 30 days (depending on the product) to make the return. And, if you’re missing the original packaging, some items will incur a 15% restocking fee, said Jennifer Calonia, lead reporter of the study. No receipt? You’re out of luck. Like Sears’, Best Buy requires the original receipt, gift receipt or packing slip (if you purchased it online). A list of nonreturnable items can be found here – and you’ll generally have 15 days to make your returns. (Elite members who spend at least $1,500 a calendar year at the store get 30.)
For Best Buy gift recipients without gift receipts: Each customer is allowed to make one return without a receipt each calendar year, according to a store representative. If you do have a gift to return, you better get to it. Best Buy’s extended deadline for holiday returns and exchanges on gift purchases made between November 3 and December 31, 2013 ends next Wednesday.
For more specifics on the best and worst return policies, you can see the full list here. But before you hop in your car or head online, Calonia offers some tips for returning the mishaps this month (or in the future):
No receipt, try your credit card number. If you’re missing a receipt (or gift receipt) ask the store clerk to look up the purchase via credit card number. (If it’s a gift you’re returning, this may require asking the giver for sensitive info; fine with your Mom, not so much with your boss.)
Be a bit of a hoarder. “I like to keep my packaging a maximum of six months, or typically until the end of the return policy,” Calonia said. “I also like to put post-it notes of when a final return can be made, and also if there are any warranty deadlines that need to be met. That way, I have it available to me in case it becomes defective.” Also, refrain from tearing into gifts in the future – damaged packaging can affect your likelihood of a refund.
Go electronic: If you don’t want to keep a paper trail around, scan the image of the gift receipt and keep it in a file on your desktop. Or use an app like OneReceipt, Smart Receipts or Hello Receipts.
Always read the fine print: It’s best not to assume the store clerk knows the ins and outs of the retailer’s return policy, Calonia said. Read the policy before you head to the store so you know what you’re talking about.