Although the 10 year has finally hit 3% here in September of 2018, stretching out on the yield curve provides little benefit as the 30 year is yielding only about 3.2%. Since the risk premium for the 30 year is not there, keep your bond duration low and pick up the higher yields when your bonds mature (think laddering your bonds). Notably, Vanguard still believes that global fixed income returns will be in the 2% to 3% range for the next decade.
If you are in your 30's, have you saved as much as your peers?
The average 401k balance, according to this article, for those in their 30’s is around $42,700. Have you saved this much? Well, if you are in your mid thirties, you really should have at least two times your salary saved for retirement. And, when using that metric, the average 401k balance should probably be around $85,000 by the time you reach 35 years of age. With that thought in mind, you may wish to clink on the link above as this article also highlights the following general checkpoints for retirement saving amounts at various points in your life:
By age 30: Have the equivalent of your starting salary saved
By age 35: Have two times your salary saved
By age 40: Have three times your salary saved
By age 45: Have four times your salary saved
By age 50: Have six times your salary saved
By age 55: Have seven times your salary saved
By age 60: Have eight times your salary saved
By age 67: Have 10 times your salary saved
I am a bit of a “belt and suspenders” kind of guy, so I would recommend shooting for 15x’s your salary saved by age 67. For example, if your salary is $100K per year, then $1.5 million allows for approximately $60K a year (4% time $1.5 million) from your retirement accounts when doing a rough back of the envelope calculation. This combined with your social security should replace approximately 80% of your pre-retirement income.
How much do I need to save every year to reach $1 Million?
Not much, if you let time (and the compounding of your hard earned dollars) work for you. At a 7% annual return, it takes 30 years for an annual $10K investment to reach $1 million. Albeit, $1 million is not worth what it used to be, it is still a good goal to set (and, hopefully, surpass). For without goals in mind, the event of retirement remains too abstract for some and leads to paralysis. Unfortunately, this article points out this very fact by noting that 1 out of 3 people only have $5,000 saved for retirement. The best time to start saving was 20 years ago, the second best time is TODAY!
401k benefits (what are they?) . . .
A good article about 401k benefits. Most notably, a 401k plan offers the following benefits:
tax savings (the account is funded through pre-tax payroll deductions);
employer match incentives (free money that immediately boosts your return);
portability (can transfer the account to another employer or a rollover IRA); and
loan and hardship withdrawals (permits acces to money).
These aren’t all of the benefits of a 401k, but funding an account with pre-tax payroll deductions and enjoying tax free growth until withdrawal is good enough on its own!
How much $$ can I save in my retirement accounts?
A good article detailing 2018 contribution limits for different retirement account options for all parties saving for their future. Thankfully, our retirement account options permit a pretty penny to be saved if one’s income allows. For example:
IRA (below age 50) - $5,500
IRA (age 50+) - $6,500
401k (below age 50) - $18,500 + employer match
401k (age 50+) - $24,500 + employer match
Solo 401k (below age 50) - up to $55,000
Solo 401k (age 50+) - up to $61,000
HSA (below age 55) - $3,450 (single); $6,850 (family); add $1K for those 55+
As such, if funds are available, a person below the age of 50 can save $24,000 rather easily (IRA $5,500 plus 401k $18,500). However, that $24K can increase once you add in employer matches, as well as, HSA contributions, if permitted.
Possible penalty free withdrawal options from an IRA before 59 and 1/2 years of age . . .
A great article detailing how, in limited situations or circumstances, one can potentially withdrawal money from an IRA without incurring a 10% penalty. As imagined, these situations are rather limited:
disability (i.e., where an individual cannot participate in gainful activity or employment);
one’s medical expenses exceed 10% of their AGI;
to cover health insurance for themselves, their spouse, and their dependents;
to cover qualified higher education expenses;
a first time home purchase;
withdrawals that meet I.R.C. section 72t exceptions (see earlier post for a further explanation of this option); and
beneficiaries of an inherited IRA (these beneficiaries are required to take withdrawals).
Saving for College? Do I use a 529, a Coverdell, an UGMA/UTMA account, or a Roth IRA?
A great article explaining the different options that folks have when investing for college. With a 529 college savings plan, you might enjoy a state tax deduction and the potential of contributing up to $150K as a married couple in a single year when utilizing the 5 year election method; however, plan fees and limited investment options can diminish a 529’s luster. That being said, it is still probably one’s best option when planning for college. Click the link above to discover your best options for your particular situation.
Do you only need three funds for investing?
Taylor Larimore thinks so. If you don’t know Taylor, he is a long-time Boglehead (i.e., a disciple of John “Jack” Bogle - the founder of the Vanguard Group). Taylor’s three fund choices:
a total market US stock index fund;
a total market stock International index fund; and
a total market US bond index fund.
That’s it. Pretty simple and the costs for such index funds are very low - a key determinant in improving an investor’s performance. Investing can be made simple!
Can I take money out of my IRA or 401k without a 10% penalty?
Yes, you can. However, that does not mean that you should. A lesser known provision of the Internal Revenue Code, specifically section 72t, allows for substantially equal periodic payments to be withdrawn from your tax-deferred account without a 10% penalty being charged. The rules surrounding this withdrawal method are complex and a tax professional, CPA, and/or an ERISA lawyer’s advice should be sought before implementing. Relatively minor mistakes can subject the entire withdrawal amount to the 10% tax penalty if you are not careful. Don’t forget that such a withdrawal comes at a great cost even if you avoid the 10% penalty; namely, your financial security in retirement because these funds are no longer compounding in value as you make your way to your golden years. Other less onerous possibilities may exist if you still need to access to your tax-deferred funds early. Talk to you financial advisor about possible “hardship” withdrawals or a 401k loan if your plan permits. Better yet, access your “rainy day” fund (i.e., a bank account with at least 6-12 months of living expenses set aside for life’s unexpected events) that all households should have for just such an emergency!
If I am not eligible for Medicare, but my spouse is eligible, can I receive Medicare benefits?
A good article explaining that "yes," you can receive Medicare benefits on a spouse's record. Notably, to acquire Medicare coverage under a spouse's record, a person need only be 65 years of age or be deemed medically disabled. Typically, to qualify for Medicare you need to have paid into the Social Security system. Fortunately, for spouses, just like with Social Security benefits, a spouse can qualify for Medicare benefits under a spouse's record.
Fidelity first to ZERO index funds pays off . . .
Wow! Fidelity's ZERO (no-fee) index funds bring in $1B in first first month. That's a lot of money. Should you switch? Maybe. But, probably not. If you are already using low-cost passively managed index funds, the move to Fidelity might only save you $4 per $10,000 invested - not exactly a King's ransom. For example, many passively managed index funds already have an expense ratio of .03% to .05%; as such, a $10,000 investment already only costs about $3 to $5 per year. Now if it turns out that Fidelity's "tracking error" of its bogey benchmark is less effective than other funds, then Fidelity's ZERO funds could actually end up costing you more in lost returns (albeit, not a huge sum most likely). Additionally, Fidelity seems to admit that these ZERO funds are a loss leader for them. Accordingly, they will need to recoup these fees by cross-selling additional products to these new customers. Finally, if you are considering switching a taxable account to Fidelity's ZERO funds, such an event can trigger a capital gains tax event and a corresponding tax bill from Uncle Sam (something most of us don't want). Nevertheless, Fidelity's ZERO funds are really good news for the average investor because reducing costs is one of the best things an investor can do to boost their returns!
Taxable Accounts and when to use them . . .
A good article about when to use taxable accounts. Generally, it is best to use an employer sponsored tax-deferred account (e.g., an IRA or a 401k plan) when saving for retirement. Such accounts typically allow for pre-tax contributions, tax free growth of your money, and sometimes even include employer matching contributions. However, some folks may not have access to an employer sponsored plan and are limited to the $5,500 or $6,500 (for those 50 and over) one can contribute per year to an IRA. Although, saving approximately $6,000 per year is not a bad start, saving even more improves your likelihood of retiring earlier and living life a little more comfortably. Hence, the first instance of utilizing a taxable account is to save more for retirement. Such taxable accounts should take advantage of tax managed assets, i.e., securities that don't provide regular capital gains and dividend income but focus on stock price appreciation, index funds, or tax free bonds. Other instances ripe for utilizing a taxable account include:
You wish to retire before age 59 1/2; such taxable accounts would not be subject to the early withdrawal 10% penalty;
You are saving for a long term goal (a long term goal other than college - you can use a 529 for college goals); or
You may wish to actively trade or speculate with a small portion of your money.
A penny saved is a penny earned, even in taxalbe accounts!
Two really important retirement charts; however, I believe the second chart is more compelling. Which do you think is more important?
This article provide two really good charts. The first chart covers what investing $5K, $10K, or $15K annually over five year increments will accrue an investor when returning 8%. Off course, the earlier you start, the better the results. But, the real benefit of this chart is revealed when one estimates the annual income produced from this nest egg when using a 4% withdrawal rate. Tellingly, the second chart shows that 20 years of saving $15,000 at 8% yields $29,000 in annual income in retirement, but start a mere 10 years earlier and that $15,000 at 8% for 30 years yields $72,000 in annual income (almost 2 and 1/2 times greater). I believe the second chart helps to put in more concrete terms what a retiree can expect from their nest egg in retirement; notwithstanding, that a back of the envelope 4% withdrawal calculation will not work for every retiree's unique and particular circumstances.
Want a more secure retirement? Plan as if Social Security will not exist . . .
There is a great chart in this article showing how saving $500 per month (at a 7% rate of return) will enhance your retirement's success rate. At $500 per month you are only saving $6,000 per year (far below what your 401k plan allows). For example (in calendar year 2018):
Employees under age 50 can save up to $18,500 per yer in their employer sponsored 401k plan, plus any employer matches, plus up to $5,500 in an IRA; or
Employees over age 50 can save up to $18,500 per yer in their employer sponsored 401k plan, plus a $6,000 401k catch-up contribution, plus any employer matches, plus up to $5,500 in an IRA, plus a $1,000 IRA catch-up contribution.
Notably, even saving at $500 per month from the age of 25 (at a 7% rate of return), one can amass nearly $1.7M by age 70 (per the article). Not a bad a result for a small (noting that everything is relative) sacrifice! However, start at the age of 50 and you will only accrue $246K . . . it pays to help youself and your children to start saving early for retirment!
Waiting until 70 may not be the best strategy for claiming Social Security . . .
Well, according to Suze Orman just about everyone should wait until 70 years of age. I read the same AARP article as Sean and was a little concerned also by her advice. Social Security planning is not a one-size fits all solution. Waiting until 70 may make for a worthwhile mass media sound bite (and, logically, one should wait if they can afford to), but many folks can't or shouldn't wait. Why shouldn't they wait? Consider the following:
Maybe longevity does not run in your family;
Maybe you have a chronic illness/condition;
Maybe an individual can't work or can't find work commensurate with their education/experience level;
Retirees who have too much debt; and/or
Folks who are willing to accept a lower standard of living so they don't have to go to work anymore.
How much money do I need to retire?
A good article that aggregates the different websites and theories (from a percentage of your pre-tax income to 12x's your final pay) that one can use to estimate how much income they will need to retire. As a general rule of thumb, aim to save at least 12% to 15% of your gross annual income (including employer matches) each year. Also, don't forget, the more lavish one's lifestyle is during their working years, the more money they will need to accrue in order to maintain that standard of living during retirement!
Filing for Medicare can be different from filing for Social Security . . .
In order to avoid costly penalties, everyone needs to remember to file for Medicare during the seven (7) month window around their 65th birthday. Filing for Social Security can occur at the same time, but need not. Remember, every year you delay taking Social Security increases your benefit by about 8% a year. So, although you need to file for Medicare around your 65th birthday, you can delay filing for Social Security until your 70th birthday to receive your maximum allowed benefit.
In your 40's and worried about Social Security?
Social Security Crisis?
There has been a lot of talk about Social Security drying up by 2034 and what that means for individuals in their 40's and younger. However, if you are not concerned about payroll taxes and the funds acquired from the taxation of Social Security benefits being diverted away from the program, then a 21% reduction in your Social Security benefit may keep 79% of your benefit in your pocket until 2092. Not the best news, but not the worst. All the more reason to save early and often!
David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM. He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton. Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar. For more information about Mr. Hogans and his firm please see his ADV filing with the Securities and Exchange Commission (SEC) .