By Jason Price2 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited November 18, 2017.
I recently received a financial advertisement in the mail that mentioned some retirement investment risks I thought were pretty good to keep in mind. Along with each were some practical tips in mitigating the risks, or ways to make them less severe.
Before discussing a few of these risks, lets first look at the nature of risks. Risks are interesting in that that they haven’t occurred yet. But, they are potential issues that could occur in the future. As a software project manager during my day job, I know the key to good risk management is identifying risks well before they are realized, or actually become issues. If you can identify them early you can develop mitigation strategies to keep them from turning into big problems.
What’s the worst that could occur if you don’t shut down risks? Just look at people who have lost their retirement money in the stock market in the recent downturn. Or, what about the people that chose to invest in the wrong company, or with the wrong person? Still, some have created risk to their future gains by not risking enough in the way they choose their investment allocations.
Market Volatility
This particular risk is obvious. Over time the market has ups and downs. Obviously, we’ve seen the downside in the last year or so. Unfortunately, there is just no way to predict the highs and lows of the stock market. Certainly, we’d all have own our own tropical island if that were possible. 🙂
Note: you can see the changes in the market over a number of years with this interactive S&P 500 volatility chart at Yahoo finance.
Probably the best way to reduce the impacts of market volatility is to have the right asset allocation for your particular situation. Finding an asset allocation involves identifying investment classes based on a number of criteria. This criteria may include (but not limited to) how much time you have until you retire, goals, or what you’ll be doing in the future, and certainly, your level of risk tolerance.
Inflation
Inflation is basically when everything increases in price and your money buys fewer goods, or loses purchasing power. In other words, inflation makes your future retirement income less valuable, so you want to invest in something that will more than offset inflation.
Inflationrate.com provides a pretty cool calculator to see the effects of inflation across time. The example they use is alarming: From December 1957 through December 2007 the calculator will tell you that inflation was 639.56%. Something that cost $1 in December 1957 would cost $1+ ($1 x 6.3956)= $7.40. Ouch!
In order to combat inflation you commonly here the recommendation of investing in growth stocks or growth stock mutual funds to earn higher returns. Obviously, there is a trade off to keep in mind with such investments. The more you invest in growth assets, the more risk you must be able to tolerate because these types of investments are more volatile.
Investment Integrity
We’ve all heard about integrity issues in the last year when it comes to people managing investments or with individual companies. This is definitely a risk you have to keep on the radar screen as unfortunately, the world will always have greed in it. Whether it’s an individual who is dishonest with the management of peoples’ resources, or a company that is taking short cuts to try to become more profitable, there will sadly be investments wiped out when they fall.
Certainly, there are more and more controls being put in place to deal with such risks, but you have to remember you’re still the overarching manager of your money, so it’s your responsibility to mitigate this risk from occurring.
How do you do that? Well, an important and timeless guideline in investing, never putting your eggs in one basket, still applies. Don’t take your entire retirement assets and place them in the invested trust of one or a few corporations. Spread the risk and invest using mutual funds or in many companies of different types and industries.
I thought this recent Crown Financial Ministries devotional was quite fitting for this subject:
When investing, there are no sure things; so the principle of diversification is essential to long-term stability. Divide your investment money into several parts and don’t risk it all in one place. Diversify not only in different investments but also into differing areas of the economy.
Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”(Ecclesiastes 11:2 NASB).
In regards, to avoiding risks with investment managers, do your homework and research before signing up to work with someone. Find an advisor from a trusted source through your church community, or from friends who have worked with the person for several years.
What are some other forms of investment risks and how would you recommend mitigating them?
Mortgage rates surged closer to 7% this week, further worsening housing conditions for buyers.
The rate on the 30-year fixed mortgage increased to 6.79% from 6.57% the week prior, according to Freddie Mac, on expectations the Federal Reserve will hike interest rates again. For the past eight months, rates have stayed between 6% and 7% with few signs of significantly softening anytime soon.
Elevated rates — along with still-high home prices — have been a blow for homebuyer affordability and have convinced many homeowners to delay listing — worsening inventory conditions in a supply-starved market.
“Both buyers and sellers have backed off from the market because mortgage rates are so high,” Daryl Fairweather, chief economist at Redfin, told Yahoo Finance. “They’ve made homebuying more expensive. Homeowners who were able to lock in 3% mortgage rates a little over a year ago don’t want to give up those rates and are not selling.”
“So we’re seeing way fewer transactions this time of the year,” she added.
The dearth of deals was evident in other data this week.
For instance, the share of applications to purchase a home slid 3% last week from a week earlier, according to the Mortgage Bankers Association’s survey. Overall, buyer demand is 45% lower than the same week one year ago.
“Although there has been a steady flow of purchase demand around rates in the low to mid 6% range, that demand is likely to weaken as rates approach 7%,” Freddie Mac Chief Economist Sam Khater said in a statement. Khater noted that a “buoyant economy” has convinced many market watchers that more Fed hikes are on the way.
A separate study by real estate analytics company Altos Research found the number of pending sales that should complete in June and July sat at 398,000 last week, unchanged from the week prior. That’s even as inventory rose 2% or the week ending May 29.
“That could be a signal that some buyers froze as rates jumped,” Mike Simonsen, founder of Altos Research wrote in a blog post.
A home is offered for sale in the Bucktown neighborhood in Chicago, Illinois. (Credit: Scott Olson/Getty Images)
Higher rates have also left a growing share of homeowners reluctant to list this spring. Those who have put their homes on the market may find they have the upper hand against buyers.
“We had a house on the market for only a couple of days and right off the bat we had four buyers through its first day listed,” Monte Miner, real estate agent at Ironwood Fine Properties, told Yahoo Finance. “That’s a good sign that the place is going to sell at or even above expectations, but buyers won’t get the opportunity to negotiate when competition is high.”
That’s if buyers can even find a house to purchase.
For instance, an index measuring the volume of signed contracts was unchanged in April from March, even though the spring is the busiest time to list and sell a home, according to the National Association of Realtors last week.
Similarly, the number of homes that went into contract this week was down almost 5% from the previous week and down 14% from the same time a year earlier, according to Altos Research.
“We know that demand for housing has outpaced supply all year. But mortgage rates really jumped this week … There are signals that some buyers put their actions on hold,” Simonsen wrote. “If rates stay … do the little green shoots of market strength quickly wither away?”
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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By Peter Anderson3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 11, 2017.
At the end of October the IRS released their 2011 IRA contribution limits. If you have a Roth IRA (and you should), you’ll want to keep a close eye on the amount you’re allowed to contribute each year, because from time to time the amount does go up. When it does, you want to make sure to take advantage.
As we thought, the allowed contribution amounts have not changed this year, although the income phaseout limits have seen some small changes.
Contribution Limits For 2011 For Roth And Traditional IRAs
The contribution limit for the 2011 tax year is $5,000 for both Roth and Traditional IRAs, for people under the age of 50. If you’re older than 50 you can make a catch up contribution to your account of $1000, which brings your limit to $6,000.
You can contribute to a Roth IRA and a Traditional IRA in the same year, however, you need to remember that the $5000 limit is a combined total for both account types. You can’t contribute $5000 to each type, just a total of $5000 (or $6000 if you’re over 50.)
So if you contribute $3000 to your Roth IRA, you can only contribute $2000 to your Traditional IRA
Here’s a table showing the 2011 Traditional and Roth IRA contribution limits, along with the limits in years past.
Year
Age 49 and Below
Age 50 and Above
2002-2004
$3,000
$3,500
2005
$4,000
$4,500
2006-2007
$4,000
$5,000
2008-2012
$5,000
$6,000
2013-2018
$5,500
$6,500
2019-2022
$6,000
$7,000
2023
$6,500
$7,500
AGI Based Income Phaseouts For Traditional And Roth IRAs For 2011
Once you reach a certain income level, the amount you can contribute to a Roth IRA or Traditional IRA starts getting phased out, and at a certain point your ability to contribute is taken away altogether.
For Roth IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $107,000 begin to see their contribution limit drop until at $122,000 it goes away completely. The limits for Married Filing Jointly investors are $169,000-$179,000.
For Traditional IRAs single taxpayers with an annual Modified Adjusted Gross Income (MAGI) over $56,000 begin to see their contribution limit drop until at $66,000 it goes away completely. The limits for Married Filing Jointly investors are $90,000-$110,000.
IRA Type
Single
Married Filing Jointly
Roth IRA
$125,000 – $140,000
$198,000 – $208,000
Traditional IRA
$66,000 – $76,000
$104,000 – $124,000
Contributions To Your IRA Can Happen Until April 15th The Following Year
One important thing to keep in mind with IRAs is that if you haven’t already contributed the full amount to your Traditional IRA or Roth IRA for the 2010 tax year, you can still open a Roth IRA and contribute to the accounts up until tax day, April 15th, 2011.
If you do make a contribution in 2011 before tax day, make sure you specify which tax year the contribution is being made for.
Roth IRA And Traditional IRA: How Are They Different
The main difference between Traditional IRA and Roth IRA accounts is when you’ll pay taxes on the money. Traditional IRA accounts have money that is put in pre-tax. Because no taxes have been taken out yet, your distributions will be taxed in retirement.
Roth IRA contributions are made with dollars that have already been taxed. Because the money has already been taxed, it will grow tax free and not be taxed at withdrawal. I like that.
For a complete look at where to open a Roth IRA before the year is out, check out this article: Where Is The Best Place To Open A Roth IRA?
Do you currently have a Traditional IRA or Roth IRA? Are you contributing to the limit? Which account type do you prefer? Tell us your thoughts in the comments.
To remain financially responsible, everyone must pay bills on a regular basis. These bills include your house payment, Dish Network with the HD package, water bill, Sirius satellite radio and few of the other essentials out there. Unfortunately, many people do not follow the same concept was it comes to investing.
The harsh reality these people may discover is that a steady saving and investing plan is sometimes necessary to help pursue such financial goals as paying for a wedding or new car, buying a house, and funding retirement. Everybody as their own opinion on the right way to generate wealth. One approach that is often seen consistently is called dollar cost averaging (DCA).
Please keep in mind that systematic investing does not ensure consistent market gains. Dollar cost averaging is a strategy that involves continuous investment in securities regardless of fluctuating price levels of such securities, and the investor should consider their financial ability to continue purchasing through periods of low price levels.
DCA Defined
Dollar cost averaging is a technique often used in buying mutual funds in which investments of defined amounts are made on a regular basis. As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum. Consider the accompanying chart, which shows the result of investing $100 in stocks every month from January 1998 to December 2007.1
The Benefits of DCA
Month
Share Price
Shares Bought
Jan
$15
3.3
Feb
$13
3.8
Mar
$12
4.2
Apr
$14
3.6
May
$13
3.8
Jun
$12
4.2
Jul
$13
3.8
Aug
$14
3.6
Sept
$16
3.3
Oct
$16
3.1
Nov
$17
2.9
Dec
$16
3.1
TOTAL SHARES:
42.7
AVERAGE PRICE PER SHARE:
$14.25
AVERAGE COST PER SHARE:
$14.05
Other Long-Term Benefits of DCA
Another potential benefit of using DCA is that it ensures that your money purchases more shares when prices are low and fewer when prices are high. Over the long term, the result could be that the average cost you pay for the shares may be less than the average price. Assume you invest $50 per month in an investment for 12 months and every month the share price fluctuates a bit. You can see that your $600 total would have bought you 42.7 shares. The average price per share, as calculated by adding up the monthly prices and dividing by 12, would have been $14.25. However, the average cost that you would have actually paid, as calculated by dividing the total amount invested by the number of shares, would have been $14.05 per share. Over the years, this method could potentially save you a lot of money.
In addition, DCA can offer the psychological comfort of easing into the market gradually instead of plunging in all at once. Although DCA does not assure a profit or protect against a loss in declining markets, its systematic investing “habit” helps encourage a long-term perspective, which can be soothing for people who might otherwise avoid the short-term volatility of the riskier, but potentially more profitable, investments, such as equities.
And last, DCA may help you make savvy investment decisions if you stick with it. For example, if your investment rises by 10%, you will likely post big gains because of the shares you’ve accrued over time. And if it declines by the same amount, take comfort in knowing that your next investment will purchase more shares at a less expensive price – shares that may regain their value and even exceed the higher price in the future.
Regular Investing Makes Sense
While investing a lump sum at the most opportune time can potentially profit you more than if you dollar cost average your investment, defining “opportune” is difficult for even the most seasoned experts. As a long-term strategy, you may find DCA to be more appropriate to help potentially lower your average cost per share, and allow you to feel more comfortable during uncertain markets knowing that you made sound investment decisions. Keep in mind, however, that you should consider your ability to purchase over long periods of time and your willingness to purchase through periods of low price levels.
1Source: Standard & Poor’s. Stocks are represented by the S&P 500.
2Richard E. Williams and Peter W. Bacon, “Lump Sum Beats Dollar Cost Averaging,” Journal of Financial Planning, April 1993, pp. 64-67.
Read What Other Bloggers Are Saying about Dollar Cost Averaging:
Dividend Growth Investor: Dollar Cost Averaging
Digerati Life: You’ve Got Money: Invest It All or Dollar Cost Average?
Cash Money Life: Pros and Cons of Dollar Cost Averaging
A universal life insurance policy can accumulate cash value in addition to providing a death benefit. There are two basic types of universal life insurance policies you should know about. With indexed universal life insurance, the cash value can increase based on the performance of a market index. With variable universal life insurance, on the other hand, a policyholder directly invests the cash value into securities.
A financial advisor can help you determine how life insurance fits into your financial plan.
Universal Life Basics
Universal life insurance is a kind of permanent life insurance. Permanent life insurance differs from the other main variety of life insurance, term life insurance, in that permanent life insurance does not expire and part of the premium is used to build up cash value in a subaccount. Term life insurance generally costs less and is for a limited number of years but provides only a death benefit, without any cash value feature.
There are two major varieties of permanent life insurance, including whole life insurance as well as universal life insurance. With both types the cash balance in the subaccount can increase, but with whole life the growth is based on a fixed interest rate while with universal life the growth rate can vary.
Whole life premiums are also fixed. A universal life policyholder can opt to pay a lower premium during a period when cash flow is tighter, or pay more to build cash value. These policies also may also include other features, including long-term care coverage and other living benefits.
Favorable tax treatment is an important characteristic of permanent life policies. The death benefit is free of income taxes. Funds in the cash value subaccount also grow tax-free, and policyholders can withdraw funds or take loans against the cash value while still alive without owing taxes on the proceeds.
Indexed Universal Life
Indexed universal life is one of the sub-types of universal life. With an indexed universal life policy, the cash value can grow based on the performance of a stock market index. This allows for a potentially higher return than a whole life policy with a fixed return.
Indexed universal life policies typically have participation rates describing the return’s relationship to the index. A 60% return rate means the cash value will earn 60% of the return posted by the tracked index. If the index returns 10%, in this case, the subaccount will earn 60% of 10% or 6%.
However, these policies also often have caps on the maximum return. In the previous example, if the policy had a cap of 5%, the subaccount would earn 5% instead of 6%.
In addition, indexed universal life policies often have floor rates describing the minimum return the return will post. A floor of 1% means the policy will return 1% even if the index posts a negative return.
Pros of indexed universal life include the ability to get a death benefit along with tax-free growth and distributions. Policyholders can also contribute unlimited amounts and use the money at any time, which are useful advantages compared to retirement accounts such as IRAs.
Cons of indexed universal life include caps on returns along with sales, administrative and other fees which are typically higher than other investment options such as exchange-traded funds. Also, withdrawals from the cash value subaccount may become taxable if the policy is surrendered or lapses.
Variable Universal Life
Another type of universal life insurance is variable universal life. It shares many of the features of indexed universal life, including tax treatment and the ability to pay flexible premiums and accumulate cash value in a subaccount. The primary difference is how funds in the subaccount are handled.
Instead of tracking an index, the cash value in a variable universal life policy subaccount can be invested directly in securities, such as stocks and bonds. Variable universal life policies do not have participation rates, cap rates or floor rates as indexed universal life does.
The return on a variable universal life policy cash value will reflect the actual performance of the securities, without any limits up or down. This means it is possible to get a higher return than with an indexed universal life policy but also to get a lower return as well as to lose money.
Pros of variable universal life policies include the possibility of a higher return while still getting favorable tax treatment and a death benefit. Cons include the possibility of a lower return or actual loss. Variable universal life policies also typically have higher fees than indexed universal life due to the added costs of managing the investments.
IUL v. VUL: Which One Is Better?
As outlined above, there are positives and negatives for both products. Which one is best for you will largely depend on what you want to get out of your life insurance policy.
Indexed universal life can be a good choice for someone who wants a death benefit as well as flexibility in paying premiums and the prospect of a somewhat better return on the cash value than is offered by a whole life policy. Indexed universal life buyers tend to be more risk-averse than variable universal life policyholders, who are willing to take the chance of higher returns in exchange for the possibility of a loss.
The Bottom Line
Indexed universal life and variable universal life are two types of permanent life insurance that let policyholders pay varying premiums and accumulate cash value. Indexed universal life cash value can grow based on the performance of a stock index. Variable universal life cash value can be invested directly into securities. Indexed universal life typically limits both gains and losses, while variable universal life offers the opportunity for higher gains as well as losses.
Life Insurance Tips
Life insurance can be an important part of a financial plan. A financial advisor can help you select which type of life insurance works best for your situation. SmartAsset’s free tool matches you with up to three vetted financial advisors in your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s investment calculator shows you how much your investment will be worth over time assuming a constant rate of return and regular contributions.
Mark Henricks
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
Our rights as women have come a long way since we earned the power to vote on August 26, 1920.
But the financial playing field between men and women still isn’t level. Not even close.
To help you make waves in your own financial life, I interviewed several Millennial and Gen Z women to find out what financial advice they’d give to other women today
Here’s what they had to say.
What’s Ahead:
1. “Don’t be afraid to negotiate your salary.”
Anna Barker, Founder of LogicalDollar, offered me this advice.
There’s no question that it can be scary to ask for more money. Especially as women, we often internalize the feeling that we’re going to be seen as pushy or demanding if we ask for a raise.
However, various studies show this is actually one of the reasons women end up earning less over their lifetimes than men, who tend to be more likely to ask for more money.
2. “Take advantage of any employer match ASAP.”
Barker also talked with me about retirement. One of the best things that you can do for your future financial security is to start investing as early as possible.
If your employer offers any matching of your 401(k) contributions, this is basically free money and you should do everything you can to invest up to the limit of the match.
3. “Avoid high-interest debt.”
According to Barker, a big money mistake that a lot of women in their 20s and 30s make is signing up for high-interest credit cards. To be clear, credit cards can actually be a great tool if used correctly — which primarily involves paying the balance off in full by the end of each billing cycle.
The problems start to arise once those interest-free periods run out and you realize you’re not able to immediately pay off the debt you’ve accrued.
4. “It is SO cliché, so hear me out… please start saving early for retirement!”
Heather Albrecht, Financial Coach and Founder of Balance Financial Coaching, discussed this with me.
It’s hard because when you’re young, you seem to have SUCH a long time until that money is needed. But the math doesn’t lie.
Starting young makes it easier because you can save less. Gosh, I wish I had made the space in our spending plan to save earlier even though it seemed impossible. The $25 here or there would have been huge by now.
5. “Start using a spending plan or budget. Zero it out each month, and save the rest.”
Albrecht also spoke with me here. And I have to say if I had been able to get myself into the mindset of “saving money is spending money on my future freedom” at a younger age, there would have been a lot less stress at times.
Budgeting doesn’t have to be difficult, either. Just pick the right method and it’ll become just another habit.
6. “As a Millennial myself, the best money advice I would give women in their 20s and 30s is to diversify how you save and spend money.”
Siobhan Alvarez, Founder of Budget Baby Budget, shared this wisdom with me.
I am a big believer in not being dependent on one checking and savings account! I have a long-term high-yield savings account for an emergency fund, a savings account at my local bank for big purchases, a checking account for everyday expenses; and a checking account for fun purchases throughout the month.
This has helped me not only pay off a huge amount of debt over the past few years but do it in a way so I didn’t feel like I was missing out on life and fun!
7. “Protect yourself and your people financially.”
Brittney Burgett, Head of Communications at Bestow, gave this little nugget of advice. Emergency savings, disability insurance, and life insurance matter, especially if you have financial dependents.
Insurance, in particular, is more affordable to buy the younger and healthier you are. I, for example, have life insurance because I own a home.
My mom is my beneficiary, so if anything were to happen to me, the payout from a policy would enable her to continue the mortgage payments and decide later on what to do with my house — keep it, rent it or sell it. Life insurance would give her flexibility when it’s needed most.
8. “Educate yourself so you understand how money, interest, and debt works.”
Lindsay Feldman, Publicist and Founder of BrandBomb Marketing, broke down this for me.
It wasn’t until I really started reading financial books and listening to podcasts that I really began to take control over my financial situation. Understanding how money, interest, and debt works are key to being able to make your money work for you. I look at everything differently now which has empowered me to make smarter decisions.
9. “Sign up for Experian Boost. It’s free and will report monthly bills that generally don’t boost your credit like a phone bill, gas, and power!”
Feldman offered up a way for folks to finally help their credit the easy way. Experian Boost™ is free and it takes just a few minutes to sign-up.
Always be on the lookout for ways to improve your credit – it’ll only help you in the long run.
Feldman shares a great tip that can help homeowners own their home sooner (and pay wayyy less in interest). If it’s possible, work those extra payments into your budget.
11. “When it comes to money, you can have your cake and eat it too.”
Youmna Rab, Founder of Brilliantly Budgeting offered me this quote.
You don’t need to save every penny you earn and give up your favorite indulgences like spa days or dinners out.
If you make a plan for your money, you can enjoy what you like while also saving money for the future.
12. “Do not share bank accounts with anyone you’re dating but not married to, even if you live together.”
Shannon Vissers, the Financial and Retail Analyst of Merchant Maverick, shared some tough love here.
If you break up or your partner spends on things you don’t agree with, you’ll have no legal recourse to get your money back apart from suing them in small claims or court (which is expensive and stressful and may not go in your favor).
13. “Do not lease your car. Take out a loan instead.”
Vissers makes a good point here as well. A lease is essentially a very expensive car rental, and it’s a bad choice unless you’re wealthy enough to comfortably afford this luxury.
This doesn’t mean you can’t get a new car when you’re young. Rather than leasing a car out of your price range, opt to finance a cute, reliable car that you’ll own in three or five years (ideally three). You’ll build credit history this way and, in a few years, you won’t even have a monthly car payment.
14. “Be a minimalist, especially if you rent.”
While this tip may not be for everyone, there’s a good reason Visser’s offers this pearl of wisdom as well.
A good case can be made for spending on experiences when you’re young – trips, concerts, etc. — but overspending on retail goods is another story. Ever heard of the saying, what you own, owns you?
It’s true.
Remember, you’ll have to deal with all your clothes, shoes, furniture, kitchen items, knick-knacks, etc. the next time you move — and your headaches will be compounded if you have to move to a smaller place.
15. “The greatest gift you can give yourself is to save and invest early.”
Sarah Jane Paulson, CFP® at Valkyrie Financial, gave me this bit of guidance.
The classic pay yourself first mentality is the easiest way to a financially strong future. Build that emergency fund (or F*** You fund, if you prefer) of three to six months worth of expenses in a separate account other than your everyday checking.
Then go out and open an IRA or Roth for yourself. Put your money into cheap, diverse index funds and keep adding to it. The greatest money strength you have on your side is that you have years for the market to create an avalanche out of the first few snowflakes of money you invest.
16. “Becoming a financially grown-up woman means unlearning a lot of money lessons society taught us as girls: that men are better at money and math (they’re not), that investing is scary (it’s not), and that the best route to financial stability is to marry a high earner (absolutely not!).”
Sara Rathner, credit cards expert at NerdWallet, wanted to share this with other women.
So throw all those old lessons in the garbage, because that’s where it belongs. Now, today, learn everything you can about managing your finances on your own.
There is nothing more empowering than being the boss of your own life, and of being an equal partner in your relationships. No one will ever care as much about your money as you will.
17. “Surround yourself with people with similar money values.”
Sue Hirst, Co-Founder and CFO of CFO On-Call shared her experience when we talked.
When I was in my 20s, I used to hang out with many people who didn’t share my money values. As a result, almost every time I went out with my friends, I splurged money recklessly due to peer pressure.
This was one of the top reasons I was unable to save as much money as I would have liked each month. Looking back, I wish I had either told my friends directly that I wasn’t comfortable spending huge amounts of money routinely, or made new friends whose financial values aligned with my own.
18. “Make saving a habit as soon as you start making income.”
Imani Francies, Finance Expert at US Insurance Agents, shared this little mind shift.
Saving becomes easier when you look at yourself with the same significance that you look at your power bill or any other bill. No matter what, you are going to do your best to pay your power bill. You should feel the same way about putting money into your savings.
Paying yourself first every month is investing in your future. Even if you can only put $5 into a savings account once a month, start early.
19. “Budget, but give yourself room to indulge.”
Lisa Thompson, Savings Expert at Coupons.com, offered up ALLLL the good tips when I spoke with her.
What’s your weakness: designer handbags, weekend getaways, fine dining with a great bottle of champagne? Make room for things you love by controlling what you spend in other areas.
20. “Cash back offers are everywhere, from brands like Rakuten, to credit card perks, to apps like Coupons.com. Use them!”
Thompson also offers this bit of advice. Refuse to pay full price for anything until you’ve looked for an offer. If you can pair a coupon or cash back offer with a store discount or sale, bam! That’s a savvy way to shop.
21. “Learn to use credit cards wisely.”
To tack on, Thompson also had this to say.
She makes a good point, too. Today, there are so many options for credit cards that offer perks from cash back to miles to points, as well as incentives, like a free Dash Pass for DoorDash or money toward a Peloton membership. The key, of course, is to not carry a balance and pay so much interest that it cancels out the perks. But if you can learn to use credit cards wisely by paying them off each month, the perks and incentives can help make everything from dining out to travel more affordable.
22. “Get a side gig by turning a passion into a money-making opportunity.”
Finally, Thompson ended our conversation with the quote above.
Do you love essential oils? Make balms, rollerballs, and pillow sprays, and sell them on Etsy or at pop-up shops.
Do you love thrifting, going to estate sales, and visiting antique shops? Find items worth more than what you’re paying and resell them! Facebook Marketplace is the perfect spot for that, and it’s free.
If you can turn a hobby into a source of income, that’s extra money for you to invest, save, or use as your slush/entertainment fund.
23. “Know your worth and advocate for yourself when negotiating.”
Amy Maliga, Personal Finance Consultant at Take Charge America, tells it like it is with her wise advice above.
Since the gender pay gap is still a real thing (ugh), it’s important to do your research on salaries for your position and advocate for yourself when negotiating a new job or discussing your annual performance review.
24. “Set goals and actively work toward them.”
Maliga offered me a simple but strong piece of advice above.
Whether it’s buying a home, starting a business, or embarking on world travel, setting financial goals gives a structure and framework to how you plan your finances.
25. “Forget FOMO. Don’t be afraid to say no.”
Maliga also makes a good point here.
TikTok made me buy it – or did it?
It’s way too easy to shop these days, and social media knows exactly what it takes to get you to press “add to cart.” When you’re tempted to buy something you hadn’t planned on, or friends are trying to talk you into activities you can’t afford, keep those long-term financial goals in mind, and don’t be afraid to say no.
Summary
We celebrate Women’s Equality Day every August 26th to commemorate the day the 19th Amendment finally recognized that women have the right to vote. But that same equality hasn’t trickled to the financial space yet, where the gender pay gap, wealth gap, and investing gap still exist today.
We’ve made a lot of progress over the decades, but a lot still needs to happen at the company, state, and national levels to achieve equal pay and equal opportunities for equal work. Until then, I hope these financial tips from awesome Millennial and Gen Z women serve as inspiration for how you can up the ante in your own financial life.
Are there any tips you’d add to the list? Let me know in the comments below!
As unemployment numbers continue to rise, many employees are stressed about whether they’ll have a job next week or not. Some have already, some have already lost their jobs and are scrambling to find new employment. In this time financial planning is crucial. This is a time when people are feeling and are desperately in need of guidance. If you think that you are about to encounter a layoff, you need to be focusing your attention on what can be controlled: cutting expenditures, figuring out emergency funds, evaluating how to replace lost benefits, and making a game plan for the job search.
1. Save Emergency Cash
For those that are still employed but the future of their job is uncertain, I would encourage them to have at least 12 months of savings in cash. Unfortunately many will not have enough. But if they’re still employed and the emergency funds are not there, tapping into their 401(k) might be a viable option. I know what you’re thinking. Tapping into your 401k usually goes against all that I stand for. And with this dismal market, it might be a dangerous move, but; if they become unemployed that option might now be available to them.
Typically if you’re still employed you’re allowed borrow up to half of your 401(k) balance, up to a maximum of $50,000. Running these numbers you can guesstimate the period of how long you think it will take you to find a new job and then how much you would need to borrow to get you by until the new job is made. If you borrow from your 401k while you are still employed then you avoid the 10% withdrawal penalty. Sure there is some speculation in this move, but if you’re in a high demand field you may be able to use this move to your advantage.
Warning: If you do this, be sure to double check with your employer when you are due to pay it back. It tends to vary from employer, but it could be due back immediately, within 60 days or some period greater.
2. Don’t Pay Off Debt
Another common misconception of after being laid-off is that most people want to take their savings or take their retirement savings and pay off debt, such as credit cards or even the 401(k) debt. But in this type of market, paying off debt should not be the priority especially if you are unemployed. The priority is to keep get your savings intact and making sure that you have plenty of cash on hand. Sure credit card debt is bad, but just focus on making the minimum payment until you get your job situation in check.
3. Focus On Crisis Budgeting
If you’re used to going to shopping every weekend or eating out every other night at fancy restaurants, then most likely those changes are just around the corner. You need to sit down and seriously hammer out a budget of things that you need and things that you don’t need.
You may even consider working out two budgets, one for while you’re working and one for when you’re not working, so that way you can truly see how much you’re spending per month. And then, you can contemplate whether you can go on a cheaper cell phone plan, or cut your cable bill services. Sometimes adding that extra payment per month might not seem like a big deal, but $50 here and $50 there will surely add up, especially on a limited budget. Also, too, knowing which expenses you absolutely must be covered will help you realistically search for your future job.
4. Replace Lost Benefits
In the aftermath of a job loss, people should take stock of what benefits have been lost, which ones you are entitled to by law, and which ones may be portable. how to continue health care coverage, especially if there are dependents.
Typically, employees are eligible to keep the same coverage through COBRA for at least 18 months. But, they may have to pay 102% of the cost of their insurance premium. If there premium have been subsidized by their employer, then that cost will be a rude shock. COBRA can often be a good bridge choice, but it ends up being a health benefit. Families paying $200 a month for insurance under COBRA, it could be $1,000. Luckily, the government just passed new law concerning COBRA benefits that qualifying period will be only responsible to pay for 35% of the benefit. This comes at a time that should be very helpful to many that are facing layoffs ahead.
Many employers offer life insurance, long-term care insurance, disability policies and they may be portable as well. For another person or one who is not in good health, ability to take over the payments on existing $100,000 life insurance policy may save the worry of having to find another carrier. It’s better to keep it for a few months, although make sure they don’t need it, and drop it later.
5. Consider a Career Transition
Many people will be forced by an unforeseen job layoff to reassess what they want in their lives and what is meaningful to them. They may have to craft resumes, cover letters for the first time in years, and feel at a loss especially if they are switching to a new career path, which is an unfamiliar field.
If you haven’t jumped on the social media bandwagon, it’s time. Consider Facebook, LinkedIn, Twitter and other social media sites to reconnect with old networks and also create new ones. The more people that know your situation the better. Also, consider starting a blog to showcase your talents. Need a good blog for inspiration? Guess what, you’re already here.
When Mary Krewsun, 65, retired as a physician assistant, she set a goal of traveling because now she has the time. During five days, she walked for 100 kilometers (about 62 miles) along the ancient pilgrim route known as the Camino de Santiago, which culminates in northwest Spain.
“I had heard about the Camino from a cousin who did it, and I was like, ‘I’ve got to do that; that’s going on my bucket list,’” said Krewsun.
She and two friends skipped the hostel route and booked stays in boutique properties, with someone bringing their bags from place to place. “I didn’t want to sleep in a dorm with 15 men snoring,” Krewsun said.
It was the trip of a lifetime, even if her feet sometimes hurt. “I figured, ‘You better do this now while you still can,’ and I am glad I did,” she shared.
Krewsun is not alone in her retirement goal of seeing more of the world. During the pandemic, retirees, like everyone else, delayed travel. Whether it’s a close-to-home road trip or a once-in-a-lifetime international extravaganza, retirees are playing a huge role in the travel surge that’s expected to continue through summer 2023.
A majority of adults (62%) age 50 and over will take at least one vacation in 2023, and most will take between three and four trips, according to a recent survey by AARP.
You have time, and you have money saved, but where to go? Here are some retirement trip ideas to get you started.
Around-the-world cruise
Cruises of two months or more are selling swiftly, so much so that there are cruise lines offering world cruises for the first time. The flashiest is Royal Caribbean, with a record-breaking nine-month itinerary that covers 65 countries on seven continents. The inaugural ship departs in December 2023.
The idea for such cruises is seeing the world in one fell swoop, though often the term “world” is used loosely. Most don’t visit every continent but combine several iconic places. You might, for instance, cruise from Southampton in the United Kingdom to Dubai, Singapore, Melbourne and Cape Town on Cunard, which offers 100-plus day world cruises each year on ships that include Queen Mary 2. In 2024, Queen Mary 2 will visit Europe, Africa and Australasia on a 108-night World Voyage.
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Upscale Oceania Cruises has Around the World in 180 Days itineraries, while ultra-luxury line Silversea introduced the concept of a soft-adventure, expedition world cruise from pole to pole. If you’re considering a world cruise, be ready. Start studying the possible itineraries. Then, learn when bookings will open for sale. They tend to sell out fast, sometimes even in a day.
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Family reunion
For retirees determined to get to know the grandkids better, family reunion trips afford bonding opportunities and can become the stuff of family lore — as in, “Remember when grandpa thought he caught a big fish and it was just a clump of seaweed?”
Depending on how you, the kids and grandkids like to travel, you might take the family to a Disney resort, book a condo at a ski destination, stay at a dude ranch, or charter a yacht in the Caribbean.
You might choose a stay at an old-fashioned resort such as the Omni Mount Washington Resort in Bretton Woods, New Hampshire, or the Grand Hotel on Mackinac Island in Michigan, which includes an excuse to dress up for dinner — and an opportunity to distract the grandkids from their iPads with old-school activities like lawn games.
A good plan is to throw out a few destination ideas and see where your family lands.
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Follow your passion
Retirement is a time when you might want to pursue your specific interests, and some of those interests may prove great themes for travel. If your goal is improving your golf game, plan that dream trip to St. Andrews Old Course, Royal Dornoch and others which are among the best courses in Scotland.
Improve your sipping skills on the Kentucky Bourbon Trail or on a wine-themed river cruise through Bordeaux. Or splurge on a luxury driving trip, such as a six-day Porsche Travel Experience driving a Porsche 911 on mountain passes across the French Alps — a package that includes a stay in a luxury Alpine “igloo” and a helicopter flight over Mont Blanc, Europe’s highest mountain.
Walk the world’s great treks
You might, like retiree Krewsun, want to look at a shortened “Camino in Style” hike along the famous 500-mile Camino Frances pilgrim trail, which she booked through Macs Adventures. If you’re super fit, do the whole thing over some 35 days.
There are other amazing hikes to consider in destinations around the world. They include the moderately strenuous Kungsleden (The King’s Trail), about 273 miles through northern Sweden, or the highly strenuous 26-mile Inca Trail, gaining 13,838 feet in elevation, over four days, to the mystical Incan citadel of Machu Picchu. Companies such as Wildlife Trekking and Country Walkers have an array of organized group treks.
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Book a bike trip
Appropriate for active retirees, bike tours run the gamut from leisurely to extreme. You’ll want to carefully choose your level and route. On the easy end, companies such as Backroads and VBT now have the option on select tours in the U.S. and Europe of using e-bikes.
You may pedal or e-bike through Switzerland, Germany and France, for instance, on VBT’s Black Forest and the Alsace Wine Route itinerary. If you’re looking for a challenge, a Backroads trip through the Canadian Rockies, from Banff to Jasper National Park, allows experienced cyclists to opt on select days for Level 4 or 5.
While the Level 2 members of your group might do 22 miles near scenic Lake Louise, Level 5 that day is an 86-mile ride with a 5,800-foot elevation gain. Both companies also have well-planned self-guide bike tours you can do at your own pace.
Live like a local
Since you’ve got time, consider planting yourself in one place for several weeks, rather than doing a fly-by of various destinations. Staying in an apartment or house, cooking some of your own meals, shopping at markets, mingling with locals and immersing yourself in the local scene is a rewarding experience — never mind that you might hear references to “the Americans” as you walk down the main drag of a small town in Italy.
Before Airbnb and Vrbo, it was harder to find a decent place to stay in, say, bohemian Le Marais or along the glitzy Amalfi Coast. That’s not the case anymore. Plug-in your dates and how many rooms you need, requesting high-speed internet, a washer/dryer, or whatever you want. Carefully read the ratings and reviews of previous travelers to compare options and you’re good to go.
Take that once in a lifetime adventure
Perhaps you’ve put off that longer “bucket list” adventure trip to see penguins in South Georgia and Antarctica, or to go snorkeling in the Great Barrier Reef, or maybe see the Big Five on a safari in Africa — all because you haven’t been able to get the time off from work to do it. What’s stopping you now?
Closer to home, Alaska is a destination that you’ll want to take the time to explore on land and sea, for a minimum of two weeks but probably more, unless you expect to return again at a later date.
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Go on a road trip
A big road trip is something else you’ve put off because of time constraints. Consider such extraordinary drives as a national parks route through Arizona and Utah, a plan to see California from San Francisco to San Diego, or a 600-mile journey on the Pacific Coast Highway.
Another drive is on Route 66, perhaps a two-week, 2,400-mile trip from Chicago to Santa Monica, lingering at state and national parks, trading posts and such iconic sights as the Milk Bottle Grocery in Oklahoma City and Cadillac Ranch in Amarillo, Texas.
Another must-do multi-day drive is the 469-mile Blue Ridge Parkway – the roadway through Virginia and North Carolina that the National Park Service refers to as “America’s Favorite Drive.” Farther afield is the 825-mile Ring Road that circles Iceland.
If you need even more time to pay off your mortgage
Or need to get the monthly payment down to boost affordability
A 40-year fixed mortgage could be one alternative to consider
But they’re harder to come by these days and aren’t well-suited for everyone
Every now and then, I take a look at a specific mortgage product to determine if it could be a good fit for a prospective (or existing) homeowner.
Today, we’ll discuss a formerly popular home loan option, the “40-year mortgage.” It was all the rage during the prior housing boom in the early 2000s.
But also partially to blame for the housing crisis that took place shortly after.
Still, with mortgage rates now double what they were to start the year, they could make a resurgence.
What Is a 40-Year Mortgage?
A 40-year mortgage is a home loan with a loan term that lasts for 40 years. This is 10 years longer than the typical 30-year loan term attached to most mortgages.
You may already be thinking, “40 years? I thought mortgages had terms of 30 years?” Is this a mistake?
Well, you’d be mostly right. The majority of mortgages issued today do have terms of 30 years. It’s certainly the most common loan term out there.
In fact, aside from 30-year fixed mortgages, which clearly last for 30 years, as the name implies, most adjustable-rate mortgages also have terms of 30 years, despite lacking any reference to 30 years in their title.
So that 5/1 ARM or 7/1 ARM you’ve got your eye on still has a 30-year term, meaning it’s fixed for the first five or seven years.
It then becomes adjustable for the remaining 25 or 23 years, respectively. This is one reason why consumers have a great amount of difficulty understanding mortgages.
Only the 15-year mortgage and 10-year fixed come with different loan terms, 15 and 10 years respectively.
Why Go With a 40-Year Mortgage Term?
It’s an extra 10 years over the typical 30-year loan term
Offered as a means to lower monthly mortgage payments
This can make the home loan more affordable or allow money to allocated elsewhere
But it will also lead to a lot more interest paid over the longer term (and a slower payoff)
Okay, so we know the 40-year mortgage bucks the trend, and adds 10 years on to the standard mortgage term. But why?
What’s the point of paying a mortgage for an extra decade? That sounds like a literal lifetime commitment. Especially since 30 years is already way too long.
Well, the longer a mortgage amortizes (is paid off), the lower the monthly mortgage payment.
Essentially, payments are stretched out over a longer period of time. Instead of 360 months, you’re looking at 480 months.
Let’s look at an example of a 40-year fixed mortgage:
As you can see, the monthly mortgage payment on the 40-year mortgage is roughly $105 less each month thanks to that longer period of time to pay it off.
That extra cash could be used to pay off student loans, credit cards, personal loans, and other higher-APR debt you may have.
Or it could be allocated toward a different investment or retirement account. It could also make a real estate purchase slightly more affordable.
The bad news is you’ll pay much more interest over the life of the loan, and it’ll take a very long time to build a meaningful amount of home equity.
If you use a mortgage calculator, make sure it’s set at 480 months. And pay close attention to how much interest is paid versus a loan with a term of 360 months. It’ll be an eye-opener.
In the example above, it’s about $150,000 more in interest for the 40-year mortgage, assuming it’s held until maturity.
40-Year Mortgage Rates Are Slightly Higher
Expect 40-year mortgage rates to be slightly higher than interest rates on 30-year fixed mortgages
How much higher will depend on the lender in question and your unique loan scenario
You essentially pay a premium to lock in an interest rate for an additional 10 years
And the slower payoff means you must pay a higher rate of interest to the bank/lender
You may have also noticed that the mortgage rate on the 40-year mortgage in my example is 0.25% higher than the interest rate on the 30-year fixed. There’s a reason for that.
Simply put, you pay a premium for a longer amortization period. This is the opposite of a 15-year fixed, where you receive a discount for paying your mortgage off faster.
After all, a bank or lender is willing to give you a fixed rate for four decades, so they’re going to want a slight premium in exchange for all that uncertainty.
In other words, expect 40-year mortgage rates to be slightly more expensive. It might only be .125% higher than the 30-year, but could definitely range from bank to bank. The bigger problem is finding a lender that offers the product to begin with.
That being said, the short-term savings can increase how much house a buyer can afford, and also make qualifying easier (or even feasible) if a borrower’s debt-to-income ratio is too high for a 30-year mortgage. That’s assuming the lender qualifies the borrower at the 40-year loan payment…
This is essentially why a borrower would go with the 40-year fixed – to buy more house or make their home loan more “affordable.”
More aggressive borrowers could even invest that $105 each month in a high-yielding retirement account and essentially try to beat the relatively low interest rate on their mortgage.
Nowadays, a 40-year mortgage term may even be part of a loan modification program to make payments more affordable for a struggling borrower.
When combined with an interest rate cut on their current mortgage, the combo can help a borrower stay put in their home for the long haul.
The Downsides of a 40-Year Mortgage
Loan is paid much back slower (harder to build equity)
Most of the mortgage payment consists of interest
May not be much cheaper than a 30-year fixed when all is said and done
And they’re not easy to find these days but that could change if rates remain elevated
While the benefits of a 40-year mortgage sound good, a borrower who chooses to go with a such a loan is paying a premium to do so.
As mentioned, they are higher-rate home loans, so that cuts into the payment “discount” afforded by a 40-year mortgage.
And while the monthly mortgage payment might be lower, the total interest paid over the full loan term will be much higher, which makes one question whether $100 or so in monthly savings is worth it.
On smaller mortgages, the payment different will be even more negligible. It may also be difficult to find a 40-year mortgage, since not all lenders offer them.
In fact, the Qualified Mortgage rule outlawed loan terms longer than 30 years, so 40-year mortgages aren’t even QM-compliant.
That means you’ll probably need to go with a specialty mortgage lender or portfolio lender if you want one.
Additionally, a longer amortization period means you’ll build home equity a lot slower, which could prove to be an issue if you need to sell your home or refinance in the future and your loan-to-value ratio is still sky-high. This could be the case if you come in with a low down payment.
Some Benefits to a 40-Year Mortgage
Could be a good short-term solution if you need monthly payment relief
Or if you don’t plan on staying in the property for very long
Those who wish to use their money elsewhere might be attracted to the program
But keep in mind that you pay for the privilege of a longer term via a higher interest rate
One could argue that most homeowners don’t stick with their mortgage full term anyway, let alone for 10 years, so why pay more each month? Or worry that it’ll take forever to pay it off?
A 40-year mortgage could also serve as a good alternative to an interest-only home loan, the latter of which won’t build any equity, and could eventually land a homeowner in an underwater position.
These mortgage types are also safer than an ARM (assuming it’s a 40-year fixed rate), which can adjust higher once the fixed period comes to an end.
So you won’t have to contend with any interest rate adjustments, which could make it easier to sleep at night, especially if you’re a first-time home buyer.
As always, do plenty of homework (and math using a mortgage calculator) and consult with a loan officer or mortgage broker to determine what’s best for you and your unique situation.
Tip: You may come across a “40 due in 30” as well, which is essentially a 30-year balloon mortgage that amortizes like it has a 40-year term.
That keeps monthly payments low, but the balance due at 30-year mark. Again, most of these probably aren’t kept full term, so it might be moot.
Is a 40-Year Mortgage a Good Idea?
Some say you should only buy a house if you can afford a 15-year mortgage. So if we’re talking a 40-year mortgage, which is 10 years beyond the standard 30-year fixed, it might be a red flag.
It may reveal that you aren’t qualified for the mortgage in question, at least from a traditional, more conservative standpoint.
Of course, there are exceptions to every rule, and it depends why a homeowner would seek out this type of financing.
They might want to deploy their cash in other places where its yield is higher than the rate on a 40-year mortgage.
At the same time, for the typical home buyer, a 40-year loan probably isn’t the best idea because so much more interest is paid throughout the loan term.
And it takes a significant amount of time to pay off the loan. But every situation is unique.
Are 40-Year Mortgages Available?
One last thing. As noted above, you might have difficulty finding a 40-year mortgage because not many lenders offer them.
So they might not even be available to begin with, which stops the debate in its tracks. Before you spend too much time thinking about getting one, maybe see if anyone offers them.
The reason they’re scarce is mostly because the Consumer Financial Protection Bureau (CFPB) outlawed loan terms beyond 30 years on most residential home loans.
You can still get one, but it won’t be considered a Qualified Mortgage (QM). And only big banks and niche non-QM lenders offer such products, typically at a premium.
So even if you find one, the pricing might not be great given the lack of competition. At the end of the day, you might be better off with a more traditional loan program instead.
A vesting schedule is a way for your employer to give you some incentive to stay with them.
To be 100% vested means to be able to take all of your retirement benefits with you if you leave or have been fired.
Depending on what type of plan you have- pension or 401k- will determine your vesting schedule.
Let me make something clear. What you contribute is always yours. The vesting schedule pertains to what your employer contributes e.g.; the 401k match. Here’s a look at the two different vesting schedules:
Defined Benefit (Pension) Plan
Pension plans are a dying breed but some people still have them. Defined benefit plan must vest at least rapidly as one of the following two schedules, assuming the plan is not top-heavy. Top-heavy has to do with making sure that each employee receives a fair share of retirement benefit as it relates to their salary.
Five-year cliff vesting, no vesting is required before five years of service. 100% vesting is required at five years of service. Referred to as a five-year cliff.
Three to seven-year graduated or graded vesting. The plan must provide vesting that is at least as fast as the following schedule:
Years of service
Vested Percentage
3
20%
4
40%
5
60%
6
80%
7
100%
So in the example above, if the employer uses the graded vesting schedule and you have been employed for 5 years, then you’ll be able to take 60% of the employer’s benefit with you.
At my previous firm, I was offered a small retention package to stay (not nearly what the boys at Merrill got) and it had a 7 year vest attached to it. Needless to say, I gave it up and started my own firm.
401k Vesting Schedules
Defined contribution plans must vest at least as rapidly as one of the following two schedules for all employers non-elected contributions and matching contributions:
Three-year cliff vesting. No vesting is required before three years of service, 100% vesting is required upon the completion of three years of service.
Two to six-year graduated or graded vesting.
The plan must provide vesting at least as fast as the following schedule. Note: These are the same vesting schedules used to top-heavy defined benefit plan.
Years of service
Vested Percentage
2
20%
3
40%
4
60%
5
80%
6
100%
The employer may choose a vesting schedule that is more favorable to the employee, but not less favorable than the cliff.
Example: ABC Company offers a 401(k) plan that has an employer match. The company has the following vesting schedule with respect to matching contributions: 25% vested after one year, 50% vested after two years, and 100% vested after three years.
Although the vesting schedule does not exactly match the vesting schedules posted above, it is acceptable because it’s more favorable to the employees than the vesting schedule listed above.
All years of service must be counted with few exceptions. Two of the more common exceptions are:
Years prior to the implementation of the plan.
Years prior to the age 18.
Both years prior to the implementation of the plan and years prior to age 18 may be considered at the choice of the employer, but it must be in the plan documents.
Employer contributions are 100% vested when:
Plan termination. Benefits become 100% vested in the event of a plan termination.
SEP, SARSEP, and SIMPLE IRA’s. All contributions to these are fully vested.
Attainment of normal retirement age. In the event of an employee attaining normal retirement
Under a 401(k) plan, elected deferrals, qualified non-elected contributions, and qualified matching contributions are 100% vested at all times.
Safe Harbor contribution is to a Safe Harbor 401(k) plan.
Plan requires two years of service for eligibility.
It’s very important to understand your vesting schedules when you start with a new employer. That could make the difference of walking with a good chunk towards your nest egg or walking away with nothing. Be sure to check your benefits manual and ask your human resources department the right questions.