Being a financial planner comes with a certain amount of stress.
Most would contribute the schizophrenic stock market as the leading culprit of the high stress levels.
And that is absolutely correct. Dang you market!
Coming in at a very close second is helping a client strategically plan for their early retirement.
What do I define as an early retirement?
Any client that is retiring before they can attain social security (and don’t have a pension). Trying to help ease the income needs for retirement puts added stress to make sure they don’t run out of money in their golden years.
An additional level of stress occurs in making clients stick to the plan.
Too often clients start viewing their retirements accounts as ATM machines, and I have to make sure they don’t get too crazy with their spending habits.
Oh yes, early retirement can be very stressful for all parties involved.
The BIG Mistake
When it comes to making the biggest mistake in retiring early, I’ve seen it done countless times and it can be a very costly one.
So, what’s the big mistake? Let me illustrate by sharing a recent conversation I had with an individual that had recently changed jobs and had to make a decision with his old 401(k).
This individual was 50 years of age and had a decision to make with his 401(k). He had been at his previous job for a number of years and his 401(k) had collected a nice sum of approximately $500,000. He was trying to make the decision whether to roll the 401(k) to his new 401(k) or roll it over to an online brokerage like TD Ameritrade or E*Trade. In the conversation, I could tell a lot of his focus was on fees, where to invest the money, access to the money, etc.
The one part that he failed to consider is what happens if he wanted to retire early. After some initial fact finding, I asked a simple question:
Do you plan on retiring early?
He quickly shot back and said
“Yes, my hope is that I can retire somewhere around the age of 57.”
That simple statement leads to ultimately the biggest mistake that many people make when changing jobs and retiring early. A little known IRS rule allows folks that retire early, starting at the age of 55, to take premature distributions from their employer sponsored plan while avoiding the 10% early withdrawal penalty.
How is this all a mistake? The mistake has everything to do with the technicality of the term “employer sponsored plan”. Employer sponsored plan would include your 401(k), 403(b), TSP, or 457. What that does not include is your IRA’s.
That’s right, your IRA, according to the IRS, is not an employer sponsored plan, so if you roll that over into an IRA, you lose the ability to take out your money and avoid the 10% early withdrawal penalty. And the last time I checked, no one likes to pay a 10% penalty just for the fun of it.
Had this individual rolled over his 401(k) into an IRA, he lost this inherent gift from the IRS.
Not Just About Job Change
It doesn’t just have to happen when you change jobs. I’ve seen several people that prior to working with me had retired early and rolled their 401(k) into an IRA not knowing about the 10% free withdrawal rule. Unfortunately, the majority of the time that I’ve seen it, the individual is working with a financial advisor that failed to disclose this. Either the advisor wasn’t up to speed on the rules, or I think their eyes were on the prize, meaning that they would only get paid if that client rolled over the money into an IRA that they managed. Do I have proof? No, just call it a hunch.
If you’re planning on retiring early, please keep in mind that to avoid paying an unnecessary 10% early withdrawal penalty, you must leave your money in the 401(k). Don’t make that mistake.
Note: Within in IRA, you are allowed to take premature distributions if you follow rule 72t or meet certain conditions. 72t is a more complex planning strategy that ties up your money for a minimum of five years. If you want more rules about 72t, feel free to check out another post where I wrote about the 72t rules and ways to avoid penalty on withdrawals from your IRA.
Are you planning on retiring early? Have you thought about rolling your 401k into an IRA? If so, be careful!
Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
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Save on Parenthood: Skip These Baby Gear Money Traps
Save more, spend smarter, and make your money go further
When it comes to saving for the future, the most commonly asked questions are “what funds should I choose for my 401(k) or IRA?” and “how much should I save per month?”. If you’re like most people, you likely zero your focus in on the former. However, in the grand scheme of things, shifting your focus to how much money you should be saving per month is the smarter, more efficient way to build your funds.
Every month, some money is added to (or subtracted from) your 401(k) or IRA due to factors beyond your control. Your stocks go up or down. A bond fund pays a dividend. In short, market stuff happens and with every month, you add some money to your account. If the amount of money you add is bigger than the effect of the market fluctuations, then your savings rate becomes significantly more important than your investment performance.
What is the savings rate?
Your savings rate is the amount of money you save every month expressed as a percentage or ratio of your overall (gross) income. The higher the savings rate, the more money you save per month. Your savings rate is often regarded as one of the most critical elements of your long-term financial planning. It’s also one of the few factors you can directly influence by making strategic choices. Ultimately, your personal savings rate can be one of the most telling percentages to account for when assessing your retirement savings success.
According to a 2005 Federal Reserve data report, the U.S. personal savings rate hovered between 2.5 and 3%. This rate is alarmingly low and indicates that it could take nearly 40 years of saving to equate one year of living savings in retirement. This past national average also signals back to the previous point— in 2005, more people were focused on building their retirement accounts than actually stashing away disposable income for future planning.
How to calculate your savings rate
Using the savings rate formula is a simple three-step process:
Add up net savings
This should include all non-retirement savings and your retirement savings for the year (including employer retirement contributions). This number could very well end up being negative if you had net debt rather than net savings for the allotted time period. For example, taking a withdrawal from any savings account or taking a loan from a savings account would be a reduction against anything you saved.
Calculate total income
Add your total take home pay plus any pre-tax savings (including employer contributions).
Divide total net savings by total income
Take your total net savings from Step 1 and divide it by your total income in Step 2. Multiply the outcome number by 100 to convert it to a percentage.
Example: You make $50,000 a year and you save $5,000 to your 401K. You had to withdraw $1,000 from your Roth IRA earlier in the year to pay for an unexpected expense but you added $500 back to your Roth IRA by the end of the year. Your employer also contributes $2,500 to your 401K for you.
Your net savings is:
$5000-1000+500+2500 = $7,000
Your total income is:
$50000+5000+2500 = $57,500
Your Savings Rate is:
$7000/57500 = 0.1217
0.1217*100 = 12.17%
What influences the savings rate?
From the state of the economy and fluctuations in market interest to age and wealth, there are a number of different factors that directly influence the savings rate.
Economic factors, such as economic stability and personal earnings, are critical for the calculation of savings rates. Intervals of extreme economic volatility, such as recessions and global crises, typically lead to a rise in investment as consumers minimize their usual spending habits in order to brace for an unpredictable future. However, on the opposite end, periods of exponential economic growth can also build optimism and trust that stimulates a comparatively higher percentage of consumption.
Income and wealth significantly affect the savings rate because there is a positive correlation between the per capita gross domestic product (GDP) and savings. Generally speaking, low-income households tend to spend the majority of their income on everyday essentials and needs as opposed to wealthier people who can afford to stash away regular portions of their income toward saving for the future.
Shifts in market interest can also have an impact on the savings rate. Higher interest rates may lead to lower average spending and higher investment levels. This is a result of the substitution effect— being able to spend more in the future outweighs the revenue effect of retaining existing income earned from interest payments for most households.
Personal savings rate example
To give a more concrete understanding of personal savings rate, let’s use a real-life example to better illuminate the purpose and meaning of this percentage. Say there are two people who work at the same job with exactly the same pay. One saves 5% and earns 10% annual returns while the other saves 10% and earns 5% annual returns. Based on the personal savings rate calculation, it will take over 25 years for the employee with the 10% return to come out ahead.
There are two key lessons here you can take away. First: on your first day of work, immediately save 10% of your gross pay and keep doing so forever. Mathematically, if you are employed and working for 45 years starting at age 20 and you consistently stash away 10% of your income, you’ll end up with enough money to retire comfortably.
The second lesson: if you hit the middle of your career and are still making avoidable investment mistakes like market timing, day trading, and performance chasing, consider changing your strategy. It’s a much more worthwhile venture to learn how to diversify your portfolio and keep costs and risk as low as possible to properly build a financially stable future.
How to increase your savings rate
Bolstering your savings rate is primarily about strategic budgeting, but there are a number of different elements to consider when creating a plan to improve your personal savings rate. Use the tips below to get a head start on building your savings rate.
Tip #1: Cut your spending
It’s vital to examine your current budget and evaluate the areas in which you may be able to cut costs. Identifying these places where you can eliminate ensures that you have ample opportunity to dedicate more of your monthly income toward savings. Every dollar counts, so when going through your budget, be meticulous and intentional about any spending shifts to maximize your saving potential.
Tip #2: Increase your income
The best way to save more money is by making more money. Though that is far simpler said than done, there are a few easy ways you can increase your income without making any significant changes to your existing lifestyle.
Consider the following:
Tip #3: Automate your savings
Instead of depending on yourself to remember to stash away a certain amount of money toward your savings account, introduce yourself to automated saving. One of the simplest ways to do this is by setting up automatic recurring transfers. The moment you get paid, a specified amount of cash will transfer into your savings account, no manual switching needed.
What about investments?
How many people do you know who started saving for retirement at age 20 and haven’t been unemployed, or taken a 401(k) loan, or gone off to India in search of themselves, before they hit age 65? In their 2011 retirement confidence survey, the Employee Benefit Research Institute found that 70 percent of Americans believe they are “a little” or “a lot” behind schedule. The best thing we can do to increase our retirement nest egg is to (snooze alert) save more and spend less. In attempting to do so, many turn to making various investment choices.
Investment choices are undoubtedly important, especially once you’ve accumulated a sizable chunk of savings. It can be fun, scary, and mysterious, and with the chance of earning a huge amount of money if you play your cards right, investing is downright attractive. But it goes without saying that making money is a lot more alluring than saving money. And that’s exactly why it’s so important.
By focusing on bettering your personal savings rate, you’ll enjoy the long-term benefits without any risk or chance involved. By stashing away disposable income for future planning, you can effectively escape the game of chance and gain the assurance you need in growing your own savings on your own terms. Also, money makes money – the more invested, the more you will make.
The silver lining of saving more
Last question: is it better for your 401(k) balance to go up because you’re saving more or because your investments are performing well? Or does it matter?
It matters. Improving your balance by saving more is better. Once you retire, you’ll be using your savings to pay expenses. The lower your expenses before retirement, the easier it will be to cover them from your nest egg. And when your savings rate goes up, your expenses (as a percentage of your pay) have to go down, right? Or, you can just increase your savings rate each time you get a raise to cover the difference.
Maybe the secret of a comfortable retirement isn’t about savings rate or investment performance: it’s about redefining “comfortable.”
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Save more, spend smarter, and make your money go further
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Save on Parenthood: Skip These Baby Gear Money Traps
Boasting iconic views of the NYC skyline, a beautiful Brooklyn condo in a historic building has just hit the market.
Set in the charming neighborhood of Brooklyn Heights, the home is located in one of the first loft-style apartment buildings in the area, one with a long history of commercial use and subsequent residential use.
Located at 75 Livingston Street, the swanky suite designed by famed architect Henry Smith-Miller has been listed at $4.65 million by its famous — and art-savvy — owner.
Let’s take a look inside the historic building and the showstopping suite owned by notable Brooklyn couple, Arnold and Pam Lehman.
History behind the luxurious landmarked coop
Landmarked in 2011, 75 Livingston Street was built by architect Abraham J. Simberg in 1926.
Also known as the Court Chambers Building, or the Brooklyn Chamber of Commerce Building, the 30-story tower is now an unmistakable residential cooperative located in downtown Brooklyn, NY.
Exterior façade of 75 Livingston Street in Brooklyn, New York. Photo credit: GrissJr, CC BY-SA 4.0, via Wikimedia Commons
In the past, the building was called the Court-Livingston due to its alternate street address of 66 Court Street. Originally built as an office tower, the structure was converted into co-op apartments in 1981.
Now, the 30-story building is a full-service landmarked housing co-op offering a 24/7 doorman, live-in super and porters.
The residence was the longtime home of art-loving couple Pam and Arnold Lehman
The sellers of the gorgeous Brooklyn Heights home are a well-known Brooklyn couple, Arnold and Pam Lehman.
Photo credit: Joel Pitra at DDReps
Brooklyn native Arnold Lehman was the director of the Brooklyn Museum for almost 18 years. He also formerly led the Baltimore Museum of Art.
Following his retirement from the Brooklyn Museum, he became senior adviser to the Phillips auction house located in New York City, London and Hong Kong.
He recently published a book titled Sensation, centered on the controversy that swept the Brooklyn Museum in 1999 after an exhibit displayed Chris Ofili’s The Holy Virgin Mary painting.
Pam was the administrator for the Kornfeld Foundation which has been involved in medical research, palliative care and literacy in New York City schools.
While the couple hasn’t publicly shared their reasons for parting ways with their Brooklyn Heights home, we suspect their massive art collection has something to do with it.
Avid collectors of contemporary art, the Lehmans have filled up their Brooklyn pad (as well as a house they had in Maine and other apartment in Miami, per a NY Times profile published in 2017) with unique works.
To name just a few of the notable art pieces that line the walls of the couple’s elegant Brooklyn home, pictured above: Kehinde Wiley’s large sidesaddle portrait, The Capture of Juliers (2006); Fernando Mastrangelo’s sculpture Brazil, in coffee, sugar and wood (2007); and Barbara Kruger’s lenticular photograph Have Me Feed Me Hug Me Love Me Need Me (1988).
A look inside the swanky suite
Listed just under five million, this contemporary gem has been highlighted in several design articles, including in the New York Times.
Spanning 3,000 square feet, the luxury condo offers three bedrooms and three baths.
Photo credit: Joel Pitra at DDRepsPhoto credit: Joel Pitra at DDReps
Designed by noted architect Henry Smith-Miller, natural light bursts through the suite’s 30 oversized tilt-turn windows.
Accessed by three private-keyed elevators, the home features a separate den and two study areas offering additional layout flexibility.
Photo credit: Joel Pitra at DDRepsPhoto credit: Joel Pitra at DDReps
Including a sweeping entertaining space with a 35-foot open living/dining room and an impressive steel-walled 30-foot entrance gallery, the picture-perfect views stretch across Brooklyn Bridge Park and the harbor to the Statue of Liberty, lower Manhattan, Governors Island and beyond.
Photo credit: Joel Pitra at DDReps
The kitchen offers chic stainless steel cabinetry with a Viking stove, Bosch dishwasher, and separate full-size Sub-Zero refrigerator and freezer.
Photo credit: Joel Pitra at DDReps
The private and panoramic outdoor space is highlighted by two terraces offering beautiful backdrops and sunrise-to-sunset views.
Photo credit: Joel Pitra at DDRepsPhoto credit: Joel Pitra at DDReps
With its truly a one-of-a-kind skyscraper design located near all the services and transportation, the luxurious Brooklyn Heights condo is listed by Sandra Cordoba of Compass.
More stories you might like
Full-Floor Residence at the Newly Built Flatiron House Wants $13.5 Million The Many Famous Residents of the San Remo, NYC’s First Twin-Towered Building 3 Homes that Put You at the Doorstep of Manhattan’s Finest Cultural Centers The Dakota, NYC’s First Luxury Apartment Building and Its Many Celebrity Residents
I started the Best Interest on December 16, 2018. It’s been two years! And this also marks two years since I’ve been tracking every single expense in my budget. E-v-e-r-y-t-h-i-n-g. Today’s post will be a year-in-review for both the blog and for my personal finances. There will be lots of fun numbers. And I’ll show you how my preaching works in practice.
To get your bearings, here’s the Year 1 Review.
Thank you!
Thank you. Yes, you. Thank you for reading, and thank you to my generous patrons.
I don’t write here because of financial gain (see the Sankey diagram in the Budgeting section). I write here because you’re reading. And because it’s incredibly fun and you readers make it rewarding.
I was recently asked about my mission statement. It’s just in draft, but:
I value helping and teaching. At my core, I want to help people improve their lives by teaching them valuable skills & knowledge. I think personal finance is a tangible, vital, and universal skill set.
Improving personal finance == improving lives.
Sharing with you is my mission. And you sharing your attention with me is a privilege that I don’t take for granted.
Every small compliment you’ve given me is extremely meaningful. I love answering your questions, your Tweets, and your Reddit comments. So again, thank you for being here.
Some Stats
Who doesn’t like statistics? Here’s what 2020 looked like on the Best Interest.
Back in 2019, about 19,000 people visited the blog. I was ecstatic.
In 2020, over 160,000 readers visited. I’m over the moon. In 2021, I’d like to hit 500,000.
Early 2019–nobody here. Recent months–25K+ readers per month. Thank YOU!
As of this publication, about 210,000 words over 82 articles have been published in 2020. About 70% of those are my own, and the other 30% I can attribute to the wonderful bloggers I work with at the Money Mix.
The Money Mix is a group of like-minded writers, bloggers, and internet nerds. We share lessons learned, tips & tricks, and even share one another’s best written work. I’ve learned a ton since joining in April and attribute much of the Best Interest’s growth to learning from TMM.
The blog’s subscriber base grew by about 400% this year. If you haven’t joined, I send out a quick newsletter every week and include all new Best Interest articles.
Never miss another Best Interest post—subscribe here.
And lastly, the blog cost ~$2800 to operate and improve (notice the sweet logo?!), plus the hundreds of hours of writing and site maintenance. The mission makes it worthwhile. But if you’d like to support the cause, please join the patronage. I truly appreciate it. The more this site pays for itself, the more time I can devote to the mission.
Budgeting
Another year, another streak of tracking every single dollar using YNAB. If you’re looking for a smart Christmas present, YNAB is a great idea.
Note: you and I both get a free month of YNAB if you end up signing yourself (or someone else) up with the link above. No extra cost to anyone involved. You get a 34-day trial, and then an additional free month. That’s two months to figure out if you like it!
Below, you can see a snapshot of my YNAB journey from November 2018 until now. During this 2+ year period, I’ve used YNAB to budget and track every dollar that I earn and spend.
My YNAB journey from November ’18 until now. Debt in RED, Assets in BLUE.
Is it overkill? Yes, tracking every dollar is overkill for most people. But I highly recommend that you run a budget, and I even interviewed some other experts for alternative budgeting ideas. Find the right budget for you.
Where the Money Goes
As for where my money actually goes, the Sankey diagram below is a terrific visualization.
Sankey Diagram of my 2020 Income Flow
I’ve normalized this diagram against 100% of my salary. Why? Because it helps visualize what percentage of my income goes where.
For example, 23.4% of my income went to taxes before I ever saw it. Only 59.42% of my income ever came to my bank account via paychecks and, therefore, was budgeted. Of that 59.4%, I spent about half and saved/invested the other half.
The bottom of the Sankey diagram shows how previous years’ investments grew, and shows the free money that comes from my employer’s 401(k) matching. If the stock market had gone down, the “Investment Interest” section could have been negative.
But as it sits, 2020 stock market returns added the equivalent of 25.44% of my salary to my portfolio. And my employer’s 401(k) match was equivalent to 6% of my salary (that’s free money, by the way). The Investments section below has more detail on those individual investments.
Between budgeted savings (Roth IRA, taxable brokerage account, emergency fund) and pre-tax savings (401k, HSA), about 45% of my salary went towards savings and investments. Add in the “extra” savings (investment returns, 401k match), and the equivalent of 76% of my salary went towards savings and investments.
Your results may vary. But this is how my preaching looks in practice.
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Investing
After plenty of questioning, I wrote an article in October that provided every detail of how I invest.
One of the nice things—for both you and I—is that it’s fairly easy to track my portfolio over time. There are four assets:
Large U.S. stock index fund (ex: Fidelity’s S&P 500 index fund, FXIAX)
Mid and small U.S. stock index fund (ex: Fidelity’s Russell 2000 index fund, FSSNX)
Bond index fund (ex: Fidelity’s Total Bond Fund, FTBFX)
International stocks fund (ex: Fidelity’s Total International Stock Fund, FTIHX)
As of 12/16/20, these assets have performed as follows in 2020:
S&P 500 Index = +13.3%
Russell 2000 Index = +17.6%
Bond Index = +3.6%
International Stock Index = +6.2%
For the 2019 year, these indices’ performances were:
S&P 500 Index = +28.9%
Russell 2000 Index = +23.72%
Bond Index = +9.9%
International Stock Index = +21.5%
What are the takeaways? 2019 performance was blistering, and 2020 performance feels oddly optimistic given current events. I don’t expect every year to be as “good” as the past two.
Nevertheless, I’m trying to leave my emotion at the door and stick with my plan. Specifically, I invest the same dollar amount every month, whether the market is up or down. If you want to learn why I’m confident in that plan (despite current events), I wrote all about it this past autumn:
Even if the markets are at all-time highs and it feels like a crash is coming, my outlook is long-term. I have faith the the long-term (10, 20, 30+ years) economic outlook is good.
Favorite Blogs Posts
I’m proud that my writing is highly regarded. I was featured this year on MSN, Grow/CNBC, the Ladders, the Good Men Project, SoFi, Budgets are $exy, the Plutus Awards Showcase, and elsewhere. Woohoo!
If you think my writing is worthy of someone else’s attention, I’d love for you to share it with them. Post a link on Facebook, Reddit, Twitter, etc. Send your Uncle Dave the article I wrote about him. If you found a post particularly useful, let your tribe know about it. Simple grassroots sharing.
Here are some of the best posts from 2020:
January—The 2010’s Will Happen Again—If you’re worried that the 2010’s were a “once in a lifetime” investing decade, this article will show you how that’s not quite true.
February—Index Fund Bubble: Arguments For and Against—I invest solely in index funds. So when well-known investors warned of a bubble, I wanted to understand for myself.
March—Viral Stock Market Strategies—Lots of Twitter experts discussed their personal investing techniques during the early days of COVID-19. So I wrote a MATLAB script to back-test all their best laid plans. Spoiler—the simplest approaches always fare best.
April—The Biggest Lesson from COVID-19—Slack. Safety net. Margin. Out of the many lessons from COVID-19, this article discusses the biggest one: how building slack in our systems—personal finance, business, hospitals, even hiking—is a life-and-death issue.
May—Jeff Bezos and the Meritocracy Kings—Jeff Bezos, resource allocation, Vonnegut, meritocracy, survivorship bias, systemic flaws, and quarantine kings.
June—Simple Financial Goals—a two-minute punch-list to start you down the path to better personal finances.
July—Do you know Dave?—a funny story about a man you know, and the perilous personal finance circumstances he finds himself in.
August—Long Term Investing Takes Faith—I returned from a camping trip rejuvenated. But memories of the rolling waves reminded me of slow, steady, long-term investing.
September—Amazing People Everywhere—inspired by Tim Ferriss’s Tools of Titans, I interviewed some amazing people in my own life, and asked them what lessons they’ve learned in their unique journeys.
October—The True Cost of Car Ownership—a detailed analysis of car costs, answering the important questions like:
How should I compare time owned vs. miles driven?
What’s the full-life true cost of owning a car?
How much does a car’s value depreciate over time?
How do I place value on the utility of my car (e.g. a work truck vs. a compact sedan)?
When is a used car purchase smarter than a new car?
How does leasing compare to owning?
Should I sink more money into an old beater? Or just get a new car?
November—Your Retirement Savings Goal for 2021—my first dabble into coding my own calculators. If you’re looking for an easy 2021 resolution, start by calculating your 2021 savings goal.
December—Curses, Miracles, and the Best Interest Student Loan Solution—The status quo is a haunting curse. The proposed solution is a divine miracle. I propose a middle-ground solution. And the math backs me up.
2020: Year of the Dog
We fostered nine sweet dogs in 2020. No dog goals for 2021, other than to keep fostering. There are lots of great dogs that just need a home. If you’re looking for a dog, consider adopting through a shelter or foster organization.
But because it’s fun and funny, here are the 2020 dog power rankings.
Starting at #9: Josie. She was one of Sadie’s puppies. And man, was she mean. Clearly, Josie learned that the meanest puppy always gets fed, and she would absolutely torment poor Oscar. If you’ve ever seen Tasmanian devils fighting on the National Geographic channel, that’s how Josie was at feeding time. Bad girl! But she’s a sweetheart now as a young adult 🙂
Next at #8, Ranger. While Ranger was a good boy, he chewed on too many things. Most dogs are athletes. Not Ranger. He was a happy, dopey, skittish, and unathletic dog.
Louis a.k.a. Mr. Bones a.k.a. Louie Long Legs comes in at #7. Not the cutest pup, and one of the only dogs that legitimately drew blood from his playful bites and claws. But he was just a pup, so you can’t hold it against him!
Jules is our current foster, and she comes in at #6. She’s a little whiny and took a poop behind the Christmas tree. Is she super cute? Sure. But a cute face only gets you so far on the Best Interest.
#5 is Raven, a solid puppy. The most athletic of Sadie’s puppies, there was nothing to dislike about Raven. If she has stayed around longer, she could have competed for the top 3. But she got adopted quickly and didn’t have much time to rise to the top of the heap.
Esther—coming in at #4—was one of two recent moms to come through our home. And poor Esther definitely missed her puppies, making multiple escape attempts over our fence. She was a sweetie. Not much is cuter than hearing a 25-pound part-Huskie give out a “big” wolf howl.
Sadie’s third-and-final puppy, Oscar, comes in at #3. This little guy was everyone’s favorite of Sadie’s three puppies. While we figured, “Ahh. Dad must have been a Blue Heeler,” we actually found out that Sadie is 55% Blue Heeler. Her recessive traits are expressed in her more slender physique and black color. Oscar’s phenotype, however, is very much the stocky, mottled grey Blue Heeler.
Scooby, the cutest bloodhound puppy around, is #2. Not only did Scooby have stellar looks, but he had the personality to match. He was playful, mostly potty-trained, and slept through the night from Day 1. He was wise beyond his weeks. The “Doobie Brother” was a very good boy.
Coming in at numero uno, it’s got to be Sadie. I’m a big softie for Sadie. She was our first foster and probably the only one who arrived at our door significantly unhealthy. She had been homeless in Houston, scrounging for nutrition to support herself and her three puppies (Josie, Raven, and Oscar). Sadie was only 27 pounds when she showed up. But we nourished her, fell for her, and adopted her ourselves! She’s now a sturdy 42 pounds and has been a great friend to all the other fosters to come through our house. She’s also kinda famous in the blogging world.
2021 and Beyond
In 2021, I’d love to help half-a-million (or more!) readers.
Monetization of the blog is something I’ve considered before. Right now, a few generous Patrons donate to the blog, and I don’t run ads (here’s why). But if the income from running ads allowed me to further the blog’s mission without interfering with that mission…would that be worthwhile? I’m interested in what you think about that idea. Do ads bother you?
Content-wise, I’m always looking for useful questions to answer. My own confusion inspired my Explaining the “Big Short” post. The many new parents in my life inspired this guide to 529 plans. If you want to learn something, let me know.
I’m excited for 2021! And I hope you are too.
Thank you for reading! If you enjoyed this article, join 6000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.
For most people contributing to a 401(k) retirement plan at their workplace is the main way they’re investing for the future.
Sometimes those retirement plans are easy to understand, low cost, and offer great options to invest, but other times they’re confusing and complicated.
Blooom is an automated investment advisor and advice engine that can make managing your 401(k) a little bit easier.
Blooom is a robo-advisor for your 401(k). Let’s take a look at who Blooom is, and what they do.
Blooom History
Blooom was founded in March 2013 in Overland Park, Kansas by three friends, co-founders Chris Costello, Kevin Conard and Randy AufDerHeide.
The idea behind the company was to help give better advice and management for 401(k) plans, for regular people.
The firm’s researchers analyzed close to 90,000 401(k)s, with over $3 billion in total assets, and they found that over 80% of them were managed poorly.
That’s where Blooom decided to step in.
Blooom helps people to manage their employer sponsored retirement plans. They can manage your 401(k), no matter where your plan is held, or who your employer is.
They’ll give you good advice, and manage the 401(k) in your best interest, since they are a fiduciary and are required to by law.
Here’s an overview of the company from the folks at Blooom:
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What Does Blooom Do?
Blooom will automatically manage your 401(k) retirement account for you. It is a robo-advisor that will help you to maximize returns within your company sponsored retirement plan.
If you work for a company that has a 401(k) plan, often the company won’t give you much advice on how to manage your investments, once you’re signed up for a plan.
They basically tell you there’s a plan, that they’ll match your contributions up to a certain level, and give you a login for your account.
Simple enough. But what happens once you start contributing money? Where does that money go, and what should you invest in? What are the expense ratios on the different funds?
If you’re in your 20s and just starting out these concepts can be a bit difficult to grasp, especially if you’re more focused on building a career.
Blooom can step into this knowledge gap and help you to make sure your investments are aligned with your future goals.
They’ll find out some basic information from you like your age, target retirement date and a few other things, and then Blooom will recommend an allocation for your portfolio.
For younger people they’ll typically recommend a 100% stock allocation, and as you age the portfolio will begin to be more heavily weighted towards bonds. In other words, you’ll be taking on more risk in your early earning years, and move towards more stable investments as you age. If you don’t like their recommendation you can opt for a different ratio of stocks to bonds.
Whenever possible Blooom wil select a low cost index fund to help you meet your goals, and if you’re someone who has accidentally selected high cost mutual funds, this could bring some significant savings for you right off the bat. They’re looking to get you into investments that will be low cost, and track the performance of the market.
Based on their algorithm, Blooom will rebalance your portfolio every 90 days to make sure your desired stock to bond ratio is maintained. If you want to adjust your allocations, or target retirement date, you can do that at any time as well.
In addition to managing your 401(k) account, Blooom will allow users to ask financial questions from experts and real advisors. Should you invest or pay extra towards your mortgage? Should you be worried about market downturns? Ask them and they’ll be happy to help.
Get Started With A Free 401(k) Checkup
Blooom offers a free 401(k) checkup before you even sign up for their services, no promo code needed.
They’ll take you through a quick questionnaire where they ask you for your name, date of birth and when you expect to retire.
Next, they’ll ask you for an email address and password to secure your account.
Third they’ll confirm that you do in fact have a 401(k), 401(a), 403(b), 457 or TSP account, and ask you to link that account.
Finally they’ll analyze your retirement account, and you’ll see how your account is doing, and what you might be able to do better. It will show you how you can do better with fees, with allocation, and with the diversity within your portfolio.
Finally it will give you a summary of your 401(k) checkup telling you just how much Blooom can save you, and how they can help.
To get started with your free 401(k) checkup, head on over through our link here:
After Your Free Checkup
After your free 401(k) analysis, if you choose to continue with Blooom within 30 days they’ll adjust the investments in your account so that it aligns with your goals.
the average Blooom client cuts their hidden investment fees by 44%. (Based on Blooom clients‘ median pre-Blooom expense ratios and median post-Blooom expense ratios as of August 5, 2018)
First they’ll check your 401(k) and remove any funds that aren’t worth having. They’ll prioritize index funds, and typically only use actively managed funds to gain investment exposure in an area that you’re light.
Then Blooom will use their algorithm to select the best portfolio based on costs and manager experience.
Any time a change is made, they’ll advise you of the changes, and you’ll get a full break down of what has changed with your investments, how your investments look now and how you can save more.
Finally, every 90 days or so Blooom will check your account for opportunities to rebalance your portfolio. If the investments are out of balance, Blooom will rebalance them. Regular rebalancing can add an additional 0.5% to the annual returns on investment.
What Types Of Accounts Will Blooom Manage?
Blooom only manages employer-sponsored retirement accounts at the current time. That means that you can sign up and use them if you have one of these types of retirement account:
401k
403b
401a
457
TSP
IRAs, Roth IRAs and other taxable account types need not apply.
Blooom Security
If you’re concerned about the security of Blooom, and whether or not your retirement accounts are safeguarded, they are. Here is how they’re protecting your information:
256 bit encryption, bank level security: The website is secured with secure socket layer encryption, and bank level security. Their servers are secure and encrypted to ensure private online transactions.
Third party verification: They take extra measures to ensure you are really who you say you are any time changes are requested.
What Is The Cost To Use Blooom?
What does it cost to use Blooom?
Currently it costs only $10/month to have Blooom manage your 401(k). If you have additional 401(k) accounts to manage under the same login it is an additional $7.50 per account.
Depending on how much you have invested, the fee may be a large percentage of your portfolio, or it could be an extremely reasonable fee. Let’s look at why that is.
The more you have in your 401(k) account, the better deal Blooom will be for you. For example, let’s compare Blooom to the fees charged for assets under management by Wealthfront or Betterment. They both charge 0.25% annual fee for assets under management. On the other hand a human financial advisor will often charge somewhere around 1%.
Let’s say you have $1000 invested in your 401(k) (not very much), then the $10 monthly fee will come out to $120/yr, or a 12% fee. That’s not going to make much sense for most people.
If you have a larger account, however, say $100,000, the $10/month fee will come out to about a 0.12% fee. At $50,000 it will be a 0.24% fee.
Once you reach a certain level it’s very reasonable and low cost to have your 401(k) fully managed by Blooom. The more you have in your 401(k), the more cost effective it is.
Reasons To Use Blooom
There are a lot of reasons to like Blooom, and to give them a try:
They’ll give your 401(k) a free once over: Even before you pay for their service, they’ll analyze your 401(k) for free, and give you some recommendations. If you don’t like the recommendations, don’t sign up.
Their service is unique, and helpful: They are one of the only full service 401(k) management services available, and what they’re offering is helpful, and at a reasonable price.
Cancel the service at any time: There are no long term management contracts. Just cancel through your blooom account before your next billing cycle and you won’t pay additional fees.
Fees are paid directly with credit or debit card: Often investment companies will take their fees directly from your investments, decreasing returns you might gain. Blooom will charge your linked card for the $10 monthly fee.
Their analysis will give insight into your plan’s fees, funds: Once they analyze your plan, they’ll give you insights into our investment options in the 401(k) plan that you may not have had before. Things like which funds have the lowest expense ratios.
You have access to a real advisor through email and chat: Not only will you get the automated financial advice, you’ll also have access to a real person through email and chat if you have questions. It doesn’t necessarily have to be about your 401(k).
Reasons To Not Use Blooom
There are a few reasons to avoid Blooom. They may not be for you if:
Have a non employer sponsored type retirement account: If you don’t have a 401(k), 401(a), 403(b), 457 or TSP account, you won’t be able to work with Blooom.
Don’t agree with their aggressive stock allocations for younger investors: Most investors under the age of 40 receive a stock allocation of 100%. If that’s too aggressive for you this might not be for you.
If your account is too small to make the fee worthwhile: If your account is small enough the fee may be too large or a percentage of your assets under management. You’re probably better off managing it yourself for the time being, and working hard to max out your contributions. Sign up later.
Blooom Is The Low Cost Robo-Advisor For Your 401(k)
Blooom is a low cost automated investment advisor for your 401(k).
Most people will contribute to a 401(k), but aren’t really fully aware of what they’re investing in, or why. If you don’t have the time or the inclination to research your 401(k), it can be like fishing in the dark. Which funds are the best for my situation?
Blooom can step in, and fill in the gap. They have the expertise, knowledge and the technology tools in order to turn your 401(k) around.
They’ll analyze your account for fees, allocations and diversity of investments. They’ll find ways that you can improve your investments and then help you to implement their suggestions.
In short, they’ll manage your 401(k) and allow you to focus on things that are more important to you.
If you love cat pictures, today is your lucky day. Because I’m back!
As longtime readers will recall, I contributed to Get Rich Slowly from 2009 to 2013. I often wrote about more “technical” (i.e., boring) topics, such as taxes and IRAs. In order to provide a reprieve from the technical-ness, J.D. occasionally sprinkled in cat pictures. I tried not to take it personally.
Photo: ZUMA Press
But for the record, I think other creatures would have been more appropriate. Such as the blob fish.
For those who remember me, it’s great to see you again. For those who don’t, here’s my Cliff’s Notes tale of priesthood, eating pre-chewed food, reproduction, and why I know a thing or few about money.
I hung up my GRS writing boots last year because I had overloaded my life with new ventures, which included more actual financial planning for folks. But things have settled down, which allows me once again to be a part of this self- and other-bettering community. But here’s the thing about financial plans: They’re really financial projections, using just your current numbers — the size of your IRAs and 401(k)s, how much you add to those accounts, your current Social Security benefit estimate, and so on. A financial adviser — or you, using a retirement calculator — inputs a bunch of figures and out comes the verdict: You’re guilty of not saving enough, or you’re innocent of all financial wrongdoing.
I wholeheartedly believe that everyone should do just such an analysis annually to estimate whether they have a reasonable shot at retirement, or other financial goal, and to determine what they can do if things aren’t looking so hot. However, these analyses also have their limitations because they only care about what can be quantified.
So more and more over the years, I’ve found myself using financial-judging software as the basis for starting a discussion, and then wading into more fluid factors that are also crucial indicators of future financial freedom. Here are five of those factors, oh-so-briefly explained. I could devote an entire article to each. (Yay, more cats! Or blob fish! Or a sitcom about them getting married but their parents not understanding!) But what follows will give you an idea.
Your non-portfolio assets. We all have a lot of stuff. In fact, that’s why we have a house, according to the late, great comedian George Carlin, who said, “Your house is nothing more than a place to keep your stuff while you go out and get more stuff.” For some, a house is not enough. According to the Self Storage Association, 9 percent of American households were renting a unit as of 2012. Chances are, you have stuff you either don’t need or that could be replaced with a less-expensive option. It starts with your stuff-container (your house) but can involve a wide and diverse range of property: other real estate, collectibles, electronics, appliances, household items, vehicles (including bikes and boats), and the many gifts of Christmases past. You can fall back on hawking these wares in a pinch, but it is even better to turn depreciating dust-collectors into growing assets now by selling them and investing the proceeds. An investment in the Vanguard 500 index fund would have grown to almost 19 times its value over the past three decades. And unless you’re a 95-year-old javelin catcher who smokes, you should think of your investment time horizon in terms of decades.
Your human capital. Regardless of what advertisers or Wall Street might say, your biggest asset isn’t what you buy or own. Your biggest asset is you — what you can do, what you know, what you’ve accomplished, and who you know. In financial terms, this can be considered your human capital — your ability to earn an income (including the variety of ways, the amount you would earn, and how easy it is to move in and out of the workforce), the things you can do that you would otherwise have to pay someone else to do, and your social and professional network. A sub-category is your financial literacy, i.e., how smart you are with your money.
Your health. A recent study from gerontologist Ken Dychtwald and Merrill Lynch found that good health is the No. 1 ingredient of a happy retirement. It is hard to enjoy your golden years if your creaky bones have you in tears. But there is also a financial component: Healthier people spend less money on health care. They keep the money that would otherwise go to hospitals, pharmacies, and the medical equipment industrial complex. Of course we are all very fortunate and grateful such things exist, but they don’t come cheap. Plus, healthier folks feel better, can do more, and can work later in life if they want to — as opposed to the approximately 25 percent of retirees who left the workforce at least partially for health reasons.
Your habits. Financial success is determined largely by financial behavior. As “The Millionaire Next Door” — the study of real-life wealth by Thomas Stanley and William Danko — and Stanley’s follow-up “Stop Acting Rich” taught us, monetary security doesn’t just happen. The majority of Americans who earned their millionaire-hood did so by having a plan for where their money would go, maintaining a system for making sure they are on track, living on 80 percent or less of their income, and not buying homes in high-priced neighborhoods. Only 30 percent of the variability of wealth among households is explained by income, so the truly well-off are doing something right besides bringing home a bunch of bacon.
Your family’s assets. When it comes to stuff, you may have heard that you can’t take it with you (even though many people think shopping is a divine experience). You might be in line for an eventual inheritance. But for many families, the biggest “asset” is the support they give one another, such as child care, elder care, professional expertise, hard-earned wisdom, and a safety net. However, to keep wealth of all kinds in the family as seamlessly and cheaply as possible, you and your relatives should have frequent and open discussions as well as the properly executed financial documents.
For the past two years, the topic of women and money has come up in my life quite a bit. I’m guessing it has something to do with the fact that I’m a woman who writes about money.
But as a woman who writes about personal finance, I feel have given the topic less attention than it deserves — not just in my writing, but in my own thoughts too. I suppose I figured personal finance is something that we all struggle with, not just women. But the more I learn, the more it hits home, and the more I realize we should embrace the topic so we can do something about it.
The Confidence Gap
Last year, when I read Barbara Stanny’s “Secrets of Six-Figure Women,” I found myself nodding in agreement to just about everything she’d written. Some of her points were an unsettling confirmation of my own career shortcomings — particularly, her chapter on the “traits of underearners.” A few of these traits: We have a high tolerance for low pay; we underestimate our worth; we’re terrible negotiators. Check, check and check.
Around the same time, I came across a study that found women are considerably less confident than men when it comes to investing. That hit home as well. I’d started saving for retirement, but I was really intimidated to learn more about investing beyond that. Then, recently, I went to an event hosted by Fidelity and Vanity Fair which was all about women, power and money. Their research echoed the findings of pretty much all previous research on this topic: Women lack confidence with personal finance. Kathy Murphy, their President of Personal Investing, called it a “confidence gap.”
It’s a weird thing to say, but sometimes I forget I’m a woman. I forget that, statistically, I might be getting the short end of the stick in some circumstances. I forget that what holds me back might have something to do with my gender. Then I read the stats and I think, “Oh, snap. That’s totally me.”
Learning about this issue and embracing it has changed the way I think about myself, my gender role and my money. And that change has made a tremendous difference in my finances.
Earning More and Overcoming Insecurity
Like a lot of people, I am insecure. It’s okay to be insecure to a point, I think. I am not a big Bukowski fan, but I do like this quote: “The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence.” I’m not saying I’m smarter than anyone; I’m just saying — a little self-doubt isn’t necessarily a bad thing. It keeps you open-minded and educated.
But insecurity can hold you back. For example, I’ve always been afraid to speak up. In third grade, a scientist visited our classroom and brought crystals. We each got one, but I lost mine and reported this to my teacher. She said Rob N.* probably had it because, somehow, he got two crystals.
My teacher brought Rob to me. “Is this yours?” she asked. Sure enough, my own crystal was shining in his palm.
But I was afraid to speak up. I thought if I said yes, I’d be seen as a greedy, crystal-grubbing brat.
I shook my head. Rob shrugged and walked away with it — who could blame him?
I’ve never really thought about it before, but this is a painfully accurate metaphor for the problems women face with negotiating. If we speak up, we are perceived differently. The statistics show it, and many of us have experienced it. No wonder we’re afraid to ask.
I didn’t really start asking for raises or negotiating rates until I hit 30. I had a high tolerance for low pay, and it didn’t do me any favors. But I realized that, gender gap or not, if I wanted to reach my money goals, I needed to speak up. I have no idea if clients now view me negatively after I’ve asked for more money. But as a woman trying to reach financial freedom and close whatever pay gap might exist between me and a hypothetical male counterpart, I can’t let that stop me. Not speaking up would only reinforce that awful statistic.
*Name has been changed to protect his identity, as he was actually a nice boy. But “Rob” if you’re reading this, give me back my damn crystal.
The Role of Empowerment in Financial Freedom
Since reading and learning about this issue, I’ve also forced myself to learn more about investing. And you know, it’s not that hard. I get it. And my net worth has grown quite a bit since figuring it out.
I still think it is okay to second-guess myself and admit that I don’t have all the answers. But I am getting tired of the little things — the small, subtle bullshit I come across and can’t help but think, “If I were a man, would this be an issue?” Like when I wrote about being frugal and a commenter, assuming I don’t have my finances in order, asked why anyone should listen to me. Or the time I chimed into a conversation among clueless male investors, who were talking about how index funds are stupid, and they completely ignored me. Or even the fact that I feel self-conscious about taking ownership of my financial accomplishments. I’m afraid of coming across as cocky.
It might seem like focusing on all of this is victimizing, and maybe that is part of the reason I ignored it for so long. But it isn’t victimizing; it is empowering. It reminds me that it’s not just me. Many women are also afraid to ask for a raise or to speak up or exude the confidence they possess because modesty and meekness and silence are more socially acceptable for our gender. Acknowledging the issue also makes me proud of the financial accomplishments I have made so far — I have found financial security despite the stats not being in my favor.
And finally, I feel thankful to have worked for people who “get it.” For the most part, my bosses have always been encouraging, supportive and understanding. Considering the statistics, that’s pretty remarkable.
The Roth 401(k) may appeal to workers willing to forego a tax break now in return for getting one at retirement. As its name implies, the Roth 401(k) combines features of a traditional 401(k) with those of a Roth IRA. If you have access to both, which one is best for you? Let’s take a closer look at a Roth 401(k) vs. the traditional 401(k).
Like a traditional 401(k), workers enjoy the convenience of contributing through payroll deduction. But similar to a Roth IRA, contributions are made on an after-tax basis and withdrawals after age 591⁄2 are tax free and penalty free for workers who have maintained their account for five years. There is also a Roth 403(b) plan for workers in the nonprofit sector.
How a Roth 401(k) Works
The Roth 401(k) follows many of the same rules as a traditional 401(k). For the 2010 tax year, federal laws permit a maximum annual contribution of $16,500, although your employer may impose a lower limit. Your employer may provide a matching contribution as part of a Roth 401(k) offering, although you will be required to accept the matching contribution in a traditional, and not a Roth, account. If you are age 50 or older, you may contribute an additional $5,500 for a total of $22,000 in 2009. You may continue to maintain a traditional 401(k) while directing all or a portion of new contributions to a Roth 401(k). Your contributions to a Roth 401(k), however, are irrevocable—once made, they cannot be transferred to a traditional 401(k) account and funds in a traditional 401(k) cannot be switched to a Roth 401(k). Both Roth and traditional 401(k)s require distributions after age 701⁄2. There is a 10% penalty for early withdrawals prior to the age of 591⁄2, and taxes may apply for traditional IRAs.
Planning for Retirement
Choosing Between Traditional 401k Vs. Roth 401k
A Roth 401(k) may present a significant benefit when it’s time for retirement—the funds can be rolled over directly to a Roth IRA with no tax payment. Assets in a traditional 401(k) can now be converted to a Roth IRA, but the conversion requires you to pay taxes on the portion of the rollover that has not yet been taxed.
To Roth or Not to Roth?
If you’re considering a Roth 401(k), you may want to review the following points before making your decision:
Although future tax rates are difficult to predict, you may benefit from a Roth 401(k) or 403(b) if you anticipate being in a higher tax bracket during retirement.
Even if your marginal tax rate remains relatively stable, you may face a higher tax bill in retirement if you will no longer claim deductions for dependents, mortgage interest and others frequently utilized by families. If this sounds like a likely scenario, a Roth 401(k) may be to your advantage.
Will you need your retirement assets for living expenses during your later years? If not, a Roth 401(k) offers the opportunity to roll over funds directly to a Roth IRA, which does not require distributions after age 701⁄2. This situation may enhance the potential tax-free growth of your assets and enable you to bequeath a larger portion of your assets to your heirs.
You are not required to meet income thresholds to participate in a Roth 401(k). In 2009, Roth IRAs are limited to single taxpayers with $120,000 and married couples with $176,000 or less in adjusted gross income. A Roth 401(k) may have some appeal if you desire tax-free withdrawals but your income exceeds the threshold for a Roth IRA.
The longer you remain invested in a Roth 401(k), the more you are likely to benefit from tax-free growth. If you plan to retire in five years or less, a shorter-term time horizon may limit the benefit of tax-free withdrawals, whereas your account may get a bigger boost from tax-free savings if you plan to continue working for a longer period of time.
Capitalizing on every option available to you may make it easier to pursue your long-term savings goal. If tax-free withdrawals could potentially benefit you and your employer makes a Roth 401(k) available, consider adding it to your retirement planning mix.
Points to Remember
A Roth 401(k) offers the option of investing for retirement on an after-tax basis. In return for foregoing a tax deduction when the contribution is made, participants are able to make withdrawals free of penalties and income taxes during retirement.
Workers may elect to make all or a portion of their 401(k) contribution to a Roth 401(k). Once made, however, a contribution cannot be transferred to a traditional 401(k) and assets in a traditional 401(k) cannot be switched to a Roth 401(k).
The annual maximum contribution for 2009 is the same as for a traditional 401(k): $16,500 plus an additional $5,500 catch-up contribution for employees aged 50 and older.
Employers who provide a matching contribution are required to allocate the match to a traditional 401(k), not a Roth account.
Older Americans are sitting on more than $12 trillion in home equity, according to the National Reverse Mortgage Lenders Association (NRMLA)/Riskspan Reverse Mortgage Market Index. These homeowners are seeking different retirement solutions to help allocate their home equity and make it more durable over the next 20 to 30 years.
According to data from Statista, there were roughly 5.95 million homes bought and sold in the U.S. last year. The National Association of Realtors (NAR) estimates that baby boomers made up roughly 39%, or 2.32 million, of those homes.
If we then look at data from the Federal Housing Administration (FHA), there were 2,063 Home Equity Conversion Mortgage (HECM) for Purchase loans endorsed in 2022 — less than 1/10th of 1% of homes sold last year.
Today’s market includes mortgage rates of above 6%, low inventory and elevated home prices, all contributing to affordability problems. Many of the baby boomers that have a mortgage on their current home likely refinanced during the pandemic to get a very low interest rate.
With all of this in mind, why would baby boomers move into a new home, where their expenses would be exponentially higher due to higher mortgage rates, increased inflation and current economic concerns?
Longbridge Financial, LLC, (NMLS #957935) believes that the answer to this dilemma is the HECM/Reverse for Purchase financing option.
“Many of these homeowners have a desire to move closer to family or to a more suitable home for their lifestyle in retirement. [They likely] would feel much more confident that they can keep a significant amount of the proceeds from their departure home and not have to make monthly mortgage payments, provided they continue to pay their taxes and insurance and maintain the home,” said Rob Cooper, National Purchase and Builders Sales Leader for Longbridge.
“If the industry were better educated on this option, there would be a significant increase in HECM/Reverse Purchase volume. There is an incredible opportunity for growth,” he said.
Why is this market underserved?
But despite the opportunity, the HECM/Reverse for Purchase market is underserved, Cooper said.
“Most real estate agents, builders and potential customers have no idea that this financing option exists to purchase homes,” he said.
Part of this may be due to the idea that it’s a niche product, said Adrian Prieto, SVP of Wholesale and Third-party Affiliates at Longbridge.
“Many in the housing and mortgage industries consider the reverse mortgage a niche product,” he said. “Now add the Reverse for Purchase product to the mix and you have a niche within a niche; that can make it even harder to break through.”
Few loan officers make the purchase product a main part of their business. Additionally, because HECM/Reverse for Purchase did not exist until late 2008, many don’t fully understand the value propositions the product poses.
“We can effectively open up a new line of customers for real estate professionals with this financing,” Cooper said.
The HECM for Purchase product
The product itself is relatively simple, Cooper said. The main difference between HECM/Reverse for Purchase and a traditional mortgage is that the amount of money required for a down payment is currently in the 60-65%* range, based on the age of the youngest borrower and other factors.
The customer would bring roughly 60-65% to the table and the reverse mortgage lender would provide the other 35-40% for the transaction.
“The big difference is that monthly mortgage payments are optional so long as the borrower continues to maintain the home and pay their property taxes and insurance,” Cooper said.
Prieto noted that the product gives borrowers the option to “right-size” their home based on their retirement goals and living situation while creating cash flow.
Opportunities and benefits
HECM/Reverse for Purchase represents a big opportunity for agents, lenders and builders, as well as customers.
Real estate agents, loan officers and builders can attract customers they have never captured before. They can help mature customers who have looked at multiple homes and shown all the buying signals but never transacted — for a variety of reasons, but largely due to finances.
The HECM/Reverse for Purchase allows the customer to feel more financially secure in making that purchase — they can get the home they want, where they want it, with a bit more control over their financial situation. They’re able to keep a significant amount of their proceeds from their departure home with the flexibility to make monthly mortgage payments or not, provided they comply with the loan terms, including tax, insurance and maintenance costs.
“The opportunity to provide agents, builders and loan officers with a flexible, dynamic product that expands their portfolio to a growing and untapped market is very enticing,” Prieto said. “If you have someone over 62 years old looking to purchase a home with a traditional mortgage, I highly recommend they compare that option with the Reverse for Purchase. Once you do the comparison, you’ll notice how dynamic the program is and how well it can position someone in their retirement phase of life.”
Longbridge Financial’s approach
The reverse industry has been working hard for years to educate real estate agents, builders and loan officers on the advantages of HECM/Reverse for Purchase, and Longbridge Financial is taking multiple steps to expand its own education efforts.
The company is launching its Reverse for Purchase Roadshow in two cities this summer, with more locations to come. The goal is to educate loan officers who are already partners, as well as loan officers that are unfamiliar with reverse mortgages, on how big of an opportunity the HECM/Reverse for Purchase product is, especially in the current market.
“Many of these loan officers have existing relationships with real estate agents and builders,” Cooper said. “If they can educate their partners on HECM/Reverse for Purchase financing and how to implement and market to mature home buyers and sellers, it could have an impact on the overall purchase volume.”
Longbridge has also created a dedicated Purchase Fulfillment Team to ensure it hits estimated closing dates. Closing these purchase loans on time and communicating effectively throughout to the builder and real estate partner helps build long-lasting partnerships.
The company continues to look at more strategic ways to brand the product, but it all comes back to education. Longbridge consistently holds Purchase training calls on the product, best marketing practices and how best to communicate expectations to all parties involved – and they offer a plethora of supporting marketing collateral.
“As a top reverse mortgage lender, LBF is committed to educating, marketing and training our business partners on the optimal and safest ways to utilize home equity in retirement,” Prieto said. “We are pouring resources into the Reverse for Purchase program with an intent to educate business partners and older homeowners nationwide. We know how much the Reverse for Purchase can help, and we want to get the message out there.”
To learn more about Longbridge Financial’s HECM/Reverse for Purchase program, contact an Account Executive at [email protected] or click here.
*This down payment range assumes closing costs will be financed into the loan. The information being displayed is for illustrative purposes only. Actual cash required may vary and is based on age of youngest borrower, interest rate, home value, and other factors. Please contact Longbridge Financial LLC for details about credit costs and terms.