Category: Insights

July 1, 202411:43 AM ET

Andee Tagle

Joint bank account or separate? The approach you choose depends on you and your partner’s financial history and goals, says financial therapist Lindsay Bryan-Podvin.

If you’re in a serious romantic relationship, you and your partner may be thinking about how to combine your finances. Should you share a joint bank account? Keep your accounts separate? Do a combination of both? 

The path depends on you and your partner’s financial goals and history. So before you decide, have an open and honest conversation, says Lindsay Bryan-Podvin, financial therapist and author of The Financial Anxiety Solution — “ideally before relationship-changing events such as moving in together or purchasing a car together.” 

Talking about money can feel like awkward, but it can also strengthen relationships. “We’re deepening our connection. We’re dreaming ahead together and creating a plan,” she adds.

Bryan-Podvin talks to Life Kit about what it means to successfully merge your finances with your partner, the merits of each approach – and strategies for success. This conversation has been edited for length and clarity.

Sharing a joint bank account seems to come with a lot of benefits. One large-scale study from 2023 found that couples who put all their money into one pot tended to be happier. They stayed together longer than those who kept some or all of their money separate. Why do you think that is?

My hypothesis is that it decreases the likelihood of financial infidelity. One of the biggest issues couples argue about is the financial secrets that can happen when we have completely separate accounts. Maybe somebody is racking up a ton of credit card debt or taking out personal loans. Or maybe they don’t have a great credit score and aren’t working on improving it. [If you have a joint bank account], your partner is in [on these issues] from the beginning.

For this reason, you recommend that couples share a joint account. 

Having a fully joint account feels great because couples are able to spend and save and talk about that very openly.

You also like an approach that the financial community calls “theirs, mine and ours.” It’s an arrangement where couples have a joint account for shared expenses and individual accounts for personal expenses. 

“Theirs, mine, and ours” can work really well when the bulk of your money is shared. You [can use your joint account to] make sure your bills and rent are paid on time and save toward future goals together. But you each have a little bit of money to spend how you want without having to text your partner and say, “Hey, can I buy a new pair of shoes?” None of us want to feel like we are under the control of our partner, so having some financial autonomy is important.

Are there some situations where it might make sense to have separate accounts?

If you’ve experienced financial abuse or have seen someone steal someone else’s credit or identity, you might have very strong feelings about having to share your money with other people. Then it makes sense to keep your finances separate.

And I think it’s important for people who have had a divorce or separation to keep separate bank accounts or do “theirs, mine and ours” for financial protection [to avoid assets getting mixed up with court proceedings for example].

Is there such a thing as splitting everything 50-50 in a relationship?

This idea of splitting everything 50-50 makes sense in theory, but we just don’t live in a theoretical world. Even if you’re earning the same amount, it doesn’t necessarily mean your financial background is equal. One partner may have $150,000 in student loans, for example. And there will be times when one person is taking on more of the emotional labor or more of the household tasks.

So keeping all this in consideration is really important. I think about [a couple’s finances] as a big old soup. Everything goes into the pot and it all blends up together, and it’s really hard to know who gave what.

So among these three approaches — joint bank account, “theirs, mine and ours” and separate accounts — how do you figure out which approach is right for you? 

Have money conversations. Don’t just ask, “What’s your credit score? How much do you earn?” Also ask: “What were you taught about money? What are you proud of that you do financially? What are things you wish you were a little better at financially?” Get a sense of what matters to your partner so you have a clear understanding of their relationship with money.

Source: https://www.npr.org/2024/07/01/g-s1-7478/how-to-combine-finances-with-your-partner

From saving too little to claiming Social Security too early, there are plenty of ways that current and future retirees can sabotage their golden years.

By Bob Niedt

last updated 21 June 2024

Contributions from

Erin Bendig

As more and more baby boomers start eyeing a happy retirement, thoughts turn from worry over the workday slog to concerns about how to fund the golden years.

How prepared are you? How much money do you really need to retire? Do you know the ins and outs of your pension (if you’re lucky enough to have one)? How about your 401(k), IRA and other retirement accounts that make up your nest egg? Do you have a good handle on when to claim Social Security benefits? 

These are some of the questions to contemplate as retirement approaches. But long before you punch out, make sure you’re making the right choices.

To help, we’ve compiled a list of the biggest retirement planning mistakes and how to avoid making them. Take a look to see if any sound familiar.

1. Relocating on a whim

The lure of warmer climates has long been the siren call of many who are approaching retirement. So, you’re cooking up a plan to retire in Florida, or maybe you’re considering relocating to one of the many places to retire near the beach. Our advice: Test the waters before you make a permanent move.

Too many folks have trudged off willy-nilly to what they thought was a dream destination only to find that it’s more akin to a nightmare. The pace of life is too slow, everyone is a stranger, and endless rounds of golf and walks on the beach can quickly grow tiresome. Well before your retirement date, spend extended vacation time in your anointed destination to get a feel for the people and lifestyle. This is especially true if you’re thinking about retiring abroad, where new languages, laws and customs can overwhelm even the hardiest retirees.

You can also check out some of our helpful articles to learn more about things you should know before retiring in Florida, retiring in Arizona or retiring in the Carolinas. And as these areas are getting more popular, you can also read about some of the longer-term challenges that might hit your pocketbook.

Once you do make the plunge, consider renting before buying. A couple I know circled Savannah, Ga., for their permanent retirement nest. But wisely, as it turned out, they decided to lease an apartment downtown for a year before building or buying a new home in the suburbs. Turns out the Deep South didn’t suit their Philadelphia get-it-done-now temperament. They instead joined the ranks of “halfback retirees” — people who head to the Deep South, find they don’t like it, and move halfway back toward their former home up north.

2. Falling for too-good-to-be-true offers

Hard work, careful planning and decades’ worth of wealth-building are the keys to a secure retirement. There are no shortcuts. Yet, Americans lose hundreds of millions of dollars a year to get-rich-quick and other scams, according to the FTC, as elder fraud runs rampant. My parents constantly receive calls on their landline from scammers trying to make them part with their hard-earned retirement dollars.

2.6 million consumers filed fraud reports in 2023, and $10 billion was lost in total to fraud, reports the FTC. This is a 14% increase over reported losses compared to 2022. Consumers reported losing the most money to investment scams.

States’ Attorney General offices and the FTC offer tips for spotting too-good-to-be-true offers. Tell-tale signs include guarantees of spectacular profits in a short time frame without risk; requests to wire money or pay a fee before you can receive a prize; or unnecessary demands to provide bank account and credit card numbers, Social Security numbers or other sensitive financial information. Also be wary of — in fact, run away from — anyone pressuring you to make an immediate decision or discouraging you from getting advice from an impartial third party.

What do you do if you suspect a scam? The FTC advises running the company or product name, along with “review,” “complaint” or “scam,” through Google or another search engine. You can also check with your local consumer protection office or your state attorney general to see if it has fielded any complaints. If it has, add yours to the list. Be sure to file a complaint with the FTC, too.

3. Planning to work indefinitely

Many baby boomers have every intention of staying on the job beyond age 65, either because they want to, they have to or they plan to maximize their Social Security checks. But that plan could backfire.

Consider this: 55% of workers expect to work after they “retire,” according to the Transamerica Center for Retirement Studies. Yet, you can’t count on being able to bring in a paycheck if you need it. While more than half of today’s workers plan to continue working in retirement, 19% of adults ages 65 and older are actually employed, according to Pew Research Center. 

You could be forced to stop working and retire early for any number of reasons. Health-related issues — either your own or those of a loved one — are a major factor. So, too, are employer-related issues such as downsizing, layoffs and buyouts. Failing to keep skills up to date is another reason older workers can struggle to get hired. The actionable advice: Assume the worst, and save early and often. Only 34% of baby boomers surveyed by Transamerica have a backup plan to replace retirement income if unable to continue working.

4. Putting off saving for retirement

The single biggest financial regret of Americans surveyed by Forbes was waiting too long to start saving for retirement. Not surprisingly, baby boomers expressed this regret at a much higher rate than younger respondents.

“Many people do not start to aggressively save for retirement until they reach their 40s or 50s,” says Ajay Kaisth, a certified financial planner with KAI Advisors in Princeton Junction, N.J. “The good news for these investors is that they may still have enough time to change their savings behavior and achieve their goals, but they will need to take action quickly and be extremely disciplined about their savings.”

Here’s how much you need to sock away monthly to build a $1 million nest egg by age 65, according to Dutch Point Credit Union. Assuming an annual interest rate of 8%, annual inflation rate of 2% and $0 in prior savings, you’d need to save $300 a month if you start at age 25; $700 monthly, starting at 35; $1,700, starting at 45; and $3,000, starting at 50.

Uncle Sam offers incentives to procrastinators. Once you turn 50, you can start making catch-up contributions to your retirement accounts. In 2024, that means older savers can contribute an extra $7,500 to a 401(k) on top of the standard $23,000. The catch-up amount for IRAs is $1,000 on top of the standard $7,000.

5. Claiming Social Security too early

You’re entitled to start taking retirement benefits at 62, but you might want to wait if you can afford it. Most financial planners recommend holding off at least until your full retirement age — 67 for anyone born after 1959 — before tapping Social Security. Waiting until 70 can be even better.

Let’s say your full retirement age, the point at which you would receive 100% of your benefit amount, is 67. If you claim Social Security at 62, your monthly check will be reduced by 30% for the rest of your life. But if you hold off, you’ll get an 8% boost in benefits each year between ages 67 and 70 thanks to delayed retirement credits. There are no additional retirement credits after you turn 70. Claiming strategies can differ for couples, widows and divorced spouses, so weigh your options and consult a professional if you need help.

“If you can live off your portfolio for a few years to delay claiming, do so,” says Natalie Colley, a financial analyst at Francis Financial in New York City. “Where else will you get guaranteed returns of 8% from the market?” Alternatively, stay on the job longer, if feasible, or start a side gig to help bridge the financial gap. There are plenty of interesting ways to earn extra cash these days.

6. Borrowing from your 401(k)

Taking a loan from your 401(k) retirement savings account can be tempting. After all, it’s your money. As long as your plan sponsor permits borrowing, you’ll usually have five years to pay it back with interest.

But short of an emergency, tapping your 401(k) is a bad idea. According to Meghan Murphy, a vice president at Fidelity Investments, you’re likely to reduce or suspend new contributions during the period you’re repaying the loan. That means you’re short-changing your retirement account for months or even years and sacrificing employer matches. You’re also missing out on the investment growth from the missed contributions and the cash that was borrowed.

”As you think about loans from retirement plans the first thing we say is there anywhere else you might be able to borrow from?” says Murphy. “We think through the importance of having an emergency fund. But, of course, if that’s not available, is there any other place that you’re able to draw from? Things you might want to think about is if it’s a medical emergency, do you have a health savings account that you might be able to take money from.”

What’s becoming more and more popular, says Murphy, is employees drawing money from stock plan options through their employer. “If you draw money from there there’s not necessarily a penalty associated with it or the requirement that you have to make payment on the loan directly through your paycheck.”

Another huge downside to borrowing from your retirement plan is the payback. Usually, loans are paid back to the fund over an up to five-year period. If you were to leave that employer before the loan is paid off, you’re obligated to pay it back in full within 60 to 90 days, says Murphy, or it becomes a taxable distribution. “And if you’re below age of 59 1/2, there’s now a 10% tax penalty associated with it.”

Keep in mind, too, that you’ll be paying the interest on that 401(k) loan with after-tax dollars — then paying taxes on those funds again when retirement rolls around. And if you leave your job, the loan usually must be paid back in as little as 30 days. Otherwise, it’s considered a distribution and taxed as income.

Before borrowing from a 401(k), explore other loan options. College tuition, for instance, can be covered with student loans and PLUS loans for parents. Major home repairs can be financed with a home equity line of credit (HELOC), though that comes with considerable risks.

7. Decluttering to the extreme

My parents are in their late-80s, early 90s and have been living in the same house for decades. In recent years they have started getting rid of a lot of the bric-a-brac they’ve accumulated. Their goal is to make it easier for my brother and I down the road when we inherit the home.

There hasn’t been much junk among the items they’ve parted with — save for the wall clock they gave me and swore it worked (it doesn’t). But there were also items my father wisely ran past his lawyer before dumping: Bookkeeping records from the business he owned for years. He was cleared.

Still, that’s a fair warning: Be careful about what you throw out in haste. Sentimental value aside, certain professionals including doctors, dentists, lawyers and accountants can be required by law to retain records for years after retirement. 

As for tax records, the IRS generally has three years to initiate an audit, but you might want to hold on to certain records including your actual returns indefinitely. The same goes for records related to the purchase and capital improvement of your home, purchases of stocks and funds in taxable investment accounts and contributions to retirement accounts (in particular nondeductible IRA contributions reported on IRS Form 8606). All can be used to determine the correct tax basis on assets to avoid paying more in taxes than you owe.

Plus, who knows? Maybe you have one of these 7 old things in your home that could be worth a fortune. 

8. Putting your kids first

Sure, you want your children to have the best — best education, best wedding, best everything. And if you can afford it, by all means, open your wallet. But footing the bill for private tuition and lavish nuptials at the expense of your own retirement savings could come back to haunt all of you.

As financial experts note, you cannot borrow for your retirement living. Instead, explore other avenues other than your 401(k) plan to help fund a child’s education. Parents and their kids should explore 529 plans, scholarships, grants, student loans and less expensive in-state schools in lieu of raiding the retirement nest egg. Another money-saving recommendation: community college for two years followed by a transfer to a four-year college. (There are many smart ways to save on weddings, too.)

No one plans to go broke in retirement, but it can happen for many reasons. One of the biggest reasons, of course, is not saving enough to begin with. If you’re not prudent now, you might end up being the one moving into your kid’s basement later.

9. Buying into a timeshare

It’s easy to see the appeal of a timeshare during retirement. Now that you’re free from the 9-to-5 grind, you can visit a favorite vacation spot more frequently. And if you get bored, simply swap for slots at other destinations within the time-share network. Great deal, right? Not always.

Buyers who don’t grasp the full financial implications of a time-share can quickly come to regret the purchase. In addition to thousands paid upfront, maintenance fees averaged $1170 in 2022, and special assessments can be levied for major renovations. There are also travel costs, which run high to vacation hotspots such as Hawaii, Mexico or the Bahamas.

And good luck if you develop buyer’s remorse. The real estate market is flush with used timeshares, which means you probably won’t get the price you want for yours — if you can sell it at all. Even if you do find a potential buyer, beware: The timeshare market is rife with scammers.

Want to get rid of a timeshare? Experts advise owners first to contact their time-share management company about resale options. If that leads nowhere, list your time-share for sale or rent on established websites such as RedWeek.com and Tug2.net. Alternatively, hire a reputable broker. The Licensed Timeshare Resale Brokers Association has an online directory of its members. If all else fails look into donating your time-share to charity for the tax write-off. But first, check with your tax adviser.

10. Avoiding the stock market

Shying away from stocks because they seem too risky is one of the biggest mistakes investors can make when saving for retirement. True, the market has plenty of ups and downs, but since 1926 stocks have returned an average of about 10% a year. Bonds, CD rates, bank accounts and mattresses don’t come close.

“Conventional wisdom may indicate the stock market is ‘risky’ and therefore should be avoided if your goal is to keep your money safe,” says Elizabeth Muldowney, a financial adviser with Savant Capital Management in Rockford, Ill. “However, this comes at the expense of low returns and, in fact, you have not eliminated your risk by avoiding the stock market, but rather shifted your risk to the possibility of your money not keeping up with inflation.”

We favor low-cost mutual funds and exchange-traded funds (ETFs) because they offer an affordable way to own a piece of hundreds or even thousands of companies without having to buy individual stocks. And don’t even think about retiring your stock portfolio once you reach retirement age, says Murphy, of Fidelity Investments. Nest eggs need to keep growing to finance a retirement that might last 30 years. You do, however, need to ratchet down risk as you age by gradually reducing your exposure to stocks.

11. Ignoring long-term care

We all want to believe we’ll stay healthy and motoring long into our retirement years. A good diet, plenty of exercise and regular medical check-ups help. But even the hardiest of retirees can fall ill, and even without a serious illness, time will take its inevitable toll on mind and body as you progress through your 70s, 80s and 90s.

When the day arrives that you or a loved one does require long-term care, be prepared for sticker shock. According to Genworth, in 2023 the national median cost of an assisted living facility was $5,350 a month; a private room in a nursing home, $9,733 a month. Projected numbers for 2024 show a median cost of $5,511 a month for an assisted living facility and $10,025 for a private room in a nursing home. 

Even a sizable retirement nest egg can be wiped out in a hurry. And remember, Medicare doesn’t cover most of the costs associated with long-term care.

There are options for funding long-term care, but they’re pricey. If you can afford the high premiums, consider long-term care insurance, which covers some but not necessarily all nursing home costs. The American Association for Long-Term Care Insurance found that for a policy offering $165,000 of total lifetime coverage, a 55-year-old single male would pay an average annual premium of $900. At age 60, it would cost $1,200. A 55-year-old single woman would pay $1500, while a 60-year-old woman would pay $1,960.

You can also look into purchasing a qualified longevity annuity contract, known as a QLAC. In exchange for investing a hefty lump sum upfront when you’re younger, the QLAC will pay out a steady stream of income for the rest of your life once you hit a certain age, typically 85.

12. Neglecting estate planning

Estate planning isn’t just for the wealthy. Even if your assets are modest — perhaps just a car, a home and a bank account — you still want to have a valid will to specify who gets what and who will be in charge of dispersing your money and possessions (a.k.a. the executor). Die without a will and your estate is subject to your state’s probate laws. Not only could your assets get tied up in court, possibly creating financial hardship for your heirs, but absent a will a judge might ultimately award your assets to an unintended party such as an estranged spouse or a relative you never liked.

Retirement is an ideal time to review existing estate planning documents and create the ones you’ve long ignored. Start with the aforementioned will. You might have had one drawn up years ago when your kids were young. Decades later, what’s changed? Are you divorced? Remarried? Richer? Poorer? Maybe you prefer for your grandkids or a favorite charity to inherit what you originally earmarked for your now-grown children? Remember, too, that some assets, such as retirement accounts, fall outside your will. Be sure the beneficiaries you have on file with financial institutions are up to date.

A will is just the start. You should also draft a durable power of attorney that names someone to manage your financial affairs if you need help or become incapacitated. And your health-care wishes should come into sharper focus now that you’re older. Advance directives such as a living will, which spells out the treatments you do and don’t want if you become seriously ill, and a power of attorney for health care, which names someone to make medical decisions for you if you can’t make them yourself, are essential.

13. Borrowing against your home

It’s tempting for retirees who are house-rich but cash-poor to tap the equity that’s built up in a home. This is especially true if the mortgage is paid off and the property has appreciated substantially in value. But tempting as it might be, think hard before taking on more debt and monthly payments at precisely the time when you’ve stopped working and your income is fixed.

Rather than borrow against the value of your home, explore ways to lower your housing costs. Start with downsizing. Sell your current home, buy a smaller place in the same area, and put your profits toward living expenses. For the ultimate in downsizing, consider a tiny home for retirement — seriously. Tiny homes are inexpensive, upkeep is easy and utility bills are low. Retiring in an RV and traveling has its advantages, too. If you’re willing to relocate, sell and move to a cheaper city that’s well-suited for retirees. Or, stay put and find a roommate. The rental income will supplement your Social Security and savings.

If you must tap your home equity, tread carefully. If you still have a mortgage, look into a cashout refi. Just try to keep the length of the refinanced mortgage to a minimum to avoid making repayments deep into retirement. Otherwise, investigate a home equity loan or home equity line of credit (HELOC). However, be forewarned that under tax law you won’t be able to deduct the interest on these loans unless the money is used to substantially improve your home, such as replacing the roof. In the past, the interest could be deducted even if you spent the money on, say, a vacation or a new car. 

Yet another option for retirees is a reverse mortgage. You’ll receive a lump sum of money or access to a line of credit that in most cases doesn’t need to be repaid until you or your heirs sell the home.

14. Failing to plan how you’ll fill your free time

A friend of mine had a nice government job. One of the perks was early retirement. He went for it. But not long after, he informed me he was going back to his old position, albeit two days a week. “There’s only so many movies to see alone during the day in an empty theater,” he said. “That got old fast.”

Our careers provide structure to our lives five days a week, and weekends can be consumed by chores and rest. The cycle starts all over again Monday morning. But once you leave your job for good, there’s suddenly a lot of time to fill. Have you truly thought through how you will fill it in retirement?

It’s critical to plan your free time in retirement as thoroughly as you plan your finances. How about a part-time job doing something you love? My happy place the summer between high school and college was working at a theme park in New Jersey. No one was unhappy there. I’ve always kept “theme park job in retirement” in my back pocket. You could also take a casual hobby to new levels now that you have the time to devote to it. 

Or, you could return to school. Many public colleges and universities (and some private ones) offer free (or cheap) college for retirees. Check a school’s website for details or call the registrar’s office.

15. Downsizing your 401(k) contributions while you’re working

Unusually large tax bills in our household forced us to scale back on contributions to our retirement savings last year. That’s an area to tread lightly in, financial experts note.

”If [people are] thinking of decreasing how much they are currently saving, make sure you choose very carefully and ensure you’re taking advantage of any 401(k) employer match that you might be eligible for, and, save at least enough to get that match,” says Murphy. “That’s money that your employer is willing to give you, and we wouldn’t want people to miss out on that benefit.”

Many retirement plans offer the option of automatically increasing your savings rate. “Check that box that you increase at some point in the future,” says Murphy. “That might be helpful to make sure you get back on track with your retirement savings.”

16. Ignoring your target date

Half of 401(k) savers are 100% invested in a target date fund, says Murphy of Fidelity Investments. That target date is an approximation of when you are going to retire. These funds become more conservative the closer that date approaches. That means the other 50% are investing on their own and may not be keeping a close eye on how much equity exposure they have, notes Murphy.

”So make sure you understand how much equity you’re holding, how much investment risk you’re willing to take on, and if those are two things you’re uncomfortable making decisions about, there are solutions within those retirement plans: A target date fund, a professionally managed account that could bring peace of mind to the process,” says Murphy.

But things change, too. You may want to retire earlier than the target date fund — or later. Murphy encourages savers to check in on their funds at least annually.

Source: https://www.kiplinger.com/slideshow/retirement/t047-s001-retirement-mistakes-you-will-regret-forever/index.html

By Coryanne Hicks

Published 22 June 2024

Before taking Social Security benefits, consider your timing. Start too early and you could miss out on additional benefits. But wait too late and you could end up draining other assets that would have been better left to grow. 

There’s a lot to know about Social Security in order to get it just right, and many people don’t know the ins and outs. In fact, 44% of Gen Z respondents said they didn’t know what Social Security is or what it does at all in a recent survey by Atticus. 

So here, we take a look at what to consider before taking Social Security, so you can make a holistic, informed decision. 

1. Taking Social Security? Watch out for three birthdays

There are three important birthdays to pay attention to when thinking about taking Social Security:

• 62: This is the earliest age you can begin receiving a benefit, but only a reduced amount.
• 66-67: Your full retirement age when you become eligible for your full benefit.
• 70: The age when your benefits stop increasing if you delay claiming.

Age isn’t the only factor in determining when you should take Social Security, either. Other considerations include your and your family’s health, longevity, spousal benefits options and what other financial assets you have, says James Hutchens, a senior wealth adviser at Northern Trust.

“The age that you start to take Social Security, combined with your life expectancy, can lead to a difference of hundreds of thousands of dollars over your lifetime, or potentially your spouse’s lifetime,” Hutchens says.

You’ll also want to consider your other retirement income. If delaying Social Security will mean you need to withdraw from other assets, it may make more sense to start your benefits. This will let you keep your other assets invested.

2. What is the full retirement age?

Social Security full retirement age, or FRA, is the age at which you become eligible to receive 100% of your benefit. This age is based on the year you were born and ranges from 66 to 67. 

If you wait to claim Social Security benefits until after your FRA, you’ll receive a larger monthly payment. Benefits increase by 8% for each year you delay taking Social Security after full retirement age. Once you reach age 70, your benefits stop increasing, so don’t keep delaying after that.

3. Can I take Social Security benefits early?

While you can begin taking Social Security as early as age 62, your benefit will be reduced by 25% to 30% if you do. Your spouse’s benefit could also be reduced. 

That said, there are still good reasons to take Social Security early despite this reduction. For example, if you’re in poor health or want to retire early.

You become eligible to receive 100% of your benefit at your Social Security full retirement age. This age is based on the year you were born and ranges from 66 to 67. If you delay claiming, your Social Security benefit will increase by 8% for each year you wait until you reach age 70.

4. When should I take benefits?

Deciding when to take Social Security involves a lot of moving parts. One strategy to picking the optimal date is to use your break-even point. This is the age you must reach to make waiting to claim until full retirement age worthwhile. 

Some may not think they’ll live long enough to make delaying worthwhile, in which case claiming early is the best route. But it’s also important to factor your spouse into the equation if you’re married.

5. What if I am married?

Married couples have more options for taking Social Security. As long as you and your spouse have been married for at least one year, you can receive a spousal benefit or your own benefit. Exceptions to the one-year rule are if you’re parenting your spouse’s child or are or were entitled to benefits under the Railroad Retirement Act the month before you got married.

One spouse can claim a benefit without impacting the other spouse’s benefit amount. However, claiming Social Security early also reduces the spousal benefit.

If you apply for both a spousal benefit and your own, you’ll receive the higher of the two. Unfortunately, you cannot file for a spousal benefit and delay your own benefit if you turned age 62 on or after January 2, 2016.

6. Can I change my mind on Social Security?

The good news is that you can change your mind after you start taking Social Security. You can stop and restart Social Security benefits. Doing so may enable you to increase your benefit as if you had delayed taking it initially.

How you go about this will depend on the length of time you’ve been receiving benefits. You may need to repay all of the benefits you and anyone who claimed benefits under your record received. You may also need to wait to press pause on your benefit until you reach your FRA.

You should also be aware that stopping your Social Security will mean you need to pay your Medicare Part B premiums directly. 

The bottom line

When to start taking Social Security is a question every retiree faces. The decision impacts not only your financial future, but also that of anyone who claims a benefit under your record. It’s a lot of responsibility to rest on your own shoulders, which is why the best strategy may be to work with a financial professional who can help you weigh all your options.

Source: https://www.kiplinger.com/retirement/social-security/taking-social-security-six-questions-to-ask-before-you-act

It’s important to know how common sources of retirement income are taxed at the federal and state levels.

BY KELLEY R. TAYLOR

LAST UPDATED 1 JUNE 2024

Navigating taxes in retirement can be challenging. Your tax situation may differ from your working years due to income and tax bracket changes. Required withdrawals from retirement accounts and income from other sources can also affect your tax liabilities.

That’s why it’s crucial to know how common sources of retirement income are taxed. Having this information can help you develop a tax-efficient strategy for your retirement years. 

Is retirement income taxable?

Comprehensive retirement planning involves considering various sources of income and understanding how they are taxed at the federal and state levels. But thankfully, there are several types of income the IRS doesn’t tax. For example, life insurance proceeds, long-term care insurance payments, disability benefits, muni bond interest, and alimony and child support are generally not taxable. Additionally, earned income in states with no income tax isn’t subject to tax at the state level.

Related: Types of Income the IRS Doesn’t Tax

Still, your tax planning should consider the tax treatment of income from annuities, pensions, Social Security benefits, and retirement savings accounts. You will also want to assess tax liability from various investments, earnings, and proceeds.

Here’s a breakdown of some common retirement income sources and a brief description of their federal tax implications. (More below on state taxes on retirement income.)

How some income in retirement is taxed

Social Security Benefits: Depending on provisional income, up to 85% of Social Security benefits can be taxed by the IRS at ordinary income tax rates.

Pensions: Pension payments are generally fully taxable as ordinary income unless you made after-tax contributions.

Interest-Bearing Accounts: Interest payments are taxed at ordinary income rates, but municipal bond interest is exempt from federal tax and may be exempt from state tax.

Sales of Stocks, Bonds, and Mutual Funds: Long-term gains (held over a year) are taxed at 0%, 15%, or 20% capital gains tax rates, based on income thresholds. Net investment income tax (NIIT) factors in for some taxpayers. at a rate of 3.8%.

Dividends: Qualified dividends are taxed at long-term capital gains rates; non-qualified dividends are taxed as ordinary income based on your federal tax bracket.

Traditional IRAs and 401(k)s: Contributions to traditional IRAs and 401(k)s reduce your taxable income. However, withdrawals are taxed at ordinary income rates. Required minimum distributions (RMDs) start at age 73. Withdrawals before age 59 ½ are subject to a tax penalty.

Roth IRAs and Roth 401(k)s: Contributions to Roth accounts are not tax-deductible. However, withdrawals after five years following the first contribution are tax-free for Roth IRAs, including gains. Withdrawals before age 59 ½ are subject to a tax penalty.

Life Insurance Proceeds: Life insurance proceeds are generally not subject to tax when received as a beneficiary. However, surrendering a policy for cash may have tax implications.

Savings Bonds: Bond interest is generally taxable at ordinary income rates upon maturity or redemption but may be tax-free for education expenses if certain conditions are met.

Annuities: For annuities, the portion representing the principal is tax-free; earnings are taxed at ordinary income rates unless purchased with pre-tax funds.

Home Sales: Under the Section 121 home sale exclusion, primary home sale gains up to $250,000 ($500,000 for married couples) are excluded from income tax if specific ownership and use criteria are met.

Which states do not tax retirement income?

Crafting a tax-efficient retirement strategy requires careful consideration of various income sources and their tax implications. 

• Seek professional guidance if you need help making decisions that maximize your retirement funds and minimize tax burdens.

Also, note that while this article focuses on federal taxes on different types of retirement income, it is essential to consider the impact of state and local taxes on your finances. (There are more than a dozen states that don’t tax retirement income.) 

Source: https://www.kiplinger.com/taxes/how-retirement-income-is-taxed

Here’s how to handle an inheritance like a pro. A bequest could change your life, but don’t quit your day job.

BY SANDRA BLOCK

LAST UPDATED 23 MAY 2024

CONTRIBUTIONS FROM

ERIN BENDIG

We’ve all heard stories about individuals who passed away quietly after a life of frugality, leaving a fortune to their unsuspecting heirs or, occasionally, a beloved pet.

The reality is a lot less riveting. According to the Washington Post, the average American has inherited only about $58,000 as of 2022, taking into account that most of us won’t receive any form of inheritance. The Federal Reserve also reports that from 1989 to 2007, on average, only 21%  of American households at a given point in time received a wealth transfer.

Complicating matters is the fact that many estate plans contain a smorgasbord of items, including real estate, investments, cash, retirement savings accounts and life insurance plans. It could take months to track down these assets and divide them among the estate’s heirs, and you could incur significant legal fees — particularly if the estate was large or your relative died without a will. There are also different rules for different heirs: Spouses, for example, enjoy some tax breaks and exemptions that aren’t available for adult children or other heirs.

For example, Brian Lee of Tacoma, Wash., got a crash course in estate law after his late father’s brother and sister died almost within a year of each other, in late 2015 and 2017. Neither of his father’s siblings had children when they died, so their estates were divided among their nieces, nephews and other surviving relatives. 

Lee ended up with a six-figure inheritance, but because his uncle died without a will, settling the estate took months and cost thousands of dollars in legal fees. Lee’s aunt had a will, with Lee as the executor, which made “all the difference in the world in terms of the process,” Lee says.

Here’s what you need to know in order to handle an inheritance like a pro.

What you’ll owe in taxes

Stocks: Unless your parents were fabulously wealthy, you won’t have to worry about federal estate taxes, but that doesn’t mean Uncle Sam has no interest in your inheritance. If you inherited stocks, mutual funds or other investments in a taxable account, you’ll be able to take advantage of a generous tax break known as a step-up in basis. The cost basis for taxable assets, such as stocks and mutual funds, is “stepped up” to the investment’s value on the day of the original owner’s death. 

For example, if your father paid $50 for a share of stock and it was worth $250 on the day he died, your basis would be $250. If you sell the stock immediately, you won’t owe any taxes; if you hold on to it, you’ll only owe taxes (or be eligible to claim a loss) on the difference between $250 and the sale price.

It’s a good idea to notify the investment account custodian of the date of death to ensure that you get the step-up, said Annette Clearwaters, a certified financial planner in Mount Kisco, N.Y.

Because of this favorable tax treatment, a taxable-account inheritance could be a good source of cash for a short-term goal, such as paying off high-interest debt or making a down payment on a house, said Jayson Owens, a certified financial planner in Anchorage, Alaska. If you’d rather keep the money invested, review your inherited investments to see whether they are appropriate for your portfolio. For example, you could sell individual stocks and invest the money in a diversified mutual fund without triggering a big tax bill.

Retirement accounts: If you inherited a tax-deferred retirement plan, such as a traditional IRA, you’ll have to pay taxes on the money. Spouses can roll the money into their own IRAs and postpone distributions — and taxes — until they’re 73. 

However, The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect on Jan. 1, 2020, changed the inherited IRA rules for non-spouse heirs. Instead of taking required minimum distributions, based on their age and life expectancy, heirs must withdraw all assets from the inherited IRA or 401(k) within 10 years of the death of the owner. 

If you were fortunate enough to inherit a Roth IRA, you’ll still be required to deplete the account in 10 years, but the withdrawals will be tax-free. If you inherit a traditional IRA or 401(k), you may want to consult with a financial planner or tax professional to determine the best time within the 10-year window to take taxable withdrawals. For example, if you’re close to retirement, it may make sense to postpone withdrawals until after you stop working, since your overall taxable income will probably decline.

Real estate: When you inherit a relative’s home (or other real estate), the value of the property will also be stepped up to its value on the date of the owner’s death. That can result in a large lump sum if the home is in a part of the country that has seen real estate prices skyrocket. Selling a home, however, is considerably more complex than unloading stocks. You’ll need to maintain the home, along with paying the mortgage, taxes, insurance and utilities, until it’s sold.

Life insurance: Proceeds from a life insurance policy aren’t taxable as income. However, the money may be included in your estate for purposes of determining whether you must pay federal or state estate taxes.

Spending your windfall

Even a small inheritance can represent more money than you’ve ever received at one time. Go ahead and treat yourself to a modest splurge — a special vacation, for example — but avoid making costly changes in your lifestyle.

Brian Lee used his inheritance to pay off his wife’s student loans and a small credit card debt; the rest went into retirement savings. Lee says he wanted to honor the legacy of his uncle, a dedicated investor who worked for IBM in the custodial department for 30 years. Lee’s uncle spent most of his life in the same small house in Austin, Texas, and drove a 1967 Ford truck, but he was a wealthy man, with an estate valued at more than $3 million when he died. “There’s no way I would blow money someone spent a lifetime saving,” Lee says.

However, many people overestimate how long their newfound wealth will last. For this reason, consider stashing your inheritance in a money market account or CD account for six months to a year. You’ll earn interest on your cash, and your money will be safe while you assemble a team of professionals, which typically should include a fee-only planner, a tax professional and an attorney.

Your team can help you look for ways to fortify your finances. Paying off credit cards and student loans will relieve you of high-interest debt and free up cash for other purposes. If you haven’t saved enough to cover several months’ worth of expenses, use your windfall to beef up your emergency fund. 

Once you’ve got that covered, consider using your inheritance to increase retirement savings. Finally, if you don’t have an estate plan of your own, use some of the money to create one, including powers of attorney, health care directives, a will and, if necessary, a living trust. Your own heirs will thank you.

Source: https://www.kiplinger.com/article/investing/t064-c000-s002-smart-ways-to-handle-an-inheritance.html

If you’re in your highest-earning years, you can make up for lost time.

BY SANDRA BLOCK

PUBLISHED 1 JUNE 2024

You’ve no doubt heard from multiple sources (including Kiplinger) that the key to retirement security is to save early and often. Thanks to the value of compound interest, even small contributions to a 401(k) or other retirement savings plan when you’re starting out will add up significantly over time.

However, there’s math and then there’s reality. Young workers have multiple demands on their finances, from student loan payments to the rising cost of child care. It’s not unusual for individuals in their twenties and thirties to put their savings on hold, or limit the amount of their contributions, until those obligations begin to diminish and they reach their highest-earning years.

But just as it’s never too late to start strength training, it’s never too late to save for retirement. Here are some strategies you can use to turbocharge your savings. 

Catch-up contributions

The easiest way to ramp up your retirement savings is to make catch-up contributions to your 401(k) or other employer-provided plan. In 2024, if you’re 50 or older, you can contribute an extra $7,500 in addition to the $23,000 maximum 401(k) contribution, for a total of $30,500. If you have a traditional IRA or Roth IRA, you can contribute an additional $1,000 beyond the standard $7,000 limit for those younger than 50, for a total contribution of $8,000 in 2024.

If your employer-provided plan offers a Roth 401(k) — and most large plans do — consider dedicating at least a portion of your catch-up contributions to that account, especially if you already have a large balance in a tax-deferred plan. Although contributions to a Roth 401(k) are after-tax, withdrawals are tax-free as long as you’re 59½ or older and have owned the account for at least five years. And you can contribute to a Roth 401(k) regardless of your income level. 

By contrast, to be eligible to contribute the maximum amount to a Roth IRA in 2024, your modified adjusted gross income (adjusted gross income with certain deductions added back) must be less than $146,000 if you’re single or less than $230,000 if you’re married and file jointly. Contributions begin phasing out above those amounts, and you can’t put any money into a Roth IRA once your income reaches $161,000 if you’re single or $240,000 if you’re married and filing jointly.

In the past, you had to take required minimum distributions from Roth 401(k) plans when you reached the age that triggers RMDs for traditional IRAs and 401(k)s (currently 73). But the law known as SECURE Act 2.0, a broad package of changes to rules governing retirement and retirement savings plans, eliminated that requirement, effective this year. 

Starting in 2026, some workers who want to make 401(k) contributions may have to put some of them in a Roth 401(k), whether they like it or not. A provision in SECURE Act 2.0 will require workers age 50 or older who earned $145,000 or more in the previous year to funnel catch-up contributions to Roth 401(k) plans. The change was originally scheduled to take effect this year, but the IRS postponed implementation of the rule after plan providers and employers — particularly those who don’t yet offer a Roth 401(k) — said they needed more time to prepare. 

After-tax contributions

If you’ve maxed out on catch-up contributions (or you aren’t yet old enough to make them), you may want to consider making after-tax contributions to your 401(k), assuming your employer allows them. In 2024, you can save up to $69,000 in combined employee and employer contributions, or $76,500 if you’re 50 or older. 

Like contributions to a Roth 401(k) (or Roth IRA), contributions are after-tax, but earnings are only tax-deferred; you’ll pay taxes on them at ordinary income tax rates when you take withdrawals. Given that, you may be wondering why you’d use this strategy instead of simply investing extra savings in a taxable brokerage account (which we’ll discuss later).

Here’s why: With a strategy that has been dubbed the “mega backdoor Roth IRA,” you may be able to convert those after-tax contributions to a Roth IRA or, if your plan offers one, a Roth 401(k). Once the money is in a Roth, earnings will grow tax-free, and withdrawals will be tax-free as long as you’re 59½ and have owned the Roth for at least five years. And you won’t be required to take RMDs from the account. “That’s the promised land,” says Ed Slott, founder of IRAhelp.com. “It’s way better off than a brokerage account.”

Now for the caveats, and there are quite a few. First, your plan must allow both after-tax contributions and what’s known as in-service distributions, which allow employees to withdraw funds from their plans while they’re still working. While the IRS permits after-tax contributions and in-service distributions, plans aren’t required to provide them. Only about one-fourth of companies allow after-tax contributions, although it’s more common among large employers. 

An even bigger hurdle is the IRS nondiscrimination rule, which limits the amount some high earners can contribute to their 401(k) plans. The IRS requires 401(k) plans to pass certain tests to ensure that the plan doesn’t favor highly compensated employees over lower-paid workers. Plans are subject to two anti-discrimination tests, one that measures pretax and Roth contributions by both types of employees, and a second that measures employer matches, profit-sharing and after-tax contributions. Because highly paid employees are typically the only workers who can afford to make after-tax contributions, it’s difficult for many companies — especially small and medium-size businesses — to pass the second test, says Ian Berger, an IRA analyst with IRAhelp.com. 

These restrictions don’t apply to solo 401(k) plans, which are primarily used by self-employed business owners, Berger notes. Participation in a solo 401(k) plan is limited to the business owner (and in some instances, his or her spouse), so the anti-discrimination rules don’t apply. If your plan allows it — and not all solo 401(k) plans do — you can make after-tax contributions up to the maximum allowed and do an in-plan Roth conversion or roll over the funds into a Roth IRA. 

The mega backdoor Roth has been in the political crosshairs since news reports revealed that PayPal cofounder Peter Thiel used the strategy to shield billions of dollars in shares of a pre–initial public offering from taxes, potentially forever. Lawmakers have proposed prohibiting individuals from converting after-tax contributions to a Roth, but none of the initiatives have been enacted into law. 

Because the mega backdoor Roth is complex — and not for everyone — consider consulting with a certified financial planner who has experience working with high-income investors to determine whether this strategy is right for you. 

Brokerage accounts

Taxable brokerage accounts are sometimes overlooked as retirement savings tools because they’re, well, taxable. But there are solid arguments for adding a brokerage account to your retirement toolkit, particularly if you’ve taken advantage of all of the available tax-advantaged accounts. 

Funds invested in a taxable account are unencumbered by early-withdrawal penalties, making them a good option for someone who wants to retire early (although if you’re behind on retirement saving, that may not be realistic). You don’t have to take distributions after you reach a specific age as you do with traditional IRAs. And unlike tax-advantaged accounts, taxable brokerage accounts don’t come with annual limits on the amount you can invest. 

Although gains on your investments are taxable, you can take steps to minimize the tax bill. As long as you hold investments in your taxable account for more than a year, gains will qualify for a long-term capital gains rate that’s likely lower than your income tax rate — the rate that applies to short-term gains for investments held in your account for one year or less. Most taxpayers pay 15% on long-term capital gains, and if your taxable income is low enough — in 2024, $47,025 or less if you’re single or $94,050 or less if you’re married and file jointly—you qualify for a 0% rate on long-term capital gains. (Single filers with taxable income of more than $518,900 and joint filers with income of more than $583,750 are subject to the maximum 20% rate; those with income that falls between the 0% and 20% thresholds pay the 15% rate.)

When determining how to invest funds in a mix of taxable and tax-advantaged accounts, you can lower your overall tax bill by using a strategy known as asset location. Exchange-traded funds are good choices for your taxable accounts, because many are index funds, which tend to generate less in capital gains distributions compared with actively managed mutual funds. Even active ETFs tend to be more tax-efficient than mutual funds because of the way they are structured.

Because interest payments from municipal bonds and municipal bond funds are often exempt from federal taxes — and in some cases from state and local levies — munis are also good choices for your taxable account. 

Meanwhile, other bonds and bond funds are better candidates for your tax-deferred accounts because interest is taxed at your ordinary income tax rate, which could be as high as 37% if you’re earning a high income. Sheltering interest-generating investments in your tax-deferred accounts will enable you to postpone paying taxes on that money until you retire and start taking withdrawals. 

Actively traded mutual funds that throw off a lot of taxable capital gains distributions are also better suited for your tax-advantaged accounts. Funds that offer the potential for a high rate of return, such as those that invest in small- and mid-capitalization stocks, are good candidates for your Roth accounts because you’ll be able to take advantage of long-term, tax-free growth. 

If your goal is to leave a legacy, a taxable account could provide an important component of your estate plan. On the day you die, your investments will receive what’s known as a step-up in basis, which means the cost basis of the investments — the amount you paid for them — will be adjusted to their current market value. If your heirs turn around and sell the investments, they’ll owe little or no tax on those appreciated assets. 

Health savings accounts

Health savings accounts are primarily viewed as a way to cover your unreimbursed medical expenses, but they also provide a tax-advantaged way to save for health costs in retirement. 

Contributions to an HSA are pretax (or tax-deductible if your HSA is not provided through your employer), funds grow tax-free, and withdrawals are tax-free as long as the money is used for eligible health care expenses. If you have an individual health insurance plan, you’ll be allowed to contribute up to $4,150 in 2024. For family coverage, you can contribute up to $8,300. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in catch-up contributions.

To qualify for an HSA, your health plan must have a deductible of at least $1,600 for individual coverage or $3,200 for a family plan. The plan must limit out-of-pocket expenses to $8,050 for self-only coverage or $16,100 for family coverage. 

If you have enough disposable income to pay for your current health care expenses out of pocket and avoid taking withdrawals from your HSA, you can get the most out of your HSA’s triple tax advantage, says Nilay Gandhi, a certified financial planner and senior wealth adviser with Vanguard Group. As long as you invest at least a portion of your HSA funds in the stock market — an option that most large plans offer — the money will grow tax-free, and withdrawals will be tax-free as long as the money is used for qualified expenses.

You can use HSA funds to pay for medical costs that Medicare doesn’t cover, as well as monthly premiums for Medicare Part B and Part D and Medicare Advantage plans. You can also use distributions to pay a portion of long-term-care insurance premiums; the amount you can withdraw tax-free depends on your age. 

Once you turn 65, you can take penalty-free withdrawals for non-medical purposes, although you’ll pay taxes on the money (non-medical withdrawals before age 65 are subject to taxes and a 20% penalty). Unlike IRAs, though, there are no required minimum distributions for HSAs, so you can allow the funds to grow throughout retirement.

Source: https://www.kiplinger.com/retirement/ways-to-catch-up-on-retirement-savings

Spoiler: The answer is not ‘under your mattress.’

Written by Toni Husbands, Liliana Hall

Edited by Kelly Ernst

Saving for unexpected costs can be just as important as saving for anticipated goals because if you aren’t prepared when life strikes, you might find yourself with high-interest debt. An emergency fund should be a reserve you can fall back on in case you find yourself in a precarious situation. 

Most experts suggest having at least six months’ worth of expenses in an emergency fund, but how much you should have depends on your individual circumstances. That said, where you should keep your emergency fund is less complicated: It should be out of sight and mind until you need it. 

Here are some of the best places to keep your emergency fund — and some places you should avoid. 

Where should you keep your emergency fund?

Experts recommend keeping your emergency fund in an account that’s liquid and easily accessible. It should be completely separate from your primary checking account so you aren’t tempted to use it in a non-emergency.

“If you’re someone who might not have as much discipline, but you’re trying to build that savings muscle, I recommend putting it out of reach, but still within reach in case of an emergency,” said Krystal Todd, a certified public accountant and the creator of The Cash Compass on YouTube and Instagram.

Additionally, you’ll want to keep it in a bank that’s insured by the Federal Deposit Insurance Corporation or with a credit union insured by the National Credit Union Administration. These accounts are federally insured for up to $250,000 per person, per account category.

You also don’t want to tie up your emergency fund with access restrictions or taxable events that are triggered when withdrawing your money. Long-term investment accounts, like retirement funds, can make it difficult or costly — in terms of fees, taxes or penalties — to access your money when needed. “It shouldn’t be invested,” said Jeremy Schneider, founder of the Personal Finance Club. “If it’s invested, it’s not your emergency fund.” 

The best places to keep your emergency fund

You should be able to access your emergency fund quickly if something unexpected pops up, like job loss, a home repair or other hefty expenses. An emergency fund helps you plan ahead so you can address an emergency without turning to high-interest credit cards or expensive payday loans. But while you want it on hand, you don’t want to keep your stash under your mattress — in today’s high-rate environment, that’s leaving money on the table.

High-yield savings account

High-yield savings accounts are interest-earning savings accounts often offered by online banks or online-only branches of larger banks. Without the overhead costs associated with brick-and-mortar branches, these banks can pass savings onto you in the form of higher annual percentage yields, or APYs. The best APYs available on high-yield savings accounts are as high as 5.35%. 

High-yield savings account APYs are variable and can change based on market conditions. However, in this current climate of rising rates on deposit accounts, keeping your emergency savings in an account that earns competitive interest only helps your bottom line.

Traditional savings account

Most financial institutions offer traditional savings accounts. If you already have a relationship with a bank, opening a traditional savings account with it can be very convenient. However, these accounts often pay very little interest on your savings. The national average annual percentage yield for a savings account is only 0.47%, according to the FDIC. Though your primary goal for an emergency fund should be accessibility and not interest growth, you can earn an even better return on your money by opting for a savings account with a higher yield.

Money market account 

A money market account is similar to a high-yield savings account. It offers a higher interest rate than a traditional savings account but provides the accessibility of a checking account. Unlike most savings accounts, MMAs generally offer debit card access and check-writing privileges. If having easy access to your emergency fund means you’ll be tempted to use it for nonemergencies, though, an MMA might not be the best option for you. 

Where should you avoid keeping your emergency fund?

Checking account

Keeping your emergency fund in the same account as the funds you use for everyday finances is a bad idea for two reasons: It’s too accessible, and you aren’t tapping into the interest-earning potential other accounts offer. 

“By leaving funds in your normal checking account, they are more likely to be spent like normal savings and not be saved for emergencies,” said Nicole T. Strbich, managing director of financial planning at Buckingham Advisors.

The national average APY for an interest-bearing checking account is only 0.07%. So your earning potential doesn’t even come close to competing with some of the best high-yield savings accounts. 

Certificate of deposit

A certificate of deposit is a deposit account that offers a fixed rate for a specific time, or term. In exchange for fixed growth, you agree not to withdraw your money before the term ends. The main benefit of a CD is that your money grows over time with a predetermined APY. Competitive one-year CDs, for example, can earn as much as 5.4% APY, which is higher than the average high-yield savings account. 

While a CD can be a great place to store extra savings, it shouldn’t serve as the primary savings option for your emergency fund. That’s because if you need to withdraw your funds before the CD term ends, you’ll pay an early withdrawal penalty (typically equal to a portion of the interest earned). Some more flexible CD types, like no-penalty CDs, could be better options but currently earn less interest than high-yield savings accounts.

Series I savings bond

Series I bonds are connected to the inflation rate. This savings option was all over the news in 2022 due to its record 9.62% interest rate. The current rate for the next six months is 5.27%. The interest rates for I bonds change twice a year, in May and November, so you can lock in this rate for the next six months if you open one before May 1, 2024.

Savings bonds are considered one of the safest investments, but they’re not the best place to store your entire emergency fund. You need to hold them for at least a year, and if you redeem them before five years, you’ll lose out on the previous three months of interest.

In your home

It’s never a good idea to keep money under your mattress or in your sock drawer because you’re missing out on two important things: insurance and the potential to earn interest. FDIC-insured banks and NCUA-insured credit unions protect your deposit for up to $250,000 per person, per account. If anything were to happen to your home, you wouldn’t have any way of getting your money back. Plus, you can’t earn a competitive yield when your cash is parked next to your favorite pair of socks.

The bottom line

Whether you’re just developing a strategy to build your savings or you have enough saved to float a year’s worth of expenses, selecting the best place to keep your money is a crucial decision. Keep your money close enough to access in an emergency, but far enough away to resist the temptation to dip into it.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.

Source: https://www.cnet.com/personal-finance/banking/advice/where-should-you-keep-your-emergency-fund/

Published Tue, Apr 23 202411:08 AM EDT

Cheyenne DeVon

If you’re in your 40s and have over $40,000 saved for retirement, you’re ahead of most people in your age bracket. However, you may need to take some proactive steps in order to retire comfortably.

The median 401(k) balance for Americans ages 40 to 49 is $38,600 as of the fourth quarter of 2023, according to data from Fidelity Investments, the nation’s largest 401(k) provider. That means half of account holders in this age range have savings above this balance and half have savings below it.

Here’s how much Americans have in their 401(k)s by age, according to Fidelity.

For people in their 40s who hope to retire in their 60s, retirement is edging closer each year. However, they’re likely a long way off from their savings goals.

By the time you reach your 40s, you should aim to have three times your salary saved for retirement, according to Fidelity’s guidelines. If you earn $80,000 annually, you’d ideally have $240,000 saved for your post-work years.

Why Americans in their 40s haven’t been able to save more

Various factors have gotten in the way of this age cohort’s ability to boost their retirement contributions.

For one, when many people in their 40s were beginning their careers, they didn’t get a chance to benefit from reforms to the tax system, such as auto-enrollment, which automatically enrolls you into your employer’s 401(k) plan, and auto-escalation, which automatically ups your savings rate by a given percentage or dollar amount annually, says Anne Lester, a retirement expert and author of “Your Best Financial Life: Save Smart Now for the Future You Want.”

“They were not the beneficiaries of all of the reforms that have happened in the 401(k) system in the last 15 years,” she tells CNBC Make It. “Many Gen Xers have changed jobs, and maybe they’re now contributing, but they missed out on saving in those early years if they didn’t sign up themselves.”

On top of that, many people in their 40s may find themselves in the “sandwich generation,” covering expenses related to both child care and taking care of aging parents.

“It just takes a huge bite out of your wallet,” Lester says. “I think as people are inevitably allocating scarce and finite resources, you may find yourself contributing less than you should.”

How people in their 40s can boost their retirement savings

If you’re in your 40s and your retirement savings aren’t where you’d like them to be, there are a couple of ways to get on track.

First, gain a clear understanding of where your retirement savings stand and what factors are within your control. Despite your contributions, your overall account balance can be impacted by things such as market volatility.

On the other hand, your savings rate, which is the percentage of your income you allocate toward your retirement investment accounts, is within your control.

That’s why you should make sure you’re contributing enough to get your company’s full match, if available. Fidelity recommends aiming for a savings rate of 15%, including any employer match.

If you’re behind on your retirement savings, you may need to make some short-term sacrifices so that you can contribute even more in order to make up for any missed years, Lester says.

“I’m not saying it’s going to be easy,” she says. “If you’re in your 40s and have saved zero for retirement, you may be looking at a savings rate of 30-plus percent.”

But this doesn’t have to be done all at once. You can use features like auto-escalation to increase your retirement savings rate by a few percentage points each year until you reach your goal.

Additionally, as expenses related to things like caring for young children decrease, you can allocate that money toward your retirement.

“Those expenses will drop off at some point and then you’ve got to redirect that money into savings,” Lester says. “Mentally plan for that now so that you’re not feeling poor or deprived when you get that a little bit of extra money.”

Source: https://www.cnbc.com/2024/04/23/fidelity-how-much-money-americans-in-their-40s-have-in-their-401ks.html

Bonds can be more complex than stocks, but it’s not hard to become a knowledgeable fixed-income investor.

BY ANNE KATES SMITH, DAN BURROWS

When it comes to bond investing, there’s a lot more to know than the current interest rate on Treasuries.

Bonds have two primary roles: income – whether taxable or tax-free – and portfolio diversification. Much of the time, when stocks or other investments struggle, bonds hold their value.

Read on to learn some key concepts every bond investor should know.

1. It’s all about interest rates

The Federal Reserve has raised interest rates by more than 5 percentage points over the past two years. Why is this important to investors in bonds?

Bond prices certainly are linked to interest rates, but inversely. When interest rates overall are on the rise, older, lower-yielding bonds become devalued. Conversely, falling rates raise the value of older issues with higher coupon rates.

So remember this like it’s your mantra:

• When interest rates rise, bond prices fall.
• When interest rates fall, bond prices rise.

Rinse, wash, repeat.

2. What does ‘duration’ mean?

To dispel with some misconceptions, “duration” is not a rough estimate of how long it will take to reach your investing goal. Neither is it the number of years a bond issuer has gone without a negative credit event. And it doesn’t refer to the number of years before the borrower has to return your principal.

Rather, it’s a measure of a bond’s interest rate sensitivity. As a general rule, for every 1% increase or decrease in interest rates, a bond’s price will change approximately 1% in the opposite direction for every year of duration. 

Duration – roughly related to a bond’s maturity, or the average maturity of the bonds in a fund’s portfolio – tells you approximately how much the price of a bond, or a fund’s net asset value, would fall or rise depending on the direction of interest rates. A duration of 5.5, for example, implies that a fund’s share price would fall roughly 5.5% if market rates rise one percentage point over a 12-month period.

3. What’s the single biggest risk to bond returns?

A rising stock market that attracts investment assets at the expense of bonds or a growing government budget deficit can hurt returns on bonds, but nothing cripples them like the “I” word.

Indeed, nothing is as pernicious to a lender than inflation, which represents a double-whammy for bondholders.

After all, inflation both devalues the real worth of future interest payments and usually results in higher interest rates that detract from a bond’s current market value.

Recession talk makes bond investors nervous for good reason. Corporate bonds are at increased risk of default when the economy is contracting. It turn, that keeps a lid on bond prices.

4. What is an inverted yield curve?

Nothing gets recession talk started like an inverted yield curve.

A wild and volatile bond market, also known as an upside-down bond market, isn’t nearly as worrisome. It’s also not good when Treasury securities pay higher interest rates than corporate bonds or mortgages with the same maturity.

But an inverted yield curve is worse. When short-term Treasury notes pay a higher interest rate than long-term government notes and bonds, there be monsters ahead.

Inverted yield curves are usually taken as a warning that the economy is slowing and might go into a recession. Longer-dated maturities typically yield more than shorter ones; when that relationship reverses, it could be because investors foresee lower interest rates as the economy slows along with borrowing demand.

However, there are exceptions, and an inverted yield curve doesn’t always spell disaster.

5. What is the highest rating a bond can have?

The two most important agencies that rate the creditworthiness of bond issues are Moody’s and Standard & Poor’s.

The highest credit score for borrowers – be they companies or countries – is AAA. Both agencies use the same designation when it comes to the very best, most reliable debtors.

AAA ratings are precious and hard to earn. The government of Canada gets one. Pharmaceutical giant Johnson & Johnson also has a AAA rating. Amazon, however, even with its massive war chest and firehouse of free cash flow, gets a rating of A1 from Moody’s and S&P rates Amazon at AA-.

Famously, the U.S. lost its top-notch rating from Standard & Poor’s when the rating agency downgraded Uncle Sam to AA+ in August 2011, citing a high level of debt and weakened “effectiveness, stability and predictability of American policymaking” with regard to the debt load.

6. What is a bond’s yield to maturity?

Don’t mistake this for the interest rate on the bond when it is issued, or the interest rate the bond pays between now and the date it is scheduled to mature.

Yield to maturity is the total return, including a gain or loss in the bond’s price, that you can expect if you buy the bond today and keep it until it matures.

Rather, it’s a total return calculation.

Although the word “yield” is in the phrase “yield to maturity,” the figure also includes the future gain or loss in the bond’s value to bring it back to par.

7. Where do bondholders rank in case of bankruptcy?

If a company goes out of business and liquidates, bondholders have the first claim on whatever cash becomes available in the bankruptcy.

Anyone who does not own securities but is owed money by the borrower becomes a general creditor. General creditors might include employees, contractors and suppliers. Stockholders are last in line.

Everyone else – including shareholders, bankers with delinquent loans to the business, and the company’s suppliers – must get in line behind the bondholders.

8. What’s the minimum order my broker will sell me?

It’s a misconception that when you buy bonds from your broker, you must order in multiples of $1,000.

In fact, you can buy $25 “baby bond” units, and often those are better and more liquid than bonds with a face value of $1,000. The $25 units are simple to buy because they are listed just like stocks or ETF units.

9. When do low-rated, high-yield bonds do well?

High-yield bonds, also known as junk bonds, can have a legitimate place in a fixed income portfolio.

That’s especially true when the economy is so strong that even weak companies are profitable and paying their debts.

Junk bonds are often seen as more related to stocks than to other bonds, and they tend to do better when the economy is growing swiftly and stocks are rising.

10. What’s the deal with munis?

Municipal bonds are often known as tax-exempt bonds, but that doesn’t mean you always escape income tax on the interest.

Some municipalities issue both tax-free and taxable bonds because some buyers, such as pension funds and foreign investors, would benefit from the higher yield but do not get anything from a tax exemption.

Source: https://www.kiplinger.com/investing/bonds/601094/bonds-10-things-you-need-to-know

Life experience can make individuals more flexible and adaptable. Here are some strategies to bolster your emotional staying power.

By Lisa B. Samalonis

April 25, 2024

Mental Health and Well-Being

Many people over 50 struggle with difficult life experiences, including personal losses, chronic health conditions and/or professional and financial issues, among others. Research shows these challenges often provide wisdom and perspective and help people become more resilient as they age.

“Human struggles are increasing and becoming more debilitating. The pandemic remains in our rearview mirror and has caused a vast majority of Americans to claim their mental health has been negatively affected by a ‘constant stream of crises without a break over the last two years’,” notes Gina Vild, co-author of “The Two Most Important Days: How to Find Your Purpose and Live a Happier, Healthier Life” and a forthcoming book on resilience.

“We all face everyday struggles that affect our state of mind and our health.”

The World Happiness Report, an initiative of the United Nations, reveals that Americans are trending toward gloom with our worst showing since it was first released in 2012. Today Americans rank 19th, above Afghanistan but well below Finland. In addition, Americans struggle with increasing political divisiveness, Vild notes.

As Vild notes, “We all face everyday struggles that affect our state of mind and our health. We experience professional problems, divorce, conflicts in relationships, debt, miscarriage, infertility, relocation, and the death of those we love. It is especially challenging as we age and face a change in our appearance, make peace with dreams that never came to pass, watch our children grow up and leave the nest, and begin to lose neighbors and friends to illness, death and relocation.”

“The point is that no one escapes adversity,” she says.

Yet, because we struggle, we also strengthen our power to rebound. For example, Vild notes that she has personally — and consciously — cultivated this fortitude at different times in her life, most notably when she lost her parents within 72 days of each other when she was in her late 20s.

“Another was when at 59 I discovered through a devastating series of reveals my marriage wasn’t at all what I thought, and I chose to walk away at a time in my life when most are nesting and readying for the later years, comfortable with long cultivated security and familiarity,” she says.

What Is Resiliency?

Resilience is the process and outcome of successfully adapting to difficult or challenging life experiences, especially through mental, emotional and behavioral flexibility and adjustment to external and internal demands, according to the American Psychological Association.

“Resiliency often encompasses experiences of flexibility or adaptability, being able to problem-solve, not letting situations ‘ruffle your feathers’ and maintaining some semblance of optimism despite life’s difficulties and adversities,” explains Cynthia Shaw, licensed clinical psychologist and owner of Authentically Living Psychological Services in New York.

“We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness.”

“It can be quite challenging to practice this during our midyears, as there are often many changes that can cause disruptions, invite self-doubt and shake our sense of inner peace,” says Shaw. “For example, the midyears is a time when children leave the home, we consider retiring and look toward the future with more questions. We may be experiencing a decline in health, dissatisfaction with what we have or haven’t accomplished in life thus far, and concern for what the latter portion of our lives might look like.”

In addition, the generation of people currently over 50 may be less adept at attending to their mental health. “We may be surprised when we are hit with overwhelming emotions of anxiety, loneliness, self-doubt and sadness. Being less aware of how to cope with such experiences, we may resort to behaviors and activities that are either fleeing or counterintuitive. For example, engaging in ‘retail therapy’ [and possibly spending money we don’t have]. This may lead to even less resiliency as we become frustrated with our current state of being, unsure of how to regain control,” she says.

Older People Cope Better

While older age may bring challenges, it also comes with experience. Recent research by Zhen Cong, PhD, director of the School of Public Health’s Climate and Health Initiative at the University of Alabama Birmingham, found older adults between ages 65 and 74 had better coping appraisals of negative outcomes than did younger adults.

“Older people also are more resilient to financial losses and stressful experiences than are younger adults,” reports Cong, a professor in the Department of Environmental Health Sciences.

Her research looks at why older adults are vulnerable or resilient to disasters. Cong explains that understanding the reasons behind resilience will help communities work together to build a disaster and climate-resilient society in a time with the population aging.

The Effects on Long-Term Mental Health

Physical ailments and chronic conditions play an integral role in resilience and these factors impact long-term mental health. For example, one recent study in the International Journal of Molecular Sciences, concluded that “physical resilience, such as preserved mobility and good physical function, is an important element in attaining high psychological resilience, because it positively influences a sense of self-coherence and self-efficacy, and boosts optimism and feelings of satisfaction with life.”

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control.”

In short, if our health is not good and we don’t feel well, it’s hard to be resilient.

How to Cultivate More Resiliency

“Resilience is a learned skill, as necessary, I always say, as learning to tie your shoe and program your remote control. Rather than relying on the crutches of drinking, overeating and sabotaging relationships, we can choose to feel happy again and survive the burden of problems by choosing to thrive,” Vild says.

Here are some tips to put into action:

Forgive Others and Yourself

Suzy Welch, professor of management at the Stern School of Business at New York University defines resilience as grit plus forgiveness. If you are going to be resilient in your life, you have got to be forgiving of people you think have held you back and be forgiving of yourself for not doing something right, she says. “You can’t pick yourself up and try again if you are still holding on to anger and resentment.”

Attend to Self-Care

Self-care does not have come with a big price tag. It means caring for your whole self — what you think and how you feel. Good nutrition and exercise play a role here, too.

“It’s important to allow yourself to experience all emotions, as each emotion plays a function and isn’t objectively negative or positive (even though there are certain emotions we don’t enjoy all that much, like sadness). Creating space for your emotions is only one form of self-care. Additional practices can include spending time in nature, participating in a water aerobics class, joining a knitting group, or going for regular manicures,” explains Shaw.

Cultivate Presence

The benefits of being present to your life are always immense especially when you are grieving a loss or disappointment and trying to heal, says Vild. “You practice acceptance by being present to your life. Consider it a form of self-care that increases mindfulness, improves health, lowers blood pressure, boosts immunity and regulates sleep patterns. Being present also boosts inner calm, increases positive emotions, provides greater clarity, increases creativity and prods patience and tolerance — all factors necessary for resilience,” she explains.

Being present has social perks as well. Presence makes you more receptive to opportunities that will lead to a stronger social network. Things like meditation, tapping and Reiki can help increase your mindfulness, Vild adds.  

“Recognizing that you have choices in life is a definite way of improving resiliency.”

Develop Optimism

“While it’s important to make space for allowing yourself to experience your emotions, to practice resiliency, it can be helpful to invite balance by curating optimism,” Shaw says. “Being able to learn from experiences, practice gratitude, identify learnings from a situation and note the bright side is a sure way to develop resiliency.”

This sometimes means fighting the urge to stay in a negative headspace. “It is difficult to accept aging, physical and cognitive decline and life changes,” she says, but practicing mental flexibility or openness to possibilities in your future and learning to enjoy moments by incorporating mindfulness can make a difference on your outlook.

Seek Support

Friends and family members can offer support during the many changes occurring at this stage of life. Having trusted relationships can aid in building resilience, as well as increasing positive joined activities, Shaw adds.

Counseling from a professional (either in person or virtually) is also an option if more guidance is needed. Many insurance plans include behavioral health services and list affiliated providers on their websites.

Remember to Problem Solve

It is often helpful to remind ourselves of the tough things we have endured.

“When we are feeling stuck in life, it can be tempting to give up hope, surrender to the stuck-ness, and wallow in self-pity and frustration. Recognizing that you have choices in life is a definite way of improving resiliency,” advises Shaw. “Consider your options, make a pro and con list, identify what your values are and make efforts towards choosing and creating your next steps or achieving your next goals.”

Bring Beauty to Your Life

Surround yourself with things you love — flowers, people, art, music or anything that brings you joy. Indulge yourself without guilt, says Vild.

“My girlfriend surrounded her bed with flowering plants after her extensive cancer surgery. Another woman began painting as self-expression. Inhale and digest beauty and positivity,” she says. 

Source: https://www.nextavenue.org/mental-health-fortifying-your-emotional-resiliency/