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9 of the Best Ways to Invest for Retirement When You’re Behind

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Saving for retirement is the kind of important-but-not-urgent task that can easily fall by the wayside. You know you should be saving a portion of your income every month toward retirement, but with so many competing needs for your income, it can be very tough to put savings at the top of your financial to-do list.

But neglecting your retirement savings will eventually catch up with you, and it will happen when you are at your most financially vulnerable. Rather than face an underfunded retirement because you didn’t save, become an aggressive saver who makes savvy investment choices now.

Here are the steps you need to take to give yourself a well-funded retirement, even if you’re behind.

Know your savings needs

The first step to retiring well is figuring out how much you’ll need in retirement. Start by looking up how much you have saved. (Don’t panic if the answer is somewhere closer to “pocket lint” than “$1 million.”)

From there, you can start plugging your information into a variety of retirement calculators. You can find such calculators in a number of places, including the American Association of Retired Persons (AARP) and insurance company Voya. These calculators can project your individual retirement goals and show you what it will take to get there, even when you are late to the process.

In addition to calculations of how much you will need in retirement and how much you’ll have to save each month to get there, you will also need to consider your current debt obligations, your current and future cost of living, and the effects of inflation over time. All of these factors can affect your savings rate and should be incorporated into your savings plans.

5 of the best ways to save for retirement when you’re behind

To get to a secure retirement, you need to have fully funded retirement accounts. Here are five ways to beef up your 401(k), IRA or other retirement accounts, even if you’re working to catch up.

1. Max out all your contribution limits

There are three different ways you can max out your contributions. First is to make sure you are contributing enough to receive your full company match in your 401(k). Many employers offer to match 401(k) contributions up to a certain amount. For instance, your company might offer to match 50% of your contributions up to 6%. This means that if you contribute 6% of your salary to your 401(k), your company will put in 3%, giving you 9% in total contributions. Taking advantage of this kind of company match is like getting free money toward your retirement savings.

Next, do your best to ensure you are contributing the maximum according to IRS guidelines. Your 401(k) plan and your Roth or traditional IRA have specific annual contribution limits. In 2019, the employee 401(k) contribution limit is $19,000 and the IRA contribution limit is $6,000 for those under 50.

Finally, if you are over the age of 50, make sure you’re taking advantage of the catch-up contribution limits. In 2019, savers over the age of 50 may put aside an additional $6,000 into their 401(k) for an annual total of $25,000, and an additional $1,000 into their Roth or traditional IRAs for a yearly total of $7,000.

2. Minimize your fees

Just as interest compounds over time, so do fees. For instance, Vanguard has calculated that if you invest $100,000 for 25 years and earn 6% per year, you’d have $430,000 by the end of your investment term. But if there’s a 2% annual fee on your account, the fees will compound as well and you’ll end up with only $260,000. That 2% fee will eat up nearly 40% of your account value.

So what can a 401(k) account holder do to minimize fees? First, remember that your employer is required to try to keep the fees in your 401(k) reasonable. However, you can reduce your fee through a change in your holdings within your 401(k). Moving from actively managed funds to index funds or ETFs will automatically reduce your fees, as those types of investments have lower costs because they do not need to pay a fund manager.

3. Diversify

Just as you shouldn’t put all your eggs in one basket, you shouldn’t have all your retirement money in a single stock or asset class. For example, if you are solely invested in domestic automobile stocks, you would face a giant loss if American auto workers decide to go on an indefinite strike. But if domestic automobile stocks only represent a portion of your investments, then you will only see a small change in your overall investment portfolio balance in the event of an auto worker strike.

It’s much easier to diversify now than it used to be. Investing in index funds can provide you with automatic diversification because the funds are made up of a number of different asset classes. This will protect you from potential losses if any one sector has a downturn.

4. Invest for a long time horizon

The main difference between investors in their 20s and those in their 40s or 50s is the length of time available to invest. The young adult will not be retiring for 30 to 40 years, so there is sufficient time to allow compound interest to work as well as time to recover from market downturns. This is why younger investors often put their money in more aggressive stocks that offer higher potential returns at a higher level of possible risk.

But older investors should remember that they don’t have to stop investing the moment they retire. In fact, older investors can still plan on a 25- to 35-year investment horizon, because they will not need all of their money as soon as they retire. That means it’s entirely possible to invest in the higher-risk/higher-return types of investments even if you have already passed your 40th (or 50th) birthday. Just put a portion of your investments into these aggressive stocks and plan to hold off on shifting them to something more conservative until you’ve reached your 70s, 80s or beyond.

5. Delay retirement

For each year that you continue to work, you have one more year of earned income, one more year to make contributions to your retirement accounts, and one more year you can delay taking your Social Security benefits. Not only will this help you increase the size of your nest egg, it will also increase the amount of your Social Security benefits, because your benefit increases with each year you wait, up until age 70.

4 top ways to find extra money to invest

Of course, just knowing that you should be saving as much as possible for retirement doesn’t make it any easier to find the extra funds in your budget to do so. You don’t have to go searching for couch-cushion change to maximize your contributions. Here are four of the best ways to invest more.

1. Invest your extra income

You might be wondering, “What extra income?” But you could have more income than you realize.

Because of a cognitive bias known as mental accounting, you might treat things like your bonuses, tax refunds or even raises like “free money” instead of income. But each of these can be funneled into your retirement accounts to help you reach your annual contribution goals.

2. Automate your savings

You can’t miss money you don’t see. Automating your savings will allow your contributions to go directly to your retirement accounts without you having to decide to move it there. (That also means it’s a little more difficult to change your mind about what to do with the money if you suddenly decide to splurge on a big purchase instead.)

3. Cut your expenses

Reducing how much you spend each month can free up what you need to maximize your contributions. Cutting back could be as simple as cooking at home more often or as complex as downsizing your home or car.

4. Generate additional income

You could always earn more money, whether by offering your services as a consultant or freelancer, getting a second job, selling off your things in preparation for downsizing, or even by renting out a room in your home.

Bottom line

It may not be easy to financially prepare for retirement if you got a late start, but it is achievable. Start by determining how much you need to save, then get busy maximizing your contributions, minimizing your fees and making savvy investment and career choices. Even if you think there’s no more wiggle room in your budget, you can find extra money to invest by changing your mindset, automating your savings, making judicious cuts and generating extra income.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How to Calculate When You Can Retire

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Estimating the year in which you retire can be a deceptively tough decision to make, even when using various age benchmarks. For instance, even though the average American retires at age 63, you might need to retire at a later age to reach your retirement savings goal.

And although it seems like the “typical” retirement age is 65, that’s considered early retirement by the Social Security Administration for anyone reaching that milestone birthday in 2019 or beyond. This means that to retire at age 65, you will have to either accept a reduction in your Social Security benefits or live on just your retirement savings until you reach your Social Security retirement age (66 or 67, depending on your year of birth).

Since age is not necessarily a reliable benchmark on which to base your retirement date, you should find other ways to calculate the right retirement age. Specifically, understanding how your finances will work into your retirement timeline can make the difference between a secure and fulfilling retirement and kicking yourself for calling it quits too early.

Here’s what you need to know about how your money can help you determine when to retire.

How much money will you need?

Determining how much you’ll need for a financially stable retirement depends on multiple some factors that vary from individual to individual. But there are a few standard rules that can help you quickly help you estimate when you can retire.

The 4% withdrawal rule

This rule originated with the 1994 study by William Bengen entitled “Determining Withdrawal Rates Using Historical Data.” Bengen used the historical market rates and fluctuations to determine that a retiree can safely withdraw 4% of her assets in the first year of retirement and increase the withdrawal a little bit each year to cover inflation. Following this kind of systematic withdrawal, the retiree’s savings could last for 30 years or more.

The 4% withdrawal rule is not the end-all-be-all for retirement income, however, because a market downturn early in your retirement can force you into an impossible decision: either take your normal withdrawal amount even though it depletes your nest egg more than originally planned, or live on less money while you wait for the market to recover.

The 4% rule is simple: Calculate 4% of your nest egg and decide if it’s enough for you to live on. For instance, if you have $1 million saved for retirement, you would withdraw $40,000 each year for living expenses.

75% of income rule

Another helpful principle is the 75% of income rule. With this guideline, you will aim to spend just 75% to 85% of your current annual income in retirement, since that will likely cover your living expenses after you stop working. That’s because retirees often see their expenses go down in retirement, as they are no longer paying payroll taxes, work expenses or saving for retirement.

However, if you plan to travel extensively during retirement, enjoy expensive hobbies, provide significant gifts to family, or if you suspect you may have serious health issues, then this rule of thumb may not be sufficient for your retirement needs.

You can use both rules to help you determine your retirement readiness. Simply calculate 75% of your current income and compare that amount to 4% of your nest egg. For instance, let’s say you earn $70,000 per year and you have $1 million saved for retirement. 75% of your current income is $52,500, and 4% of your $1 million nest egg is $40,000.

A gap in your numbers might mean you are not ready to retire, but remember that you are not yet done calculating your income sources.

Other income sources in retirement

The above calculations can provide a good sense of how well-prepared you are for retirement, but don’t feel discouraged if your calculations don’t line-up. There are other income sources to include in your retirement plans, which can be broken up into three categories: income from growth (such as dividends), income from interest and lifetime income.

Social Security and pensions would be considered a lifetime income stream. Average retirees can expect their Social Security benefits to replace about 40% of their pre-retirement income, according to the Social Security Administration. (The higher your income, the lower that percentage will be.) You can view your projected Social Security benefit amount by logging in to your Social Security account. Remember that the longer you wait to take your Social Security benefits, the higher they will be (up to age 70).

CDs, bonds and cash would be examples of interest-dependent income streams, and dividend-producing stocks and mutual funds could provide growth income. Other income streams to consider would be inheritance, royalties and savings — all of which can be included in your retirement income calculations.

Take advantage of compound interest

The power of compound interest can also help you reach your retirement goals, especially if you start saving early.

For instance, 25-year-old Beau and 45-year-old Mitch both start saving at the same time, hoping for retirement at age 65. Beau sets aside $200 per month and Mitch puts away $400 per month. Both men earn 8% interest, which is compounded annually.

Over 40 years of savings, Beau will put away a total of $96,000, but the power of compounding interest will make his account grow to be worth nearly $622,000. Mitch’s 20 years of savings will also result in $96,000 being put away, but the account will only grow to about $220,000 because there was only 20 years of growth rather than 40.

But even if your 20s (or even your 50s) are behind you, don’t assume that you can no longer take advantage of compound interest. While you are still working, you can set aside money in investment vehicles that you don’t plan to touch until you have been retired for at least a decade or more. Even after you have retired, you can still take advantage of compounding interest by keeping a portion of your retirement assets in long-term investments that you do not plan to access for 15 to 20 years. In that way, you can still get the benefits of compound interest without inventing a time machine.

When can I retire?

Determining the best time to retire will depend on your unique financial situation. But you can do some quick calculations to help you understand how much you’ll need and how you’re pacing along toward retirement.

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How to Know if an Annuity Is Right for You

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Annuities offer retirees one potential way of providing income in their golden years. But the world of annuities can feel confusing because of the vast array of options out there. It’s common for those nearing retirement not to know what annuities are and how they work.

But it’s important to understand the ins and outs of annuities to help you determine if one of these products would be a good addition to your retirement plan. Here’s what you need to know about annuities so you can figure out if they should be part of your retirement income strategy.

What are annuities?

An annuity is a product sold by an insurance company that creates an investment contract between the investor and the insurer. In exchange for a lump sum from the investor, the insurance company provides guaranteed payments to the investor for either a fixed period or for the investor’s lifetime. As for the lump sum, the insurer invests that money and then shares some of the investment growth with you through your guaranteed payments.

You can purchase an annuity through any number of insurance companies. While most annuities are purchased with a lump sum (known as single premium), you can also purchase annuities over a period of time by paying in installments. This is known as a flexible premium.

The timeframe for receiving your payment from the insurer can either be immediate or deferred. Here’s how each one works.

Immediate annuities

Just like it sounds, immediate annuities offer you regular, guaranteed payments immediately after you make your initial lump sum purchase. Since there is no time for an immediate annuity to grow, these products generally cost more than deferred annuities to get the same monthly payment.

Deferred annuities

If your payments are deferred, there is time to allow your initial investment to grow, making these kinds of annuities less expensive to purchase. The time between your initial investment and when you begin withdrawing money is called the surrender period. If you try to take money out of your deferred annuity before the end of the surrender period, you will face hefty fees known as surrender charges.

With a deferred annuity, once you have finished the surrender period, there are multiple ways to access the money. You can withdraw the original lump sum (plus any interest you have earned), receive regular payments for a set period or life, or take systematic withdrawals when you need them until you have emptied the fund.

Types of annuities

Within the basic framework outline above, there are different types of annuities with different benefits and drawbacks. Here are three of the most common types.

Fixed annuities

This type of annuity promises a specific, guaranteed interest rate for your investment. The rate is set by the insurer. While it is possible that your money will earn more than the guaranteed rate, it will never earn less.

The catch with fixed annuities is that the insurer needs to make certain it will earn more interest than it will pay you, which means the guaranteed interest rate is likely to be relatively low. Putting your money in a fixed annuity may guarantee you payment, but it is unlikely to do better than (or even as well as) more traditional investments.

Variable annuities

With variable annuities, there is no guaranteed interest rate for the investment. However, variable annuities earn returns based on their underlying investment portfolios. As the investor, you get to choose which investment portfolio (known as a sub-account) you want for your variable annuity. If the investment does well, you receive the bump up in interest that you would miss if you had a fixed annuity. On the other hand, if the investment does poorly, you will also experience the downturn that a fixed annuity would have shielded you from.

Indexed annuities

Another version of a variable annuity is an indexed annuity, which ties the investment’s performance to a specific index, such as the S&P 500. Since the annuity is tied to an index that theoretically follows the market’s performance as a whole, this product potentially offers investors the upside of a variable annuity with the peace-of-mind of a fixed annuity.

Indexed annuities are not without pitfalls, however. To begin with, insurers place interest caps on their indexed annuities, which state the maximum amount of interest you can earn even if the underlying investment does much better than the cap.

In addition, the insurer may set a “participation rate,” where it decides the percentage of the index’s return that it will credit to the annuity. For instance, if the index goes up 8% and the indexed annuity has an 80% participation rate, your investment will only earn 80% of the 8% gains — or 6.4%.

Why you might choose an annuity

Though annuity products can be quite complex, there are a number of reasons why a savvy investor may choose to make an annuity part of their retirement plan.

  • Guaranteed, predictable income for life: If you would like to continue to get what amounts to a paycheck in retirement, an annuity could be a helpful way to structure your retirement income. This is particularly helpful for those who know that they can budget a predictable and regular income, but might struggle if they had access to more than a month’s worth of money at a time. Since annuities can offer lifetime payouts, this kind of predictable income will always be there.
  • Protection from stock market fluctuations: Depending on what type of annuity you choose, you can feel confident that your money will not take a hit in a market downturn. If you feel overwhelmed or panicked by market fluctuations, an annuity can offer you a great deal of peace of mind.
  • Life insurance benefits without underwriting: If you’re not in perfect health but want to provide a life insurance payout to your spouse, an annuity can be a good option. There is no health underwriting for an annuity and you can designate your spouse as the beneficiary of your annuity, which means the payments transfer to him or her upon your death. There may also be some additional riders that you can add to your annuity to increase the payment at your death. This makes an annuity a reasonable substitute if you are unable to qualify for life insurance.
  • Long-term care protection: Purchasing a long-term care rider for your annuity can offer you a financial safety net in case you need long-term care. This can be a more affordable option than long-term care insurance.

Why you might not want an annuity

Despite the benefits, annuities do come with their fair share of pitfalls. Here are some of the reasons why you may not want an annuity to be part of your retirement income plan:

  • Illiquid investment: The biggest downside to an annuity is the fact that your money is tied up in it once you have purchased it. There is no way to access your funds without paying a painful fee.
  • High fees: The fee structures for annuities can be complex, expensive and less-than-transparent. The fees for variable annuities tend to be significantly higher than fees for similar investments that are not annuities, and the surrender charges you pay for accessing your money early can be prohibitive.
  • Commission sales: In many cases, insurance agents selling annuities receive commissions for their sales, incentivizing them to sell you more expensive products than you may need.
  • High level of complexity: While the simplest annuities are easy to understand, annuities can get incredibly complex and difficult to understand. While some retirees are happy to do the necessary work to understand the specifics of any one annuity product, others are turned off by the complexity and would prefer to put their money in something that does not require a flowchart to understand.

Bottom line

Annuities are not the right product for everyone. Retirees who need the security of a guaranteed regular payment, protection from long-term care costs or who are unable to get life insurance may want to consider an annuity to cover their needs.

However, anyone considering an annuity needs to be fully aware of the potential costs, complexity and risks of putting their money into an illiquid, complex investment. Make sure you know what you will pay in fees and how your specific annuity would work before you sign on the dotted line.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.