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Top Retirement Strategies to Consider

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.

What would the retirement of your dreams look like? Would you like to travel the world? Maybe you’d prefer to spend your days volunteering at a local food bank and helping others? Perhaps you’d like to move to one of the most popular retirement destinations in the U.S.?

Whatever your retirement goals may be, you’ll need a financial plan to help you get there. Social Security alone is highly unlikely to make your retirement a reality. And the average life expectancy in the United States is approaching 80 years, so you need to be planning for a longer period of retirement than has been the case for people retiring in previous generations.

We’ve asked a panel of certified financial planners (CFPs) to weigh in on the top retirement strategies they recommend to their clients. Below we discuss 11 retirement strategies that our CFPs believe everyone should consider.

11 top retirement strategies to consider

If you’re ready to create your retirement plan, here are a few ideas that could help you.

1. Start saving early

The first step toward reaching your retirement goals is to simply start saving money. Thanks to the power of compound interest, the earlier you can start saving, the better. Compound interest is nothing more than the interest that you earn from your interest. With compound interest, you earn money from the money you’ve already earned.

To give you an example of how compound interest works, let’s say you made an initial investment of $10,000 and in year one, your investment earned 5% in interest, for a total of $500.

That would mean in year two, your starting balance would be $10,500. Now let’s say that in year two you earned another 5% in interest. The only difference is that now you’d be earning 5% of $10,500. So, in year two, you’d accrue $525 in interest. That’s $25 more in interest than year one even though you earned the same rate of return.

Compound interest can have a magical effect on your retirement portfolio. But in order for compound interest to really gain steam, you need to give it time. That’s why starting early and committing to lifelong saving for retirement is so important.

Using MagnifyMoney’s compound interest calculator, you’ll find that if you saved $500 a month for over 30 years with a 7% annual rate of return, you’d end up with an account value of over $600,000.

That’s a nice sum. But what if you had just started saving 10 years earlier, for a total of 40 years instead? In that case — assuming the same 7% annual rate of return – your retirement portfolio would grow to over $1.3 million by your retirement date, more than double the total from 30 years. That’s why investing when you’re young is a good idea, especially if you want to retire early.

2. Get rid of your debt

Compound interest is great when it’s working for you. But it can work against you as well. When you only making minimum payments on high-interest credit card debt, debt balances can compound quickly.

Credit card debt

MagnifyMoney recently updated our statistics on credit card debt. Statistics show that many Americans are increasingly taking on more credit card debt. Here are two key pieces of data that were uncovered:

  • Credit card interest payments are up 49% over the last five years. Last year, Americans paid over $113 billion in interest payments, up over 12% from just the year before.
  • The average APRs on credit card accounts that were assessed interest are now 16.86%. That’s up nearly four percentage points over the last five years.

Every extra dollar that you pay towards interest is money that you’re not able to save for retirement. That’s why getting rid of high-interest debt could really jumpstart your retirement saving.

Student loan debt

For many of us, credit card debt isn’t the only kind of debt that we’re dealing with. Our research shows that nearly 1 in 5 adults carry student loan debt. MagnifyMoney’s analysis of anonymized My LendingTree users’ September 2018 credit reports (Note: LendingTree is MagnifyMoney’s parent company), the average student loan debt for each borrower was $36,314.

If you’re wondering whether to pay off your student loans early or invest the money instead, begin by considering the interest rate on your student loans. If your student loans have an average interest rate of 5%, then you have a guaranteed 5% rate of return when you pay them off early.

But the average annualized S&P 500 rate of return over the last decade has been approximately 10%. Plus, when you invest money you get to take advantage of compound interest. And if you have an available match with an employer-sponsored retirement plan, that’s an awesome opportunity that you probably don’t want to waste.

To help you get a better idea which strategy would work best for your situation, try using our Payoff Student Loans vs. Investing Calculator.

3. Set a retirement savings goal

There are two main ways to go about setting your retirement savings goal:

Save a percentage of your income

One way is to aim to save a certain percentage of your income. Fidelity says that 15% of your pre-tax income is a good starting point. But, depending on your situation and retirement goals, your personal target could be different.

Set a retirement savings number.

Another strategy is to set an actual retirement number. In other words, you decide exactly how much money you’ll need to have saved before you can quit the day job.

To calculate your retirement number, a common rule of thumb is to plan to live off a 4% withdrawal rate in retirement. Using the 4% rule, if you want to withdraw $50,000 a year in retirement, you’d need to save $1.25 million.

No matter which way you choose to set your retirement goals, realize that you may need to tweak your retirement plan over time.

Automating your retirement savings

Once you’ve decided how much you want to save on an annual basis, it may be a smart idea to automate the savings. Setting up a consistent transfer from your bank to your brokerage account helps make the savings less emotional. You just set it and forget it.

How often you set up automatic retirement savings transfers is really up to you. You may want to set up a monthly transfer. Or you may prefer to save a percentage of every paycheck.

Whichever strategy you choose, automatic transfers help you to build retirement savings into your budget from the get-go rather than waiting to see if you have money “left over” at the end of the month. The more that you can approach your retirement savings as just another bill, the easier it will be to stay on track.

4. Choose an asset allocation mix that fits your risk tolerance

The mix of stocks and bonds in your retirement portfolio should reflect how aggressive you hope to be and the amount of risk you’re willing to be exposed to. While aggressive portfolios can have higher upside potential in the long run, they can also produce bumpier rides in the short-term. And if you’re not prepared for that, it could lead to problems.

“If you take more risk than you are comfortable with, you could end up panicking and selling at the worst possible time, said Brandon Renfro, a financial planner based in Texas and a Retirement Income Certified Professional®. “Taking too much risk could cause you to literally work against yourself.”

There are many investment tools available today that can assess your risk tolerance and suggest your ideal asset allocation. And many of the top robo-advisors will rebalance your portfolio whenever one type of investment grows faster than the others.

5. Minimize investment commissions and fees

Commissions and fees on your investments may seem small now. But they can make a big difference in your retirement savings over time. Vanguard estimates that if you paid 2% in investment costs every year for the next 25 years, it cost you up to 40% in your final account value. That’s staggering.

If you use a financial advisor, check to see how much they’re charging you on an annual basis. You’ll want to pay attention to the expense ratio on your mutual funds too. And if you’re really serious about finding low-cost investments, you may want to consider index funds.

6. Use tax-advantaged retirement accounts

To encourage retirement savings, the government gives individual retirement accounts (IRA) special tax treatment. Taking advantage of these tax breaks is a smart retirement strategy.

With a Traditional IRA, your contributions will typically be tax deductible. However, you will have to pay taxes on your withdrawals in retirement. Roth IRAs are the opposite. While they don’t offer an up-front tax break, growth and withdrawals are both tax-free.

For 2019, the maximum that you can contribute to either type of IRA is $6,000 for those under 50 years old.

Traditional IRA or Roth IRA?

How do you decide which type of IRA is best for your situation? “A Roth IRA can be a good avenue if you’re young and haven’t reached your peak earnings yet,” said Kayse Kress, a CFP at Physician Wealth Services.

But there are exceptions. Kress said that contributing to a traditional IRA could lower your student loan payments if you’re on an income-driven repayment plan. And if you’re pursuing a forgiveness program like Public Service Loan Forgiveness (PSLF), it could be an even smarter move.

“If you’re going for PSLF, you want to lower your payment as much as possible to maximize your student loan forgiveness,” Kress said. “You’re saving yourself now by lowering your student loan payment and saving for later by saving in your retirement account.”

Open a separate IRA for your spouse

Already maxing out your IRA? If you’re married, you can open a separate one for your spouse, even if he or she doesn’t work.

The IRS rules dictate that your annual contributions can’t exceed your joint taxable income, but it doesn’t matter who earned the income. If you’re married, this could be a simple retirement strategy to double your tax-advantaged savings each year.

7. Contribute to your employer’s 401(k) plan

Does your employer offer a company 401(k) plan? If so, you may want to consider contributing to the plan. Employee 401(k) plans have two key upsides. First, they come with a higher contribution limit than individual IRAs. In 2019, you can contribute up to $19,000. Second, some employers offer a 401(k) match.

How 401(k) matches work

If you’re not familiar with 401(k) matching, here’s how it works. When your employer offers a match, they are saying that they’ll match your 401(k) contribution, up to a certain point.

Many employers use a partial 401(k) matching strategy. In this scenario, will match a percentage of your contributions. For instance, your employer may match 50% of your contributions, up to 5% of your salary.

With dollar-for-dollar matching, your employer matches 100% of your contributions. While dollar-for-dollar matching is a fantastic perk, it’s also less common because it can be very expensive for employers.

How to choose between contributing to a 401(k) or IRA

If your employer offers a match, that’s free money that you don’t want to leave on the table. It’s like getting an immediate 50% return or more on your money. You don’t want to pass that up.

But it’s also important to point out that some 401(k) plans can have high administrative costs. “Depending on your employer, the plan may not be the greatest,” said Sharif Mohammed, a CFP based in New Jersey.  “Sometimes it’s best to take advantage of any match that’s available and then max out your IRA options before moving back to your 401(k).”

8. Don’t ignore health care

It’s true that once you reach age 65, you’ll be eligible for Medicare. But there are certain medical costs that Medicare won’t be able to cover — optical care, dental care and long-term care are just a few examples. In fact, Fidelity says that the average couple will need $285,000 in today’s dollars for medical costs throughout retirement.

Medicare Supplemental Policies

For these reasons, buying a Medicare Supplemental Policy in retirement could be a smart move.

A Medicare Supplemental Policy (also known as Medigap) is health insurance sold by private insurers that can help pay for things that Medicare doesn’t cover. “For people that can afford it, I absolutely recommend a Supplemental Policy,” Kress said, “especially if you have specific doctors that you want to continue going to.”

A Medigap policy could help with coinsurance, copayments and deductibles as well — all which are not covered by original Medicare. To qualify for a Medicare Supplemental policy, you’ll need to have Medicare Part A and Part B. It’s also important to note that you and your spouse would each need to have your own separate Medigap policy.

For more information on Medicare Supplemental policies and where to find them, check out the Medigap guide on Medicare.gov.

Health Savings Accounts (HSA)

One way to bridge any medical expense gaps you may have in retirement is to save money in a Health Savings Account (HSA).

To be eligible for an HSA account, you’ll need to be enrolled in a high deductible health care plan. But, if you are, HSAs have the potential to offer triple-tax savings.

First, your contributions can be excluded from your taxable income. Second, your earnings grow tax free. And third, you can don’t have to pay tax on your withdrawals as long as they’re used to pay for medical expenses.

And, after age 65, you can use HSA money for any purpose without penalty. You will have to pay income tax on any distributions that don’t pay for medical costs though.

9. Take advantage of “catch-up” contribution allowances

Are you a little behind on your retirement savings? That’s ok. It’s never too late to get started. Plus, once you’re past age 50, the government allows you to put more money each year in tax-advantaged retirement accounts.

For 2019, individuals age 50 or older can contribute up to $7,000 per year in an IRA. That’s an increase of $1,000 from the regular $6,000 contribution limit. And if you’re over 50, you can contribute up to $6,000 more per year in your employer 401k plan.

10. Think about your social security benefits withdrawal strategy

You can begin taking social security income as early as age 62 or as late as age 70. You’ll receive a higher monthly payout if you delay withdrawals. But that doesn’t mean it’s always the best decision.

Some retirees simply need the income to meet their needs. Others may be in poor health and are worried that they won’t live long enough to break even. In either situation, taking social security benefits at age 62 could be the right move.

11. Get professional advice

You don’t have to figure everything out alone. You may want to schedule an appointment with a CFP to discuss your retirement strategies. A CFP will look at your entire financial situation and can help you set your retirement goals.

If you’ve found a local advisor who says they’re a financial planner, ask specifically if they’re a CFP. “Financial planner” is a term that can be thrown around loosely in the financial advisor world.

Even if the advisor claims to be a CFP, you still may want to verify their certification with the CFP Board. The CFP Board can also be a great resource for finding a CFP near you.

If you’re specifically looking for a fee-only financial planner, the Garrett Planning Network, the XY Planning Network and the National Association of Personal Financial Advisors are three great places to begin your search.

If you’d rather handle your retirement planning yourself, that’s fine. But don’t ever feel bad for seeking out professional help.

The bottom line

There are lots of ways to boost your retirement savings. But not every retirement strategy works for everyone, so consider what’s best for your personal situation. And don’t get overwhelmed by the options. Ultimately, the most important retirement strategy is the one we covered first — simply saving money.

As Kress puts it, “People worry about intricate retirement strategies, when at the end of the day, people just need to create a plan where they’re living below their means. That’s what every good retirement plan is built on.”

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.

Clint Proctor
Clint Proctor |

Clint Proctor is a writer at MagnifyMoney. You can email Clint here

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Banking

How Do Banks and Credit Unions Make Money?

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.

Banks and credit unions share some broad similarities: They help their customers borrow money, build savings and invest for the future. Both credit unions and banks make money by charging interest on loans and charging fees for banking services. But their business models are very different in many ways, mainly in regards to what they do with their profits.

Banks are for-profit enterprises that serve all and any customers who come to them, and distribute profits to shareholders. Credit unions are not-for-profit institutions that only serve people who become members, often by requiring them to meet certain membership criteria. Credit unions reward their members with bonus dividends or lower-cost services, rather than redistributing earnings to investors.

How banks and credit unions make money

Banks and credit unions both make money by lending out a portion of their deposits, charging interest on those loans and collecting fees and charges for various financial services, such as investing and wealth management.

Interest on loans

The most significant source of profits for banks and credit unions is charging interest on loans to consumers. Common types of loans offered by banks and credit unions include mortgages, home equity lines of credit (HELOCs), auto loans and personal loans, said Ken Tumin, founder of DepositAccounts.com, a LendingTree company.

Banks pay interest on deposits — checking accounts, savings accounts and certificates of deposit — but the interest they earn from making loans is typically higher than what they pay for deposits. In the banking business, the difference between these two types of interest is known as the “spread.”

If a bank pays out 1% interest on $200,000 worth of CDs, and receives 4.5% interest on a $200,000 mortgage, the difference — the spread — is how the bank makes money. Banks have to comply with rules on how many loans they can make relative to their asset bases.

Fees

Another way that banks and credit unions make money is by charging consumers fees for a variety of services, Tumin said. Commonly charged fees include:

  • Overdraft fees: Overdraft fees comprise 60% of the fees charged by banks, and they tend to fall disproportionately on lower-income customers. Banks and credit unions charge these fees when you don’t have enough money to cover your payment or withdrawal. Fees can run as high as $36 per overdraft transaction.
  • Interchange fees: Banks and credit unions charge merchants fees when you use your credit or debit card, which are known as interchange fees. If a consumer makes a purchase, money is withdrawn from their account — and the merchant pays a fee to both the bank and the credit card company for the transaction.
  • Checking account fees: Monthly fees may be associated with a checking account, or fees may be levied if a consumer doesn’t maintain a minimum balance in the account.
  • ATM fees: If you use another financial institution’s ATM, you typically pay a fee to do so, which goes into that bank or credit union’s pocket.
  • In-branch service fees: If you need a cashier’s check, money order, notary or lock box storage, banks charge per-use or annual fees for these services.
  • Document fees: Banks may charge a fee to pull historical bank records pre-dating a certain time period or to provide print copies of cashed checks. Banks may also charge fees for check printing or paper statements.
  • Loan origination fees: Banks charge fees to “originate” loans, including home loans and personal loans. Loan origination fees may be a one-time flat fee or a percentage of a loan. They may sound low (1%, for instance) but can actually be substantial when considering the total size of the loan.
  • Late fees: Banks charge late fees when borrowers pay credit cards, mortgage loans, personal loans and other forms of debt past the bill’s due date (or past a grace period, which is a few days past the due date). When a checking account is overdrawn, there may be additional late fees if it is not brought back to or above $0 swiftly.
  • Early withdrawal fees: Those who open CDs at banks will pay early withdrawal fees if they withdraw funds before their certificate’s term expires. These fees can cut into earnings from a CD.

Financial services

Many banks offer financial advisory and wealth management services. Institutions charge either a percentage of assets under management or per-transaction brokerage fees.

Many banks offer private banking services to high-net-worth consumers, charging an annual management fee as a percentage of the assets under management. Banks also offer access to investment products for customers in lower wealth brackets.

Credit unions cannot offer financial advisory or wealth management services directly, so they provide them by affiliating with partner registered investment advisors or registered broker-dealers. Credit unions offer these services as a benefit to consumers who want investing advice, and they may make money indirectly through referral fees or other partnerships arranged with an investment advising company.

What do banks and credit unions do with their profits?

Credit unions do not have to pay taxes since they are not-for-profit organizations, which means they avoid one major expense that banks need to pay. Additionally, because credit unions are owned by their members rather than by shareholders, they aren’t focused on generating profits for shareholders like banks are. Often, credit unions return profits to their members as dividends, or they may offer reduced fees or better interest rates on loans or deposit accounts, which can, in turn, attract new members.

Banks, on the other hand, are owned by investors and operate as for-profit institutions. They use their profits to provide returns to shareholders (especially if they’re publicly traded, as most larger banks are), and to pay state and federal taxes, which they must pay as for-profit organizations.

How online banking impacts banks and credit unions

Brick-and-mortar banks and credit unions have been facing more and more competition from online banks. Online banks tend to charge lower account fees than credit unions and pay out higher interest rates on deposits, said Tumin.

While online banks don’t have physical branch locations, they nonetheless offer a compelling proposition to consumers. In response, brick-and-mortar banks are beating them by joining them, offering online banking services of their own to address competition from apps and other tools, which threaten to reduce payment-related revenue by as much as 15% by 2025, according to a report published by Accenture, a professional services firm.

Going forward, banks’ business models will have to change to accommodate the anticipated reduction in fee income. But while these tools may not add revenue for banks, they could potentially lower branch operation costs, which are substantial. By putting more power in consumer hands, a big bank could reduce its branch count, branch hours or individual branch teller staff hours.

“For banks, these tools may be more about cutting back on expenses than adding revenue,” Tumin said.

For credit unions, providing these tools offers the conveniences that banks, which typically have larger branch networks, present. Since credit unions aren’t driven to provide returns to shareholders on Wall Street and are instead driven to manage so that their members receive benefits and favorable rates, credit unions can choose which services are for benefit versus for profit.

Are banks or credit unions better for your money?

Now that you know how banks and credit unions make money, you may be wondering which option is best for your money. As with most financial questions, the answer largely depends on what’s most important to you.

Online banks offer the most compelling savings account rates, with the average savings account interest rising from 0.79% in mid-2017 to 1.52% by the close of 2018. During that time period, traditional banks and credit unions also increased rates, but only to 0.26% and 0.23%, respectively. Pair this with their low-fee checking accounts, and online banks are a compelling option for many consumers, although a lack of branches may deter some people.

Brick-and-mortar bank networks may be more convenient, offering more branches and more sophisticated online banking and investing options. These benefits are positives for some busy consumers, but the convenience comes at a cost — especially when it comes to overdraft and other fees.

“Credit unions may be more consumer-friendly,” Tumin said, citing their low account fees and balance minimums. Because credit unions are member-owned and locally driven, they may give back to their communities and their members. However, they are not open to everyone, as a consumer generally can’t join a credit union for aerospace or military members if they’ve never worked in those fields, for example.

The bottom line

No two consumers need the same things from their bank or credit union, so it pays to research how accounts and fees are structured and which additional services are available. While credit unions and banks make money in similar ways, including through interest on loans and fees that customers pay, they don’t handle profits in the same way.

Where that money is reinvested — in discounts to consumers, or in profits for shareholders — is a key differentiator between credit unions and banks. If you’re going to entrust an institution with your money, it pays to know how that institution ultimately makes money.

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.

Jane Hodges
Jane Hodges |

Jane Hodges is a writer at MagnifyMoney. You can email Jane here

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Banking

Credit Karma Savings Account Review

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.

Credit Karma is the latest fintech company to jump on the mobile banking bandwagon. The company is now offering a free high-yield savings account, which is somewhat of a departure from the product it’s most famous for: providing consumers with access to free credit checks.

Credit Karma joins a slew of firms—including SoFi and Betterment—that have recently rolled out cash management accounts of their own. Credit Karma Savings will offer a generous 1.90%  APY, and the company says it will leverage technology to keep its rates competitive. Credit Karma is partnering with a network of banks to hold your deposits and gain Federal Deposit Insurance Corporation (FDIC) insurance.

What is Credit Karma Savings?

Expected to launch later this year, Credit Karma Savings is a high-yield savings account that will be accessible through the company’s app. Credit Karma claims it will take consumers just “four clicks” to get started.

Once signed up, deposits will collect an APY of 1.90%. That’s 22 times more than the current national average of 0.09% for savings accounts. Credit Karma says it will leverage technology to keep that rate moving competitively, so that consumers won’t have to monitor rates themselves to ensure they’re getting the most for their money.

There are no fees or minimums required to open a Credit Karma Savings account, and deposits up to $5 million are insured by the Federal Deposit Insurance Corporation (FDIC). To achieve this, Credit Karma partnered with MVB Bank to provide banking services, and it will be utilizing a network of over 800 banks to hold deposits.

However, it’s important to note that the amount that is actually insured is dependent on whether you already have a balance in a partner bank and how much that balance is: “Actual insured amounts may be lower or adversely affected based on any balances you hold at a network bank,” Credit Karma said.

Credit Karma Savings vs. other cash management accounts

Credit Karma joins the ranks of other fintech companies that have recently launched high-yield savings accounts or cash management accounts for consumers, all boasting no fees and no minimum balance requirements. Here’s how Credit Karma Savings stacks up against companies with similar products.

Bank APYNumber of partner / network banks Amount FDIC insured

Credit Karma Savings

1.90%1 partner bank with network of 800+ banks$5 million

SoFi Money

1.60%7 program banks$1.5 million

Betterment Everyday Cash Reserve

1.60%11 program banks$1 million

Wealthfront Cash Account

1.82%9 program banks$1 million

Savings accounts with higher interest rates than Credit Karma Savings

Credit Karma Savings’ 1.90%  APY is certainly nothing to sneeze at, especially when looking at other fintech companies that offer similar high-yield accounts for stashing your cash. But other savings accounts—particularly those at online banks—boast even higher rates. Vio Bank, for example, currently has an online high-yield savings account with an impressive APY of 2.07% , while HSBC Direct Savings touts a 2.05% APY.

The bottom line on Credit Karma Savings

Credit Karma Savings offers a number of attractive incentives, like a competitive APY, no fees and a high maximum amount of $5 million that’s eligible for FDIC insurance. If you already have a Credit Karma account, the convenience and ease of being able to open a Credit Karma Savings account isn’t a bad perk, either. If your main goal is to rack up as much interest as possible on your savings, though, a number of online banks offer higher-yield savings account offerings.

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.

Sarah Berger
Sarah Berger |

Sarah Berger is a writer at MagnifyMoney. You can email Sarah here