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How Much Should I Save for Retirement?

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

Saving enough for retirement is an extremely important goal everyone should be working toward but many tend to put off. However, neglecting your retirement savings can leave you in a terrible bind as you get closer to retirement. So how do you figure out how much to save for retirement? Here’s what you need to know about prioritizing your retirement savings at any age.

Why should I save for retirement?

There are plenty of reasons you’re not saving for retirement:

  • You have bills to pay
  • You assume Social Security will cover your living expenses through retirement
  • You still have decades to go before retirement

Although these excuses for delaying — or even flat-out avoiding — your retirement savings may sound convincing, they don’t tell the whole story.

To start, paying your bills while you’re employed is much easier than trying to pay bills on a fixed income in retirement. And your bills are not necessarily getting smaller as you age. According to an annual Fidelity report on the cost of healthcare in retirement, a 65-year-old couple retiring in 2018 will need an average of $280,000 for their healthcare needs for the rest of their lives. You would hate to face illness in retirement (or even just the changes that accompany aging) without having an emergency cushion in place.

As for Social Security, the retirement benefit only replaces a part of your income, and as of 2018, the average monthly benefit is only $1,413. It would be very difficult to live solely on this amount of money, even in a low cost-of-living area.

Finally, assuming that you have years (or decades) before you need to worry about retirement means you miss out on years of compounding interest. The longer you wait to start saving, the more money you have to put away to ensure a comfortable retirement. You will be in a much better position if you start as soon as you can.

Calculating how much to save for retirement

Knowing that you need to set money aside for your retirement is only the beginning. Next, you have to decide exactly how much to save — and that means thinking ahead to the end of your career and becoming familiar with any contribution limits.

Any calculation of retirement savings needs to start with your intended retirement date. If you’re in your 20s, 30s, or 40s, it’s pretty safe to start with the assumption that you’ll work until you are 65, unless you specifically hope to retire earlier. If you are in your 50s, you might want to be more specific as to your anticipated retirement date.

The 25x rule

Once you have a target date for your retirement, you need to figure out how much you will need. In a perfect world, there would be a universally-agreed upon amount that would guarantee you an ideal retirement. Although there are plenty rules of thumb you could follow — like aiming for a $1 million nest egg — the amount you need may be more or less than that, depending on how much you make, where you live and what you plan to do in retirement.

The best way to figure out how much you need to save is by calculating your annual retirement expenses. This will be a rather large and detailed list, including any mortgages, vehicle costs, medications and healthcare, childcare, disability insurance. (Note: Don’t forget to include the cost of inflation in your calculations. It only takes 24 years of 3% inflation for the buying power of your money to lose half its value.)

When you have a rough idea of what you will be spending per year in retirement, multiply that number by 25 to get your savings goal. The idea is that you’ll need 25 times your annual expenses in order to retire — known as the 25x rule.

The 4% strategy

The 25x rule is based on the theory behind the 4% withdrawal strategy. Ideally, you should be able to withdraw 4% of your assets in the first year of retirement, and then increase the withdrawal amount to match inflation rate in subsequent years. You should also factor in dividends and capital-gains distributions that are paid in cash when calculating the total withdrawal amount for each year. Hypothetically, this will allow your savings to last at least 30 years.

The 4% strategy assumes your investments will continue to receive a rate of return that is at least 4% or higher per year. This is a relatively safe assumption since the historical rate of return on stocks tends to hover around 10% annually.

Unfortunately, this strategy may not serve retirees well in bad economic times. During years with sub-4% growth in the market, retirees have to either dip into the principal or drastically cut back on their spending.

Even though the 4% strategy can potentially be risky during market downturns, the 25x rule for retirement savings is still a helpful metric for determining your savings goal. It gives you a specific, measurable and achievable goal that you can adjust as necessary over time.

Retirement saving milestones by age

While there are a few forward-thinking go-getters who are doing these kinds of calculations just after landing their first job, most of us don’t think about retirement until we’ve been in the workforce for quite a few years. So how do you determine how much to save to reach your 25x expenses goal?

This is where some rules of thumb can really come in handy. You should take time to calculate the exact amount you’ll need, which you should do every few years to make sure you’re on track.

According to Fidelity’s widely accepted savings guidelines, you should aim for the following by each decade:

  • 1x your annual salary saved by age 30
  • 3x your annual salary saved by age 40
  • 6x your annual salary by age 50
  • 8x your annual salary by age 60

Adjust retirement plan as needed

While these guidelines and your 25x calculation can give you a decent target to shoot for, it’s important to remember your retirement goals should not be static. As your life changes, make sure you adjust your retirement strategy accordingly.

So if you get a big raise, have a child, see some major investment growth (or losses), move to a place with a higher or lower cost of living, or even decide to go back to school, you will need to adjust your retirement goals and expectations accordingly. That way you won’t be stuck following an outdated retirement goal that no longer meets your needs.

The early bird gets the compound interest

While it’s certainly possible to save for the retirement of your dreams even if you don’t start until your 40s or 50s, you will have to save more money to hit the same goal than you would if you’d started earlier.

That’s because of the power of compound interest, which you can calculate here. Here’s one example:

Let’s say that Jane (age 25), and Violet (age 45), start saving for retirement at the same time. They both hope to retire at 65. Jane starts putting away $200 per month, earning 8% interest, which is compounded annually. Violet starts putting away $400 per month at the same interest rate.

If Jane maintains her savings rate of $200 per month for the next 40 years, she will put away $96,000 total. But because of the compounding interest, her nest egg will be worth nearly $622,000.

Violet will also put aside $96,000 over 20 years if she maintains her $400 per month savings rate. However, her account will only grow to about $220,000 because the compound interest has only had half of Jane’s time to grow.

The bottom line

If you want a comfortable and well-funded retirement, the buck starts with you. Start by calculating your annual expenses in retirement and then multiply that number by 25. This will give you a reasonable goal to shoot for, although you will need to adjust your goals and expectations with the fluctuations of life.

Finally, the earlier you start saving, the easier it will be for your nest egg grow via the power of compound interest. That means that even though saving for retirement may not feel urgent, it truly is.

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.

Emily Guy Birken
Emily Guy Birken |

Emily Guy Birken is a writer at MagnifyMoney. You can email Emily here

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Investing

Understanding Binary Options

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

Binary options are a simplified form of options trading. Options trading can be a little difficult to understand, but essentially when you trade options, you are buying or selling contracts that give you the right, or the obligation, to make certain asset trades in the future. Binary options remove much of this complexity, allowing you to bet on whether the value of an asset will be higher or lower than a target price by a given deadline. Simple, right? Let’s take a closer look at how binary options work and whether they make sense for your trading strategy.

What are binary options?

Binary options — like all options — are a financial instrument based on the value of an underlying asset. This underlying asset can be a stock, a bond, a currency exchange rate or the price of gold. When you buy or sell binary options, you’re making a bet about the future price of the underlying asset.

Let’s say the price of gold right now is $1,450 an ounce, and you think it will be higher than $1,500 by the end of the week. You could buy a binary option with a strike price of $1,500 and a deadline of Friday at 5:00 p.m. If the price ends up higher than $1,500 on Friday at 5:00 p.m., you would make money. If the price ends up at $1,500 or lower, you lose money.

How are binary options priced?

Binary options are priced between $0 and $100. Their value is based on how likely the underlying asset will be above the strike price by the option deadline. If the actual value of the asset is above the strike price at the deadline, then the option is worth $100. If it’s below the price, then the option is worth $0.

Before the deadline, the value of the option will fluctuate between $0 and $100, depending on how likely the final result looks. If it looks very likely that the final price will be above the strike price, then the option price will be closer to $100. If it looks unlikely, the price will fall closer to zero. If you own a binary option and want to get out before the expiration date, you can sell the contract to another investor at the current market price.

How do you buy and sell binary options?

When it comes to trading binary options, you can be either a buyer or a seller. Let’s go back to the example of gold going up to a value of $1,500. Imagine that the option currently trades at $45 — that means you’d pay $45 to bet that the price will end up higher than $1,500 by the deadline. If the price ends up higher, you’ll receive $100, giving you a profit of $55 (100 – 45 = 55.) If the price ends up at or below $1,500, your option value falls to $0, meaning that you’d lose your $45 investment.

On the other hand, if you think the price of gold will not be above $1,500, you could take the opposite position by selling the $45 option to another investor. This person would give you the money upfront, and if the price ends up below $1,500, you keep the $45 profit. If the price ends up above $1,500, you need to pay the option buyer $100, so your loss is $55.

Where can you trade binary options?

Since binary options are a newer, more specialized type of investment, you won’t find them with just any online stock broker. One way to make these investments is through the North American Derivatives Exchange (Nadex). This exchange is supervised by the Commodity Futures Trading Commission, a government regulatory agency.

There are other online websites that allow binary option trading, such as Binary.com and IQ Option. But Braden Perry, a former enforcement attorney at the Commodity Futures Trading Commission (CFTC), warns you have to be careful.

“Many internet-based platforms have surged into the market, and with that surge, the opportunity for fraudulent promotional schemes, overstatement of returns, and the failure to pay out for the wins have increased,” said Perry. “Furthermore, some actors are using manipulative software to rig the system, so winning bids end up losing.”

As he recommends, before opening an account with a website, you should check their registration and disciplinary history through BrokerCheck or the Background Affiliation Status Information Center, two databases run by regulatory agencies. You could also perform web searches to determine if your potential broker has been accused of wrongdoing.

What are the fees for trading binary options?

The fees for trading binary options depend on the broker or trading platform. They may charge a flat transaction cost, like $1 for each contract that you buy or sell. They might also charge a fee when they pay out the $100 earnings at a contract’s expiration deadline, known as a settlement fee. Once again this could be $1 per contract, charged to the investor who made the correct bet on the option.

Another way brokers can make money is by using a bid-ask spread, which means the price to buy an option is higher than the price to sell an option. For example, it costs $45 to buy but you would only receive $43 by selling. The $2 difference goes to the broker or the trading platform.

Finally, the broker/platform could charge additional miscellaneous fees for other actions, such as setting up your account or processing withdrawals.

Advantages of binary options

  • Simple to understand: Binary options are pretty straightforward compared to other options trading strategies — either your price prediction comes true and you make money, or it doesn’t and you lose money.
  • Fixed risk: Going into each trade, you can calculate exactly what your loss would be in the event that your prediction was wrong. With some other trading strategies, like short selling a stock, your possible loss is potentially unlimited; with binary options, it’s a fixed risk.
  • Higher potential returns: Investing is generally a tradeoff between risk and return, where higher risk investments tend to have a higher potential return. Since binary options can be relatively risky, they are also potentially lucrative. Due to the higher risk the typical returns on investments are much higher than foreign exchange trading — typically 60% to 90%, compared to 10% for forex.

Downsides of binary options

  • High risk: With the “all-or-nothing” payout system, you can lose money very quickly when trading binary options if your predictions turn out badly. This simplicity may be a downside for new investors, who could lose a lot of money through inexperience.
  • Bad market actors: You need to be careful about which trading platform you use. Binary options are a relatively new investment and still not regulated as closely as more established markets, so the opportunity for fraud can be higher.
  • Broker limitations: There could be limits on how much you can invest per trade. Only some brokers allow big investments, restricting them to clients with large balances. If you want to make larger investments, you may need to sign up with multiple platforms as you could go over the maximum limit on just one.

Who should trade binary options?

Binary options are a better fit for investors with a high-risk tolerance, those more willing to lose money in the short-term in exchange for making a larger profit in the future. If you’re scared about the idea of short-term losses, binary options are likely not a good fit.

In addition, you need to be willing to put in lots of research for your binary option trading decisions. You are competing against other investors, including Wall Street professionals, who are only accepting your buy/sell moves because they bet the opposite will happen and they’ll make money off you. It’s a tough market and takes hard work to make a profit.

Even if binary options sound like a good fit for your personality, Nicholas Hofer, a CFP® and President of Boston Family Advisors, still believes you should think twice before getting started: “I wouldn’t recommend this strategy for traditional investors as it’s more like gambling.”

He thinks binary options are a misuse of what options should be used for, as a hedge against risk and losses. “Unfortunately,” he noted, “‘hedging’ is now often viewed as a way to generate alpha [above market returns] rather than a way to reduce risk.”

Learn more about binary options

If you’d like more help to learn about binary options, there are online courses and bootcamps that can give you trading strategies and tips. You could also hire a financial advisor to help set up your options trading account and give you recommendations for trades.

The complicated part is not understanding how binary options work, but rather how to make good predictions. That means studying up on market trends, closely following financial news and learning everything you can about potential trades so you can make better predictions than the average investor.

If you do decide to move forward with trading binary options, make sure to do so responsibly — only invest money you can afford to lose. With research and some luck, you can make money quickly through binary options. But if you aren’t careful, you can lose it just as fast.

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.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here

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Investing

Wealthfront Review 2020

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

Wealthfront is a robo-advisor for beginner investors who don’t have the time or money to devote to hands-on investing but who still want to save for the future. Wealthfront’s automated platform designs a portfolio of low-cost, exchange-traded funds (ETFs) that maximizes your returns while honoring your own level of risk tolerance. And with a minimum investment requirement of only $500, there’s a low threshold for entry.

Wealthfront also guides your financial planning. It examines where you are now, helps you set goals and ensures you stay on track to hit your investing objectives. Additional key features include automatic rebalancing and tax-loss harvesting, plus college savings plans.

Wealthfront
Visit WealthfrontSecuredon Wealthfront’s secure site
The bottom line: Wealthfront is an easy-to-use robo-advisor for novice investors.

  • Low fees, automatic portfolio rebalancing and tax-loss harvesting.
  • Save for retirement and college in one place.
  • Free financial planning.

Who should consider Wealthfront?

Wealthfront doesn’t allow its clients to choose the assets that make up their portfolio until they reach an account balance of $100,000. This makes the robo-advisor a good option for beginners who know they should be investing for the long term but aren’t looking for in-depth portfolio customization. It’s also a good choice for investors looking for a robust tax-loss harvesting strategy, and anyone looking to save for education expenses, since it offers a 529 plan.

The site is also a good checkpoint for anyone seeking basic financial planning, since Wealthfront offers free financial guidance on retirement, college savings, home purchases and the decision to take time off to travel. This is not, however, the robo-advisor for someone who wants access to a human advisor or anyone who’s interested in a socially responsible investing portfolio.

Wealthfront fees and features

Amount minimum to open account
  • $500
Management fees
  • 0.25% annual advisory fee on investments
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Portfolio
  • Wealthfront offers 12 asset classes
Automatic rebalancing
Tax loss harvesting
Tax loss harvesting detailWealthfront offers daily tax loss harvesting for taxable accounts for no additional charge.
Offers fractional shares
Ease of use
Mobile appiOS, Android
Customer supportPhone , 24/7 live support, Email

How does Wealthfront invest your money?

Wealthfront uses Modern Portfolio Theory (MPT) to choose a portfolio for you with the maximum expected return for your chosen level of risk. The site uses software to design a diversified mix of investments across “relatively uncorrelated asset classes,” based on your risk selection. The strategy seeks to maximize long-term returns. Each of Wealthfront’s asset classes is represented by a low-cost, passive ETF.

Wealthfront’s investment team currently utilizes the following asset classes:

  • U.S. stocks
  • Foreign developed market stocks
  • Emerging market stocks
  • Dividend growth stocks
  • U.S. government bonds
  • Corporate bonds
  • Emerging market bonds
  • Municipal bonds
  • Treasury inflation-protected securities (TIPS)
  • Real estate
  • Natural resources

Wealthfront builds your portfolio from ETFs that minimize cost and tracking error, offer enough market liquidity and minimize the lending of their underlying securities. To ensure adequate diversification, no asset class can contain more than 35% of your total allocation. Based on your risk score, Wealthfront assigns portfolios with target annualized volatility ranging from 5.5% to 15.0%.

The platform uses software to monitor and periodically rebalance your investments, while also taking care to minimize any tax impact. Its rules-based strategies aim to deliver more value than buying and holding an index fund:

  • Tax-loss harvesting: Designed to reduce your tax bill by capturing investment losses after market movements.
  • Stock-level tax-loss harvesting: Once your account reaches $100,000, Wealthfront captures losses on individual stocks within an index.
  • Risk parity: Aims to increase your risk-adjusted returns through an enhanced asset allocation strategy. Customers must have $100,000 to activate this strategy.
  • Smart beta: designed to boost your expected return by weighting the stocks in your portfolio more intelligently. Available to clients with $500,000 or more in their account.

Note that Wealthfront’s risk parity strategy comprises a separate investing methodology than its standard model, and clients must opt in. It allocates capital across multiple asset classes, also known as mean-variance optimization. Applying the Risk Parity model complicates tax-loss harvesting and limits the ability to borrow against the portfolio value for other purposes, so Wealthfront limits participation to 20% of larger accounts.

Financial planning features

Wealthfront offers free, automated financial planning features. There’s no phone call — customers link their other financial accounts to Wealthfront, which then analyses them for you and offers advice. The more you link, the better view the automated platform has of your financial life, and the better the advice it can provide. You can explore various scenarios to see how they might affect your end goals, and update your plans accordingly. Bonus: You don’t have to have a Wealthfront account to use this feature.

This mobile and desktop tool — the Path — offers advice about retirement, buying a home, covering college costs and even the equation of whether you can take time off to travel:

  • Retirement: Wealthfront will show you how your retirement picture changes depending on your savings level, choosing a different retirement age or adjusting other near-term goals.
  • Buying a home: Wealthfront uses your location, net worth, credit score and debt-to-income ratio to estimate the mortgage you’d qualify for and suggest what you can afford to purchase. By changing variables like your timing, location and home size, you can see how the advice adjusts.
  • Covering college costs: Once you choose a college for your child (Harvard aspirations?), Wealthfront uses Postsecondary Education Data System data to project the total cost you can expect to pay, even factoring in estimated financial aid. Then the system will suggest a realistic monthly savings goal.
  • Time off to travel: Wealthfront’s engine will help you determine how you can comfortably take time off to travel while staying on track for financial goals by doing things like working remotely, subletting your home or varying the details of your trip to affect the cost.

Wealthfront Cash Account

The Wealthfront Cash Account is a high-yield savings account that earns 1.78% APY. It’s a competitive interest rate in the field of online savings accounts, but it’s not as accessible as many competing cash management accounts. There is no option to withdraw funds or make payments from the account via check or ATM card (although the site states that debit cards are coming soon) — you can only get money into and out of the account via ACH transfer to and from a separate checking account. Transfers take one to three business days.

Funds saved in the Wealthfront Cash Account are swept into multiple accounts at partner banks. The partner banks provide FDIC insurance coverage up to $1 million on the funds (or $2 million if you have a joint account).

Despite the strong interest rate, other robo-advisor cash management accounts offer more perks. The Betterment Everyday Cash Reserve account offers a two-way sweep feature that automatically optimizes your account balance based on your spending patterns. SoFi Money pays slightly less interest, but the account comes with debit card access so you can use it to make purchases and withdraw money from ATMs.

Strengths of Wealthfront

  • Low fees: Wealthfront charges just 0.25% for digital portfolio management, which is competitive. That means if you have $10,000 invested, you’ll pay about $25 per year in fees. Wealthfront’s underlying investments are also low-cost ETFs with expense ratios ranging from 0.03% to 0.13%. That said, Betterment also charges 0.25% for portfolio management, and SoFi offers the service for free.
  • Low-cost 529 plan: Wealthfront offers a 529 college savings account with fees ranging from 0.42% to 0.46% per year, making it one of the lowest cost advisor-sold 529 plans.
  • Continuous rebalancing. Wealthfront has no schedule for rebalancing, it monitors your portfolio and rebalances as your allocations drift from their original target mix.
  • Free financial planning help. You can link your other financial accounts to Wealthfront, giving you an overall picture of your finances in one spot. The platform offers targeted automated advice on retirement, college savings, buying a home or taking time off to travel, based on your financial info, which may be just enough help for the novice saver.
  • Robust tax-loss harvesting: Wealthfront offers tax-loss harvesting for all clients — and stock-level tax-loss harvesting for larger accounts — using losses to offset ordinary income or investment gains to minimize your overall tax bill. In a taxable account, this can make a big difference. Not all competing robo-advisors offer this service for no additional charge.

Drawbacks of Wealthfront

  • No human advisors: While you can talk to a professional about your investment account, and Wealthfront offers only automated advice on life goals like retirement and college savings. If you would prefer a human to talk you through your options, Wealthfront may not be your first choice. For slightly higher fees, you can get access to digital portfolio management and human advisors, such as with Vanguard Personal Advisor Services (charging 0.30%) or Betterment’s Premium plan ( 0.40%).
  • No fractional shares. The ability to purchase fractional shares minimizes the amount of uninvested cash is sitting in your account, optimizing your long-term returns. Wealthfront doesn’t offer fractional shares, while Betterment and SoFi both do.
  • Minimum investment: Wealthfront’s minimum of $500 isn’t steep, but it’s not $0, which is the minimum investment for Betterment , SoFi and Ellevest. If you don’t yet have $500 to throw at your investing future, you may want to start with another platform.
  • No socially responsible investing portfolio. Many robo-advisors offer the option to invest in a socially conscious portfolio. Wealthfront only offers the ability to exclude companies you don’t wish to invest in once your account is large enough for Stock-Level Tax-Loss Harvesting ($100,000) or Smart Beta ($500,000). Investors interested in SRI should look toward Betterment or Wealthsimple, which offer SRI portfolio options.

Is Wealthfront safe?

Though no investment is guaranteed as “safe,” Wealthfront focuses on investing in ETFs, index funds that are widely considered to be low risk, even for the most conservative investors.

Wealthfront is also a member of SIPC, insuring your securities up to $500,000 for each account, and Wealthfront’s cash account is protected with FDIC insurance. They don’t have any complaints under the Consumer Financial Protection Bureau and have $20 billion in assets under management. View Wealthfront on FINRA BrokerCheck.

Wealthfront review: Final thoughts

Starting out in investing can be overwhelming, and it can be hard to know where to begin. If you have $500 to invest, Wealthfront will jump-start the process for you, diversifying your portfolio and minimizing expenses and taxes. The robo offers robust tax-loss harvesting and rebalancing features. There is no SRI portfolio for socially-conscious investors, but there are college savings options, so you’ll have to decide what’s important to you.

The lack of a human advisor isn’t for everyone, but you still get easy-to-manage tools, including financial planning advice on big life goals. You can trust that your money will be secure, and this robo-advisor will do all the work for you.

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.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate here