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How to Catch Up on Retirement Savings in Your 50s

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.

Data is increasingly showing that many Americans, even those in their 50s, have saved little for their retirement.

According to research by the nonprofit Economic Policy Institute, among households headed by adults ages 50 to 55, the median retirement savings is only $8,000, according to the Economic Policy Institute.

Lack of retirement funds is all the more concerning as today’s adults are expected to live much longer. In 1940, the life expectancy of a 65 year old was almost 14 years. Today it is just over 20 years.

Supplemental income like Social Security may not be enough to cover anything beyond basic needs, especially if retirees need extensive health care as they age. The average monthly Social Security benefit is $1,369, for an annual haul of $16,428 — that’s peanuts compared with the $46,000 that the average 65 year old spends in a given year.

For 50-somethings who are swiftly approaching retirement but feel as if they haven’t yet saved enough, it can be overwhelming. The good news is that you still have some time to catch up.

Here are seven ways to boost your savings and cut back on expenses.

Use a retirement calculator to set savings goals

Even though it’s late in the game, it’s important to get an idea of how much you need to save in order to have the type of retirement that you envision.

Organizations from the American Association of Retired Persons to insurance company Voya sponsor retirement calculators, which can project your individual financial goals and show you what it will take to reach those goals, even when you are late to the process. David Skid, executive director and financial adviser of Vantage Wealth Management at Morgan Stanley in Atlanta, suggests using a variety of retirement calculators, and comparing to make sure you get consistent results.

Retirement calculators will ask you to input several pieces of data, including your age, annual salary, how much you have saved for retirement so far and any pension you expect to receive, as well as this data for a spouse.

Retirement calculators will also often ask about your spending plans during retirement. For example, if you plan to travel or spend more on hobbies or dining out, calculators will take this factor into account when projecting how much you should save.

Take advantage of catch-up contributions

One good thing about turning 50 is an additional savings opportunity for your 401(k) and IRA accounts.

For eligible workers under the age of 50, the maximum contribution limit to a 401(k) is $18,500, up from $18,000 in 2017, and to an IRA is $5,000.

But catch-up contributions allow eligible workers 50 and over to save more, which are called “catch-up contributions”. This boosts those total contribution limits to $24,500 and $6,500, respectively.

“The government gives the ability to turbocharge or jump-start [retirement savings] for investors that are getting a later start,” Skid said.

Don’t use your 401(k) like a piggy bank

It might be tempting when facing large costs such as college tuition to dip into your 401(k), but it’s best to not touch the account. All 401(k) withdrawals are subject to your ordinary income tax rate, and it’s likely you will pay more to take out money now rather than in your retirement years because you currently are earning more and therefore placed in a higher tax bracket.

Also, 401(k) accounts only allow for one loan at a time and loans must be paid back in five years, meaning you would have to take out all of the college tuition you would need in one withdrawal and pay back four years’ worth of costs in only five years.

If your child is vying to go to an expensive school and you’re tempted to use your nest egg to fund their way, think of this before you dip: College students have access to low-cost, flexible federal student loans and decades ahead of them to repay their debt. No one is going to issue a 50-something a low-rate loan to fund their retirement.

To save your child from the financial burden of paying for your retirement later in life, you might need to have a different conversation about paying for college on their own or taking out student loans. And it’s not only for your benefit — it’s for theirs, too.

“If we don’t save for our own retirement, then when we become older, we are going to have to be reliant on somebody else to financially support us when we are no longer able to work or face potential health challenges,” Skid said.

Enroll in employer match programs

When you are saving with a 401(k), some employers will match a percentage of the contribution you make to your account.

For example, your employer could match your contributions 100% up to 6% of your income. This means if you earn $100,000 and you place 6% into your 401(k), or $6,000, and your employer will add $6,000. If you add 8% of your income, or $8,000, your employer would still match you at 6%.

Not every employer offers a match and even when they do, the match they offer can be different. It is important for you to ask your company’s HR or similar representative to find out if this opportunity exists and how to take advantage of it.

If you haven’t taken advantage of this program or if your employer is just starting to implement matches, it’s worth your time to investigate. Employer matches are like free money to add to your retirement savings account.

“It’s important for all of us to make sure in our jobs what sort of match we might have available to us and contributing at least as much money as we can to get that free money from our employers,” said Skid, who also is a chartered financial analyst (CFA) and certified financial planner (CFP).

Also, if your employer’s 401(k) plans offer financial advice, take up the offer. A 2014 study by Financial Engines and Aon Hewitt found that 401(k) participants who received professional investment help in the form of managed accounts, target-date funds or online advice, earned higher median annual returns than others who invested on their own.

The study found that if two employees both invested $10,000 at age 45, one with advice and one without, the one who received advice could have 79% more wealth at age 65 than the employee without advice.

Add more income streams

Accelerate your savings by adding to your workload during the last few years until you retire or delaying your retirement if you are still healthy and able.

Add a part-time job or pick up an extra project at work to increase your monthly cash flow, some of which can be saved for retirement. Likewise, if you continue to work past 62, you can keep employer benefits, such as health insurance, and increase your time to add money to employer-sponsored retirement plans.

“If you are starting savings later in life, you might have to have a paradigm shift of when your retirement is going to start,” Skid said.

Automate your savings

Set your checking account to put aside money once a month into your investment account, instead of relying on yourself to manually do it, Skid says. You will be less likely to forget or bend to other expenses. Consider it your own personal payroll deduction plan.

Typically, most financial advisers suggest putting aside 10% to 15% of your income into a retirement account each year throughout your life. At this rate, financial services company Fidelity estimates that you should have about six times your salary saved up if you started saving at age 25 and planned to retire at age 67.

However, if you have delayed savings, a 2014 report from the Center for Retirement Research at Boston College found that in your 50s, you might have to boost the percentage of your income going to your account to almost 29% to reach a savings amount that is enough to live off.

Pay off debt aggressively

If you have enough cash on hand, Skid said accelerating your mortgage payments or paying down other consumer debt is another good way to prepare for retirement if you are late in the savings game.

Speeding up your mortgage payments would ease the burden of debt from the mortgage during retirement, when you would have less income to pay off the mortgage.

Because cash is earning you less than your mortgage is costing you, paying off your mortgage with that money will help set you up for a less costly retirement.

The same goes for high-interest credit card debt. You should still sock away at least enough in your 401(k) to capture any employer match, but then throw everything you’ve got toward tackling high-interest credit debt. Conservatively, you might earn 7% a year in annual stock market returns, while credit card debt can easily carry interest rates of 16% or higher.

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.

Lindsey Conway
Lindsey Conway |

Lindsey Conway is a writer at MagnifyMoney. You can email Lindsey here

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How Fed Rate Hikes Change Borrowing and Savings Rates

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.

Since late 2015, the Federal Reserve has raised the upper limit of its target federal funds rate by 2.25 percentage points, from 0.25% in December 2015, to 2.50% for much of 2019.

But the Fed is no longer raising rates. The question now is whether the Fed will continue to make cuts in the federal funds rate like the first two 0.25 percentage point reductions in July and September 2019, which lowered the federal funds target rate from 2.50% to 2.00%.

Previously MagnifyMoney analyzed Federal Reserve rate data to illustrate how the rates consumers pay for loans and earn on deposits have changed since the Fed started raising them two and a half years ago. Now, with the Federal Reserve embarking on a series of rate cuts, we’ll be tracking that effect on rates as well.

  • Credit card borrowers are currently paying $113 billion in interest annually, up $34 billion from the annual $79 billion they paid prior to the first Federal Reserve interest rate hike in December 2015, making introductory 0% APR deals all the more attractive.
  • Meanwhile, depositors earned significantly more from savings accounts. In the 12 months ending in June 2019, depositors earned $39.3 billion in interest on their savings accounts, up $29.3 billion from the $10 billion they earned in 2015.
  • According to our analysis, credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 3 percentage point increase since December 2015. Credit card rates will continue to rise in line with the Fed’s rate increases, and if the Fed raises them again, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the Fed rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.
  • Student loan and auto loan rates have also risen — but by less than half as much as credit card rates — in part because they are long-term forms of lending that are less reliant on the short-term federal funds rate. Federal student loan rates are set based on the 10-year Treasury note rate each May.
  • Savers at big banks have seen little change, with the average savings and CD account passing through only a fraction of the rate increase. However, that masks a big opportunity for savers who shop around and move deposits to online banks. Online banks have aggressively raised rates, and now often offer rates of more than 2%, versus just 1% in 2015. That’s over 20 times what typical accounts pay.

In addition, MagnifyMoney also looked at the impact on consumer rates the last time the Fed reduced rates in 2007.

 

Generally, unsecured loans like credit cards and personal loans are more rate-change sensitive than secured loans like autos and home mortgage rates, no matter the direction of the rate change. However, savings products like Certificates of Deposit are a stark exception. Even after 3 years of fed funds rate increases, CD rates generally languished at rock-bottom rates until very recently, and then only increased modestly, relative to other financial products. Compare that to 2007, when it was the product most sensitive to interest rate cuts.

 

Let’s take a closer look at how the Fed rate hike impacts different financial products:

Credit cards

Most credit cards have a rate that’s directly based on the prime rate, for example, the prime rate plus 9.99%. As a result, card rates tend to move almost immediately in line with Fed rate changes. In the current cycle, the rates on all credit card accounts tracked by the Federal Reserve have increased 3 points, even more than the Fed’s increase of 2.25 points.

Although it’s too early to tell, we expect a similar decline in credit card APRs as the Fed continues to pare rates. And consumers can still find attractive introductory rate offers.

For example, introductory 0% balance transfer offers have continued to have long terms even as the Fed hiked rates, with offers still available for nearly two years at 0%.

Credit card issuers make up for the rate hike with the automatic rise in variable back-end rates, as well as the increasing spread between the prime rate and what consumers pay on new accounts. They can also increase other fees, like late payment fees or balance transfer fees to keep long 0% deals viable.

The Federal Reserve tends to hike up interest rates gradually over time. And people in credit card debt will barely notice the rate increase in their monthly statement. When rates are increased by 0.25%, the monthly minimum due on a credit card will increase $2 for every $10,000 of debt.

Similarly, monthly minimums may decline with rate reductions – though cards typically have monthly minimum payments of at least $20. But making minimum payments could mean years of paying off credit card debt and accumulating interest. The best ways to lock in lower rates are by leveraging long 0% balance transfer deals or by consolidating into fixed rate personal loans.

Savings accounts

On average, savings account rates haven’t changed much since the Fed started raising rates. That’s largely because big banks with the biggest deposits and large branch networks have less incentive to offer higher rates, and this skews national data on rates earned because most savers don’t shop around to find higher rates at online banks and credit unions.

Consumers who shop around can find much higher savings account rates than three years ago, and shopping around for a better rate on your deposits is one of the best ways to make the Fed’s rate hikes work in your favor.

Back in 2015, it was rare to see savings accounts pay 1% interest.

Today, many online banks are competing for deposits by offering savings account rates in excess of 2%, flowing through about half of the Fed’s rate hike into increased rates for depositors. These rates will continue to rise as the Fed hikes rates. The increases are already apparent in the data. Depositors are currently earning more than $39 billion in interest on their savings accounts annually, versus $10 billion in 2015.

CDs

CD rates have moved faster than savings rates, up 0.41 points for 12-month CDs since the Fed started raising rates. That’s in part because they are a more competitive product that forces consumers to rate shop when they expire at the end of their 6-month, 12-month or longer term.

But that rate rise doesn’t fully reflect what some smaller banks are passing through, as the banks with the largest deposits have been slow to raise rates.

Recently rates on 1- and 2-year CDs at online banks had been increasing rapidly to well over 2%, reflecting much of the Fed’s rate increases since 2015. The rates on 5-year CDs also began to increased, with some banks offering 60-month CDs with rates above 3.00%. Although rates have started to recede from those highs, CD rates are still well above their 2017 levels.

One reasonable strategy would be to invest in short-term (1- and 2-year) CDs. If competition on the short end continues, you can get the benefit in a year on renewal.

Student loans

Federal student loan rates are set based on a May auction of 10-year Treasury notes, plus a defined add-on to the rate. Today, rates for new undergraduate Stafford loans stand at 4.53%, up from 4.30% before the federal funds target rate began to rise.

Since student loan rates are determined by the 10-year Treasury rate, rather than a short-term rate, they are less directly related to changes in the federal funds rate than some shorter-term forms of borrowing like credit cards. Instead, future market views of inflation and economic growth play a role. Federal student loan rates are capped at 8.25% for undergraduates and 9.5% for graduate students.

For private refinancing options, rates depend on secondary markets that tend to follow longer-term rates, rather than the current federal funds rate, but in general, a rising rate environment could mean less attractive refinancing options.

Personal loans

Personal loan rates tend to be driven by many factors, including an individual lender’s view of the lifetime value of a customer, funding availability and credit appetite. Most personal loans offer fixed rates, and in a rising rate environment overall, we expect these rates will go up, making new loans more expensive, so consumers on the fence should consider shopping for a good rate sooner rather than later. Since the end of 2015, rates on 2-year personal loans tracked by the Federal Reserve have increased by 0.24 basis points.

Auto loans

Prime consumers who shop around for an auto loan can still find very low rates, especially when manufacturers are offering special financing deals to move certain car models.

But the overall rates across the credit spectrum have gone up since the Fed raised rates, in part due to the rate hikes and because of recent greater than expected delinquencies in some parts of the auto lending market.

Mortgages

Since the Fed started raising rates in late 2015, the average 30-year fixed mortgage is now sightly lower than the 3.90% rate in December 2015. The mortgage market tends to follow trends in longer term bond markets, like the 10-year Treasury, since mortgages are a longer-term form of borrowing. That shields them from the impact of Fed rate hikes, and it’s not unusual for mortgage rates to decline during some periods when the Fed is raising rates.

What can consumers do

Even if rates are no longer going up, life is still expensive for debtors, and more rewarding for savers than in recent years.

If you are in debt, now is the time to lock in the lowest rate possible. There are still plenty of options at this point in the credit cycle for people to lock in lower interest rates.

If you are a saver, ignore your traditional bank and look online. Take advantage of online savings accounts and CDs to earn 20 times the rate of typical big bank rates.

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.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at [email protected]

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Survey: Most Millennials Believe They’ll Become Wealthy Some Day

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.

It seems like everyone has an opinion about millennials these days, but perhaps what they should be saying is that they are confident and optimistic. MagnifyMoney has surveyed more than 1,000 Americans on their views about wealth, and we found that millennials have a remarkably positive outlook when it comes to the subject.

Compared to the other generations surveyed, millennials are much more likely than older generations to believe that they’ll become wealthy someday. Whether this comes from youthful exuberance, wishful thinking or a healthy attitude toward building wealth is not entirely clear. But what is clear are the striking generational perspectives on wealth revealed by our study.

Key findings:

  • Just over half (51%) of respondents believe they will one day become wealthy, despite only 15% saying that they already are. Millennials are even more confident, with 66% saying they think they will become wealthy in the future.

  • Of those surveyed, 28% think acquiring real estate is the best wealth-building strategy. The stock market came in as the second most popular effective strategy at 19%, while only 4% think investing in cryptocurrency was a good way to build wealth.

  • There were generational differences of opinion on the best wealth-building strategy. Baby boomers are most likely to think real estate is the best way to build wealth, while millennials are more likely than any other generation to say investing in a business is the best wealth-building strategy. Generation X are the most likely to consider the stock market as their top strategy.
  • Unfortunately, 23% of Americans currently are not doing anything to build wealth. On the bright side, 36% are saving for retirement and 29% are investing in the stock market.

  • Millennials prefer to do things digitally. They are the generation most likely to utilize an online savings account. About 30% of millennials use one, compared to only 17% of baby boomers.
  • About 55% of Americans reported believing that being wealthy ultimately means having the ability to live comfortably without concern for their finances. Meanwhile, 43% defined it as feeling financially secure.

What are millennials doing to build wealth?

The two most popular strategies for wealth building among millennials are investing in real estate and in the stock market, but they’re hardly the only generation to take that approach. Across the board, real estate investing and the stock market were named as the two most popular investment strategies.

Still, both the real estate and stock market are subject to fluctuations, such as those seen during the Great Recession. According to a Gallup poll published in May 2019, during the Great Recession of 2008 to 2010, Americans were just as likely to name savings accounts or CDs as the best long-term investments, on par with stocks and real estate. As of 2019, the poll found that Americans currently view stocks and real estate as the best long-term investments.

Of course, this mindset could change quickly if another economic downturn hits. But for now, property owners have cause to celebrate. In 2018, home values were the highest on record, according to Gallup.

That same Gallup poll found that those who actually invest in stocks were more confident in the value of stocks as an investment, though stock ownership remains below pre-recession levels. Note that the S&P 500, which is considered a proxy for the stock market as a whole, has gained 9% per year on an annualized basis over the last decade — that return rises to an annualized gain of more than 11% per year when dividends are reinvested.

Hurdles to wealth building

But even if stock and real estate strategies can be effective, debt may still stand in the way of some millennials’ wealth-building efforts. Due to rising student debt burdens, it’s not uncommon for millennials to carry large amounts of debt.

According to Misty Lynch, a Boston-based resident certified financial planner (CFP) with the savings and investing app Twine, millennials may be too accustomed to debt. “Millennials are used to having debt and feel like it is just part of life,” Lynch said. “This sometimes hurts them if they continue to add to their debt without considering the long term impact.”

Lynch also noted that the glitz of social media can affect millennial finances: “Social media has changed the definition of wealth. It is easier to appear wealthy in this Instagram-era even if your bank account doesn’t back that up.”

Plus, although 66% of millennials believe they’ll someday become wealthy, the survey also revealed that 18% of millennials currently aren’t doing anything to build wealth. For millennials looking to start the process, saving for retirement is a great launching point. One suggestion from Cynthia Loh, vice president of Digital Advice and Innovation at Charles Schwab in Denver, is that if your employer offers a 401(k) plan, you should set up recurring contributions that deposit money from your paycheck. Plus, you should max out annual contributions if you can afford to. The potential match from an employer is an added bonus worth taking advantage of.

For those without access to a 401(k), consider checking out a robo-advisor, which can be great for newer investors. Most robo-advisors have low investment minimums, which makes it easy to start investing your money.

What does wealth mean for millennials?

More than other generations, millennials believe they can become wealthy some day. The survey found that 66% of millennials believe that they will become wealthy compared to only 25% of baby boomers.

As baby boomers are in the 54-72 year age range, their different perspectives make sense. Baby boomers are in the phase of their life where they either have already retired or are nearing the end of their career. They know their potential for wealth building is slowing down.

In general, younger generations seemed to be more optimistic. For instance, Gen Xers are more optimistic than baby boomers, and Generation Z seems to be even more hopeful than millennials.

Youthful optimism aside, perhaps millennials simply have a different definition of wealth than older generations. Across all generations surveyed, 55% said they thought the definition of being wealthy was being able to live comfortably without worrying about their finances. If you’re looking to quantify wealth, 20% of millennials (more so than any other generation) reported that they define being wealthy as having $500,000 or more; only 8 percent of baby boomers feel this way. Networth finds more common ground between millennials and baby boomers — almost 18 percent of both generations feel a networth of at least $1 million signifies wealth.

Andrea Woroch, a money saving expert from Bakersfield, California, thinks that mindset may just be the key to millennial’s future financial success.

“Thinking positively about your money is key toward building better financial habits,” Woroch said. “Ultimately, your thoughts influence your behavior which will lead to a desired outcome, so if you think you will be wealthy then you can start acting in accordance with this vision.”

Methodology

MagnifyMoney by LendingTree commissioned Qualtrics to conduct an online survey of 1,029 Americans, with the sample base proportioned to represent the general population. The survey was fielded June 24-27, 2019.

In the survey, generations are defined as:

  • Millennials are ages 22-37
  • Generation Xers are ages 38-53
  • Baby boomers are ages 54-72

Members of Generation Z (ages 18-21) and the Silent Generation (ages 73 and older) were also surveyed, and their responses are included within the total percentages among all respondents. However, their responses are excluded from the charts and age breakdowns due to the smaller population size among our survey sample.

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.

Jacqueline DeMarco
Jacqueline DeMarco |

Jacqueline DeMarco is a writer at MagnifyMoney. You can email Jacqueline here