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Will Your Nest Egg be Enough 

Great News! According to the Social Security Administration Women Will Outlive Men  

According to the Social Security Administration, American men will live to the age of 83 years while women are expected to live to 87 years of age.  Those additional years will require women to have an adequate nest egg to cover medical expenses, travel, and any other fulfilling hobby.  A woman retiring today at the age of 67 will have spent $195,000, by age 87, in medical expenses: optometrist, dentist, and annual health screens to name a few.  Also, remember women’s clothing, dry cleaning, hair care, manicures, and pedicures will add up quickly.  Those are not cheap!  Allow yourself plenty of cushion for pampering.  

On average, 75 percent of  women will be widowed at the age of 57.  I include this statistic not to alarm you, but to highlight this reality and to get you involved in your finances.  For those of you already asking the questions I commend you for demonstrating an interest in savings and retirement.   Still undecided?  What do you have to lose or rather gain if you start today and not tomorrow? 

 Congrats for Outliving Your Spouse.  Now what?  

Have you considered how much money you will need for retirement?  You should expect to have a big enough nest egg to last 30 years after you retire.   Do you have an idea where this nest egg will come from? Please don’t say social security.  That may not be around for you to enjoy. It’s a numbers game.  Families are getting smaller meaning there will be fewer people putting into social security.  I tend to be a pessimist when it comes to Uncle Sam managing any retirement. 

Women earn less than men

You also need to consider that women earn 80 percent less than a man’s paid salary.   That means for every dollar a man earns a women will earn 80 cents.  More often women will be in and out of the workplace as family needs come up; taking care of the household, assisting an elderly parent, or home-schooling to name a few.  These are your nurturing traits kicking in and we are thankful for that.   You should develop a plan for situations that come up.  You’ll want to make the most of interest.  Don’t misunderstand me, I’m not discouraging from doing these but perhaps proactive steps can be made to make the most of the interest.  These lapses in earning compound interest can potentially set you behind in your retirement.  

Family Emergency Account

What plans are you implementing now to have a fulfilling retirement?  There are so many options to consider.  Here is what my wife and I have done with our financial goals.  We have a savings account that will cover six months of living expenses.  These expenses should include mortgage, food, and other necessities.  Anything that may jeopardize your family’s well-being is considered a necessity.  The other stuff you can do without  until you’re back on your feet.This emergency fund will be used when either one is out of work for any amount of time, like maternity leave or unemployment.  This savings account is in a local bank where we can access at any moment.

Park it in a safe place: bank

Ideally, I want that emergency money earning more interest and would invest in money market but I need to be able to withdraw immediately.  We have made purchases from this account such as a $6000 car, vacation, and covered Jess’ salary when she took maternity leave.  The vacation was not an emergency but helped us avoid debt.  

Pros and cons of this type of savings account

Pros

  • Can be accessed at any time
  • Backed by the FDIC up to $250,000
  • Immediate access
  • _______________?  I’ll reward the person that comes up with more Pros.  

Cons

  • Very low interest paid
  • LOW INTEREST PAID

No value here

I am not a fan of savings accounts as they don’t add any value to our financial plans. This is by far the worst place to park your hard earned money.  This will only pay a rate of 1.6 percent.  That is low and is not keeping up with the rate of inflation.  Interest rates are so low that you cannot expect to retire off of personal savings accounts.  But nonetheless, we do have a savings account for emergencies.   Consider it a necessary evil.  

 Employer Sponsored Retirement Accounts

 Most employers offer a 401K or 403B retirement accounts.  The 401K is offered by organizations while 403B’s are exclusive to non-profits, educational entities, hospitals, and government entities. 

Don’t pass on the FREE Money

Both are similar as the employer will match up to a percentage of what you put in.  That is FREE money you need to take advantage of.   For example, you invest 3 percent of your bi-weekly salary and your employer will match the other 3 percent.   That is now 6 percent of your salary you are setting aside for retirement. 

Start out early and let compound interest work for you

The key is to start out as early as possible and compound interest will have a great impact on your wealth building.   Compound interest is a basic calculation yet a powerful one!  In fact, Albert Einstein has been credited to have said that compound interest is the “eighth wonder” of the world.

Pre-tax basis

401K and 403B are funded with your money on a pre-tax basis and are taxed as income when you retire. Taxes will be based on your retirement age tax bracket.  These accounts can be considered  a passive retirement as you contribute and let your money work for you. There are no conversations with any advisors.  You can also choose to let a professional manage the accounts and will end up paying them a small fee.  This professional service reviews my account on a monthly basis and advises on allocations. My managed account will cost me .03% of the overall balance.  

Don’t neglect your retirement account

Even if you have a professional manage your accounts it is your responsibility to schedule calls to check on your investments.  Establish that relationship with the advisors.  I schedule a call at the beginning of the calendar year to review these accounts.  

Jess and I have contributed to both our retirement accounts for the last 11 years.  We understand this to be a great means to retirement as the accounts have grown. The year 2017 was a record year for the majority of investors.   Earlier I mentioned that many employers match up to a percentage and there are many young employees who don’t take advantage of this.    This is FREE money they are passing up.   Again, the younger you are the better off you will be.  

“Voluntary” Retirement Accounts

Employers are taking matters into their hands and have started “forcing” employees to save for retirement.  They are eliminating some of the confusion surrounding funds and have started using target-date funds.  For example, these will be noted by the year the employee will retire.  In my case we have one fund with a target-date of 2045.  This is my projected retirement date per my employer.  

Keep it Simple Stupid

Other strategies employers are doing is to reduce the number of plans you can participate in.  Sometimes too many options can have a negative impact; confusion. This confusion will keep the employee on the sidelines. The analysis paralysis keeps most employees from opting in to these retirements. Additionally, employers are automatically increasing the employees’ contributions on a yearly basis.  Of course you can opt out of this but I would discourage you from this.  You can choose the percentage you want to increase and I do a yearly 1% increase.  

Tips to Get the Most of Your Employer Sponsored Accounts:

  • Start contributing regardless of the amount you can contribute
  • Strive to contribute the matching if possible
  • Increase your contributions on a yearly basis by at least 1%
  • Review your accounts on a yearly basis
  • Set up automatic contributions 
  • Any bonus you receive consider investing a percentage
    • will be the same percentage, not dollar amount, you will contribute

Individual Retirement Accounts, IRA

More and more individuals are passing up conventional employment meaning they don’t have a traditional employer. Rather they are their own boss or self-employed; freelancers, entrepreneur, crafts or home decor, and the list goes on and on. The traditional employer retirement accounts, 401K and 403B, are not available to them.  However, there are other funds to consider investing in.   

Traditional IRA

These are Individual Retirement Accounts where money is invested after tax.  This will come out of your salary without any matches.  Remember you have no employer to match your contributions and this should not deter you from starting this account.  They can only be withdrawn when you retire and gains will be taxed at your tax bracket. 

Not an emergency savings account

There are a few exceptions to withdrawals and to avoid confusion I will not discuss them.  I would also discourage this.   These are not savings accounts and withdrawals before retirement age will be a heavy tax burden.  Think long term here.  

Roth IRA

This is the youngest of the IRAs.  I prefer Roth IRA as my money invested grows tax-free.  The money invested is after tax and  when you withdraw monies it is not taxed.  This would be double-taxation. 

Easy to setup an IRA or ROTH IRA

Again, I prefer ROTH IRA and any licensed professional can help you set one up.  Both Traditional and Roth IRA have a maximum yearly contribution of $5,500.  One can make withdrawals or take distributions at age 59 1/2 and anything before that age will be a taxed heavily.  This will be 10 percent penalty plus current tax bracket.  The link provides the 2018 tax brackets.  Look for your bracket and add 10 percent to that and that is what you can expect to pay for withdrawing early. That dollar amount can be huge! Don’t penalize yourself by taking out before the 59 1/2.  

 

 Mutual Funds

These are a considered a pool of monies deposited by individuals, companies, and other organizations to purchase funds. You and other investors “mutually” own the stocks. The funds are invested in sectors: energy, telecommunications, small and large companies, healthcare, etc.  These accounts are managed by professionals so you can make a one-time or monthly deposit and sit back.  I wouldn’t recommend this approach.  You need to keep tabs on your accounts and see how it has performed.   

Do a Google search for mutual funds and you can find where to invest.  Some self investing  firms include  T. Rowe, Vanguard, Fidelity, and Charles Schwab.  I have used Vanguard with good success.  These firms offer a few funds that don’t require large initial investment amounts.  Some funds are as low as $100 and others in the $1000 range.   Some will require a larger amount like $3000-$10,000 range.   

Let’s look at an example of a $10,000 initial investment in a good performing fund look like?  The link highlights the fund I chose for the example.  The chart below is over a 10 year period with an initial investment of $10,000.  After 10 years the account has grown to approximately $45,000 and will be greater if additional monthly or year-end contributions are made.  (Reference the Blue line)