Category Archives: Retirement

Should You Save for Retirement or Pay Down Credit Card Debt?

Back when I was knee-deep in credit card debt, saving for retirement was about the last thing on my list of priorities. It simply made no sense to me to put away money for the future when my debt was costing me so much in interest.

However, once I fully reviewed my situation, I understood that there may be room for both. It ultimately depends upon your situation, and in order to make the right decision, you’ll have to take a good hard look at both your retirement plans and your current credit card debt.

Retirement

  • Have You Started Saving? If you currently have nothing put aside for your golden years, then I would suggest starting a modest retirement portfolio, regardless of  your level of credit card debt. Because of compound interest, the earlier you start, the more your dollars will earn over time.
  • Does Your Employer Match? It is important to review your employer’s 401k plan. If they offer any sort of match, consider investing in this option up to the maximum. This is free money provided to you by your employer, and it just makes good sense to take advantage of it, regardless of the amount of your credit card balances.

Credit Card Debt

  • How Bad Is It? If your current situation is dire, and interest fees are eating away at your checking account, you may want to scale back or temporarily suspend retirement savings. If your situation isn’t quite this bad, continue to pay down your balances while still contributing what you can to retirement.
  • Can It Be Restructured? If your credit card debt is significant, you may want to consider restructuring it. There are numerous balance transfer options where you can reduce your interest rate to 0% for a short period of time. Do your research to see if you can save, and if so, you’ll have to decide where to apply the money you’ve saved: to  your credit card balances, or to your retirement portfolio.
  • Do You Have a Plan? If you currently have no plan to pay down and eventually eliminate credit card debt, it’s time you put one into place. Keep your monthly spending beneath what you earn, and figure out other ways to save in your everyday life. Commit these savings to your credit card debts until they’re under control.

Final Thoughts

You should continue to both pay down your credit card debt and also save for retirement. Where you focus the bulk of your efforts will depend upon your situation. However, you won’t be able to make an intelligent decision unless you truly understand the state of each in your life. Ask yourself the three pertinent questions regarding both credit card debt and retirement, and you’ll gain a clearer understanding of each and be able to decide where you should be applying more money.

What do you think? Should you prioritize getting out of credit card debt or saving for retirement?

Starting to Invest: Opening an IRA

Without much more than basic knowledge of how the stock market works, I was prepared to wait to get involved until I got a job with a 401k. I figured that would help me get my feet wet and provide the motivation I needed to learn more and prepare for the future. Words like “investing”, “IRA” and “bonds” all made me feel the same: excited, and really really nervous.

My wife and I have thought about opening an IRA for a while, and now that we have our debt paid off and our emergency fund is well under way, it was the next thing to do on our personal financial checklist. However, something kept stopping me.

I hadn’t ever taken the time to learn about investing, and I felt like waiting wasn’t going to hurt me that much.

Then, something changed.

I read this post about investing returns over time at the personal finance blog Darwin’s Finance. I read the post through a couple of times, because I couldn’t believe what I was seeing. The post starts with a quote from the author’s father:

“If you started investing at age 25 and put the same amount of money into stocks until age 35, you’d have more money at retirement than if you started saving at 35 and invested the same amount of money in stocks EVERY YEAR until retirement”

Someone who invests $5,000 a year from age 25 to age 35 will (with an average 8% return) have $615,580 when they turn 60.

Someone who begins investing $5,000 at age 35 and continues until age 60 will (again, with the 8% return) have $431,745 at age 60. (See the post for graphs and full explanation).

So even in a down market (and maybe even especially in a down market) in makes sense to start with something, somehow, to cash in on the power of time. But, you don’t want to invest without doing your research and making goals. My wife and I decided to open a Roth IRA, and during our research, completed a questionnaire that helped determine if we were really ready to begin investing. A Roth IRA is a recommended choice for those starting young – the money is taxed now, but not when you draw it out – beneficial if you anticipate being in a higher tax bracket when you retire. I felt like some of the things I learned during my research might help others who are nervous about beginning to invest.

NOTE: This is what I’ve learned over only a short time of research – please learn for yourself and seek qualified financial assistance before starting to or continuing investing. The information below is based only on my experience and is not professional investing advice.

What Is Your Purpose For Investing?

You’ve got to have a goal. This is the first question we were asked. There are three main purposes for investing:

Growth – You want your money to grow. You’re prepared to take slightly bigger risks that have potential to grow, and are also prepared to invest for at least five years (or more) to realize the potential of your investments and recover from down turns in the market.

Sample goals: to save for college, a home or retirement.

Income – Instead of growth, you’re looking for more immediate income. You’ll look at more conservative investments that pay dividends, either monthly or quarterly.

Sample goals: to pay for monthly expenses.

Preservation of Capital – The main goal here is to preserve and slowly increase your investment. You’d want to use this type of strategy when you’re looking for small returns on your investment, but your main goal is to preserve what you already have.

Sample goals: to build an emergency fund or save for an expense within the next 12 months.

How Long Are You Planning on Investing?

Obviously, the length of time your money will be invested affects what type of investment you’ll choose.

Do You Have a 3-6 Month Emergency Fund?

I was very glad they asked this question. Investing is an important financial goal, but it should become a priority only after other major financial needs are met. An emergency fund should be the first thing on your list to take care of.

How Much Are You Going to Contribute?

This is also a key thing to consider. You shouldn’t go into debt to invest. You should only contribute a small, reasonable amount until you’re comfortable with investing and have learned more about it. We’ve started with just $20 a month into a mutual fund. We’ve budgeted that amount into our monthly budget and know we can afford to contribute at least that much each month – both key considerations.

Start With The Basics

Don’t feel pressured to begin investing if you’re not sure you understand how everything works. My wife and I have been looking at doing this for quite a while, and have sat down and gone over the numbers and the different ways we can invest, as well as the different tools we have access to. Begin learning, and before you know it you’ll be ready to go. Again, though, take the proper time to consult professionals and understand the risks of investing. You need to understand there is a very real possibility you’ll have weeks, months, and years where your investment might be losing money. Hopefully, though, if you’ve done your research and prepared for the worst, you’ll be able to ride out the bumps in your long-term investment strategy.

I understand that there will still be ups and downs (probably even more major ones) between now and the time I retire. But I also can’t describe the relief and the feeling of comfort that I have knowing that I’m at least doing something for the future. The earlier you start, the more consistent you are, the better of you’ll be, and the more time you’ll have to recover from major downswings in the market. Investing wasn’t the huge ugly monster I thought it would be. I’m actually enjoying putting what I’ve learned to use. Do your research, talk to a professional, and get started!

If You Work In Retirement, Are You Still Considered Retired?

Retirement is something that we all strive to achieve. It symbolizes the end of a long career and is the point where you can relax and reap the rewards of life. However, many individuals these days are not prepared financially for retirement. Either they did not save enough or they had unusual circumstances that required them to retire prematurely. This typically means that they need to become extremely frugal (living solely on Social Security) or continuing to work. I’ve always wondered about the later. If you work in retirement, are you still considered retired?

What is Retirement to You?

What does retirement mean to you? Merriam-Webster defines retirement as:

withdrawal from one’s position or occupation or from active working life

With that definition, you can say that after you stop working your primary occupation, you are officially retired. What happens if you decide to go back to work after a few months of retirement? Does that mean that you are no longer retired?

Taking Any Work Possible In Retirement

I feel that if you go back to work in retirement because you need money, you are no longer retired. The ideal retirement for me does not have me greeting customers coming in the front door of a department store. When I retire I want to do the things that I always wanted to do but did not have the time to do it. I want to travel the world but because of work, I cannot do that right now. However, in retirement, I will have the time and resources to complete this dream.

Doing a Job That You Always Dreamed of In Retirement

What if you are set financially but choose to work? Many people choose to work in retirement because there has always been something that they longed to do. Have you always wanted to start a charitable foundation or non-profit company? I feel that if you are working in retirement doing something you are passionate about, you are still considered retired. Isn’t that what retirement is supposed to be all about, doing stuff you love?

In conclusion, I think that retirement is what you make of it. However, if you cannot fully retire for financial reasons, I don’t think you are officially retired. However, if you have a job just to stimulate your brain or get to know members of your community, I think that is an ideal retirement because you are doing what you are passionate about or what keeps you ticking. I just do not think you can officially be retired if you dread going to work at the local grocery store at the age of 75 just so you can eat.

What is your definition of retirement? Do you agree with my reasonings or am I way off base?

The Average Net Worth of Americans: Where Do You Stand?

I absolutely love using the calculators at CNNMoney.com. There are so many cool ones that I use frequently. They have one for housing prices, cost of living comparison, retirement needs, saving for college, etc. I actually just stumbled across one for the average net worth of Americans. All you have to do is enter in your age and current salary and it give you two charts. The first chart shows you the average net worth of individuals in your age group. The second chart shows you the average net worth of individuals in your income range. I’m not sure how helpful the second one would be since it compares the salary against any age. If I am making $50,000 as a 22 year old, of course someone making $50,000 as a 50 year old will have a larger net worth than me (I hope they do). Anyway, here are the averages for different age groups:

Under 25

$1,475

25-34

$8,525

35-44

$51,575

45-54

$98,350

55-64

$180,125

65 and Over

$232,000

Where do you stack up against these numbers? Personally, we are no where near the average for our age group. I mean we are not even in the same zip code. I imagine that has to do with the fact that we both used a lot of student debt to earn our degrees and we own no real estate.

Do you think these numbers reflect the recent turmoil in the stock market? The calculator did not have  a certain date on it (i.e. “this chart is based on the 2000 census”). However, I hope that it takes into account the recent decline. The net worth of individuals should be much higher than these averages. You should strive to be much higher than these averages.

Free Retirement Guides from Forbes and Amazon.com

Forbes, in partnership with Amazon, has some free retirement guides available for download. These guides are only available until the end of February. Head over there to get your copies today! Make sure you save them on your computer so you can access them later. Here are some titles that are available:

The Forbes Investors Guide – A great guide here that goes over plenty of great retirement topics. They include: stocks and bonds, estate planning, mutual funds, current economy (politics), real estate, etc.

Investing in a World Gone Mad – This is an article focused on the company Thrive. Thrive is a company similar to Quicken or Mint. They allow you to download bank and credit card transactions, make a budget, plan for retirement, etc. This article has prompted me to try out the service (it’s FREE). Look for a review coming soon!

Also, many of their personal finance magazines are on sale. Head over and purchase some. I personally subscribe to Money, Kiplinger’s Personal Finance and Smart Money.

Should You Forgo A Match From a 401(k) In Order to Start an Emergency Fund?

I received a question the other week that many people seem to be asking. We will leave the commenter anonymous for obvious reasons. Here is the question:

“My husband and I have no emergency savings. However, we do participate in my husband’s 401(k) with matching employer contribution. Considering today’s current conditions, would we be better served putting the money in the bank and forgoing the matching employer contributions?”

If I were in your position, I would continue to contribute to the 401(k) unless I am really feeling an oncoming layoff or financial emergency.

When Should You Forget About the Match?

I would only forgo the match if I was almost certain that a layoff was coming. If that seems to be what’s on the horizon, you should sock away as much cash as you can. It is recommended that you have 3-6 months worth of expenses in your emergency fund. Notice that I said expenses and not salary. You should have enough money saved in order to cover your mandatory expenses such as food, shelter, clothing, etc. Also remember that an emergency fund is not only for job loss. Financial emergencies can happen from almost anything. Your spouse may need to go to the hospital or your 1971 AMC Gremlin may need new tires.

If you are wondering if you should save for 3 or 6 months, it depends on your situation. If both you and your spouse are tenured teachers and a layoff is the last thing on your mind, you probably only need 3 months. If you are both car assemblers at Chrysler, you may want to have 6 months or more. You should base your savings on your job security. If you would receive a severance if you are laid off, make sure you include that money in your emergency fund. No need to save too much.

Why Continue the 401(k) Match?

A 401(k) match is free money. What other way can you get a 100% return on your money? I surely cannot think of any. Many companies offer some type of match when you contribute to the plan. The match can be something like 50¢ for ever $1 you contribute up to a certain of your salary. Others match it dollar for dollar and I have even seen some companies put in $2 for each $1 you contribute. Why on earth would you pass something like that up? It will increase your retirement savings immensely and you may even have to save less thanks to the miracle of compound interest.

Also, as a good friend reminds me, there is no better time to start saving for retirement than today!

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