Would You Like $100 Today, or $110 Tomorrow?

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Dear Rich Lifer,

Imagine you’re offered two choices:

Get $100 today or $110 tomorrow.

Statistically speaking, most people would choose to take the $100 today.

But, if you reframe this scenario and offer someone $100 in one year and $110 in one year and one day from now, the majority of people will wait the extra day for the $10.

This makes absolutely no sense.

Why do most people choose a bigger reward when the wait is longer versus a smaller reward when the wait is shorter?

The answer has to do with a cognitive bias behavioral economists call hyperbolic discounting.

Hyperbolic What?

Hyperbolic discounting essentially states that people tend to choose smaller-sooner rewards over larger-later rewards as the delay occurs sooner rather than later in time.

Or, put another way, we prefer immediate rewards in the short term. But, we’re more patient and wait for better rewards in the long term.

Then why is saving for retirement so hard?

The reason people struggle with saving for the long term is because most day-to-day decisions are competing with immediate rewards in the short term.

Do you go out for dinner tonight, or save that $50 so it will grow to 4x that amount when you retire?

The reason I bring this up is to show you what your brain is doing when you start to think about taking money out of your 401(k) early.

According to Fidelity, 1 in 3 investors have cashed out of their 401(k) before reaching age 59 and a half, often when changing jobs.

Most people considering cashing out early are doing so because of short term needs.

Maybe your car breaks down and you need an extra $10,000. Maybe you lose your job and you need to pay your mortgage.

Whatever the situation may be, taking money out of your 401(k) probably seems like your only option.

What Happens When You Withdraw Early?

Three things happen when you take money out of your 401(k) before you turn 59 and a half:

1) The IRS Takes 20%

The IRS usually requires automatic withholding of 20% of a 401(k) early withdrawal for taxes. So if you withdraw $10,000 in your 401(k) at age 50, you may only get back $8,000.

2) The IRS Will Penalize You 10%

If you withdraw money from your 401(k) before age 59 and a half, the IRS will hit you with a 10% penalty when you file your tax return.

3) It Could Mean a LOT Less Money Later

If you’re pulling money out when the market is down, you’re killing your chances of a rebound. It’s also erasing all the hard work and saving you did up until this point.

That’s why withdrawing early from a 401(k) is not an option in my opinion.

There are other ways to meet your short term financial needs without sacrificing your retirement nest egg…or at least not giving so much of it away to the government.

401(k) Loans

Rather than lose a portion of your investment account forever, some 401(k) plans offer loans that allow you to replace the money through payments deducted from your paycheck.

You’ll have to check with your plan provider and see if you’re eligible but a 401(k) loan is better than taking a withdrawal and incurring those aforementioned penalties.

Exceptions to the 10% Penalty

If you’re really stuck and it seems like tapping your 401(k) is the only option, before you do make sure you check to see if you qualify for any exceptions to the 10% early distribution penalty.

If your situation falls under the following conditions you are exempt from the 10% penalty:

  • You leave your job and are at least 55 years old
  • You have to divide your 401(k) in a divorce
  • You withdraw an amount less than is allowable as a medical expense deduction
  • You rolled the account over to another retirement plan (within a certain time).
  • You begin substantially equal periodic payments
  • The money paid an IRS levy
  • You overcontributed or were auto-enrolled in a 401(k) and want out (time limits apply).
  • Your withdrawal is related to a qualified domestic relations order
  • You die, and the account is paid to your beneficiary
  • You become disabled

Other exceptions to the 10% penalty are hardship distributions. In order to qualify, the IRS needs to decide whether “an immediate and heavy financial need,” is merited. This includes:

  • Medical bills for you, your spouse or dependents
  • Money to buy a house (if you’re a first time home buyer)
  • College tuition, fees, and room and board for you, your spouse or your dependents
  • Money to avoid foreclosure or eviction
  • Funeral expenses
  • Certain costs to repair damage to your home

Your employer’s plan administrator should be able to determine whether you qualify for a hardship distribution or not, and you’ll definitely need to explain why you can’t get the money elsewhere.

Withdrawals in all of these scenarios would only be subject to ordinary income taxes and not the additional 10% penalty.

But you have to make the withdrawal according to your 401(k) plan rules and have appropriate documentation.

The reason why early withdrawals can be so devastating is because you lose the potential future investment growth of that retirement money. 401(k) plans have annual contribution limits, so you can’t make up for a previous withdrawal later.

“Catching up” is almost impossible.

This is why it’s so important to consider the implications of your decision fully. Remember that your brain is wired to choose short term gratification over long term gain.

Do your best to override this thinking and make sure you protect your future self.

To a richer life,

Nilus Mattive

Nilus Mattive

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Uncle Sam is Coming For Your IRA

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One of the advantages of 401(k)s and traditional IRAs is tax deferral.

Whatever amount you contribute today lowers your taxable income for the year and you don’t pay any taxes on that money until you withdraw it.

But this perk only lasts so long…

When you reach age 70 ½, Uncle Sam comes calling for his cut, and how the government takes its share is through something called Required Minimum Distributions (RMDs).

The idea is that the government wants to collect taxes for all that tax-deferred growth and the original tax-deferral you’ve benefited from but it’s willing to wait until you’re in a lower tax bracket in retirement.

However that last piece is not always the case. RMDs are meant to help supplement a retiree’s income. But some retirees don’t need the extra cash flow from RMDs and would rather minimize them and the resulting tax bill.

If you’re close to age 70 ½ and you don’t plan on using RMDs to cover your living costs, here are four ways you can limit or even eliminate RMDs altogether:

Take Your First Distribution ASAP

A big reason why RMDs get such a bad rap is that the amount you’re required to draw down can sometimes push you into a higher tax bracket, which means you end up giving away more of your hard-earned cash to Uncle Sam.

When you turn 70 ½, you have until April 1 of the following calendar year to take your first distribution. After that you must take it by December 31 on an annual basis.

A mistake I see a lot of retirees make is they opt to hold off taking their first RMD because they figure it doesn’t really matter since they’ll be in a lower tax bracket regardless.

While holding off makes sense for some people, it also means you have to take two distributions in one year, which can bump you back into a higher tax bracket.

A better strategy is to take your first distribution as soon as you turn 70 ½ to avoid having to draw down twice in the first year.

Convert to a Roth IRA

Another strategy I recommend is converting all or part of your traditional IRA to a Roth IRA. Unlike traditional IRAs or Roth 401(k)s, which require RMDs, a Roth IRA doesn’t require any distributions at all.

This means your money can stay in the Roth IRA for as long as you want or it can be passed down to heirs.

When you convert part of a traditional IRA account, you’re reducing the amount subject to RMDs later on. This strategy requires some planning and you’ll need to still navigate taxes due on the amount converted.

But you can maximize this strategy by converting during years when your income is lower than usual. Typically during your first few years of retirement,

Don’t Stop Working

As mentioned above, the reason for RMDs is that the IRS wants to get paid for previously untaxed income. If you’re still working and you don’t own 5% or more of the company you work for, you can delay distributions when you turn 70 ½.

This exemption only applies to your 401(k) at the company you currently work at. If you have money stashed away in an IRA or 401(k) from a previous employer, you’re still on the hook for those RMDs.

What happens if you don’t take your RMD?

If you forget to take your RMD or miscalculate how much you owe, you’ll be subject to an excess accumulation penalty, which is 50% of the required distribution.

For example, if your RMD is $3,000 and you don’t take it, you’ll have to pay an additional $1,500.

Give It Away to Charity

This last strategy won’t reduce your RMD, but it will lower your tax liability from the RMD you owe. You’re allowed to donate part of your RMD, up to $100,000, directly to a qualified charity.

The donation is not included as part of your income and you’re also not eligible for a charity deduction on top of this. But the benefit of this strategy is it can significantly lower your adjusted gross income.

Qualified charitable distributions apply only to IRAs and not traditional 401(k) accounts.

Final Word

A lot of retirees rely on RMDs to cover their basic living costs. If you’re one of the lucky ones who don’t need the money, consider implementing some of these strategies to limit the amount of tax you owe from RMDs.

Working longer, converting to a Roth IRA, taking distributions early, and donating to qualified charities are all solid strategies to keep what’s rightfully yours.

To a richer life,

Nilus Mattive

Nilus Mattive

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How to Avoid Shipwrecking Your Retirement

This post How to Avoid Shipwrecking Your Retirement appeared first on Daily Reckoning.

Nilus MattiveDear Rich Lifer,

You’ve worked incredibly hard in order to save up to retire. The road to retirement can be a difficult one that requires both social and financial sacrifices in order to save enough for a comfortable retirement. This is why it’s crucial  to avoid as many financial  mistakes that  could compromise the security of your retirement plan as you can.

Not to fear! I’ll highlight some of the common mistakes people make with their retirement funds so that you can avoid these slip ups.


  1. Not Having a Plan


According to the Retirement Confidence Survey from the Employee Benefits Research Institute, 48% of workers haven’t calculated how much money they need to save for retirement. If you don’t have a plan, you are setting yourself up for failure. In fact, Fortune magazine published a study which showed that people with written plans end up with an average of five times the amount of money at retirement as compared to those with no written plansThere is no “one size fits all” when it comes to a financial plan, but experts suggest you aim to have enough saved up to in your retirement account and income from other sources to equal 80% of your income at the time you retire..


  1. Taking Social Security Too Early


Although you can start collecting Social Security Payments at age 62, your monthly checks are reduced if you start collecting benefits so soon. This could mean your benefits are reduced by almost 30%! To claim your full benefits you must sign up for Social Security at your full retirement age, which varies based on date of birth. So, for a worker eligible for a $1,000 monthly Social Security benefit at his full retirement age, claiming at age 62 reduces their monthly payment to $750 if his birth year is 1954 and if they were  born in 1957 it brings the amount down to $725.

Of course, there can be reasons to start collecting social security early, such as health concerns or an issue with your work status, but if you have the choice, make sure you think long and hard about when the right time is to start your collection.


  1. Cashing Out Before You Retire


It’s very tempting to dip into a sizable retirement fund, but as much as you tell yourself you will pay yourself back, once that money is gone it is usually gone for good. It is also important to remember that you have to pay income tax on any money you withdraw from an IRA. You also can face a 10% early withdrawal penalty if you withdraw money before the age 59 ½. If you absolutely must take out funds from your 401(k), there is a loophole you can use to take money out with no penalty. You can take penalty-free 401(k) withdrawals beginning at age 55, if you leave the job associated with that 401(k) account at age 55 or later.


  1. Spending Too Much Too Soon


When most people retire they are still living active and healthy lives. This will most likely result in wanting to spend money on activities such as trips, vacation homes, or boats. However, always make sure you are keeping track of your spending. If you live into your 90s you will still need resources in order to take care of yourself for your whole life.


  1. Playing the Stock Market


This one may seem a bit counterintuitive, but hear me out. Most people automate their 401(k) savings and investments while they are actively working so they can focus on other things. However, once retired some retirees think they are smart enough to take on Wall Street and take control of their own financial fate. My advice here may seem harsh, but unless you have experience with the market, or have someone who does know what they are doing, most likely you are not smart enough to beat Wall Street at it’s own game. Ultimately it may be  a much better idea to stick to a low-cost diversified ETF or mutual fund. Either way, if you decide to play the stock market, make sure it is with funds you are comfortable losing. Never invest money you can’t afford to lose.


  1. Failing to Account for Inflation


Right now the government states that inflation is barely 2%; however, there is no way to tell if, or when, higher inflation will occur. Inflation is often an issue for retirees because pensions may not be adjusted for inflation. Further, many jobs fail to offer a traditional pension plan. In fact, Only 17 percent of private industry employees were offered a traditional pension plan in 2018, according to Bureau of Labor Statistics data.

Social Security payments are adjusted for inflation annually; for example, recipients will get 2.8 percent bigger checks in 2019. However, this often only accounts for the increase in Medicare costs. So make sure you should keep a portion of your savings invested in assets that increase with inflation, such as real estate, stocks or rental properties.

  1. Failing to Prepare for Medical Expenses


Many retirees have Medicare which covers most medical bills, alongside supplemental insurance. However, many forget that you must also be prepared to pay for deductibles, uncovered procedures and copays. These costs can add up over time. In addition, some health expenses, such as dental, eyeglasses, or hearing aids, are not covered by Medicare. Putting aside funds for health expenses that are likely to occur later in life will save you a lot of headache down the road for unexpected medical expenses..

Also remember, most people become  eligible for Medicare during the months around their 65th birthday. If you don’t sign up for Medicare during this initial enrollment period, you could be charged a late enrollment penalty for as long as you have Medicare.


  1. Not Spending Enough


This may seem odd, but it is possible to be too cautious when it comes to spending your retirement savings. Of course it’s great to leave your kids an inheritance, but there is no reason to scrimp and save if you have enough money in the bank. Don’t put yourself through  Unnecessary financial hardships that could be easily avoided by being realistic about your spending plan.

I hope that these tips will be helpful to you as you move forward with your retirement plan! I know it can seem like a daunting task, but with the right research, and planning, you can retire comfortably, and live out your golden years the way you always pictured them.

To a richer life,

Nilus Mattive

Nilus Mattive

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Are You Ready for Another Recession

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Dear Rich Lifer,

Although the U.S. economy continues to grow and add jobs, talk of the dreaded “R” word is on the rise due to a number of worrying signs.

Yes, I’m talking about a “Recession”.

Between the ongoing trade war with China, an inverted yield curve, and the Federal Reserve lowering short-term borrowing costs, investors are starting to get spooked.

A question I get asked a lot is what should retirees do with their money when a recession is looming?

When the market crashed in 2008, an estimated $2.4 trillion disappeared almost overnight from Americans’ 401(k)s and IRAs.

The fear of losing everything to another recession is sending a lot of investors running for the hills.

However, there are steps you can take today to minimize losses during a recession, no matter your age or financial situation.

Here’s a checklist you can follow so that your investments and savings can weather any financial storm.

1. Start tracking your cash flow.

Step one in preparing for a recession is knowing where you stand. The best way to figure this out is by calculating your cash flow, or how much money you have coming in versus going out.

Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty should there be an economic downturn.

If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last.

An easy way to begin tracking cash flow is with free mobile apps, like Mint or Personal Capital. You simply connect your bank accounts to these apps and the software tracks your transactions and categorizes your spending.

This way you know where your money is going each month and you can start setting budget goals or identifying expenses that can easily be cut in the future.

2. Top up your emergency fund.

Your best defense against economic hardship will be a well-funded emergency fund. Rather than rack up high-interest debt, you can tap your savings to cover basic living expenses.

As a general rule-of-thumb, I recommend building an emergency fund of 3-6 months worth of expenses. With talk of a nearing recession, however, it’s best to err on the conservative side.

The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.

If you’re retired, you won’t have to worry about getting laid off, but you’ll still need an adequate amount of accessible cash in case your retirement accounts or pension take a hit.

3. Pay off outstanding debt.

With talk of a recession happening in the next year or so, it’s a good time to start aggressively paying down any bad debts you owe.

Should a recession strike, you’ll want your income going toward monthly living expenses and not paying the bank.

Plus, if you miss too many payments you could end up wrecking your credit score, which will make your life even more challenging when the economy recovers.

Also, whatever you do, don’t dip into your 401(k) to pay off debt, especially if you’re not yet retired. Start with high-interest debt first, like credit cards and build debt payments directly into your budget so you don’t forget.

4. Rebalance your investment portfolio.

Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investments.

If you’re already retired or close to retirement, you’ll want to mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation.

Traditional wisdom of maintaining a 60/40 mix of stocks and bonds is no longer enough diversification.

The reason being that retirees are now living longer, which means your portfolio needs more room for growth. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.

5. Manage your 401(k) wisely

If times get really tough, it can be tempting to want to sell or make significant alterations to your 401(k). My advice: don’t touch it.

Most likely, your 401(k) is part of your long-term financial plan, which means economic downturns are part of the deal. You don’t want to jeopardize any long-term gains by panic-selling the moment markets start dropping.

Lastly, if you’re not already maxing out your 401(k) contributions or taking advantage of any employer-match programs, make sure you do. That’s your money to keep.

Finally, understand that recessions are a normal part of the economy. They’re cyclical in nature and notoriously hard to predict. Control what you can by heeding the warning signs and preparing best you can.

To a richer life,

Nilus Mattive

Nilus Mattive

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A New Tax Warning for Business Owners

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I’ve been self-employed for the last decade and I’ve been doing my own taxes for as long as I’ve had income so I’ve learned an awful lot about both things over the years.

Now, after recently getting a letter from the IRS regarding my 2018 return, I have some new insights to share with you about where the two areas intersect – specifically why the advantages of a special retirement plans for business owners have just gotten a bit less attractive under the new tax laws that went into effect for 2018.

Here’s the Background…

As a self-employed person, I’ve been using a special type of retirement plan for years now and it’s already helped me keep more than $500,000 in income away from Uncle Sam’s greedy hands (at least for the foreseeable future).

It’s called a Solo 401(k) or an Individual 401(k) and I’ve universally recommended them to anyone else with self-employment income… whether from a primary business or a side hustle.

To use one, you just have to own a business and you can’t have any employees other than your spouse.

You can be a sole proprietor… a partnership… a corporation… it doesn’t matter.

Solo 401(k) plans have many of the same features as their regular brethren.

One of the biggest? You can deduct your contributions come tax time.

The difference is that you can put away a lot more money every year.

Just to illustrate the point:

Like regular 401(k) plans, your employee “elective” contributions couldn’t exceed a maximum of $18,500 for the 2018 tax year ($24,500 if 50 or older).

But in addition to that amount, Solo 401(k) plans also allow your employer — i.e. YOU — to make additional profit-sharing contributions every year – up to a maximum of $36,500 last year.

All told, that means the total limit was $55,000 for 2018 (or $60,000 for folks 50+).

To take full advantage of the sky-high maxes, you have to earn a significant amount of money in any given year. All the details on the rules and calculations via the IRS here.

However, the point is that Solo 401(k) plans offer the most generous total contribution caps available just about anywhere.

One New Wrinkle with Trump’s Tax Changes…

The amount you deduct for contributing to a solo 401(k) – or another pre-tax retirement account like a SEP or SIMPLE IRA – reduces the amount of money that benefits from the new 20% deduction for qualified business income (QBI).

That came as a surprise to me.

After all, you don’t deduct your retirement contributions on Schedule C… which is the record of your net self-employment income. They’re a separate line item on the 1040 itself (more specifically, line 28 on Schedule 1 of the new 1040).

As a corollary, any deductions you have related to self-employment health insurance also reduce the amount of pass-through income that qualifies for the deduction (line 29 of Schedule 1). 

Same goes for the deductible tax on your self-employment income (line 27 of Schedule 1).

You can get the full set of regulations here.

Here’s the Upshot…

The new 20% QBI deduction somewhat reduces the value of contributing to a tax-deferred plan like a Solo 401(k).

Does that mean you should forgo contributing? No. Everyone’s situation and goals are different.

Just as an example: I live in the high-tax state of California. My Solo 401(k) contributions reduce my taxable income at the state level even as California ignores the new QBI deduction.

I’m simply pointing out that anyone with self-employment income has a new variable to consider when they pencil out their yearly tax planning.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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How to Maximize Your 401(K)

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Does your employer offer a 401(k) plan? And do they match any of your contributions?

If so, they might only match up to that percentage on each of your checks, and not on how that check amount relates to your total annual salary. 

That means deferring too much, too soon of your salary could reduce the amount of those matching contributions.

Here’s an example of how that could happen:

In 2019, you can contribute up to $19,000 of your salary to a 401(k) plus another $6,000 if you are 50 or older for a potential total of $25,000.

Suppose you are 60, just got a fat bonus from last year or maybe your spouse started a new job that includes a hefty pay increase.

Now you have cash to spare and decide to max out your tax-deductible contributions to your 401(k) within the first six months of the year. Then you’ll have the remaining six months to sock away money for a nice vacation over the holidays.

Let’s assume your salary is $75,000 and you are paid twice a month ($3,125). To reach your goal of front-loading your 401(k) by June 30, you’ll have to contribute $2,083 per pay period ($25,000 ÷ 12). 

And say your employer matches the first 6% of your salary that you contribute each pay period to your retirement plan. That comes to $187.50 ($3,125 x 6%).

Therefore, for the six months you contributed to the plan, your employer put in $2,250.

So far so good. Except for this…

You’ll Miss Out on More Free Money!

The remaining six months of the year you aren’t contributing to your 401(k), which was your goal. But neither is your employer.

Gone is the free money… $2,250 to be exact.

Over many years that can add up, especially when you figure the returns you might earn on those matches. 


You Might Be in Luck…

Your 401(k) could have a true-up match.

This optional feature allows you to receive the maximum employer match even if you’ve reached the maximum deferral amount prior to the end of the year.

In other words, an employer-sponsored retirement plan that has the true-match arrangement doesn’t care when you hit the annual cap.

When Front-Loading Could Make Sense

Without an employer match, front-loading your 401(k) is worth considering since your money will have the opportunity to benefit faster from compounded, tax-free growth.

It could also make sense if you are retiring, as this will be the last opportunity to put away more tax-favored money for your golden years.

And even if you are going to another job that has a retirement plan, there might be a waiting period at your new employer before you can participate. 

Don’t Be Too Eager To Fill Up That 401(K) Bucket Early In The Year

As you can see, there’s no absolute right or wrong answer on whether front-loading is the right choice for you.

Before you do it though, first check with your HR department.


  1. What is the match formula?
  2. How often are matches made… per pay period, monthly, quarterly, or annually?
  3. Is there a true-up provision?

Then run the calculations.

If you find that you’re going to fall into a deferring-too-much-too-fast trap that will cost you down the road, simply cut back on the amount you are deferring so it’s spread throughout the year.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Thinking About Retiring? Here’s How Much You’ll Really Need…

This post Thinking About Retiring? Here’s How Much You’ll Really Need… appeared first on Daily Reckoning.

One million dollars has long been the benchmark for how much retirees need to have saved for a comfortable retirement.

However, it appears a cool million doesn’t go too far these days. A new report by GoBankingRates, looked at how long a nest egg of $1 million would last in the U.S.

The study compared average expenses for people age 65 and older, including groceries, housing, utilities, transportation and health care.

Not surprisingly, the longevity of the $1 million nest egg really depends on where you live. The money stretched furthest in states like Arkansas, Mississippi and Tennessee, where retirees could live in leisure for at least 25 years.

But, in Hawaii, that same $1 million will only get you just shy of 12 years — mostly because of the higher cost of living and expensive real estate in the Aloha state. 

The study also points out the average person retires at age 63 and has a life expectancy of 85 years. So if you’re expected to spend 22 years in retirement, how much will you need to retire comfortably?

That’s the burning question everyone has. While there’s no exact formula to determine this magic number, there are some pretty good rules-of-thumb that’ll get you close.

Here are few questions to get you started:

1. How Much Will You Spend Once You’re Retired?

Step one is figure out how much you spend now. Build a budget and start tracking your expenses so you know exactly where your money goes each month.

There are a couple different schools of thought when it comes to calculating your retirement nest egg goal based on your burn rate. Some experts suggest you’ll need 70-80% of your pre-retirement income after you finish working.

Others say you’ll need at least 100% for the first 10 years into retirement. It’s a myth that spending slows down once you’re retired — if anything it goes up, at least in the first few years.

Another strategy is to have 10 times your final salary in savings if you want to retire by age 67. If you follow the 10x rule, here’s what that might look like for your savings over 30+ years:

  • By 30: Have the equivalent of your salary saved
  • By 40: Have three times your salary saved
  • By 50: Have six times your salary saved
  • By 60: Have eight times your salary saved
  • By 67: Have 10 times your salary saved

2. How Long Will You Live?

This is nearly impossible to predict so it’s sort of an unfair question. However, people are living longer now. A healthy, upper-middle-class couple who are 65 today have a 43 percent chance that one or both partners will live to see 95.

If your parents or grandparents lived well into their 80s and 90s, then chances are you’ll live that long too. But living longer comes at a cost.

The Bureau of Labor Statistics estimates that mean healthcare spending for seniors is close to $6,000 annually. And seniors are statistically more likely to experience major health emergencies.

It’s also worth noting that Medicare won’t shield you from high healthcare costs. In fact, you’ll need to pay Medicare premiums as well as coinsurance costs, which can be quite high.

Having a dedicated fund, ideally in a health savings account, to cover health care costs during retirement is a good idea.

3. Should You Follow the 4% Rule?

You’re probably familiar with the 4% rule, also known as the safe withdrawal rate. Which is basically the rate at which you can spend your money without running out because withdrawals primarily consist of interest and dividends. 

To figure out how big your portfolio needs to be, you divide your annual spending by 0.04 (or multiply it by 25).

For example, say your family spends $45,000 per year.

$45,000 x 25 = $1,125,000

You’ll need a $1.12 million nest egg to support yourself for at least 25 years.

If you’re wondering why 4% and not 2% or 10%? The four percent rule is calculated based the average rate of investment returns minus inflation. Historically, the stock market has returned an average 7% per year and on average inflation is about 3%.

7% – 3%  = 4%

So your net worth should increase by about four percent each year. If you spend that four percent, you should end the year with the same amount you started with and the cycle will continue.

The 4% rule is a solid rule of thumb. Since the early 1900s, it’s held true. However, experts are less optimistic about what future markets hold so there’s been a push for a more conservative 3% rule. But living off 3% is a lot less attractive so you’ll have to be the judge of what you can sustain.

The other option is to aggressively ramp up your savings. Savers can double, on average, their nest eggs in the last decade or so of their working lives, thanks to compound interest.

These are just a few ways to find your retirement target. Once you have a number in mind, there are three things you should do:

  1. Save as much of your income as you can. If your employer has a 401(k), the contribution limit for 2019 is $19,000 for workers under age 50. If you’re funding a Roth IRA or traditional IRA, the maximum yearly contribution is $6,000 for workers under age 50.
  2. Automate your savings. Have your employer deduct your savings from your checking account straight into your retirement account. You can’t spend what you don’t see.
  3. Increase your savings consistently. Either every six months or at the end of every year when you get a raise, you should be upping your savings. You can do this by setting up “auto-increase,” so you don’t forget.

If you follow these three steps, you’ll be in good shape to hitting your retirement number.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post Thinking About Retiring? Here’s How Much You’ll Really Need… appeared first on Daily Reckoning.

401(k) & SS: Which Is Top Dog?

This post 401(k) & SS: Which Is Top Dog? appeared first on Daily Reckoning.

Your monthly Social Security benefit is determined by your age when you begin taking it and your lifetime earnings. Only annual income up to the maximum taxable earnings is counted, which includes money you put into a 401(k) plan. For 2019, that maximum is $132,900.

The longer you wait to take the benefits and the more you earned, the bigger the monthly payout.

The maximum monthly benefit in 2019 is $2,861 for someone who files at full retirement age (currently 66). Holding off as long as you can, for instance until 70, would boost that benefit to $3,770.

Click here to estimate your benefits.

So the simple answer is: No. Your 401(k) will not directly affect your benefits.

However, withdrawals from your 401(k) could make some of your Social Security benefits taxable, which affects the net amount you end up with.

To Determine If Your Benefits are Taxable…

Take one-half of your benefits plus all other income, including tax-exempt interest and 401(k) withdrawals. If that sum is more than your base amount, part of your benefits will be taxable.

Your base amount is:

  • $25,000 if your are single, head of household, or a qualifying widow(er)
  • $25,000 if you are married filing separately and lived apart from your spouse for all of 2018
  • $32,000 if you are married filing jointly
  • $0 if you are married filing separately and lived with your spouse at any time during 2018
  • How much is taxable is based on your filing status and income …
  • If you file as an individual and your base amount is between $25,000 and $34,000, you may have to pay tax on up to 50% of your benefits. If it’s more than $34,000, up to 85% may be taxable.
  • If you file a joint return and have a base amount between $32,000 and $44,000, you’ll pay tax on up to 50% of your benefits. And if it’s more than $44,000, expect up to 85% of your benefits to be taxable.
  • And if you’re married and file a separate tax return, you’ll probably pay taxes on all of your benefits.

Click here for a worksheet to check if your benefits are taxable.

5 Ways to Ease the Pain

Required Minimum Distributions (RMDs) are part of what makes up your base amount for calculating tax on Social Security benefits. 

However, some planning could help shrink your 401(k), which will make the RMDs smaller and ultimately cut or eliminate the tax on your benefits …

1. Start Taking Distributions While Working

When you turn 59½ you can withdraw money from your 401(k) without paying the 10% early-withdraw penalty.

You’ll have to pay income tax on those dollars. At the same time you’re reducing the amount in your 401(k). And that could mean smaller RMDs down the road.

Make sure though, that the additional income won’t kick you into a higher tax bracket.

2. Use 401(k) to Pay Living Expenses

If you retire say at 65, use 401(k) withdraws to pay your living expenses rather than beginning Social Security benefits. That accomplishes two things:

  • You’ll shrink the size of your 401(k) and ultimately the RMDs
  • By postponing Social Security you could significantly boost the payouts. For every year past your full retirement age that you delay, your benefits go up by about 8% until age 70.    

3. Convert to a Roth IRA

Roth IRAs aren’t subject to RMDs. Moreover, you can take unlimited tax-free distributions from a Roth without worrying about any impact on the taxation of your Social Security benefits.

However when you convert to a Roth, the amount converted is taxable at your ordinary rate. Take note:

A large conversion could push you into a higher tax bracket and make some of your Social Security benefits taxable, although it would only be for the year of conversion.

4. Charitable Contributions

You can’t give RMDs from your 401(k) tax-free to a charity. That only applies to IRAs. But there is an indirect way to make a tax-free transfer.

Simply roll over funds from your 401(k) to an IRA and then donate it to charity. Taxpayers age 70½ or older can transfer up to $100,000 a year to charities. And those donations count towards your RMDs.

Smaller RMDs could keep your income below base amounts in which Social Security benefits become taxable. 

5. Go Back to Work or Keep Working

You must begin taking RMDs from your 401(k) at age 70½. Miss one and you’re looking at a 50% penalty on the amount that should have been withdrawn.

But that doesn’t apply if you’re still working.

So if you’re not quite sure you want to retire or you’re considering going back to work, a position that offers a 401(k) gives you two benefits:

  • The ability to delay RMDs 
  • The potential for additional tax-deferred growth

And if you have a 401(k) from a previous employer, rolling it into your current employer’s plan (assuming the plan allows rollovers) will let you postpone RMDs on that money, too.

Bottom Line

Keep in mind that if you take large distributions from your 401(k) while receiving Social Security benefits, those withdrawals could push you past the base amount and increase your income tax bill for the year.

Also, watch for any changes to the Social Security base amounts. And include income tax when planning your retirement.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

The post 401(k) & SS: Which Is Top Dog? appeared first on Daily Reckoning.