Category : savings

Don’t Sacrifice Your Future

Don’t sacrifice your future: retirement vs children’s education

Every parent, at some point, has made a decision to put their children’s needs ahead of their own. Starting from the moment your child becomes a part of your family, you’re putting aside your need for sleep, to feed and comfort your tiny bundle of joy…Every. Two. Hours.

And, this continues throughout parenthood with decisions to miss that once-in-a lifetime concert because your little one has a fever or to buy the minivan over the sweet two-seater you’ve absolutely fallen in love with. We make these “sacrifices” without regret because we love our children unconditionally.

There is one decision, however, where your children’s needs should not supersede your own…that’s the decision between saving for your retirement or saving for your children’s education. For many the decision normally comes down to which one to save for, not how much to save for both. When you’re pressed with making a choice between the two – your children’s future or your own future – placing yourself first will give your family a long-term benefit.

In a 2016 Parents, Kids and Money survey conducted by T. Rowe Price, more respondents had saved for their children’s college than saving for their own retirement. And, in this same study 16 percent of those questioned indicated they used their retirement savings to pay for their children’s education.

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The Single Most Important Piece of Financial Advice

There is no shortage of advice on this topic. A quick google search on “ financial advice ” reveals roughly 65 million hits on the topic. I intend to share the one piece of financial advice that – if followed – will have the single largest impact on you becoming financially independent at some point down the road. This advice comes from my years of working with investors as they approached their own retirement.

Prior to blooom, I spent 20 years advising, planning, and managing investment portfolios primarily for baby boomers. Most of these clients were 55-65 years old and almost all of them had more than $1million in their portfolio. Often times I would meet these folks when they were within 5 years of the finish line and were looking for someone to help them plan out the financial transition from work-life to retirement. With just a few years (or months) left until retirement, there wasn’t a whole lot I could do to alter their ability to retire. Most of these folks had, for the most part, “won the race to financial independence.” Candidly, I was not their advisor when they were younger and working towards their retirement. Rather, I stepped in to help them make the transition into retirement and captain the management of their finances from that point forward.

But that begs the question…how did they amass this wealth? How did they arrive at the point in their life where they could stop earning an income and live on their accumulated savings? The answer is simple. They lived below their means during their working years. Translation – they spent less than they made. It wasn’t an inheritance, it wasn’t a big salary (as most of my millionaire clients NEVER made more than $100,000 per year) and it definitely wasn’t because they knew how to time the market. Rather, it was the simple in concept but hard to execute lifestyle of buying less “stuff” than their incomes allowed. These were the kind of people that would go to take out a mortgage in their early working years and buy a house that they could afford to buy, not the house that they could qualify to buy.

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Retirement or Student Loans?

Drowning in Student Loan Debt!

One of the frequently asked questions we get from our blooom clients is – “I am still paying on my student loans, how much should I contribute to my 401k, if anything?” Unfortunately, student loan debts are hindering retirement savings for a huge segment of millennials and Gen Xers. Paying your student loans instead of saving for retirement can translate into hundreds of thousands of dollars less in your 401k by the time you reach retirement. If anything, this problem has been getting worse. Average student loan balances have risen steadily over the past 20 years. In 1993, the average graduating student owed less than $10,000. This went up to $35,000 for the unfortunate class of 2015 (source Mark Kantrowitz, wsj.com). Personally, when I walked down the Hill at my college commencement in 1995, I was also dragging along $29,000 in student loans. My point is: you are definitely not alone with this burden.

Student loans or retirement savings? A simple answer.

For those of you in the workforce with access to participate in your employer sponsored retirement account (such as a 401k or 403b), you are likely juggling your student loan re-payment and retirement contributions. Maybe you’re wondering what balance should be struck between these two. Fortunately, the advice is fairly straightforward. IF your employer offers a match on contributions that you make into your 401k, PLEASE, PLEASE DO NOT miss out on this free money! So even if you are saddled with student loan payments, I still strongly encourage you to contribute to your 401k. But: ONLY enough to get the maximum employer match.

What does the employer match get you?

The employer match can take on many different shapes and sizes. Oftentimes it looks like this: For the first 6% that you contribute to your 401k, your employer will match $0.50 on the dollar. In other words – if you contribute 6% of your paycheck, they will match another 3%. Put in different terms, if you make $50,000 per year and you elect to put 6% into your 401k, you are saving $3,000 towards your retirement (6% of $50,000). On top of this, your employer is contributing another $1,500 into your account (3% of $50,000). Try this one on for size: your $3,000 contribution just received an automatic 50% return before any investment return!

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When to Start Contributing to your 401k?

At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?

Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.

If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.

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What The Heck Does “Pre-Tax” Really Mean?

You may have heard the term “pre-tax” in the context of your company sponsored retirement plan (401k or similar). What you may not realize is just how beneficial, and rare, that term really is.

Let’s Assume Your Employer Offers a Retirement Savings Plan Like a 401k.

These types of tax-favored retirement plans allow participants to contribute some of their salary to their 401k account before taxes are assessed. If you don’t contribute anything to your 401k, your friends at the IRS will assess taxes on ALL of your salary.

So let’s also assume that your salary is $50,000. From that, you choose to contribute 10% per paycheck to your 401k. That means you contribute $5,000 (10% of $50,000) into your 401k. To your benefit, the IRS is now only able to tax you on $45,000, NOT your $50,000 salary. This is because your 401k contribution is taken from your paycheck pre-tax. (Note: Pre-tax does not mean you avoid any FICA taxes. You may owe Social Security and Medicare tax, for example. FICA taxes are based on gross pay.)

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