A Sophisticated  Approach to Financial Services

Summer is expensive for parents, which is why it is the perfect time to teach kids about money. With kids out of school, parents have to either spend money on childcare, camps, or entertainment. It adds up. Fast.  Pre-pandemic, families were already spending quite a bit during the summer months. A 2019 Pearachute survey found, “The average family expects to spend $10,759 this [2019] summer.”¹ This estimate was based on the following traditional summer family expenses:

• Childcare: $3,488
• Summer camp: $2,344
• Vacation: $2,232
• Entertainment: $2,695

Now, consider the fact that these expenses have risen significantly since 2019. According to the American Camp Association, “The average cost of a day camp has more than doubled from $76 last year to $178 this year. And sleep-away-camp has tripled up to $449 a day.”²  Vacation costs in 2023 are around 10% higher than in 2019.³  Theme park ticket prices have increased, as well as museums and other attractions. In short, raising kids is now more expensive.  Instead of stressing about overspending this summer, use this time off school as a teaching opportunity. Here are 15 tips to teach kids about money and get everyone on the same page money-wise this summer. 

1. Set a Summer Savings Goal

Kids typically have big plans for the summer involving what they want to do. These things cost money. Be upfront with kids and explain you cannot (and will not) just pay for them to do whatever they want. Instead, encourage them to set a summer savings goal, such as saving enough money to go to the waterpark.

2. Push Them to Earn Their Own Money

Summer jobs are a fantastic way to teach kids about money. In addition to finding actual summer jobs at local restaurants or retail stores, kids can earn money in many other ways. For example, encourage your child to offer dog walking, pet sitting, or poop scooping services. Once they earn money, teach them the importance of saving and not spending more than they earn. 

3. Play Financial Board Games as a Family

Playing games like Monopoly and Life is a great way to make kids more financially aware. Plus, if your kids just can’t get off their devices this summer, download some apps that teach financial literacy, such as Practical Money Skill’s Cash Puzzler and Peter Pig’s Money Counter.

4. Teach Them How to Tip

This is an important life skill, but many kids enter the adult world not knowing how to properly tip. Let your kids see you tip those who provide services on vacation. Show them your restaurant bill and explain how to calculate a tip. And explain why you do so. 

5. Create a Summer Budget as a Family

Many parents avoid talking to their children about money, but this often backfires. Kids need to have some idea of what things cost and how to budget. If you don’t feel comfortable telling kids all the ins and outs of your financial history, start by involving them when creating your summer budget. For example, tell the kids how much money you have budgeted for summer camps, and then allow them to choose the camps they’d like to attend with this budget in mind.

6. Explain Cash Flow Using Snacks

My kids run through snacks very quickly. I never cease to be amazed at how soon they disappear after I’ve purchased them. But snacks add up – especially when kids are given free rein in the pantry during summer. Hence the reason to use snacks as a learning opportunity. At the beginning of the summer, go on a grocery shopping trip with your kids to buy summer snacks (i.e., snacks to last for x number of weeks). The snacks represent money moving in and money moving out (aka cash flow). Kids will have to manage their snack consumption in order for the snacks to last, like money management.

7. Give Them a Family Fun Day Budget-Planning Challenge

During the summer, give kids the opportunity to plan their own family fun day using a set budget. For example, you set the budget at $150. Your child will then choose where to go, what to eat, and what to do. They will need to research options and calculate costs to ensure they stay on budget. This gives them the freedom to do what they want while also helping them see how quickly things add up. 

8. Point Out Common Markups

During the summer, we tend to take our kids to places we don’t normally go and buy things we don’t normally buy. For example, we may go to a minor league baseball game in our town. This provides a chance to point out markups of common items.  A hot dog at the ball game is marked up in cost. Point out how much it likely costs to buy the hot dog versus how much they sell it for. Similarly, if your kids go crazy for the ice cream truck, point out how much the ice cream is marked up compared to buying your own and storing it in your freezer. 

9. Allow Them to Make Purchases

Far too often, parents make purchases for their children when their children are with them. Whenever possible, if it is a purchase for your child (especially if your child is purchasing it with his or her own money), allow your child to go through the basic steps of paying for the item. A great way to teach financial literacy is to get a child-friendly debit card, such as Greenlight, for these types of purchases. Or use cash.

10. Watch Movies with Valuable Money Lessons

Have a summer movie night that incorporates valuable money lessons. Here are some examples:

• Aladdin teaches the importance of not using money to impress others.
• Harry Potter and the Sorcerer’s Stone teaches the importance of only using what you need instead of blowing all the money you’ve got stored in the Gringotts Bank. 
• Confessions of a Shopaholic teaches the dangers of compulsive shopping and credit card debt.

11. Make Them Earn for Expensive Summer Entertainment

If your kids have pricey summer to-do lists, make them earn the money for their personal entertainment. For example, if they want to go to the movies with their friends, give them tasks or ways to earn money for their movie tickets. If they want to buy new pool toys, don’t just buy them. Make them earn money for the toys. 

12. Complete a Money-Matching Challenge

Here is a great suggestion from Quicken: “For one month, task your kids with contributing any money they earn from doing chores, mowing the lawn, delivering papers, or any other odd job to a jar. On the last day of the month, have them count up the total amount and then match it. Boom, your kids just doubled their earnings! (and learned the basic concept of investing.)”

13. Give Them Financial Choices

Money management involves making wise choices.  If I buy X, I won’t have enough money for Y, so I’ll need to save money and wait. Many adults struggle with these types of financial choices because they were never given the opportunity to make financial choices in a safe environment (at home with their parents). Make it normal to give your children choices about how to spend money. “You have $5 for snacks at the movies. Choose what you like, but that’s all you get.” OR “We can either spend $20 to have a dinner and movie night at home tonight, or we can save up a few weeks to go to the movie theater.” 

14. Send Them on a Grocery-Shopping Challenge

Put kids in charge of grocery shopping for a week this summer. Give them a certain amount of money and tell them they can keep whatever they don’t spend.  Make them put together a meal plan and a shopping list. Allow them to use price comparison apps and coupons. But be sure to set some parameters, like “It can’t be all sweets and snacks” and “We need at least three different family meals.” This will prevent you from eating cereal and peanut butter and jelly every meal.

15. Show Them Fun Doesn’t Have to Cost Anything 

Summer is also the perfect time to teach kids about money because you can show them that fun doesn’t have to cost a thing. If kids know the summer budget and there isn’t any money left, they will find ways to have fun without spending a penny. They’ll discover they have just as much fun hiking with friends for free as they do spending money meeting at Starbucks.

Better Prepare for a Life of Abundance in Retirement. Check us out on YouTube.

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Sources

1.  https://thebossmagazine.com/summer-spending-survey/
2. https://www.wcnc.com/article/news/local/connect-the-dots/summer-camp-money-costly-connect-the-dots-charlotte/275-96e3dc26-2182-460b-9943-5d37e14012b8
3. https://www.usatoday.com/story/travel/airline-news/2023/04/21/why-summer-travel-flights-are-expensive/11713801002/

When you have a bad day, do you head to Target? When you are bored, do you shop online? When you have cause for celebration, do you splurge on something new?

These are all common ways to engage in retail therapy.

The problem is that retail therapy is not true therapy. 

It is simply a way to get a quick dopamine boost and improve mood. 

But retail therapy adds up.

Mint explains, “Roughly half of consumers admitted to buying products to boost their mood. And, each emotional purchase costs, on average, $114.32. If you were to make one emotional purchase a month, it would cost $1,371.81 each year.”¹

Money doesn’t buy happiness. It’s time to say goodbye to retail therapy.

Keep reading for 12 tips to help you break your retail therapy habit and make healthier choices. 

The Status of Retail Therapy Today

Research has been done to better understand why people engage in retail therapy and use it as an emotional crutch.

According to Better Help, “Studies have found that many people use shopping and browsing as a short lived habit to alleviate boredom and loneliness and to counteract uncomfortable or unwanted moods, such as residual sadness from adverse life events.”²

It’s important to note that retail therapy is not real therapy. At the same time, it is not considered a mental health issue. 

However, retail therapy can quickly become a behavioral addiction, which can turn into a shopping compulsion or shopping addiction.

According to a 2006 study published in The American Journal of Psychiatry, “Compulsive buying (uncontrolled urges to buy, with resulting significant adverse consequences) has been estimated to affect from 1.8% to 16% of the adult U.S. population.”³

Years later, we can assume those numbers are closer to the higher end.

Why? Because post-pandemic, people are using retail therapy as an emotional crutch even more.

A 2022 Consumer Pulse survey explains, “US inflation grew to nearly 8.5 percent in March 2022, with the May 2021 to March 2022 period showing the highest inflation in a decade. Yet, US consumers spent 18 percent more in March 2022 than they did two years earlier, and 12 percent more than they were forecast to spend based on the pre-COVID-19 trajectory.”⁴

When people should be saving money, they instead turn to buying more to help them cope.

A 2023 survey by consumer platform Klaviyo found “consumers believe in spending during stressful times, such as the recent rise in inflation. The survey includes more than 1,000 people in the U.S., which found that more than 60 percent of people use retail therapy to improve their mood.”⁵

The same survey found “more than 45 percent of consumers say they treat themselves to retail therapy, with 49 percent of consumers reporting that they will indulge on discretionary items because they are stressed about the economy, while more than 35 percent state they are spending because they are stressed about the job market.”⁶

While occasional retail therapy is okay, many people are using retail therapy regularly as a crutch to deal with life’s stressors. 

This is dangerous.

Ultimately, retail therapy can hurt your financial security, put you in debt, and make it more difficult to achieve your long-term goals. 

Here are 12 ways to stop using retail therapy as an emotional crutch. 

1. Identify Your Retail Therapy Triggers

When are you most likely to engage in retail therapy? 

Here are some of the common retail therapy triggers:

• Jealousy (social media scrolling)
• Guilt 
• Fear (FOMO or fear of missing out)
• Sadness
• Achievement

2. Get Honest with Yourself

Now that you’ve identified your retail therapy triggers, it’s time to see how retail therapy is hurting you.

Look at last month’s bank account and add up all your emotional spending splurges. Then, ask yourself if what you spent your money on was worth it a month later. Do you still need it or use it? 

3. Recognize Where You Shop

It’s also important to know where you tend to go when you want to engage in retail therapy.

For example, do you head to Target after a rough day at work?

Is there a regular happy hour spot you go to on Fridays?

When you are bored and lonely, do you find yourself scrolling Instagram and clicking the shopping links? 

If you know where you tend to turn, you can make an effort to say no next time. 

4. Create a Spending Budget

Life wouldn’t be fun if you couldn’t ever buy something you wanted. That’s why it is so important to create a budget that includes space for spending.

Make sure your budget is set up in a way that includes disposable income so you can occasionally spend for fun.

5. Keep Track of Your Spending

Small retail therapy purchases, such as nail polishes, add up. That’s why it is important to keep track of your spending.

Download a budgeting app that keeps track of your spending.

6. Delete and Unsubscribe

Marketers know how much people love retail therapy, and they know how to hit our emotional triggers.

With this in mind, go through your phone and delete your shopping apps and unsubscribe to store mailing lists. 

7. Make It Harder to Spend Money

Have you noticed how easy it is to spend money these days? We no longer even have to insert our credit cards into the machine. 

We can just tap our cards or our Apple watches and make a purchase in a matter of seconds.

Don’t make it so easy to spend your hard-earned cash.

When you are going out, leave your credit card at home.

Delete saved credit card information from online stores. Turn off Apple Pay. Use cash.

8. Find a Healthier Way to Cope

If you are using retail therapy as an emotional crutch, it means you are using it to cope with something going on in your life.

Fortunately, there are many other healthier ways to cope that won’t hurt your bank account.

Here are some suggestions:

• Take a walk.
• Exercise.
• Call a friend.
• Look at funny memes.
• Tackle something on your to-do list.
• Meditate.
• Pick up a book.
• Turn on your favorite song and dance it out. 

9. Wait It Out

A major problem with retail therapy is that it typically involves shopping on impulse.

You see it, you like it, you buy it. Then, you suffer buyer’s remorse.

Instead, make it a habit to wait out purchases.

Sure, you got a boost of emotional joy just looking at that disco planter, but that doesn’t mean you have to buy it this very minute.

Instead, put it on the shelf of your wish list and walk away.

If you still feel like you have to have it 24 hours later (and can afford it), then buy it. 

10. Pretend Shop

According to clinical psychologist Scott Bea, PsyD, “Whether you’re adding items to your shopping cart online or visiting your favorite boutique for a few hours, you do get a psychological and emotional boost. Even window shopping or online browsing can bring brain-fueled happiness.”⁷

With that in mind, do some pretend shopping.

Pretend shopping looks like window shopping without buying. Create an Amazon Wish List of items you want to “buy,” but don’t. Or create Pinterest boards of “maybe someday” items. 

NOTE – This takes a lot of self-control, so if you aren’t there yet, skip this one until you are ready.

11. Always Shop with a List

Instead of shopping for shopping’s sake, always shop with a list.

If you are heading to the store to pick up some needed items, such as new shoes for your kid who outgrew his latest pair, write down what you need on your shopping list.

If an item isn’t on the list, pass on it. 

12. Get a Rush the Opposite Way

One of the reasons people turn to retail therapy is because it gives people “a sense of personal control over their environment.”⁸

The idea is that being able to purchase what you want feels like a personal achievement.

With that in mind, switch your thinking from retail therapy to saving.

Create a savings goal and get that same rush by watching your savings account grow closer to achieving your goal (such as a vacation). 

Better Prepare for a Life of Abundance in Retirement. Check us out on YouTube.

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Sources

1. https://mint.intuit.com/blog/how-to/emotional-spending/
2. https://www.betterhelp.com/advice/therapy/what-is-shopping-therapy-and-can-it-help-me/
3. https://ajp.psychiatryonline.org/doi/10.1176/ajp.2006.163.10.1806
4. https://www.mckinsey.com/capabilities/growth-marketing-and-sales/our-insights/how-us-consumers-are-feeling-shopping-and-spending-and-what-it-means-for-companies
5. https://news.yahoo.com/consumers-turn-retail-therapy-during-133507229.html
6. https://news.yahoo.com/consumers-turn-retail-therapy-during-133507229.html
7. https://health.clevelandclinic.org/retail-therapy-shopping-compulsion/
8. https://health.clevelandclinic.org/retail-therapy-shopping-compulsion/

The original SECURE Act of 2019 extended the Required Minimum Distribution (RMDs) age from 70½ to 72 for retirement accounts. 

Now with the passing of the Omnibus Bill, SECURE Act 2.0 extends the RMD beginning date to age 73, starting in 2023.

Not only does the new legislation push back the required minimum distribution age, but penalties for not taking withdrawals are also changing – and changing in investors’ favor. 

If you are nearing retirement, it’s critical you stay up to date on these changes, and how they may affect your retirement portfolio. 

Understanding the new RMD rules –  including how the penalties for not taking withdrawals on time will affect you – will help you better plan for a prosperous retirement.

What Are Required Minimum Distributions (RMDs)? 

RMDs are the minimum amount of money you must withdraw from your 401(k) account each year, starting at age 73. 

The exact amount you need to withdraw is calculated based on your account balance and life expectancy.

RMDs were created to ensure that people don’t use 401(k) plans as a way to avoid taxes indefinitely. 

Because 401(k) contributions are made with pre-tax dollars, the government wants to ensure that you eventually pay taxes on that money.

This minimum distribution applies to all of these plan types:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k) plans
• 403(b) plans
• 457(b) plans
• Profit sharing plans
• Other defined contribution plans

RMD Changes Starting This Year

Secure Act 2.0 RMD changes will be phased in over the next 10 years. 

Here’s a breakdown of when you need to take RMDs: 

Phase #1: In 2023, RMDs will now start at age 73. 

If you have already started RMDs, this will not change for you. Anyone who turned 72 in 2022 or earlier follows the old rules.

If you turn 72 in 2023, you can take your first RMD by December 31, 2024, or you could delay it to April 1, 2025. If you delay until April, you will need to take 2 RMDs in 2025. One for 2024, and one for 2025.

Phase #2: Starting in 2033, the RMDs move up to 75.

Penalties for Not taking RMDs Changed

Penalties for not taking RMDs on time have also changed with the passing of the Secure Act 2.0. 

• The hefty 50% penalty for not taking RMDs will drop to 25% in 2023.
  
• The penalty drops to 10% if you take the required amount by the end of the second year that it was due. If your RMDs for 2023 aren’t taken, you have until December 31, 2025, to take the withdrawal and only pay the 10% penalty.
  
• The penalty could be waived completely if you didn’t take the RMD due to an unforeseen event (like illness), but then withdrew it as soon as you could. You would have to ask the IRS for a penalty waiver.

Roth Changes

Good news for those contributing to their Roth 401(k)s. 

Starting in 2024, the Roth option will now be exempt from RMDs – just like it is for the Roth IRA. You no longer have to roll your Roth 401(k) into a Roth IRA to stop the required minimum distribution rule.

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Contrary to what most experts advise, there are times when it may not make sense to roll over your 401(k).

We even advise most investors against leaving behind an old 401(k). 

However, there is an IRS rule that – if you qualify – may help you have more money and avoid penalties that could eat into your retirement income. 

It’s called the 55 and Separated from Service Rule. 

If you aren’t aware of this provision and you roll over your 401(k) should you retire early, change jobs, or be terminated, it may be a costly mistake.

Keep reading for more on this IRS rule and why it may not make sense to roll over your 401(k).

What Is the 55 and Separated from Service Rule? 

The Separation from Service exemption is an IRS provision that allows you to take penalty-free distributions on 401(k)s if you leave your job during or after the calendar year you turn 55. 

It’s also called the Rule of 55, or 55 Rule. 

It gives 401(k) investors, who are looking to retire earlier than normal or those who need the cash flow, a way to take distributions from their retirement plans sooner than is typically allowed.

Normally, any withdrawals prior to age 59½ would have a 10% early penalty from the IRS. But, if you take advantage of this rule, you can avoid paying the early withdrawal penalty. 

You will, however, still owe ordinary income tax on the amount you withdraw.

When It Doesn’t Make Sense to Roll Over Your 401(k)

Typically, it’s advisable not to leave behind an old 401(k) with a past employer. 

However, if you’re nearing age 55 or are already 55, it may be in your best interest to leave the 401(k) where it is and NOT roll it over. 

Here’s why: If you are over the age of 55, but under 59½, and you roll over your old 401(k) to an IRA, the 55 and Separated from Service Rule no longer applies to you. 

That means, if you need to take a withdrawal from your new IRA – the old 401(k) – you will have to pay the 10% penalty, plus taxes.If you leave all or some of the money in your old 401(k), you can withdraw from it without penalty thanks to the 55 Rule.

A lot can happen in the years between 55 and 59½. If you think you may need to access part of your 401(k) funds in those years, it may be in your best interest not to roll over all the money into an IRA.

Get Help Before You Make Your Move

Every investor’s situation is different, and we recommend you speak with an advisor who can help you navigate the rollover process and help you make the best decision possible for your financial future.

Have questions about rolling over your 401(k)? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.

Don’t Break the Bank: Tips for Planning Your Family Summer Vacation

Now is the time to plan and save for a family summer vacation. If you wait too much longer, you’ll be too late.

This is because Americans are still feeling the need for pent-up “revenge” travel following the pandemic – even with inflation.

According to Forbes, “The U.S. Travel Foundation is forecasting an increase in travel spending in 2023 compared to 2022 (or 2019, for that matter).”¹

Summer vacation prices shot up last summer (2022), but they haven’t come down. 

NerdWallet found, “Overall trip prices remained 15% higher in January 2023 compared with January 2020, before travel plummeted because of the pandemic. It looks like prices could remain high through the summer.”²

Given this is the case, families won’t be able to hop in the car and drive on a whim.

To stay within budget, it’s important to plan and save for a family summer vacation.

Keep reading for tips covering all areas of travel to help you plan and save for a family summer vacation.

Budget, Budget, Budget

Unfortunately, many Americans go into debt over summer vacations. 

Credit Karma reports, “About half of millennials (51%) and Gen Z (49%) have gone into debt for summer travel.”³

As much fun as vacations are, you don’t want to find yourself struggling to pay off vacation debt all year long, which will make it even more difficult to take a vacation the next summer.

So, before you start planning a family vacation, you need to know what you are willing and able to spend.

Look over your savings and income, and determine how much you can spend on a family vacation. Make sure you factor in all the vacation costs (hotel, transportation, excursions, food, etc.).

Here are some tips to plan and save for a family summer vacation without taking on debt. 

• Be realistic. Be realistic about your budget. You may want to have a luxury vacation, but your budget is much leaner. Be honest with yourself and your family about what you can afford this summer. At the same time, don’t plan a cheap family vacation that won’t bring joy (such as taking your outdoor-hating spouse tent camping).
  
• Automate savings. Once you have determined how much you’d like to budget for your summer vacation, figure out how much you have to save between now and your vacation. Then, automate savings.
  
• Plan early rather than later. The sooner you book flights, hotels, and activities, the better deals you can get.
  
• Look for personal discounts. Before you pay the full cost for any travel-related expense, check to see what discounts are available. For example, many hotels and theme parks offer discounts for active military, veterans, senior citizens, educators, and/or AAA members.
  
• Pay with points. If you’ve been saving up your credit card points, vacation is the time to use them. 

Where to Go

Where you go on vacation will make a huge difference in how much you spend. 

Think carefully about where you want to go, keeping your budget in mind. 

• Less popular destinations. Less popular destinations tend to be less expensive. Instead of traveling to Disney World, consider a different theme such as Carowinds or Six Flags.
  
• Parks. You can find great deals for visiting National Parks and state parks.
  
• Staycation. This summer may be the year your family enjoys a staycation. To make this enjoyable, treat it like an actual vacation. Don’t use it as a chore catch-up week. Use your allotted budget to enjoy activities and restaurants where you live.
  
• Day trips. Instead of trying to plan and save for a family summer vacation that lasts a week, consider taking a few different day trips throughout the summer. What destinations are within driving distance that your family would enjoy? 

When to Go

A major part of the decision as you plan and save for a family summer vacation comes down to when you choose to go.

Holiday weekends, such as the 4th of July, will be much more expensive than other times. 

• Avoid weekends. If possible, avoid traveling on the weekends. Flight and hotel prices tend to rise on weekends. You can save by traveling Tuesday to Tuesday rather than Saturday to Saturday.
  
• Aim for shoulder seasons. Shoulder seasons refer to travel times when busy destinations are less crowded, such as May or September. For instance, if your kids get out of school in mid-May, take your family vacation in May before all schools are out.
  
• Be flexible. Many online travel booking sites allow you to see prices for travel on different days. The more flexible you are about when you travel, the more likely you are to save money. 

Where to Stay

There are many ways to save money on where you stay. Ultimately, it comes down to doing some research.

• Stay with family or friends. If possible, try to travel to a destination near friends and family who are willing to let you use their home as a base for your travels.
  
• Hotel versus Airbnb. While Airbnb seemed to be overtaking the hotel industry, people have started complaining about the high fees. When you know your destination, be sure to check both hotels and Airbnb to find the best price option.
  
• All-inclusive options. People are often shocked to discover international all-inclusive hotels or cruises tend to be cheaper than domestic stays. This is because all food, drinks, and activities are included, whereas these costs add up on traditional vacations.
  
• Camping. You can find great camping spots in most vacation locations for low prices.
  
• Stay outside the city center. One way to save money on a family vacation is to avoid staying in the center of the action. If you book a beach vacation, save money by staying at a beach house, condo, or hotel not located directly on the beach. If you travel to D.C., for example, stay outside the center but close enough to drive in and park at a metro station. 

How to Travel

Decide how you plan to get to your destination according to your budget. 

• Drive. Is driving possible? Is it the cheaper option? Make sure you factor in rising gas prices.
  
• Fly. If you need to fly, sign up for price drop alerts from Skyscanner to get the best flight deals. 

You’ll also need to decide how you’ll get around your destination.

• Rent a car. Will you need to rent a car? Factor these costs into your budget.
  
• Uber or Lyft. Do you plan to stay mostly on-site? If so, can you get by using Uber and Lyft for the few times you leave where you are staying?
  
• Public transportation. Is there public transportation available? Look into the costs and plan ahead.

What to Eat

Food is one of the fastest ways to blow your vacation budget. Here are some tips to help you stay on track.

• Stay somewhere with a kitchen. Book a vacation stay with a kitchen so you can cook meals instead of eating out constantly.
  
• Look for free or discounted meals. There is no shame in looking for meal discounts. For example, some dinner entertainment shows offer discounted shows and meals for lunch rather than dinner.
  
• Kids eat free. Use the app Kids Eat Free to locate restaurants nearby that offer free or discounted meals for children.
• Pack snacks. You may be able to avoid paying for expensive theme park foods and snacks by packing your kids’ favorite snacks to take with you. 

What to Do

Another area where families tend to overspend on vacation is entertainment. 

Vacations are an ideal time to splurge and have some fun, but you shouldn’t go into debt to do so. 

• Free entertainment. In the weeks leading up to your vacation, be on the lookout for free entertainment, such as free museums, free concerts, or free festivals.
• Discounted tickets in advance. Many entertainment venues offer a significant discount for booking online ahead of time.
  
• Groupon. Spend time looking through Groupon for discounted activities offered at your destination.
  
• Reciprocal memberships. Consider visiting destinations that offer reciprocal memberships. For example, many zoos, children’s museums, and science museums offer reciprocal memberships, which means they offer free or discounted admission to museums and zoos across the country. 

What to Buy

If your kids are like every other kid on vacation, they want to buy all the souvenirs. Here are some tips for dealing with overspending on souvenirs.

• Budget for souvenirs. When you plan and save for a family summer vacation, make sure you include souvenirs in your planning. Determine the amount each family member is allowed to spend on souvenirs ahead of time and let them know!
  
• Use cash. Use cash for souvenirs. For example, if you budget $50 for each child to spend on souvenirs, give them $50 in cash. Once the cash is gone, they can’t buy anything else.
  
• Pack fidget toys ahead of time. Avoid having to buy toys during road trip stops by packing a few new, cheap toys ahead of time. 

How to Pack

Luggage fees continue to increase, and you can find yourself paying a good bit extra just for luggage on a family vacation.

Avoid paying for extra luggage with these tips. 

• Carry-on. Whenever possible, try to pack in a carry-on only. Give each family member a carry-on to pack in. Using packing cubes will make this easier.
  
• Ship items. Depending on where you are traveling, consider shipping luggage. It may be cheaper than paying airline fees!
  
• Purchase later. Instead of packing disposable items, such as packs of diapers, order them from Amazon to arrive at your destination. 

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Sources:

1. https://www.forbes.com/advisor/credit-cards/travel-rewards/travel-trends-predictions-2023/
2. https://www.nerdwallet.com/article/travel/summer-2023-travel-prices
3. https://www.creditkarma.com/insights/i/half-millennials-gen-z-debt-summer-travel-survey

The more you know your rights as a 401(k) investor, the better choices you will be able to make building wealth for retirement.

But far too many 401(k) investors don’t know their rights due to the lack of education. 

Most of us sign up for a 401(k) plan and are handed a packet of information filled with industry jargon. Very little is explained by the plan representative or HR department. 

If this sounds familiar – and you are ready to get engaged with your 401(k) – then keep reading to understand your rights as a 401(k) investor. 

Access to Information

You have the right to receive information about your 401(k) plan and its investments, including performance data, fees and expenses, and the investment strategies being used.

In addition, your plan administrator must provide you with an annual report that includes information about the plan’s investments, expenses, and performance, as well as quarterly statements. 

Knowing how to read and understand the information presented in a 401(k) statement may be critical to your retirement future. 

But, let’s face it – there’s a lot in them and they can be difficult to understand. 

Watch the video below to see how to read your 401(k) statement.

You Are Responsible for Your 401(k)

Far too many 401(k) investors think their employers take care of their 401(k)s for them. 

This is not true. They cannot and will not make changes for you.  

It’s your money. It’s your account. It’s up to you to make changes. 

This also means that, should you leave a 401(k) behind with your old employer when you switch jobs, they are not staying on top of your 401(k). It’s your responsibility to roll over your 401(k) – whether it be to an IRA or to your new 401(k) plan. 

[Related Read: How Much Is Your Forgotten 401(k) Costing You in Potential Savings?]

Control over Investment Choices

You have the right to choose how your 401(k) contributions are invested, within the options provided by the plan.

Typically, when you enroll in a 401(k) plan, you are given a menu of investment options to choose from, and you can decide how much of your contributions you want to allocate to each investment option.

You also have the right to make changes to your investment choices over time. 

For example, if you decide that you want to take on more risk in your portfolio, you can shift some of your investments from bond funds to stock funds. 

Or, if you become more risk-averse as you get closer to retirement, you can move some of your investments into more conservative options, such as stable value funds or money market funds.

It’s important to note that there may be limits on how often you can make changes to your investments. Some 401(k) plans limit the number of changes you can make per year, while others may charge a fee for making frequent changes.

To stay on track to meet your retirement goals, we recommend rebalancing your account throughout the year. 

[Related Read: What Every Investor Needs to Know about Rebalancing]

Employers Can Automatically Enroll You in TDFs

Your employer can automatically enroll you in (i.e., 2030, 2040 funds) as their default option or Qualified Default Investment Alternatives (QDIAs).

They can legally do this thanks to the Pension Protection Act of 2016, which enabled employers to direct plan participants’ assets into a target date fund and not be liable–should the employee not select an investment.  

Average investors are advised to invest in target date, or lifestyle, funds because they are supposed to automatically adjust account allocations throughout life. 

The problem is that investors are grouped solely based on their expected retirement date. 

TDFs don’t take into account your profession, salary, risk tolerance, or retirement goals and objectives. Nor do they take into consideration changes in economic and market trends or tax or trade policy.

As a result, TDFs often underperform in good markets and do a poor job of managing downside risk during tough markets.

Watch 3 Ways Target Date Funds May Hurt 401(k) Investors

Employer Match Roth Option

Thanks to the Secure Act 2.0, which was passed into law December 29, 2022, employers can now match the Roth option in 401(k)s. 

Prior to this law, employer matches had to be made with pretax dollars, go into your traditional 401(k), and then you’d have to pay taxes on the money when you withdrew it later on. 

This is optional for employers, and employers may elect to make pretax matches or not provide a company match at all. 

[Related Read: SECURE Act 2.0: How It Affects Your Retirement Savings]

Company Match Dollars May Not Be Yours to Keep

Vesting is your legal right to keep what your employer contributes as a company match. 

Each employer has its own requirements for vesting. 

No matter what, once you become fully vested, the money is yours to keep. 

So, should you change jobs after you are fully vested, you don’t have to return part or all of the money your company matched. 

Your vesting schedule should be clearly spelled out in the information packet provided when you signed up. If you don’t see it, make sure to ask your plan representative or HR department.

[Related Read: Changing Jobs? Know Your Vesting Schedule before Quitting]

You Can Contribute Up to $22,500 in 2023 

Employees with 401(k)s, 403(b)s, most 457 plans, and federal Thrift Savings Plans can contribute up to $22,500 in 2023. 

For those age 50 and older, the 401(k) catch-up contribution is $7,500 in 2023. This means you can contribute a total of $30,000 this year if you’re over 50.

Protected from Bankruptcy 

Typically, 401(k)s are considered exempt from bankruptcy under the Employee Retirement Income Security Act (ERISA).

This means creditors won’t have access to your 401(k) when you liquidate assets in Chapter 7 bankruptcy, and it won’t be considered an asset when your payment plan is determined under Chapter 13. 

However, there are some situations where your 401(k) funds may be at risk should you have to file for bankruptcy. 

You Can Borrow from Your 401(k) 

Should you need money for an emergency or for a down payment on a home, you can take out a 401(k) loan.

But do so with caution.

Should you take out a loan and then be terminated or you voluntarily quit, you will have to pay back the 401(k) loan in full – and potentially in significantly less time than you’d planned.

If you cannot repay the loan balance in the mandated time frame, the loan will be treated as an early withdrawal, or taxable distribution. And you have until the due date of your tax return for the year of distribution to pay it back.

Should this happen, in addition to having to pay the 10% early withdrawal penalty if you are under age 59½, you’ll also owe income taxes on the full balance of the loan.  

[Related Read: The Downside of 401(k) Loans: Investors Beware]

You Can Withdraw from Your 401(k)

As with the 401(k) loan, this option should be your last resort. However, it is your right to pull money from your 401(k).

You can do it, but not without consequences. 

First things first: If you withdraw money from your 401(k) before age 59½, you will have to pay income tax on the amount you withdraw plus a 10% early withdrawal penalty.

Unless you qualify for a hardship withdrawal, which is defined by the IRS as taking money out of your 401(k) because of an immediate financial need that’s limited to the amount to satisfy the hardship need – not the amount you want. 

The need of the employee also covers the employee’s spouse or dependents. 

With a 401(k) hardship withdrawal, you pull money from your savings, and you cannot pay it back like you do a 401(k) loan. 

If you qualify, you will still have to pay taxes as ordinary income on the money withdrawn, but you won’t have to pay the 10% early withdrawal penalty. 

[Related Read: The High Cost of Raiding Your 401(k)] 

You Must Take RMDs at Age 73

Thanks to the Secure Act 2.0, required minimum distribution (RMD) changes will be phased in over the next 10 years.

RMDs will now start at age 73, starting in 2023. If you have already started RMDs, this will not change for you. 

If you turn 72 in 2023, you can take your first RMD by December 31, 2024, or you could delay it to April 1, 2025. If you delay until April, you will need to take two RMDs in 2025. One for 2024, and one for 2025.

Starting in 2033, or phase 2, the RMDs move up to age 75.

Also included in the bill are massive changes to the original 50% penalty for not taking Required Minimum Distributions on time:

• The hefty 50% penalty for not taking RMDs will drop to 25% in 2023.
• The penalty drops to 10% if you take the required amount by the end of the second year that it was due. The penalty could be waived completely if you didn’t take the RMD due to an unforeseen event (like illness), but then withdrew it as soon as you could. You would have to ask the IRS for a penalty waiver.

You Have a Right to Professional Account Management

Professional 401(k) management help has been shown to increase 401(k) investors’ returns.

In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., reported a 3% average increase in the value of portfolios of clients who have their accounts professionally managed.¹ 

Aon Hewitt and Financial Engines conducted a study from 2006 to 2012 comparing the returns of investors who sought help in the form of online sources or managed accounts to those who managed their 401(k)s themselves. 

The study examined the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers. It showed that investors who received professionally managed help earned higher median annual returns than those who invested alone. 

In fact, participants who had their assets managed by professionals saw an average of 3.32% (net of fees) more in returns annually than those who managed their own accounts.² 

The study revealed, “If two participants—one using Help and one not using Help—both invest $10,000 at age 45, assuming both participants receive the median returns identified in the report, the Help participant could have 79 percent more wealth at age 65 ($58,700) than the Non-Help participant ($32,800).”³

To see how 3% may improve your 401(k) performance, check out our retirement Calculator.

401(k) Maneuver provides professional account management to help you grow and protect your 401(k) account. 

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance. 

Our done-for-you, virtual service allows you to keep your 401(k) right where it is while we review and rebalance your account based on your risk tolerance and current market conditions.

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Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

Sources: 

1. https://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp
2. https://www.edelmanfinancialengines.com/press_category/2014/financial-engines-aon-hewitt-find-401k-participants-who-use-professional-help-are-better-off/
3. https://www.edelmanfinancialengines.com/press_category/2014/financial-engines-aon-hewitt-find-401k-participants-who-use-professional-help-are-better-off/ 

401(k)s are often the largest asset people have for retirement. We save year after year, paycheck after paycheck, with the goal to have a comfortable retirement. 

However, there are times when we may be tempted to dip into our retirement savings before we reach retirement age.

While it may seem like an easy way out of a financial jam, taking money from your 401(k) may have serious long-term financial consequences. 

Keep reading for the downsides to raiding your 401(k). 

#1 Missing Out on Compound Returns

One of the key advantages of a 401(k) is the power of compound returns. 

When you contribute to a 401(k), your money earns interest, and that interest compounds over time – meaning you earn returns on your returns. 

This may lead to significant growth over time. The longer your money is invested, the more it can grow. 

Should you raid your 401(k) early – whether it’s a 401(k) loan or withdrawal – you risk missing out on that compounding effect and your losing out on the potential growth. This can have a significant impact on your retirement savings over time.

#2 Taxes and Penalties

In most cases, if you withdraw money from a retirement account before you reach 59½, you’ll face both taxes and penalties. 

The IRS requires automatic withholding of 20% of a 401(k) early withdrawal for taxes if you are under age 59½ – and it’s considered ordinary income. This means you might be pushed into the next tax bracket if you’re not careful. 

Along with the withholding taxes, the IRS will also hit you with a 10% penalty on all funds withdrawn when you file your tax return – again, if you’re under the age of 59½. 

These taxes and penalties can significantly reduce the amount of money you need to withdraw, making it an even less attractive option.

#3 Harder to Catch Up

Retirement savings is a long-term game, and every dollar counts. If you raid your 401(k) now, you may find it difficult to catch up later. 

If you withdraw money from your account, you’ll have to work that much harder to make up the difference later on, which may be difficult or even impossible depending on your age and financial situation.

#4 Robbing Your Future Self

When you take money from your 401(k), you’re essentially borrowing from your future self. 

While it may be tempting to use that money now, it’s important to remember that it’s earmarked for your retirement years. 

Taking money out now means you’re essentially reducing the amount of money you’ll have available to live on in the future. 

This can lead to significant financial stress later on, especially if you’re not able to make up the difference.

The Root of the Problem

If you’re struggling to make ends meet or facing unexpected expenses, taking money from your retirement may provide temporary relief, but it doesn’t address the root cause of the problem. 

Raiding your 401(k) early may be a band-aid solution to a larger financial problem. 

More than likely, it may be that you don’t have an emergency fund or more liquid investments to draw from. 

If that’s the case, taking money from your 401(k) will only temporarily solve your problem. But should another financial emergency arise, you’ll be right back where you started.

Make a plan today to reduce expenses so you can stash cash for emergencies. If you need to, take on a side hustle to increase your income, and then use the additional funds to save more. 

One final thought: Should you absolutely need to raid your 401(k), we recommend speaking with a tax professional, as well as a financial advisor before making a move. 

Better Prepare for a Life of Abundance in Retirement. Check Us Out on YouTube.

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For 401(k) investors over 50, retirement is around the corner. And, with the market volatility over the past year, many are wondering how to best protect their savings and ensure they have enough for retirement. 

If you’re nearing retirement and want to do what you can now to maximize your 401(k) savings and set yourself on a path to a comfortable retirement, make sure to avoid these costly 401(k) mistakes.

#1 Not Contributing Enough

One of the most significant 401(k) mistakes people over 50 make is not contributing enough. 

Not only should you be maxing out contribution limits, but you should also be taking advantage of the 401(k) catch-up contribution for investors over 50.

Employees with 401(k)s, 403(b)s, most 457 plans, and federal Thrift Savings Plans can contribute up to $22,500 in 2023. 

For those ages 50 and older, the 401(k) catch-up contribution is $7,500 – for a total of $30,000.

How much you can realistically contribute to your 401(k) depends on how much you earn and the amount of debt you carry, among other factors. 

Do what you can to save as close to the 401(k) contribution limits as possible: Cut monthly spending, postpone discretionary large purchases, or pick up a side hustle.

#2 Being Too Conservative

Many 401(k) investors over 50 become more conservative with their investments as they approach retirement. It’s totally understandable because you want to protect your hard-earned savings. 

However, being too conservative may be a mistake.

If you play it too safe, you may miss out on potential growth that could make a significant difference in your retirement savings.

For example, if you’re invested too much in bonds for stability and to protect your retirement savings, an overly conservative portfolio can hurt long-term growth. 

Instead, consider a mix of stocks, bonds, and other asset classes to help with growth potential. 

Another reason being too conservative may be a mistake is inflation. 

If you’re not earning enough on your investments to keep up with inflation, your savings lose purchasing power over time. 

This can be especially problematic for 401(k) investors over 50 because they’re likely to be retired for longer than younger investors, which means they’ll need their savings to last longer.

#3 Failing to Rebalance

Market fluctuations can cause your portfolio to become unbalanced over time, with some investments outpacing others. 

The investments you initially chose to help you meet your retirement goals – whether that was 2 years ago or 2 months ago – may no longer be the best alternatives for you now or be aligned with your retirement goals. 

This is why it’s important to regularly review and rebalance your portfolio. 

Rebalancing is the process of realigning the weightings of the assets (your investments) in the portfolio. This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation. 

It’s not enough to just simply rebalance. With professional help, consider rebalancing based on the current economic and market trends rather than just realigning allocations.

Check out our 401(k) Calculator to see how professionally managed help may impact your 401(k) balance in retirement. 

#4 Pulling Money from Your 401(k)

When you withdraw from your 401(k) before retirement, you’re depleting your savings and missing out on potential growth. 

Plus, it can be an expensive mistake if you withdraw money before you reach 59½. 

Not only will you face an early withdrawal penalty, but you’ll also have to pay taxes on that money as ordinary income. 

Whether you need the money for a medical emergency or to pay down debt, consider alternatives before tapping into your retirement nest egg. Get a home equity loan, refinance your mortgage loan, take out a personal loan, or use a 0% APR credit card.

[Related Read: 401(k) Hardship Withdrawals – What You Need to Know]

#5 Underestimating How Much You Actually Need 

Many Americans have a disconnect between what they think they will need during their retirement years and the actual cost of retirement.

Underestimating your retirement needs can lead to financial difficulties, forcing you to rely on Social Security or other sources of income to make ends meet later on in life. 

We are living longer, which means retirement is lasting longer for many. Yet, healthcare, transportation, housing, and long-term care costs continue to rise. 

It’s critical to revisit your retirement plan and get crystal clear on how much money you need. Then, do what you can to save as much in your remaining working years as you can. 

Check out our 401(k) Calculator to see how professionally managed help may impact your 401(k) balance in retirement. 

#6 Not Getting Professional Advice

If you’d like to take control of your financial future and potentially have more income at retirement, we strongly suggest getting third-party advice. 

If you’re hesitant to reach out for advice because you think your account balance isn’t big enough, or you think you’re too close to retirement to get help, don’t let that stop you! 

401(k) Maneuver provides professional account management with the goal to help you grow and protect your 401(k).

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance. 

There are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account. 

Simply connect your account to our secure platform, and we regularly review and  rebalance your account for you, when necessary. Check here to learn more about how it works. 

If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.

One of the most common financial mantras to building wealth is “pay yourself first,” but there isn’t much guidance on how to create a pay yourself first budget.

That might be why so many Americans struggle with saving money.

A 2023 Bankrate study found, “Nearly half (49 percent) of U.S. adults have less savings (39 percent) or no savings (10 percent) compared to a year ago.”¹ 

A 2022 Bankrate study found, “Some 56% of Americans are unable to cover an unexpected $1,000 bill with savings.”² And that 33% of American workers do not have any real retirement savings plan.³

A pay yourself first budget builds wealth because it helps you prioritize your savings.

Let’s face it: It’s too easy to spend first and wait to save until later. The problem is, later seldom comes.

Most people spend their paychecks and then have nothing leftover to save. A pay yourself first budget flips this around by saving first and spending second.

If you are new to this financial philosophy, it can be hard to wrap your brain around.

There is a fear that you won’t be able to cover your expenses if you save before you pay your bills. 

If you follow the steps below, you’ll see how easy it is and how paying yourself first not only provides you a financial cushion, but also helps you build wealth. 

Identify Your Spending Patterns

The first thing to do is to get honest about your spending patterns.

Take a good hard look at your accounts and see where your money is going. Do you have a Starbucks habit? Are you regularly shopping for new clothes or gadgets?

You can’t put into practice a pay yourself first budget until you are realistic about how you spend money.

Track your spending for a month so you can be prepared to craft the budget honestly.

Write Out All Income and Expenses

Once you have a basic idea about your spending habits, write down your annual income and your monthly income.

Then, write down all your recurring and required expenses.

Your monthly expenses should be less than your monthly income. (If not, we’ll come back to this point.)

This is where you look at your spending habits.

Use this information to calculate how much you need for food and other usual purchases (such as streaming subscriptions) each month. 

Calculate the Minimum Amount You Must Spend Each Month

Take the info from the previous step, and calculate the minimum amount of money you have to spend each month (housing, utilities, cell phone, etc.).

See how low you can get your spending down using just the required expenses.

Consider this scenario.

You make $3,000 a month.

Your minimum monthly expenses total $1,400. 

This leaves you with $1,600 to save or spend.

Adjust Your Budget as Needed

If you discover you aren’t bringing in enough money each month to cover your required expenses, then what? 

First of all, get clear on the fact that you are living beyond your means and commit to changing that. 

If this is your situation, you need to focus on paying down some of your high-interest debt instead of following a pay yourself first budget – with the exception of building an emergency fund. 

When it comes to a pay yourself first budget for someone drowning in debt, follow the same process, but allocate the remaining income to an emergency fund and debt payments.

Next, you need to adjust your budget to better reflect your income.

Can you move to somewhere with cheaper rent? Can you scale back? Can you renegotiate with utilities? Can you start a side hustle?

Decide How Much to Save Each Month

Now that you know where you stand with monthly income and expenses, calculate how much you want to save each month. 

A common savings goal is 20% of monthly income, but you may opt to save 10% or 15%. The choice is yours. The point is to select a percentage goal you can meet every month. 

Let’s go back to the original scenario.

You make $3,000 a month.

Your minimum monthly expenses total $1,400. 

You decide to save 20% each month (or $600).

This leaves you with $1,000 to spend (or put toward other financial goals).

Decide What You Are Saving For

Once you’ve decided how much you want to save monthly, you need to decide what you are saving for.

Prioritize saving to build an emergency fund and save for retirement at the same time. 

You may also want to start saving for a down payment on a house or a special birthday vacation.

Determine what percentage of monthly savings will be allocated to each fund. 

Going back to our original scenario.

You’ve decided to save $600 a month:

• $300 toward retirement
• $200 toward the emergency fund
• $100 toward the vacation fund

Play around with it to see what works best for you financially in the long run. 

Set Up Automatic Transfers

At this point, you want to set up your savings account(s) and automate transfers.

The goal is to transfer the money from your paycheck into these savings accounts BEFORE you even see the money.

When you do so, you are paying yourself first!

SOURCES

1. https://www.bankrate.com/banking/savings/emergency-savings-report/#over-1-in-3
2. https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-cover-a-1000-emergency-expense-with-savings.html
3. https://www.gobankingrates.com/retirement/planning/jaw-dropping-stats-state-retirement-america/

With inflation not going down and interest rates rising, many Americans are wondering: Should I pay off debt or continue to contribute to my 401(k)?

It’s not surprising American households are feeling pinched. NerdWallet reports, “In the past year, median household income has grown just 4%, while the overall cost of living has jumped 8%”¹

As a result, more Americans are taking on debt just to afford the cost of living. 

We’re not talking about taking on debt for family vacations; we’re talking about the huge rise in the cost of essentials. It’s putting pressure on American households.

If you are one of the many Americans wondering whether you should pay off debt or continue to contribute to your 401(k), keep reading for tips on how to do both.

The State of Debt in America in 2023

Following the pandemic, debt decreased. But with inflation and credit card interest rates now reaching 20%, many Americans are drowning in debt. 

Check out these recent statistics about debt in America.

• According to NerdWallet, “The average amount of credit card interest paid by households is up due to recent Federal Reserve rate hikes and rising amounts of revolving credit card debt. U.S. households that carry credit card debt will pay an average of $1,380 in interest this year.”²
  
• The average U.S. household owed about $222,000 in mortgages, $17,000 in credit card debt, and $29,000 in auto loans last year.³
  
• According to Bankrate, “The share of credit card users who carry a balance has increased to 46% from 39% a year ago.”⁴
  
• The latest quarterly report by TransUnion shows total credit card debt reached a record high of $930.6 billion at the end of 2022, an 18.5% spike from a year earlier. The average balance rose to $5,805 during this same time.⁵
  

Debt holds you prisoner while you are in it presently, but it also has an effect on your future. 

If you aren’t careful, debt can follow you into retirement and affect the type of retirement you have. 

The State of Retirement in America in 2023

As the cost of living increases, so will the amount needed during your retirement years.

The problem is that inflation and interest rate hikes are making it more difficult for people to save for the retirement they want. 

A Northwestern Mutual Study found that “U.S. adults aged 18+ anticipate they will need $1.25 million to retire comfortably, a 20% rise since 2021. At the same time, Americans’ average retirement savings has dropped 11% – from $98,800 last year to $86,869 now – while their expected retirement age has risen – now 64, which is up from 62.6 last year.”⁶

The same study found, “More than four in ten (43%) people say they do not expect to be financially ready for retirement when the time comes. […] Meanwhile, one-third (33%) of Americans expect to live to 100, with an equal third (33%) predicting there is a better than 50% chance they may outlive their savings. At the same time, more than one in three (36%) report that they have not proactively taken any steps to address this concern.”⁷

And, according to Fox Business, “Forty-one percent of survey respondents said that inflation was the most significant obstacle to reaching financial security in retirement, while 39% blamed the economy.”⁸ 

Add in debt – especially high-interest debt –  and it is even harder to save for a comfortable retirement.

[Related Read: 13 Ways to Avoid Cutting Back on 401(k) Contributions amid Inflation]

Debt and Retirement

If you are drowning in debt, consider whether your retirement income will even be enough to cover your monthly debts.

This might make you feel as if you need to focus solely on paying off debt and not contributing to your 401(k).

But that also has consequences.

For one, if you focus only on paying off debt for 5 years, you may be debt-free in 5 years, but you will also be 5 years behind on retirement savings.

You will have potentially missed out on 5 years of compounded investment returns had you consistently contributed.  

Plus, those with a 401(k) who didn’t contribute at least the company match while paying off debt over these 5 years may have missed out on 5 years of free money. 

This is even more significant beginning in 2023 as 401(k) contribution limits have risen to $22,500 from $20,500. 

On the flipside, interest rates on your debt may be higher than the return you could expect on your retirement investments.

Let’s say you have $10,000 in credit card debt and you pay 13.98% APR. Let’s also say you have a 401(k) with an expected annual rate of return of 7%.

If you decide to only pay the minimum on your credit card and divert what you can into your 401(k), you would be losing money over time on the amount you invested – 6.98% to be exact.

Rethinking the Question: Should I Pay Off Debt or Contribute to My 401(k)?

The best way to answer this question is to change the question. Instead of debt payoff OR saving for retirement, use AND. 

How can I pay off debt AND save for retirement?

Here are some suggestions on how to do both: 

• Pay off high-interest debt first, while saving something for retirement. It is critical that you at least contribute enough to your 401(k) to get your company match because that’s FREE money. Aim to contribute enough to get the company match and then divert any additional retirement savings to pay off high-interest debt.
  
• Create a budget that prioritizes debt repayment while still allowing you to contribute enough to your 401(k) to receive the full company match.
  
• Once you’ve paid off your high-interest debt, continue paying a bit over the minimum on any lower-rate credit cards or debt you have.
  
• Then, divert more money to fund an emergency savings account. If you want to avoid getting back into debt, you need access to cash.
  
• Once you have built up your emergency savings, increase your retirement savings (even a small percentage makes a big difference) and continue paying down the debt you have.
  
• Once your debt is manageable or gone, try to max out your yearly 401(k) contributions.
• Continue funding your retirement even as you approach it.

Better Prepare for a Life of Abundance in Retirement. Check Us Out on YouTube.

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SOURCES

1. https://www.nerdwallet.com/article/credit-cards/average-credit-card-debt-household
2. https://www.nerdwallet.com/article/credit-cards/average-credit-card-debt-household
3. https://www.nerdwallet.com/article/credit-cards/average-credit-card-debt-household
4. https://www.bankrate.com/finance/credit-cards/credit-card-debt-costs-more-than-ever/
5. https://www.cnbc.com/2023/02/03/us-credit-card-debt-jumps-18point5percent-and-hits-a-record-930point6-billion-.html
6. https://news.northwesternmutual.com/2022-10-25-Northwestern-Mutual-Study-Finds-Americans-Now-Believe-They-Will-Need-1-25-Million-for-Comfortable-Retirement
7. https://news.northwesternmutual.com/2022-10-25-Northwestern-Mutual-Study-Finds-Americans-Now-Believe-They-Will-Need-1-25-Million-for-Comfortable-Retirement
8. https://www.foxbusiness.com/personal-finance/american-savings-retirement-not-enough-inflation