September 23, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
T.R. from Kenton County: How much do I need in my 401(k) to retire? I’m close to $500,000, but not sure if that’s enough.
Answer: First off, congratulations on a job well done. In a day and age in which the average 401(k) balance is about $104,000 (according to the latest numbers from Vanguard), you’ve obviously made saving for the future a top priority. You should be very proud of your accomplishment thus far.
However, we’re going to throw a little cold water on the celebration. Because it’s time to realize that all that money you think you have in your traditional 401(k) isn’t actually all yours. While your account balance might say something close to $500,000, all that money has been tax-deferred; that is, you agreed to let the government give you an up-front tax break on contributions as long as you paid taxes on withdrawals later on down the line. So, for example, if you’re in the 12 percent tax bracket in retirement (assuming current tax brackets stay the same for a while), only about $440,000 is yours. In the 22 percent bracket? Only $390,000.
With that said, those amounts might be enough for you to retire. In all honesty, everyone’s vision of retirement is unique. Some people need millions to retire, others only need a few hundred thousand. The amount you need to retire the way you want depends on numerous factors including your lifestyle, budget, other sources of income (such as Social Security, pension, other investments, etc.), your health, and the number of years in retirement, just to name a few.
It’s also important to remember that you don’t retire on a “chunk” of money. You retire on the stream of income that money generates. So, don’t get too focused on the big “headline” number of your account balance.
Here’s The Simply Money Point: As you approach retirement, consider working with a trusted financial advisor, such as a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®. He or she can take a look at your entire financial picture to help you figure out if you’re financially on track to retire well.
Stephanie in Colerain Township: I just noticed my credit score dropped, and I’m not sure why. I did just recently pay off my mortgage, but why would that have a negative impact?
Answer: What a huge achievement! And while you wouldn’t think paying off a mortgage would hurt your credit score… surprise, it sometimes can!
What’s going on here? Simply put, credit score companies, such as FICO (Fair Isaac Corporation), like to see that you have different “types” of credit to your name. For instance, a “revolving” account is something that has a different payment each month, such as a credit card, and an “installment” account has a fixed payment over a certain amount of time, such as a mortgage, car loan, or student loan. Credit scoring models want to see that you can handle all types of credit well. Your credit mix actually accounts for about 10 percent of your credit score.
In your case, now that you’re no longer paying one of your installment loans, the algorithm your credit score uses might be “dinging” you a little. But the good news is that, according to the credit bureau Equifax, if you consistently paid your monthly mortgage payments on time throughout the life of that loan, that positive behavior should off-set your credit score drop over the long term. Moreover, your paid-off mortgage should stay on your credit report for up to 10 years, which will help boost the length of your credit history.
You don’t mention how much your credit score dropped, but if you saw a significant decrease and/or it remains lower for a while, keep in mind that other activity can also negatively impact your credit score. Did you apply for a new credit card lately? Miss a payment? Run up a high balance? Those could actually be the culprit.
The Simply Money Point is that the possibility of a small credit score drop shouldn’t deter anyone from paying off the mortgage. Just understand that it can happen, but that it should bounce back quickly.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or firstname.lastname@example.org.