January 28, 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
Michael in Delhi Township: My wife and I are hoping to retire in a few years. We’re wondering how to create a retirement budget?
Answer: Your retirement has the potential to last 30 years or more. Or, think of it this way: you’re going to be ‘unemployed’ for 30 years or more! So, it’s extremely important to be as prepared as possible and make sure you stretch your money as far as it will go.
Before you create a retirement budget you’ll want to determine what you’re currently spending, down to the penny. You’ll also want to make note of what expenses will change when you retire. For example, hopefully you’ll have your mortgage paid off by then, and you probably won’t be saving any longer, meaning those expenses will be removed.
Next, you need to understand where your income will come from. Will you be receiving Social Security? If so, how much? Will you take a standard distribution from your 401(k)? Are you lucky enough to have a pension? Do you have other investment income? Be sure to understand how much money you’ll have coming in. This will help you adjust your budget accordingly.
After you’ve determined what your income and expenses will be, compare the two. If your expenses are more than your income, you may need to do some tweaking. Determine different areas you could cut back.
You’ll also want to think about creating a tax strategy for retirement. Simply Money Advisors recommends working with a tax professional (such as a Certified Public Accountant) and a trusted financial planner (preferably a Certified Financial Planner™) to help you develop an appropriate plan for your specific financial situation. Hiring professionals will help you understand all angles of your financial future and what you need to prepare for.
The Simply Money Point is your retirement budget will be the foundation for what your lifestyle is in retirement. Make sure it helps set you up for a secure and sustainable future.
Jacob in Mt. Washington: I’m 25. Should I be saving for retirement or putting money toward paying down my student debt faster?
Answer: There are many factors that can play a role in this decision. For starters, what’s the interest rate on your student loans? If you have private loans, your interest rate may be anywhere from six percent to 12 percent. If you have subsidized federal loans, your interest rate may be a lot less. By understanding this number, you’ll know what’s more important to focus on.
Generally, if your student loan interest rate is higher than an investment’s expected rate of return, it makes more sense to pay off the loan quicker. But if an investment’s expected rate of return is higher, you may want to invest. But remember, past performance does not guarantee future results.
Let’s say your student loan payment is $400 a month and your interest rate is fairly low, around three percent. Historically, stocks have earned more than three percent. Therefore, it may make sense to put any extra income toward investing in your future because you can capitalize on compounding. For example, if you decide to contribute the maximum annual amount (currently $5,500) to a Roth IRA and you earn seven percent a year (after the costs of investing have been deducted) for the next 40 years, by the time you’re 65, you’ll have just over $1 million in tax-free money.
You may also have the opportunity to contribute to a 401(k) at work. If your employer is willing to match your contribution up to a certain amount, you’re missing out on free money if you don’t contribute to the plan. This will help boost your savings while helping you prepare for the future.
If you want to look at hard numbers, the website StudentLoanHero.com has a calculator you can use to compare the different outcomes of putting extra money toward student loans versus investing it.
The Simply Money Point is that student loans can make you feel like you’ll never get out of debt. That’s why you should create a realistic budget you can stick to. Do your best to balance paying off your debt while investing in your future. At your young age, you don’t want to miss the opportunity to take advantage of compounding.
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 email firstname.lastname@example.org.