As families invest their savings in preparation for their children’s future K-12 or college tuition and expenses, 529 college savings plans can provide various tax and financial benefits. These benefits make 529 plans an essential tool for most college savings strategies. Most states offer two types of 529 Plans.
  1. College savings plans
  2. Prepaid tuition plans
Nearly every state in the U.S. offers one or more 529 plan. Further, you can use the funds invested in a 529 at any one of more than 6,000 eligible colleges and universities located throughout the country. Some private universities and colleges also provide prepaid tuition programs to allow parents to pay all or a portion of their child’s tuition at locked-in rates over time and in advance. However, these plan types do not enjoy the same tax benefits as 529 plans. Fees and Expenses According to the United States Securities and Exchange Commission (SEC), fees vary widely from one 529 plan to the next. Therefore, it is best to research these plans as those fees will impact the returns on your investment and, ultimately, the amount of money that will be available for your child to attend college when the time comes. Prepaid Tuition Plans Most prepaid tuition plans charge an enrollment or application fee with ongoing administrative expenses. The better you understand the terms and costs, the better you can determine whether it will be the right choice for your needs. Education Savings Plans There are plenty of fees you might need to pay with your 529 saving plan. They may include any of the following: These fees will vary according to your state’s regulations and the type of account you choose for your 529 saving plan. Work closely with a trusted advisor to better know the fees associated with 529 plans in your state and how those fees may impact the final amount you have to contribute to your child’s education. Restrictions The funds you contribute to 529 plans are not eligible for federal income tax deductions. However, interest is tax-free, so long as withdrawals pay for qualifying educational expenses. Most states, though—30 of them at the time of writing—offer state income tax deductions or tax credits for contributions on 529 plans. While the money you invest in a 529 plan is yours, and you can remove it at any time, you may have to pay income taxes on the earnings gained as well as additional penalties, some up to 10%. Currently, only 9 states offer prepaid tuition plans. They include: All 50 states offer a 529 savings plan. Interestingly, there are no income restrictions for participating in these plans. Individuals can make annual contributions of $18,000 to a 529 program in 2024 without incurring any gift tax repercussions from the IRS. The IRS evaluates and adjusts this limit each year. Limits are individually based, meaning both you and your spouse may make contributions of $18,000 each year. You can give more provided that you pay the appropriate taxes on the gift. An IRS ‘five-year’ rule does allow individuals to make a lump-sum gift of up to $85,000 without incurring gift taxes. However, you must spread that contribution over five years. 529 plans can be a helpful estate tax planning tool for a grandparent. They allow you to gift funds to grandchildren, sheltering them from estate taxes while ensuring that the funds go towards their grandchild’s education. The 529 savings plan offers greater flexibility and may be spent on a variety of things, including: The last two require students to attend school on a half-time basis, at least, and attend schools eligible for participation in the 529 programs. Prepaid tuition plans have rules that vary by state and program but typically cover tuition and mandatory fees for education (and exclude things like housing, food, and other room and board items). Impact on Financial Aid Each state has its own rules for treating funds held in 529 accounts when determining assets and financial aid eligibility. In most cases, however, participation in a 529 plan does affect your child’s eligibility for specific need-based financial aid. Also, having funds in a 529 account may impact the fitness of your younger children to receive tuition assistance for private school tuition. Now that you know more about 529 plans and the options available to you, you can make informed decisions about which, if any, of these programs best meet the financial and educational needs of your family.

An Overview of 529 Plans

View Resource An Overview of 529 Plans
Saving enough money to help pay for your children’s college education is a daunting challenge. Are you trying to save for your retirement at the same time? That makes a difficult task even more challenging. Fortunately, there are ways in which parents can save not only for their children’s college education but also for their retirement at the same time. It requires starting early, planning for the future, and making wise choices. Moreover, when the decision comes down to whether it makes more sense to pay for your children’s college years or fund your retirement? The choice should always come down to your retirement. Saving on Two Fronts College tuition and fees are not getting lower. According to College Board, the average cost of tuition alone for a private college has soared to $41,540, which is $1,600 higher than the year prior. However, when compared to private schools, state schools seem more affordable. For the 2023-24 school year, in-state students can expect to pay an average of $11,260 per year in tuition and fees at their state universities. That is a 2.5 percent increase from the prior year. Saving for retirement, though, is also a financial challenge. Though there’s no real consensus on how much you should save for retirement — several factors, including where you live, what you plan to do, and your health, will help to determine your need. According to Forbes, it is a good rule of thumb to assume that you should save 15% of the salary you have earned during a career of 40 years. So how do you do both? How can you save for your children’s college and your retirement simultaneously? Start Early The key is to start early. The sooner you start socking away money for both of these expenses, the better. For example, say your first child is in preschool. If you start putting away just $25 to $50 a month, you will have a substantial nest egg when this child is ready to go to college. The same rule holds when saving for retirement. If your company offers a 401(k) plan, contribute the maximum amount with every paycheck, even if you are still in your early 20s. Again, these savings will add up over the years. You can also work with your children to find ways to make their college educations less expensive. For example, do your children have to go to a private college for all four years? Maybe they can spend two years at a local community college before transferring to a private university for their final two. Perhaps your children can take extra classes during each semester to allow them to graduate early. You can take the same approach with retirement. Maybe you can work a part-time job to earn extra cash during your retirement. Perhaps you can downsize to a cheaper car or a smaller home to save money. Retirement First If you cannot save for both your retirement years and your children’s college education, it is better to funnel your limited dollars to your retirement. There are many reasons for this. Even if your children have to use student loans to fund their college education, student loan debt is far from the worst type of debt. Student loans come with low-interest rates and tax breaks. Students can also sometimes delay paying these loans back. However, if you do not have enough money for retirement? You cannot delay paying your bills in retirement, even if you do not have the cash available. Remember, your children have the rest of their professional lives to pay off their student loan debt. You will be much more financially vulnerable if you reach retirement age without enough savings. What if you need to pay high medical bills? What if Social Security and your savings do not provide enough cushion to afford your car payments, groceries, or utility bills? As you get older, your focus should be on preparing for your retirement. You want your retirement years to be enjoyable ones. You want the freedom to travel, spend time with your grandchildren or take up a new hobby. Unfortunately, you will not be able to do this if you have sent all your retirement dollars into your children’s college education fund.

Choosing Between College and Retirement Savings

View Resource Choosing Between College and Retirement Savings
Parents can feel lonely when trying to finance their children’s college educations. But, unfortunately, college tuition and fees are not falling. According to CollegeBoard.org, over the last 30 years (1992-93 and 2022-23), in-state tuition and fees at public four-year institutions increased by $6,070 and $17,540 for private four-year universities. However, parents need to know that paying for their children’s higher education does not have to be a solitary affair. Parents have several tools that they can rely on to help cover these costs. Parents can rely on, at least partly, their savings. Alternatively, they can help their children receive grants or scholarships. Finally, though they require repayment, student loans can help ease the financial burden of paying for a college education. Here, then, is a summary of the tools that can help overwhelmed parents.

Savings

The best way for parents to help pay for their children’s college education is to rely on their savings. For many parents, though, this is unrealistic. Typically, they don’t have enough savings built up to cover the escalating cost of a college education. However, parents can significantly reduce the stress of funding a college education by socking away money early. It is relatively easy for most parents to put away $50 to $100 a month. However, parents who start saving early — long before their children hit high school — will find a significant nest egg available when it is time for their sons and daughters to go to college. Parents, though, need to be careful. It is good to help pay for their children’s higher education. However, it is not suitable for them to shortchange their retirement years. Unfortunately, too many parents funnel too much of their cash toward building college funds for their children. That can leave them without enough money for their retirement years. Parents who have to decide between saving for their children’s college education and providing for their retirement years need to take care of themselves first.

Grants and Scholarships

Grants and scholarships can be a big help to parents struggling to save for their children’s college education. These sources of funds are especially welcome because students do not have to pay them back. It is why many financial experts advise parents and future college students to seek out grants and scholarships before they worry about applying for student loans: Grants and scholarships, after all, represent free money. In general, grants go to students based on financial need. Scholarships typically go to students based on merit. For example, students might earn scholarships because they earned straight-As in high school. In addition, their achievements on the football field, debate team, or science club might help them earn scholarships. Scholarships and grants are available from several sources, from colleges to corporations, the federal government, state governments, and charitable organizations. For instance, many organizations offer scholarships based on students’ essay-writing skills. For example, the John F. Kennedy Profile in Courage Essay Contest provides up to $10,000 to high school students who submit essays about elected officials who have demonstrated political courage. The Coca-Cola Scholars Foundation provides 150 $20,000 scholarships, 150 scholarships ranging from $1,000 to $1,500, and 180 four-year scholarships of $1,000 to students who display leadership and excellence. In addition, Davidson Fellows Scholarship provides $50,000, $25,000, and $10,000 to students under 18 who have completed a significant piece of work in the field of science, literature, music, technology, philosophy, or math.

Student Loans

Student loans are often the last resort for parents. That is understandable: Every day, we hear horror stories of college students graduating with tens of thousands of dollars worth of student loan debt. The truth is, though, that student loans come with terms and interest rates that are far more favorable than you would find with any other type of consumer loan. Student loans come in two forms: federal loans, based partly on financial need, while private loans are available to all students regardless of need. Federal need-based student loans come with the lowest interest rates and best terms. On the other hand, the interest rates associated with private students loans can soar relatively high. These loans work much like other consumer loans: The loans help students pay for anything from college tuition to room-and-board, supplies, books, and meals. They do not have to pay back these loans until a set number of months after graduating from college. Once the loan comes due, graduates must pay back the money they borrowed in monthly installments, including interest. Graduates can often delay repayment depending on their financial situations and whether they have found a job. To determine how much federal loans their children can receive, parents must first fill out the Free Application for Federal Student Aid form, better known as FAFSA. Parents can find this form online. Once parents fill out this form, they become eligible for aid from the U.S. federal government, including assistance available from the Stafford Loan, PLUS Loan, Perkins Loan, and Pell Grant programs. Parents might also discover that their children are eligible for the Federal Work-Study program. Based on students’ financial needs, this program provides part-time jobs to students to help them cover the cost of attending college. In addition, students who do not qualify for federal work-study might be eligible for private work-study programs. No one said that financing your child’s college education would be an easy task for parents. As long as college tuition and fees continue to rise, helping to fund a college education will remain a financial struggle for many parents. However, parents should take comfort in that so many opportunities for financial help are available to them. The key is to start planning early. Those parents who start saving early for their children’s college education and who start researching financial aid opportunities at the start of the college selection process will be in the best shape once college beckons.

Financing a College Education

View Resource Financing a College Education
The Free Application for Federal Student Aid, more commonly known as FAFSA, is the gateway to most types of college financial aid. This application asks questions about the student and family’s financial situation to assess financial needs. The federal government, state governments, and individual schools use the information to determine your financial aid award. Am I Eligible For Financial Aid? Most students are eligible for at least some financial aid. However, you must have completed high school or the equivalent and enrolled in a degree-seeking program. You also must be a U.S. citizen, U.S. national, or eligible non-citizen with a Social Security Number. In addition, you must not be in default on previous federal student loans, and you must not have received any drug convictions while receiving federal student aid in the past. Some types of financial aid, like grants and subsidized student loans, are based on financial need. Therefore, your eligibility for these types of assistance will depend on the answers you provide in the FAFSA. However, other kinds of financial aid, like unsubsidized student loans and parent loans, are available to all eligible applicants, regardless of financial need. What Types of Aid Are Available? How and When do I Apply? You need to apply before each school year for which you want to receive financial aid. Fill out the application at FAFSA.ed.gov as early as January 1 of the calendar year in which the school year begins. The federal deadline for the application is June 30 at the end of the school year, although states and schools often have earlier deadlines. You will need a prior-year tax return and W-2 statements to fill out the application correctly. You will also need current bank statements and records of any other investments. If you are a dependent student, as most undergraduates are, you will also need your parents’ financial information. What Happens After I Apply? As soon as you complete your FAFSA, it goes into the processing stage. Each college you list on the FAFSA will receive your information the following day. Then, you will receive a Student Aid Report (SAR) via email about 3 to 5 days after you submit the FAFSA. The SAR will tell you your Estimated Family Contribution (EFC) if your application is complete. That is the amount the federal formulas determine your family should pay for this year of college. Your college will use your EFC to determine your exact financial aid award. If you did complete your application, the SAR would let you know what you need to do to finish it.

FAFSA and You

View Resource FAFSA and You
College graduates often leave their universities with an unwelcome burden — a significant amount of debt. It is important to note how much student debt has grown over the last ten years. According to EducationData.org’s latest report, student loan debt has increased from $1.24 trillion in 2014 to $1.773 trillion in 2024. And according to that same report, the average student loan debt is currently at $37,853. That means that the odds are good that college graduates will leave school with at least some debt to repay. It says, too, that paying back this amount of debt will be problematic for some graduates who struggle after entering the workforce to find jobs that pay decent wages. The good news is that there are options for graduates who cannot afford their monthly student loan payments. The bad news? Those graduates who ignore these possibilities could face serious financial consequences. Don’t Ignore It The worst move college graduates can make when their student-loan debt becomes overwhelming is to ignore the problem. It is tempting for students to ignore their late bills and hope that the problem goes away. However, it will not. Graduates who do not make their student loan payments on time could face severe financial penalties. They will also see their credit scores take a hit. That is terrible news: Lenders of all kinds — mortgage, auto, and personal — rely on these scores when determining who gets loans and at what interest rates. The borrowers with low credit scores will either not qualify for loans or credit cards or have sky-high interest rates for loans they can obtain. So what should graduates do if their loan payments become too much of a burden? First, they should call their lenders. That might be embarrassing, but lenders will often work with graduates to come up with a solution to their financial woes. Consolidation Many graduates choose to consolidate their student loans. Under consolidation, multiple loans get combined into one. That simplifies paying back these loans: Graduates now have to make just one payment every month. Consolidation can also lower the monthly payments of graduates because the process gives them up to 30 years to repay their loans. The downside? Graduates who increase the length of their repayment period will pay far more in interest during the life of their student loan debt. That is why loan consolidation is not always the best financial solution for college graduates. Postpone Some lenders might allow graduates to postpone their loan payments during unemployment or other financial crises. That gives graduates extra time to shore up their finances or find a better-paying job. The problem? Adding months to the lifespan of a student loan means that borrowers will usually have to pay more interest over the life of the loan. The best way to handle student loan debt is to pay it back as quickly as possible. Postponements instead make debtors spend more months paying back their loans. Payment Plans Another option for borrowers is to request a new payment plan from their lenders. Lenders might be willing to lower the money that borrowers have to pay each month. They might also help reduce the interest rate attached to the loan. Borrowers who took out federal student loans might qualify for income-contingent repayment plans. Under these plans, graduates only pay a monthly payment of a set percentage of their monthly incomes. Such plans are a boon for borrowers whose monthly incomes are low. Alternatives Graduates can also sign up for specific careers or programs to reduce the student loan debt they owe. For instance, graduates who signup for the Peace Corps can eliminate 70 percent of their student loan debt from Perkins loans. In addition, those who took out Stafford and consolidated loans can receive a deferment of up to 27 months. Graduates who sign up as volunteers for Americorps can receive nearly $5,000 to pay off their student loans after one year of service. Facing monthly student loan payments can prove stressful to recent college graduates. Moreover, graduates struggling to find good-paying work in their field will face even more stress when those student loan payments come due. However, students who want to overcome their debt will have to be proactive. There are options out there. It is up to graduates to do the research necessary to find the best ones.

Living with High Student Loan Obligations

View Resource Living with High Student Loan Obligations
Making monthly student loan payments is about as much fun as going to the dentist. According to EducationData.org, 62 percent of today’s college students went into debt after graduating with roughly $37,853 on average. Student loan debt totals at $1.773 trillion, a 5.4 percent decrease from the year prior. As tuition costs rise and student loan debt balances grow for new graduates, it might feel like paying off that student loan is something you will never get behind you. Strategies The good news is that you are permitted to repay your student loans at a faster rate than the maximum 10-year timeline that federal loans allow. In other words, there is no penalty for repaying them early. Additionally, following a more rapid repayment strategy would result in lower interest costs than if you conformed to the standard repayment term. These rapid repayment strategies will help you repay your student loans quickly so that you can move on with life without student loan debt weighing you down. Prioritize Payoff Concentrations Many people have multiple student loans with different repayment requirements, interest rates, and terms. As you put together a repayment strategy, you will want to examine all of your student debts closely and, while paying the minimum due on each student loan, you will want to prioritize repaying the debt that will cost the most first. That means you will pay the minimum balance on all other student loans while paying as much as you can on the one that carries the highest interest rate or least favorable terms. You will especially want to do this if you have any student loans with a variable interest rate. Paying those loans off early, before rates increase, should be a top priority. If you have high-interest-rate loans or massive student loan debt, the savings you stand to gain from this tactic can be substantial. However, once you finish paying off one loan, it is time to move on to the next – and then the next. Paying off each successive loan should be faster as you apply the monthly payment you made on a paid-off debt to the next one. Keep doing this until all student loans reach a zero balance. Consolidate Student Loans Consider consolidating your student loans if you have an excellent credit score and high-interest rate loans. Not only will that simplify the repayment process, providing you with a single bill to pay each month, but it can also substantially reduce your interest rate. Take Advantage of Your Job if Possible Some employers offer student loan assistance programs in their benefits packages. But, taking some jobs may actually qualify you for student loan forgiveness. There may be regional requirements or time of service requirements, but people working in the following professions may be eligible for forgiveness programs: Even if you qualify to have only a portion of your student loans repaid by someone else or forgiven, it can mean a massive reduction in your overall debt. In addition, loan forgiveness can help you repay your outstanding debt balance that much faster. Change Your Financial Circumstances Putting extra finances towards student loan repayment will have you pay off your debt in a shorter time frame, which is much quicker than sticking to the minimum payments for the next 10 or 20 years. Of course, making more money is not the only way to put more towards your student loan payments. You may also choose to cut unnecessary expenses from your budget and invest those savings toward eliminating your student loan debt. Easy starting places include the following: The key is to reinvest your savings into paying off your student loans faster. You will be surprised by how quickly the little things add up. Caveats There is one key point to remember before you dive too deep into your efforts to pay off your student loans faster. Be cautious of some government programs designed to ease the pain of student loan payments. They often provide you with the means to reduce your monthly payments, simplify your record-keeping, and only make one payment each month. However, that convenience typically comes at the high cost of extended repayment terms on your loan. Since the goal is to repay your student loan debt faster, not lengthen the amount of time you must continue to pay this debt, these government programs might not be your best choice. In addition, extended repayment periods often mean you will pay more interest over time. Quickly paying off your student loans frees up your money and attention for far more enjoyable pursuits. The strategies and tips above will help.

How to Quickly Pay Off Your Student Loans

View Resource How to Quickly Pay Off Your Student Loans
Are you saving enough for retirement? If you are like most U.S. residents, probably not. The Employee Benefit Research Institute’s 2022 Retirement Confidence Survey reports that slightly more than 7 in 10 works are confident in having enough saved to live comfortably in retirement. In addition, slightly more than half of workers report that the COVID-19 pandemic has not changed their confidence in their ability to live comfortably throughout retirement. However, roughly a third of workers that are less confident in their ability to save for retirement cites that inflation and the increase in cost of living are the reason. Despite all this, two-thirds of workers are still confident in their ability to cover basic expenses and medical expenses during their retirement. However, confidence in a comfortable retirement is also firmly based on whether survey respondents had a retirement plan in place. For example, 73 percent of workers are very or somewhat confident that they’ll have enough money to live comfortably in retirement, with 28 percent being very confident. The good news is that you can avoid falling into this ‘confidence trap’ by preparing yourself for retirement now. The key is to assess your retirement needs early by determining what lifestyle you want to live and how much money you need each year to afford it. Then start saving money as early as possible and learn the basics of the various retirement-savings vehicles available to you.

Assessing Your Retirement Needs

The Retirement Confidence Survey also reports that 60 percent of workers have began to receive information from their employers regarding their projected monthly income in retirement. Not calculating how much you’ll need is a worker’s biggest mistake as their retirement years draw closer. If you do not know how much money you will need to live the lifestyle you want in your retirement years, you are far less likely to save enough money each month to reach these goals. The amount of money you need to save each month will vary depending on your goals. For example, your savings needs will differ depending on whether you want to travel the globe after retirement or prefer to spend your post-work days visiting your grandchildren who live less than an hour’s drive away. Know, too, that your health will play a significant factor in how much you will need to live comfortably after retirement. If you or your spouse require a considerable amount of medical care, your savings, no matter how much insurance coverage you have, will be more likely to dwindle at a faster rate. Most people rely on three sources of funding for their retirement years: Combining these three funding streams must equal or be larger than the amount of money that you determine you need each year to live comfortably in your retirement.

Starting Early

The best move is to start saving for retirement as early as possible. The later you wait, the more difficult it will be to save enough. In their article Penny Saved, Penny Earned, Vanguard Group researchers Maria Bruno and Yan Zilbering show how vital saving early is. According to their research, investors who saved 6 percent of their salaries in a portfolio split evenly between stocks and bonds starting at age 25 enjoyed a median portfolio balance at retirement of nearly $360,000. That figure fell to $237,000 for investors who waited until 35 to start investing and $128,000 for those who waited until age 45. The message here is simple: It is never too early to save for retirement. Those workers in their 20s and early 30s might be especially well-suited for saving for retirement. Setting aside retirement money once children, mortgage payments, and auto loans enter the picture becomes more challenging. However, young workers who get into the habit of saving early for retirement will be more likely to continue their savings even as their monthly expenses rise.

Retirement-Savings Vehicles

If you have decided to boost your retirement savings, the good news is that you have plenty of financial vehicles to choose from when saving for your retirement years. While pension plans are becoming rarities, many workers do have the option of participating in their company’s 401(k) plan. If your company offers such a plan, you will be wise to participate and contribute as much of each paycheck as allowed. The more you save each month, the more comfortable you will be in your retirement years. An Individual Retirement Account, better known as an IRA, is probably the best known of these vehicles. If your employer does not offer a retirement plan, you can deduct your contributions to a traditional IRA from your gross income. That pays off at tax time; you will pay lower taxes because your reported income will be lower. However, your contributions to an IRA are not deductible if you have a retirement plan at work. You can start withdrawing money from an IRA at the age of 59-and-a-half without paying any penalties. When you withdraw money from a traditional IRA, though, you will pay taxes. A Roth IRA operates differently. The contributions to a Roth IRA are never tax-deductible, but the earnings on these contributions grow tax-free. Meaning, you end up paying taxes when you contribute money to a Roth IRA, but you do not pay them when you withdraw it. You can also withdraw money from a Roth IRA before turning 59-and-a-half and not pay any penalties. There is one thing that both Roth and traditional IRAs do have in common: The money you deposit in both types of IRAs will grow tax-free. IRAs are a significant source of retirement savings. However, investors can also earn retirement income through such savings vehicles as stocks, bonds, and annuities. The best plan is to rely on several types of retirement savings vehicles. That way, if one type does not perform well — say the stock market falters — your other vehicles can help cushion the blow.

The Basic Principles of Retirement Planning

View Resource The Basic Principles of Retirement Planning
A strong economy, coupled with a rising stock market, provided steady increases in the average 401(k) account between 2010 and 2020. That trend seemed to continue in 2021, however, account balances began to shrink due to market volatility and inflation in 2022. According to a 2022 Fidelity Q3 Retirement Analysis, the average 401(k) balance decreased by 23% from $126,000 in Q3 of 2021 to $97,200. In addition, the average IRA balance went from $136,000 in Q3 2021 to $102,000 in Q3 2022. Most workers know that there is little that they can do to improve the country’s economic performance, and predicting the stock market’s performance is a challenging task. What workers know they can do is to focus on their retirement savings strategy. With the proper focus, your retirement years can be comfortable, allowing you to travel, spend time with your grandchildren or take up new hobbies. However, this will not happen if you spend these years worrying about money. Fortunately, you can boost the odds of a happy retirement by avoiding some of the most common retirement savings mistakes.

New Workers

Not saving early enough: It is easy to forget about planning for retirement when you first start working. After all, you have other expenses — rent, maybe a mortgage, furniture, clothing — that you need to cover. With that said, those who start saving early for retirement will end up with significantly more money in their retirement years. In their article Penny Saved, Penny Earned, Vanguard Group researchers Maria Bruno and Yan Zilbering show how vital saving early is. According to their research, investors who saved 6 percent of their salaries in a portfolio split evenly between stocks and bonds starting at age 25 enjoyed a median portfolio balance at retirement of nearly $360,000. That figure fell to $237,000 for investors who waited until 35 to start investing and $128,000 for those who waited until age 45. Not maximizing the match: If you work for a company that offers a 401(k) program, you need to participate in it. These programs provide a relatively pain-free way to build your retirement savings over time. Don’t make a mistake many young workers make, though: Maximize your employer’s match. You will miss those extra dollars when retirement arrives if you do not. Running up debts: It is easy to run up credit card debt. However, remember, it is not easy to comfortably retire when carrying a heavy debt burden. Begin wise spending habits — only charge what you can afford to pay back when your next credit card statement arrives — at a young age. They can save you a world of financial pain as retirement nears.

Middle-Age Workers

Borrowing money from your retirement accounts: Borrowing money from your retirement accounts is a terrible financial decision. You will sometimes pay severe tax penalties to withdraw funds early from these accounts. Even worse, though, is the toll early withdrawals take on your future savings. If you remove money from your retirement accounts, these dollars do not get a chance to grow at a compounded rate. As a result, you will end up with far less money at retirement age. Putting college before retirement: It is natural that many parents want to help their children pay for their college educations. However, remember this: Your children can take advantage of student loans and grants to get through college. They then have their entire lives to pay back their college debt. If you spend your retirement dollars to help fund your children’s education, though, you will face severe financial consequences once you stop working. Not diversifying: The best way to save money for retirement is by creating a diversified portfolio of stocks, bonds, and other savings vehicles. This way, if one savings vehicle suffers — the stock market crashes, for instance — your other investments will remain strong. But, unfortunately, too many investors put all their dollars into one type of investment, either incurring too much risk or not enough.

Nearing Retirement Age

Underestimating medical expenses: Too many people think they will remain healthy throughout their retirement years. Unfortunately, that often doesn’t happen, and not planning for medical expenses can prove a costly mistake. Fidelity estimated that most retirees should expect to pay roughly $315,000 in medical costs during their retirement years. Underestimating their lifespans: We are living longer today. That is good news. However, it also means that you will want to save more money for retirement. Don’t mistake thinking that your retirement will be a relatively short one. If you leave work at age 66, you might have 30 years of retirement living to fund. Retiring too early: Full Social Security benefits kick in at age 66.The longer you put off retiring, though, the higher your annual benefits will be. If you can keep working, it makes financial sense to push off retirement as long as possible.

Retirement

Withdrawing too much too early: Once you retire, don’t make the mistake of withdrawing too many dollars from your retirement savings too early. Instead, financial planners advise that retirees follow the 4 percent rule: Only withdraw 4 percent of your retirement savings each year.

Retirement Planning Mistakes to Avoid

View Resource Retirement Planning Mistakes to Avoid
The Employee Benefit Research Institute’s 2022 Retirement Confidence Survey reports that 7 in 10 workers are at least somewhat confident in their ability to live comfortably in retirement. There’s been an increase in worker confidence comes from an increasing belief that they will have the ability to handle one of the basic expenses in retirement — their health care. But that also means that 3 in 10 workers are not confident that they will have saved enough. If those currently in the workforce follow the same path, they will face a painful reality when they reach retirement age: Social Security provides far from enough income for people in their retirement years. Those who do not save enough will spend these years worrying about paying their bills. The truth is, retirement is not inexpensive, even if you do not have a mortgage to pay or significant credit card debt. Consider medical costs. The Fidelity Retiree Health Care Cost Estimate found that a couple retiring in 2022 at age 65 with no employer-provided health care coverage will need $315,000 in savings to fund out-of-pocket medical expenses during their retirement years. The good news? Even if you have been lax in saving for retirement, you can still take steps to increase the amount of money available to you after you quit working. Here is what you should be doing at every stage of your working life to save for retirement.

Just Getting Started

Admittedly, it is not easy to think about saving for retirement when you are just getting started on your job. However, there are specific steps you can take today to boost the odds that you will have enough money to enjoy your retirement years. Step one? Participate in your company’s 401(k) plan if it offers one. Moreover, participate completely; max out your regular contributions. You will not miss money that is deducted from your paycheck automatically. However, you will undoubtedly appreciate it once you retire. Next, invest in a traditional or Roth IRA or a combination of the two. That allows you to save money for your retirement years on a tax-deferred basis. The other important step to take at this stage? Practice sound financial habits. You do not want to enter your retirement years burdened by credit card debt. The less consumer debt you generate during your 20s, the better off you will be as retirement nears.

Mid-Career

Again, debt remains a significant factor in how enjoyable your retirement years will be. So do everything you can to pay off your debts as you move closer to retirement. Paying off your credit card debt is a must. If you can afford it, you should pay off your mortgage, too. Not making monthly payments in your retirement years will prove a significant financial relief. The mid-point of your career is also the time to start drafting a financial plan for your retirement years. Discuss your goals for your post-work life with your spouse. For example, do you want to spend most of your time with your grandchildren? Do you want to travel the globe or take regular cruises? Maybe you want to take up golf. Your goals for your retirement years will impact how much money you will need for this time of your life. Armed with this information, you can sketch out a rough figure of how much you will need to save to reach your retirement goals. If you have not yet opened IRAs for you and your spouse, do so now. Be sure to contribute regularly to these accounts. Every bit of money you save now becomes critical as retirement nears.

5 to 10 Years Before Retirement

The Internet can help you determine if you are on track to have enough savings to support the lifestyle you desire during retirement. Use an online retirement calculator to determine how prepared you are for your retirement. That is also an excellent time to evaluate your savings vehicles. You should maintain a diverse portfolio, investing in bonds, stocks, and other savings vehicles. However, this is an excellent time to move more of your savings to lower-risk investments. That will protect these dollars as your retirement years draw near. It is essential to learn about Social Security during this time, too. You do not want to retire too early; this will diminish the amount of Social Security income you receive each year. In fact, the longer you can put off retiring — if you are healthy enough to work — the better financially off you will be. Not only will you draw more income to support your retirement years, but you will also boost the amount of Social Security benefits you receive each year. It is also best to practice living on your new income before finalizing your retirement. You might find that you have underestimated how much money you will need during your retirement years.

After Retiring

Once you have retired, you need to be cautious about how much money you withdraw from your retirement savings each year. Many retirees follow the 4 percent rule, meaning that they only withdraw 4 percent of their savings each year of retirement. That is a sound financial plan to take.

Retirement Planning Checklist

View Resource Retirement Planning Checklist
American workers who have retirement plans through their employers should take advantage of them. Without a solid retirement plan, security in retirement is uncertain. According to the U.S. Bureau of Labor Statistics, 69 percent of private industry workers have access to some form of retirement plan. While some retirement plans are better than others, that leaves a third of workers in the U.S. without access to an employer-sponsored retirement plan. That also means those workers will not have financial stability when they retire. Luckily, there are other options for retirement savings besides the traditional 401(k) and 403(b) accounts. For example, workers can still save for retirement using a payroll deduction IRA.

What is a Payroll Deduction IRA?

Payroll Deduction IRAs are individual (not employer-sponsored) retirement accounts. Typically, employees fund their IRA by having automatic deductions from their paycheck, hence the “payroll deduction” plan. In addition, employees can set a dollar or percentage amount that transfers to their retirement account from each paycheck. Workers can use a Payroll Deduction IRA to fund either a Traditional or Roth IRA. Similar to other individual retirement plans, the payroll deduction account may provide many low-cost investment options. In addition, payroll deduction IRAs are an excellent option for employers that can’t offer a traditional retirement plan. The payroll deduction IRA ensures employees can save for retirement.

How Do Payroll Deduction IRAs Work?

Typically, payroll deduction IRAs are set up with a financial institution. Once you determine which institution to use, you will pick either a traditional or Roth IRA. The main difference between the accounts focuses on when you pay your taxes for your contributions. Traditional IRA contributions are tax-free and only paid upon withdrawal. Meanwhile, Roth IRAs charge taxes on your contributions; however, you do not pay taxes upon withdrawal. Once you establish your account, you can set up your automatic payroll deduction. You can choose either a percentage of your paycheck or a set dollar amount. For example, if each of your paychecks is $5,000, you can have 10% deducted and sent to your IRA account. With this method, you will have $500 deducted each pay period and transferred directly to your IRA. Otherwise, you can choose a fixed-dollar amount to contribute every paycheck instead. Keep in mind that there are limits to how much you can contribute each year to an IRA. Your payroll deduction choices should consider these limits. You will quickly see the growth of your payroll deduction IRA account over time.

IRA Tax Benefits

IRAs come with certain tax benefits too.

Using Your Payroll Deduction IRA

Thankfully, simplicity and ease of use are attractive benefits of a payroll deduction IRA. You need to establish the account and set up your automatic payments so that you don’t have to worry about making contributions yourself. As you work and earn more money, you will see the overall growth of your account, which will eventually support you during retirement. In addition, payroll deductions do not require government filings like employer-sponsored plans. It is important to note that payroll deduction IRAs have the same contribution limits as other IRAs. In 2023, The maximum contribution limit for all IRAs for an individual under 50 is $6,500 and $7,500 for those over 50. Once you retire, your contributions from your payroll deduction IRA will be accessible so you can maintain your financial security well into retirement. However, employees who withdraw contributions before 59 1/2 will be subject to an income tax and 10% penalty.

Explaining Payroll Deduction IRAs

View Resource Explaining Payroll Deduction IRAs