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At 55 years old, I will have worked for 30 years — what are the pros and cons of retiring at that age?
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Dear MarketWatch,
I currently own one home, no mortgage with rental income. I own another home that will be paid off the year I turn 55. Both valued at $750,000. I have a 401(k) and other stocks and investments totaling another $750,000. My debt will be all paid by the year I turn 55.
I have been on my job for 27 years. It will be 30 years when I’m 55. What are the disadvantages and advantages of not working after 55 years of age?
Dear reader,
It is completely understandable that you would want to retire after working for 30 years, especially when you have rental income, but I would caution you to take this decision very seriously and find a few backup plans.
One big pro of waiting until 55 is the fact that you get to withdraw from your current 401(k) at that age. It’s called the Rule of 55, and not everyone knows about it. Usually, savers have to wait until they’re 59 ½ years old in order to take distributions from their retirement accounts, such as 401(k) plans and IRAs. An early distribution incurs a 10% penalty, plus taxes.
The Rule of 55 gives workers a break if they want to tap into their 401(k) and have separated from their current job for any reason.
But you probably don’t want to tap into that 401(k) — or at least, you shouldn’t want to do that.
If you stop working at 55, you’re halting a major source of income. Rental property is great, and having no mortgage over your head is a huge plus, but will it be enough to cover your everyday expenses and the unexpected for decades to come? Retirement isn’t what it used to be — people are living longer, which means every dollar you have for retirement needs to last until you die. If you retire at 55, you could potentially be in retirement for 30 years — or more. Do you think your nest egg and any other sources of income, like Social Security and rental income, could cover you for that long?
Some people would say $750,000 in a retirement account is more than enough, but others would argue it is not. Of course, it also depends on what your annual expenses are, what future spending could look like if you were to fall ill or need to change something from your current lifestyle. And do you have any other money set aside for various circumstances, like repairs on either of your homes?
You could look to see what other sources of income may look like (for example, what can you expect from Social Security?) but you should still find a few backup plans for income so that you’re not sweating it out later in life. Not to be a Debbie Downer, but rental income may not be enough to make ends meet or keep you from distributing too much from your retirement accounts. Also, do you have money set aside to offset your costs if your property is vacant for a little while?
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
Also, don’t forget about healthcare. If you’re not married to a spouse who has health insurance through an employer, what would you do? Medicare eligibility starts at age 65, which means you would need your own health insurance for an entire decade, and that can be quite expensive.
Instead of retiring fully, is there another job you may be happier working? Or some type of part-time gig you could take on? A huge bonus would be if this job comes with health benefits, as well as another retirement account you could keep putting money into until you’re ready to fully retire.
I know this may not have been the answer you wanted to hear, but it’s absolutely worth considering every possible good and bad thing that could come out of retiring early. But as with everything else in life, you need to strike a balance — finding work you can do that brings in an income, while also enjoying your life now. It’s not easy, but it’s worth it to plan this out a bit more before you celebrate the big 55.
Readers: Do you have suggestions for this reader? Add them in the comments below.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
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I’m a single dad maxing out my retirement accounts and earning $100,000 – how do I make the most of my retirement dollars?
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Dear MarketWatch,
I make over $100,000 a year, and expect to for the foreseeable future. As of now, I am contributing 8% of my income to my 403(b) with a 3% 401(a) match; all Roth. It would be more, but I am maxing out a Roth IRA and an HSA as well each year. I am a single father with a 9-year-old daughter, and do not have plans to marry, so I’m planning everything as single. I expect house to be paid off when I (plan to anyway) retire at age 65. I plan to collect Social Security at 67.
My question is, should I move my 403(b) & 401(a) income to pretax dollars, since I expect to be in a lower tax bracket echelon once I retire? Or leave it at Roth. I’m hoping for some advice on what would generally be the most prudent option to maximize retirement dollars.
Dear reader,
First, congratulations on maxing out your Roth IRA and HSA and contributing to your other retirement accounts — managing that while being a single dad and paying off a home is no simple task.
You’ve asked the age-old retirement planning question: should I be investing in a traditional account, or a Roth? For readers unaware, traditional accounts are invested with pretax dollars, and the money is taxed at withdrawal in retirement. Roth accounts are invested with after-tax dollars upon deposit, and then withdrawn tax-free (if investors follow the rules as far as how and when to take the money, such as after the account has been opened for five years and the investor is 59 ½ years old or older).
As you know, the rule of thumb for choosing between a Roth and a traditional account comes down to taxes. If you’re in a lower tax bracket, advisers will typically suggest opting for a Roth as you’ll be paying taxes at a lower rate now versus a potentially higher one later. For a traditional, you may be better off if you’re in your peak earning years and expect to drop a tax bracket or more at the time of withdrawal.
One of the greatest challenges, however, is knowing future tax brackets. You may think you’ll be in a lower one now, but you can’t be sure. We also don’t know what tax rates might even look like when you get to retirement. The current tax rates are expected to increase in 2026, when the brackets from the Tax Cuts and Jobs Act are set to expire. Congress may do something before that, or after of course.
Check out MarketWatch’s column ‘Retirement Hacks’ for actionable advice for your own retirement savings journey
That being said, if you believe you’ll be in a lower tax bracket in retirement, it doesn’t hurt to have some of your money go in a traditional account. Having tax diversification can really work in your favor, too. It allows you more control and freedom when retirement does come, as you’ll be able to choose which accounts you withdraw from and how to save the most on taxes. The more options, the better.
You should do your best to crunch the numbers now, and then make a plan to do it every year or so until you get to retirement. Here’s one calculator that can help.
Make estimates where you have to, and factor in inflation — I’m sure we’ve all seen how inflation can impact personal finances in the last year alone. There are a few other things you can do to make these calculations. For example, get a sense of what your Social Security income may be by creating an account with the Social Security Administration, which will show you what you could expect to receive in benefits at various claiming ages. Also add in any other income you may get, like a pension.
After you calculate what you expect to spend in retirement, you can figure out what your withdrawal needs will be — and how that will impact your taxable income depending on if the money comes from a traditional or Roth account. Remember: Withdrawals from Roths do not increase your taxable income, whereas traditional account investments do when taken out.
Keep in mind, Roth IRAs have one really great advantage over traditional accounts — they are not subject to required minimum distributions, which is when investors must withdraw money from the account if they haven’t yet done so by the mandatory age. Traditional employer-sponsored plans, like 401(k) and 403(b) plans, are subjected to an RMD. Roth employer-sponsored plans have also had an RMD, though the Secure Act 2.0, which Congress passed at the end of 2022, eliminates the RMD for Roth workplace plans beginning in 2024. (The Secure Act 2.0 also pushed the age up for RMDs to 73 this year, and age 75 in 2033.)
Traditional versus Roth accounts are just one piece of the puzzle in retirement planning, though. There are many other questions you need to ask yourself, and a financial planner if you’re interested and able to work with one. For example, what rates of return are you anticipating on your investments, and how are your investments allocated? What state do you live in now and will that change in retirement (that will affect your taxes). Are you concerned about leaving behind an inheritance, and have you considered life insurance? And even before you get to retirement, as a single dad, do you have a will, healthcare proxy and disability insurance in the event something unfortunate happens?
I know this may feel overwhelming, especially when you’re taking into account calculations and estimates for years and years from now, but it will all be worth it. Consider working with a qualified financial planner, or talking to someone at the firm that houses your investments, and don’t feel obligated to stick with whatever you choose until you retire. As with many things in life, retirement plans tend to change and adapt as you do.
Have a question about your own retirement savings? Email us at HelpMeRetire@marketwatch.com
Readers: Do you have suggestions for this reader? Add them in the comments below.
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Entrepreneur | What Is a Brokerage Account? Do You Need One?
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If you’ve been conducting research on investment options or retirement planning, then you may have come across brokerage accounts. It can be challenging to sort through all the information, but it is crucial to do so to make the best financial decision for yourself.
If you’re interested in learning more about brokerage accounts, eep reading for everything you need to know, including the pros and cons, how to open one and whether or not you need one.
What is a brokerage account?
A brokerage account is a type of investment account through which you can buy, sell and trade many different types of investments. With a brokerage account, you can allocate money for retirement, college tuition, down payments and other significant life investments.
While many investment or retirement accounts do not allow you ready access to the invested assets, brokerage accounts will enable you to transfer money in and out freely, like a standard bank account.
Common types of assets in a brokerage account include:
- Stocks.
- Bonds.
- Mutual funds.
- Exchange-traded funds (ETFs).
- Other securities.
Brokerage accounts are also known as “taxable accounts” because any income gained from this investment is subject to capital gains tax, which could be 0%, 15% or 20%, depending on your filing status. Because of this, brokerage accounts are best for long-term investments rather than a fast way to play the stock market.
How do brokerage accounts work?
Generally, you do not need a large sum of money to open a brokerage account. For some, you might not even need an up-front deposit.
You will, however, need to fund the account before buying investments. Because brokerage accounts are easily accessible, you can move money into the account from your checking account, savings account or another brokerage account.
Related: 3 Best Business Checking Accounts of 2023
With a brokerage account, the broker holds your account, but you own the money and the investments. The broker is simply the middleman that asks as the messenger between you and the assets you’re interested in purchasing.
Related: 6 Best Online Brokers Of 2023
How does a brokerage account compare to other accounts?
Other common types of accounts include retirement accounts and checking accounts. To see how a brokerage account compares to these, look below.
Brokerage account
- Purpose: Investing.
- Fees: Possible maintenance fees depending on the institution.
- Taxes: Offers flexibility based on what you sell and typically must claim any capital gains as taxable income.
- Contribution limits: None.
- Withdrawal rules: No restrictions or fees.
Retirement account
- Purpose: Long-term growth and retirement savings.
- Fees: Possible maintenance fees depending on the institution.
- Taxes: Possible tax benefits depending on your chosen IRA.
- Contribution limits: Contribution limits and eligibility requirements.
- Withdrawal rules: Possible penalties for withdrawing money before retirement.
Checking account
- Purpose: Everyday spending.
- Fees: Possible maintenance fees depending on the institution.
- Taxes: Possible taxes on earned interest income based on checking account type.
- Contribution limits: None.
- Withdrawal rules: No restrictions or fees.
Individual retirement account (IRA)
- Purpose: Long-term growth and retirement savings.
- Fees: Possible maintenance fees depending on the institution.
- Taxes: Possible taxes depending on several factors, including withdrawals.
- Contribution limits: Yes, depending on year and age.
- Withdrawal rules: Yes, depending on contribution and age.
Related: What Is a Roth IRA? How It Works and How to Get One Started
What types of brokerage accounts exist?
There are two different types of brokerage accounts that you can open. The structure you choose will depend on how you plan to handle your securities.
Cash account
With a cash account, an investor is required to pay the entire amount for purchased securities. A cash account structure does not allow you to borrow broker funds to pay for account transactions.
Margin account
Opposite to a cash account, a margin account structure allows the investor to borrow money from the broker-dealer to purchase securities. To do this, you must have securities in your account that will serve as collateral for the loan. Remember that margin accounts, like any other loan, will require you to pay interest.
The margin account structure is riskier than a cash account because of the uncertainty of borrowing.
For example, if you purchase a security on borrowed money and your security value declines, your broker can require you to deposit cash or equivalent securities into your account to cover the loss. Your broker also has the power to sell your securities without advance notice to cover the loss.
Related: How Many Credit Cards Should I Have?
What are the different brokerage account ownership types?
Brokerage accounts are flexible in more than one way, as they also offer options for who will own the account.
Individual brokerage account ownership
If you choose this type, you will be the sole owner of the brokerage account, meaning it will be in your name and your name only.
Joint brokerage account ownership
If you choose this type, you can own a brokerage account with other people. Generally, those other people include spouses, children, parents or other family members.
However, joint ownership does not have to be between blood relatives; it can also simply be between people with mutual financial goals.
The three types of joint brokerage accounts include:
- Joint tenants with survivorship rights: The individuals share equal ownership rights; if one dies, the other will receive the remaining share.
- Tenants in common: If one owner dies, there is no right of survivorship and the deceased’s share will be allocated to their estate.
- Community property: This ownership is reserved for married couples, and the assets are split equally. If one owner dies, the deceased’s share will be allocated to their estate. This type of ownership is not available in all states.
Related: What are Your Investment Goals? Let’s Explore
What are the pros and cons of a brokerage account?
When making investment decisions, it is essential to weigh the benefits and drawbacks to determine the best possible outcome. To help see both sides, look at the pros and cons below.
Pros of a brokerage account
- Diversification: Whether you’re a seasoned investor or a beginner, you can diversify your portfolio and gain experience with new ventures. In addition, because of the different areas of investments, gains in one area may offset losses in others.
- Convenience: Online brokerage accounts make all operations easy and accessible, as they can be completed from home. However, if you prefer to deal with your broker in person, investing with a brokerage firm you can physically visit is also an option.
- Growth potential: Brokerage accounts are a long-term investment, but they can help grow wealth over time. Stocks are generally the asset that will garner the most significant return; however, having multiple assets like you can with a brokerage account is a considerable advantage.
- Liquidity: There are few restrictions on handling your brokerage account investments, meaning you can access, buy and sell assets quickly and easily.
- Managed by professionals: With an online brokerage account, you may have access to a robo-dealer that will provide investment suggestions based on data. With a broker, you will have a human account advisor to advise your portfolio based on data and their expertise.
Related: 6 Best Robo-Advisors Right Now: Top Picks for 2023 | Entrepreneur Guide
Cons of a brokerage account
- Market risk: When you invest in stocks, there is always a risk because it is subject to market fluctuation.
- Fees: You will generally encounter fees with brokerage firms as part of the payment for their service. These fees may include maintenance fees, annual fees and trade execution fees.
- Regulatory risk: Government agencies like the Securities and Exchange Commission (SEC) regulate brokerage firms, meaning those regulations and enforcements may impact the firm, its stability and, therefore, your investments.
- Limited guarantee: Generally, brokerage firms are Securities Investor Protection Corporation (SIPC) members. This is not the same as being a member-FDIC entity, meaning FDIC insured. The SIPC does provide guaranteed asset protection but only up to a certain amount, and it does not protect against market losses.
How can you open a brokerage account?
If you’re ready to take your research to the next level, dive into this step-by-step process of opening a brokerage account.
1. Choose the brokerage account type
Remember, there are two account types: cash accounts and margin accounts. The cash account means everything you invest and trade is directly from your funds.
The margin account allows you to borrow money from the financial institution but comes with a loan’s risks.
2. Compare costs and incentives
Many brokers offer commission-free trading and incentives for choosing their firm. Make sure to compare firms you are interested in to see which one will work best for you.
In addition to the incentives, examine the broker’s full pricing schedule for all assets, as many firms charge for trades that do not involve stocks.
3. Consider services and conveniences
Finding the correct prices and incentives is a large part of the research; however, there are other considerations to make.
When choosing a full-service firm, you should be considering:
- Access to research: Many brokerage firms use their own stock ratings in addition to the S&P 500 and Dow Jones indices. Make sure their access matches what you are looking for.
- Foreign trading: If you are interested in diversifying your portfolio with foreign trading, you must make sure you partner with a firm that offers the option to convert your account money into foreign currencies you can trade on international stock exchanges.
- Fractional shares: If you are looking for affordable options to start investing, you will need to make sure the brokerage firm offers fractional shares, which allow you to purchase a fraction of a stock share rather than the entire share.
- Trading platforms: The platform you trade is a personal preference, but you should ensure that the firm you choose operates on a platform that you deem user-friendly. With so many options, from trading software to mobile apps, it’s all about what is most accessible to you.
- Convenience: How can the brokerage firm make your experience more convenient? Consider factors like locations, online options, robo-advisors, human investment advisors, account connecting from checking to brokerage and money transfers.
Related: 4 Best Money and Investment Management Apps
4. Choose the right firm for you
After you’ve done your research and considered all the options and factors, it’s time to decide based on what is the right fit for you.
5. Complete the account application
Once you’ve determined the right fit, you’ll need to complete an account application.
The application will require you to provide information like:
- Social Security number.
- Driver’s license.
- Net worth.
- Employment status.
- Investable assets.
- Investment objectives and goals.
Related: Short-Term, Mid-Term and Long-Term Personal Finance Goals: How to Iron Yours Out
6. Fund your account
You will need to add money to your account to begin investing.
Depending on the rules of the brokerage firm, you will be able to transfer money via the following:
- ETF.
- Wire transfer.
- Checks.
- Asset transfer.
- Stock certificates.
7. Research and select investments
Now that you’ve got everything settled, it’s time to start researching the investments you’d like to make. Learn the basics, build responsibly and start building your portfolio.
Do you need a brokerage account?
Whether or not you need a brokerage account is ultimately up to you. They are an excellent option for long-term investment strategies that will grow over time.
Like most investments, certain risks come with brokerage accounts, but as long as you invest responsibly, they can be a great asset.
Weigh the pros and cons, consider your financial goals and determine if a brokerage account is a right move for you.
For more information on investment advice, retirement planning, financial advisors and more, visit Entrepreneur.com for the need-to-know information.
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Entrepreneur | What Are Index Funds and How Do They Work?
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If you’re looking to expand your investment portfolio, several investment products exist. In your research, you may have come across index funds. If you’re looking for more information, keep reading for everything you need to know.
What are index funds?
In 1976, Jack Bogle, the founder of Vanguard, created the first index fund to provide a low-cost investing method that valued the investor’s interest over the company’s.
Index funds track the aggregate trends of a total market index, like the S&P 500, Dow Jones Industrial Average or Nasdaq. It is a type of mutual fund or exchange-traded fund (ETF).
A mutual fund is an investment made by multiple people who purchase stocks, bonds and other securities. The mutual fund manager handles the day-to-day management to ensure the portfolio stays on track with the end-of-day purchase and sales. An ETF is a share or group of shares traded based on the stock exchange, with prices varying throughout the day.
Unlike other investment funds, an index mutual fund is meant to work as a passive investment option rather than one that needs to be monitored against the market at all times. Index funds also tend to be lower maintenance because they offer a low-cost option with fewer management expenses.
Related: The Difference Between Direct Indexing and ETFs
How does an index fund work?
An index fund’s performance is meant to mirror the index it tracks. For example, when the index fund manager purchases a stock or bond, they do so in the same proportion as is represented on the financial market index. For the most part, the fund monitors itself and will occasionally be rebalanced to continue mirroring any changes to the index.
When someone decides to invest in an index fund, the shares they buy are essentially a small portion of the stock or bond they purchase, as represented in the index.
An index fund holder’s financial returns are determined by that stock’s or bond’s performance, usually factoring in metrics like the fund companies’ market capitalizations.
Again, index funds are built to be a low-risk, low-maintenance investment because they do not require the day-to-day management of other funds.
Related: Index Fund Inflows & Outflows Show Which Asset Classes Are In Favor
How does an index fund compare to mutual funds and ETFs?
While mutual funds exist in the same realm as mutual funds and ETFs, they have some differences.
Management style
Index funds are meant to facilitate a passive management style, meaning they match the market index’s performance without the hassle of trying to outperform the market.
Mutual funds and ETFs are a bit more flexible, as they can be managed actively or passively, depending on the fund manager and investors’ investment strategy.
Related: Best Passive Income Investments: 8 Methods
Investment objective
An index fund gets its name because it is designed to track the performance of a market index. Mutual and ETFs do not necessarily follow that same objective. Mutual funds and ETFs might be an investment to generate income or appreciate capital.
Trading and pricing
ETFs are stock exchange trades, which means they are bought and sold throughout the ebbs and flows of the daily stock market hours. Mutual funds are priced per day, meaning they are the price of the fund’s net asset value for that day. Index funds typically work the same way.
Related: Become a Better Investor in the Stock Market with This Training
What are the pros of index funds?
Diversification
Because of the nature of index funds, they provide the investor with a diversification of their portfolio.
When an investor chooses an index fund, they buy a piece of each stock or bond on that index, meaning their risk is spread over a larger number of holdings, reducing the risk of individual securities.
Low fees and costs
Because index funds are meant to be passive investments, they typically have lower management fees than those requiring constant attention. Over time, lower fees can equate to larger returns. Costs you can expect with index funds include:
- Investment minimum.
- Account minimum.
- Expense ratio.
- Tax-cost ratio.
Performance
Index funds are a long-term investment rather than a “get rich quick” short-term decision. They are generally reliable and consistent investments that do not involve the volatility of other assets.
Index funds can work for someone searching for a lower-risk, lower-cost option that will perform well in the long run.
Related: This Small-Cap Healthcare Name Is Outperforming Its Index
Ease of investment
Index funds are easily accessible and involve a straightforward process. You can purchase them through a brokerage account or a company that handles mutual funds. Because of the low cost, they are available to a wider range of investors than other funds.
Liquidity
High liquidity helps provide ease of buying and selling shares. Investors who want easy and quick access to their funds should consider index funds as an option.
Tax efficiency
Because index funds are straightforward, they usually generate a lower portfolio turnover than other funds. Lower turnover means lower capital gains taxes.
Market exposure
Again, index funds are low-cost and low-risk, which can be a great starting point for investors looking to get their footing in a particular market.
Index funds allow investors to gain familiarity with market areas without selecting individual stocks. Once they’ve studied the market enough, investors can move on to higher-cost, higher-risk investments.
What are the cons of index funds?
Limited upside potential
Unfortunately, there is rarely such a thing as low risk, low reward. Index funds are meant to replicate the index’s performance, meaning they will likely not outperform the stock market. Investors looking for high returns should look to another type of investment.
No control over portfolio composition
Because an index fund means the investor does not have complete control over the actual portfolio composition, investors might not be happy with the industries or companies involved.
Also, indexes change which can result in removed securities, meaning the fund has to sell that security. This might lead to the investor owing capital gains taxes.
Market risk
While index funds are low-risk investments, that does not mean they are risk-free. The fund’s holding value will fluctuate, which means that the investor is at risk of losing money if the market takes a dip.
Tracking errors
Index funds are designed to replicate the underlying index’s performance. However, there is a slight chance that performance differences occur due to tax treatments and the timing of sales and purchases. The performance difference is called a “tracking error,” which can negatively affect the index fund.
Lack of customization
The broad market exposure that comes with index funds means that investors with a specific interest or streamlined goals are better off with a different type of investment. Actively managed funds are the types that will better suit investors who want to be able to customize their portfolios.
What are the best index funds of 2023?
If you’re ready to take the plunge or want some direction, look at the most popular index funds for S&P 500 and Nasdaq.
S&P 500
- Vanguard 500 Index Fund – Admiral shares (VFIAX)
- Minimum investment: $3,000.
- Expense ratio: 0.04%.
- Schwab S&P 500 Index Fund (SWPPX)
- Minimum investment: no minimum.
- Expense ratio: 0.02%.
- Fidelity 500 Index Fund (FXAIX)
- Minimum investment: no minimum.
- Expense ratio: 0.015%.
- Fidelity Zero Large Cap Index (FNILX)
- Minimum investment: no minimum.
- Expense ratio: 0.0%.
- T. Rowe Price Equity Index 500 Fund (PREIX)
- Minimum investment: $2,500.
- Expense ratio: 0.15%.
Related: 3 Inflation-Proof ETFs to Put into Your Portfolio
Nasdaq
- Invesco NASDAQ 100 ETF (QQQM)
- Minimum investment: no minimum.
- Expense ratio: 0.15%.
- Invesco QQQ (QQQ)
- Minimum investment: no minimum.
- Expense ratio: 0.20%.
- Fidelity NASDAQ Composite Index Fund (FNCMX)
- Minimum investment: no minimum.
- Expense ratio: 0.37%.
Related: Should You Bet Against The Nasdaq 100 With This Inverse ETF?
How do you invest in index funds?
Ready to invest in your very own index fund? Take a look below at the step-by-step process for how to get started.
- Create a goal for your index fund.
- Complete thorough research.
- Choose the index fund.
- Decide where to purchase the index fund.
- Purchase index fund.
What can index funds do for you?
Index funds are passively managed investments that can be an excellent option for investors looking for a low-cost, low-risk investment that will work towards a diversified portfolio.
A few drawbacks come with index funds, like a lack of customization and limited upside potential.
However, seasoned and novice investors should always complete thorough research, consult with a financial advisor and make the financial decisions that are right for them.
Are you looking for more information about funds, finances or investment strategy? Check out Entrepreneur.com for all the latest need-to-know.
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