If you don’t have health insurance for 2023, you may still be able to get it through the public marketplace.
Open enrollment for the federal health-care exchange ends Sunday, with coverage taking effect Feb. 1. If your state operates its own exchange, you may have more time.
Most marketplace enrollees — 13 million of 14.5 million in 2022 — qualify for federal subsidies (technically tax credits) to help pay premiums. Some people may also be eligible for help with cost sharing, such as deductibles and copays on certain plans, depending on their income.
So far, nearly 15.9 million people have signed up through the exchange during this open enrollment, which started Nov. 1. Four out of 5 customers can find 2023 plans for $10 or less per month after accounting for those tax credits, according to the Centers for Medicare & Medicaid Services.
After the sign-up window closes, you’d generally need to experience a qualifying life event — i.e., birth of a child or marriage — to be given a special enrollment period.
For the most part, people who get insurance through the federal (or their state’s) exchange are self-employed or don’t have access to workplace insurance, or they don’t qualify for Medicare or Medicaid.
The subsidies are still more generous than before the pandemic. Temporarily expanded subsidies that were put in place for 2021 and 2022 were extended through 2025 in the Inflation Reduction Act, which became law in August.
This means there is no income cap to qualify for subsidies, and the amount anyone pays for premiums is limited to 8.5% of their income as calculated by the exchange. Before the changes, the aid was generally only available to households with income from 100% to 400% of the federal poverty level.
The marketplace subsidies that you’re eligible for are based on factors that include income, age and the second-lowest-cost “silver” plan in your geographic area (which may or may not be the plan you enroll in).
Opinions expressed by Entrepreneur contributors are their own.
Some projections state that a new startup could take as long as four years to start earning a profit. Your business may be growing, but waiting four years may not be an option. If you want to start earning passive income that you can use to grow your business, then the stock market may be a viable option. If this is your first foray into stock investing, then the 2023 Stock Candlestick and Options Profit Trading Bundle could help you learn to be a wise investor.
StackCommerce
This course can help you mitigate your risks and maximize potential payouts. It contains 25 hours of instruction, starting from the basics. Get your first look at investing strategies in Options Trading 101 and Learn to Trade Options from Some of the Industry Greats. Both of these courses are led by professionals from MoneyShow, an investment advising organization with 40 years of experience.
Once you’re confident in your investment strategy, you can automate it using Python and a style of coding you could learn in the course Automatic Stock Trading with Python. It even comes with its own automatic trading bot that can make investments for you based on parameters you input.
Katie St. Ores has a 100% track record of getting her tax clients out of paying the steep penalty for missing a required minimum distribution from their retirement funds. That amounts to only two households getting forgiveness, but it represents a lot of dollars, because the fee for any sort of mistake with RMDs is 50% of what’s missing, which could be tens of thousands of dollars.
Now’s the time to make things right if you forgot to make your RMD payment by Dec. 31 for 2022, paid the wrong amount or realized you got it wrong in a past year. The faster you correct it, the more likely the IRS is likely to waive the fines — and your chances are good overall, despite the agency’s stern reputation.
Beware, though, that new rules are going into effect in 2023 that could make the IRS less accommodating. For one thing, the age to start RMDs is going to 73 this year, and then 75 in 2033, which means the government is going to be hungry for the missing revenue. Even more important, the penalty will be reduced to 25% — or 10% if you’re really quick about reporting it.
The IRS doesn’t publicly track how many people miss or make mistakes with their RMDs, but financial advisers and tax professionals say it happens often enough, and they consider the IRS to be quite liberal about granting waivers.
St. Ores, who is a financial adviser and tax preparer based in McMinnville, Ore., thinks the IRS has responded generously so far because they know the rules are complex and mistakes happen.
“They know people are getting up there in age, and so they’ve probably said up to now, let’s just grant it,” says St. Ores.
But the new penalties seem worded to avoid waivers in the future, especially because of the extra reduction to 10% if you act to quickly correct mistakes. Up to now, the IRS has taken pains to point out how to ask for a forgiveness on its website, but now there will be new emphasis on the lower penalties.
“The 50% penalty effectively ‘scared’ taxpayers to withdraw RMDs, so reducing the penalty could reduce the fear of additional tax, leading to more taxpayers missing their RMDs,” says St. Ores. “Between more taxpayers that potentially neglect to take their RMDs because of a not-as-high penalty and confusion over the current required age, the IRS will probably collect more taxes overall.”
What to do about past mistakes
There are a lot of different ways to mess up your required minimum distributions. The amount you’re supposed to pay is calculated according to a formula that takes your account balance of all your qualified tax-deferred accounts and multiplies it by a factor related to your age.
When you get started taking the money out, it works out generally to about 4% of the account value. You keep taking RMDs every year from your designated start time until the accounts are empty (or you die). The beginning age in the past was 70½, then it moved to 72, and now it’s changing to 73.
“These things can get complicated,” says Isaac Bradley, director of financial planning at Homrich Berg, an investment firm based in Atlanta. He advised one couple that accidentally took the distribution from the wrong spouse.
Another easy mistake is taking the wrong amount because of a math error. Sometimes, the problem is just about communication, because people tend to have multiple 401(k)s at old employers or several rollover IRAs that aren’t consolidated. The adviser helping make the calculations might not know of an account held at a different custodian, and that could throw off the whole equation.
David Haas, a financial adviser and president of Cereus Financial Advisors, based in Franklin Lakes, N.J., has had to help family members correct RMDs, mostly having to do with inherited IRA accounts.
“You’re supposed to take RMD for the person who died, if they didn’t already take it,” he says, but a lot of people miss those in the confusion of grief.
Then once you inherit the account, you have to take RMDs over a 10 year period to empty the account.
“With one relative, she just kept on missing it and that was her fault. She didn’t realize what she was supposed to do. People don’t know the law, and it’s very confusing,” Haas says.
The first step is realizing you made a mistake, and then once you know that, pay the amount that’s missing. You need to file a special form with the IRS for the tax year in question (Form 5329), which you can send in at any point — you don’t have to wait until you file your next tax return.
If you want to ask for a waiver, you need to attach a letter explaining the mistake. If your request is not granted, then you pay the penalty.
While the process isn’t excessively complicated, you might want to consult with a tax professional to make sure you’re not making more mistakes in calculating the amount that’s missing. It could turn out to be a lot of paperwork if you have missed multiple years.
Kenneth Waltzer, a financial planner based in Los Angeles, had a client who did not realize he had inherited an IRA and missed the RMDs on it for five years. “He ignored emails about it,” says Waltzer. “When he came to us, it added up to over $100,000.”
For Katie St. Ores, the message going forward is going to be: Get it right the first time. Forgiveness may not be so easy to come by in the future. “I’m trying to stay on top of my clients taking their RMDs on time,” she says.
General inflation is easing, but the prices of some food items are not going down anytime soon. And the reasons are largely out of the Federal Reserve’s control.
The consumer price index cooled in December, falling to an annualized 6.5% from the 7.1% annual rate recorded in November, according to government data. Still, the annualized inflation rate in food was 10.4% in December, significantly higher than the overall inflation rate even as it represented a slower rate of increase than November, when food prices were 12% higher than in November 2021.
Inflation running at nearly 40-year highs over the past year has put a squeeze on American wallets. Through a series of jumbo rate hikes, the Federal Reserve has sought to tamp down inflation. Its target interest rate was lifted from a negligible level to a range of 4.25% to 4.50% by the end of 2022.
But a few factors impacting food prices are not going away. War is still ongoing in Ukraine, which affected the prices of fertilizers and animal feeds; the avian flu continues to impact the egg supply; and extreme weather conditions are adding complexities to food production.
The following is a look at how a few popular food items are affected.
Eggs
The price of eggs surged 59.9% on the year in December, up from 49% in November, according to the most government data. That means a carton of Grade A large eggs on average more than doubled in cost with prices reaching $4.25 in December 2022, compared to $1.79 a year earlier. In some parts of the country, consumers could pay up to $8 for a carton of organic eggs.
Avian flu, which has forced millions of chickens to be culled and caused a shortage of eggs, is the main reason behind the price increase. In a change from previous breakouts that faded as summer ended, this time the avian flu lingered into winter.
The holiday season is usually the peak for consumer egg demand, which means that we could see egg prices tick down a little in the new year, experts said.
But it will not be a significant drop given the ongoing flu and high cost of feed. If input costs continue to increase and the bird flu continues to kill large quantities of hens, the costs will most likely be passed on to consumers, said Curt Covington, senior director of partner relations at AgAmerica Lending, a financial services company providing agriculture loans.
Experts, including the biggest egg producer in the country, Cal-Maine, said the avian flu will be hitting egg supplies for the long term. “More than 43 million of the 58 million birds slaughtered over the past year to control the virus have been egg-laying chickens, including some farms with more than a million birds apiece in major egg-producing states like Iowa,” the Associated Press reported this week.
“I suspect it will take much additional effort to ‘stamp-out’ HPAI this time around and we may very well be dealing with the reality that this will be a year-round issue,” said Brian Earnest, lead economist for animal protein at CoBank, a national cooperative bank serving industries across rural America, in an email to MarketWatch.
The weekly supplies of eggs on hand has also reached a historic low, he told MarketWatch. For the week ended Dec. 19, cases on hand reported by the USDA totaled 1.176 million. That’s a 20% drop year-over-year, and the lowest level for the same week since 2014, he said.
Butter prices rose by 31.4% on the year in December, up from 27% in November, making the average price for a pound of butter $4.81 nationally. It was $3.47 a year earlier.
Extreme heat and smaller cow herds are the main reasons behind that, experts told MarketWatch. Cows eat less and produce less milk in the heat, and the cost of maintaining milk production skyrocketed last year, making farmers unwilling to expand their herds.
Going forward into 2023, the price of butter could soften, but year-over-year price increases could still stay high, said Tanner Ehmke, lead economist of dairy and specialty crops at CoBank.
Cows are approaching their prime milk-producing season, which usually runs from March through May, although customer demand usually peaks during the recently completed holiday season, he said.
But the increase of supply will not be much, Ehmke said, because costs are staying at record highs for farmers to maintain and expand their herds. Drought in the Western part of the country and the war in Ukraine continue to impact the supply and costs of feed.
“It’s [going to be] a very modest increase,” said Ehmke.
About 58% of the U.S. is at least “abnormally dry,” according to the National Integrated Drought Information System. It’s likely this year will see more drought-inducing La Niña weather conditions, according to National Weather Service’s Climate Prediction Center.
“If so, the third dry year in a row would signal the worst drought since at least 2011- 2013,” said Rob Fox, director of CoBank’s knowledge-exchange division in a 2023 preview released in December. “But this time it is more concentrated in the Western states, and it would be even more devastating to their already precarious water supplies and desiccated pastures,” he added.
At the same time, butter production is competing with the growing production of and appetite for cheese in the U.S., Ehmke told MarketWatch last September. U.S. cheese consumption per capita is growing around 1% to 2% each year, according to the USDA. U.S. cheese exports also increased, particularly to countries like South Korea and Japan.
Margarine, which is largely made of vegetable oil, is also seeing a huge price increase. The price of margarine, the substitute for butter in the old days, rose by 43.8 % in December, down slightly from 47.4% in November compared to a year before.
While soybeans, corn and sunflower oil are among the food items that have been hugely impacted by the war in Ukraine, another dynamic is at play here, analysts suggested: A large quantity of vegetable oil is being used for the production of renewable diesel.
In 2021/2022, 38.4% of soybean-oil supplies were used for biofuel production — biofuel is a broader category than renewable diesel — up from 35.6% the year before, according to USDA data updated in October 2022.
Transitioning to a green economy laid out in the Inflation Reduction Act will require more soybean supply. The expected growth in soybean oil-based renewable diesel will require considerably more soybean bushels for domestic production, wrote Kenneth Scott Zuckerberg, CoBank’s lead economist for grain and farm supply, in a report in September.
At the moment, global grain and oilseed supplies are tight, and the combined global stocks of corn, wheat and soybeans are forecast to decline for the fifth straight year in 2023, according to the CoBank report.
It may not have been a surprise to see the consumer discretionary sector of the S&P 500 get hammered last year amid talk of a looming recession while the Federal Reserve jacked up interest rates to push back against inflation.
But the stock market always looks ahead. Following a decline of 19.4% for the S&P 500 SPX, +0.42%
in 2022 and a 37.6% drop for the benchmark index’s consumer discretionary sector, this may be the time to begin looking for bargains.
And now, analysts at Jefferies have lifted the sector to a “bullish” rating.
In a note to clients on Jan. 10, Jefferies’ global equity strategist, Sean Darby, wrote: “A Goldilocks scenario might be unfolding for the U.S. consumer — falling inflation but steady employment conditions.”
He sees consumer confidence improving, in part because “households are still sitting on [about] $1.4 trillion of Covid savings.”
Darby pointed to a list of 18 consumer discretionary stocks favored by Jefferies analysts that was published on Jan. 6. Those are listed below, along with three stocks in the sector the analysts rate “underperform.”
The ratings of the Jefferies analysts for individual stocks is based on their 12-month outlooks for the companies, in keeping with Wall Street tradition.
So we have added another list further down, showing which companies in the S&P 500 consumer discretionary sector are expected by analysts polled by FactSet to increase sales the most through 2024.
The Jefferies 18
Here are the 18 consumer discretionary stocks recommended by Jefferies analysts with “buy” ratings on Jan. 6, sorted by how much upside the firm sees for the shares from closing prices on Jan. 9:
Click on the tickers for more information about the companies.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The two right-most columns on the table show estimated compound annual growth rates (CAGR) for the companies over the past three calendar years and expected sales CAGR for two years through calendar 2024, based on the companies’ financial reports and consensus estimates among analysts polled by FactSet.
(We used calendar-year numbers, some of which are estimated by FactSet for prior years, because some companies have fiscal years or even months that don’t match the calendar.)
The stock pick with the highest 12-month upside potential, based on Jefferies’ price target, is Topgolf Callaway Brands Corp. MODG, -0.22%.
This company has the highest estimated three-year sales CAGR on the list, and has the third-highest projected sales CAGR through 2024, after Planet Fitness Inc. PLNT, +0.69%
and Chewy Inc. CHWY, +1.63%.
On Jan. 6, the Jefferies analysts also listed three stocks in the sector they rated “underperform.” Here they are, sorted by how much the analysts expect the stocks to decline over the next 12 months:
A look head at which companies are expected to increase sales the most over the next two years might serve as a good starting point for your own research.
Bear in mind that some of the companies in travel-related industries suffered declining sales for three years through 2022 because of the coronavirus pandemic. Some of those are on this new list of 20 stocks in the S&P 500 consumer discretionary sector expected to show the highest two-year sales CAGR through calendar 2024:
Among the companies on this list that didn’t suffer sales declines from 2019 levels, Tesla Inc. TSLA, -1.83%
is expected to achieve the highest two-year sales CAGR through 2022.
Dollar General Corp. DG, -0.26%
is the only company to appear on this list based on consensus sales growth estimates and the Jefferies recommended list.
There’s a $1.1 billion top prize at stake on Tuesday night, following the news that no one won Friday’s drawing. While that doesn’t come close to the record $2.04 billion U.S. Powerball jackpot someone claimed in November, it’s still a sizable sum that could pay off all those holiday bills (and then some). And it’s the rare lottery jackpot to pass the $1 billion mark.
Here’s what you need to know if you’re going to play:
How does Mega Millions work?
It costs $2 per ticket to play. As the Mega Millions site explains, “Players may pick six numbers from two separate pools of numbers — five different numbers from 1 to 70 (the white balls) and one number from 1 to 25 (the gold Mega Ball) — or select Easy Pick/Quick Pick. You win the jackpot by matching all six winning numbers in a drawing.”
There are prizes beyond the jackpot, of course. You can win as little as $2 for matching the gold Mega Ball number alone. Other prizes vary depending on how many numbers you match.
Players also have the ability to increase their potential winnings by adding a $1 Megaplier option, but this doesn’t apply to the jackpot prize.
When does the drawing take place?
The next Mega Millions drawing will take place Tuesday at 11 p.m. Eastern.
Where can you buy a ticket?
Mega Millions is offered at lottery retailers in 45 states and is also available in Washington, D.C., and the U.S. Virgin Islands. Some states also allow for online purchase of tickets.
Up until what time can you buy a ticket?
How late you can purchase your ticket varies depending on the jurisdiction. For some places, the cutoff time is 10:45 p.m. Eastern, but others have earlier cutoffs.
What are the odds of winning the jackpot?
You’re looking at some pretty tall odds — 1 in 302,575,350. But the chance of winning any prize ($2 and up) is much better — 1 in 24.
What are the options for the jackpot payout?
You can opt for a lump sum, which is less than the actual jackpot — in the case of the current $1.1 billion jackpot, the lump sum is $568.7 million. But you can also opt for annuity payments, which means you’ll receive an immediate payment followed by 29 annual payments that increase by 5% each year.
Can you watch the drawing live?
Yes, it’s carried by many television stations across the country, according to the Lottery ‘n Go website. Recorded video of the drawing is also posted to the Mega Millions YouTube channel.
If you win the jackpot, can you remain anonymous?
The rules vary by jurisdiction. The Mega Millions site explains it this way: “Public disclosure laws vary from state to state. Some states require their lotteries to publicly identify winners, while others do not.”
Opinions expressed by Entrepreneur contributors are their own.
As a recent college graduate, you have your degree and possibly some experience from an initial job or internship. But now, you’re interested in acting on your entrepreneurial ambitions and starting your own business.
Starting a small business is an increasingly popular option for young people — 17% of college graduates run their own businesses while they’re still in college, and another 43% plan to do so shortly after graduating.
Of course, starting your own business is a lot of work and comes with a huge learning curve. Let’s look at seven tips for starting your own small business as a college graduate.
Your first step should be to determine what kind of business you want to start and run. For instance, do you want to start a restaurant, offer a service-based business or do something else entirely?
To determine the kind of business you want to start, think about business ideas you’ve had in the past, and consider the kind of work you like to do. You should also look for current opportunities in the market you can take advantage of. Above all else, consider what skills you have that might provide value to other people.
2. Register your business
Your next major step is to register your business. There’s a lot involved with this step, including:
Deciding on a business name: Your business name must be 100% unique to your state. For the best results, try to come up with a business name that sounds good, is easy to spell and won’t blend in with the crowd.
Apply for an EIN: An employer identification number (EIN) is a unique number assigned by the IRS to businesses operating in the U.S. You’ll need an EIN to open a business bank account and register your business.
Choose your business structure: Next, you’ll need to choose your business structure, like an LLC, corporation or sole proprietorship. The business structure you choose can affect what tax breaks you benefit from and how many employees you can hire.
Register your business: Finally, register with your state’s Secretary of State office. You’ll need to provide all the above information and pay some minor fees.
3. Come up with a business plan
Think of your business plan as the guiding document that outlines what your business is about, how it will achieve its goals and who it serves. A business plan helps guide your business, and it’s necessary if you want to receive financing from investors.
Write a detailed business plan, including cash flow projections, target audience research and your expected marketing strategy. If you’re unsure where to start, you can use a free business plan template to get started.
At this stage, you need to determine your target audience. This is the group of people most likely to buy from your brand or subscribe to your services. You can do this by researching keywords, performing marketing research and doing competitor analysis.
In any case, you need to know who your target audience is in terms of attributes like gender, age and buying habits. The better you know your target audience, the more effectively you can market directly to those prospective customers.
5. Decide how you’ll finance the business
No business can get off the ground without financing of some kind. Unless you have a nest egg you’ve saved up for this purpose, odds are you’ll need to seek out financing from other sources.
You can do this in a few different ways:
Try applying for a business loan, either from a bank, credit union, the U.S. Small Business Administration or non-bank lender.
Appeal to venture capital firms and other investors by presenting them with a business plan and details about your company.
Ask friends and family members to pool money together, then promise to pay them back once you start turning a profit.
Consider your finances and how you’ll acquire money before committing to any business idea.
6. Keep your expenses low
Even after acquiring funds, your business is unlikely to turn a profit for the first few years of operations. Therefore, it’s wise to keep your expenses low as you start your business. To cut down on costs, you can do things like:
Living with your parents, so you don’t have to pay rent.
Working a side job while diverting most of your effort toward your entrepreneurial endeavor.
Doing a lot of the hard work in your business yourself rather than hiring employees. This isn’t a great long-term strategy, but it may be necessary in the beginning.
Your initial business idea might not work out as you expect or hope, so you should always be ready to pivot or change your business plan. While it might be difficult or uncomfortable, navigating through hurdles and challenges will allow you to learn valuable lessons on how to run a business and identify mistakes to avoid in the future.
For instance, let’s say you have an initial idea to provide one product to your target audience, but you discover that you can produce a better product for cheaper. It may make sense to switch your business plan and pivot toward the other product. Being flexible and adaptable are key attributes for all small business owners.
There’s a lot that goes into starting a business, and almost half (47%) of all small businesses won’t last longer than five years. But by coming up with a plan and being strategic and flexible, you’ll increase your likelihood of success, and you can continue your entrepreneurial journey with the confidence to grow to greatness.
Opinions expressed by Entrepreneur contributors are their own.
As I write this, commercial interest rates — the rate businesses pay for working capital, equipment and property loans — have more than doubled over this past year. My clients are now seeing commercial rates exceed 10% — that’s going to be a big challenge for those that rely on debt to fund their operations and expansion, let alone those entrepreneurs looking to startup and grow their businesses.
The financing environment will be tough in 2023. Less businesses will get approved for loans as the financial services industry contracts in response to continued high interest, inflation and a slowing economy. But it’s not a catastrophe. There will be money out there if you’re willing to pay for it. Here are your best choices to consider.
For starters, if you don’t need a loan, then you should definitely go to a traditional bank. I’m kidding, of course. But traditional banks — and you know the names — are the most risk-averse of all lenders. They are going to lend money to businesses that have collateral, history, solid credit and the ability to pay the loans back almost without question. Interest rates and terms, assuming you meet those requirements, will always be the most favorable compared to other financing options.
Small bank loans
Besides the big banks, there are independent and community banks and credit unions all of which offer different types of loan arrangements and may be more amenable to dealing with a smaller company that isn’t as qualified to get a loan from a big bank. But still, these banks, though a little more entrepreneurial, tend to also be very risk averse and will require significant due diligence.
SBA Loans
The best option in 2023 is to seek out a loan from a lender certified by the Small Business Administration. Those loans (called Section 7a or 504) can be offered at market or slightly above market interest rates. Because most of the amounts are guaranteed by the federal government, the banks offering these loans can do so to smaller companies with less of a financial history or collateral available and are less at risk. But it’s still not a slam dunk and you’ll have plenty of hoops to jump through.
If you’re looking for a very short-term loan to satisfy an immediate financing need (a big inventory purchase, a down payment on a lease, a deposit on a new piece of equipment) you can try an online banker like Kabbage, Fundbox and OnDeck. These companies charge extremely high annual interest rates, but no sane business person would borrow from them for the long term. The upside is that these services provide funds very quickly — in some cases within 24 to 48 hours — and (as opposed to many banks) are more technology-oriented to gather data, monitor their loans and communicate issues.
Merchant advances
If you’re in the retail world then you might want to consider a merchant advance, which are short-term loans provided by popular payment services like Square, PayPal and QuickBooks Merchant Services. Your loan qualifications are determined by your actual sales volume to which these payment services are privy because, well, they’re already handling your cash. Like online lenders, interest rates are much higher than what traditional banks offer but the funds are quickly deposited in your account and payback is done automatically through the sales transactions you record with the service.
SSBCI
If you’re a very small business or a minority business owner or someone located in a lower-income part of the world then you should definitely look into the State Small Business Credit Imitative. Thanks to prior pandemic-related legislation, $10 billion is being distributed this year and next by the Treasury Department to states (based on a number of factors) that will then be allocated to local nonprofits and other organizations that support small and minority-owned businesses. You can Google your state and the State Small Business Credit initiative to find out what organizations are getting this funding and then apply directly to those organizations. Grants and equity investments are also available through this program.
Micro loans
For startups and very small businesses, you can also look for microloans offered by nonprofit organizations like Kiva, for example. These amounts are — by definition — very small but organizations like this one also provide good consulting services and can connect you to other places that offer finances for companies at your early stage.
Private lenders
Although these companies don’t charge as much interest as some of the short-term online lenders mentioned previously, interest rates are still higher but so are approval rates. Collateral — oftentimes receivables (for companies that “factor these amounts) and inventory — will be required. The best place to find these lenders (and other more traditional forms of financing) are platforms like Lendio and Fundera which offer a “marketplace” of different vehicles provided by their partners and an easy way to apply for them all.
Credit cards
What about credit card financing? You know you’ll pay a hefty interest rate but don’t knock it entirely — it may be a bad choice unless it’s for very short-term needs. Just make sure you’re not building your business around credit card debt because as interest rates continue to rise, so will credit card rates.
Family and friends
Finally, there are friends and family. A lot’s been written on this so I don’t have to tell you of the potential perils. You already know them. But getting a loan from a reasonable friend or family member can provide you with a reasonable rate of interest and flexibility. It all depends on the people involved.
The takeaway is that 2023 will be a tough year for financing. But not impossible. Just make sure you can afford it. And give yourself the flexibility to renegotiate in the future when rates do eventually come down.
Question: I am accepting an early retirement offer from my long-term employer of 24 years. In March of 2023, I will retire and receive nine months of salary as well as my benefits. During this time I will be looking for another job that’s 30 or 40 hours per week. I would like to do this in order to invest some of the stipend I will be receiving. I have approximately $113,000 in a 401(k) that I will also be looking to invest. I have no other savings or checking, and I am 60 years old. I need advice as to whether it would benefit me to hire a financial advisor outside of the one I have with a large investment company through my current employer. (Looking for a financial adviser too? This tool can help match you with an adviser who might meet your needs.)
Answer: While it may benefit you to work with a financial adviser outside of your employer, that’s not always the case. “It really depends on what the employer-adviser costs, what their fiduciary obligations may or may not be and how well-credentialed they are. If they’re low cost, act as a fiduciary, have a preeminent planning designation, then it may be a great fit, but if not, you may wish to find an adviser elsewhere,” says certified financial planner Philip Mock at 1522 Financial.
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
For his part, certified financial planner Joe Favorito at Landmark Wealth Management says he recommends meeting with the current adviser and going over your situation along with your longer term goals to see if they’re competent and have done a good job up to this point. “If they aren’t, and you’re looking elsewhere, then I would suggest using whoever you choose exclusively because you want your financial plans to be one cohesive strategy and having two competing advisers can sometimes create more problems than you can solve,” says Favorito. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
No matter which adviser you choose — or if you go it alone — you have a number of things you will want to consider here. “I’d want to know what your net monthly expenses will be in retirement in today’s dollars, whether you have any pensions expected in the future, and if not, what Social Security will look like at 67 and 70. I’d also want to know when you’d like to have the choice to quit working, but all of these questions come with assumptions, and my biggest concern is that you haven’t saved enough to quit working when you’d like,” says certified financial planner Adam Koos at Libertas Wealth Management.
Indeed, Koos says there are two possible scenarios here. “My guess is that either you’re going to need to save as much as you can between now and full retirement, or I would hope that you’re a relatively frugal individual. Case in point, if your Social Security comes out to $3,500 per month and your total retirement savings grows to $150,000 between now and retirement at 65, you can only expect a $500 per month gross check from your retirement portfolio, which puts your monthly gross retirement income at around $4,000 per month,” says Koos.
The good news here is that that may be enough for you, and you plan to keep working and earning money that you can use to boost your retirement funds. And if you decide to go the financial adviser route, that person can help you invest your earnings and come up with a solid plan to ensure a smooth retirement. Make sure that whoever you work with has the ability to handle — or knows someone they can recommend — not just the investment advice, but all the other issues that become paramount as you get closer to your senior years. “This means estate planning, insurance planning and tax planning,” says Favorito.
Something else to consider: Advisers say you should plan to have some liquid emergency savings on hand. “Your question about not having any other savings means you’re definitely in need of an emergency fund,” says Mock. Pros advise having between 3 and 6 months of living expenses in an emergency fund, regardless of whether you’re approaching retirement.
You should also think about when you will take Social Security. If you retire at full retirement age (66 if you’re born between 1943 and 1954 and 67 if you’re born between 1955 and 1960), you’ll receive the maximum benefit. It’s best to delay taking Social Security as long as possible because benefits are increased by a percentage each month you delay starting after your full retirement age.
If you can’t find a job you like because of a looming recession, it may make sense to enter the gig economy and work wherever you can to earn extra money.
Looking for a new adviser? Consider checking out professional planners using the National Association of Professional Financial Advisors (NAPFA) online tool since hiring a personal financial planner is highly recommended in your case, as the individual helping with your retirement plan at work likely doesn’t have the capabilities, license or legal ability to provide the kind of advice you’re going to need. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
Questions edited for brevity and clarity.
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.
Just as deciding when to take advantage of 4th and goal, refinancing a home has many opportunities and pitfalls.
Due – Due
The reason you might consider a refinance is that you want to pay less interest. Or, if you need to put some money towards another expense, you can take some money out of your house. It’s even possible you want to shorten your term.
These are all good reasons to refinance. However, if you want to maximize these benefits, as well as take advantage of the current market, which favors refinancers since mortgage rates are at record lows, you could make a hasty decision that’s not right for you.
Considering a home refinance now? Here are twelve costly mistakes you should avoid so you can score a touchdown with a refi.
1. Taking only interest rates into account.
Whenever interest rates drop, many people think about refinancing. A lower interest rate might lower your monthly mortgage payment, but there are other things that will affect it. For example, there might be a drop in interest rates, but are they below what you financed your home at? Did your credit score drop since you first financed your house? Can you cover closing costs with your savings?
Remember, getting a refinance is like getting a new loan. That means you’ll have to pay closing costs and your lender will look at your credit score. Therefore, before you refinance, make sure you compare your current interest rate with today’s rates, review your credit score, and make sure you can afford closing costs.
2. Not shopping around.
When you need a home loan or a refinance, you might be tempted to go right to your regular bank. Or maybe you just check a few lenders and pick the cheapest one. And, plenty of people think they have to refinance with their current lender.
Mortgage pricing can also be tricky, with many factors affecting the actual cost, so compare rates, terms, and fees from different lenders carefully. You’ll also want to use a refinance calculator to help you determine what your new monthly payment will be.
In short, don’t rush when it comes to refinancing your home so that you’ll find the best idea available.
3. Restarting the clock for another 30 years.
Whenever you refinance your mortgage, you should avoid restarting the clock to another 30 years on your new mortgage, advises Alvin Carlos of District Capital.
“This means that if you’re already five years into your mortgage, you don’t want to extend your mortgage and pay over a period of 30 years when you would have just paid over a remaining period of 25 years,” Carlos explains.
Another 30 years may seem appealing since it will lower your current monthly payment and may seem like immediate savings. However, if you reset the clock to 30 years instead of 30, you’ll pay significantly more interest than you would have had you kept the original 30-year mortgage.
“To avoid this, you can request that your lender amortize the newly refinanced mortgage over 25 years rather than 30,” suggests Carlos. “Alternatively, you could do the math and figure out how much more monthly you need to pay on the loan to pay it off in 25 years rather than 30, and then set that up to automatically pay each month.”
4. Choosing a mortgage with no closing costs.
Again, refinancing your mortgage is basically getting a new loan to replace the old one. So you’ll have to pay closing costs to finalize the deal. Typically, closing costs range from 2% to 5% of the loan amount. If you’re getting a $200,000 loan, for example, you can expect to pay between $4,000 and $10,000.
Luckily, there are no closing-cost mortgages out there. But, as with most things in life, there’s a catch. In order to make up for the money they lost upfront, the lender may charge you a little more interest. It can make refinancing much more expensive over time.
To show how the cost breaks down, here’s an example. Imagine you have a choice between a $200,000 loan at 4% with closing costs of $6,000 or a $200,000 loan with no closing costs at 4.5%. Not much difference, right? Well, if you opt for the second option, you’ll end up paying thousands more over 30 years.
5. Don’t refinance at the wrong time.
When is the best time to refinance? Preferably, it’s when you’ve got your finances in order. At the minimum, this means you’ve been making payments on time and are a valuable customer.
In addition, you should consider what you hope to accomplish when determining when the time is right. As an example, you might do better to wait until the fixed-rate loan has ended before starting a new term, rather than refinancing and incurring break costs if your fixed-rate loan is nearing its end. Before refinancing, take into account your future plans (renovation, investment, starting a family). You should be able to meet your future needs.
Consolidating debt is a valid reason to refinance. As an example, if you consolidate $40,000 in credit card debt into your $250,000 home loan, your revised loan amount will be $29,000. However, a shorter loan term is available for the $40,000 portion. Even if the rate of interest on your short-term debt is lower, you will end up paying more in interest if you extend the term over which you pay it to the full term of your mortgage.
6. Over-estimating the value of the home.
“Just because your home was worth $300,000 seven years ago doesn’t mean it’s still worth that,” Ilyce R. Glink writes for CBS News. “Nationally, home prices have fallen more than 30 percent, with some markets (Las Vegas, Phoenix, and Miami come to mind), falling much more.”
In other words, if you don’t have enough equity, your refinance offer will be higher than you expected.
7. Saving too little.
Getting a small reduction in your interest rate, such as half a percentage point, will take you a long time to recoup your closing costs. This is called the break-even point. More specifically, this is the point when you save enough from refinancing to pay for refinancing.
As an example, you may have paid $5,000 in closing costs and saved $100 a month by refinancing. You will reach break-even in 50 months, or just over four years. However, if you save only $50 a month, you’ll have to wait eight years to break even. What’s more, you might already have sold your home by then as well.
A refinance is worthwhile if you can lower your rate by at least three-quarters or a full percent. In high-end homes, lower rates can be justified because savings are considerably higher than in modestly priced homes. In addition, if you plan to live in the home for a long time, a small reduction can be worthwhile.
8. Refinancing a home with less than 20% equity.
If you don’t have enough equity in your home, refinancing can increase your mortgage costs. If your equity value is less than 20%, your lender is likely to require you to pay private mortgage insurance (PMI). In the event of a default, this insurance protects the lender.
Conventional mortgages typically cost between 0.3% and 1.5% in PMI premiums. Payment for the premiums is added directly to your monthly bill. With that extra money added into your payment, you’ll lose out on any savings you might have obtained by locking in a low-interest rate.
9. Taking out too much equity at once.
Refinancing your mortgage allows you to borrow against the equity in your home. These funds can be used for home repairs, investments, or other significant purchases. Often, mortgage interest is tax-deductible on income-producing properties. Because of this, it makes them an attractive option for borrowing money.
However, the risk of taking out too much equity increases when homeowners take out too much equity. The value of your property might decrease and your mortgage repayments may increase to such an extent that you have little wiggle room if financial problems arise in the future.
Overall, if you want to cash out your home equity, be cautious when refinancing.
10. Don’t ignore your credit score.
There are usually minimum credit score guidelines set by lenders. Credit agencies such as Equifax, TransUnion, and Experian can provide you with your credit score. Your credit score could affect your ability to refinance or your interest rate if you’ve changed it since you got your first mortgage.
It’s great if your credit score has improved! However, if it went down by 100 points, it could affect your interest rate by half a point or more. Alternatively, it could prevent you from refinancing your home.
Keeping your bills current and reducing your outstanding debt will help you improve your credit score. Eventually, your credit score could qualify you for a better interest rate or a refi.
11. Buying a large item before your refinance closes.
While awaiting their refinance to close, many people purchase a car or furniture via credit while waiting to close on their refinance. It can result in a lower credit score or a higher debt-to-income ratio, which may make it difficult for you to qualify for the loan you want.
In other words, you could lose the loan if anything changes on your credit right before closing, as lenders typically pull your credit right before closing. If you’re waiting to close on your mortgage, avoid completing any credit transactions. It is possible to jeopardize your mortgage even if you pay off debt if your available cash is less than the amount the loan depends on. Between applying for a refinance and closing, you have to tread lightly.
12. Having to pay junk fees.
In addition to the regular closing costs, borrowers need to watch out for “junk fees” added to their mortgages. Sure, the cost of loan origination, application, and title fees is unavoidable and legitimate. But some lenders overcharge for things such as “document preparation” or credit reports.
As a general rule, junk fees are those that could be done by you or someone else for less.
FAQs
Is it a good time to refinance my current mortgage?
Refinancing for a lower rate is great, but it’s just one piece of the puzzle. As an example, it wouldn’t make financial sense to refinance if it will take three years to recoup the costs after refinancing and you plan to move in two years.
You should also consider the loan term, as refinancing to a shorter term will help you build equity more quickly. Let’s say that you refinance your 30-year fixed-rate mortgage into a 30-year fixed-rate mortgage with 20 years left on it. In this case, you’re essentially extending the loan term by 10 years and paying more interest.
By dividing the total refinance cost by your monthly savings, you can determine whether refinancing is financially viable for you.
Am I required to refinance with my current lender?
Refinancing your mortgage can be done through your existing lender or through a new one. Regardless, you should compare loan estimates from multiple lenders to ensure your interest rate is as low as possible.
Can I refinance for free?
Refinancing your mortgage is similar to applying for a new home loan. As such, expect closing costs should be included. These costs depend on your location and the amount of the loan. But, they should be about the same as what you paid at closing on your original loan.
In the event that you are unsure of your ability to pay for the costs of refinancing, ask your lender if they can cover some of the fees for you. A no-closing-cost refinance option may be available from your lender, which includes your closing costs in the total loan amount. In this case, you may have to make a slightly higher mortgage payment each month.
To gain a better understanding of all upfront costs, talk to your lender. You can also learn about different options for paying closing costs from a housing counselor. There are many programs offered by state and local housing commissions to assist buyers with closing costs. There might even be a grant available to help offset the cost of refinancing.
Refinancing may be feasible if you own your home for less than 20% and have a good credit score. In addition to the monthly mortgage payments, your lender will require that you pay private mortgage insurance (PMI).
How many times can I refinance my mortgage?
You can refinance your mortgage as many times as you like. In the case of conventional mortgages, you may be able to refinance immediately after your previous refinance closes.
You should keep in mind that refinancing isn’t free and that multiple credit inquiries can negatively impact your credit score. Take the time to weigh the cost of refinancing against the potential savings if you intend to refinance at a lower rate.
Some expenses that go with homeownership can often be unpredictable — and costly.
Last year, homeowners spent an average of $6,000 on maintenance and repairs, according to a recent report from insurance firm Hippo. A separate study from home services website Angi that measured similar 2022 costs shows maintenance averaged $2,467 and home emergency spending — i.e., an unexpected repair — was $1,953 on average ($4,420 altogether).
Regardless of what you may fork over for those expenses, they have the potential to upend a household’s budget when unexpected. While some of the costs may be unpredictable, there are things you can do to mitigate their sting, experts say.
For starters, the general advice is to annually set aside at least 1% to 3% of your home’s purchase price to cover a combination of home improvements, maintenance and repairs, said Angie Hicks, chief customer officer of Angi.
“That’s for all three buckets,” Hicks said. “For a $400,000 home, the [$4,420] in maintenance and emergency spending in our report is closer to 1%. You want to make sure you have that 1% covered.”
The median selling price for a home stood at $393,756 as of November, according to Redfin. (One percent of that amount is $3,937.)
While it’s wise to have money set aside, maintenance can help reduce what you spend on unexpected repairs, Hicks said.
“We’re seeing an increased focus on maintenance activities, which is good to see,” Hicks said. “When there are inflationary pressures, people … don’t want to be surprised, so they start doing more maintenance-type projects that they might have previously skipped over.”
And some things — such as remembering to regularly replace your furnace filter to help keep the system run optimally — can often be done by the homeowner.
In the Hippo report, which was based on a survey of about 1,000 homeowners, 65% of respondents who had something go wrong in their house last year said they could have prevented it with proactive maintenance.
By way of example: It’s worth doing a visual inspection of your roof a couple times a year to make sure you don’t see any missing or curled shingles that warrant a repair before the problem worsens and you’re facing extensive water damage, Hicks said.
“You don’t want a leak,” Hicks said. “Water is the worst enemy of your house.”
While the specifics of a necessary roof repair determine the cost, the average is $1,000, according to thisoldhouse.com. That compares to an average $3,342 shelled out for water-damage repairs, according to Angi.
It’s worth getting your main systems, such as heating and cooling, serviced on a regular basis, said Courtney Klosterman, home insights expert at Hippo.
Also, “get to know the critical systems in your home — major appliances, plumbing, electrical, etc. — so you can monitor them for wear and tear over time,” Klosterman said.
You may want to keep track of how long major appliances in your home will last. For example, furnaces generally last 15 to 20 years if well-maintained, according to home appliances maker Carrier. If yours is closing in on that age, you’ll know to be financially ready to replace or repair it instead of being surprised by its failure.
Unexpected house-related costs have a way of weighing more heavily on homeowners, Klosterman said.
“When one thing goes wrong, it brings a wave of anxiety and dread about what could go wrong next,” she said. “Taking a proactive approach to home care can save not just money but time and anxiety, as well.”
Financing a new or used car is more expensive than ever, new research shows.
Amid rising interest rates and elevated auto prices, the share of new car buyers with a monthly payment of more than $1,000 jumped to a record high, according to Edmunds. For the first time, just over 15% of consumers who financed a new car in the fourth quarter of 2022 committed to a monthly payment of $1,000 or more — the highest level on record — compared with 10.5% one year ago, Edmunds found.
The average price paid for a new car in December set a record of $46,382, according to a separate estimate from J.D. Power and LMC Automotive. While there are signs the market is cooling, sticker prices are up 2.5% from a year ago.
At the same time, the interest rate on new car loans reached 6.5%, up from 4.1% a year earlier, Edmunds data shows. As the Federal Reserve continues to raise interest rates to combat persisting inflation, auto loan rates could tick even higher, although consumers with higher credit scores may be able to secure better loan terms.
“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.
Now, more consumers face monthly payments that they likely cannot afford, according to Ivan Drury, Edmunds’ director of insights. Car buyers are hit with “shock and awe” as high prices and rising rates cause monthly payments to balloon, he said.
“Sticker shock doesn’t begin to describe it,” Drury said. “When you factor in the financing, it’s very jarring.”
Many Americans are also choosing more expensive SUVs and pickups with all the bells and whistles, he added, which can cost 30% more than the base price.
“Base models, while enticing in theory, rarely hit the street,” Drury said, cautioning car shoppers to ask themselves if they’re “buying too much car.”
“There could be a perfectly good substitute at about half the cost,” he added.
A customer looks at a vehicle at a BMW dealership in Mountain View, California, on Dec. 14, 2022.
David Paul Morris | Bloomberg | Getty Images
Shelling out more to finance a car today puts car buyers at greater risk of going underwater on those loans down the road as used car values decline, Drury cautioned.
“At the onset of the pandemic, consumers benefited from low interest rates and elevated trade-in values, helping shield even the more questionable financing decisions from resulting in negative equity,” he said.
“But as we shifted toward an environment with diminished used car values and rising interest rates over the past few months, consumers have become less insulated from those riskier loan decisions, and we are only seeing the tip of the negative equity iceberg.”
As the Federal Reserve continues to hike interest rates, you may assume you’re earning more on the money in your savings account.
But that may not be the case.
related investing news
Carolyn McClanahan, a certified financial planner at Life Planning Partners in Jacksonville, Florida, was recently surprised when a client told her he was hardly making any interest on his cash.
The interest rate on his Capital One account was 0.3%, far lower than the 3.3% annual percentage yield the firm is currently advertising for new savings accounts. McClanahan discovered the same situation when she checked her own Capital One account.
“I was not happy,” McClanahan said.
While a call to Capital One’s customer service revealed it was possible to access the higher interest rate by opening a new account, McClanahan decided it was better to move the money elsewhere.
“I’ve been recommending Capital One for a long time, and they are now off my list,” McClanahan said.
Capital One did not immediately respond to requests for comment.
The Federal Reserve has raised the federal funds rate to the highest levels since 2007. While that makes borrowing more expensive for credit cards and other accounts, the expectation is that it will also push up the interest consumers can make on their cash savings.
Some online savings accounts are touting rates as high as 4%. Some certificates of deposit, or CDs, may provide higher rates, depending on the term.
Rates are expected to climb even higher as Federal Reserve poised to continue its hiking cycle in 2023. Bankrate.com predicts top-yielding national money market and savings accounts could climb to 5.25% by year end.
Yet like McClanahan, others may be in for a surprise if they realize their accounts are not keeping up with those top rates.
“Consumers need to check their accounts at least once a month to see what their accounts are earning,” said Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts.
“Don’t assume it’s the latest greatest rate,” he said.
Following Fed rate hikes, online savings accounts should generally be in the ballpark of the federal funds rate within about a month, according to Tumin.
There are signs that may help consumers spot when they may get shortchanged on rates.
Watch for changing account names, Tumin said. If a bank is touting savings offers under a new account name from when you opened your account, the terms you are subject to might not be the latest.
If you see a new account, often you can request to be upgraded.
“That’s an easy way to get the benefit of the higher rate,” Tumin said.
Also be more vigilant when a bank, such as Emigrant Bank, has more than one online division, Tumin said. In September, Emigrant’s Dollar Savings Direct division was the first to offer 3% on an account, which eventually climbed to 3.5%.
Now, however, its My Savings Direct division has the highest rate for an online account, with 4.35%, Tumin noted.
Student loan borrowers are starting 2023 with a lot of uncertainty.
The fate of President Joe Biden’s major student loan forgiveness program lies with the US Supreme Court, and it could be as late as summer before the justices rule on whether the policy can take effect.
The pandemic-related pause on student loan payments remains in place. But a restart date is up in the air, dependent on when the Supreme Court rules on the forgiveness program.
Meanwhile, significant changes are coming in July to the existing Public Service Loan Forgiveness program that aids government and nonprofit workers. And a new income-driven repayment plan that could lower payments for some federal student loan borrowers is in the works.
The mired rollout of Biden’s forgiveness program has created confusion for borrowers. Here are some of the big questions surrounding student loans this year:
In late February, the Supreme Court will hear arguments in two cases concerning Biden’s student loan forgiveness program, which could deliver up to $20,000 of debt relief for millions of low- and middle-income borrowers.
A decision on whether the program is legal and can move forward is expected by June. Until then, it is on hold and no debt will be discharged under the program.
Biden’s student loan forgiveness program has faced several legal challenges since the president announced the program in August. The Department of Education received about 26 million applications for debt relief by the time a federal district court judge struck down the program on November 10.
Lawyers for the Biden administration say that Congress gave the secretary of education “expansive authority to alleviate the hardship that federal student loan recipients may suffer as a result of national emergencies,” like the Covid-19 pandemic, according to a memo from the Department of Justice.
But litigants argue the Biden administration has overstepped its authority, and other recent Supreme Court decisions have ruled against aggressive executive agency actions. The justices curbed the Environmental Protection Agency’s authority to set certain climate change regulations last year, for example, as well as limited the federal government’s power to implement a pandemic-related eviction moratorium in 2021 and mandate Covid-19 vaccinations in 2022.
For the third consecutive time, federal student loan borrowers begin a new year without having to make payments on their loans thanks to a pandemic-related pause.
Payments were set to resume in January, but the Biden administration extended the pause after its student loan forgiveness program was halted by federal courts. Officials had told borrowers debt relief would be granted before payments restarted.
The payment pause will now last until 60 days after litigation over Biden’s student loan forgiveness program is resolved. If the program has not been implemented and the litigation has not been resolved by June 30, payments will resume 60 days after that.
Borrower balances have effectively been frozen since March 2020, with no payments required on most federal student loans. During this time, interest has stopped adding up and collections on defaulted debt have also been on hold.
The yearslong pause cost the government $155 billion through the end of 2022, according to an estimate from the Committee for a Responsible Federal Budget.
The Public Service Loan Forgiveness program allows certain government and nonprofit employees to seek federal student loan forgiveness after making 10 years of qualifying payments – but it has been plagued with implementation problems for years.
A yearlong waiver that expanded eligibility for the PSLF program expired on October 31, but some of those temporary changes will be made permanent starting in July.
Under the new rules, borrowers will be able to receive credit toward PSLF on payments that are made late, in installments or in a lump sum. Prior rules only counted a payment as eligible if it was made in full within 15 days of its due date.
Also, time spent in certain periods of deferment or forbearance will count toward PSLF. These periods include deferments for cancer treatment, military service, economic hardship and time served in AmeriCorps and the National Guard.
Starting in July, borrowers will receive some credit for past payments when they consolidate older loans into federal Direct Loans in order to qualify for the program. Borrowers previously lost all progress toward forgiveness when they consolidated. After July, they will receive a weighted average of existing qualifying payments toward PSLF.
The new rules will also simplify the criteria to meet the requirement that a borrower be a full-time employee in a public sector job. The new standard will consider full-time employment at 30 hours a week. In particular, the change will help adjunct faculty at public colleges qualify for the program.
The Biden administration has proposed a new income-driven repayment plan that is intended to make payments more manageable for borrowers, though it’s unclear when it could take effect.
Several income-driven repayment plans already exist for federal student loan borrowers, but the new proposal could offer more favorable terms.
The new rule is expected to cap payments at 5% of a borrower’s discretionary income, down from 10% that is offered in most current income-driven plans, as well as reduce the amount of income that is considered discretionary. It would also forgive remaining balances after 10 years of repayment, instead of 20 or 25 years, as well as cover the borrower’s unpaid monthly interest.
It was 2017, the year before they got married, when Ali and Josh Lupo took a serious look at their finances — and realized they owed more than $100,000 in student loans.
Courtesy of The FI Couple
Despite working long, hard hours in human services, the couple was still living paycheck-to-paycheck, unsure how they’d afford a wedding or pay off their staggering debt.
“So we started having that conversation of: ‘Is this what we want to do for the next 30 to 40 years, or do we want to start learning how to live differently?’ And that was where our mindset around money really started to evolve,” Josh tells Entrepreneur.
The Lupos began tracking their expenses and saw they spent most of their income on rent and car payments, followed by food and dining out. Their first plan of attack? Implementing a strict budget: No date nights, no Netflix subscription, etc.
But the extreme approach burned the couple out quickly, so they went back to the drawing board. They needed to find a creative way to reduce their largest expense: housing.
Self-education led them to a solution (Ali emphasizes how many online resources, podcasts and books on financial freedom exist). If the Lupos purchased a multi-family home with a low down payment, they could dramatically decrease their monthly payments by renting out the other unit.
So that’s exactly what they did.
In the years since then, the Lupos have continued their journey to financial independence. They manage numerous streams of active and passive income, including their work as personal-finance content creators running the educational platform “The FI Couple.”
If you’re ready to get your finances on track in 2023, read on for the Lupos’ step-by-step strategy.
Define what success looks like for you
The first step is the foundation for all the rest: Figure out your unique definition of success.
The couple suggests considering what your ideal day and life look like. In other words, be clear about how financial freedom will allow you to do more of the things that make you happy.
“Our life was ‘easier’ when our heads were in the sand, ignoring everything about our finances,” Ali says. “Our lives are more complicated and harder now because we’re more in tune with all of the responsibilities that come with this. But to have the power and autonomy over our time is worth all of it, so [you have to be] clear with your why.”
Build a community that can help you stay the course
The road to financial freedom can be a difficult one, but it’s even harder for those going it alone.
Finding a community geared towards financial wellness can make all the difference, according to the Lupos.
“Unfortunately, being financially savvy is not the norm,” Josh says, “and pursuing financial independence can get lonely because a lot of people aren’t necessarily living the same lifestyle. So whether it’s in person or online, having that community of like-minded people can be really inspiring.”
Know your numbers: income, expenses, assets and debts
Another critical move?Get thoroughly acquainted with the reality of your financial picture.
As of September 2022, consumer debt in the U.S. was at $16.5 trillion, according to Bankrate. But many Americans are unaware of how much they actually owe: A 2019 survey from U.S. News found that one in five Americans doesn’t know if they have credit card debt.
The Lupos stress the value of familiarizing yourself with all of your numbers.
“So literally outlining and understanding your income, expenses, assets and debts,” Ali explains, “and having a crystal clear understanding of your financial situation.”
Figure out how to lower expenses and increase your income
Next up, consider how you might save and earn more money — “the two biggest levers a person can pull,” Josh notes.
The couple acknowledges that increasing your income significantly can seem challenging at first, but the key is to get creative.
“We decided to focus on how we could radically lower our expenses to increase our savings,” Josh says, “and doing so helped us pay off all the debt and buy real estate.”
“If you’re able to increase your income and reduce your expenses, you’ll have more of a gap in between,” Ali adds, “and what you do with that gap is the key to becoming financially independent.”
Never underestimate your earning potential either.
“Coming from backgrounds in social work and human services that are historically lower-income opportunities, for a long time we identified ourselves as people [whose] value was a little bit lower and [thought] earning more just simply wasn’t in the cards,” Josh says. “In hindsight though, [the key is] getting around the right people and understanding different opportunity vehicles.”
Consider which strategy makes the most sense for your lifestyle
It’s not enough to brainstorm a solution and go all in — part of the secret is choosing an approach that aligns with your values and priorities.
As fundamental as real estate investment has been to the Lupos’ success, the couple recognizes that it’s not for everyone.
“The goal of financial independence is to have enough assets to pay for your overall cost of living,” Ali says. “So you have to [ask], What strategy makes sense for me? Do I want to invest in stocks? Do I want to invest in real estate? Do I want to be a business owner?“
“We talk to people all the time,” she continues. “They say, ‘I want to buy real estate.’ But then we talk to them, and I’m like, ‘It doesn’t really sound like you want real estate. Because real estate’s not that passive — and it’s a little more hands-on.’ You really have to think about which investing strategy makes sense for [your] life.”
Real estate isn’t always “passive”
Then again, neither are 40-50 hour weeks at a job
At least with real estate “hard” weeks are still only 2-3 hours of work
Maybe the most important thing to keep in mind, though? Don’t forget to enjoy the journey to financial freedom.
“When we first started out, it felt like a chore,” Ali says. “Through the process, we’ve learned that the journey to financial independence is more important than the destination and that it’s really important that whatever you do to get there is sustainable and you don’t sacrifice the quality of your life to achieve [your] goal. Because then once you get to the goal, what life do you have?”
This is the second straight week that the Standard & Poor’s 500 has lost 1.4%. It fell by 407 points, or 1.2%, on the Dow Jones industrial average to 32,796 points and by 1% on the Nasdaq composite.
Investors’ hopes for interest rate cuts next year were dashed as well when the Fed raised its forecast for how high interest rates will ultimately go.
Inflation, while down from its highest levels in decades, remains painfully high. As a result, the Fed has kept raising interest rates to slow economic growth to maintain its aggressive attack on prices. The danger, however, is that too much braking could send an already sluggish economy into recession.
The risk was highlighted by S&P Global. According to the report, inflation slowed business activity this month. Even with the sharp drop, inflation pressures have eased.
According to Fed forecasts, inflation will slow next year due to rising unemployment. Despite this, the Fed’s own projections show prices still rising at an unacceptable rate by year-end 2023, with inflation at 3.5%.
Why’s that concerning?
Inflation has been running at 3.7% or higher during every recession since 1960 except the pandemic-induced downturn of 2020. It was only in 1974 that inflation was higher than 2.7% when the recession ended.
While we don’t have a crystal ball to predict the future, it wouldn’t hurt to prepare for a possible downturn. And, one area to focus on is avoiding the following investing mistakes during a recession.
Immediately selling your holdings when they begin to fall.
When the economy is in recession, the stock market becomes highly volatile. As a result, you might be tempted to cut your losses when you see all your investments tank on the trading screen. However, when investments fail, you should not unload them.
Why? Well, here are three reasons why you should hold onto your investments.
If you sell during a downturn, you could lose money.
As a result of a market downturn, stock prices decline. The prices of investments were likely higher when the market was booming, so you likely paid more for them. In other words, if you sell during a downturn, you might end up losing money on your investments.
Remember that you will never lose money unless you sell, no matter what the market does. The only way to lock in your losses is to sell when prices are lower, even if your investments decrease in value. In short, a good way to avoid losing money is to hold onto your stocks until the price recovers.
There is no way to predict the market.
If you want to maximize your returns, you should buy stocks at their lowest prices when the market bottoms out, and sell when the market peaks. The strategy is called timing the market, and while it sounds smart, executing it successfully is extremely challenging.
There is no way that anyone can accurately predict what will happen in the stock market, not even the best investors. Even a small error in timing can result in a lot of losses in the stock market.
As an example, consider the 2020 market crash during the early stages of the COVID-19 pandemic. In just a few weeks, the S&P 500 lost more than one-third of its value. By selling your investments shortly after prices started to fall, you would have not only locked in your losses but also locked in higher profits. Also, you could have missed the near-immediate recovery of the market.
By timing the market, you might buy during high prices, sell during their lowest, and rebuy during high prices. When you hold onto your investments through the rough patches, though, you’re more likely to come out on top.
A healthy company should see its price rebound.
Stock markets are volatile, but companies with strong, healthy balance sheets have a better chance of bouncing back.
It is important to understand a company’s underlying business fundamentals in order to determine its strength. Asking the following questions can help you determine this:
In its industry, does it have a competitive advantage?
Are its leaders capable of making good business decisions during challenging times?
Is it financially healthy?
In the long run, your investments should rebound after periods of volatility if you invest in solid companies. In times of market turmoil, it’s best to hold onto your investments and ride out the storm.
Strictly limiting investing amid volatility.
While some investors sell when the market dips, others don’t invest at all. In fact, according to a recent survey from Allianz Life, 65% of investors keep “more money than they should” out of the stock market.
“We’re more fixated on what we could potentially lose on paper than what opportunities pass us by that we never capitalize upon,” said Josh Reidinger, CEO of Waverly Advisors in Birmingham, Alabama, which ranked No. 59 on the FA 100 list.
If you stay away from the stock market, you might miss out on some of the best returns. As a matter of fact, over the past 20 years, the top 10 performing days occurred after big stock market declines in 2008 and 2020, during the beginning of the Covid-19 pandemic, according to Morgan Asset Management.
“History does not repeat itself,” Reidinger said. “But it’s a pretty good indicator of where we are going.”
Buying stocks at their lowest points
Stocks might be at their absolute lowest when you’re investing during a period of economic instability. Again, it’s possible to miss out on some profitable opportunities if you try to time the market that way.
In a recession, it’s best to invest consistently at regular intervals. The only thing that matters is if that stock goes up in value eventually, not if you buy it at its lowest point.
A recession can present a number of challenges when it comes to investing. However, knowing what mistakes to avoid can save you from having to live with regrets in the future.
Not understanding what you are investing in.
During recessions, Pamela Capalad, a financial planner at Brunch & Budget, says investors are tempted to invest in new, trendy investments. “Avoid anything that you didn’t understand before the recession,” she says.
For instance, if you are unfamiliar with cryptocurrency and desperate to invest in it, now might be a bad time. Capalad says, “Ultimately, it goes back to: Do you understand what you’re investing in? Do you understand why you’re investing in crypto? Do you understand how crypto works?”
“Crypto was one of the first things to take a dive when there was any hint of recession because crypto is currently all speculation,” she adds. “It’s really easy to ride a trend, especially when it’s going up.”
Investing without diversification.
Putting all your eggs in one basket isn’t a good idea. In general, investing in only a handful of stocks can be risky. The risk is even higher during a recession. However, by diversifying your capital across several assets, you’ll be able to mitigate losses if one or a few of your bets don’t work.
In a recession, exchange-traded funds (ETFs) give you exposure to a diverse group of high-quality stocks through index-tracking ETFs, helping you avoid these mistakes.
There are 2 basic types of indexes:
A market index such as the S&P 500 is a measure of the overall market.
An index which tracks a much more targeted subset of the overall market, such as small-cap growth stocks or large-cap value stocks. A bond index, a commodity index, and a currency index are also available.
ETFs based on indexes seek to replicate the return of the market or subset of the market they aim to replicate, less their fees. The ETF market price will differ from the fund’s net asset value, so index ETFs do not track the underlying index perfectly.
Generally, indexes based on subsets of the market compete with broader indexes based on the entire market. A small-cap index, for example, is typically compared to a broader index on the entire market by investors.
Making investment decisions based on the market’s movements and constantly fretting over your portfolio’s value during a downturn is unlikely to be profitable. Continually checking indicates worry, which could lead to emotional decisions. You should check your portfolio once a week if you can. Occasionally, big down days follow big up days.
In addition, if you participate in a workplace retirement plan like a 401(k), you’re likely adopting the practice of dollar-cost averaging. In this method, investments (typically mutual funds) are consistently purchased over time. With this strategy, you buy fewer shares when prices are high and more shares when prices are low.
You listen to the “experts.”
There’s no way Mad Money, Squawk Box, and Closing Bell along with their panel of supposedly “expert” money managers are going to predict when this recession will end.
No offense. But, it’s all for entertainment.
You may think that I’m being too harsh here. However, lead author Nicola Gennaioli examined stock prices, dividends, and data over the past 35 years to compare them with recommendations made by market experts. In his study, his team found that investing in the 10 percent of stocks most recommended by experts yielded, on average, a three percent return. In contrast, investors who invested in the ten percent of stocks least recommended by experts earned 15 percent returns on average!
Not safeguarding your retirement.
“Building an investment plan is like formulating a diet plan – totally dependent on your goal,” writes Sanjay Sehgal in a previous Due article. “When you visit your dietician for instance, one of the first questions asked is about your goal – Do you want to lose weight, build muscle, or you wish to celebrate food?”
“But moderation, as any good dietician will tell you is the key; it’s only when everything you need is in your plate, in the right quantities, that you can achieve your goal, as well as enjoy each bite and every taste,” he adds. “A dietician’s plan begins from this understanding.
Consequently, we should plan our investments based on a post-pandemic financial horizon that will differ from anything we know. This now involves recession-proofing your retirement investments by following these steps:
Take care of your health. Occasionally, there are pandemics, recessions, depressions, or high inflation rates. As a result, during a crisis, you would have a better chance of thinking clearly, taking action, and even protecting yourself against other risks.
Have an emergency fund. An emergency fund should be equal to 6 months’ worth of income. In the event that you lose your job and unemployment is high, that is not going to save your life. But you will have some options and options for adjusting.
Live within your means. Adapt your living expenses to match your retirement income. By living within your means during the good times, you will be less likely to go into debt when gas prices go up and more able to adjust spending in other areas.
Stay in the market. There is always a risk associated with investing in the stock market. In exchange, you typically get higher returns over time than you would from savings accounts, fixed deposits, etc. Occasionally, the market dips, and your portfolio may suffer, but it will pass.
Invest for the long term. What if your investments drop 15% as a result of a drop in the market? You won’t lose anything if you don’t sell. You will have plenty of opportunities to sell high in the long run, since the market is cyclical. Buying during a down market may end up paying off later on.
Diversify your investments. Diversification reduces your portfolio’s market risk. Regardless of what the market does, diversification keeps a portfolio healthy. The market may fluctuate, but a portion of your portfolio may respond positively and offset some negative effects.
Cash is where you stay.
As a result of this mistake, panic selling is compounded. After a market downturn, stock prices often rebound strongly, showing how bailing out can cost you when the market turns around.
To be fair, holding cash makes sense if you have short-term spending needs or are building an emergency fund. When your long-term financial goals are decades away, it makes no sense to hold a large position in it as part of your investment portfolio.
It is advisable for investors who have excess cash because they sold during the market slide, or for any other reason, to close the gap and invest. It is possible to get back into the market gradually by buying set amounts of stock at regular intervals (say, monthly) using dollar-cost averaging. In many cases, dollar-cost averaging can make it easier for fearful investors to move out of cash, since they won’t have to worry about putting lots of money into the market, only to see it sell off again. As a result, if the market recovers, they will be glad they already put some of their money back to work rather than leaving all of it on the bench.
You don’t consult an investment professional before making a large investment.
As humans, we all make mistakes. And, occasionally, we make these mistakes because we all let our emotions get the best of us. In the end, though, you’ll get into trouble when you make decisions based on feelings rather than facts.
How can you keep things in perspective and make sure your investments are on track? Consult a professional for investment advice. When you have a pro on your side, you’re more likely to stay focused on your long-term goals and stay as cool as a cucumber.
FAQs
1. What is a recession?
After a period of growth, a recession is typically defined as two consecutive quarters of declining GDP (gross domestic product).
According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales.”
2. What causes recessions?
Many things have led to recessions in the past, but economic imbalances are typically the cause. For instance, the 2008 recession was caused by excess debt in the housing market. Unexpected shocks can also lead to job cuts, like the COVID-19 pandemic.
Economic growth, earnings and stock prices are all put under pressure when unemployment rises. An economy can be thrown into a vicious cycle by these factors. In the long run, recessions are necessary to clear out excesses before the next boom.
3. How does a recession affect the stock market?
Although recessions are hard to predict, it’s still smart to think about how they might affect your portfolio. Historically, bear markets (market declines of 20% or more) and recessions (economic declines) have often overlapped, with equity markets leading the economic cycle by 6 to 7 months on the way down and back up.
Even so, market timing moves can backfire, like moving an entire portfolio to cash. It’s often the late stages of an economic cycle or right after a market bottom that yield the best returns. In down markets, dollar cost averaging, where investors invest equal amounts at regular intervals, can help. Investors can buy more shares at lower prices while staying positioned for when the market recovers.
4. How long do recessions last?
Since 1854, the average recession has lasted 17 months, according to the NBER. Generally, recessions in the U.S. have lasted about 10 months since World War II, with recessions typically lasting much shorter. However, a recession can last much longer than that. For example, the Great Recession of 2007 – 2009 lasted 18 months. Conversely, it can last only a short time. The COVID-19 recession of 2020, for instance, lasted for only two months..
5. What should you do to prepare for a recession?
Before and during a recession, investors should remain calm. It’s especially true during times of economic and market stress that emotions can sabotage investment returns.
Although recessions can’t be predicted, it’s important to maintain a long-term mindset. Ensure your portfolio is designed to be balanced so that you can take advantage of growth periods before they happen while remaining resilient during volatile periods.
When starting a business, it’s sometimes hard to know what to prioritize, and going at it alone can be overwhelming. But there are strategies you can use to avoid common pitfalls.
My mission is to teach people how to earn money from their passions. It’s what I did: I went from living on food stamps to building two online businesses.
Many new business owners I meet know only one thing: how much money they want to make.
While that’s a great starting point, it’s incomplete. Your business should serve your life, not the other way around. So make sure it aligns with your hopes, dreams and goals.
To get clear about the type of business and life you want, ask three questions:
What does a perfect day look like to you? Don’t just think about your typical workday. Consider other life activities you want to fit into your day, like exercising or spending time with family.
How many hours do you want to work a week? You don’t have to follow the standard 40-hour workweek. Knowing exactly how many hours you want to work will help you better prioritize tasks.
How important is time off? Some people don’t care much about taking time off, as long as they love what they do. Others value extended time off. In order to have money flowing in when you’re not working, you’ll need to have some sort of passive income stream.
When I started my music education business, people told me I needed to test my sales pages, throw launch parties and pre-record a bunch of ads in order to grow.
Rather than stretching myself thin doing things that didn’t make sense to me, I kept it simple and focused on three things: creating weekly content for my blog and YouTube channel, growing my email list from that audience, and promoting the paid products I created to that list.
If you’re just starting out, develop content around your expertise to grow an audience. It doesn’t have to be perfect. You can iterate as you go and design new products based on what your customers want more of.
Identify what daily activities will help you earn more. Don’t waste time or burn yourself out focusing on unimportant tasks.
It might feel good to get to inbox zero or change the color of the buttons on your website, especially in the early days where you want to feel like you’ve achieved a goal. But neither of those things will make you money.
Before you start a new task, ask yourself three questions:
What’s the expected outcome for doing this task?
Does it lead to more money?
Can I point to a direct link between doing that task and earning income?
What’s the cost of doing this instead of something else?
People can tell if you’re just doing something for the money or if you actually love what you do. That authenticity will connect you deeper to your customers and it will sustain you for the long haul.
You don’t want to burn out because you spent all your time doing things that weren’t meaningful to you.
I always give my students this framework when they are beginning their entrepreneur journey: Build a business around something you see yourself doing and enjoying for the next 10 years.
I had always said I was going to retire when I was 50. I had worked and saved since I was 16. Retiring without Medicare and Social Security is a scary thing. I wound up retiring then going back to work. At 53, I took a part-time job with a decent salary for the hours but I was sooooo bored. And then life rang my bell.
I had major medical problems. So major that when I was able to return to work they let me go because they didn’t think I could keep up with the workflow. They were probably right. Nobody else felt comfortable enough with my health issues to hire me. I applied for disability but was denied. I appealed and got my rejection to the appeal while I was in ICU. I appealed again and I was denied because they didn’t think anything changed from my original application.
I am assuming you can imagine what my savings is now. I took early retirement, with the penalty, because I needed income. $4,000 a month wouldn’t have put a dent in my prescriptions.
Everybody needs to know there’s no such thing as a safe amount of money set aside for retirement. Life happens and in the blink of an eye your whole life and everything you worked for can be gone.
I normally only feature letters with questions for this column, but your note was just so important for other readers that I had to respond — and let others see what you’ve shared.
I’m so very sorry that you experienced this. Wanting to retire early isn’t inherently wrong — so many people wish to do it, especially after decades of working. But without the proper planning, it could lead to despair, especially if an emergency occurs.
“Retiring early is a dream for many people,” said Landon Tan, a certified financial planner. “But those years of not working diminish your chance of a successful retirement more than almost any other metric we toggle when making financial plans.”
Retiring early means there are more years you need to be able to financially cover, and that requires money — a lot of it. When planning to retire early, those extra years need to be considered — at the forefront of retirement, but also in the back end if you live longer than anticipated.
“Today’s retirees are expecting their accumulated assets to work for them for 10-20 years longer than before,” said Glenn Downing, a certified financial planner and founder of CameronDowning. “Centenarians are no longer uncommon. For that to happen successfully, there needs to be more assets — simple as that.” Anyone should prepare to live longer than expected so their money does not outlast them, which can feel daunting.
Those missing years may also affect your Social Security benefits, which so many elderly Americans rely on for most of their retirement income. People retiring early should have a clear picture of what to expect from Social Security in the future, and how their plans may impact those expectations.
Leaving the workforce also means possibly losing out on participating in a group health plan, and I think we can say with certainty the pandemic has shown just how crucial health insurance can be in dire times.
You’re absolutely right: Retiring before Medicare is scary. Healthcare is expensive even without an emergency. Not everyone considers this expense when they’re dreaming about calling it quits in their 50s, but if they don’t have proper insurance lined up when they retire they could be blowing through their retirement budget quickly — or putting themselves in a very dangerous situation. Those years can feel long when Medicare eligibility only begins at age 65 for most Americans. And it also doesn’t take into consideration long-term care, which is an entirely other expense. Think nursing homes, home health aides and necessary medical equipment for daily activities.
Knowing how much is enough to have saved for retirement is very difficult. There is no such thing as one “safe” number before you retire, but there are a few guidelines one can follow to find security in old age.
Part of that equation comes down to personal circumstance: how much you typically spent in your pre-retirement life, how much you anticipate spending in retirement, various financial factors like taxes and cost of housing and utilities, and so on. And as you have experienced — and considerately reminding others — major unexpected emergencies can absolutely derail any sort of financial security.
Another factor is what is available to you in your older years. I’ll get to that in a moment in hopes it may help you or others in similar situations.
Retirees tend to focus on short-term changes, which can cause them to be unprepared for what the future holds, a recent survey found. Many retirees just deal with these emergencies as they come, according to research from the Society of Actuaries. The organization found more than seven in 10 retirees have thought about how their lives will change in the following decades, but only 27% feel financially prepared for it.
More than half of the retirees in the survey said they could not afford more than $25,000 for an unexpected emergency without jeopardizing their retirement security. More than half of Black respondents and Latino respondents said they couldn’t afford to spend $10,000 for a financial shock.
“The world can change around you really quickly, and you need to be prepared for the change and to deal with change,” said Anna Rappaport, a member of the Society of Actuaries Research Institute’s Aging and Retirement Program. Americans didn’t often plan for the shocks life could bring before the pandemic, and that hasn’t necessarily changed since, she said. “The shocks were there before and the landscape just changed a little.”
Check out MarketWatch’s column “Retirement Hacks” for actionable pieces of advice for your own retirement savings journey
But you’re not alone. Many people have fallen into hard times before and during retirement, pandemic or no pandemic. You may already be exhausting all avenues, but this one retiree shared the steps he took when he lost his job at 58. He searched for another job for 18 months before taking one with a 40% pay cut, and had to live a lot leaner until he officially retired at age 64. That lifestyle included taking in a roommate, buying some household items at the dollar store and extreme meal planning. Here’s what he says about his retirement now.
If your medical condition allows, could you take on some part-time work, or find some ways to make money while working from home? Or could you possibly downsize where you live or take in a roommate?
I know you didn’t ask for any suggestions and I’m sure you’re already doing as much as you can to live comfortably, but there are plenty of resources you might want to consider if you haven’t already.
Have you explored any government benefits, such as assistance in costs for housing, heating or groceries? There are many federal and state programs available for seniors with needs for financial assistance — not just Supplemental Security Insurance and Medicaid, though of course those are the most prominently known.
AARP created a list of resources, broken up by state, and has its own services, such as helping people get back to work in their 50s and beyond. GoFundMe also has a list for financial assistance for older Americans. It includes options for housing, food, medicine and getting back into the workforce. States, and sometimes even individual cities, have departments and offices dedicated to aging issues, which you may want to try calling as well. There is help out there, even if it may not feel easy to find.
I wish you the best.
Readers: Do you have suggestions for this reader? Add them in the comments below.
The federal government will allow you to save nearly 10% more for retirement in 2023. But it’s not likely that many will take advantage of the tax break. The simple reason: Most people don’t make enough money to save more from their paychecks.
The average amount that participants contribute is 7.3% of their salary, according to Vanguard’s How America Saves 2022 report. At that rate, you’d have to make more than $300,000 to hit the $22,500 maximum amount an employee can save in a workplace plan for 2023, up from $20,500 in 2022. To put it another way, to save the max, you’d have to put aside $1,875 per month, or $865 per paycheck if you’re paid biweekly.
Only 14% of participants saved the maximum amount in 2020.
Few people will also likely take advantage of the increase in the catch-up contribution limit, which will allow those 50 and older to contribute an extra $7,500, up by $1,000 from 2022, for a total of $30,000. Vanguard’s report found that only 16% of those eligible participate, even though 98% of plans allow for catch-up contributions.
“The max numbers are very high. A lot of people don’t make that kind of money,” says Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College.
You might not need to max out
Not everyone needs that kind of money put away for retirement. The key is to save over time to eventually be able to replace your current income in the future, supplemented by Social Security. If you’re making $60,000 now, it wouldn’t make sense to try to save more than a third of your yearly income just because the government says you can.
“You don’t want to deprive yourself today or later on. You want to balance that over time, to be able to maintain the same standard of living in retirement,” says Chen.
The tried-and-true method to get people to contribute to retirement savings is a monetary incentive: matching funds. That “free money” on the table is at the base of every recommendation for how much workers should contribute. Give at least up to the match, everyone says. But almost all company retirement plans offer matching funds, and it hasn’t yet solved the retirement crisis facing most Americans who haven’t saved enough.
Trend in deferral rate changes
Vanguard 2022
If there’s a takeaway from the new IRS limits, it’s that pushing up the limits every year does help. Retirement contributions have been indexed for inflation since 2001 for good reason, because legislators recognized that the amount you need in the future is constantly going up.
Ten years ago, the maximum for 401(k) contributions was $17,000 and going back 30 years to 1992, it was $8,728. In today’s dollars, that certainly wouldn’t be enough.
At the same time, the government has to cap it somewhere to put a limit on tax deferral, so you can’t just shelter all your income from the IRS.
“These annual step-ups matter over time, because saving for retirement is a multidecade thing,” says David Stinnett, head of strategic retirement consulting for Vanguard.
His advice for those who can’t max out, particularly younger workers, is to at least contribute up to the company match and then automatically escalate your savings rate over time to something in the rage of 12% to 15%.
It can be helpful to think of the amounts in dollar terms, rather than percentages.
“By starting small and thinking of it as just ‘3 pennies per dollar’ earned and then adding ‘2 pennies per dollar’ each year going forward, you’ll get on track to those recommended savings rates in no time,” says Tom Armstrong, vice president of customer analytics and insight at Voya Financial.
Escalating over time does seem to move the needle, according to Vanguard’s study, at least if you look at the rate of people coming to the table. The voluntary participation rate was only 66%, but the participation rate for automatic enrollment was 93%.
“What that does is make it easy to save more,” says Stinnett.
Withdrawals from 401(k) accounts before age 59½ are subject to a 10% penalty and taxes. That means if you needed $15,000, you’d have to take out close to $24,000, after accounting for those charges, according to Fidelity.
Of course, any cash you pull from the account will also miss out on market gains. Stocks have produced an average annual return of more than 10% over the last 100 or so years.
All that “should combine to far outweigh the average credit card rate,” said Ted Rossman, a senior industry analyst at CreditCards.com.
There may be exceptions, however.
Stopping your 401(k) contributions for a while — or at least cutting back — and redirecting those funds to debt payoff might make sense.
Ted Rossman
industry analyst at CreditCards.com
For people over 59½ and in a low tax bracket, a 401(k) withdrawal to pay off credit card debt may make sense because they’d avoid the 10% penalty and not be subject to a huge levy, explains Allan Roth, a certified financial planner and the founder of Wealth Logic in Colorado Springs, Colorado.
“Certainly, the math can make it worth it,” Roth said.
For most others, though, there are more appealing options than a withdrawal, Rossman said.
The interest rate on 401(k) loans is typically less than 5%, far less than the annual charge on most credit cards. The interest paid on the loan also goes back into your savings rather than to a bank.
“Using a 401(k) loan to pay off high-interest debt, like credit cards, could reduce the amount you pay in interest to lenders,” said Jessica Macdonald, head of editorial content at Fidelity Institutional.
Other benefits to a 401(k) loan, Macdonald said, are that they don’t require a credit check and they don’t show up as debt on your credit report.
Brand X Pictures | Stockbyte | Getty Images
But there are other factors to consider here, as well.
For one, you’ll have to be able to repay the loan within five years. You could also face consequences if you leave your job and fail to pay the loan back. In such cases, your loan would be deemed in default, and you’d be hit with taxes and that 10% withdrawal penalty on whatever you still owe. And, again, your money will miss out on market returns.
Anyone considering turning to their 401(k) to address credit card balances would also be wise to think about the behavioral reasons why they got into the debt in the first place, some experts say.
“If one takes out money to pay off their credit card debt and then buys more to build the debt back up again, it backfired,” Roth said.
