We saw that just recently with a USA Today columnist who quantified exactly how much you need to save for retirement (his answer, via an analysis by T. Rowe Price: $82.28 a day). Lots of people didn’t like that the number was an estimate, an average, and that their own mileage may vary.
But many more people don’t have the patience, knowledge or energy to sort through all the potential factors for every financial decision. Sometimes, they just want an answer.
Over the next few days, I’m going to share the most helpful rules of thumb I know. They aren’t going to apply to everyone in all situations. But if you’re looking for guidelines (or guardrails), there are a starting point.
Let’s start with retirement:
Retirement comes first. You can’t get back lost company matches or lost tax breaks, and every $1 you fail to save now can cost you $10 to $20 in lost future retirement income. You may have other important goals, such as paying down debt or building an emergency fund, but you first need to get started with retirement savings.
Save 10% for basics, 15% for comfort, 20% to escape. If you start saving for retirement by your early 30s, 10% is a decent start and 15% should put you in good shape for a comfortable retirement (these numbers can include company matches). If you’re hoping for early retirement, though, you’ll want to boost that to at least 20%. Add 5-10% to each category for each decade you’ve delayed getting started.
Don’t touch your retirement funds until you’re retired. That pile of money can be tempting, and you can come up with all kinds of reasons why it makes sense to borrow against it or withdraw it. You’re just robbing your future self.
Keep it simple–and cheap. Don’t waste money trying to beat the market. Choosing index mutual funds or exchange-traded funds, which seek to match market benchmarks rather than exceed them, will give you the returns you need at low cost. And cost makes a huge difference. If you put aside $5,000 a year for 40 years, 1 percentage point difference in the fees you pay can result in $225,000 less for retirement.
Today’s top story: What you need to save every day for a comfortable retirement. Also in the news: The three tax buckets, the 10 commandments of savings, and four boring but essential money conversations.
$82 a Day Is the Average Savings for a Comfortable Retirement
$82.28 to be exact.
What Pre-Retirees Should Be Asking About Taxes
Introducing the three buckets.
The 10 Commandments of Saving Money
Thou shall follow these rules.
4 Boring Money Talks You Need to Have
Boring but necessary.
How to Find Financial Assistance for Your Down Payment
Don’t let your down payment hold you back.
Today’s top story: What to do if you made a mistake on your taxes. Also in the news: How to help a friend in financial trouble, money mistakes to avoid on your honeymoon, and what you need to take care of financially before your baby arrives.
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And without risking your friendship.
3 Money Mistakes to Avoid on Your Honeymoon
Don’t get started on the wrong foot.
6 Vital Money Tasks to Tackle Before Your Baby Arrives
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8 Things That Smart Parents Shouldn’t Buy for Their Kids
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How To Spot A 401(k) Rip-off
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6 Financially Freeing Tasks Not to ‘Pass Over’
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2 Legal Documents You Can’t Live Without
As a nation we’re not getting much better at managing our money. Efforts to change that by teaching money skills in schools haven’t done much to improve the situation. Follow-up studies on people who took financial literacy courses in school typically show the education has little effect. So the debate rages on about whether we should still try.
You won’t be surprised, given what I do, that I think it’s essential people educate themselves and their kids about money. So I’m looking forward to tomorrow’s Google Hangout with CFP Neal Frankle, who runs the Wealth Pilgrim site, where we’ll talk about financial literacy, including ways to get it and give it. The event is sponsored by Bankrate and AOL DailyFinance.
If you’d like to join us, our chat will stream live starting at 2 p.m. Eastern, 11 a.m. Pacific. Hope to see you there!
Update: If you missed the event, the link to our conversation can be found here, on the DailyFinance site.
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Dear Liz: I went with my brother to his credit union to refinance his house and found out his wife has about eight medical bills that went to collections and he owes a phone company more than $2,000. Their debt totals about $6,300. I could lend them the money or they could do a debt consolidation or talk to a credit counselor. What’s your opinion on these options?
Answer: None of these options is likely to work the way you hope.
Your brother should be wary of any “debt consolidation” offers he gets, as many will be scams and others will charge outrageous interest. The collections accounts have trashed the couple’s credit, which means mainstream lenders will probably avoid them until their situation improves.
The debt management plans offered by legitimate credit counseling agencies, meanwhile, are designed to help people pay off credit card bills, not past-due medical or phone bills. A credit counselor may give the couple some helpful budgeting advice to enable them to pay their debts, but it typically wouldn’t arrange payment plans.
Lending your brother the money would enable the couple to pay off the overdue bills. That won’t help their credit scores, however, unless your brother is able to persuade the collectors to remove the accounts from their credit reports. That’s often difficult to do, said debt collection expert Gerri Detweiler of Credit.com.
Your brother could start by asking the medical providers to take back any accounts that have been assigned to collectors and making payment arrangements directly with those providers. Medical collections are often on consignment and can be called back if the provider wishes.
The phone account, by contrast, was probably sold to a collection agency and can’t be reassigned to the original company. Even if your brother can’t get the account deleted from credit reports, he’ll probably need to pay or settle it if he hopes to refinance his mortgage because lenders usually don’t like to see open collection accounts.
Before you lend him the money, you should understand that loans to people with debt problems often don’t get repaid. If you can’t afford to lose this money, don’t lend it.
Today’s top story: What parents and students need to know about financial aid. Also in the news: Using your smartphone or tablet to clean up your finances, tax tips for procrastinators, and what to do when your teenager has become a financial disaster.
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Health care expenses will eat up a significant part of your retirement savings.