Income can peak before you’re ready

Most retirement calculators are optimistic to a fault. They assume our incomes will rise throughout our working lives, or at least stay roughly the same.

In reality, our incomes are likely to peak years — and sometimes decades — before we retire. In my latest for the Associated Press, why saving early for retirement is crucial.

Friday’s need-to-know money news

Today’s top story: Are you robbing your parents’ retirement. Also in the news: When is your credit score high enough, when a cash back card is better than travel rewards, and how to pay for your pet’s healthcare.

Are You Robbing Your Parents’ Retirement?
Parents helping their adult kids at the expense of their future.

When Is Your Credit Score High Enough?
Your credit health matters.

It’s OK If Travel Rewards Cards Aren’t for You
A cash back card could be better.

How to Pay for Your Pet’s Healthcare
Taking care of your furkids.

Wednesday’s need-to-know money news

Today’s top story: How income-based student loan repayment is calculated. Also in the news: The ideal debt-to-income ratio for student loan refinancing, why you might be eligible for a TurboTax refund, and how adult children are eating into their parents’ retirement savings.

How Is Income-Based Repayment Calculated?
Determining your monthly student loan payment.

Debt-to-Income Ratio for Student Loan Refinancing
Below 50% is the target.

You Might Be Eligible for a TurboTax Refund
If you paid to file, read this.

Adult children are eating into parents’ retirement savings: Study
Putting retirement on the back burner.

Friday’s need-to-know money news

Today’s top story: Why you should ask your parents about their financial plans. Also in the news: Why you no longer need a chip-and-PIN card overseas, earning and burning your airline rewards to maximize free flights, and 1 in 4 millennials raiding 401(k)s early to pay down debt.

Yes, You Should Ask Your Parents About Their Financial Plans
Life moves fast.

Do You Need a Chip-and-PIN Card? Probably Not Anymore
“Chip-and-signature” becoming widely accepted overseas.

‘Earn and Burn’ Your Airline Rewards to Maximize Free Flights
Use your miles as soon as possible.

Yikes: 1 in 4 millennials raiding 401(k)s early to pay down debt
Risking retirement.

Q&A: Nearing retirement and in debt? Now isn’t the time to tap retirement savings

Dear Liz: I’m 60 and owe about $12,000 on a home equity line of credit at a variable interest rate now at 7%. I won’t start paying that down until my other, lower-interest balances are paid off in about two years. I have about $130,000, or about 20%, of my qualified savings sitting in cash right now as a hedge against a falling stock market. Should I use some of that money to pay off the HELOC? I know I would pay tax on what I pull out of savings, but I’m not sure what the driving determinant is: the tax rate now while I’m working versus tax rate later after retirement? I don’t think there’s going to be a 7% difference in that calculus but please provide your recommendation.

Answer: There are enough moving parts to this situation, and you’re close enough to retirement, that you really should hire a fee-only financial planner.

Getting a second opinion is especially important when you’re five to 10 years from retirement because the decisions you make from this point on may be irreversible and have a lifelong effect on your ability to live comfortably.

In general, it’s best to pay off debt out of your current income rather than tapping retirement savings to do so. You’re old enough to avoid the 10% federal penalty on premature withdrawal, but the decision involves more than just tax rates. Many people who tap retirement savings haven’t addressed what caused them to incur debt in the first place and wind up with more debt, and less savings, a few years down the road.

That might not describe you, as you seem to be on track paying off other debt. But it’s usually best to tackle the highest-rate debts first, which you don’t seem to be doing. It’s also not clear if you’re saving enough for retirement. That will depend in large part on when you plan to retire, when you plan to claim Social Security, how much your benefit will be and how much you plan to spend.

A fee-only financial planner could review your circumstances and give you the personalized advice you need to feel confident you’re making the right choices. You can get referrals from a number of sources, including the National Assn. of Personal Financial Advisors, Garrett Planning Network and XY Planning Network.

Wednesday’s need-to-know money news

Today’s top story: 6 things your side gig will probably do to your taxes. Also in the news: How banking apps can motivate you to save, contributing to your IRA by April 15th could lower your 2018 tax bill, and social media is making Valentine’s Day super expensive for millennials.

6 Things That Side Gig Will Probably Do to Your Taxes

How Banking Apps Can Motivate You to Save

Contributing to Your IRA by April 15 Could Lower Your 2018 Tax Bill

Social media is making Valentine’s Day super expensive for millennials

Tuesday’s need-to-know money news

Today’s top story: Could you live on your retirement savings for 23 years? Also in the news: How a new pilot manages $116,000+ in loans, what your tax refund will look like this year, and the top 10 colleges for financial aid.

Could You Live on Your Retirement Savings for 23 Years?
How long will your money last?

Debt Diary: How a New Pilot Manages $116,000+ in Loans
A payoff strategy.

What Your Tax Refund Will Look Like This Year
It might not be as much as you think.

The top 10 colleges for financial aid
Some colleges are quite generous.

Thursday’s need-to-know money news

Today’s top story: The average 401(k) balance by age. Also in the news: Taking the next step with your student loans, 3 money tasks to do right now, and what to do with all the tax documents you’re receiving.

The Average 401(k) Balance by Age
How do you match up?

Take the Next Step With Your Student Loans in 2019
Setting small goals.

3 Money Tasks You Need to Do Right Now
Starting the year off right.

What to Do With All the Tax Documents You’re Getting Right Now
What to keep and what to toss.

Q&A: Is it smarter to save for retirement or pay off debt first?

Dear Liz: I graduated from college in May and began a full-time job in October making $36,000. I also do freelance work and receive anywhere from $500 to $1,000 a month from that. I live at home, so I don’t have to pay for rent or groceries, which really helps. Currently, I have just over $18,800 in student loans at an average interest rate of 4.45%. I have also opened a Roth IRA.

My plan currently is to contribute $500 a month to my IRA in order to max it out, and pay $700 a month to my student loans in order to get them out of the way quickly. Or is it better to skip the Roth and put that extra $500 toward my student loans? That way, I would be debt free when I move out of my parents’ house next year. The stock market has done nothing but fall since I opened my account, and I am reading that it could do the same this year as well. But I have also read that it’s good to just keep consistently contributing to an IRA when your debt isn’t high-interest to reap the rewards of compounded returns.

Answer: It’s generally a good idea to start the habit of saving for retirement early and not stop. What the market is doing now doesn’t really matter. It’s what the market does over the next four or five decades that you should care about, and history shows that stocks outperform every other investment class over time.

The $6,000 you contribute this year could grow to about $100,000 by the time you’re in your 60s, if you manage an average annual return of around 7%. (The stock market’s long-term average is closer to 8%.) And Roth IRAs are a pretty great way to invest, because withdrawals are tax-free in retirement.

That said, your other option isn’t a bad idea either. You are not proposing to put off retirement savings for years while you pay off relatively low-rate debt, which clearly would be a bad idea. Instead, what you’re losing is the opportunity to fund a Roth for one year. That’s an opportunity you can’t get back — but you could fully fund the Roth next year, and perhaps use some of your freelance money to fund a SEP IRA or solo 401(k) as well.

Either way, you should be fine.

Q&A: Why do 401(k) and IRA contributions have such different rules?

Dear Liz: Can you please explain to me why the IRS allows an employee in a workplace 401(k) to contribute $19,000 but a wage earner without a 401(k) can contribute only $6,000 to an IRA? This seems grossly unfair. Why does one group get to save three times as much for retirement?

Answer: Congress works in mysterious ways, and this is far from the only weird byproduct of tax law.

The 401(k) and the IRA were created through different mechanisms.

The 401(k)’s birth was almost accidental. Benefits consultant Ted Benna created the first 401(k) savings plan in 1981, using a creative interpretation of a section of IRS code. Benna crafted the plan to provide an alternative to cash bonuses, not to replace traditional pensions — although that’s what it ended up doing.

IRAs, by contrast, were created deliberately by Congress in 1974 to provide a way for people to save independent of their employers.

Raising the IRA limit would be costly to the budget, while decreasing 401(k) limits would be unpopular, since so many people rely on them for the bulk of their retirement savings.

You aren’t, however, limited to saving only $6,000 annually for retirement. You can always save more in a taxable account. You wouldn’t get the tax deduction for contributions, but your investments can qualify for favorable long-term capital gains treatment if you hold them for at least one year.