Money Management

Some retirement plans force you to take withdrawals. Read on to see how the rules work. 

The whole purpose of saving for retirement is to have money to tap once your career comes to an end. So for some savers, the idea of being forced to take distributions from an IRA or 401(k) isn’t so problematic, since that was the plan from the start.

But required minimum distributions, or RMDs, can be a problem in some situations. It’s important to know how RMDs work, which retirement plans they apply to, and how to avoid them.

What are RMDs?

An RMD is a withdrawal you must take from a tax-advantaged retirement plan at a certain age. RMDs are calculated based on your savings balance and life expectancy tables. As such, they’re not set in stone, but rather, can change from one year to the next.

When do RMDs start?

The rules of RMDs have evolved over time. It used to be that they began at age 70 ½, but then they were pushed back to 72.

However, starting this year, RMDs don’t begin until age 73. And beginning in 2033, they won’t kick in until age 75.

What this means is that many retirees do not have to take RMDs right away. If you wrap up your career at age 67 this year, you won’t have to start tapping your retirement savings for another six years if you don’t want to.

Why are RMDs a problem?

For some seniors, they aren’t. Many people need to live off their savings once their careers come to an end.

Remember, Social Security benefits generally only replace about 40% of a typical earner’s pre-retirement wages. Most seniors don’t want an instant 60% pay cut, so they commonly turn to their savings for extra income.

However, not everyone needs to tap their retirement plan at age 73. Perhaps you retired at 67 but maintained a side business that’s been generating enough income for you to live on. If you’re forced to take an RMD, that withdrawal counts as income — taxable income. And it’s frustrating to pay taxes on money you don’t actually want or need.

But while a tax bill for an RMD can be costly, it can be even more expensive to not take an RMD when you’re supposed to. Failing to take an RMD could leave you on the hook for a 25% penalty. So if you’re supposed to take an RMD of $10,000 and you don’t remove that money from your retirement account, you could lose $2,500 off the bat.

It’s worth noting that the penalty for failing to take RMDs used to be 50%, so 25% is a less harsh blow. But it’s one you’ll probably want to avoid.

That said, in some cases, you might only face a 10% penalty for failing to take an RMD. If you take a missed RMD by the end of the second year after the year it was initially due, you can whittle your penalty down to 10%. So if you don’t take your 2023 RMD on time but take it before the end of 2025, you might end up with that lower penalty.

Still, a 10% penalty isn’t exactly great. That’s the same penalty you’ll face by tapping an IRA or 401(k) plan prior to age 59 ½. So it’s generally best to take your RMDs when you’re supposed to.

How to avoid RMDs

If you don’t like the idea of being forced to take money out of your retirement savings, then you may want to house your nest egg in a Roth IRA or Roth 401(k). Roth IRAs don’t impose RMDs now. And starting next year, neither will Roth 401(k)s.

But traditional IRAs and 401(k)s do impose RMDs. So if you’re saving in one of these accounts, know that you’ll eventually be forced to remove that money.

And if you’re wondering why that’s the case, it’s because the IRS does not want these tax-advantaged retirement accounts to serve as a means of passing on generational wealth. Remember, the money you have in a traditional IRA or 401(k) gets to continue benefiting from tax-advantaged growth while you’re in retirement. The IRS is only willing to let you do that for so long.

Now to be fair, with a Roth IRA or Roth 401(k), you’re also getting tax-free gains in your account during retirement. The difference is that you didn’t get a tax break on your contributions, whereas with a traditional IRA or 401(k), you did.

All told, RMDs are important to keep track of so you don’t end up losing a portion of your hard-earned savings to IRS penalties. If you’d rather set yourself up to avoid RMDs altogether, consider housing your savings in a Roth IRA or Roth 401(k) to begin with.

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Don’t want your wedding to drive you into debt? Read on to see how to pull off a wedding on the cheap. 

You deserve a wedding that’s magical and special. But pulling that off without landing in credit card debt is easier said than done.

The average wedding thrown in 2022 cost a whopping $30,000, reports The Knot. And if you happen to have that much money sitting in your savings account and you want to spend it on a wedding, go for it.

But if you don’t have anywhere close to $30,000 sitting around, then you may want to do what you can to pull off a wedding at a much lower price point. And while that might seem impossible, it really can be done if you’re willing to make some compromises. Here’s how you can throw a fabulous wedding for just $5,000.

1. Don’t invite everyone you know

In 2022, the average wedding had 117 guests, says The Knot. But if you’re able to keep your guest list to a few dozen important people, you can lower your costs significantly.

Of course, making a small guest list isn’t easy. But start with immediate family and then move on to extended family like aunts and uncles you’re close with. From there, think about your closest and dearest friends — the ones you’ve known the longest or see regularly. You may not want to bump your old college roommate, but it may be okay to bump a nice colleague you’ve only started having lunch with recently.

Also, if you’re truly looking to conserve costs, don’t invite single guests with a plus-one. It may seem unkind, but if you follow up with a personalized note explaining that you’re really on a budget, chances are, they’ll understand.

2. Skip the expensive venue

You may have dreamed of getting married at a country club overlooking the water. But if that venue charges $125 a head, you’re going to have a hard time sticking to your budget.

Instead, find a venue that’s more reasonably priced — perhaps one that you can add your own personal touch to. There may be a restaurant or brewery in town you can rent out. If you and your soon-to-spouse love movies, you could decorate that space with posters of your favorite films for ambiance. Or if you’re big sports fans, you could put paraphernalia from your favorite teams all around.

3. Ask your friends for help

You don’t want your wedding to be a snooze fest. It’s natural to want entertainment in the form of music and dancing. But that doesn’t mean you have to pay for a DJ.

The average cost there is $1,500, says The Knot, while a live band costs $3,900 on average. If you have a friend with an extensive music collection, ask them to play DJ for the night. And if you have close friends in a band, ask if they’d consider playing at your event as their gift to you.

You can similarly outsource photography if you have a friend who’s great behind the lens. That could save you $2,600, which is the average cost of a photographer today.

Similarly, if you have a friend who’s great with cosmetics and a hairbrush, ask them to style you and do your wedding makeup. That could save you a cool $250 based on today’s prices.

Sacrifices that are worth making

It’s definitely not easy to throw a wedding for $5,000. And you will have to give up certain things to make that happen. But think about what you stand to gain.

Not starting off a marriage with debt could remove one major layer of stress. And any money you don’t spend on your wedding is money you can use for other things, like starting a college fund for your future kids or making a down payment on a house.

So rather than focus on the things you’re not getting for your wedding, think about the many things your saved money might buy you. That might help you embrace the idea of a budget wedding rather than resent it.

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California’s home insurance reforms will likely mean higher rates. Find out why this is actually a good thing for homeowners in the state. 

The cost of home insurance in many U.S. states has shot up dramatically in recent years. A combination of inflation and unprecedented numbers of climate related disasters have had a significant impact on premiums. Moreover, in some states, insurers have pulled out altogether, leaving thousands of households with extremely limited coverage options.

We’ve seen this playing out in California, which faces an increasingly heavy toll from wildfires. The state regulates the rate at which insurance companies can hike insurance premiums through a regulation called Proposition 103. The rule was designed to protect consumers, but it’s had the opposite effect. It’s caused insurers to withdraw coverage and deem many homes “uninsurable.”

California has one of the lowest average homeowners insurance rates in the U.S. in spite of the elevated risk of wildfire. The problem is that insurance companies say they can’t charge enough to cover the risk. It is a nightmare for California homeowners — or potential homeowners. Not least because most mortgage lenders require borrowers to have home insurance. This is why the state’s sweeping home insurance reforms are good news, even though they’ll likely result in higher premiums.

Heavy risk of wildfire

A recent report from First Street Foundation had some scary predictions about wildfire damage in California and the rest of the U.S. It said, “Recent disaster data shows that since 2009 there has also been a 270% increase in the cost of wildfires and a 335% increase in the number of structures destroyed by wildfires.”

Not only is the risk of wildfire increasing, says the report, but the fires are also more likely to damage property — in part because more homes are being built in wildfire-prone areas. For homeowners, that either means higher premiums or a cancellation of their policy. The First Street data shows nearly 5 million properties in the western U.S. are at risk of higher insurance rates or non-renewals.

One of the most at-risk areas highlighted is Riverdale, California. An expected 1,612 structures will be destroyed by wildfires this year. Jump forward to 2053, and the researchers believe this number will increase by 45% to 2,336. It predicts the average annual cost of those losses in Riverdale alone will reach almost $1.5 billion in 30 years’ time.

As a homeowner, wherever you live, increased climate risks mean you can expect to pay more for insurance in the coming years. Insurify predicts that average home insurance premiums will rise 9% in 2023. If you are paying $2,500 a year now, that could rise to $2,725 — or more if you live in a high risk part of the country.

California’s insurance crisis

Last week’s announcement from California’s Insurance Commissioner Ricardo Lara comes after several years of wrangling between local politicians and insurance companies. In May, State Farm — the country’s largest home insurance company — said it would stop issuing new policies in California. AIG had already made a similar move in January, and Allstate followed suit in June.

Unlike utility companies, insurers are under no obligation to provide coverage. When big insurance companies pull out of an area, it pushes homeowners to the insurance of last resort. In this case, that’s California’s FAIR (Fair Access to Insurance Requirements) plan. The difficulty with this is that it is expensive and overstretched. Plus, consumers can’t shop around for the best price and FAIR coverage — designed to be a temporary solution — can be limited.

Phil Irwin, a FAIR representative, told KCRA that average annual premiums were around $3,200. In contrast, The Ascent research puts the average annual cost of home insurance in California at $1,252. That’s a significant extra weight on people’s budgets. More worrying? The First Street report says the number of non-renewals in parts of California increased by 800% between 2015 and 2021.

How California’s home insurance reform will impact consumers

If you live in California and are struggling to find affordable home insurance, the reforms should help. On the one hand, it will almost certainly mean insurers can charge higher premiums. On the other, it means top insurers will return to areas with higher wildfire risk, reducing people’s reliance on the FAIR plan.

Rate shopping is a key way to lower your insurance costs, but you can’t shop around if no companies will insure you. The re-entry of top insurers also opens the potential to bundle your auto and home insurance. This can help you to swing a discount of as much as 25%. (At least, that’s what Allstate promises on its website.)

Another way to reduce your costs? California’s reforms require insurance companies to lower rates if homeowners take steps to protect their property against wildfire. You’ll be able to get a wildfire risk score, which you can improve by joining fire reduction community programs or making your property more fire resilient.

Bottom line

There are no easy answers when it comes to climate change and home insurance. Whatever part of the country you live in, there’s a good chance your premiums will increase in the coming years. Unfortunately, that’s the least worst option: Paying higher rates is better than not being able to insure your property at all.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Rental prices are rising faster in the suburbs compared to metro areas. Find out why prices are increasing. 

For years, Americans consistently flocked to downtowns, eager to take advantage of the walkability, nightlife, and activities offered in more urban locations. That all changed during the pandemic, though, as many white-collar jobs went remote and workers looked for more space.

But what began as a pandemic trend has become a much bigger shift in America’s housing preference, causing suburban rents to soar.

The latest data from Apartment List, as reported by The Wall Street Journal, shows that between March 2020 (when the World Health Organization officially declared COVID-19 a pandemic) to July 2023, suburban rent prices spiked 25.8% compared to urban rent price increases of 17.8%.

The ‘burbs are bustling

While there are still a few cities where rent growth in urban areas is outpacing the suburbs — including Tampa and New York City — Apartment List’s research shows that in 28 out of 33 metro areas, the suburbs are experiencing the most significant rent increases.

The Atlanta area is a good example of how pricey the suburbs are becoming. Median rent in July 2023 was $1,529 in Atlanta’s urban core, compared to a median price of $1,677 in Sandy Springs, a suburb of the city.

Not only has the influx of people moving to suburbs caused rents to increase quickly, but higher house prices and soaring mortgage rates have kept people in rentals rather than buying homes.

A National Association of Homebuilders report from the spring showed 96.5 million households — about 73% of U.S. households — couldn’t afford a median-priced home of $425,768. Home prices have come down only slightly since then, to $416,100, but it hasn’t been enough. Housing affordability is still at its worst in 40 years.

How to help bring your rental costs down

A recent Harvard report showed that 21.6 million households spend more than 30% of their pre-tax income on rent. And with rental prices elevated, you may need to make some changes to help keep your personal finances on track. Here are a few suggestions:

Consider a roommate: This is probably one of the best ways to deal with high rent costs. U.S. Census Bureau data shows that more than one-quarter of households have just one person. If you have the space, taking on a roommate could help you cut your rent costs in half.Negotiate your rent: I’ve rented homes where I negotiated the monthly rent down or asked for a month-to-month lease rather than a year-long commitment. There’s no guarantee you’ll get what you want, but if you’re reasonable with your request and have a good rental record, you may be able to lower your monthly costs or get more favorable rental terms.Evaluate your needs: It can be hard to do, but it may be worth asking yourself whether you need to live in the area you want to live in or if you need all the space you have. Maybe you’ve already made a lot of sacrifices and can’t compromise any further. But with luxury rental construction spiking over the past few years, some renters may be in apartments that are just a bit too nice and too pricey.

The good news is that there may be some rental relief on the way soon. Apartment vacancies have increased for the past 22 consecutive months, Apartment List says. When vacancies increase, rental companies typically lower prices to spur more demand. Last month, apartment vacancies reached 6.4%, higher than pre-pandemic levels.

While that may not help your situation right now, more vacancies could help lower rental costs soon. Like any other financial decision, it’s worth taking some time to evaluate what you’re currently doing and see if there are any changes you can make to improve your current financial situation.

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It’s best to avoid taking on new debt until your mortgage closes. Read on to see why. 

You may be looking at several different expenses when buying a home. Not only is there your mortgage, but you may need to apply for a personal loan to finance your furniture purchases so you can function in the home you’re buying.

There’s nothing wrong with applying for a personal loan, or another type of loan, to furnish or improve your home after you close on your mortgage — provided you can afford those additional loan payments, of course. But it’s a good idea to hold off on applying for a new loan while you’re in the process of closing on your mortgage for a few big reasons.

You don’t want to compromise your mortgage

Experian says that opening a line of credit or signing a loan during the mortgage application process could cause mortgage lenders to view you as a riskier borrower. From there, a couple of things can happen.

Your mortgage closing could get delayed as your lender delves deeper into your finances to make sure it’s not taking on too much risk. Or, it might pull your mortgage offer after determining that your new loan application does, indeed, make you too risky a candidate.

Plus, any time you apply for a new loan, it results in a hard inquiry on your credit report. In many cases, this will only result in a modest dip in your credit score. However, it takes a minimum credit score of 620 to qualify for a conventional mortgage.

If you’re starting out with a credit score of 625 and your score drops by 10 points following a loan application, that could put you below the threshold of being able to qualify for a conventional home loan. The result? Bye bye, mortgage.

But let’s say you’re still able to finalize your mortgage despite a credit score drop. What might happen instead is that you get stuck with a less favorable rate on your mortgage due to that credit score dip. The result? More expensive monthly payments.

It’s best to wait

It’s easy to see why you might feel compelled to sign a loan while you’re in the process of closing on a mortgage. Maybe you want to order furniture for your new place before you’re ready to move in, not after. Or maybe you want to put a loan in place so you’re able to tackle renovations right away.

But you should know that applying for a loan before your mortgage closes could put that home loan at risk. So it’s best to wait until after you’ve closed on your mortgage to apply for financing.

Once you have the keys to your home in hand and your mortgage loan has been finalized, you’ll still need to be careful about taking on new expenses. After all, you’re now paying a mortgage on top of the bills you had before buying a home. Borrowing elsewhere could mean running the risk of not being able to keep up with your various payments.

But if your mortgage has closed, a new loan application shortly thereafter won’t compromise it, because that home loan will already be in place. So from there, you’re free to borrow as you want to, provided you’ve run the numbers and are absolutely certain you can afford to keep up with a mortgage plus another loan payment (or more).

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It can be hard to cover costs after you’re finished with your career. Learn whether a reverse mortgage can make retirement possible. 

A lot of people look forward to someday stepping away from the hassles of the working world and getting to retire. However, being able to actually end your career relies upon having the money to cover your expenses in the absence of a job. AARP notes that you’ll need to replace about 80% of your pre-retirement income in order to live comfortably, and depending on your hopes and dreams for your retirement, you might want the flexibility to spend more money on travel and crossing items off your bucket list. And this is where some people run into trouble.

If you haven’t been able to sock money away in a brokerage account to invest and grow it over your career, you might be lacking the savings to comfortably retire. Social Security payments will not match your old salary, and if you’re a long way off from retiring, how much they cover could change over time. For some people, a reverse mortgage looks like an attractive option. But what is a reverse mortgage, and are they worth considering?

What is a reverse mortgage?

You’re probably familiar with the concept of a mortgage loan. You stretch out the cost of buying a home over many years (15- and 30-year mortgage terms are common) in exchange for being charged interest on the loan by your mortgage lender. As you make your payments, you build up more and more home equity, until eventually, you’ve paid the loan off entirely and the home is yours outright. Along the way, you can also borrow against your home equity in the form of additional mortgages, home equity loans, and home equity lines of credit (HELOCs).

A reverse mortgage is another way of borrowing against your home equity, but the loan is repaid when you no longer live in the home. Interest and fees are added over time to the amount you borrow, and eventually, you’ll have to pay the money back (along with these extra costs) by selling the home (or if you’ve passed on, your heirs will handle this). You can receive the money as a lump sum, in monthly installments, or as a line of credit you can draw from as needed.

The most common type is called a HECM (or home equity conversion mortgage), and you must be 62 or older to qualify. There are other conditions to meet — the home must be your primary residence, you must keep up with maintenance and property taxes, and you must not have any outstanding federal debt, like unpaid income taxes.

Is it a good idea to do this?

Like so many aspects of personal finance, deciding whether to get a reverse mortgage to help you pay for retirement is just that: personal. So I can’t answer this question for you! But here’s a look at the upsides and downsides of taking out a reverse mortgage.

Pros

If you’ve spent years building home equity, getting to access it to cover your living costs in retirement can certainly be a good thing. And you don’t even have to move out, you can remain in the home you love and it’ll stay in your name.

The payments you receive from your reverse mortgage aren’t taxable, so that can improve your bottom line at a time of life when money can be tight. And reverse mortgages are a type of non-recourse loan, which means they are backed by the value of the home itself, rather than any other assets, so the amount due can never be more than your home is worth.

Cons

A reverse mortgage is not free, and there’s no guarantee that you’ll qualify. You’ll have to meet the conditions noted above as well as others (for example, if you own a co-op, your home might not be eligible). And you’ll have to pay closing costs, just like with a traditional mortgage. Those fees will eat into the money you’d get from your home equity.

And eventually, your reverse mortgage must be paid off. Perhaps it’s your intention to leave the home to your heirs when you die, and have them handle selling it to pay off the loan (or paying it off otherwise). If not, it’ll be on you to sell your home and move. And if you pass away before your spouse, they may or may not be able to remain in the home.

Finally, reverse mortgage scams abound, so you’ll need to do your due diligence if you’re considering going this route.

If things are looking a little tight in your retirement budget, and you have a lot of home equity, a reverse mortgage could be just the ticket for you. But consider the pros and cons, and speak with a HUD counselor if you’re intending to go with a HECM (which is backed by HUD). You deserve the most stress-free retirement you can get, and this includes finding ways to cover your costs.

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