Money Management

Want to retire early with a seven-figure nest egg? Keep reading to discover your playbook for accomplishing just that. 

The short answer is that it’s entirely possible to retire at age 50 with $1 million in savings. But the question of whether it’s possible for you might be another matter.

One of the most important concepts to learn about retirement planning is that it isn’t just about how much money you have in the bank — it’s how much income you’ll have to fund your lifestyle. And as an early retiree, you have the disadvantage that you can’t rely on Social Security, so unless you have any pensions, your income is going to come exclusively from your savings.

Most retirement planners use the 4% rule of retirement, which basically says you can withdraw as much as 4% from your savings in your first year of retirement and adjust it upward in subsequent years for cost-of-living increases, without much fear of running out of money. To be clear, this assumes your savings are invested in an age-appropriate portfolio, not simply sitting in cash in a savings account.

So, if you have $1 million to your name, the 4% rule says you can take out $40,000 per year in retirement. Now, you may be able to adjust this upward a little to account for the fact that you’ll eventually get Social Security, but I wouldn’t suggest going too much higher.

Can you comfortably and happily live on this level of income? If the answer is yes, retirement at 50 could be practical for you.

What do you need to do to retire at 50 with $1 million?

Once you’ve answered whether you’d be able to retire at age 50 with $1 million, the other big question is how you’re going to get to $1 million.

Of course, investment performance isn’t linear, but over the long run, an age-appropriate portfolio of stock- and bond-based investments should return somewhere in the neighborhood of 7% annualized returns over the long run. Using this return, here’s how much you’d need to save and invest each year in your brokerage account or retirement plan to reach $1 million by age 50 if you’re starting at certain ages.

The most important takeaway: The sooner you start, the easier it will be.

Now, this assumes you’re starting from zero, so if you already have retirement savings, you have a head start. But you can still use this as a guideline to determine how much you should be saving to reach $1 million by age 50.

Other questions you need to answer

As a final thought, keep in mind that this discussion has centered around the money you’ll have to live on to support your retirement, but other questions remain before you decide if early retirement is right for you. For example, what are you going to do about healthcare? Unless you’re one of the few lucky people whose job allows you to stay enrolled in their health plan after early retirement, you’ll need a plan for this – after all, you won’t be eligible for Medicare until you turn 65.

There’s also the question of what you will do after retiring at 50. Do you plan to live in an RV and travel around the U.S.? Spend your days volunteering your time for things you believe in? Whatever you do, have a plan. One study found that the average retiree is bored within one year of retirement, and if you retire at 50, you’ll hopefully have many years to fill.

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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.Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. Matthew Frankel, CFP® has no position in any of the stocks mentioned. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.

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Most financial planners recommend saving three to six months of expenses for emergencies. Find out why retirees should save even more. 

Most financial experts and planners agree that keeping a three- to six-month emergency fund is sound advice. Keeping a hefty pile of cash in a savings account can put some ground beneath you when you need it most, especially when you lose a job, a spouse, or encounter a medical or life-saving emergency.

But what about retirees? Do you need an emergency fund when you retire? After all, you’ll likely have a nest egg to fall back on. Do you really need a separate savings account at a bank to stash emergency cash?

Yes, retirees still need an emergency fund. Here’s why.

An emergency fund prevents you from selling investments at an inopportune time

True, retirees may have saved enough to cover most emergencies. But those savings may not be liquid cash. And for retirees with a significant portion of their savings in investments, like index funds and stocks, an emergency expense could force them to withdraw at an unfavorable time, like market downturns and recessions.

In other words, when you don’t have an emergency fund in retirement, you could be forced to sell investments for a loss. Depending on how poorly your investments are performing, that loss could be significant enough to shorten your portfolio’s longevity.

In this case, an emergency fund could help you pay your monthly expenses, without dipping deeper into your investment portfolio. It can also prevent you from breaking contracts, such as those on CDs and annuities, which may have early withdrawal penalties, as well as avoiding high-interest debt, such as credit cards and loans.

How much should retirees set aside for emergencies?

The general rule of thumb is to save three to six months of living expenses as an emergency fund. However, for retirees, I’d recommend having closer to one to two years of cash free from investments, annuities, and CDs. Most bear markets don’t last longer than a year, with the average being somewhere around 289 days, and one to two years of cash should give you plenty of time to start withdrawing when conditions are more favorable.

Even if you don’t plan to have your retirement savings tied up in investments, it’s sound financial planning to put an emergency fund in an account that’s easily accessible, such as a basic savings or checking account. You could take advantage of high-yield savings accounts, but be mindful of withdrawal limits, as you want to minimize penalties to keep more money in your savings.

Fortunately, if you’ve saved enough for retirement, building an emergency fund could be as simple as moving money around. Selling investments when the timing is right — that is, when you’re not going to sell for a loss — could help you start or replenish an emergency fund in another account, even if the money doesn’t have a strong rate of return there.

In the end, this is money you will eventually use, whether it’s an emergency or not, but keeping it in a low-risk account could mean avoiding losses and penalties, effectively protecting the longevity of your retirement savings.

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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.The Motley Fool has a disclosure policy.

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From exploding batteries to overpriced toothpaste, there are some items that aren’t worth buying in Dollar Tree. Find out what else to avoid. 

Discount stores like Dollar Tree can be great ways to save money on your groceries, particularly if you’re able to make them part of a two-stop shop. But they don’t always offer the best value or the best quality. The trick is knowing what to buy — and what not to buy. Not only can some items in dollar stores be more expensive, but some things are worth paying slightly more for.

Here are four products I’d never buy at Dollar Tree.

1. Toothpaste

Dollar stores often change the package sizes to keep the price per item low, so it’s important to look at the price per ounce when making comparisons. For example, buying toothpaste at Dollar Tree does not make financial sense. A 2.4 ounce tube of Crest Fresh Mint Baking Soda & Peroxide Whitening toothpaste cost $1.25 at Dollar Tree online. That works out at $0.52 per ounce. You can get a 5.7 ounce tube of the same stuff for $2.12 at Walmart, which is just $0.37 per ounce.

2. Batteries

You can buy a pack of four alkaline AA batteries or six so-called “Super Heavy Duty” AA batteries for $1.25 at Dollar Tree online. Getting four — or even six — batteries for $1.25 feels like a bargain. That is, until they run out shortly after you’ve started to use them. According to calculations by Wired, dollar store batteries have about a third of the energy of big brand ones.

Or worse, they leak and ruin the gadget, toy, or whatever else they’re powering. Even worse? One of the reviews on Dollar Tree’s website says the battery exploded: “Terrible product plan to sue as it exploded and got battery acid in my wife’s eyes.” Another complained they ruined a $125 toy, saying, “Exploded in my son’s fisher price smart house toy. I opened the toy to replace the batteries to find all four batteries leaking battery acid and disintegrated one of the connectors.”

I love a good deal, but no amount of savings could make me risk exploding batteries.

3. Vitamins and supplements

If you buy over-the-counter medicines at Dollar Tree, they’ll almost certainly be FDA-approved, even generic brands. These can be good value. However, vitamins and supplements are a different matter — according to Consumer Reports, there’s less regulation around these products. Unless they carry an independent stamp of approval, such as NSF International or U.S. Pharmacopeia, you may not be buying the supplements you think you are.

Personally, I prefer to get nutrients at the source by eating more fruit and vegetables when I can, but that’s not always feasible. I often struggle to get enough iron and I’ve tried discount iron supplements, with varying degrees of success. These days, I’d rather stock up on the slightly more expensive iron tablets when they’re on discount. The dollar store versions sometimes upset my stomach and I’m not even confident I’m getting an iron boost.

4. Laundry detergent

Buying tiny bottles of laundry detergent rarely works out cheaper than buying a bigger bottle in another store. To give you an idea, Dollar Tree online charges $1.25 for an 8-fluid-ounce bottle of Tide laundry detergent. Walmart online charges $15.94 for a 115-fluid-ounce bottle. That’s $0.16 per fl oz, compared to Walmart’s $0.14 per fluid ounce. At the time of writing, Walgreens sells a 92-fluid-ounce bottle for 12.99, with an additional $3 coupon saving. That works out at about $0.11 per fluid ounce, which is significantly less than Dollar Tree.

It may only seem like a couple of cents on each fluid ounce, but it can add up to several more loads of washing. Now, perhaps your budget only stretches to $1.25 for laundry detergent right now, in which case the Dollar Tree bottle may be the right choice. But it’s worth watching for coupons or offers on cash back apps to see if you can get a decent deal on a bigger bottle. You might ask a friend or family member to go halves on a bigger bottle so you can both save.

Bottom line

Saving money on your groceries can translate into more cash in your bank account for other things. Don’t assume that everything in Dollar Tree is automatically a better value — sometimes you will get better deals in other stores. And sometimes it’s worth paying more for a product that will last or do the job you want it to do.

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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 positions in and recommends Walmart. The Motley Fool has a disclosure policy.

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A 401(k) loan could give you a low-cost way to renovate your home. But is it worth the risks? Weigh the pros and cons here. 

You’ve probably heard it said a thousand times to leave your retirement savings alone. After all, the longer you let your retirement savings sit undisturbed and unspent, the greater your chances of growing it to a sizable nest egg, especially since missing just five of the market’s best days could leave you with half the amount you would have otherwise had — according to a study by Fidelity.

But a 401(k) loan is an interesting animal. This is a loan you essentially take against yourself, meaning what you borrow you’ll eventually pay back. And, yes, while there is an interest rate attached to your loan, it’s an interest payment that goes back into your 401(k). For homeowners looking for ways to finance renovations projects, that raises a good question — could it be savvy to use your 401(k) to finance home renovations, especially if your other options are high-interest debt?

It’s a tricky question. But let’s take a closer look and see if it’s worth borrowing money from your retirement savings to renovate your home.

Do it if the renovations are necessary

A 401(k) loan might be worth it if the renovation is urgently needed. For example, if you need to remodel your home for wheelchair accessibility — installing ramps, customizing spaces with handrails, or building a lift — your 401(k) could give you a way to avoid personal loans and credit cards. Likewise, if your home has a safety hazard that home insurance does not cover, your 401(k) could help you afford projects without going into debt.

As I’ll discuss below, a 0% APR credit card could also give you a low-cost borrowing option to do these renovations. But depending on your circumstances, your 401(k) could be a viable choice.

It might be worth it if it means boosting your equity before a home sale

Targeting renovations that will boost your home’s value could mean selling your home for a higher price. In this case, a 401(k) loan could be worth it. You could take the proceeds from your sale to pay off the loan, effectively returning your 401(k) money back to its rightful place.

But this may not work as smoothly as you might think. For one, you have to target renovations that actually return what you pay for them. The list of home renovations that give you a 100% return on investment are surprisingly few and are usually limited to projects that boost curbside appeal, like replacing your front door or adding new siding. Renovating your kitchen or bathroom could give you a good return, but certain high-scale projects may leave you spending more out of pocket than you get in resale value.

Weigh the cons carefully before you proceed

Borrowing from your 401(k) does have consequences, not the least of which is losing potential earnings from your investments. But even more so than opportunity costs, taking out a 401(k) loan does have some risks, including:

Owing taxes and penalties: Even though you’re paying money to yourself, you’re still expected to make payments on time. If you fail to pay back what you borrow, the IRS will treat it as an income distribution. You’ll have to pay ordinary income taxes, and you may be subject to a 10% withdrawal penalty if you were younger than 59½ when you borrowed the money.Losing your job: Typically, you have five years to pay back what you borrow. But if you lose your job before you pay the loan, you’ll owe the remaining balance by Tax Day for that year’s taxes.

In addition to these risks, your 401(k) provider may not even allow 401(k) loans. Check in with your provider to see if it’s a possibility and, if it is, make sure the fees are worth borrowing the amount you’re interested in withdrawing.

Consider a 0% APR credit card instead

If you can’t borrow money from your 401(k), or you don’t want to risk missing the market’s best days, you could fund your home renovation with a 0% APR credit card instead.

These cards have a promotional 0% interest period during which you won’t pay interest on what you borrow. This gives you time to pay off your balance without risking going into credit card debt. Just be careful — once the 0% APR promotional period ends, you’ll start paying interest at a higher rate. As long as you can pay off what you borrow before the period ends, these cards could give you a low-cost way to renovate your home.

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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.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Credit cards come with a lot of potential pitfalls. Keep reading to learn what not to do when you use them. 

Credit cards are a pretty ubiquitous part of most Americans’ personal finances. In fact, according to a recent study by The Ascent, 80% of us have at least one. It’s easy to see why credit cards are so popular — they’re a safe and convenient way to pay for purchases, and many of them allow you to earn cash back and rewards on your spending. Plus, you can easily build credit with a credit card.

Unfortunately, credit cards can also come with a few pitfalls, and if you’re not careful, you can land in credit card debt or damage your credit score. If you’re new to credit cards or just need a little primer, here are five mistakes you don’t want to make.

1. Carrying a balance

Unless you have a charge card, you’re allowed to carry over a balance on your credit card from month to month. This isn’t a good idea under most circumstances, though. If you have a credit card with a 0% intro APR financing offer, and you’ll be able to pay off your balance in full before interest is charged, that’s fine. But under normal circumstances, credit card interest is very, very expensive — as of this writing, the average APR for a credit card is 24.72%, according to Forbes.

Do this instead: Aim to pay off your entire credit card balance every month. It’s good to get in the mindset of remembering that credit cards represent borrowed money, and try to only charge what you can afford to pay for with your own money. Some people pay off their credit cards monthly, but I try to take mine back to a $0 balance every week — it’s a lot better for my own peace of mind.

2. Making only the minimum payment

When you only make the minimum payment on your card, you’ll end up carrying some of your balance forward, which means, yep, those expensive interest charges we just discussed. You should be careful about this even if your card has 0% APR for a period of time. In this case, the card issuer will also give you a minimum payment, but don’t be fooled! Instead, run the numbers yourself.

Let’s say you bought a new washing machine for $800 and have 12 months of 0% APR. Your card issuer says your minimum payment is $40. But paying only this would leave you owing $320 when the card starts charging you interest. Instead, divide that $800 by 12 months, and you’ll have your actual minimum payment — $66.67.

Do this instead: Again, ideally, you’re paying off your full balance every month, but if you can’t, try to pay more than the minimum owed in order to get yourself out of debt as quickly as possible. And run your own numbers for a 0% APR card to make sure you land on a minimum payment that gets you clear of debt before interest is charged.

3. Using too much of your credit limit

If you’ve got a credit limit of $5,000, you’re allowed to spend that much on the card, right? Technically, yes — but for the benefit of your credit score, no. Your credit utilization ratio is a big part of your credit score. This is the percentage of available credit that you’re using at any given time, and it makes up 30% of your FICO® Score. To keep your score in good shape, it’s best to keep your credit utilization ratio under 30%.

Do this instead: Don’t go over 30% of your credit limit, if you can manage to avoid it. In the case of your $5,000 credit limit, that caps you at just $1,500.

4. Paying late

Another major credit score no-no is paying your bill late. Your payment history represents 35% of your FICO® Score, and speaking from experience again, making all your payments on time, every single month, can save your credit score even if you’re in debt.

Do this instead: If you struggle to remember when payments are due, set an alert on your phone, or do what I do. Buy a wall calendar, hang it where you can see it, write all your monthly bills on it, and then check them off as you pay them. It’s old school, but it works.

5. Canceling old credit cards

You might think that if you’re not using a particular credit card, you may as well cancel it. Not so fast! Closing an old credit card account can ding your credit score eventually (accounts in good standing remain on credit reports for 10 years), because length of credit history is also a factor in calculating it — it’s 15% of your FICO® Score. I canceled an old card earlier this year, but I have excellent credit and thankfully only saw a two-point drop in my score. If your credit score is poor or fair, it’s best to keep the card to avoid the hit.

Do this instead: Unless there is an actual reason to cancel an old credit card (perhaps it has an annual fee, and if you’re not using the card, it’s certainly not worth continuing to pay that), it’s best to keep it open. Maybe make a small purchase with it occasionally to keep the account active.

Credit cards can be an extremely useful financial tool, so it’s worth taking the time to learn how to use them the right way. Don’t worry if you’ve already been making these rookie mistakes — you’re never too old to learn some new personal finance moves.

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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.The Motley Fool has a disclosure policy.

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You might be able to pay a bill directly from your savings account — but should you if you’re allowed? Read on to find out. 

Savings accounts are often pretty basic, as bank accounts go. Add money to one, and if you’ve got a high-yield savings account, you could see some pretty decent growth over time. And if your account is with an FDIC-insured bank (as it should be!), your money will be protected and waiting for you when you need it.

If you’re paying for an expense using money from your savings account (say, booking flights and hotels for that sweet vacation you’ve been saving up for), you might wonder if you can just cut out the middleman and pay using your savings account directly. While it may technically be possible, it’s not a good idea. Here’s why.

How would making a payment using a savings account work?

When you make a payment from your checking account, you generally use one of a few different methods. You can write a paper check (how retro!), do a bank transfer using your routing and account numbers, pay with a debit card, or use a payments app that’s linked to your account.

You may be able to access some of these payment methods using your savings account. If you’re making a bank transfer payment, you may be able to plug in your savings account number and the bank’s routing number, and enable the payment to be taken directly from the account. Similarly, you can link a savings account to a payments app and withdraw directly from it that way. And if you have a savings account that offers a debit card (not common!), you could make purchases with it.

So why not make payments out of your savings like this? Well, your savings account isn’t really designed to be a payments account. As such, many banks still enforce limits of six convenient withdrawals per month (this harkens back to Regulation D rules). Go over that number and you could incur a fee or even have your savings account changed to a checking account. And when you provide your savings account number and your bank’s routing number to an outside party, you could be putting your money at risk. It’s a much better move to use a different payment method.

Use these payment methods instead of your savings account

Your checking account was designed to make it easy to pay bills! As mentioned above, you can write a check or whip out a debit card. In the case of utility bills or mortgage/rent payments, you can set up bank transfers using your checking account.

A credit card is another fabulous way to make payments. Your line of credit isn’t linked to your bank account balance, so if something goes wrong and you lose your credit card or it gets stolen, you’re not liable for fraudulent charges. It’s an extremely safe payment method. Plus, a rewards credit card gives you the opportunity to earn cash back or points on purchases you were going to make anyway. Your savings account doesn’t give you that.

And if you’re paying for something like a travel booking, you could be using a travel credit card and earning even more. When I book travel using money I’ve saved, I make the booking using my travel credit card, and then transfer the money from savings to a linked checking account so I can pay off the credit card using that money — rather than paying for it directly out of my savings.

Your savings account is special

Your savings account is a home for your emergency fund and also for money you’re saving for an expense in the next few years. If you have money you’ll be spending sooner rather than later (say, for this month’s bills), it’s best kept in your checking account so you have easy access to it. And if it’s for a longer-term goal (such as retirement), consider investing it with a brokerage, because doing so over a long time window gives you the opportunity to grow your money substantially.

In a pinch, sure, you might be able to pay bills with your savings account. But as you can see, there are better ways to tackle those bills, and your savings account has its own special purposes.

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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.The Motley Fool has a disclosure policy.

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