Money Management

A $1 million nest egg may not last as long as you think. Read on to learn more. 

The FIRE movement (Financial Independence, Retire Early) has gained a lot of traction in recent years. And workers are increasingly opting out of the labor force at younger ages to live their best lives without being shackled to a job.

Of course, it’s easy to see why retiring at a very young age is appealing. Doing so means you can do things like travel or pursue hobbies at an age when health and mobility issues are less likely to be a concern.

If you’ve reached the age of 40 and have $1 million to your name, you might assume that you can exit the workforce for good and kick off an early retirement. But that $1 million may not last nearly as long as you expect it to.

Why $1 million just isn’t enough

It’s one thing to exit the workforce at age 65 with a $1 million IRA. At that point, your savings might easily last throughout retirement, and the fact that you’ll also be eligible for Social Security should help, too.

But retiring at age 40 with $1 million is a very different story. And even if you keep that money invested in a brokerage account, you may find that you’re not able to sustain the lifestyle you want without rapidly depleting your assets.

Let’s say you assemble a $1 million portfolio of dividend-paying stocks. If your average dividend yield is 5%, which is on the high side for a lot of stocks, that amounts to an annual income of $50,000.

But if you’re a 40-year-old retiree, you’re probably not spending your days sitting around the house watching TV. You’re apt to want to stay busy by getting out, going places, and doing things. And an income of $50,000 a year may not lend to that, especially when you factor in your basic expenses like housing, transportation, and food.

Also, remember that if you retire at age 40, there’s no Medicare to fall back on. You’ll have to cover the cost of health insurance, and that could be exorbitant.

Now, you may be thinking, “Well, I don’t have to only live on dividend income. I can sell stocks at a profit and live on that money.”

Given that the stock market’s average annual return over the past 50 years is an impressive 10%, that might seem doable at first. But remember, that 10% is the market’s average over a long period of time. You can’t bank on your portfolio delivering a 10% return every year, and if you liquidate investments for cash and shrink your portfolio, you’ll risk setting yourself up for smaller gains year after year. That’s not a good thing.

A shift in mindset and career may be a better approach

You may be eager to retire at age 40 so you’re not tethered to a job you don’t like, or a job you do like but takes up most of your time. But if you have $1 million saved by age 40, it means you’re in a prime position to embark on a career shift that allows you to enjoy life without quitting the workforce entirely.

Let’s imagine you earn $100,000 a year, and you’re convinced you’ll be able to live on $50,000. Rather than retire and rely solely on your $1 million portfolio for income, find a part-time gig that allows you to earn enough to largely cover your bills, and supplement with dividend income or cashed-out stocks as needed.

You may find, for example, that instead of plugging away as a full-time IT professional, you can start your own consulting business and work remotely for 20 hours a week instead of 40. You might cut your income in half, but that might be enough income to live on. And that way, you can free up time while you’re young for the things you want to do, such as travel extensively.

The idea of retiring at age 40 may be appealing in many ways. And sure, if you have a $10 million portfolio, at that point, it may be feasible to never have to work again.

But a $1 million portfolio may not go as far as you expect it to. So before you make plans to end your career for good, think about the different ways you can get what you really want out of an early retirement without the financial stress that might ensue if you stop earning money entirely.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.

 Read More 

Older Americans have higher credit scores on average. Read on to learn why this is, and how you can improve yours at any age. 

Some things get better with age — wine, some cheeses…and credit scores!? Research from The Ascent found that older Americans have higher credit scores on average — for example, the average credit score for baby boomers is 742, while the average credit score for Generation Z is 679.

Does this mean that as you age, your credit score will naturally rise? Well, no — but as you get older, it is easier to affect positive credit score change. Let’s take a look at why older Americans have higher credit scores, and see a few ways you can boost yours, whether you’re just getting started with credit or have been using it for decades.

Why do older Americans have better scores?

In short: They’ve had longer to establish a long and deep credit history, and they’re also more likely to have a mix of credit accounts. The length of your credit history is one of the five factors that makes up a FICO® Score (the most popular credit-scoring model) and it represents 15% of that three-digit number. Simply put, it’s good for your credit score to keep revolving credit accounts open for as long as possible, because it shows lenders you can manage one successfully over a long period. If you’re very young (say, a member of Gen Z), you haven’t yet had long to build up a credit history, while someone in their 60s or 70s has.

Credit mix is also important to your credit score, and makes up 10% of a FICO® Score. Credit mix refers to the different types of borrowing out there. For example, if you have a mortgage loan, two credit cards, and an auto loan, you have a good credit mix. If you can keep up with payments on all these different accounts, it shows lenders you know how to manage different types of credit. Again, older folks have the edge here. It’s more likely that a baby boomer owns a house than a member of Gen Z, for example.

So how can you improve your credit score?

Now you know that older Americans’ higher credit scores are less a function of age and more a function of circumstance. You can’t hit fast-forward on time itself (and you shouldn’t want to; enjoy living without joint pain as long as you can, you young whippersnapper!). Here are a few ways to whip your credit score into shape now, while you’re waiting for your credit history to age and to reach the point in your life where you can finance a big purchase like a home:

If you’ve occasionally been lax about paying your creditors (such as your credit card issuers) on time every month, tighten that up. On-time payments are reflected in 35% of your FICO® Score.You might not be able to afford a mortgage quite yet, but you likely need a car. Are you able to buy a good used car with an auto loan? Taking on an installment loan (that you can afford and to buy something you need!) will diversify your credit mix, so if you’ve already got one, read the above tip again.While it may be tempting to apply for every shiny new travel credit card you encounter, resist the urge. Limiting new hard inquiries on your credit can keep your score looking its best.

If you’re just getting started with credit and languishing with a lower credit score than you’d like, don’t lose hope. Over time, you’ll be able to boost your score by improving your credit mix and keeping your current accounts open and in good standing over the long run, but for now, look to the tips above.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Want to succeed in the world of freelancing? Read on to find out how one writer makes it work. 

If you’re thinking of quitting a salaried position and going freelance instead, you’ll be in good company. More than 70 million Americans worked in a freelance capacity in 2022, according to Zippia, and it’s estimated that 36% of the U.S. workforce participates in freelance work.

Being a freelancer certainly has its benefits and drawbacks. On the plus side, you commonly get to set your own hours, and you can say no to work that doesn’t interest you or you feel isn’t worth the pay being offered.

On the flipside, there’s no steady paycheck to be had when you’re a freelancer. You might see $2,000 hit your bank account one week, only to earn absolutely nothing the week after that.

And forget about things like health benefits and paid time off. When you work for yourself, you have to build time off into your schedule, and it’s on you to come up with — and pay for — health insurance coverage.

Despite these drawbacks, being a freelancer suits my needs really well. I have young kids who rely on me to not only parent, but get them places after school, so working a job that requires me to be at a desk from 9:00 in the morning to 5:00 in the evening every day without flexibility just doesn’t make sense.

But I will say that not everyone is well-suited for a freelance lifestyle, and you really do need to have certain skills to pull it off. Here are some of the skills that have made it so I’m able to earn a steady income freelancing.

1. Time management

When you’re a salaried worker and you goof off or take too long to get things done, your performance review might suffer, but your paycheck generally won’t take a hit. That’s not the case when you’re a freelancer.

When you work for yourself, time management is key, because if you’re not working, you’re not getting paid. I’ve learned to be really good at managing my time by mapping out schedules in advance and taking advantage of small snippets of time to work when I need to.

For example, if I have a 30-minute wait while my daughter does her piano lessons after school, I won’t just fool around on my phone. Instead, I’ll bring my laptop along and hammer away.

2. The ability to stay focused

I do a lot of my work during the day while my kids are at school. During my core working hours, as I call them, I’m not checking social media or logging on to review my credit card balances. Rather, I’m working. I can do those non-work tasks at other times, so I make a point to not let myself get distracted.

I will say that having a home office helps in that regard. I don’t know if I’d fare as well sitting in bed with a laptop. The point, either way, is that doing well in a freelance capacity often hinges on being able to really work hard during those times when you’re on, so that you can not work during those times when your hours are earmarked for other things.

3. Being organized

As a writer who juggles different deadlines, being organized is key. If you go freelance, you might end up having to balance multiple clients and projects, so you’ll need to come up with a system that works well for you. The more organized you are, the better you can use your time.

One specific thing I do is spend a few minutes every weekend reviewing my upcoming deadlines and figuring out how many hours I have to tackle the work I need to get done. From there, I order my assignments by priority so I know which ones to hammer out first.

Although being a freelancer isn’t always easy, I wouldn’t have it any other way. But I will say that freelancing isn’t right for everyone. And if you feel that you’re sorely lacking in the above skills, you may want to reconsider diving into a freelance lifestyle. A better bet could be to freelance on the side and see if you can improve these skills before giving up your primary source of income.

Alert: highest cash back card we’ve seen now has 0% intro APR until nearly 2025

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR for 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Buying a house sometimes comes with supply issues and low appraisals. Read on to learn how one writer copes using some creative approaches. 

I have bought a home several times over the years. And, when I’ve purchased properties, I’ve run into a variety of different issues that have caused problems with the purchase transaction. In fact, here are four problems I’ve had when searching for a house — along with some details on how I overcame the issues.

1. A lack of properties on the market that I’m interested in

In June 2023, there were around 26% fewer newly listed houses on the market than in June 2022, according to data from Realtor.com. Housing inventory is low because people don’t want to sell and give up their low mortgage rates now that rates are a lot higher.

Because there aren’t as many properties being listed, I had a really hard time finding a home. To overcome this issue, I looked beyond the MLS listings of houses for sale. I found a house that was for rent that needed a lot of work, which renters didn’t seem to be gravitating toward, and I approached the owners and asked if they would sell it to me.

Thinking outside of the box this way can be helpful at a time when there’s no properties you’re interested in on the market. You may also want to expand your search parameters if you can, such as by looking in a wider geographic area or opening up to buying a fixer-upper even if you planned on finding a finished home.

2. Homes that were out of my budget

In the past, I’ve had a hard time finding houses within the budget I had set for myself — especially when home values were pretty high. I’ve taken a few different approaches in this situation — none of which involved spending more than I should.

When I was finding homes in my desired area were too expensive, I opted to buy one that needed remodeling. Since I was able to pay a lower initial purchase price and pay for the upgrades over time, I ended up being able to get a house in my desired location.

I’ve also dealt with this issue by scaling down my list of necessities. I focused primarily on location and other factors I couldn’t change, like commuting time, and gave up some “nice-to-haves,” like a large kitchen.

If you are also finding houses aren’t affordable for you, you could try these tactics. Or you could wait and save more so you can afford a costlier home without risking your future financial security.

3. An appraisal that came in too low

One big issue I’ve run into is an appraisal that is too low. See, mortgage lenders typically won’t loan you more than a certain percentage of the market value of the home. I try to keep my loan-to-value ratio below 80% so I can avoid private mortgage insurance, which means I won’t borrow more than 80% of what the home is worth.

The issue, though, is that the bank determines what a home is worth based on the appraisal, not based on what you’re paying for it. And, in the past, I have had situations where a house appraised for less than the amount I had offered — which adversely impacts the loan to value ratio.

To give a simple example, say you’re buying a property for $100,000 and putting down $20,000. You’d have an 80% loan-to-value ratio — but if the house only appraised for $90,000, you’d still have to borrow $80,000 to be able to afford the $100,000 price after making your $20,000 down payment. So, the low appraisal would mean your loan-to-value ratio was now 88%.

When this happened to me, in one instance I was able to get the sellers to reduce the price based on the low appraisal since other borrowers were likely to run into the same issue. In another situation, though, I actually ended up switching lenders. My new lender ordered a new appraisal, the property appraised higher, and I was able to move forward with the transaction as planned.

You could attempt these techniques as well, or could put more money down and move forward even with a lower than expected appraisal.

4. Sellers who are unwilling to make repairs after problem inspections

Finally, the last problem I ran into was sellers who were not willing to make repairs after a problem with a home inspection. When this happened, I actually ended up walking away from the sale and finding a better home.

If major repairs need to be done and the seller won’t be reasonable, you may want to take this approach too, unless you’re getting a good enough deal that you can fund the repairs out of pocket and still incur reasonable total costs for the home purchase.

The reality is, it is inevitable that you’ll have some problems in your search for a home. But if you can handle them with a level head and look into all your options for solving them, you can overcome them and maybe end up in the home of your dreams.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

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.

 Read More 

Despite the stock market’s volatility in 2022, Americans managed to save more money than ever in their retirement accounts. Read on to find out if it’s enough. 

Retirement savings has been a hot topic in recent years, particularly with the uncertainty of the pandemic. Many people have been forced to prioritize their spending and saving habits, and while some have seen their retirement accounts take a hit due to market fluctuation, others have actually managed to save at record levels. Despite high inflation and a volatile stock market, Americans saved and invested more than ever last year.

Workers stay the course when it comes to savings

According to Vanguard’s annual “How America Saves” report, even in the face of economic uncertainty, Americans have been able to stay focused on their financial goals. Workers managed to contribute an average of 7.4% of pay to their 401(k) accounts last year, which ties 2021’s record.

One key factor is that many employers now automatically enroll their workers in 401(k) plans as soon as they start working. The plans are configured for workers to automatically save a percentage of their income, which workers have the option to adjust upward if they choose to. It takes the effort and willpower out of the savings process, making it easier for workers to resist the temptation to spend their income elsewhere.

On top of the average 7.4% contributed by workers, including the company match, the total average contribution rate was 11.3%. In 2022, the average account balance for Vanguard participants was $112,572, while the median balance was $27,376.

However, the average account balances experienced a decline of 20% since the end of 2021. This dip is primarily due to the downturn in both equity and bond markets last year. The S&P 500 experienced a significant decline of almost 20%, U.S. bonds dropped by 13%, and most target-date funds fell somewhere in the middle.

Surprisingly, despite these losses, only a small 6% of investors chose to trade their investments last year, a drop of 4% from 2020. Trading activity in 2022 reached the lowest level in close to two decades.

Target-date funds are popular

Target-date funds have become an increasingly popular option for retirement account investors, and this trend shows no signs of slowing down. In fact, a staggering 83% of all participants in the study used target-date funds last year. What’s more, 71% of those participants had their entire account invested in a single target-date fund.

This trend is likely due to the fact that investors are recognizing the benefits of a well-diversified portfolio that is automatically adjusted over time to become more conservative as retirement approaches.

Another interesting aspect of this trend is that it seems to be leading to a decline in participant trading. Over the past 15 years, there has been a significant drop in trading activity, and only 2% of participants holding a single target-date fund traded in 2022.

Savings still not enough

Despite the record highs in participation, deferral rates, and the use of professionally managed allocations last year, the Vanguard report found that workers are still falling short when it comes to saving for retirement.

Vanguard recommends that participants should save at least 12% to 15% of their pay to meet their retirement goals.

With the average total contribution rate at 11.3%, it is slightly lower than the recommended amount. The study found that only 20% of the participants require a slight boost of just 1% to 3% to reach their targeted savings rate.

Why investing in a 401(k) is important

It’s essential for individuals to take stock of their financial priorities. Saving enough for retirement shouldn’t be an afterthought or a luxury, but rather a necessity.

A 401(k) is a powerful savings tool that offers significant tax benefits and potential for compound interest. Setting a budget and contributing a portion of income consistently over time can result in having a substantial nest egg for your retirement. Additionally, many employers offer matching contributions, further boosting your account balance.

How to save more for retirement

When it comes to saving for retirement, planning ahead is crucial. Establishing a mindset of consistent saving can go a long way in helping individuals meet their retirement goals. Even small amounts of money can add up over time, as compound interest does its work.

In addition to employer-sponsored 401(k)s, traditional or Roth individual retirement accounts (IRAs) can help you maximize your savings potential. Another tactic is to create a budget and regularly review and adjust it to prioritize saving for retirement.

Additionally, reducing unnecessary expenses, such as dining out or buying non-essential items, can free up money that can be redirected towards retirement savings. These tips can help ensure you have a comfortable retirement and less financial stress.

As retirement approaches, the money saved in a 401(k) can be used to supplement income and provide financial security. While there are other types of retirement accounts and investment options available, a 401(k) remains a popular choice for its simplicity and potential long-term growth. Starting early, staying consistent, and contributing 12%-15% of your pay can make a significant impact on future financial stability.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.

 Read More 

When you’re a small business owner, you won’t have an employer to provide a 401(k). Here’s why it’s important to create your own plan. 

When you are running your own small business, there are many benefits of being your own boss. You have much more direct control over your work hours and over the kinds of work you do. Your success can directly translate into more money in your bank account rather than just enriching a company’s bottom line. And ideally, you can also do work that you love.

But, there are some downsides as well. And one of those downsides is that you are not going to have access to a workplace 401(k). A 401(k) can be the easiest way to save for retirement because you have money automatically taken from your paycheck and your company may match some of your contributions — but this won’t be an option for you if you work for yourself.

As a result, it’s absolutely crucial that you make a retirement plan of your own.

Here’s why making a retirement plan is so essential

Creating your own retirement plan is vital as a self-employed individual running your own small business because you need to supplement Social Security.

See, Social Security retirement benefits only replace about 40% of pre-retirement income and taking a 60% pay cut isn’t feasible to retain anywhere close to your standard of living. You need money to supplement Social Security, and it’s up to you to make sure you have it.

When you can’t just invest in your employer’s 401(k), you need to take control of where your supplementary income is going to come from as a retiree. And that means making a plan as soon as possible when you start your own company, so you have plenty of time for compound interest to work for you and help you build the nest egg you need.

How can you make a retirement savings plan when you run your own company?

The good news is, you have options to make a retirement savings plan for yourself — and potentially for your employees if you will have people working for you at your company.

There are many different retirement plans that are good for entrepreneurs, including plans targeted at sole proprietors as well as small businesses with workers. These plans, which include a SIMPLE IRA, SEP-IRA, or Solo-401(k), can also offer some great tax advantages that allow you to make tax-deductible contributions just like you could if you had a plan through your employer.

You can typically choose which brokerage firm you use to open your retirement plan, although some may charge fees for specific kinds of plans such as a Solo 401(k). You’ll want to research the cost of the different plans at your broker of choice, as well as the contribution limits to pick which is right for you.

You are also eligible for other kinds of plans open to all workers, such as a traditional and Roth IRA. These can be simpler to use, although they’ll have lower contributions than Simple IRAs, SEP-IRAs, or Solo 401(k)s.

The important thing is to look into the options available to you and make sure you set up a retirement plan as soon as you start your company. Otherwise, you could find yourself in dire straits as a senior.

Our best stock brokers

We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review our best stock brokers.

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.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

 Read More