Money Management

Retirees should have a few months’ worth of living expenses in checking and a few years’ worth of living expenses in savings. Here’s why. 

Once you leave the workforce, Social Security benefits are going to cover about 40% of your pre-retirement income. You’ll have to come up with the remainder of the money you need for a comfortable retirement.

Typically, you’ll be taking money out of your 401(k) or other brokerage account to help fund your retirement. But you obviously don’t want to sell stock and wait for a withdrawal from your brokerage account every time you have an expense. As a result, you’ll need to keep some money in your checking account so you can pay bills and cover everyday living expenses.

Just how much money should you have though? Here’s how to figure it out.

This is how much you should have in checking

Your checking account is the place where you should keep your day-to-day funds. This is the account you’ll use to pay bills like rent or a mortgage and utilities. You’ll also be paying for expenses like doctor copays and grocery costs out of this account.

Typically, you’ll have your Social Security check deposited into checking as a retiree, as well as money from a pension that comes in monthly, if you’re receiving one. And, when you take a distribution from a retirement account or get money from an annuity, you’ll usually put it into checking as well.

Since you’ll likely have money coming into and out of this account each month, you don’t necessarily want to keep a ton of extra cash in it. After all, these funds are meant to be spent and you’ll access them regularly. You don’t want to keep a ton of money in your checking account that isn’t meant to cover your routine expenses.

Typically, it’s a good idea to have enough in your account to cover the upcoming month or two of expenses, along with a cushion to avoid getting hit with overdraft fees. This cushion could be around an extra $500 to $1,000, so even if you forget about a check you wrote or a payment that’s being withdrawn, you won’t go into negative territory in your account.

Don’t forget to keep some money in savings as well

While you don’t want to keep a lot of money in your checking account where there is a risk the funds could be spent, you do want to have a pretty substantial amount of money outside of brokerage or investment accounts. This is where a savings account comes in.

In fact, retirees should aim to have about two to five years of living expenses in a savings account, so they don’t have to take withdrawals from the stock market during a downturn. This money can help see you through until the market recovers.

A savings account is a better place for this money than a checking account, because you won’t be tempted to just spend the money if it’s earmarked for living expenses in case of a bad market year. Plus, you’ll earn a higher interest rate in a savings account than in a checking account in most situations.

By carefully considering how much to have in reserves and choosing the right account for it, you can ensure you don’t end up with too much — or too little — in your checking account when you need the cash after you’ve retired and your paychecks have stopped coming.

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The Powerball winner will get $558.1 million if they choose the lump sum. Learn how they could net millions (or even billions) more. 

It’s been little over a week since the numbers for the $1.08 billion Powerball were announced, and the winner has yet to come forward. While this isn’t unusual — it can take weeks or months to properly identify and vet the winner — it does give us pause to speculate on how the winner will receive their money — and what they can do to get more.

Powerball winners are given a choice between receiving their money as a lump sum payment or as an annuity with 30 installments over 29 years. Most winners choose the lump sum. It gives them the money all at once and doesn’t put them at risk of dying before the 29-year annuity finishes paying out. However, by taking the lump sum, you automatically leave money on the table, sometimes a massive amount.

Lump sums are smaller than the advertised prize

If the winner chooses the lump sum, the lottery agency will automatically subtract a portion from their earnings. The portion that they subtract is calculated by a “discount value,” which the agency determines before the Powerball begins. For this lottery, the lump sum would yield roughly $558.1 million after the discount value is applied, according to the lottery site usamega.com, which would be more like $351 million when taxes are taken out.

The annuity option, however, yields the entire advertised prize over 30 installments. This time around the winner would be looking at roughly $36 million every year for the next 29 years (plus this year) for a grand total of $1.08 billion. After taxes are taken out, that would end up as about $22.7 million each year, or roughly $681 million total – $330 million more than what the lump sum winner would receive.

Now, typically, most winners have taken the lump sum. In fact, no winner has chosen the annuity since 2014, when a Californian nail technician, Vinh Nguyen, won $228.4 million and elected to receive it as an annuity at roughly $7.6 million per year. But those that choose the annuity will almost double their winnings and perhaps prevent themselves from spending all their earnings at once.

The lump sum may have an edge over the annuity in this one instance…

But don’t be mistaken: Lump sum winners who can resist spending all their money on super yachts and private jets can possibly earn even more than the advertised prize itself. How does that work? Simple. By investing.

For example, let’s assume the lump sum winner receives $351 million after taxes and decides to stick a modest $51 million in their savings account and invest $300 million in the S&P 500 for the next 29 years. Assuming an annual compound growth rate of 9.7% (which is the S&P 500‘s compound annual growth rate over the last 95 years), your $300 million would grow to $4.397 billion in 29 years — more than four times the jackpot’s original value and more than six times what you would have gotten with the annuity.

But now what if you decided to take the annuity and invest $20 million of your $22.7 million monthly payouts? If you invested $20 million each year for the next 29 years (assuming again a 9.7% annual compound growth rate), your final amount would be $3.109 billion — a full billion and some change less than the invested lump sum.

Of course, that assumes the winner doesn’t pull their money out (which could more than halve their earnings if they miss the market’s best days) and keeps their personal finances stable over the next 29 years. But if the winner is savvy enough to make their money work harder for them, they could take the lump sum and be a billionaire in 29 years, with $51 million to live off between now and then.

What are the odds that the winner will invest in the S&P 500? Who knows. But if they, like Einstein, believe compound interest is the eighth wonder of the world, they could grow that money to a sum no lottery has ever reached.

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Is your emergency fund really all set? Read on to see if yours could use a lift. 

A recent SecureSave survey found that 67% of Americans don’t have the cash on hand to cover an emergency $400 expense. So if you have several thousand dollars in your emergency fund, you’re doing better than the bulk of the U.S. adult population.

But that doesn’t mean your emergency fund is all set. If these situations apply to you, it’s best that you do what you can to add to your savings account.

1. You don’t have enough cash to cover three months of essential expenses

Some people land on a random amount of savings — say, $5,000 or $10,000 — and decide that they’re set from an emergency fund standpoint. But actually, your emergency fund shouldn’t be a random number. It should be based on your specific expenses.

What’s more, it’s important that your emergency fund has enough cash to cover at least three months of essential expenses. Why three months’ worth?

Let’s say you were to lose your job, which would force you to live largely on savings for a period. It could easily take three months to interview for a new job, entertain offers, and get brought on board. So that’s the logic behind that guideline.

But remember, three months is really just the minimum number of bills you should be aiming to cover with emergency savings. If you’re able to save enough to cover six months of expenses, you’ll be in an even stronger position.

2. You haven’t padded your emergency fund since buying your home

When you own a home, there’s always the chance that something will break. And that something might cost a small fortune to fix. Replacing a roof, for example, costs $9,152 on average, according to Angi, while the average homeowner spends $5,887 to install new air conditioning.

These are just a couple of examples. The point, however, is that home repairs tend to be extremely expensive. So it’s best to have more than three months’ worth of expenses in savings once you become a homeowner.

3. You’re looking to start a business or make a career change

Starting a business could be a very positive career move for you. So could switching career fields. But if you’re looking to go in either direction, then it’s important to have a really strong emergency fund, so you may want to boost yours considerably.

It can take a long time for a new business to turn a profit, and you’ll need money to live on during that ramp-up phase. Similarly, when you switch careers, you often have to start at a lower level, which commonly means taking a lower salary for a period. A more robust emergency fund could help ensure that you’ll be able to cover your expenses while you’re making these big changes, thereby allowing you to focus on work without having to stress about money.

Having some amount of emergency savings is always better than having none. But if these signs apply to you, it may be time to assess your savings and give your emergency fund a helpful boost.

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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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There’s no one-size-fits-all answer to how much you need to retire because everyone’s situation is different. Find out how you can determine your number. 

I won’t keep you in suspense; the average American believes they’ll need $1.27 million to retire comfortably. However, this varies considerably by age, and no age group has nearly enough savings (on average) to be on track to achieve their target amount.

One interesting note is that the age groups that are currently at or near retirement age are the ones that believe they need the least amount of money to retire comfortably. This is likely because many respondents are already well into their retirement, so their future financial needs are naturally lower than someone who hasn’t started their retirement yet.

Is $1.27 million enough for a comfortable retirement?

Let’s take a closer look at the $1.27 million the average American believes they’ll need to enjoy a comfortable retirement and whether it’s truly enough.

The short answer is “it depends.”

The longer answer is that a comfortable retirement isn’t necessarily about how much money you have in savings, but about how much income that money can create relative to the kind of lifestyle you want.

How much income do you need in retirement?

A popular rule of thumb is that the average American needs about 80% of their pre-retirement income in order to maintain the same quality of life they’re used to. For example, if you earn $100,000 now, a retirement income of $80,000 per year should allow you to sustain your lifestyle. The reasoning is that you won’t have some of the expenses you have now (like commuting to work or buying things for your children), and you won’t need to put any of your income into retirement accounts like you’re (hopefully) doing now.

Of course, this is just a guideline. If you plan to travel extensively or pursue expensive hobbies in retirement, you might need more. On the other hand, if you’re a super-saver or plan to live a downsized life in retirement, less than 80% could be fine.

Consider your other income sources

The next step is figuring out where your income is going to come from after you leave the workforce. It doesn’t all need to come from your retirement savings. At the very least, you’ll have Social Security income, and you can get an estimate of your future Social Security benefits by viewing your latest statement at SSA.gov and creating an account if you haven’t yet. Also consider any pensions, annuities, or other expected income streams you’ll have.

Let’s stick with our simplified example of someone who earns $100,000 from their job and expects to need $80,000 in retirement income. If this individual expects $30,000 in annual Social Security income and doesn’t have any other sources, they’ll need to draw $50,000 from their retirement savings.

The 4% rule

Admittedly, the 4% rule isn’t perfect, but a good guideline is that it’s a safe withdrawal rate to take 4% of your retirement savings in your first year and increase it with inflation in subsequent years, without too much worry about running out of money.

So, if you take the average person’s $1.27 million figure for a comfortable retirement and multiply it by 4%, we get a sustainable withdrawal rate of $50,800 per year.

So, how much is enough for you?

Combined with Social Security and other sources, a $1.27 million retirement nest egg could certainly be enough for many Americans to retire comfortably, but it isn’t likely to be enough for everyone. Using the steps outlined here, you can assess your own retirement income needs and decide whether you might need to increase your savings rate.

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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.Matthew Frankel, CFP® 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.

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When we sold some land recently, our buyer had to delay the closing. Read on to learn how we coped. 

Recently, I sold some land. We had purchased the property with the goal of getting a mortgage loan and building a home on it. Unfortunately, the pandemic got in the way and then we decided we would rather buy a home in a different neighborhood, so we opted to sell the plot instead.

We got a good offer after a few months on the market, which would allow us to walk away with a reasonable profit, and we scheduled our closing date. Unfortunately, when it came time to close, our buyer had a problem. They were from out of the country and they claimed they didn’t realize how the process worked and would not be able to get the money to their U.S. agents on time in order to close on schedule.

Naturally, we got a little nervous about this unexpected delay, and we were wary of their request to push back closing by two weeks. We didn’t want to walk away from the offer, but we also didn’t want to keep our land as pending and end up missing out on other potential buyers only to have the deal fall through.

So, we came up with a plan that would allow us to comply with their request for a delay while still reducing our risk.

This was our approach to a request to delay the closing

In order to protect ourselves, we requested that the buyer immediately release all contingencies and increase their earnest money or escrow deposit. Because they had originally agreed to a quick closing, we had allowed them to make the sale contingent on the land being suitable for their building purposes — and they had the entire time until close as their due diligence period.

But since we no longer wanted them to have an “out” since they were extending the closing, we asked them to remove the contingency. This way, they would be legally bound to follow through on the contract. There were no more outs for them, and they would have to close or they would lose their deposit and we’d potentially be able to sue them to force them to follow through on the contract.

We also asked them to increase their escrow deposit by an additional $20,000. Since they were paying cash for the property, there was no reason they shouldn’t be able to make this money available before the closing if they were serious about following through. Their original deposit had only been $5,000, but by adding an additional $20,000, they now had $25,000 on the line that they stood to lose if they didn’t follow through.

Here’s why this worked out well for us

By making sure that the buyers had no out and by demanding a larger deposit, we put ourselves in a good position. They would have to close or lose a lot of money, so we were OK with pushing the closing back for them since we had renewed confidence they would close the deal.

If you are selling a property of your own, it’s important to remember that things don’t always work out as planned. It can pay off to offer some flexibility to a buyer so you don’t lose out on a deal. But you need to protect your own interests, too. A larger deposit and a short period to satisfy contingencies can help you ensure that a buyer doesn’t force you to take your home off the market for a long time, only to back out on a deal in the end.

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About 90% of S&P 500 companies publish their environmental, social, and governance information. Read on to find out why some lawmakers want ESG to go away. 

There’s a debate brewing in Congress right now over environmental, social, and governance — or ESG — investing. Currently, investment funds can, if they want, focus their attention on ESG investments. For example, a fund may choose to invest in companies that are focused on environmentally responsible manufacturing or a company that ensures it sources its materials in a socially ethical way.

The disagreement between lawmakers comes as some elected officials (mainly Republicans) believe that too much focus on ESG doesn’t allow funds to focus on purely financial factors of investing, which could then lead to poor mutual fund performance.

Other lawmakers (mostly Democrats) say focusing on ESG investments is a good financial decision because, for example, companies that are environmentally conscious may be more stable than those exposed to climate-related risks.

Without picking a side in this fight, let’s look at what a ban on ESG investing would mean for the average investor.

What a ban on ESG investing would do

First, it’s worth mentioning that a bill that would have kept pension fund managers from making investment decisions based on ESG-related factors was already vetoed by President Biden earlier this year.

But that doesn’t mean restrictions on these types of investments couldn’t happen in the future. Congress recently debated current mandates that require companies to make certain disclosures about the types of environmental, social, and governance investments they make.

Republicans are worried that publicly traded companies that don’t have a significant focus on ESG investments may be ignored by investors, even if they have significant financial strength. They fear that it could discourage some companies from going public and hurt current companies that already sell their stock on public markets. Based on this viewpoint, a ban on ESG investing would open up more investment opportunities and help investors focus on a company’s financial strength.

The flip side, according to most Democratic lawmakers, is that a ban on ESG investing would keep investors in the dark about what the companies they’re invested in are doing for climate change or social advancements. They believe that a ban on ESG has the potential to harm investors’ portfolios because they may not be able to tell which companies have exposure to threats, such as a company having outsized risks from climate-related events.

Investors still have the power

There will likely be a debate about this topic for a while. But here’s the good news for investors, no matter which side of the coin you fall on: Investors can still decide where to put their money. Neither side is forcing investors to open their brokerage account and buy specific stocks or funds, nor are they making investors sell anything they own. In short, investors can still buy and sell what they want.

Even if a ban were to occur, that wouldn’t change which companies or funds an investor can purchase. That doesn’t mean rules or regulations can’t influence the market, but neither side is calling for investors to choose specific types of investments in their online brokerage.

According to McKinsey, more than 90% of companies in the S&P 500 publish ESG reports in some form. Contrary to what both sides may argue, there is conflicting evidence as to whether ESG-focused companies and investments outperform or underperform other investments.

This leads us back to the ultimate conclusion: Invest in whatever you want. If ESG is important to you, find the funds and companies focusing on those ideas. If it’s not a compelling idea to you, you have the option to ignore it.

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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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