Do you have an emergency fund? If the answer is no, you’re not alone. According to a recent survey, 24 percent of American adults said they had no savings at all. Among those approaching retirement, age 53 to 62, more than 30 percent said they didn’t have any money set aside for emergencies.1
An emergency fund is important at any age. During your working years, an emergency fund can help you get through stretches of unemployment or disability. You can use it to cover medical bills, home repairs or any other major unexpected costs. Common advice is to always maintain at least a few months’ worth of living expenses in a safe, liquid emergency account. Retirement is different, though. Work is no longer an issue, so unemployment and disability no longer pose major threats. You’ll have Medicare to cover health care costs. And you may have significant retirement assets to pay for any other need. You might feel that a substantial emergency reserve is no longer important.
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Qualified accounts such as traditional IRAs and 401(k) plans are among the most commonly used assets for saving for retirement. They’re popular largely because of their tax treatment. Your contributions may reduce your taxable income. Traditional IRA contributions may be tax-deductible, and 401(k) contributions are taken from pretax earnings.
As long as the funds stay inside the account, you don’t pay taxes on your growth. That means you can increase your assets over a long period of time without paying taxes on the gains each year. That tax deferral could help you accumulate assets at a faster rate than you would achieve in a similar taxable account. However, you can’t defer your taxes forever. Distributions from these accounts are usually taxable. The IRS requires you to take distributions from a traditional IRA or 401(k) by age 70½. The amount of these required minimum distributions (RMDs) is based on your account balance and your age. The withdrawal usually increases as you get older. Worried that you’re behind on your retirement savings? You’re not alone. According to a study from Gallup, more than half of Americans are worried that they won’t have enough money to fund their retirement. In fact, Gallup has conducted a study on Americans’ top financial worries every year since 2000. Retirement has topped the list as the No. 1 financial concern in every study.1
A separate study from the Economic Policy Institute suggests many Americans have reason for concern. The study found that half of Americans have no retirement savings. The average savings balance is just over $95,000, but the median balance is only $5,000.2 If you’re behind on your savings, there are several steps you can take to catch up. You could work to a later age, giving yourself more opportunity to save. You could scale back your retirement plans, reducing your anticipated spending. You could even work part time in retirement. It’s a new year, which also means it’s resolution season. For many, that means hitting the gym or embarking on a new diet. It could mean going back to school or pursuing a new job. New Year’s is the time to assess your life and identify areas for improvement. Unfortunately, nearly 80 percent of all resolutions fail by February.1
This year, consider adding some financial resolutions to your list. With some simple changes in habit and behavior, you can significantly improve your financial picture. Facing an early retirement? Maybe you’ve accumulated enough savings to retire in your 50s. Or maybe you’re facing a health issue or job loss that’s pushing you into retirement. No matter the reason, early retirement can present a number of unique challenges.
One of the biggest issues that early retirees face is taking distributions from their qualified retirement accounts, such as IRAs and 401(k) plans. These accounts are tax-deferred, which means there are no taxes on growth as long as the funds stay inside the account. However, distributions may be taxed as income. Additionally, if you withdraw funds from a 401(k) or an IRA before age 59½, you could face a 10 percent early distribution penalty. Are you starting to think about your legacy and how you’ll pass it on to the next generation? It’s never fun to think about your own death. However, it’s too important to ignore. You may have a substantial amount of assets that you want to distribute to loved ones. You may have a spouse, children or other family members who are dependent on you for support. You might even own a business that could face hardship after your death.
All these issues require some level of estate planning. If you fail to develop a robust estate plan, you could leave your loved ones, business partners and others in a difficult financial situation. |