Americans have questions about how to fund their retirement, prioritize their financial goals and pay off debts — and MarketWatch has answers.
In a three-part series, “Mastering Your Money,” MarketWatch editors and reporters speak with panelists to help people get a handle on their finances. The first session, held on Feb. 3, addressed getting started with the basics, spending and savings strategies and balancing debt with other financial obligations. The next two sessions, held on Feb. 10 and Feb. 17, will include sessions about taxes, insurance, estate planning and retirement savings.
Viewers had plenty of questions during the event. Here were a few regarding retirement:
Any significant differences between a Roth 401(K) and Roth IRA? Which would be a better choice for a retirement account?
A Roth 401(k) is like a traditional 401(k) in that it is an employer-sponsored retirement account. It operates similarly to the traditional plan, but is funded with after-tax dollars, which means your distributions will be tax-free at retirement. With a traditional 401(k), your contributions are added to your account before tax is taken out, giving you a larger balance, but when you retire you have to pay taxes on the money you withdraw.
A Roth IRA follows the same pattern. It is similar to a traditional individual retirement plan, but it is funded with after-tax dollars as well. Traditional accounts use pretax dollars, which means you’ll see more money in those accounts at the onset, but you’ll be taxed when you withdraw the money.
One of the greatest differences, however, is the contribution limits: For 2021, the contribution limit to a 401(k) is $19,500, with a catch-up provision of $6,500 more for people 50 and older, whereas an IRA’s limit is $6,000, with a $1,000 catch-up addition. An employer must offer its employees access to a 401(k) plan, but an IRA can be opened with earned income outside of the workplace, such as self-employment income, commissions or tips.
There are also eligibility requirements to fund a Roth IRA based on income.
I will be 65 in December and will be retiring. I will have a pension and will be taking my Social Security. I also have a deferred-compensation plan with $215,000. I plan on relocating from New York City where I rent and move south where I would like to purchase. I can afford a mortgage on a lesser priced home and still have some money left over. I really don’t want to rent anymore. Any advice?
Paying for a mortgage in retirement is doable, depending of course on your retirement income and spending needs. Still, this is a question that many MarketWatch readers have asked, because having that debt over your head when you’re no longer in the workforce can be stressful.
There’s no quick answer here, unfortunately. Your best bet would be to look at home prices, figure out how much you could put down without tapping into your retirement savings, and then determine what your monthly payments would be on top of your other expenses. You don’t want to draw down too much of your $215,000 account balance, but you may be able to offset your costs with a pension and Social Security income. Side note: You might want to try holding off on claiming Social Security until your Full Retirement Age if you can — if you turn 65 in December, your FRA is somewhere around 66 years old and 4 months, according to the Social Security Administration, at which point you’d get 100% of your benefits.
MarketWatch has a great tool to help you decide where to retire.
Here is what financial advisers had to say about this couple with a $60,000 mortgage near retirement — and what they should do if they were worried about having that housing debt.
Is the 4% rule a good one to go by for spending? I have a sizable 401(k) type, pension, and Social Security. I am 58.
The 4% rule is a classic guideline for retirement spending, but it isn’t the only option — and certainly not one you should live by without careful consideration.
The rule of thumb essentially says you won’t have to worry about running out of money in retirement if you withdraw 4% of your portfolio balance every year, or put another way, $4,000 a year for every $100,000 in your account. The problem: Humans are complex by nature, and one year you may only need 4%, but another year you may want to splurge on a second home or a luxurious vacation, and might need 7%. Or perhaps you’re staying home most of the year, as many people did in 2020 when the pandemic began, and you’ll only need 2.5%.
Even the financial adviser who came up with the rule, Bill Bengen, said it’s used too simplistically. Based on his research, the average ‘safe withdrawal rate’ could be much higher — in some years, as much as 13%. There are so many factors to consider, including inflation, how much of your portfolio is in stocks or bonds and expected future investment returns.
If you will have a pension and Social Security coming in, you may feel 4% is still a fair estimate, or you may want less or more depending on your lifestyle. Before making any distributions, take a close look at your spending before retirement and what you expect it to be in retirement. Then, assess how much income you’ll be receiving outside of the retirement accounts (such as Social Security and that pension) and determine whether the 4% rule really works for you.
I am just beginning to learn investing to prepare for retirement. I am a 54-year-old homemaker and mom — no savings. I am buying and selling stocks daily to make a profit. I am trying to build my base to buy stocks for dividends profits. Is this a good plan? I have also begun a rental business to help with retirement, 18 doors averaging $4,000 a month. I am beginning with $80,000 in my trading fund. What would be a good base to have to get enough dividends to get $1,000 in profits a month.
It sounds like you have a handle on this strategy, but you may want to take a step back before you continue. If you have no savings, working on a comfortable and reliable nest egg should be priority. Buying and selling stocks can be risky — particularly if you’re doing it every day. Timing the market is rarely a great approach, especially for retirement savings.
Participating in the market always has some risk to it — but those risks are exponentially higher when you’re actively investing. Just look at what happened with GameStop, a perfect example of what not to do for your long-term investments.
Before you try calculating how much you need to get $1,000 a month in dividends, look at the big picture. Assess your current finances — what money is coming in and what money is going out — and look for other opportunities to save and invest. Do you have a spouse who is working, and if so, does he or she have access to a workplace retirement plan? If not, have you opened up an individual retirement account? You can also look into regular brokerage accounts, which you might already have, where you can open a portfolio to passively invest. It seems you’re comfortable with risk, but I would recommend speaking with a financial adviser who can help you create a portfolio that is growing for you without you having to do all the work — and also one that takes into consideration reasonable investment returns and inflation expectations.
Beyond this, make sure you have an emergency fund. That’s just as important as a retirement plan because when the unexpected occurs, you don’t want to be worrying if there’s enough money in your trading funds. It’s great that you have extra funds coming in with your rental business — the more money you can put away now, the better off you’ll be in retirement.