November 26, 2023

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Good day.

Despite an increased emphasis on retirement planning in recent years, many Americans still find themselves behind the 8-ball. Can you guess what percentage of workers feel like they're lagging their retirement goals? A. 45% B. 56% C. 62%.

Here are the topics for today:

Retirement Planning is Going Overlooked
Prioritizing Your Finances: Retirement vs. Savings
Your 401(k) Contributions Could Save You Money on Tuition

RETIREMENT

Retirement Planning is Going Overlooked

Let's take a brief moment to congratulate ourselves — retirement planning has come a long way in recent decades. Largely thanks to an increased emphasis on financial wellness, investors have emerged from the early 2020s pandemic era with both higher participation and account balances.

What's the catch?

That's great, well, at least for those who have access to retirement accounts. As of 2022, just 54% of American families owned retirement accounts, and the median balance of those that do is still just $87K.

In terms of our retirement system, a recent survey placed the U.S. in 22nd out of 47 nations worldwide. This is largely due to the fact that a vast swath of Americans don't even have access to an employer-sponsored retirement plan.

Unsurprisingly, this conundrum is most common amongst lower-earning workers. It's an issue where those that need the least help can get it, and those that need the most cannot.

What can workers do about this?

Open an IRA: If you don't have access to an employer-sponsored retirement plan, opening an individual retirement account is your next best bet. Albeit the contribution limits are much lower, ($6,500 for 2023 & $7,000 in 2024) maxing these out to the best of your ability is much better than nothing.
If you're self-employed or work for a qualifying small business, consider opening a solo 401(k), SEP IRA, or SIMPLE IRA. These are uniquely crafted retirement accounts for individuals in equally unique situations, and they have much higher contribution limits than a Roth or traditional IRA.
Invest as usual. In terms of tax advantages, a brokerage account is one step from being a Roth IRA with no contribution limit. The difference is, that your capital gains aren't tax-free — but, you can minimize the impact of this. Investing as usual is far better than not investing at all, and once you've maxed out an IRA, it's the most logical choice. You can minimize your tax hit here by utilizing tax-loss harvesting and investing for the long run (not selling).
Save, save, and save. Some may say that cash is trash, but at the end of the day, it's what we use to fund our retirement. Once your emergency fund is established and investments are on track, there's no shame in doing some old-fashioned mattress stuffing. Just make sure it's in a high-yield savings account.
Also of note here — is that more long-term, part-time workers will begin gaining access to employer-sponsored retirement accounts next year. Thanks to SECURE 2.0, starting in 2024, employers are required to extend retirement account offerings to part-time employees who work 500+ hours per year for 3 consecutive years, and in 2025, this is reduced to 2 years.

FINANCIAL PLANNING

Prioritizing Your Finances: Retirement vs. Savings

For most of us living relatively normal lives with normal incomes, carrying out the balancing act of financial planning can be an arduous task. It's often tough to decide which goal to dedicate your money and efforts to, and it's easy to feel like you're trying to be everywhere at once.

Outside of meeting your basic monthly needs, two main financial goals are tugging on your income — retirement investing and saving. It's a conflicting position as adding to one often means subtracting from the other, so how are you supposed to decide which comes first?

The timeline

Savings come first, but this comes with an asterisk. Savings come first up to the point of funding your emergency savings, but after that, stash some cash for retirement investing too. What constitutes an emergency fund depends largely on your needs, but ultimately there are two tiers — the first $1,000, and then 3-6 months of living expenses.
The in-between period: For many of us, it can take a long time to save up a whole 6 months' worth of living expenses — that's more than $20,000 for most. Because of this, there's often an in-between time when you'll ideally be contributing both to retirement savings and a full emergency fund. It's that time between the first $1,000 and your full 6 months of expenses.
Eventually, maximize both: It takes differing lengths of time for everyone to reach a full emergency fund. Once you're there, shift your focus to maximizing your retirement investing for the time being until you've made some headway, then look back on your savings and add to them as needed.

Practical bonus tips

Decide on your savings: It takes differing lengths of time for people to reach a full emergency fund. Some may feel comfortable with just 3 months' expenses, whereas others prefer a year or simply as much as they can save. Deciding on this number will show you how long you might have to be in that in-between period, and how much you might miss out on if you invest less during that time.
Assess your retirement situation: Every situation is different — you'll need to know how much you've invested so far and compare it with what your goal is and how many years you've got to achieve that. Knowing where you stand relative to where you want to go will help determine how you balance these two things.
Increase your income: One of the simplest ways to solve this balancing act is to increase your income. That's often much easier said than done, but it's also true that if you fixate relentlessly on a goal, you'll almost always find a way to achieve it.
Always use a match: If your employer happens to offer the benefit of a 401(k) match, you should be in a rush to take advantage of that. It's free money and free money that increases the power of your compound interest over time.

Saving for Retirement & Why It Matters

Retirement Planning

8 mins

MONEY TIP

Your 401(k) Contributions Could Save You Money on Tuition

Over the last two decades, the average cost of tuition at public, 4-year universities has increased by about 9% per year, or 179.2% in that time frame. Our most recent data from the 2021-2022 academic year shows that the average annual cost was roughly $10,700 for in-state students and $27,500 for out-of-state students.

No matter how you slice it, this adds up to a substantial amount of debt for the majority of students (and/or parents) by the time they've graduated — the average balance is $37,338 per borrower.

Students can minimize their tuition costs by maximizing their financial aid, which rewards students with lower expected family contributions (EFC) and lower incomes by offering them more aid.

Luckily, it just got easier to lower your parents' (or your own) income.

Starting this year, FAFSA applications will allow applicants to exclude pre-tax retirement account contributions from their income reporting.
Previously, FAFSA would ask applicants how much they had contributed to their employer-sponsored retirement plan during the prior tax year, and then include that amount in their total income calculations, falsely increasing the amount of "income" families were expected to contribute toward tuition costs.
This new, streamlined FAFSA form rolls out on the last day of December and will be available for prospective and current students to use for the 2024-2025 academic year.

🌊 BY THE WAY

💰 Answer: It's 56%, an unsettlingly high amount. (CBS)
🗞️ TikTok is becoming a go-to news source for younger Americans (Pew Research Center)
👀 ICYMI. It's a bad time to refinance student loans (Finny)
🔑 Home shopping is pretty much an online thing now (Axios)

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