Retirement accounts across the country are suffering...
According to a recent survey by personal finance company MagnifyMoney, many Americans have either stopped contributing to their retirement accounts or have decreased their contributions because of the coronavirus crisis.
Even worse, some Americans are pulling money out of their retirement accounts to pay for essentials.
I've talked a lot in my newsletters about the economy, the stock market, and the coronavirus recently. But today, I want to cover some basics of personal finance...
The MagnifyMoney survey went out to people of all ages who had a retirement savings account. When asked the question, "Are you still contributing to your retirement savings account amid the coronavirus pandemic?" just under half of all respondents said they stopped their contributions or at least lowered them.
And as you can see, the Baby Boomer generation (ages 55 to 74) has been impacted the most...
This is troubling because folks in their 50s and 60s are the ones who need to keep their contributions steady. No one wants to get to the finish line only to be a few thousand dollars short.
But the scariest result is that at the time of the survey, half of Americans had either pulled money from their retirement accounts in the prior two months, or they planned to shortly.
The majority of Baby Boomers said they needed the money to go toward household bills. The majority of millennials and Gen Xers needed it for groceries. And a large portion of each group needed it for rent or mortgage payments.
Many people in the U.S. have adopted the attitude of just surviving this crisis. But I don't want you to forget about one important goal... being able to retire when you want to and being able to live comfortably in retirement.
Today, let's go over three important topics... your ideal savings rate, housing and other debt levels, and how much you need in case of an emergency.
- How much should you save per year?
You can't rely on the government or anyone else to take care of you when you enter your golden years. If you haven't saved enough money, it will be hard to live the retirement lifestyle you are hoping for.
At a minimum, you should save 10% of your gross salary. This includes employee and employer contributions.
Let's say you have an annual salary of $80,000 and you're paid bi-weekly. If you contribute 5% of that to your 401(k) plan and your employer matches your contribution up to 3%, you'll end up saving $6,400 each year. You also set aside $500 every year in your savings account, bringing your total savings to $6,900. Divide that by your gross salary of $80,000, and your savings rate is 8.6%.
In the long term, you'll need to start saving more. Of course, how much you need to save depends on your age...
Every situation is different, but in general, you should follow these guidelines.
- How much debt should you have?
For most of us, a house is the most expensive purchase we'll ever make. As a general rule, your housing costs should be less than 28% of your gross pay.
Housing costs include principal, interest, taxes, and home insurance. So if your total housing costs are $2,000 each month, you'll need a monthly income of at least $7,142 per month, or about $85,000 per year.
If you calculate your housing costs and you're over 28%, it might be time to downsize. And as you approach your retirement age, your housing costs should decrease and only make up about 5% of gross pay.
Also, if you throw in other debt such as car loans, student loans, or credit-card payments, your total debt shouldn't exceed 36% of your gross salary. Here's the formula...
(Housing Costs + Other Debt Payments) / Gross Pay ≤ 36%
And for folks near retirement age, that number should be 10% or less of gross pay.
Interest rates are practically zero, so borrowing is cheap today. Keep this formula in mind when you're thinking about taking on more debt.
- How much of a rainy-day fund should you have?
You should always have about three to six months' worth of expenses in cash.
In case you lose your job, you'll need such a buffer for unexpected costs such as medical bills or your car suddenly breaking down. (Or if a virus spreads across the U.S., causing much of the economy to shut down.)
Be sure that when you calculate your monthly expenses, you include items such as groceries, school expenses if you have children, clothing, and insurance. Don't include "nice to haves" like vacations or premium cable channels.
How much of an emergency fund you need also depends on your situation. If you are the sole provider in your family, you should have an emergency fund closer to six months' worth of expenses. If you and your spouse are both employed and bring in roughly the same income, you could probably get away with three months' worth.
But no matter what, always have an emergency fund at a minimum of three times your monthly expenses. It should never be below that.
Coronavirus and unemployment headlines are dominating the news right now... But don't lose sight of your financial goals.
No matter what age you are, SAVE... Keep your debt levels under control... And always be prepared for an emergency.
Also, did I mention the importance of saving?
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
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