How I Money is a series featuring real people who have real questions about money, and real advice from Betterment’s experts. Follow along as our financial planners help folks just like you think through saving, investing, debt, retirement, and more.
Meet Sasha*:
Let’s dive into Sasha’s financial goals and concerns:
Talk me through your short-term financial goals. What do you hope to achieve within the next 5 years?
Sasha:
- Be financially stable enough to take one big vacation a year.
- Have a year’s worth of expenses (mortgage, bills, etc.) saved.
- Be relatively debt free (except for student loans, though those are all federal).
- Start investing more aggressively towards retirement (tracking towards 1 million in investments by the age of 63).
Let’s talk long-term. What do you hope to accomplish financially 5 years or more from now?
Sasha:
- Pay off student loans.
- Maybe start a business?
- Invest in real estate.
- Donate more to the causes we care about.
- Build our dream home.
What impact has COVID-19 had on either your short or long-term financial goals?
Sasha: My wife worked in the food industry and was furloughed for 5 months this year. While we are very grateful to have an additional salary to pay the month-to-month bills and a decent cushion in savings, we weren’t able to start paying down our debt as aggressively as we’d hoped to until now. My job is also not matching 401(k) contributions during this time, though we are hopeful that will resume in 2021.
If you could ask a financial expert for advice on one money question, what would it be?
Sasha: How best to save for retirement—how do we maximize the impact of our investment?
What the financial experts say:
We asked Corbin to comment on Sasha’s financial goals. Here are her thoughts.
Sasha and her wife have so many short and long-term goals, which is great. How should they prioritize them?
Corbin: This is a really common question that a lot of our customers ask, and thankfully Sasha has already done the hard part of figuring out exactly what her goals are.
At a high level, prioritizing the life goals we need to save money for is so important because most of us only have a limited amount of income. But before Sasha and her wife even get to saving for their goals, they need to ensure that they’ve covered the basics:
- Making all minimum debt payments
- Always having three to five weeks’ worth of expenses in an easily accessible place, like a checking account.
- Contributing to their employer’s retirement plan to maximize any employer match once they receive a match again.
Once they have those three sorted, they can move on to getting specific about each of their goals and determining how much they would have to save, then decide when they’d need the money. For example, they currently have a mortgage but also want to build a dream home—do they want to stay in the house they’re currently in and renovate it, or move to a new home? When would they buy their new home? Where would it be? And what size?
When you open a goal within Betterment, we prompt you to enter this information. Keep in mind that it doesn’t have to be exact, but when Sasha completes this process for each of her short and long term goals, she will be able to rank her goals in their order of importance, calculate how much she would have to save for each, and then set up auto-deposits to the goals she is funding so that her savings happen automatically.
Sasha also mentioned she wanted to save a year’s worth of expenses in her emergency fund, even though we typically recommend having three to six months’ worth of expenses saved. But, since Sasha mentioned that her wife was furloughed during the pandemic, it makes sense that she would want an extra financial cushion.
Once she covers all the basics, I recommend starting there to give them more peace of mind and be prepared for anything else that might happen.
How should Sasha and her wife save for retirement? With no 401(k) contribution from her employer, are there other accounts and products they should explore to maximize their investment?
Corbin: Fortunately, Sasha and her wife are eligible for both their employer’s 401(k) and an IRA (regardless of if they’re married filing separately or married filing jointly). There are many different options for them to choose from, but she can use these questions to help guide her:
- How much does she need to save? First, she needs to know how much she wants to spend every year in retirement, and when she wants to retire. This way she can calculate how much money she should be saving, or use a financial product that does it for her, like Betterment.
- How much can she save? Not everyone can afford to save everything they need to for the retirement lifestyle/age they want. However, Sasha can still weigh her retirement goals against other expenses and financial goals, and determine how much her and her wife can afford and are willing to save for this goal.
- Does she expect to be in a lower tax bracket today or in retirement? Knowing this will help dictate her highest priority account. For example, if she expects to be in a higher tax bracket, then she should be putting money away in a Roth IRA for tax-free withdrawals in retirement. But if she expects to be in a lower tax bracket, then prioritizing a Traditional 401(k) might be better for her in the long run.
For reference, the 401(k) and IRA limits for 2021 are as follows:
- The contribution limit for employer-sponsored 401(k) plans remains at $19,500 for individuals under age 50.
- Contribution limits for IRAs remain at $6,000 in 2021 for individuals under age 50.
- The income phase-out range for taxpayers making contributions to a Roth IRA is $125,000 to $140,000 for singles and heads of household. For married couples filing jointly, the income phase-out range is $198,000 to $208,000.
One of Sasha’s long-term goals is to donate more to the causes she cares about. What are some things she should keep in mind?
Corbin: Donating any amount of money on a regular basis takes planning. Not only does it require researching the causes and charities she’s interested in, but it also requires tax planning if Sasha envisions reporting the donations in her yearly taxes.
One thing Sasha should keep in mind are the administrative expenses of the organization. For some folks, it’s important to them that the money used for these expenses doesn’t outnumber the amount of money used to fund programs.
From a personal financial perspective, donating to charity can help reduce her taxes. If Sasha wants to claim a deduction for her charitable donations on her taxes, she needs to itemize rather than take the standard deduction in that year(s). When it comes time to file them, she can use Schedule A on the form 1040 to itemize each of her deductions, and be sure to include her donation on lines 16-19.
Another tax efficient way to donate to charity is by donating appreciated stock instead of cash. Betterment has a charitable giving feature that ensures almost all charities keep 100% of your gift.
Let’s say that Sasha opens an investment account at Betterment and her money grows over the years.
If she were to sell some of her shares and donate the cash, she would pay taxes on the growth, but if she simply donates the actual shares to her charity of choice, she can avoid having to pay taxes on the gains and still gets to deduct the fair market value of the shares on the date of her donation (as long as the shares were held for more than a year).
Another benefit to this strategy is that you can donate shares, and then replace the shares with an additional cash deposit, resulting in a lower embedded tax liability, while keeping your investing goals on track.
How much of her student loans should she prioritize paying every month, particularly with federal loans repayments on hold?
Corbin: The exact dollar amount of how much she pays off will depend on her competing priorities. Thankfully, on Wednesday, January 20th, President Biden signed an executive order to extend federal student loan forbearance until September 30th, 2021, which is great news. We always recommend making minimum monthly payments on time for all loans and bills, with any extra income going to the loan with the highest interest first, not the highest balance.
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* Responses for the How I Money series were gathered through voluntary participation in an online survey where participants were requested to provide comments, feedback, ideas, reports, suggestions, data or other information to Betterment (collectively “Feedback”). The Feedback gathered in that survey excluded Betterment clients, was anonymized, and used internally to help us understand how people could benefit from Betterment’s services and to create content to address those needs. Participants permitted Betterment to use any Feedback they provided for these purposes. While this content is written for advice purposes, it may not be applicable to all and is intended to be informational only.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER
certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.