About two-thirds of retirees’ savings are spent within the first year of retirement. Disbursing this wealth at a time when retirees can’t find enough money to last a lifetime also adds a financial burden on their younger family members.
With February being National Retirement Month, Phil Bressler, co-founder of the online investment platform Betterment, came up with a clever idea: Let retirees start 2019 thinking about enjoying all the exciting trips they have planned, instead of focusing on saving and investing for their income later.
The Betterment solution is to invest retirement savings into a “Money Gap” account, where for the first year, all interest earnings are tax-free, and the account balance is forfeited to charities. The money can then be returned to the retiree at retirement or investment tax rates, depending on whether the retiree is a married couple or single.
Bressler explained in a video on Betterment’s website that if an individual needs $5,000 a year from his or her retirement account to live, “the average 15 percent annual return for a regular investment account results in just $3,080. That’s enough to travel the world for seven years. But under this approach, the retirement savings account earns more than $13,000 in interest, assuming the conservatively timed withdrawals for the first year are as low as $500.”
Bressler then addressed people who worry about how they will save enough money when retirement is several years away: “People are talking about the ‘rainy day fund,’ people are talking about other concerns, but I see this as an opportunity. There’s a huge, huge spending problem for the very long-term, and a solution is within our grasp.”
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