Latest news with #InitiativeforFinancialDecision-Making
Yahoo
02-05-2025
- Business
- Yahoo
A 401(k), IRA, or something else? How to start investing for retirement
If Annamaria Lusardi had one wish, it would be for people to understand the importance of compound interest. Lusardi, who heads Stanford's Initiative for Financial Decision-Making, and other financial experts agree that the best time to start investing for retirement was yesterday. 'I cannot overplay the importance of time. It's so essential when we plan for retirement,' Lusardi said. 'Time is on our side.' The sooner you start, the more you will earn interest on interest. For example, if you put $1,000 into a retirement account that earns 5% interest each year, you'll have $1,050 at the end of the first year and $1,102.50 the next without ever putting more money into the account. If you start early, your money has time to grow significantly. However, in reality most people don't get serious about planning for retirement until their late 20s or 30s, according to Deryck Gryne, a senior financial adviser at Ally Invest Advisors. 'If you're past that point, that's okay,' Gryne told USA TODAY. 'The most important step is to start. Whether you're 25 or 45, today is always better than tomorrow when it comes to retirement planning.' Here's what to know about saving for retirement: More: $1.5m is a retirement 'magic number.' Here's how long it lasts in every state. Financial experts agree that one of the best ways to start saving for retirement is to take advantage of your employer's 401(k) match if one is available to you. Employees who don't take full advantage of it are missing out on an average of $1,336 each year, which could add up to $42,855 over 20 years assuming an average annual return of 4.5%, according to Vanguard and a 2015 Financial Engines research report. Employer matches vary, but the average tends to hover around 4%. Find out how much you need to contribute to get the full match and increase your savings rate to capture all the free money you can. 'If you have one that offers a 401(k) with a match, there are no doubts about what you should do,' Lusardi said. 'No financial market is able to offer that benefit.' To comfortably retire, financial experts advise getting to a point where you are contributing 10% to 15% or more of your income to your 401(k) depending on when you start, when you retire, and where you live. But they say it's not bad to start small. Dr. Peter Fisher, founder and CEO of Human Investing, said contributing enough to capture an employer match is the best way to check a box when starting to save for retirement without making things more complicated than they need to be. 'Go through the math yourself. If I contribute five, my company contributes four, I get a tax deduction before I've even started investing, I'm up 100% on my money,' Fisher said. 'If I told anybody that and didn't call it retirement, they would jump at it.' Some employers' 401(k) match is tied to a vesting schedule, meaning you will need to stay with the company for a certain amount of time before you can claim their contributions. Lusardi said even if you're unsure about how long you'll stick with an employer, it never hurts to start saving. What you contribute to a retirement account is always yours to keep. You've heard the experts' advice. You go to start contributing to your company's plan, but there are two options: a traditional and a Roth 401(k). What's the difference? They're both powerful tools to help build retirement savings, but they work a little differently, Gryne said. He explained that with a traditional 401(k), you are contributing pre-tax dollars, meaning that money is taken out of your paycheck before taxes are taken out. This lowers your taxable income for the year and could reduce what you owe when tax season rolls around. So, what's the catch? With a traditional 401(k), Gryne explains, your investments will grow tax-deferred, and you'll have to pay taxes on the money when you start making withdrawals in retirement. If that doesn't sound appealing, you might consider a Roth 401(k) which works the other way. Contribute after-tax dollars and don't receive a tax benefit now, but the money will grow tax-free, and you won't need to pay taxes when you make withdrawals in retirement. The choice is a personal one. A traditional account may make sense if you don't expect to be in a larger tax bracket when you retire. Inversely, a Roth account may be the better choice if you predict your taxes will be higher when you retire. Several things can affect your tax rate, including where you live and a change in your filing status. Those who plan for their income to drop and move to a state with lower taxes, like Florida, when they retire might prefer a traditional 401(k), Lusardi said. Without access to a 401(k) account, one of the best tools available to you is an individual retirement account. An IRA is another way to grow retirement savings on a tax-free or tax-deferred basis, depending on the account you choose. You can open one through a bank, credit union, online broker, or investment company. Common places people turn when opening an IRA include Fidelity, Charles Schwab, and Vanguard. The most popular accounts are traditional IRAs and Roth IRAs. Like 401(k)s, you'll pay taxes when you withdraw money with a traditional IRA and pay taxes now when you contribute to a Roth IRA. With most IRAs and 401(k) accounts, you can generally start making withdrawals without penalties six months after you turn 59, but there are exceptions to this rule. There are several other types of IRAs, including a SEP IRA which is common for self-employed people and a SIMPLE IRA which is sometimes offered by small businesses. Contribution limits are something to keep in mind with IRAs. In 2025, savers using this method can contribute up to $7,000 – or $8,000 if they are 50 and older – per year. That's often not enough to completely fund a retirement. Still, they can be a good way to get started. Lusardi particularly recommends Roth IRAs to young people who are still in low tax brackets. 'The sooner we start, the more our money will grow,' Lusardi said. 'I tell my students to open a Roth IRA during their college years and invest the money they get during their summers.' Opening an IRA can also be an option for someone who has already maxed out their 401(k) contributions or wants to diversify their retirement investments. When it comes to preparing for retirement, the most important thing is to have a plan. The reality is that many don't. Some 20% of adults 50 and over have no retirement savings, a new AARP survey found. If you don't have a 401(k) or an IRA, Fisher hopes you have a different strategy in mind. He said for most people, it's not an inheritance, and that he heard some creative ideas while interviewing people for his research. For example, Fisher admired the resilience of one person he met who had lost a significant amount in the stock market, pulled out his remaining money, and shifted focus to investing in real estate. Another person he met wasn't contributing to his 401(k) but gave a detailed explanation about his investments in cryptocurrency. Fisher liked that he was at least thinking about retirement. 'My concern tends to rise when someone lacks a plan and has no history of saving. I'm less worried when someone is saving — even if it's not in the optimal way — because they're at least building the right habit," Fisher said. "Over time, many people learn from their financial missteps and self-correct. The key is starting the discipline early.' Gryne said while alternative investments like real estate and cryptocurrency can diversify a portfolio, be wary that they also introduce higher risk and volatility. He advises each person to make a plan that is best in line with their risk tolerance and goals. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_ This article originally appeared on USA TODAY: How to start investing for retirement today: Tips for beginners Sign in to access your portfolio
Yahoo
01-05-2025
- Business
- Yahoo
What is the average credit score and how is it measured? Expert tips on how to raise yours
Credit scores don't matter unless you're trying to get a loan, rent an apartment, secure insurance, buy a home, avoid paying a deposit to utility companies, or even land some jobs. OK. Unless you're living off the grid, they really do matter. The average credit score in the U.S. is 717, according to FICO, the data analytics company whose scoring model is used in most lending decisions. That's considered a good score. But millions of Americans still struggle to raise theirs, and low credit scores can make achieving common life goals much more difficult. Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said having a good credit score will save you money because it allows you to secure lower insurance premiums and lower interest rates on loans. 'Just one percentage point difference on a mortgage, even on our auto loans, it's enormous savings,' Lusardi said. 'If we don't have a good score, we're actually not going to have any credit. We are shut down from borrowing. That's why I say the financial system is not forgiving.' Here's what to know about credit scores and how to raise yours: More: Credit report errors are more common than you think. Here's how to dispute one A credit score is a three-digit number that indicates how likely you are to pay back money when you borrow it, based on your credit history and data from major credit bureaus. 'I always describe the credit score to my students as their financial GPA,' Lusardi said. 'We need to have the best grade available to signal to everybody who wants to work with us that we are a good borrower. That we are a good person with good credit.' FICO scores, used in 90% of lending decisions, are calculated using five criteria, but the weight of each category can sometimes vary by person. FICO notes, for example, that scores for people with short credit histories could be calculated differently than for those who have been using credit longer. The first and most important thing that affects your score is payment history. Whether and how you paid back past credit generally accounts for 35% of your FICO score. How much you currently owe is the second most important thing, generally making up 30% of your score. While the amount matters, your credit utilization is also important. If a person has used all credit available to them, it can indicate that they are overextended and more likely to miss payments, FICO notes. The third aspect, the length of your credit history, generally accounts for 15% of your score. The age of your oldest account, newest account, and the average age of all your accounts will play into your score. The fourth and fifth categories generally each make up 10% of your score. They are the amount of new credit you have and your credit mix. Opening multiple new credit lines in a short amount of time can drop your score, particularly if you don't have a long credit history. Your credit mix reflects the different kinds of credit you manage. It can include credit cards, mortgages, car payments, and more. If you have several types of credit and routinely make payments on them, it can boost your score. The highest FICO score possible to achieve is 850. That's a perfect score and it's not always necessary to get the best terms and rates when borrowing. FICO scores are divided into five ranges: poor, fair, good, very good and exceptional. According to data from Experian, 71% of Americans have a good score or better. Some 13% have a score between 300 and 579, which is in the 'poor' range. Another 16% have a score between 580 and 669, falling in the 'fair' range. The next 21% are in the 'good' range, meaning they have a score between 670 and 739. At 28%, the highest percentage of people, fall within the 'very good' range and have a score between 740 and 799. In the 'exceptional' range are 22% of Americans, who have a score between 800 and 850. According to other data from Experian, credit scores tend to increase over time. It found the average FICO scores in 2024 by generation were: Generation Z: 681 Millennials: 691 Generation X: 709 Baby boomers: 746 Silent generation: 760 A common misconception about credit scores is that checking yours will make it drop. That's not true. However, lenders checking your credit score, like when you go to buy a car or open a credit card, can make it decrease for a short time, Lusardi said. You can view your own often through your bank or credit union, and online at If you're trying to raise your score, the best thing you can do is pay off debt, Lusardi said. She also recommends using only about 70% of the credit available to you to avoid indicating that you are overspending. In terms of improving your credit mix, Lusardi said it's important to manage the different types of credit you currently have well. If you don't have student loans, a mortgage, or another loan, but have one credit card, she doesn't recommend opening a new line of credit just to raise your FICO score. 'In this case, I actually wouldn't worry too much about it,' Lusardi said. 'I don't think that it is worth opening a new line of credit both because it is only 10% and because if you don't have other sources of debt there is really no reason.' To maximize the length of your credit history, don't close old credit card accounts, Lusardi said. She also warns against opening multiple new lines of credit at once because that could signal that you are in financial trouble. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_ This article originally appeared on USA TODAY: What is a good credit score? Expert tips on how to raise yours Sign in to access your portfolio
USA Today
29-04-2025
- Business
- USA Today
What is the average credit score and how is it measured? Expert tips on how to raise yours
What is the average credit score and how is it measured? Expert tips on how to raise yours Show Caption Hide Caption What is a good credit score? Here's what your score means. What makes a good credit score? Here's how they work and which factors can impact your score. Credit scores don't matter unless you're trying to get a loan, rent an apartment, secure insurance, buy a home, avoid paying a deposit to utility companies, or even land some jobs. OK. Unless you're living off the grid, they really do matter. The average credit score in the U.S. is 717, according to FICO, the data analytics company whose scoring model is used in most lending decisions. That's considered a good score. But millions of Americans still struggle to raise theirs, and low credit scores can make achieving common life goals much more difficult. Annamaria Lusardi, who heads Stanford's Initiative for Financial Decision-Making, said having a good credit score will save you money because it allows you to secure lower insurance premiums and lower interest rates on loans. 'Just one percentage point difference on a mortgage, even on our auto loans, it's enormous savings,' Lusardi said. 'If we don't have a good score, we're actually not going to have any credit. We are shut down from borrowing. That's why I say the financial system is not forgiving.' Here's what to know about credit scores and how to raise yours: More: Credit report errors are more common than you think. Here's how to dispute one What is a credit score? A credit score is a three-digit number that indicates how likely you are to pay back money when you borrow it, based on your credit history and data from major credit bureaus. 'I always describe the credit score to my students as their financial GPA,' Lusardi said. 'We need to have the best grade available to signal to everybody who wants to work with us that we are a good borrower. That we are a good person with good credit.' FICO scores, used in 90% of lending decisions, are calculated using five criteria, but the weight of each category can sometimes vary by person. FICO notes, for example, that scores for people with short credit histories could be calculated differently than for those who have been using credit longer. How is a credit score measured? The first and most important thing that affects your score is payment history. Whether and how you paid back past credit generally accounts for 35% of your FICO score. How much you currently owe is the second most important thing, generally making up 30% of your score. While the amount matters, your credit utilization is also important. If a person has used all credit available to them, it can indicate that they are overextended and more likely to miss payments, FICO notes. The third aspect, the length of your credit history, generally accounts for 15% of your score. The age of your oldest account, newest account, and the average age of all your accounts will play into your score. The fourth and fifth categories generally each make up 10% of your score. They are the amount of new credit you have and your credit mix. Opening multiple new credit lines in a short amount of time can drop your score, particularly if you don't have a long credit history. Your credit mix reflects the different kinds of credit you manage. It can include credit cards, mortgages, car payments, and more. If you have several types of credit and routinely make payments on them, it can boost your score. What's the highest credit score you can get? The highest FICO score possible to achieve is 850. That's a perfect score and it's not always necessary to get the best terms and rates when borrowing. FICO scores are divided into five ranges: poor, fair, good, very good and exceptional. According to data from Experian, 71% of Americans have a good score or better. Some 13% have a score between 300 and 579, which is in the 'poor' range. Another 16% have a score between 580 and 669, falling in the 'fair' range. The next 21% are in the 'good' range, meaning they have a score between 670 and 739. At 28%, the highest percentage of people, fall within the 'very good' range and have a score between 740 and 799. In the 'exceptional' range are 22% of Americans, who have a score between 800 and 850. What's the average credit score by generation? According to other data from Experian, credit scores tend to increase over time. It found the average FICO scores in 2024 by generation were: Generation Z: 681 Millennials: 691 Generation X: 709 Baby boomers: 746 Silent generation: 760 How do you raise your credit score? A common misconception about credit scores is that checking yours will make it drop. That's not true. However, lenders checking your credit score, like when you go to buy a car or open a credit card, can make it decrease for a short time, Lusardi said. You can view your own often through your bank or credit union, and online at If you're trying to raise your score, the best thing you can do is pay off debt, Lusardi said. She also recommends using only about 70% of the credit available to you to avoid indicating that you are overspending. In terms of improving your credit mix, Lusardi said it's important to manage the different types of credit you currently have well. If you don't have student loans, a mortgage, or another loan, but have one credit card, she doesn't recommend opening a new line of credit just to raise your FICO score. 'In this case, I actually wouldn't worry too much about it,' Lusardi said. 'I don't think that it is worth opening a new line of credit both because it is only 10% and because if you don't have other sources of debt there is really no reason.' To maximize the length of your credit history, don't close old credit card accounts, Lusardi said. She also warns against opening multiple new lines of credit at once because that could signal that you are in financial trouble. Reach Rachel Barber at rbarber@ and follow her on X @rachelbarber_
