Last week I spoke about the situation I found myself in, looking into planning for my retirement while paying down my student loans. This week I’d like to talk about the strategies and accounts I’ll be taking and opening to help detour some of the misdirection I received in my youth. It’s scary to think how much time I’ve lost to just not knowing how to plan for the future. But it’s never too late to start and there’s no time like the present. So let’s jump in.
I’d also like to take the time to state that I am not a financial professional and these are just my opinions of how I’m planning for retirement. If you have any questions about your own financial situation, I suggest you seek out help from a professional financial adviser.
10% or 15% How Much Should I Save?
There are a couple of different views on this front. Dave Ramsey says to save 15% of your annual income after you’ve paid off your debt and set up an emergency fund. While Ramit Sethi suggests saving 10% and doing so while you’re paying down low interest debt such as student loans.
Dave’s rational is that if you’re in debt, then paying into retirement doesn’t make any sense if it means extending the life of your loans and the interest you’ll be paying on them. This makes sense, seeing how you’re not really making money if you’re still paying somebody else at the same time.
But Ramit’s point is valid as well. His angle being that the sooner you begin to invest, the more time you have to let your money grow. And it’s better to start the process of saving as early as possible. So the question remains, should we invest 10% or 15% and should I pay off debt first or jump right in with savings?
Whether you decide to start right away, while paying down low interest student loans or to pay into retirement after you’re done with debt, that’s your call. My take on the subject is, the more I save the better and the less debt I have, the easier it will be to reach those goals. If I can put away 15%, I’m going for it. Hell, if I can put away 20%, even better. But before I go ape shit and throw everything I’ve earned towards retirement, I want to make sure that I’m not spreading my finances too thin by trying to save too aggressively. Also that I’m able to enjoy my money as well.
The goal of saving for your future isn’t only about surviving, it’s about enjoying yourself. Do I really want to look back in retirement and think, “man, I’m sure glad I missed out on all those fun things I could have done instead of saving so aggressively for retirement”. This is a bit of an exaggeration, and it’s better to be safe than sorry. But I’m not going to let saving for retirement get in the way of living my life either. Just like most things in life, there’s a balance to be struck.
The Accounts I’ll be Opening
This one was a little confusing for me when I first started thinking about investing. Should I start with an account that is tax deferred, so I’m taxed when I withdraw my money? Or should I open an account where I’m taxed when I make the deposit, and withdraw without being taxed? This all depends on your situation and I suggest that you speak with a qualified financial professional about your options.
But it’s still good to do some research on the subject before hand, so you’ll know the right questions to ask. Dave Ramsey has a good list of retirement accounts and their specific details here on his website. But as for the accounts I’ll be opening, it seems as though most people are on the same page, and me as well.
A 401k is a retirement account that you can fund directly from your paycheck, allowing you to make contributions tax free. The benefits are, your money grows tax free and Uncle Sam takes his share when you make withdrawals. Also, you’re able to contribute up to 22,000 dollars a year as of 2022. You also have to wait until you are 59 1/2 to start making withdrawals or you will pay heavy fees.
This type of account is often offered by your employer. And some companies offer a match up to a certain percentage. This means that the company will offer you a certain amount of money based on how much you contribute to your fund. This may be a dollar amount set by the company, or a percentage of your annual salary.
Roth IRAs or Roth Individual Retirement Accounts, are personal accounts you take out independently, where your contributions are taxed before being added to the fund and are not taxed when you withdraw your money or while your investment is growing. You fund these accounts after taxes are taken out of your pay, unlike a 401k, and are capped at $6,000 annually as of 2022, $7,000 if you are over the age of fifty.
Roth IRAs are good options because they are available to everybody as long as you meet the income requirements. As of 2022 the limit for a single person is under $144,000 a year. They’re great savings vehicles and the sooner you get started investing in them, the better. Also you don’t have to start withdrawing until you’re 72. Unlike the age limit of 59 1/2 for 401ks.
Also, don’t forget about social security! Where this isn’t technically an account that you open, it’s something you’ve most likely been contributing to your entire working career.
How it works is, you pay into it by having it taken out of your paycheck directly. Your contributions are listed as the “social security” line on your paystub. When you’re ready to withdraw, which you can start at age 62 to age 70, the government takes the highest earning 35 years or your working history, and averages them to calculate your payout. If you work less than 35 years, the years that you didn’t work will equal 0. This could hurt your total payout when you decide to withdraw.
This link from The Penny Hoarder goes into detail about how social security works and the questions you may have navigating it. It can be deceptively complicated, so take your time and do some research around this subject.
The above accounts are what I’ll be using, but there are also a variety of other accounts that may be more suited to your situation. For example, if you’re a freelancer, you may want to open up a SEP-IRA. This is a plan for individuals who are self employed or small business owners. If your employer offers a pension, this is also something worth looking into as well. And again, if you have any questions on what’s right for you in your situation, get in touch with a financial planner who can help you make these important decisions about your future.
What’s My Strategy?
So now that we took a quick look at some of the basic retirement accounts and how they work, how do we put them all together to make a comfortable retirement? I’ll walk you through what I’m planning on doing as of now, with my investing. Of course this is unique to my situation so it will be helpful for you to take a look at what’s out there and what works best for you, speaking with a professional when necessary. Hopefully this will help give you some basic info when deciding what’s best for your plan.
And luckily, Dave Ramsey and Ramit Sethi both seem to agree about some basic money maneuvers when it comes to retirement. Their plans are something I’ve modeled my own after. So if these guys are on the same page, it’s likely that their advise should be taken into consideration. I’d also like to say that I’ll be meeting with a financial advisor once I hit some of my financial goals, to fine tune my plan. So let’s review what I’ve come up with.
Step One: 401k With a Match
The first step I took was to see if my employer had a 401k I could contribute to and if they had a match. Fortunately for me, my employer does have a 401k. Unfortunately, they do not offer a match. If my employer did offer a match, I would most definitely take advantage of this. Reason being, that any match they would give me would be the equivalent of getting free money. And it would just be silly for me to say no to free money. But since they do not offer anything in the way of a match, it’s on to step two for me.
Step Two: Roth IRA
The next step, and the one where I’ll be starting my savings journey is, opening a Roth IRA. You can open a Roth with just about any investment firm or bank. For example, Fidelity has a Roth account you can open with only a few pieces of identification and a bank account with which to start funding it.
As of 2022, you are only able to contribute $6,000 to your account annually and $7,000 if you’re over the age of fifty, incase you need to play catchup for starting late. For me, this means I can max out my Roth IRA contributions with $500 a month. And luckily for me, this fits just inside of my budget for my savings goals with a little extra to contribute to another account. So once I max out my Roth IRA, what’s my next step?
Step Three: 401k, Again?
After I contribute all I’m able to to my Roth, it’ll be time for me to revisit my 401k again. This is where I’ll be putting my overflow from my 15%+ savings goal that won’t fit in my Roth IRA after I’ve met my cap. Allowing my contribution to grow tax deferred is better than letting it sit in high interest savings like a money market account.
My money market account is solely for the purpose of housing my emergency fund and any long term savings goals I have. Such as saving a down payment for a house. And if you still need somewhere to stash your retirement savings after maxing out both a Roth and a 401k, congratulations! Because you are crushing it on your pay rate and planning!
Step Four: Social Security
The good news is, once you’ve established the above accounts, Roth IRA and 401k, by the time you’re ready to collect social security, you’ll be in pretty good shape. Social security was never meant to be the sole source of income for retired individuals. It’s supposed to be supplemental income to your other accounts. And there are benefits to taking out your social security at the later age of 70. So be mindful of how and when you decide to start collecting on all of these accounts. It will literally pay off in the long run.
Some numbers I’ve read are that social security is only supposed to account for 40%-60% of your income in retirement. This means you need a healthy amount in your retirement accounts by the time you start withdrawing from social security. So be prepared and make sure you’re spending time researching what you want your future to look like and how much it will cost to fund it.
Make a Plan and Stay Fluid
When it comes to planning for your future, it’s best to play it safe. Talk with people who know what the market looks like and who have been down this road before. I’ve been lucky enough to have some good role models in this area. One of the most valuable pieces of information being, if you don’t know something, ask someone who does.
There’s a lot of information out there and not all of it good. So be diligent and find some people you can trust to help guide you along the way. Dave Ramsey and Ramit Sethi are two great resources out there for handling money responsibly. Also, The Penny Hoarder and Nerd Wallet are two sites that have a wealth of general information about money matters and ones I visit when I have questions about how accounts, or things money related work.
Knowing we’re in a good place and that we’ll be able to meet our monetary needs for our future is important, and also an act of self-care. Money isn’t the most important thing in our lives, but not being responsible with it can do some serious harm. For example, I just celebrated my 42nd birthday and am $55k in debt. This can be a scary place to be if you don’t have a plan. Luckily for me, there are load of resources at my disposal. And just remember, when it feels like it’s impossible, or your feeling like giving up, know that it’s never too late to start. Just be patient. Peace : ) and thanks for reading.