Save For Retirement

RetirementWhat is your plan for when you retire? Travel, visit your grandkids, sit on the beach? My plan used to be to travel. The beach seemed like a nice spot to sit down and relax. No matter what your retirement plans are, you won’t get to do them if you don’t save for retirement.

When you get to this step, you have no debt except a mortgage maybe, and you have a fully funded emergency fund. The next step is to save for retirement. You are really going to invest for retirement. This money is going to be invested in stocks, either in mutual funds or index funds.

You need to do a couple of things while on this step: You need to save 15% of your household income for retirement, and you are also going to need to learn about investing, taxes, and tax-preferred accounts.

Save 15% for Retirement

Save 15% of your household income for retirement. Take your gross household income and multiply by .15. This is the amount that you and your spouse if married need to invest for retirement. Some of you will want to invest more than 15%, but leave it at 15% for now, because there are two more things you need to do with your money: save for your kids’ college and pay off your house. You can increase this after your house is paid for.

This money should be invested in tax-preferred accounts like a 401(k), 403(b), and/or IRA, both traditional and ROTH versions. It will come down to your current tax rate and the tax rate you will expect during retirement. Your tax rate will be based on future government policy, so trying to plan for that is not practical. You might as well plan based on the current tax rate.

Learn About Investing

You are saving your 15%. Now what? You need to learn about investing. You have the potential to have a large pile of money when you retire, so you need to learn how to manage this money. You can pay investment managers 1%-2% to manage your money, or you can spend the time to learn and save this expense. You are learning how to win with money by reading this blog, so you have already started learning. Investing isn’t hard. You do not have to research a ton of stocks and pick the best ones. In fact, you don’t want to invest in individual stocks! You want to invest with mutual funds or index funds. You can buy an S&P 500 index fund and own shares in all 500 of the largest companies in America. This has averaged 7%-10% returns year over year (depending on how you look at it) since its inception. I will get into index funds and mutual funds in a future post.

Tax-Preferred Accounts

Retirement accounts are governed by IRS rules, so these rules can change depending on tax laws that are passed. Part of your learning will be around taxes and the rules that govern the tax-preferred accounts. Tax-preferred accounts can be pre-taxed or post-taxed. Pre-taxed is when your money is not taxed now, it grows tax-free, and it is taxed when you withdraw the money out of the account. Post-taxed is when your money is taxed now, but then it grows tax-free, and there is no tax on the money when it is withdrawn.

The reason that you will want to invest with tax-preferred accounts is that each dollar you save on taxes is one more dollar that you have working for you to increase your wealth. There are penalties if you withdraw your money for non-qualified events, so that also gives you an incentive to keep it invested as well.

Do you want your money in traditional accounts or ROTH accounts? Again, that depends on the tax bracket you are in now and the one you think you will be in in the future. If you plan on investing a minimum of 15% for 40 years, then you most likely will want to put as much as you can in a ROTH, because you can end up with a lot of money. If you are looking at retiring early with just enough to live on the rest of your life, then you will likely want to use a traditional account. You pay no taxes on the money now, and there are ways to limit taxes in the future.

Dream

Sit down with your spouse if you are married and come up with your retirement plan. If you are single, determine what you want to do in retirement. Dream big. You are now in a position to save for your retirement. Discussing your retirement plans will determine how much you need for retirement.

 

When you get to this step, you are debt free except for your mortgage, you have your fully funded emergency fund in place. You now want to invest 15% of your income for retirement while saving for college and paying off your mortgage. After the mortgage is gone (step 6), you can revisit your retirement savings and crank your savings up and watch your wealth grow!

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