Financial Education 302: Retirement Savings

So you’re getting your employer match on your 401(k), great. Welcome to the beginning of serious saving. Everything up to this point has been risk avoidance, reducing debt, and reducing expenses. Now let’s start making money. 

Do you have a Roth IRA? If not, get one, unless you as a single person make more than $120,000 a year. You can probably contribute $5,500 a year to it, $6,500 if you are over 50 years old. If you don’t have an employer retirement plan, this is the way to go. Why the Roth IRA instead of a traditional IRA? Future Taxes. Future taxes will probably be higher than today. Due to our current deficit and national debt current taxes are not sustainable. Although a Value Added Tax (VAT) is highly likely that wouldn’t affect income taxes… What I’m saying is, if you have any money to throw toward retirement, even $500 saved over a whole year, a Roth IRA is money that can grow tax free, and be withdrawn tax free in the future. That $500 in 10 years might be $1000, and it’s yours, tax free. Plus, unlike most retirement accounts, you can withdraw the contributions tax free and without any penalty.

On the odd chance you make more than $120k for a single person, put it in a traditional IRA. You don’t really get any tax breaks, except for the growth before you start withdrawing. 

After you max out your Roth IRA or traditional IRA, and of course you’re getting your “free” money from employer matching, it’s kind of up to you what to do. You could increase your 401(k) contributions, and get some tax benefit. Every $100 invested in a traditional 401(k) only reduces your take home pay about $75. So it’s not a bad idea to max out your 401(k). Of course, that’s a bit of crazy talk, because the employee contributions to a 401(k) in 2018 are $18,500, and $24,500 if you are over 50. I mean, that’s close to a year of super frugal living expenses, not to mention that that does not count employer contributions.

While maxing out your 401(k) is a great option, honestly, save money outside of traditional retirement accounts. I didn’t pay tens of thousands of dollars to climb Mt. Everest using retirement savings. You can simply continue to add to your savings account that I mentioned several posts ago. However, with interest rates around 1%, it’s not a great investment. I recommend opening a brokerage account and investing in stocks and bonds. What do you then invest in? SPY for starters, it’s basically the largest 500 publicly traded companies in the United States, as tracked in the S&P 500. It pays a dividend every three months, and as far as stocks go it’s fairly low risk, and as far as expenses go it costs 0.09% a year, which is pretty low. If you want a bond fund, I like FAGIX, because I use Fidelity and it returns about 4% annually in the form of monthly dividends. If you want to buy a stock, AT&T or Verizon both pay hefty dividends, and come on, they aren’t going out of business any time soon. And if you are in the market for a crazy growth start up I’ve been investing in OKTA, because I happen to know they have a very large corporate customer, but that’s pretty risky, so don't do it unless you can stand to lose the money.

Why would you save for retirement outside of a retirement account? Next lesson…