Retirement Planning 101

in , , , by Katie Margaret, June 04, 2020
Retirement Planning 101

I'm often asked questions about how Kevin and I have been successful at saving money and planning for our retirement.  I never know exactly how to explain it to people.  I have a hard time explaining all the technical terms.  That's why I asked Kevin to write a special post for me about all the basic things you need to know about retirement planning.  He's explaining what accounts you should have, how much you should save, and where to invest.   

Retirement Planning 101:

There are only four things you need to know to put your retirement savings plan on autopilot. 

1. 401(k): A 401(k) is an employer-sponsored retirement savings plan where an employee can contribute up to $19,500 per year ($26,000 if you are age 50 or older). If you can afford it you should always contribute the maximum $19,500 or $26,000 per year to this tax-advantaged savings plan. Most employers match a percentage of your contributions which provide an increase in your annual savings. Some similar retirement savings plans are a 403(b), 457, or a Thrift Savings Plan depending on your type of employment. 

2. IRA: An IRA (Individual Retirement Account) is similar to a 401(k) except it is not employer-sponsored and has lower maximum contribution limits. The maximum contribution limit is $6000 ($7000 if you are age 50 or older). You should always contribute the maximum $6000 or $7,000 per year to an IRA. If you have a spouse you should contribute the maximum $6000 or $7,000 per year into an IRA for them as well, whether they are employed or not. The IRS allows an employed spouse to contribute for an unemployed spouse. This is frequently called a “Spousal IRA”.

3. S&P 500 Index Fund: Assuming you have a lot of time left before retirement it is my opinion that 100% of your retirement savings should be invested in an S&P 500 Index Fund. Most 401(k) plans have an S&P 500 Index Fund available to invest your money in. Index funds usually have very low fees compared to other mutual funds or ETF’s (Exchange-Traded Funds). If your plan does not specifically offer an S&P 500 Index Fund look for funds with “Large Cap” in the name. Pick the one that most resembles an S&P 500 Index Fund.

4. Traditional vs ROTH: Both 401(k)’s and IRA’s have the option of Traditional or ROTH. With a Traditional account, you put money in “before tax” and pay taxes later when you take distributions during retirement. A ROTH account is just the opposite. You pay the taxes upfront and you will not pay any tax later. So what’s better? Traditional or ROTH? The answer is, it depends. For an IRA the answer is almost always ROTH. This is because there are lower income limits to the tax advantages of a Traditional IRA. However, if you make less than these limits and are in a high tax bracket you would be better off contributing to a Traditional IRA. There are higher income limits for contributing to a ROTH IRA. If you exceed these limits there is a loophole you can use. For more information on that lookup “Backdoor ROTH IRA”. Generally, with regard to a 401(k), if you are in a low tax bracket do ROTH. If you are in a high tax bracket do Traditional. The main goal is to pay the least amount of tax possible. Currently, the federal tax brackets jump from 12% to 22% at an income level specific to how you file your taxes. If you are in the 22% bracket or higher I would say you are in a high tax bracket. Once you retire you can manage your distributions between your Traditional and ROTH accounts in order to remain in a low tax bracket. For tax purposes, Traditional distributions count as income while ROTH distributions do not. Therefore, you should take Traditional distributions up to the maximum threshold of the lower tax bracket and take the rest of your distributions from your ROTH accounts. 

    Money for everyday living, savings for a down payment on a house, emergency savings, etc. should be separate from your retirement savings. You want to avoid taking money from your retirement accounts prior to retirement. Money you don’t need right now but might need to access quickly should be in an interest-bearing savings account. 

    Make regular contributions to your retirement accounts and don’t sweat the swings in the stock market. As a result, when the market is up your savings are up and when the market is down you are buying at a discount. This is called “dollar-cost averaging”. All you need to do is watch your money grow. If you already max out all your retirement accounts and are looking for a place to save more money with a tax advantage look up “Mega Backdoor Roth”.

  I'd like to say a big thanks to Kevin for sharing his knowledge.  If you have any questions at all feel free to reach out to me.  I'd be happy to answer or pass along any questions you may have. 


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Retirement Planning 101

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