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| Grow your money! |
My wife and I are recent early retirees at ages 51 and 48. Since our early retirement in August of 2020, we’ve been slow traveling with our Pomeranian dog, Toby. We’ve visited destinations such as Ocean City (Maryland), Atlantic Beach (North Carolina), Claysburg (Pennsylvania), Ellicottville (New York), and we see ourselves continuing to travel in our foreseeable future.
In this post, I’d like to share my tips on putting away money towards retirement accounts, like the 401k and the IRA/Roth IRA.
When we started this journey to become financially independent, there were few pivotal moments that altered our path. Had we not chosen to increase our savings rate from measly 3% in the beginning of our journey, to eventual 24% by the end of our journey, we probably wouldn’t be where we are today.
To achieve our goal, constant corrections, like increasing our savings rate, were needed along the way. Lifestyle changes, like spending less, that would allow this to happen, were needed as well.
Putting money away for retirement is one of the hardest things to do, as most people have a hard time visualizing their future selves. The younger they are, the harder it is for them to imagine the future. It’s probably on the back burner of ‘important things to worry about’ for most young people.
The priorities for young adults just starting out, will be different than older adults, who are already established in their careers, for example. Those starting out will have things like getting a job/starting a career, having fun, traveling, and paying off those student loans, as their top priorities.
Priorities for more established adults will be marriage, kids, advancing in their careers, buying a home, etc. I would argue the older you get, the harder it is to plan for retirement, not easier. There are more responsibilities mentally and financially that take up your time. It will take even more discipline to push through the hurdles that prevent you from committing to a retirement plan...
We were young once. We know what that’s like. Retirement is something you hear about from old folks, and it’s not something that impacts you in any way. Retirement is some faraway thing, which you really don’t have time or the energy to worry or think about.
Planning for and saving for retirement is especially tough when you have debt (student loan, credit card, car, etc.). It’s doubly so, when life happens around you. Emergencies will happen at the least opportune time, leaving you even less likely to save towards your retirement...
Despite all these factors that make saving for retirement a very difficult task, know that this must be done. To reach your retirement age without a proper retirement plan, is not going to be fun, to say the least. Unless your idea of retirement is eating canned food or eating ramen noodles everyday, then you’ll want to plan/commit to saving for retirement NOW!
If your retirement plan is any of these below, then you got another thing coming:
- Hitting the lottery
- Getting huge inheritance
- Social security
- Work until you die
- Marry a rich person
- Buy the latest fad investment scheme that promises incredible rate of return
- There are probably many others...
These are our tips for saving towards your retirement:
Reduce housing, transportation, and food costs. Reduce other discretionary spending including dining out, drinking, coffees from Starbucks, expensive vacations, cable bills, etc.
Once you get your spending under control, save much as you can towards your retirement account(s) like the 401k or IRA.
NOTE: If you have an IRA or Roth IRA, the maximum allowable contribution is either $6,000 (under 50) or $7,000 (over 50). If you have more money left over, open a brokerage account.
For those with 401k, the maximum allowable contribution is either $19,500 (under 50), or $26,000 (over 50).
Set a goal of few hundred dollars in the beginning. Increase it incrementally so you won’t feel the pain. Write down your goal so you can hold yourself accountable!
- Increase your savings rate (401k)
Increase of 1 to 2% every few months will not be missed in your 401k. Because of tax advantages in a 401k, if you increase your savings rate by 1% on a $50,000 income, it’ll only reduce your paycheck by about $16 per paycheck.
$16 isn’t something most people will miss. Better to save this now for your future, and let compounding interest to work!
Slowly increasing the contribution rate every few months until you hit the maximum allowable contribution limit is the ultimate goal you want to set for yourself. Remember, it’s hard to get to your first $100,000, but once you do that, the compounding effects of that money will create a snowballing effect!
- Save to Roth IRA if you have money left over after maxing out your 401k
If you ever get to the point where you are maximizing your contribution rate to your 401k, then save those funds to Roth IRA.
- For IRA/Roth IRA savers only without a 401k
Max out the maximum allowable contribution amount for the tax year, then open a brokerage account to put away more into that.
Tip: Keep in mind to consider these factors when you’re investing for your future:
- Your retirement timeframe: If your retirement will be more than ten years away, then invest more aggressively, meaning stock index funds. If you’re planning on retiring within the next 10 years, you may want to invest less aggressively.
- Your risk tolerance: If you absolutely cannot stomach big losses in the stock market, you may want to look into buying more bond mutual funds. This way, your portfolio won’t take a huge hit when stocks go down. Bonds in general will fluctuate less than stocks.
As we discussed in my previous posts, be sure to keep emergency funds available at all times for just such downturn. Most FIRE (financial independence retire early) movement followers will keep a year or two years worth of liquid (cash) in savings accounts or similar...
Note: Choosing a regular IRA vs a Roth IRA is a decision you’ll need to make for yourself. A good rule of thumb is to have some income stream that is mostly tax free when you withdraw it after you retire at age 59 1/2. For this reason, if I was in this scenario, I would do a Roth IRA, and not an IRA. Do your own research, get help from a tax expert, etc. before making this decision.
- If you own a home, pay additional amount to reduce your principal amount
Depending on what interest rate you currently have on your 30 year mortgage, you should consider refinancing to a lower rate (only if the rate difference is around 1 percent or higher, otherwise, the fees alone won’t make too much of a difference) and to shorten the duration.
If this is not possible, then I suggest paying more towards the principal amount. This will also save you money on interest and cut down the duration...
- Once you get really good at budgeting, you may have more funds available. Put away more! Don’t stop!
Remember, the quicker you hit your first $100,000, the quicker you’ll get to your next $100,000. The time it takes to reach your first $100,000 may take a long time, but after that, it’ll get shorter and shorter with each succeeding $100,000!
In conclusion:
It’s super important to think and breathe retirement as soon as you can. The younger you are, the easier it is to reach your retirement savings goals due to compounding effects of that money. The earlier you get to your first $100,000, the less work you’ll need to do later on.
It’s really impressive how compounding interest works. When you have a big chunk of money (around say $200,000 or more), it really starts to earn money on that money! If you were 30 years old and had $200,000, you can expect that to double three times or more, equaling $1.6 million (or more) by the time you hit 60!
This is the mindset you have to operate under. Keep pushing your goals and make it happen!
Thank you all for reading!
Jake
Wandering Money Pig
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