About 13% of plan participants max out their 401(k) each year. If you’re one of the 13% – congrats! Maxing out your 401(k) is an amazing accomplishment, and it can help to put you on the path to living the retirement you’ve always imagined.
However, maxing out your 401(k) doesn’t mean you’re done saving! Depending on your retirement goals, you may need to go above and beyond maxing out this account. There are so many different ways for you to save for your future goals (while in some cases also continuing to save money on your taxes). If you have the extra cash flow to maximize some of these strategies, it’s wise to take advantage of them!
What Does Maxing Out Your 401(k) Look Like?
In 2019, the deferral limit to your 401(k) is $19,000. If you’re age 50+, you can add an extra $6,000 in “catch up” contributions. This limit only applies to your money. Any matching contributions made by your employer are icing on the cake.
Remember to check your employer’s policy. In some cases they may stop matching contributions if you hit your $19,000 contribution limit part-way through the year. There’s no reason to leave free money on the table, so make sure that you plan to contribute up to your maximum limit over the course of the full year to keep receiving your employer’s matching contribution.
Backdoor Roth IRA
A backdoor Roth IRA isn’t as complicated as it sounds. To fund a “backdoor” Roth IRA, you start by funding a Traditional IRA. Then, once a year (or every few years) you do a one-time conversion of your contributions from the past year to a Roth IRA.
Let’s look at an example:
You have $6,000 you’d like to contribute to retirement savings, but you don’t meet the income restrictions to open and fund a Roth IRA. So, you open a Traditional IRA, and contribute the $6,000 as a non-deductible contribution. Once the money hits the IRA account, you can convert the $6,000 into a Roth IRA (thus working around the income restrictions) at a future point.
When does a Roth conversion make sense?
Roth conversions are a fantastic way to boost your retirement savings and save money on taxes during retirement. You can stagger when you do a Roth conversion depending on what tax bracket you’re in that year, or whether you have the extra cash flow to pay the income taxes on the amount you’re converting to a Roth IRA.
It’s also worth noting that a Roth IRA can be used for more than just retirement income. After the funds have been in the account for five years or more, you can withdraw them without penalty for specific expenses, like a first home purchase, or education expenses. This gives you the opportunity to go through the Roth conversion process with the intention of saving for retirement, but also allows you to have some flexibility with how you spend that money down the road.
Contribute to a 529 Plan
When you know that you’re on track to achieve your retirement savings goals, you can shift your focus to other financial milestones you’re working toward. For a lot of young parents, being able to help their kids pay for college is a big priority.
Contributing to a 529 Plan for your kids helps to set them up for future success, and encourages generational wealth. 529 Plan contributions also grow tax-free – which means you’re able to save now without paying exorbitant taxes later when you withdraw the funds for qualified educational purposes. You can use the tools and calculators here to crunch numbers on what to set aside for future college expenses.
If you still have additional cash flow and want to take advantage of the growth that come with investing, you could consider opening a standard investing account. Although contributions to these accounts aren’t pre-tax, they’re still a good way to grow your savings and diversify your portfolio.
Investing accounts don’t have to be retirement-specific. A traditional investment account allows you the flexibility to access your money before retirement, while still incorporating a wide range of investment options into your strategy.
When clients have maxed out their employer-sponsored retirement plans, we typically begin to weigh options of contributing to after-tax investment accounts versus doing non-deductible IRA contributions. Investing in an after-tax account gives you the flexibility to access the funds at an earlier age (pre 59 ½) than if you have the age-restrictions around retirement accounts.
Fund Your HSA
Your HSA (Health Savings Account) is an excellent way to continue saving for medical expenses in retirement without sacrificing the flexibility to use the funds now. Contributions to an HSA are all pre-tax, which helps to lower your taxable income. When you use your HSA on a qualifying medical expense, you aren’t taxed on any capital gains the funds have earned in your account over the years.
But how can you use your HSA for retirement expenses?
The funds in your HSA rollover year to year. There’s no urgency to spend them now, and you don’t have a deadline to use them by. Even if you’ve started your HSA through your employer, you are the sole owner.
So, if you should change jobs, you get to take your HSA with you. However, if you do run into a medical emergency now, you can still use the funds in your HSA to cover the expenses. The flexibility your HSA gives you is reason enough to consider funding one for you and your family, and the fact that you can continue to use the funds for growing medical expenses in retirement is an added bonus!
Does your company allow you to buy into stock options or RSUs? If you’ve already maximized your other retirement savings options, you might look into leveraging the stock options your company offers to their employees. These stock options can help you to boost your income using long-term capital gains strategies. Because many stock options are discounted for employees, you may even be able to use them as a way to get more exposure to the stock market for relatively low upfront cost.
Before diving head first into stock options or RSUs (restricted stock units – another form of employee stock option or compensation), make sure that you understand exactly when they’ll vest, when you can exercise them, and what you can expect from a tax perspective. Stock options can be a really good way to grow your wealth quickly, but the taxes you owe on them, and the upfront cost need to be planned for. This is especially true if your employer hasn’t discounted the options enough to make them a good deal for you and your family’s unique financial situation.
Build a Plan That Meets Your Goals
It’s easy to get stuck in the constant cycle of focusing only on retirement saving. After all, most of the financial planning articles out there push two main savings “goals” that everyone should be working toward:
Beyond that, there’s not a ton of information out there on what to do after you check both of those boxes.
Saving for retirement is fantastic, and it’s a goal that a lot of people should be taking more seriously. But if you’re on track to have more than enough saved for retirement, it’s worth figuring out how saving can positively impact your life right now.
When you build a savings plan, don’t just save for the sake of saving. Squirreling money away without goals can be a recipe for burn out. You wind up not achieving your short-term goals, or living the life you want to live, because you’re so focused on the future.
As you build savings goals beyond maxing out your 401(k), it can be helpful to work backward. Start by outlining what you want to achieve through savings, then start outlining the steps you’ll take to reach those goals. Your goals might be long-term: like saving for your child’s education expenses, or buying a rental property. They might also be short-term: like purchasing your first family home in the next few years, or saving so that you can buy a new-to-you vehicle using cash.
Maxing out your 401(k) is really only the kick-off point. You’re entering a world of exciting saving options that are going to benefit you for the rest of your life!
Want help? Schedule a call today – I’d love to talk to you about how to organize a savings plan that sets you up for success right now and in the future.
When people think of saving money, it’s often translated into feelings of deprivation and if you’re like most people, you probably don’t get excited about depriving yourself. Instead of trying to save money by limiting the things you enjoy in life like dining out or travel, there are ways to save creatively by reducing taxes (meaning more money in your pocket) or limiting lifestyle overhead expenses (such as utilities and living costs).
Here are eight creative ways to save cash (that we practice in our house too):
• If you have $1,000 set aside in an emergency fund, take a few minutes to bump up your deductibles to $1,000 on your auto or home insurance policies to reduce your premiums. Since you have the funds on hand in case of an emergency, you’ll be able to cover the deductible without using your credit card and also save money by reducing your premiums.
• Pay your insurance premiums annually. Whether it’s life, auto or home insurance, you’ll almost always get a cheaper rate when you opt to pay your premiums annually instead of monthly. The way to prepare for this expense is to open a separate savings account and divide the annual payment by 12. Stash away that amount each month for 12 months so that by the time your premium is due, you’ll have the cash on hand to pay in full and will have paid a lesser amount.
• If you’re a homeowner and haven’t already jumped on the refinance bandwagon, it might be time to quickly consider getting on. Rates have been low for months and are set to increase in the months ahead. Depending on what your current mortgage interest rate is, this could save you hundreds if not thousands of dollars each year. Just be sure to consider the fees involved with the refinance and how long you’ll be staying in the home before jumping in.
• Before hitting “buy” for the items in your online shopping cart, do a quick Google search for “name of the store + coupon codes” to see if there’s any coupons or discounts you can benefit from on the purchase. Why pay full price if the option to save 10-20% is sitting just two clicks away? Also, is anyone else in love with Target’s Cartwheel app?!
• Get a better credit card. If you’re someone who uses your credit card for purchases and then (hopefully) pays off the balance in full each month, you want to make sure your rewards program is working for you in terms of cash back, gift cards or travel. If your credit card isn’t providing the best rewards, check out Nerd Wallet’s list of best rewards credit cards to find one that’s a fit for you. Stocking up on rewards points is a great way to then fund travel and vacations or cash them in for holiday and birthday gifts.
• Look at your company benefits. Does your employer offer flexible spending accounts? If you have children and are paying for daycare while your company offers this benefit, you’re able to stash away up to $5,000 into this account pre-tax (which means you’re saving money on income tax) and then use it to pay for childcare. Assuming a 25% tax rate, that’s $1,250 back into your pocket for the year.
• Brush up on your negotiation skills. Looking for a higher salary, better price on your new car or for more work-life balance? Practice your negotiation skills with a friend or partner before heading in for conversations and deal making. Document your points and practice getting push back. Worst case you get a “no”. Best case, you get what you want, which hopefully means more money in your pocket.
• Get a price adjustment. When you buy something and the price drops within a week or two, you can often get a refund for the difference depending on the retailer’s policy. Using an app like Paribus to review your transactions will help you to find money automatically when they track your purchases.
Some mistakes can’t be undone, whether it’s burning a bridge, ruining an opportunity or sabotaging something you’ve worked for. Nowhere is that more apparent than in planning for retirement. While you can put in the work to make up for significant losses in your retirement account, the money you’ve lost is gone forever. But irrevocable as they may be, making mistakes while planning for retirement is part of the game. The key is to learn from those mistakes and do everything possible to avoid making them in the future. Here are some of the more common mistakes people make in their retirement planning – and how to avoid them.
Paying High Fees
One of the easiest ways to reduce your retirement savings is to invest in funds with high fees. Unfortunately, too many investors aren’t aware they’re paying too much – or that they’re paying any fees at all. This NPR graph showed that a 2% annual fee could decimate your investments by more than half in 40 years. Imagine taking half of what you’ve saved for retirement and giving it up without even knowing you had it. Choosing a fund with a fee of less than 1% will help to ensure you keep more money in your pocket.
Not Checking Your Vesting Schedule
Many employees have a matching schedule with their company’s retirement plan. Unfortunately, some of them fail to note the vesting schedule attached to those retirement accounts. A vesting schedule determines when an employee is eligible for the money their employer has contributed to their retirement account. Each company has their own vesting schedule, some more generous than others. For example, a firm with a five-year cliff vesting schedule means you have to stay at the firm for five years to be eligible for any of those matched funds. If you’re contributing 5% of your income and receive a 5% match but leave before you’re fully vested, it will be as if you’d never gotten that matched money. Make sure to check the vesting schedule, and don’t count on any matched money until it’s safely in your hands. You never know when a better job will come along or a round of layoffs will take away your chance to complete the vesting schedule.
Being Too Conservative
Investing in the stock market can be scary for many people, especially those who suffered during the Great Recession. But being too conservative with your money is also risky, especially if that means avoiding stocks. If you only invest in income funds such as bonds, you won’t earn the returns needed to grow your retirement account significantly. According to CNN Money, stocks have averaged 10% in the past 90 years while bonds have only grown 5%. Once you factor in fees and inflation, your profit with bonds is slim – and not enough to sustain you for 30 years of retirement. It may seem like you’re being cautious and responsible if you eschew stocks, but in reality, you’re just crippling the potential of your retirement fund. Keep in mind that you could unintentionally be sitting on cash in your 401(k) or retirement accounts as well. Just because you’ve transferred money into the account, doesn’t necessarily mean it’s being invested for you. Check your investment option and ensure you’re selecting how your funds should be allocated or manually investing your money as it’s transferred in.
Investing in Individual Stocks
While you need to have stocks in your portfolio to earn enough for retirement, it’s better to have a diverse range of stocks instead of supporting a handful of individual companies. Your risk is heightened if you only have stock in Apple, Facebook, and a few other individual companies – even if those companies are consistently successful. Keep an eye out for low-fee index funds, which can hold hundreds of stocks and provide a better hedge against the market’s fluctuations. Choosing well-regarded index funds is not only easier for you as an investor, but it gives you a broader reach and a bigger probability of high returns.
Letting Lifestyle Inflation Erode Your Savings Power
Hopefully, you’re in a position where your income is growing on a consistent basis, even if it’s in small increments. You probably know when these income bumps or raises are coming and you may even have the money spent before the change is even reflected. A big mistake you can make with your retirement savings is not increasing your savings contribution rate as you get income increases. If you leave your savings rate unaltered as your income is growing, you’re essentially opening the door for lifestyle inflation to creep into your spending plan. Each time you earn a raise or income boost, aim to adjust your savings upward by 1 to 2 percent immediately to ensure some of the extra funds are stashed away and you don’t become used to seeing them in your day-to-day cash flow.
The wide world of retirement investing can seem a little overwhelming and can get overly complicated way too quickly. For those not prone to pore over spreadsheets, the abundance of data can lead to paralysis – but it doesn’t have to. Thankfully, planning for your retirement isn’t an all-or-nothing endeavor. Educating yourself about your accounts – even in small increments – goes a long way. If you’re looking to get a better grasp on how your retirement is shaping up, here are five questions you should be asking.
What Fees are You Paying?
A silent killer to many nest eggs, high fees can decimate even the highest-yielding retirement account. Low fees let you keep more of your investment while allowing you to withdraw a higher rate from your nest egg during retirement. You can use this calculator from Vanguard to compare funds and their fees to see how much you stand to lose. Keep an eye on account fees, transaction fees, fund fees and investment management fees. You may be paying one or all of these depending on your situation. Hint: Aim for funds with fees of 1% or less – anything more and you’re likely throwing money away.
What’s the Average Return?
The average return on your funds shows what your fund has earned in the past. While past performance is never an indicator of future results, it can give you a decent sense of what to expect. Make sure to check the return as far back as the fund shows. Many funds show high five-year averages since the Great Recession, due to the economy’s slow but steady recovery. That trajectory isn’t sustainable, so try to get a sense of the bigger picture before you extrapolate from the data.
What Company Matching Do You Have?
Nowadays, many employers offer a matching program within their 401(k) – but not all matching programs are created equal. Some offer a dollar-for-dollar match, while others only put in 50% of what you contribute up to a certain percentage. Make sure to understand your company’s matching program completely, and try to contribute enough to get the match. You never want to pass up the opportunity to earn free money.
What’s Your 401(k) Vesting Schedule?
In the midst of questions about fees and returns, one aspect of 401(k) accounts often gets lost in the shuffle: the vesting schedule. The vesting schedule determines when you’ll be eligible for any funds your company contributes to your retirement account. Many companies work on a graded vesting schedule. In this system, every year you work makes you eligible for a greater percentage of the employer’s contributions. For example, a five-year equal graded vesting schedule means you’ll only be eligible for 20% of your company’s contributions after one year. Some have a cliff-vesting schedule, which require you work a certain amount of years to be eligible for 100% of what your job has put in. If you work less than that amount of time, you won’t be able to take any contributions your employer has made. It’s important to know your vesting schedule, because it can drastically change how much you’ve actually contributed to your retirement account, especially if you’re expecting to job hop your way up the career ladder.
Should You Choose a Roth or Traditional Account?
When you choose a retirement account, you can decide between a Roth or Traditional account. A traditional account allows you to deduct contributions on your taxes today, but requires you to pay taxes on your withdrawals during retirement. A Roth account does not allow you to deduct anything on your current taxes, but lets you withdraw your money tax-free after you turn 59.5. A Roth is often recommended for young people, who have yet to hit their highest income potential. A traditional account is best for those currently in a high income tax bracket.
One of the best things you can do is to examine your retirement account carefully and ask questions on whatever doesn’t make sense. There’s a slew of free resources available online that can also help you decipher your retirement account and learn more about investing.