Your Retirement Questions Answered

When people find out I write a financial independence/early retirement blog, they sometimes take a breath and start peppering me with questions.  I thought it may be helpful to y’all if I answer the questions I get asked most often.

How much should I contribute to my retirement?

If you want to retire at a typical age then 15% of your gross salary before taxes and benefits.  This 15% can include your company match.

At my last job, the company matched 25% of my contributions up to 6% of my salary so that worked out to a 1.5% total match.  If I wanted to retire around my full retirement age for Social Security, then I should have contributed 13.5% of my money.

If you want to retire early, you should be contributing 15% to your retirement and saving outside of your retirement accounts as well.  How much depends on your expenses and risk profile.  Run a few calculators, or build a spreadsheet and figure it out.  Here’s a calculator from Vanguard.

What if I started late or don’t have much saved now?

You’ll probably need to max out your company retirement plan–currently $18,000 if you are under 50 or $24,000 if you are 50 or over.  Plus max out an IRA–currently $5,500 if you are under 50 and $6,500 if you are 50 or older.

Use a retirement calculator to figure out what you need.  Here’s the Vanguard calculator again.  Depending upon your risk tolerance, their default return of 5% may be too high after inflation.  Enter your information and then adjust that return.

But I can’t afford to contribute 15%.

Commit to increasing your contributions by at least 1/2 of any future salary increases.  You may be able to automate this with your Human Resources Department.  Throw all bonuses and extra income at your retirement too.  This is the easy way to fund your dreams.

Look for ways to reduce your spending.  Sorry but this is that important.  Need some ideas?  Check out my spending less articles.

Which retirement account should I use?

Use your company 401k, 403b etc. up to the company match.

Then fund your IRA up to the max.  You MUST automate this–set up a monthly transfer from the account your paycheck goes in.

Then back to your 401k, 403b etc. until your reach 15% of your gross salary in total.

Why not put all of my retirement savings in my company’s retirement plan?

It costs a lot to administer a retirement plan so typically you pay fees on top of the expense ratios in your underlying funds.  My old company’s plan was a good one with low fees but I still paid about .5% a year of these fees on top of my fund expense ratios.  It may not seem like a lot, but over decades fees matter.

If you don’t automate your contribution to your IRA, it will never get funded.  So until you get around to automating this transfer, use your company’s retirement plan for the entire 15%.

I find all of this very confusing.  Mutual funds, mutual fund companies, 401k plans, etc.

I think Jean Chatzky explains this best (her podcast, Her Money, is one of my favorites BTW).  Think of it like a cup of coffee.  The type of account–non-retirement, 401k, 403b, or IRA is the cup, it holds your investment.  The coffee is the actual investment–mutual funds, stocks, bonds etc.

I’ll add that the fund company is where you buy your coffee or the investment–Vanguard, Fidelity, Charles Schwab etc.

What is a Roth IRA or Roth 401k?

The Roth retirement accounts are named after the Senator who proposed this form of retirement account.

With a traditional IRA, 401k, 403b etc., your contributions are deductible so they reduce your taxes.  When you withdraw the money, you pay taxes on all of the withdrawals–your contributions and any earnings on those contributions.

With a Roth IRA, 401k, 403b etc., the contributions are not deductible when you make contributions.  So you pay taxes on the contributions.  BUT, when you withdraw the money, you won’t have to pay taxes the withdrawal–both your contributions and any earnings on those contributions.

Should I contribute to a Roth IRA or Roth 401k?

Maybe . . .

There are some huge advantages to a Roth.

First, the withdrawals are more flexible than a traditional retirement account.  You can more easily access the money you contributed before age 59 1/2.  And there are no required minimum distributions from a Roth account so the money can grow longer.

Second, it allows you to lock in today’s tax rates rather than have the risk that rates will be higher when you withdraw the money.  We’ll need to fund our country’s huge deficit at some point, right?  It seems like that will require income tax rates to go up but they won’t go up on your Roth accounts–those taxes were already paid.

But . . .

If you are in a high tax bracket now, while you are working, it may make sense to take the deduction now.  You’ll likely be in a lower tax bracket when you are retired.

And, because you have to pay taxes on your contributions to the Roth account, you may have less money available to contribute.

The math . . .

Let’s say you pay 25% Federal and state tax on your incremental income.  You contribute $5,500 to a traditional IRA or $4,125 ($5,500 less 25% tax) to a Roth IRA.  You invest the money in the same investments and pay the same fees.  When you withdraw the money, you pay 25% tax on the traditional withdrawals and no tax on the Roth withdrawals.  You are left with the exact same amount.

But, if you can contribute the full limit of $5,500 to the Roth account, you’ll have more money with the Roth.

Did you contribute to a Roth account?

I have only about 3% of my spendable investments in a Roth account.  For most of my career, my employer did not offer a Roth 401k and our income was too high to qualify for a Roth IRA.

I probably should not have used Roth.  Our tax rate was high so the deductible traditional contributions would have been more valuable to us.  I wanted the flexibility of getting at this money before 59 1/2 but ended up with enough money outside of my retirement accounts that I shouldn’t need to access the Roth.

If you’re not sure what to do, a good solution is to put half in Roth and 1/2 in traditional.

Should I take a 401k loan?

NO.  This should be your loan of last resort as it puts your retirement at risk.

You’re typically paying interest back to the account at a much lower rate than your investments would have earned.  It may not seem like you’re losing much here, but compounded, over a 30 year career this difference can be significant.

If you quit, are laid off or fired, the loan must be paid back within 60 days.  If it is not paid back, it becomes an unqualified distribution which is subject to a 10% penalty unless you are at least 59 1/2.  Plus you have to pay taxes on the distribution.  POOF – about 40% disappears.

Where should I have my IRA account?

I like Vanguard–their account holders (us!) own the company so they are not answering to two masters–shareholders who want them to make money and account holders who want low fees.

Fidelity and Charles Schwab are good too.

Whichever company you select, pay attention to the expense ratio on the funds you select within the account because Fees matter.

I left my company, what should I do with my old 401k?

Move it to Vanguard.  Or Fidelity or Charles Schwab.  This will eliminate the fees your 401k provider charges you.

Super important:  before you do anything, contact the fund company you are going to transfer the money to.  They will facilitate the transfer from your employer’s plan so the transfer is not considered a distribution.

If you take the money yourself, the IRS considers it a distribution, you are taxed on it and cannot put it back in an IRA.

What funds should I invest in?

This one’s tricky and depends on your tolerance for risk.  Fill out a questionnaire to figure out your risk tolerance.  I like this one from Vanguard.

The worst thing you can do is invest and then pull out your investment when it goes down.  And someday the funds are going to go down!  You have to make your investment decision and then leave it there.

I love JL Collins’ stock series  read Part VI: Portfolio ideas to build and keep your wealth. or buy his book*.  Then make the decision that is right for you.

What about the life cycle funds offered by Vanguard or my company’s retirement account?

Many fund companies offer a fund of funds called something like life cycle #### or retirement #### where the desired retirement year is included in the fund name.

These are definitely the easy button.  They invest more aggressively (in stocks) when the retirement date is far in the future and gradually shift more towards bonds as the retirement date draws near.

Make sure the expense ratios on the funds are low.  Vanguard’s average LifeStrategy Fund fee is .14% so you pay $1.40 a year on $1,000 balance.

If you don’t want to think about this stuff, the life cycle funds are your easy button.

What funds do you invest in?

Largely Vanguard Total Stock Market Index Fund–VTSAX, I wrote about the details here.

I have a chunk of money sitting in my checking account, how do I get it invested?

First of all, your primary checking account is the absolute worst place to have a large chunk of money.  It is your account that is most likely to be hacked.  Move extra money to a savings or high interest checking account that is not connected to your primary checking account right away.  Check out Bankrate or MagnifyMoney* to find a high interest savings account.

OK, now that we have your money out of your checking account, JL Collins would tell you to just open a Vanguard brokerage account and buy VTSAX because the market always goes up.

But I’d have a hard time doing that–if the market goes down (which it will eventually), it would be really hard to see my money evaporate even if it is only temporary.

I’d pick a time period over which I want to invest it–say if I had $100,000, I’d set up an automatic transfer of $5,500 each month into a stock fund.  This would get all of the money invested over 18 months.

This method of setting a dollar amount to transfer is called dollar cost averaging.  Because you’re buying a fixed dollar amount each month (or week or quarter etc.), this method results in you buying fewer shares when the market is high and more shares when the market is low.  Your average share cost ends up being lower (better) than if you just bought a designated number of shares each month.

OK, what did I miss? 

* I’ll receive a small commission if you order Jim’s book through the provided link.  The Stacking Benjamins Podcast receives a commission if you use their magnify money link.  I love their podcast and magnify money is a great resource so I thought I’d help them out.  No other links provide commissions.

How I’ll Fund My Retirement

Many of the financial bloggers I follow are pursuing financial independence.  Not many of them are already there.  So there isn’t much information about how to fund your life once you are retired.

My fellow blogger, Fritz, at RetirementManifesto decided to correct that by creating a chain of articles discussing drawdown strategies.

I decided to join in the fun and lay out my draw down strategy.

I don’t have a pension.  I am counting on Social Security though I’ve reduced my expected payments by 30% because something has to change with Social Security, right?  At 52, with a husband in his 60’s (sorry Mr. Ms. Liz!) I feel secure in counting on this.

Curious about how I got here?  Here’s my savings rate and net worth growth.

First, a couple snapshots on where I am now.  I’m following Fritz’s lead on format. Continue reading “How I’ll Fund My Retirement”

How Much Is Enough?

When you get to your 50’s and 60’s, thoughts turn to retirement.

Since we’re among the first of our friends to take the leap, we’re having a bunch of fun conversations.  Friends are trying to figure out when they can join us.

Mr. Ms. Liz tells them to do it sooner than later.

My friends think I’m crazy but one of the big reasons I retired early is that Mr. Ms. Liz’s Mom died at 64.  Mr. Ms. Liz just turned 61.

If he were to follow in his Mom’s footsteps, we have three more years.  There are a slew of reasons why this won’t happen (smoker, non-exerciser, poor eater etc.) but it was on my mind.  If we have three more years, I want them to be three years focused on FUN, not three years focused on work.  And we were ready–financially and emotionally.

You don’t know how many good years you have left.  We know few people who have a great quality of life after 75.  So we say make it happen sooner if you can. Continue reading “How Much Is Enough?”

Let’s Make A Deal

I went to a (early!) retirement party for a friend and former colleague of mine this week.  Yay Phil!  It was so fun to catch up with my old work buddies who were there.

Knowing that Mr. Ms. Liz and I are fairly knowledgeable about things financial, one former colleague confessed that he spends about $4,000 a year going out to lunch.

If you read last week’s post, you know that if you LOVE going out to lunch and it completely enhances your world,  you should go out to lunch and enjoy every minute and every morsel.  (So long as you don’t have consumer debt like credit cards and you are saving at least 15% of your income for your retirement).

But he was making this confession because going out to lunch doesn’t completely enhance his world, it just makes life a bit more convenient.

He thinks $4,000 a year is too much money.  Yep, it would be too much money for me too. Continue reading “Let’s Make A Deal”

Pick Your Path and Don’t Stray

I read an amazing post by Kitty at BitchesGetRiches last night.  She walked through her reasoning behind buying $25 wedding rings.  She compared them to the $1,900 rings she and her partner really wanted and explained why they decided on the $25 rings.

They decided on the $25 rings because she and her partner had, years earlier, talked about their dreams.  She wanted the pony her parents never got her and she wanted to live in a house with secret passages.

Buying $1,900 rings didn’t help her get the pony. . . or the house. Continue reading “Pick Your Path and Don’t Stray”

Save To Retire Early Even If You Won’t

I listened to a good bit of the James Comey hearing last week.  I don’t follow politics closely but Mr. Ms. Liz does so it was on the TV while I was working.

I kept wondering–does he have F U money?

We haven’t talked about F U money before because I find it to be a bit vulgar and I know some of my readers are sensitive to such things.  But I haven’t found a better way to express this concept.

Jim Collins, one of my personal finance heroes, coined the term.  If you haven’t read his stock series yet, do it right after you finish this insightful post :).

Does James Comey have enough money to move on to something else without worrying about how he will keep his family afloat during the interim?  He’s 56, could he retire? Continue reading “Save To Retire Early Even If You Won’t”

Reflections On My First Year of Retirement

I’ve been retired a year–it’s crazy how fast it has gone!  It makes me better understand a line Gretchen Rubin often quotes “The days are long but the years are short”.

I hope you’re not disappointed but I’m not issuing a report card like I did for my first four months of retirement.

Mainly because my grade would go down and I’m a gold star junkie.

Not because I’m not loving this retirement thing but because retirement has turned into more of a vacation than something I can grade myself on.

I feel like this first year has been a detox.

I’ve allowed myself to be far less productive than I expected I would. Continue reading “Reflections On My First Year of Retirement”

The Easy Way To Fund Your Dreams

What do you dream of?

Traveling? Buying a home? Staying home with your kids? Taking time off? Sending your kid to college? Retiring someday or even early? Buying a camper and heading for the open road?

Don’t know what your dream is?  Read this and figure it out!

Unfortunately, few dreams are free.  If you want to pursue your dream, you’ll probably need to save some money.

It may seem really hard to eek out savings from each paycheck.

But I promise it will only get easier!

As long as you’re not spending more than you make, you don’t even have to reduce your spending.  IF you’re spending more than you make, sorry, but you have to get yourself on track.  Cut, cut, cut and earn, earn, earn until you’re not living beyond your means.

You just need to commit to keep your spending where it is. Continue reading “The Easy Way To Fund Your Dreams”

Social Security Is My Bond Portfolio

My Dad is an Investor.  I say Investor with a capital I because I remember him studying investments in his home office (aka my brother’s former bedroom) for hours when I was a teenager.

He’s the first early retiree I knew.  So when he shared a bit of his investment philosophy with me, I listened.

In spite of being in his late 60’s at the time and retired with no significant pension, he continued to be invested very aggressively and held very little of his investments in bonds.

He said Social Security was his bond portfolio.

This approach worked well for him.  He’s now in his late 70’s and running out of money is not even possible (he was also the first frugal person I knew!).  Though he recognizes he would have been better off investing in index funds and saving the hours he pored over investment reports.

I’ve followed in his footsteps on many things and I’m following him on this one too. Continue reading “Social Security Is My Bond Portfolio”

The Power Of One Word

I just got back from a mountain bike ride.  It’s one I do regularly because it is a good lung buster that helps me get in shape.  But I haven’t ridden this trail in six months.  Our desert trails are much flatter and I’ve only been back at altitude for a week.  So it felt really hard.  I got to the top without taking any breaks–though I felt like I might puke.

I know exercise is good for my body and my brain.  But getting out and exercising regularly doesn’t come easy for me.  And I’m especially bad at making myself do the hard stuff like I did today.

I was tempted to put my foot down, take a break and get my breathing under control. Continue reading “The Power Of One Word”