You get a job with a company that offers a 401k with a match. What do you do? You do what you’ve been told to do. You contribute what you need to get the max contribution from the employer. For me, I contribute 6% and get a 3.5% match, totaling to 9.5%. I am nearly saving 10% of my salary in my early 20’s. I’m doing a good job of preparing for retirement right?… Well yes and no. ALWAYS, I repeat ALWAYS, contribute what you need to your 401k to get your company match. It’s FREE MONEY.
This is where I will tell you about the easiest way one can double his or her retirement income. It is through a Roth IRA. You see a 401k is pre-tax money, so you will pay taxes on your withdrawals in retirement along with whatever social security you are receiving at the time. Combine social security and your 401k and you will have only 75% (assumming a 25% income tax bracket) of the income you receive during retirement. A Roth IRA allows you to pay taxes on the money now, so regardless of what tax bracket you are placed in the future you can keep all of the income you withdraw!
Check out the spreadsheet I have attached to truly see how a Roth IRA can double your retirement income. Keep in mind also with a Roth you never owe taxes and with your 401k you will.
Actionable step for the day, set up a Roth IRA!
To project your retirement income with a 401k and a Roth IRA, simply enter your salary into the cell along with your contribution and your employer match and watch the pie chart on the left shift! Consider increasing your 401k contribution at work for more income in retirement.
The older we get the less “stuff” we get for Christmas. As kids our Christmases were often filled with various toys and gadgets. However, once you reach your 20’s you tend to want bigger items such as iPads, new cell phones and money.
I gifted unto my sister this year what I consider to be the perfect financial gift. It was a check worth $200. Now most of the time when we get a check for Christmas or our birthday we think of what we could possibly buy with that money. This check was different. I wrote out the check, but I did not date or sign the check. The check is currently worthless. Under the “For” spot on the bottom left part of the check I wrote: “Roth IRA”. The check was given unto my sister with the stipulation that it be used as funds to go towards her opening a Roth IRA. When she decides to gather up another $800, she will have $1,000 to put towards a low-cost index fund through Vanguard, and I will sign and date the check. This Roth IRA money will aid in her retirement goals many years down the road.
I would like to think that this gift can one day make her a MILLIONAIRE, and it can. If she were to open an account with the $1,000 needed and put in the maximum contribution allowed to a Roth IRA, given an 8% annual return on her investment. She would have an account balance of well over $1 million dollars by the time she is just 60!!!
Maybe you received some money for Christmas or a recent birthday. My challenge to you is instead on spending it frivolously on the latest iPad or TV, open yourself a Roth IRA. Vanguard offers low-cost mutual funds that can be started with as little as $1,000. Be diligent and stay the course, you could turn some Christmas cash into a million dollars!
You might say it’s your financial advisor, your parent, a relative or maybe even a mentor who has had great financial success.
Your best friend when it comes to investing is: Compound Interest
People who are new to investing often wonder what is compound interest, or why is compound interest important. I’ve touched briefly on the subject of compound interest in a past post but I feel it is so vital to creating long term wealth that I am circling back to it again.
Money can be made and lost. However, time cannot. Each of us has only a finite amount of time here on Earth to build up a financial wealth. Mr. Time is your next best friend.
Check out the following article which shows a visual representation of how Compound Interest and Mr. Time can work together to create a substantial amount of financial wealth for oneself.
A recent survey completed by Fidelity Investments showed that approximately 1 in 3 people who were changing jobs touched their old employer’s 401k. Cashing out your old 401k will cause one to pay income taxes, along with penalty taxes if one is not of age.
Touching this precious “Retirement Money” takes away from the money’s potential to compound upon itself, accelerating growth in your retirement account.
How to avoid the penalty and current income taxes on an old employer 401k?… Roll it over into a traditional IRA. This will give you the same preferential tax treatment that your old employer plan had and continue to keep you on track towards retirement.