Monday, September 3, 2012


Alright, as I get closer to closer to the big 3.0. (OMG!) I realize now more then ever it is time to buckle down on retirement savings. 
As you may have already read (about 100 times) we are avid Dave Ramsey followers and since we've completed baby steps 1-3 it is time for baby step #4 - saving 15% of gross pay towards retirement.  Holy cow, that seems like a lot of money to save EVERY month for something 30-40 years away!  Seriously though, retirement is going to be the most expensive adventure of your life; don't skimp on preparing for it. 

There many different ways of saving for retirement, and just as many schools of thought on the subject.  There is the 401k (traditional and Roth), IRAs (traditional and Roth), real estate, pensions (you lucky dog), and a lot more I know nothing about.  There are very distinct differences between these:

A traditional 401k is a pre-tax retirement savings plan offered through your employer.  You may or may not have good low-cost choices here, it depends on what your work offers, but if you get a company match of any kind take advantage of that first and foremost.  If your company matches 100% for the first 3% you put into your 401k, that is an automatic 100% increase on that money; even if the fund choices are expensive and terrible, you aren't going to get that kind of return on your investment anywhere else.  The fact that the 401k is pretax means it is not taxed until you start making withdrawals during retirement.  The Roth 401k is the same plan, but it comes out after taxes, which means you pay taxes on this income now, but you pay no taxes on the income or the growth when you withdraw it in retirement.  Right now, in 2012, there is a $17,000 per year maximum, plus an additional $5500/year if you're over age 50, you can save into your 401k (traditional and Roth together).

Next are IRAs.  A traditional IRA works the same as a traditional 401k in that the money saved is pre-tax, and a Roth IRA is similar to the Roth 401 as it is post-tax.  The difference here is there is the max you can save in an IRA is $5000/year ($6000 if over 50) but you can choose which company to invest with.  My husband and I each have a vanguard Roth IRA and have been very satisfied with their low fees and great customer service.  Also, with a Roth IRA, your contributions (the money you have put in), can be taken out at any time, for any reason, without penalty or taxes. 

***There are arguments for Roth over Traditional and vice-versa.  Really, if you think you'll be in a higher tax bracket in retirement then you are now then a Roth is your best savings tool.  Likewise, if you think you'll be in a lower tax bracket in retirement then now, then traditional is your best bet.  Sadly though, I do not know anybody with a future telling crystal ball, so the "best" option will only be known in hindsight.  However, even if you save in the "wrong" one, you're still saving. Saving is much better then not, so don't procrastinate because you're not sure where to put your money.  For full disclosure, Chris and I utilize both Roth space and Traditional; we do a 60/40 split with 60% going into a 401k and 40% going into a Roth IRA.

Real-estate income in retirement can be handled in a few different ways.  Some people build up several rental properties over their lives with the intention of using the rental income as retirement income, others buy up properties and rent them out over the years as they pay them off to turn around and sell them at a hopefully much greater price tag during their retirement years for money to live off of.  I have known a few people who have used each of these tactics, and it can work out well, but you really have to be able to keep in mind the big picture through the years, and also be ready to continue taking care of all of the properties during retirement if you are planning to use the rental income.  This is not something we're doing, but if the right opportunity presents itself at the right time it is something I would consider.

Pensions are becoming less and less common as they are being replaced by the 401k.  Even some government positions that were once highly sought after for their retirement benefits (i.e. postal worker) have gotten rid of the pensions.  If you are lucky enough to work in a field/company that offers a pension then that is fantastic, but keep in mind those can change and it would probably still be wise to save outside of that just in case.  If you save too much for retirement and have to live a luxurious lifestyle to spend it all or have too much money to leave your children then I guess that is a good problem to have. 

I am in no way pretending to be any kind of finance expert; these are just things I've learned along the way as I embarked on my investing journey and thought I would be a bad steward of information if I didn't pass it along. 

I really do want to say, no matter your age, if you haven't started thinking about saving for retirement please do it.  If you have been thinking about it but haven't done anything, please do it.  If you have been saving all along and are going to be sitting pretty in your golden years, great job and I hope to be able to say that someday too.

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