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401(k) here we come
The 401(k) is the lucky winner! You have access to a 401(k) and you're ready to make some meaningful contributions. Woohoo! Read on for details on how to choose Roth vs. Traditional, when to contribute to both an IRA and 401(k) as well as my best retirement tips. Here's how to decide between a Traditional and Roth 401(k) if you have access to both. With a Roth account you pay taxes now. With a Traditional (or pre-tax) account you pay taxes when you take the money out. In both accounts, the investments grow tax-free. Which is better?“Fun” fact: If your tax rate now is the same as your tax rate when you retire, there is no tax difference between what you will owe with a Roth and Traditional account. Cool, right? Yes, I know. My sense of cool is quite warped.Generally, if you think you’re in a lower tax bracket now than you will be when you plan to take the money out (i.e., you think you’ll be earning more then), then it makes more sense to pay taxes now. Important caveat: This assumes tax rates look similar to what they are now when we retire, but we don’t actually know what they will be. Paying taxes now can avoid some tax risk in the case taxes go up.You can also contribute to a 401(k) AND an IRA. Here are some reasons when it makes sense: You want to contribute more than the 401(k) maximum contribution. Amazing! You want to contribute to a Roth account and your company doesn’t offer a Roth 401(k) You have a 401(k) (or multiple) from previous employers. You can roll them into an IRA (or potentially your current 401(k))Your 401(k) has lousy investment options or high fees (you’ll want to max out your 401(k) matching, then max out your contributions to your IRA first)You can rollover a 401(k) into an IRA at any time. What to do if you don't have great investment options. If your 401(k) doesn't have great investment options, meaning the fees are high or aren't broadly diversified, here's what to do.Max out your 401(k) matching first. Even with the high fees, earning 100% on your money is typically worth it. Max out your IRA next. With an IRA you can invest in whatever you wish! With whatever additional money you have to put towards retirement, you can invest in your 401(k). If you are curious, do the math (but really let a calculator do the math) to see what a tax-advantaged account with the higher expense ratio vs. a typical brokerage (non-tax advantaged account) with lower fees looks like in 20 or 30 years. It's most likely still worth it. Here are some of my favorite retirement tips: 1. If you'd like to contribute more, sneak up your contributions. If you are far from your goal, don’t fret (too much). Starting small is okay and really works! You can up your contributions by as little as 1%. Then set a calendar reminder to increase 1% again in four to six weeks. Some 401(k) plans allow for an automatic increase on contributions to make this process easier for you.2. Maximize employer match if you have it (but don't stop there). After some rainy-day funds, a top priority goal should be to maximize our company 401(k) matching if we have it because it’s free money our company gives us for investing in our own retirement. It's 100% return off the bat and is part of your total compensation. If you’re not maximizing your match, you’re leaving money on the table.3. Make sure your retirement funds are invested. One of the most common and painful retirement mistakes I see is that people don't invest the money they put into their retirement account. That's why I like to call it retirement investing vs. retirement savings. You have to invest the money so that it can grow and compound for you. If you aren’t sure, go ahead and login to your retirement accounts right now and check that your balance is invested and that your contributions are being invested.4. Figure out your asset allocation. There’s a general quick calculation to figure out your ideal asset allocation for retirement. Take 120 and subtract your age. That’s the percentage of your retirement portfolio that should be invested in stocks rather than bonds. For example, if you are 30, 120 – 30 = 90% stocks and 100% – 90% = 10% bonds.You can also use or mimic target date funds which create our asset allocation for us. They're a great option as long as the expense ratio is low because we can set it and forget it and it takes care of the asset allocation for us. 5. Check in with a retirement calculator or two. Investing 15% of your income for retirement is a great general guideline but if you'd like to get more specific and accurate, plug your numbers into a calculator or two. Another general guideline you can use to calculate how much you need to retire: take the amount you want to earn in retirement and multiply it by 25. So if you want to earn an annual “salary” of $75,000 in retirement, you’d want to have $1.875 million saved. This assumes you take out (or withdraw) 4% of your nest egg each year and need the funds to last for 30 years. 6. Take time to dream about your retirement. For many, retirement is a big goal that's far away. To help us reconnect with it, take some time to dream about what you want your retirement to look like. How will you spend your days? What will they look like and feel like? Not only is this great for motivation, it can also help us calculate what you'll want to earn in retirement. 7. Simplify your retirement accounts. Over time it can be easy (and common) to accumulate a bunch of different retirement accounts, especially if you had 401(k)s from past employers. Make your life as easy as possible by consolidating and simplifying as much as possible. Rollover any old 401(k)s into IRAs or your current 401(k). And also minimize the amount of places you have to login to keep track of everything. Let me introduce myself...Hello, hello 👋 My name is Ashley Feinstein Gerstley.I’m an author, CFP® professional, money coach and founder of the Fiscal Femme. After studying finance in college (at Wharton) and working in finance (as an investment banker and in corporate finance), I still knew nothing about my own money. When I switched from my high paying investment banking job to a job with a better lifestyle, I took a big pay cut and had to figure my money out. I started a blog (back in 2011) to share what I was learning and the rest is history. I now spend my days talking about (and thinking about) how to get you wealthy. The Fiscal Femme community has grown to over 200K and I have two books - The 30-Day Money Cleanse and Financial Adulting. P.S. I love hanging out on Instagram, so c’mon over and join me if we’re not connected yet.
