The only exception I would consider to that general rule is to put in enough to money in to get your company’s match. It’s doubling your contributions.
Where Should Our Money Go?
Assuming that you’ve gotten out of high interest debt, you may now want to go ahead and optimize your money.
We searched to find some answers. Some financial gurus encourage the following process to maximize your retirement contributions.
401(k) up to the employer’s match
Roth IRA up to the year contribution limit
Rest into 401(k)
401(k) Contributions – How Much?
Start small if you’re cautious and decide what will work well with your budget. Some financial experts suggest put 5- 10% of your paycheck into a retirement account.
You can always increase the amount as you make more money.
When I made it a year into my internship, I called the human Resource Department to get started with the company’s 401(k) plan. I was fortunate that I qualified to participate and I wanted to take advantage of it.
If you don’t qualify for a 401(k) at work, though, you can still open an IRA. Opening an IRA isn’t hard at all and it can be a huge benefit for you.
You have to decide if you want to open a Roth IRA or a traditional IRA.
Roth IRA vs Traditional IRA- Which is Better?
The main difference between the two IRAs has to do with when you’ll be taxed:
Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
Right now you can contribute $5,500/year to a Roth IRA if your modified AGI is:
$178,000 for married filing jointly or qualifying widow(er),
$112,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
$10,000 for married filing separately and you lived with your spouse at any time during the year.
I’ve written how I had gotten a ballpark figure before, using financial calculators and basing assumptions on averages and historical data. I still believe it’s better to have some goal for how much to save than to just go without a plan. However if you can get smarter with your target number, than go for it.
How Much Do You Need with Conventional Retirement Planning?
What makes Todd’s book a resource is how he doesn’t give a one size fits all solution. He takes you step by step on how you can build a nest egg that fits your particular needs and situation. To give you an idea of wealth of information he shares, I’ll highlight just a few questions tackled in the first section where he explains how conventional retirement planning works.
How much income do I need for retirement? While the traditional rule of the says that you should plan for around 75% of your current income, Todd shows that it’s more practical to look at your expenses and make a reasonable ballpark figure as to what you will need. He references studies where most categories see a significant decrease with the exception of health insurance.
How does inflation impact the amount of money I need for retirement? Todd gives some compelling reasons why you shouldn’t just assume the standard 3% rate and instead stress test your savings requirement.
How does life expectancy impact the amount of money I need to retire? While actuary tables are useful for insurance companies, Todd explains why they aren’t valid for you and your retirement.
How much will my company pension and social security pay during retirement? While those closer to retirement may want to factor in their pension and retirements, Todd goes into why you can’t treat them as secure solutions.
What I appreciate is that Todd pulls no punches with these questions and more. He shares the math and studies relevant to each question. You are encourage to run the numbers yourself and decide whether or not conventional retirement planning suits your needs.
From here, the second section covers creative retirement planning. Todd goes over how you can adjust and tweak your current lifestyle and assumptions based on scenario analysis. He gives some practical advice on how you can turn activities and hobbies that you enjoy into income streams that you can utilize when you retire. For couples approaching their retirement and are looking to shore up their finances, this section is for you.
The last section gives the cash flow model, which Todd used himself and allowed him to ‘retire’ (be financially independent) at 35. He crafted a three rule system handles inflation and life expectancy plus gives you diversified sources of income.
I can say that going through the questions he asked, I feel more prepared and knowledgeable. Instead of being focused on that ‘magic’ number, I have a doable plan that would work for us. If you two are looking for a retirement planning resource, I highly recommend Todd’s book. It is packed with information without getting too dry or long winded.
Autographed Book Giveaway!
I had the pleasure of chatting with Mr. Tresidder last month in St. Louis and I attended one of his sessions. Not only is he extremely knowledgeable about investing, he is also a genuinely concerned about helping others get their retirement plan squared away.
He was kind enough to offer a couple pf autographed copies of his book and I’m giving them away on both my sites – one for a Couple Money and one for My Financial Reviews. It’s simple to enter; I just want you to share your biggest retirement question by November 30, 2013. I’ll pick a winner December 1, 2013.