Ramen noodles for life! Doesn’t that sound great? All the flavors in the world! Chicken, Beef, Shrimp, Jalapeno and Spicy Chicken. While these may be fine in college and for people just starting out you don’t want to be 75 years old and eating them for lunch and dinner at 20 cents per pack. So let’s talk about retirement.
Social security will be less than it is now
That’s right sometime around 2035 the social security trust fund will run out of money. That means benefits will get paid for from payroll deductions at 79% of the current level unless taxes are raised significantly. Also, the amounts social security pays now out aren’t that great. You can determine what you would get paid by looking at the social security statements you get sent annually. Multiply this by 0.79 and you see what you would get per month. Remember there is also inflation and there will be less workers for every retire so you can’t count on only this. The amount you get also depends on when you start withdrawing. You need a plan!
401Ks are a great place to start
- If your employer offers a 401K plan you should be in it. No ifs, ands or buts. Start contributing.
- Some employers offer a match on your contributions of say 5% on your 5%. That’s free money. Take it!
- Your contributions are tax free. Meaning if you put in a dollar your paycheck may only go down by $0.60 as you paying with pre-tax money.
- Your contributions grow tax free until you retire.
- When you withdraw you will be older and in a lower tax bracket than now.
- The contribution limit is $19K per year in 2019. If you are over 50 you are allowed to contribute more via catch up contributions for a total of $20K per year.
- Try to put in 15% if you can to build the base. If you can’t afford that try 10%. If you still can’t afford that then try for 5% and bump it up as soon as you can.
- The more you put in now the faster it grows due to compounding. Investing is like making a snowman. At first the ball starts out small, the grows faster and faster as the ball gets bigger. Imagine making 20% return on $300K instead of $30K. That’s $60K instead of $6K.
- Don’t stop even if the economy goes south. Then you will be buying assets on the cheap at fire sale prices. Once the market bounces back they will rise a lot.
- Never cash out to pay other bills. Keep that ball growing. Do not withdraw!
- If your company has bonuses and they match do not turn off your 401K for the bonus. That way you can get matching on your bonus too. More free money.
- Invest in stock funds when you are young or middle aged. You won’t need the money for a long time. If you are older go with a mix of stocks and safer investments like bonds.
- Look at stock index funds with low expense ratios to keep costs down
What if my employer doesn’t offer a 401k plan?
Many states also offer plans to small businesses and independent contractors. They work pretty much the same except that you work with the state fund instead of your company. They withhold your paycheck just the same. The state however won’t match you.
If you work for the government they have similar plans like 403b that work the same. Use the same methodology to keep that snowball growing fast.
If you don’t have access to any plan then
- Start a traditional IRA via a place like Fidelity or another provider
- Start a Roth IRA via a place like Fidelity or another provider
- Actually do both as each has relatively low limits
- Then start a solo 401K plan too
Comment: Personally I feel that the government has left American workers in a bad place given most people are woefully unprepared for retirement. Many people are unable to fathom what needs to be done. It is not this bad in other industrialized countries as there are government pensions funds for all funded by taxes. There is going to be a major retirement crisis in fifteen to twenty years in the USA. You however will be fine if you follow my advice and get busy. : )