Retirement Breakdown

It’s 2018 and this is the year you’re finally going to start paying attention to your retirement plan. You’ve got this, right? You totally know everything there is to know about retirement.

Or do you?

HAHAHAHAHA

You know nothing.

Seriously.

I know nothing and I blog about this shit semi-regularly.

Remember when I made this post about my retirement planning worksheet? It’s a pretty cool worksheet, I’ll give you that.

But one of the things I realized when I was re-reading that post is that I really don’t talk too much about how much you can invest in your retirement accounts, where those accounts should be held, what type of accounts they should be, etc…

So let’s bullet point this thing and start you on your retirement planning education.

Here are few things it might be helpful to spell out:  

  • What are your retirement vehicle options? (401K, 403B, Pensions, IRAs, etc…)
  • How much money can you stash in them?
  • Which of these is the right choice for you?

Let’s break it down

Number 1 – What retirement vehicles do you have available to you?

Many people use the retirement vehicles provided to them by the organization they work for. My husband has a 401k and profit sharing options through his work. I have a 401k and a 403b through my work.

These are… a lot of numbers and letters.

Here are some quick definitions courtesy of the IRS.  

401k  – is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage.

403b – is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and nonelective employer contributions.

IRA – An individual account or annuity set up with a financial institution, such as a bank or a mutual fund company. Under federal law, individuals may set aside personal savings up to a certain amount, and the investments grow, tax deferred. In addition, participants can transfer money from an employer retirement plan to an IRA when leaving an employer. IRAs also can be part of an employer plan.

Roth IRA – same as above except that you are contributing after-tax income, meaning you will not be taxed on this money when you withdraw it in retirement.

Profit Sharing – a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.

Yeah, yeah. But what does this mean!?

Well, it means that if your employer does not offer you a retirement vehicle you can still save for retirement with an IRA or a Roth IRA.

And you should be doing that. Don’t wait for someone else to start a retirement account for you. They will not. You need to start it yourself!

So if you haven’t talked to HR about your benefits package, or you know you set one of these up 10 years ago when you started this job, you might want to look into how you can get some more information on what is or isn’t offered to you via work.

Number 2 – How much money can you contribute to these vehicles?

This is where it gets tricky. There are a lot of numbers to remember. The Motley Fool breaks it down pretty well, but here are where things stand in a nutshell:

$18,500 – max elective contributions to your 401 if you’re under 55 years old. This is the max amount you personally can put in before taxes. This does not include employer contributions – so if your employer contributes a 5% match, you don’t have to count that 5% towards your cap.

$55,000 – this is the combined limit of contributions to a 401k if you’re under 55 years old. If your employer match would put you over $55k, you are SOL. You can’t put a dime more than that into your 401K for the year 2018.

$5,500 – this is the most amount of money you can put into a traditional IRA or a Roth IRA in 2018. This is a bummer. It’s not a lot of money.

One note about those IRAs. You must have earned income to contribute to them. If you do not work but your spouse does, your spouse can contribute to an IRA in your name if they made enough income to do so.

$1,000,000 – hehe, this is just here to note that if you have other investment accounts, such as money you contribute to a Target Retirement Fund (which I do) or other investment vehicle you can put as much or as little money as you want in here. (Assuming it’s just a regular account – NOT an IRA or Roth IRA).

Number 3 – which of these is the right choice for you?

Well that depends. Does your employer offer any incentives or matches if you invest in their 401k? If they do, you should DEFINITELY take advantage of that. You’re throwing away free money (literally, you might as well light Benjamin’s on fire) if you don’t contribute at least enough to get the match.

If you’re a contract worker or a freelancer or your employer does not offer any retirement vehicles, start an IRA. I like a Roth because I’m convinced the tax burden is going to be higher when I retire than it is now so I like the thought of paying taxes on that money up front. But a traditional IRA is great too.

Look into a Target Retirement Fund account. I have one through Vanguard and it’s great. It’s the lazy man’s retirement vehicle. Set it up to auto draft as much money as you can afford every month (try at least 10% of your income – more if you can spare it) and then set your retirement date. It will help set you up with minimal work on your part.

What do you guys think? Was this a helpful overview? Did you learn some things you didn’t know?

I’d love to hear about how you’re saving if you have a system that’s working for you. E-mail me at basicbgettingrich@gmail.com or drop a note in the comments!

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