Millionnaire Retirement Plan
Start Early
I know it’s cliche, but compounding interest is the 8th wonder of the world. There isn’t a thing as starting retirement too early and I highly encourage as soon as you make taxable income to start putting money away in a Roth IRA (I’ll explain in a bit). Retirement should not be your main priority though, keeping a roof over your head and food on the table is. If at any point you are struggling, or are encountering trouble do not be afraid to take a pause on contributing to retirement. This is also why early contribution = success. If there are hardships down the road, you will already have money earning you interest without you having to actively contribute.
Max Employer Match
Most companies have moved away from the pension plan and focus on matching contributions to a retirement account. If you are financially able to, ALWAYS MAX YOUR EMPLOYER MATCH!! It is essentially free money you get for doing your part in saving for retirement. If you work for a non -profit this will commonly be called a 403(b), otherwise it is known as a 401k. It is also important to consider this when comparing job offers, if one company matches 2% and the other matches 5%, that could equal a few extra thousand a year. Compounded over 30–40 years could make it over $100,000 in the long run (using approximate numbers).Roth v. Traditional
Commonly with IRA’s and sometimes 401k’s you will have the option of a Traditional or a Roth account. To break it down simply Traditional accounts are pretax contributions, meaning you don’t pay taxes on the money you put in. Instead, you will pay taxes on the money when you pull it out, at your future income tax rate. This is useful if you are at the peak of your income and will likely be in a lower tax bracket in retirement (59 1/2).Roth contributions are the opposite, they are taxed at your current income rate, and you do not pay taxes when you withdraw in retirement(on either principle or interest gained). This is very beneficial if you are just starting out as most college grads are, and your income is expected to grow. Keep in mind there are certain limits to who can contribute and how much which I cover below.
IRA's
Individual Retirement Accounts (IRA)’s allow you to save for retirement independent of your company’s 401k or 403(b) options. Often the company will only allow a few select investment options and a IRA will give you access to many more funds and often feature lower expense and management fees.As soon as you have taxable income OPEN AN IRA! This will give you an avenue to capture that compounded interest I was talking about earlier.
I personally prefer Roth IRA’s, because I plan on making more money as I grow in my career and do not want to pay taxes on the interest I make on my capital. Do not be afraid of opening an account. It isn’t a marriage license or long term obligation. Opening one is half of the work. The other half is making regular contributions. At the time of writing this the maximum contributions for a Roth IRA is $6,000 annually. This equates to $500 a month. This may seem daunting or a breeze depending on your income level. Keep in mind, anything is better than nothing. Even $50 a month will make you better prepared than not contributing at all.
Below shows some of the limits as of writing this in 2022, but make sure to confirm for your situation.
Roth IRA
- AGI (adjusted gross income) under $129,000 for single filer
- Can contribute $6,000/year ($7,000 if over 50 years old)
Traditional IRA
- No Income Limit
- Can contribute $6,000/year ($7,000 if over 50 years old)
Notice: The maximum amount applies to all IRA's you own.
You can split it between both types, but you cannot contribute $6k to a Roth AND $6k to a Traditional. That is illegal, please follow the law.
15% of Income?
Most people follow the rule of saving 15% of their income to retirement and this sounds hard to do, especially with taxes and monthly bills considered. Let’s break it down a bit.If you contribute 5% in a 401k and your employer matches it, you are already 2/3 of the way there. Like I said, it’s free money.
If you continue the other 5% into an IRA then you’ve met the 15% mark by only investing 10% out of your pocket.
Priorities
Retirement is important don’t get me wrong, but there are current items that are more important long term, like paying rent and groceries. Do not hesitate to slow down on contributing to retirement if you are having financial difficulties. If you do, stop contributing to your IRA first, and then your 401k. The reason we do it in this order is because of the employer match, it is free money that we can’t make back.My Plan
If you follow the same plan I do, you are going to be a millionaire by the time you retire.1. Max Employer 401k match
2. Max IRA contributions
It’s that simple, two easy steps. Let’s break it down.
Math Time!
For easy numbers let’s say you make $50k a year pre tax. After taxes ($39,000)- Start working/ contributing at 24
- Average return of 5% (conservative)
- Max out 5% employer match ($5,000 to retirement)
- Contribute additional 5% ($2,500) to IRA
We can use a financial calculator to figure this out.
PV =0
PMT =7,500
I/Y = 7
N = 36
CPT = FV = $1,116,850.94
That’s right, using these baseline numbers on a $50k salary doing what I said, you will be a millionaire when you retire.