Making Retirement Decisions Over Pizza & Beer

 

Tonight, Lloyd and I enjoyed a low-key date of pizza and beer (with a coupon, of course – who do you think I am?).  Pizza and beer is one of my favorite dates – I’m a low-maintenance kinda gal and there’s something so refreshing about an ice cold brew and a steaming slice of pie on a Saturday night.  It really gets you to thinking about…retirement?

Over slices of pepperoni, Lloyd and I got on the subject of our retirement accounts and saving for the future.  Truth be told, we’ve been talking about this subject quite a lot lately.  I’ve been toying with the idea of…not maxing out my retirement account next year. *shocked gasps from readers*

Yes, that’s right, I might stray from the biggest personal finance rule of them all:  Thou shall max out thy retirement accounts each and every year.

The fact of the matter is that we have a lot to save for right now.  We want to pay off a good chunk of our future house before we have kids, we want to build our home gym, we want to buy a dog when we have a house, we want to get married.  On top of that, while my car is close to brand-new, Lloyd’s car is almost 10 years old and we’d be naive to think it won’t need maintenance or even need to be traded in in the near future.

What’s more important:  not getting into debt again or maxing out my retirement account?

The obvious answer is avoiding going back in debt.  I made a one-time stop in Debtsville and I don’t intend to ever go back.  I don’t mind working for even 5 more years if it means that I never have to be in debt ever again.

I’m happy I maxed out my 401k this year.  If I was going to do it any year, this was the year to do it.  I now have a huge amount of shares under my belt that I bought for a really cheap price.  Who knows when the market will provide that opportunity again?

So, next year, I won’t be maxing out my retirement accounts.  Instead of saving almost 24% for retirement, I’ll be backing my contributions down to the Dave Ramsey recommended percentage of 15%.  Next year, I will contribute $5,000 to a Roth IRA and $5-6,000 to my 401k (plus about $3,000 in matching from my employer).

Our ultimate goal is to reach max-out again and stay there, but for now, we’re content with contributing just 15%.

I’m happy with my decision.  My taxable income will go up and I’ll pay a couple thousand dollars more in federal taxes, but I think it’s worth it in the end.

We had some great personal finance discussion flowing over our dinner tonight.  It makes me think: is it possible that the best financial decisions are made over pizza and beer?

(photo source)

Where Should I Put My Retirement Money? Roth 401K Vs. Roth IRA Vs. 401K

Unless you have the IQ of Lindsay Lohan (sorry, Linds), you’re probably smart enough to know by now that you should be socking away a good deal of money into one of those handy-dandy retirement accounts.  This is especially true for us young’ns who have years upon years for our money to ride out the recession and start compounding earnings like rabbits.

We all thought we knew everything there is to know about 401Ks and Roth IRAs until the new retirement tool waltzed in like he owned the investment-world.  Well, hell-ooo there Mr. Roth 401K.  You’re looking mighty attractive, aren’t you?

Here’s the deal.  Roth investments are amazing for one simple reason:

The earnings you make from a Roth investment are 100% tax-free when distributed to you in retirement.

That means that, even though the money you contribute to your Roth IRA/401K has already been taxed, any – and I mean ANY – earnings you make from your Roth is 100% NOT TAXED.  This is why Roth IRAs are such an amazing retirement tool, but also why they come with some limitations that weed out those uber-rich guys.

If you’re new to retirement accounts, I put together a very minimal table showing the basic key points about these three types of retirement tools – the 401K, Roth 401K, and the Roth IRA:

*These are just the bare basics - there is so much more to these investments than what I've listed. **$16,500 is the max total you can contribute to both a 401K AND/OR a Roth 401K

As you can see, there are pros and cons and several differences among each account.  Can I tell you whether you should put your money in one over the other?  No, I can’t.  But I can help show you the benefits of each tool.  However, if I had the option of using a Roth 401K, I would be ALL OVER that. 😉

Here are more fun facts about these retirement investments:

ROTH 401K

• This type of investment is relatively new, so they are pretty rare.  They haven’t become outrageoulsy popular just yet mainly because companies aren’t willing to hire more personnel to help manage the Roth 401K.  If your employer offers this type of retirement, I would definitely ask your Human Resources office about the details!
• As I mentioned in the bullets above, the max is $16,500 – but only to the extent that you don’t contribute to a traditional 401K.  So you can only contribute a max total of $16,500 to either account (for example, you could contribute $8,250 to each account).
• Roth 401Ks are not subject to the income limitations that Roth IRAs are!  No matter what you make, you should be able to contribute.
• Employers are allowed to match contributions, but you’ll have to ask your HR department more about that for your particular company.
• Since we can’t predict the future (try as we might), we have no idea how much higher or lower our taxes will be in 30 years; the Roth 401K dodges the risk of high future taxes by having 100% tax-free distributions for you to live off of when you retire.

ROTH IRA

• To be eligible to contribute to a Roth IRA, you must have had earned income in that year.  This means that you can’t use money gifted to you or scholarship money.
• You cannot contribute more than you make (a given if you abide by the first bullet).
• You can invest in many different things – stocks, bonds, mutual funds, etc.
• Did I mention that all the earnings from a Roth IRA are TAX-FREE?!

401K

• The biggest benefit to this retirement tool is the employer matching.  Most companies offer some sort of matching deal up to certain amounts that you contribute.  For example, your company may match up to 5% – but you’ll have to contribute at least 5% to get the full matching.  It’s generally understood that you should contribute at least up to the amount that is matched, otherwise you’re passing up free money.
• You’re employer maintains this plan (similar to a Roth 401K), so it doesn’t require much effort from you, the employee.  It’s simple to set up automatic withdrawals that will be deposited right into your 401K account.  I recently heard a great quote from Ramit Sethi about this type of automation.  He said, “Don’t make retirement about willpower, make it automated.”  He couldn’t be more right – once that money is deposited into your 401K, there’s no way you can go out and spend it!

I hope this helps you along in your decision on where to put your retirement money.  There are many great tools available to us for retirement that are just too good to pass up!  Keep putting that money away every payday and you can rest easy knowing that your beach house and country club memberships will be fully funded whenever you’re ready to retire!

*Editor’s Note:  Please do your own research and consult your Human Resources Department or a financial advisor before you make any decisions.  I cannot tell you where to put your money, I am only trying to show the various benefits to each type of retirement account.

How To (Mentally) Max Out Your 401K

I’ve had a couple readers share with me that even though they probably could max out their 401K, they don’t.  I totally get it – it’s tough to do.  If everyone’s strong suit was willpower, we’d have a bunch of rich, skinny people walking this Earth!

Here are a couple of ideas to help you max out that 401K and get yourself on the fast track to an early and/or prosperous retirement:

• Daydream:  I kid you not.  This works for me.  Lloyd and I often talk about our summer beach house and our winter ski trips that we plan to take when we’re retired.  Not only retired, but retirees with smokin’ hot bods…
• Stay In Shape:  Yep, you read that right.  I think that so many (young) people think of retirement as the end of the good part of your life.  You’re not a young adult anymore, your body is shot, and you have to wear diapers, right?  NO!  50, 55, 60, 65 is FAR from old – and even further from the end of life.  Keep that body rockin’ and you’ll be able to live retirement like a feisty young whipper snapper.
• SSS (Start Small Silly):  A masterpiece isn’t completed in a day, nor is a 401K.  Now, don’t take advantage of the “start small” tip by contributing an extra $10 a year.  Instead, try to contribute an extra $50-$100 every month.  Before you know it, you’ll be maxing out.  And if starting small doesn’t work for you…
• Go All In:  Max out all at once.  Change your contribution amount and never look back.  This is how I did it and it worked for me.  If you need a support system, round up the nearest personal finance blogger and have them do the clicking for you.
• Keep more of your own money:  Story time…last year I contributed 5% of my income to my 401K.  I paid about $9,700 in federal income taxes.  This year, I will make $3,000 more than I did last year and I’m contributing about 23% to my 401K.  Guess how much I’m going to pay in taxes this year?  About $7,000 in federal taxes in 2009.  Not only did I get a pay raise from my employer, but I’m also getting a pay raise from the government in the form of lower taxes…to the tune of almost three-thousand smackers!
• Expand Your Mind: Truly, the big picture is that the  more you invest from a young age (e.g. twenty-somethings should max out), the more time that money is invested, the more money you walk away with in the end.  I used my handy-dandy balance projection calculator on my 401K website and came up with this:

• A Load Off: Maxing-out your 401K in 2009 and beyond…$16,500.  Knowing you’ll be financially secure in your golden years…priceless.

As you can tell, I’m a big advocate of the 401K Max-Out.  Even though it’s tough putting aside all of that money today, I know how much more rewarding it will be in the future.  After all, it’s the most difficult obstacles in life that have the biggest payout (pun intended).

Question:  Are you maxing out your 401K?  Why or why not?