The Best Strategies to Save for Retirement

Posted on

What are the best strategies to use to save for retirement?  In this video and in the summary below, I respond to a few questions sent to me regarding the “right” ways to save for retirement.  Specifically, we discuss these three questions:

  • Presuming that a 401(k) alone won’t be sufficient to fund your retirement, what are the “next best” places to put your retirement money?
  • Pre-tax vs. Roth retirement accounts- what’s the best option to choose?
  • How much do you really need to save for retirement?

(Bill’s Note: The video below was originally recorded as a Facebook Live broadcast on November 26, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

The Three Tiers of Retirement Savings

Not all retirement savings accounts are created equal.  If your goal is to save aggressively for retirement, you’ll likely need to make some decisions about where you should be putting your money for retirement. 

I like to think about retirement savings accounts in the context of three different “tiers” that you should contribute to, in the following order:

Tier 1: Employer-Sponsored Retirement Accounts

If you have access to a retirement plan through your work, this should almost always be your first priority to save for retirement.  Typically, these accounts are structured as 401(k) accounts (for private sector workers), 403(b) accounts (for non-profit and education workers), or 457 accounts (for government employees).

If you don’t have access to a 401(k), 403(b), or 457 account through your work, you should skip to Tier 2, with one caveat.  If you are self-employed, there are a myriad of other retirement account options you could set up.  We’ll discuss these in more detail another day.

Assuming you do have a 401(k) or similar account at your job, there are several things you should consider:

  • If your employer matches your contributions, you should, at a minimum, contribute enough to receive the full match.  This is the closest thing to “free money” that you’ll ever get, so take advantage of it!
  • One of my favorite strategies to help people find ways to save more for retirement is to increase your 401(k) contributions by 1% every time you get a raise at work. You won’t notice the money you’re “missing” from your paycheck, since your paycheck is going up, anyway!  But you’d be surprised how big an effect thee gradual changes can have.  By the time I left my corporate job at PwC before starting my own business, I was contributing 12% of my paycheck to my 401(k), simply by following this strategy.
  • Most employer-sponsored retirement accounts are pre-tax accounts.  In other words, you don’t pay income tax on the money you contribute to these accounts (and in return, the money will be taxed when you withdraw funds from these accounts during retirement).  But “Roth-style” 401(k) plans have become increasingly common in recent years, which work the exact opposite way- you pay income taxes on your contributions today, but can withdraw the money tax free in retirement. If you have access to a Roth 401(k), you should seriously consider utilizing it.  More on Roth accounts in a bit.
  • Finally, make sure you know the maximum contribution you’re allowed to make to your retirement accounts every year.  For 2019, the max you can contribute is $19,000 per year (assuming you’re under the age of 50).  Typically, the IRS raises this limit each year (it was $18,500 in 2018, for example.)

But, as the three questions at the beginning of this post strongly implied, 401(k) savings alone typically aren’t sufficient to completely fund your retirement.  So, after setting up your 401(k) contributions, what should your next step be?

Tier 2: Individual Tax-Advantaged Accounts

As you have probably noticed, a key component of optimal retirement savings strategies includes managing taxes on your investments and retirement income.  As a result, you should always look for tax advantages in your retirement savings strategies, whether they’re traditional accounts (no taxes now, but you pay taxes during retirement) or Roth accounts (pay income taxes now, grow and withdraw the funds tax free in retirement). 

There are several different options available to you in Tier 2.  And my favorite one might surprise you.

Health Savings Accounts (HSAs)

Outside of a 401(k)/403(b)/457, HSAs are my absolute favorite way to save for retirement.

Why?  Because HSAs are essentially the last complete tax shelter that exists in America.

When choosing between a Traditional or Roth IRA, you pay taxes on your contributions at some point; whether it’s today or during retirement, your money gets taxed eventually.

But as long as you use the funds in your HSA for qualifying medical expenses, the money you contribute and invest in an HSA is never taxed.  Presuming your HSA account allows you to invest the money in your account, this can be an incredible savings vehicle for retirement.

This probably isn’t a shocker for you, but one of the primary challenges in preparing for retirement is making sure you have enough cash on hand to support your medical bills as you get older. With the rising cost of medical care, using an HSA to save for these retirement expenses is an incredibly efficient way to prepare for this.

Of course, there are a few qualifiers here:

  • You’re only eligible to open and fund an HSA if you have a high-deductible health plan. And if you do, you need to make sure you have a sufficient emergency fund to meet your deductible if you want to use your HSA for long-term investing.
  • The maximum contributions you can make to an HSA are relatively low.
HSA Contribution Limits for 2018 and 2019

HSAs are commonly overlooked as a retirement savings vehicle… but they really shouldn’t be.

NOTE: HSAs and Flexible Spending Accounts (FSAs) are not the same thing.  You should not be using FSAs to save for retirement, because you need to use the money in FSAs each year or it goes away.  Conversely, you are allowed to accumulate money in an HSA.

Traditional/ Roth IRAs

In 2019, you can contribute $6,000 to either a traditional or Roth IRA (up from $5,500 in 2018). Although, it’s worth noting that you have until April 15, 2019 to make that $5,500 contribution to your IRA for the 2018 tax year!

There are several questions you need to answer to determine which is the right type of account to use. Here’s how to decide which one to contribute to:

Can you deduct a traditional IRA contribution?  We’ve already established that “traditional” retirement accounts allow you to deduct your contributions from your taxable income this year.  But here’s the catch: if you have a 401(k) or similar account at work, you likely can’t deduct your IRA contribution on top of that.  The rules are somewhat complicated, and you should seek professional advice to verify your ability to deduct your IRA contributions.  But, this should be the first question you answer before making your decision.

Are you eligible to contribute to a Roth IRA? “Making too much money” is generally a good problem to have.  But, it can make you ineligible to directly contribute to a Roth IRA.  The table below shows the income restrictions on making direct Roth IRA contributions. 

Roth IRA Income Contribution Limits: 2019

Two caveats about this:

  1. These income restrictions do not apply to Roth 401(k) plans.  So, if your employer offers one, it is worth considering regardless of your income levels.
  2. You technically can still get money into a Roth IRA utilizing a Roth IRA conversion strategy. This is a very complicated process and it’s important to make sure you do it the proper way to avoid trouble with the IRS, so you should seek professional help before attempting this on your own.

When will your tax rate be higher: now, or during retirement?  This is the fundamental driver of the Traditional-or-Roth IRA decision.  Simply put, you want to pay taxes when you’re in a lower tax bracket.

If you expect your tax rate to be higher in retirement than it is now, you should pay taxes on your income now and withdraw it tax free in retirement by using a Roth IRA.  If, on the other hand, you expect your income (and income tax rate) to be significantly lower when you retire, a Traditional IRA is probably the right choice for you.

However, this is more complicated than it appears at first glance.  Remember, we’re not looking to compare your tax rate today with what your tax rate today is for your expected retirement income level.  You need to think about how tax rates will change between now and when you retire to make this decision.  Which, given that your retirement date is likely decades from now, is notan easy task.

My personal belief? Particularly after the passage of the Tax Cuts and Jobs Act in late 2017, today’s income tax rates are at all-time lows.  Which makes me inclined to believe that tax rates are likely to be higher when we retire, making Roth IRAs a great option for young people today.  That’s just my opinion, of course; I don’t have any more of a crystal ball to predict the future than you do.  But, particularly if you’re close to exceeding the income limits, you should seriously consider a Roth IRA.

How much flexibility do you need?   One final thing to consider: Roth IRAs are much more flexible than traditional IRAs.  While I don’t typically recommend that you withdraw money from your retirement accounts before retirement, you should know that you can withdraw your contributions to your Roth IRA at any time, without penalty. (As long as your investments haven’t gone down significantly in value of course- you can’t withdraw something that isn’t there!)  You can’t withdraw the investment earnings in your Roth IRA without paying a significant penalty, but you canwithdraw your contributions. 

Make Non-Deductible Contributions to Traditional IRAs

Even if you can’t deduct your traditional IRA contributions, it’s a strategy worth considering.

Even though you won’t be able to deduct a $6,000 (2019 maximum) contribution to a Traditional IRA now, and you’ll pay taxes when you withdraw the money in retirement, there’s still one tax benefit you can take advantage of:  between now and when you retire, you won’t be taxed each year on the investment earnings in your account. 

You might be losing the “primary” benefit of a traditional IRA if you can’t deduct the contributions, but at least you’ll save on taxes every year between now and when you retire by sheltering your investments in this type of account.

Tier 3: Regular Investment Accounts

You should be investing your retirement savings into something.  Which means that once you’ve run out of retirement account options, your final option is to invest in a regular brokerage account.

There are no tax benefits to holding this type of account.  The money you put into this account is after-tax money, your investment earnings will be taxed every year, and you’ll be taxed when you sell your investments.  But, the primary challenge in saving for retirement is making sure your money grows at a faster rate than inflation.  By investing your money as opposed to keeping it in a savings account, you give yourself the best possible shot to make sure that happens, even if there aren’t specific tax benefits for doing so.

What Shouldn’t You Use to Save for Retirement?

In a nutshell: you shouldn’t use permanent life insurance or annuity products to save for retirement. 

I’ve written at length before about why I hate permanent life insurance as an investment vehicle for retirement.  It might come with tax benefits, but the costs of these products far outweigh the benefits for the vast majority of people. 

And for young people, annuities are even worse. Until you’re at least 50 years old, you shouldn’t even consider purchasing an annuity.  And even then, there are still probably better options for you.

I’ll probably do a whole separate article about why I dislike these products.  But until then, if you’re contemplating using life insurance or annuities as a retirement-savings vehicle, you should seek advice from a third party who doesn’t sell these products for a livingto make sure it’s the right fit for you.

How Much Do I Need to Save For Retirement?

Unfortunately, there’s no generic answer I can give to this question.  Everybody’s retirement savings needs are different, so you should work with a financial planner to develop a retirement plan specific to you and your vision for your life to answer this question.

Simply put, the way you want to live in retirement significantly impacts the math on how much you need to save.  Consider two different families:  one of whom wants to purchase a vacation house on the beach when they retire, and the other wants to sell their primary house, downsize to an apartment, and buy an RV to travel the country.

Which person will need more money to support their vision for their life in retirement?  All other things equal, the first one.

You need to develop your own retirement savings plan to determine how much you need to save.  If you want to learn more and get this process started, I encourage you to book a free breakthrough session with me so we can discuss more and start developing your plan of action. 

The Pacesetter Planning Personal Savings Program

Posted on

I’m excited to announce the launch of the Pacesetter Planning Personal Savings Program.  The objective of this program, beginning with a four month pilot group on January 1, 2019, is to help you double the amount you’re saving every month.

If you’re interested in participating in the pilot program at a 70% discount, please take 2-3 minutes to complete this application by Wednesday, November 21.  

In the video below, you will learn:

  • Why I’m so excited about this program, and the results you can expect if you participate
  • How the Pacesetter Planning Personal Savings Program works
  • How to participate in the pilot group of the program at a significant discount.

Program Results

I find that about 60% of the value I bring to my comprehensive financial planning clients involves helping them save more on a monthly basis, and helping them figure out where they should be putting their savings.  Because I have seen the enormous value of increasing savings rates in the lives of my clients, I want to create a way to work together that helps with this as a standalone service.

But ultimately, while we call this a “Personal Savings Program”, merely increasing your savings rate is only a small part of what this program will do for you.  By getting your cash flow under control and using your money with purpose and clarity, the potential results you will experience are countless.

  • This is how we gain confidence and reduce anxiety about our financial situation.
  • This is how you can go from being able to afford buying a house in 6 or 7 years, to buying a house in 2 or 3 years.
  • This is how you can go from retiring in your 70s to retiring at 65.
  • This is how you can get the confidence to quit a job that’s burning you out so you can do work that you truly enjoy, even if you need to take a paycut.
  • This is how you can save your money to buy the memories and experiences you want in life.

The “process” of the Pacesetter Planning Personal Savings Program might be about budgeting and banking structures, but the results you’ll get are far more important.  Your results, of course, will be unique based on your hopes and dreams for the future, and the state of your finances today.  

But ultimately, this program is about decreasing the regrets you might have at the end of your life, and increasing the kind of memories you want to have with your friends and family.

Program Details

The pilot group of the Pacesetter Planning Personal Savings Program will launch on January 1, 2019 and will run for four months.  I am expecting to officially “launch” the program to people outside the pilot group on April 1. 

But even though we won’t officially start tracking your savings until January, we’ll meet in December to get you set up on the program.  After all, we need to be ready to hit the ground running on New Year’s Day… but the holiday season is not the right time to start trying to increase your savings! 🙂

Quantitatively, the goal of this program will be to help you double your savings rate.  This, of course, isn’t a “guarantee”- hitting this type of goal will depend on your degree of participation in the program.  But, that’s the sort of improvement we are shooting for!

(I should note that this program is modeled off of a similar program developed by an Australian firm – with permission, of course! –  and they find that their clients are able to increase their monthly savings rate by two or three times the savings rate of the average Australian.)

Three Program Components

1. Budgeting

You probably saw this coming.  It’s hard to talk about increasing your savings rate without talking about budgeting.  

I’ve talked at length in the past about why most people fail at budgeting.  So you shouldn’t be surprised to hear that this program is designed to address these challenges. 

We’re going to spend some time developing a realistic budget for you (without giving up your social life and entertainment expenses.)

The goal here isn’t to cut spending across the board, it’s to make sure we’re directing enough money to the things that are important to you, both today and in the future, and making sure that you’re held accountable to these best intentions.

And we’ll spend some time helping you identify what you want to be saving for, too.

One final note on the budgeting component of the program: I’m not going to tell you how much you can spend, and how much you can’t spend.  This program isn’t a dictatorship, it’s a partnership. 

You’ll be responsible for taking 15-20 minutes at the beginning of the program to complete a “trial budget” planner, and we will meet to review it before officially starting the program.  My job is to help you see the outcomes of your budget, and help you prioritize things as necessary.  And, of course, it’s my job to do everything I can to help you stick to the budget!

2. Banking

This is probably the most important piece of the program.  We’ll make sure your bank accounts and credit cards are set up to maximize your ability to see what dollars are “spendable” and which dollars need to be saved.

Most people’s bank account structure is designed to make it very, very difficult to consistently save money.  And “designed” might be a generous word; most of the people I work with don’t have their bank accounts organized in any sort of way when I first meet them.

There’s no shame in that whatsoever.  But before you get started on the Personal Savings Program, we’ll get you set up in a proven bank account structure that will make it much easier for you to hit your savings targets each month.

3. Reporting

This is where this program will really shine.  You’ll get a series of reports from me that will help give you clarity on where your money is going and will hold you accountable to your savings goals.

There are four types of reports you’ll receive throughout the Personal Savings Program:

  • Weekly reports are designed to give you a quick overview on your spending progress against your budget in 4-6 key areas of spending.  In particular, your weekly spending reports will focus on a few areas where you know you’re more likely to overspend.  In this way, these reports function in a similar manner to the text message warnings you get from your cell phone provider when you’re close to going over your data limit.  These reports will keep you focused on the few items that really matter, and help you avoid being distracted by the rest.
  • Monthly reports will show you your progress on hitting your savings targets at the end of each month, and (after the first month) will show you trend lines on a month-to-month basis.
  • Quarterly reports will be the key report we discuss in our quarterly meetings as part of the program.  These reports will show you your progress over the past three months, and if you fell short of your savings targets, will show you where things went wrong.  The quarterly meetings we have to discuss these reports will “reward” you for hitting your savings targets by deciding what we’ll do with the extra savings, and help get you back on track if you fell short.
  • Finally, yearly reports will analyze your progress over the course of the year.  Even more importantly, we’ll use the view of your full year of saving and spending to make any necessary changes to your budget.

Cost

So, what does all this cost?

Costs to participate in the program, if you start after the pilot group launches, will be finalized after I see the results from the pilot group.  But, the fee for this program will likely be about $750 upfront and $97 per month.

But by participating in the pilot group, you will be eligible for a large discount, both for the upfront fee and the first four months of the program.

The cost to participate in the pilot program will be $225 upfront, and $30 per month for the first four months.  This is about a 70% discount off of the eventual price of the program.  

But, I only have room for ten individuals/families in the pilot group.  So if you’re interested, be sure to apply today.  It will only take you a few minutes!

Applications are due on Wednesday, November 21.  If you have any questions about the program in the meantime, feel free to email me (bill at pacesetterplanning dot com) or set up a 15 minute call so we can discuss. 

I hope to see your name in the applicants list!  And I can’t wait to see how far you’ve come by the end of the pilot program in April!

KEEP More of Your 2018 Money, plus What We’ve Got for You in 2019

Posted on

In this short video, I’ll tell you what we have in store for you to close 2018 (including how to KEEP more of your 2018 money) and I have a BIG announcement for you at the end of the video!

 Watch the Video ⬇️ 

In the video above, I talk about three simple and practical ways we can work together without (or before) comprehensive financial planning services: through Focused Project Planning services.

Timestamps for your convenience:

1:06 – “Lighter” ways to work together: Focused Project Plans
1:20 – Student Loan Analysis and Payment Planning
1:39 – Health Insurance Plan Selection & Open Enrollment
1:56 – End of Year Tax Loss Harvesting (<< BIGGEST opportunity at this time of year, especially in our current stock market conditions.  There could be a great opportunity to keep more of your 2018 money by saving on taxes!)


⬆️ If you’re interested in working together through Focused Project Planning, please schedule a call with me!


I also made a special announcement in the video (at 4:36)…



YOU
could be one of 10 people
in my Personal Savings Pilot Program 
beginning together on Tuesday, January 1st! 

My program goal is to double your monthly savings amount
without feeling like you’re sacrificing your quality of life.

If you’re ready to challenge yourself
to putting your money where your mouth is…

Click below to apply for your chance 
to be one of just ten people in this program!