Last weekend, I was at a friend’s house for dinner and we started talking about saving for retirement. We were discussing the different types of plans we use for our personal retirement savings – 401k, 403b, IRA, and Roth IRA. We knew there were contribution limits for each retirement tool, but we weren’t sure about retirement limits among similar tools. Our question was: can we contribute the maximum amount to a traditional IRA plus the maximum amount to a Roth IRA?
I decided to answer this burning question so I looked it up on the IRS website!
Disclaimer: This post is not intended to be retirement or financial advice. Please consult your tax professional regarding your specific circumstances before making any changes to your retirement and other accounts.
Yes, I know, the title of this post might sound a little funky. If you’re still in school, why would you be thinking about retirement?! My thought is that you can never start saving for retirement too early. Hear me out…
Over the summer, you probably worked really hard at a summer job and earned a bunch of money. I’m sure that you’ll use some of that money for your books for the semester, and for your entertainment – dinner and a movie with friends, etc. These are all important things to use your money for.
Have you also saved some of it? Remember we talked about opening checking and savings accounts last month (revisit that post here). It’s important to put some of the money you earned in a savings account so that it earns money while you’re in school! We’ll talk more about the miracle of compound interest a little later. It’s an interesting subject…trust me!
Also, remember we talked about 401k plans (revisit that post here)? Well, if you’re not eligible for one because your employer doesn’t offer one, you can still save for retirement. When you turn 18, you are eligible to open an Individual Retirement Account (IRA). Consider depositing some of your hard-earned summer savings in a retirement account. When you get to be retirement age, you’ll be happy that you did!
Like a 401k plan, an IRA will allow you to invest in mutual funds and sometimes even stocks. Each plan has its own selection of funds in which to invest. In a later post, we’ll discuss more about the different types of retirement plans and investments.
In honor of July 4th, my great country’s Independence Day, I’ve been trying to figure out how to apply that to finances. Then I thought of it – Financial Independence.
You’ve probably heard people say it (and maybe even said it yourself) – “I need to be financially independent (or independently wealthy) in order to do ___________ (fill in the blank)”.
It’s fine to have financial independence as a goal, but as with any goal, you need to have a plan if you’re serious about achieving it. This is the perfect time for you to sit down and really think about how you want your future to look. Does it include traveling all around the country and even the world? Does it include a big house and fancy cars? Or is the size of your bank account what matters to you? Does it mean sending your kids to the best schools available in the country? Owning a vacation home or two? All of the above?
How ever you picture your perfect life, it is important that you have plenty of money so that you can follow your dreams. That is sometimes easier said than done. How do we get from here to there?
First, it’s vitally important to be doing something for a living that you love. I mean, really LOVE. It makes life so much easier when the way you earn your money makes your heart sing.
Next, take a close look at your finances. Decide if all your current expenses are really necessary. Ask yourself – does this expense make me happy? Will it help me to achieve my goals? Is this really something I want to be spending my money on? If you answer no to any of these questions, cut that expense out. Now I know you’ll likely say no when you examine taxes, let’s say, but there’s not much you can do about that!
Once you have an overall picture of your future, take a piece of that picture and break it down into little parts. This makes working toward your goals more manageable.
For example, if driving a Corvette is part of your dream life, first determine how much they cost. With that information, you can look at your monthly savings and determine how much of it to allocate to buying your new ‘Vette. Then you can figure out how long it will take until you are behind the wheel of your brand new car!
Finally, now that you’ve decided on an idea of what you want your future to look like, set about getting yourself there. Keep these goals in the front of your mind each day. In order to do that, consider building a vision board. Cut out pictures and phrases from magazines that remind you of your goals and paste them on a board that you keep in plain sight. Make it into something fun!
In the Corvette example, I’d certainly cut out a picture of the Corvette I have my eye on. I’d also find a large logo, and maybe even a picture of the steering wheel to add to my poster. Then I’d add pictures of the kind of house I want, places I want to visit, and so on.
Really get into your visualization of your dream life. Wait expectantly for it to come to fruition. This doesn’t mean to sit around and wait for it to show up. This means that you’re working toward your goals in a logical manner and you expect that you’re following the right path that will lead you to your dream life.
What is most important is that you commit to your goals and always work toward them. If you decide in the future that you need to tweak your goals, that’s no big deal – tweak away! There is no shame in realizing that you actually don’t want that goal after all. Feel free to make a complete 180 degree turn and go for a goal that is totally different.
As long as you work toward what you think will make you happy, you’re doing the right thing.
I recently found a great blog. The woman who writes it is passionate about cheering you on toward your goals, whatever they may be. If you need a pick-me-up, or just to feel like someone is on your side, cheering you forward, check out the blog: www.dailypeptalks.wordpress.com. You will be happy that you did!
I wish you success on your road to your own financial independence. I am happy that you have chosen me to help you along the way.
Most companies these days offer employees a retirement plan, usually called a 401k. As a part of these programs, companies will often offer a company match to help you save for retirement quicker. Both the plan and the match are considered part of your benefits package.
You should always take advantage of the full company match – this is free money!
Matching programs differ from company to company. Some companies will contribute a percentage of your salary to your 401k plan, even if you don’t contribute to the plan – this is pretty awesome, and also rare. The company I work for will contribute 4.5% of my salary to my 401k plan as long as I contribute at least 5% of my salary to the plan. That means, if 5% of my salary is $1,000, when I contribute $1,000 of my salary, my company will contribute $900 of their money to my 401k account.
You are always welcome to contribute more than that to your 401k plan, and I encourage you to do so. You can never save too much for retirement! However, you should always contribute at least the minimum required in order to qualify for the company match in your 401k plan.
For 2014, the IRS has decided that the maximum amount you are allowed to contribute to your 401k plan is $17,500. This is quite a lot of money, and you may not be in a position to defer all that income each year.
Ideally, when you start your next job, you will “max out” your 401k contribution by contributing $17,500 all at once. It may be tight at first, but as you move up in your career and receive cost of living increases, raises, and promotions, the maximum amount to contribute to your 401 plan will become a smaller and smaller percentage of your salary.
If maxing out is not possible in your situation, start with the percentage that is required in order to receive the company match. Then each year, increase this percentage by 1%. You won’t notice that much of a difference in your paycheck, especially if you increase the percentage at the same time as you receive your annual raise.
By increasing your 401k contribution by 1% each year, you will eventually get to the maximum contribution amount allowed each year. If you are given an extra-large raise one year, don’t be shy to increase your contribution percentage by more than just 1%. The more, the better!
Since it did not occur to me when I started this job to max out my 401k contribution, I have been increasing the amount I’m contributing by 1% each year. Anytime I’ve received a large raise, I’ve increased my contribution by a larger percentage. I’m now up to contributing 12% of my salary to my 401k plan. I plan to max out my 401k contribution when I start my next job.
Saving as much as you can when you’re young may be difficult, but it is well worth the effort. Time is definitely on your side!