Where to save my retirement money?!?

If you read my last post (thanks for reading!) – I talked about how much a pharmacist should save for retirement.

For today’s post I’m going to assume that you are currently saving (or wanting to save) 15-20% of your salary and you desire some help on where to put it.

 

Ok, ok, Jason, you convinced me to save – but, where do I put this $15,000-$25,000???

 

The good part of retirement saving, is it’s pretty easy figure out what accounts to put this money in (for most people).

 

First place to stash your money

 

Does your employer offer a 401k or 403b? Yes? Good. Start contributing money to it!

  • For now we’ll just talk about how much to contribute to these accounts, not what to do once you put money in these accounts… baby steps!! =)
  • Just know that for the accounts I discuss below, you contribute money to them (kind of like a special type of online bank account)
    • Then you have to select mutual funds to actually own, these funds are collections of different stocks, bonds, etc.
    • We’ll talk more about it in a subsequent post, don’t worry! =)

 

Wait, wait – hold on. What is a 401k or 403b? Is this geometry? Because I’m done with that…

 

  • Briefly, a 401k or 403b account is employer-sponsored retirement plan.
    • You can put money in here tax-deferred (meaning you don’t pay taxes on that money now)
    • It grows tax-deferred (meaning no taxes are paid/owed on any increases in value the money may have)
    • You will need to pay taxes (as if you earned an income) when you withdrawal it in retirement.
    • Generally, withdrawing money from this account is a bad idea:
      • if you take money out before 59 1/2 years old, you will pay a penalty (more taxes and a stiff 10% penalty off the top!) –
      • so plan to leave this money in until retirement.
  • You can put up to $18,500 per year into this these accounts
    • So if you want to save $20,000/year for retirement, you can put most of this money into this account
    • This is normally done as an amount deducted and deposited from each paycheck

 

I don’t quite understand this… can you show me an example??

 

Sure thing, I’m here to help! =)growbill1

 

Normal paycheck without any retirement saving (assuming $100,000 per year):

Gross income on that happy Fri-Yea payday$ 3,850
Approximate Taxes to Uncle Sam$ 880
Take Home Pay$ 2,970

 

 

Paycheck when you save the maximum into the 401k/403b

Gross income on that happy Fri-Yea payday$ 3,850
Money put in retirement 401k/403b account ($711 x 26 = $18,500)$ 711
Taxable Income is now$ 3,139
Taxes to Uncle Same (way less than $880, wizardry!!)$ 722
Total Take Home Pay$ 2,417

*Notice that your take-home pay isn’t decreased by the full $711 you contributed to your retirement (only about $550) – this is the magic of tax-deferred savings!

 

 

Ok! This is fun! But I’ve only saved $18,500. I have another $1,500 to save – where do I put that??

 

 

Second place to stash your money

You have a few options depending on how much you still want to save for retirement.

If you have a Health-Savings Account (not a Flexible Spending Account) because you have a High-Deductible Health-Plan from your employer – this is probably your best option.

 

 

Wait!?! you want me to save money for retirement in a HEALTH-SAVINGS account? You’re crazy…

 

Hear me out – assuming you are young and relatively healthy. This might be the best retirement account you have access too.

  1. You can contribute up to $3,450 per year to this account ($6,850 if Married)
  2. Contributed money is tax-deferred (like your 403b/401k above)
  3. It grows tax-free (just like your 403b/401k above)

The best part is coming!!!

4. Your withdrawals from the account are ALSO tax-free (as long as its for healthcare)

So I think this is possibly the best retirement account you have access to. Since it’s the only account that you can potentially save, invest, and withdrawal all tax-free.

Worried that you might not have enough health-care expenses in retirement?

  • I’m going to do a dedicated post on Medicare premiums and other possible healthcare expenses in the future
  • But trust me, you are likely to have $100,000-300,000 or more in total healthcare expenses in retirement (even if you are healthier than most)

 

Hmm ok, but I heard something about a ROTH IRA account – tell me about that!

 

Third place to stash your money

If you’d rather not save in the HSA for retirement (or you don’t have access to it) – a Roth IRA is for you!

A Roth IRA (opened at a company like Vanguard, Fidelity, Charles Schwab, etc)

  • Money in this account is contributed with after-tax dollars
    • Meaning you don’t get a tax-benefit today
    • Its money you’d contribute after you get paid from your normal job
  • You can invest this money and it grows tax-free
  • The big difference between a 401k/403b and a Roth IRA is you can withdrawal money from a Roth tax-free !!!

So to continue our scenario from above. You could invest the final $1,500 into a Roth IRA instead of a the HSA. This would allow to get tax-free grow and withdrawal on this money since you don’t get a tax-benefit today

 

That’s it?!? Everyone makes it seem way more complex than this…

 

People can make personal finance infinitely complicated (especially if there is a financial incentive for them). If you are just starting out, this will get you heading in the right direction. Once you get more knowledge or experience – there are tweaks that might make sense for your specific situation.

 

To review, your main retirement options are most likely:

Employer-sponsored 401k or 403b – can contribute up to $18,500 per year

  • This is put in pre-tax, grows tax-deferred, but you have to pay taxes on it in retirement
  • your employer may even give you a “match” and contribute extra money to this account for you!

 

Roth IRA – can contribute $5,500 per year

  • You contribute to this account with after-tax money. So it grows tax-free and you can withdrawal it tax-free in retirement

 

Health-savings account (HSA) – secret retirement vehicle (triple-tax advantaged)

  • Can contribute up to $3,450 ($6850 if married) per year
  • Money is contributed pre-tax, can be invested and grows tax-free, and withdrawals are tax-free (as long as they are for health expenses)

So, for a single person – you have $21,950 in tax-deferred savings per year and another $5,500 in after-tax space.

 

And there is nothing fancy or difficult about this – anyone can do this for themselves without paying a financial advisor any money!

 

What do you think? Do you do something else for retirement? Make a comment below!

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