The younger you are, the less you’re likely able — or willing — to think about what your retirement might be like. That’s OK, but you probably do know one thing, even if you’re a millennial with years and years to save toward your future: you want to have enough money to support your lifestyle for as long as you live.
In my previous position, I worked almost exclusively with clients who were 65 or older, so I saw a range of outcomes from decisions they’d made earlier in life — some positive, and some not so much. My focus today is informing younger people based on that experience, to help them end up where they want to be many years from now.
Fast-forward 30 years, when you’ve had it with your corporate job and want to slow down, living comfortably by replacing your work paycheck with a paycheck from yourself — a savings paycheck, so to speak. When you see what you’ve saved, you may be in for an unpleasant surprise if you realize everything is in your 401(k), your retirement account — thus it’s all taxable as you take it out.
What that means is you may have less available to support yourself than you thought. For instance, if you want to “pay yourself” $50,000 a year, after taxes that may end up being only $40,000. While taxes can’t be avoided, that’s a less than ideal situation.
The solution is to diversify where you save to include not just a 401(k), but also a brokerage account and a Roth account, if possible. One possible scenario is to split your current savings into three buckets — 50-30-20: 50 percent in a tax-deferred account, 30 percent in a taxable (brokerage) account, and 20 percent in a Roth IRA. By spreading out your tax liability, you’ll end up with more options and more flexibility when you retire, which equals more freedom to enjoy life as you see fit.
Of course, we have no idea where taxes will be in the future, and each situation is unique. The point I want to highlight is that you maximize your options when saving into all three buckets.
Let’s say your target savings level is $1,000 per month. If that entire amount is going into your 401(k), you might pat yourself on the back that you aren’t taxed on that money now — but the taxman will cometh when you want to withdraw it. A better strategy would be to save $500 in your 401(k), $300 in a brokerage account and $200 in a Roth IRA; you’ll pay a bit more in taxes now, but you’ll reap the benefits of less taxation when your only source of income is your savings.
It’s actually easier for entrepreneurs to achieve an ideal level of savings diversification than it is for those who have corporate jobs. If you work for yourself, you’ll set up your savings vehicles; if you work for a corporation, your savings may all be going into a retirement account — unless you’re proactive and take steps to diversify.
The end may be a long way away — but the steps you take today will go a long way toward ensuring you’re able to enjoy the retirement you desire.
Other articles filed under LA/OC CFP Team Posts
June 30, 2020 - WorthPointe advisors John Chapman and Matt Addington — both fathers of three — talk about the need to educate children about money in a new video. The discussion was spurred by a recent Twitter post from Kyng Kyren, Can’t Be...
June 15, 2020 - WorthPointe advisors John Chapman and Morgan Smith spoke recently about Morgan’s recently released book, Generation Squeezed—A Holistic Guide for Taking Care of Aging Parents. Watch the video here. Morgan noted he wrote the book after being a caretaker to his...
May 18, 2020 - The unprecedented effect of COVID-19 on the economy has resulted in a number of disaster relief alternatives being available to small businesses — and things seem to change rapidly as they scramble for funds. WorthPointe advisor John Chapman spoke with...
March 11, 2020 - John Chapman, CFP®, CKA®, has recently earned the Certified Kingdom Advisor® designation. This certification reflects his training and expertise in biblically informed financial practices and the use of money with a sense of purpose and view of eternity. What does...
July 17, 2019 - That’s not a typo in the headline; this blog is directed toward intrapreneurs — folks who hold manager, VP and director positions at public companies. These ambitious leaders often self-select as, but since they work within large organizations, they have...
- How to Manage It: Millennial Rules for Finances
- The Randomness of Global Equity Returns