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Peter, good to see you. This one is kind of a personal question I wanted to ask you. Should I really be maxing out my 401k? For 2023, the maximum 401k plan contribution is $22,500 for most people.
If you are 50 or older, that bumps up to $30,000. Now, 401ks are, of course, generally the most accessible, easiest way to save for retirement. How important do you think it is that we're maxing out those contributions?
Very important. I mean, the American population is underprepared for retirement. Retirement is in the future.
It is more expensive and it can be very long and the number one fear is running out of money. So why don't we do what we can when we can do it and save as much as possible? Now, I know life happens along the way and we've got to balance living today versus preparing for tomorrow.
But when you get there to tomorrow, I think you will have thanked yourself for doing as much as possible to prepare today while you can. Now, I've heard before only contribute up to the max match. Generally, that's like four to six percent of your salary. How does that factor into the calculus of how much to save?
I disagree. I think that you should save as much as possible. Now, there is potentially an order of operations there, but if you are not at least capturing the match, I hate the term free money because it's not free money. You are working for that, whether you receive it or not. That is part of your compensation. And if you don't put some skin in the game, you just don't get that part of your paycheck.
So let's do at least at very least the match. That's kind of the minimum threshold. That's the zero sum game of what's the minimum I should be putting in is whatever is being matched there. And then above and beyond the match there, there are some reasonable arguments that you could pivot out and then contribute to your IRAs, your Roth IRAs, even spousal IRAs and Roth IRAs and max those out next and then pivot back to the 401k. If you've got the ability to continue saving more and and that hasn't given you the sum threshold of 15 percent, which is what you should be saving toward retirement accounts.
But if you max out those IRAs, Roth IRAs, then pivot back to the 401k if you've got the ability to save even more because it's got much higher limits. And let's utilize the ability to save where we can. Now, there's also an element there of personal discipline and knowing yourself, because we have a habit of being able to find a way to spend money if it comes home. And so if we're not going to be disciplined enough to get the money in the IRA or the Roth IRA once it comes home, then I would just automatically have it placed into the 401k before we even see it, before we bring it home. You know, a lot of the savings that has been done in this country has happened because it's done automatically before we even see the money.
And if it was left up to us to save it, it wouldn't have been saved at all. So putting it on there's something to be said for putting it on autopilot here where it just it does the discipline factor for us. You and I have talked before about the limited investment options for 401ks. So when would you advise branching out and investing in stocks or ETFs outside of the limited options within a 401k? Well, I think you need to be striving for 15 percent of all gross household income being saved for retirement somewhere. Whether it's the 401k or the IRA or the Roth IRA or Roth 401k. I'm I'm OK. As long as the sum total is that 15 percent threshold.
And I've heard pay yourself first 10 percent. But that really, if we do the math on that and have a 30 year career, if you add up 10 percent over 30 years, by the end of your career, that is only three years worth of the income that we are used to by the time we retire. And that's if we had made the same thing over the course of that 30 year career, which doesn't happen. We make more and more so the first years don't account for that. Now, of course, we hope for investment rates of return to double that and double it and double it again. But retirement can easily be 30 to 35 years. We need to save as much as possible.
So 15 percent is kind of the threshold to say you are doing what you should be doing in saving for and preparing yourself for retirement. Above and beyond that, there are always investment opportunities available. You can open a nonqualified individual investment brokerage account.
And there are a couple of different types of titles there for those those names. They're an individual account, a brokerage account, an investment account. It's just where you invest money.
And the reason to do that would be numerous. You don't have the restrictions of a retirement account. So if you've got the goal of buying a vacation home or putting a down payment on a home, or maybe you're planning for a wedding in 10 or 15 years, something like that. Right.
Those dollars would not be accessible to you in the retirement account, but they would be in the investment account, the individual account where you can invest in stocks, bonds, mutual funds, ETFs and the like. So, yeah, there's there's certainly a time and place for that, Aaron. But in in my order of operations of what should be happening and should be done to make our optimal progress toward retirement, we want to make sure that we're doing 15 percent in the traditional long term retirement account kind of approach, because there are some tax advantages there as well. Right. I want to circle back to what you're saying, because this does address liquidity issues.
Right. If all my money is tied up in a 401k and I need a big chunk of change, I'm going to be penalized if I take any money out of that retirement account. Yeah, don't take any money out of that account. A lot of people are really behind because they use the 401k as a piggy bank and we shouldn't be using the 401k as a mechanism to fund pre-retirement expenses. Now, there are some caveats where in case of emergency financial hardship, disability, a first time home purchase, you can remove some dollars from a 401k without the penalty. But by and large, there are a lot of people who cash out 401ks before fifty nine and a half. Not only do they have to pay tax, but then they are subject to the 10 percent penalty. So they see that balance in there. And then when they cash it out, they only receive, you know, 60, 65 percent of what they thought the balance was in the first place.
So it's not a great deal. Now, what if I'm 50 and just now realizing that I haven't saved enough for retirement? Yeah. Catch up. Catch up. That's why the government gives you the catch up provision, allowing you to put seven thousand five hundred dollars more into your 401k after age 50. A thousand dollars a year more into your IRA or Roth IRA after age 50. But that's the time to supercharge the retirement savings. Right. Hopefully by that point, maybe the kids are up and out or at least in in the tail end of their college years and you've got them off the payroll. So now you've got all this additional cash flow and and hopefully we can get that geared toward really getting you as best prepared for retirement as we can be by using those catch up provisions. All right. Well, if somebody wants to talk to you more about the order of operations and where they should be putting their money, what's the best way to reach you? You can reach me at Rashan planning nine one nine three zero zero five eight eight six nine one nine three zero zero five eight eight six.
And Aaron, circling back. And another reason why the 401k may make sense for more than just the match is if you are a higher income earner, if you're making over eighty three thousand dollars a year as a as a single individual, you can't you begin to lose the deduction for making IRA contributions where you still would get that deduction in a 401k. Or if you choose to pay your taxes upfront, if you make over a certain amount, you cannot make Roth IRA contributions. But if you have the 401k there, you can still make 401k Roth 401k contribution.
So the income limitations aren't there, which is another really important factor and value of the 401k compared to IRA or at least reason why you would consider one over the other. All right. So also just want to point people to your website, Rashan planning dot com.
Yes. Thank you, Aaron. Looks like rich on planning dot com because you don't get rich on accident. It's my last name, Rashan planning dot com. Always a pleasure. Yes, it is. Peter, thank you very much. Thank you. This has been Planning Matters Radio. The judiciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
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