October takes on a different twist with two young children. We spend most of our time discussing the merits of Halloween costumes: Princess, Lady Bug, or Butterfly, oh my!
Life is never boring in the McCann household.
This quarter, I thought I would share an equally exciting topic. My most common piece of advice…
Max out Your 401k
(Or: How to retire wealthy in one easy step)
Here is the thing I find myself repeating during the financial planning process: Max out your 401k. For most clients, the 401k plan (or 403b or 457 plan) ends up being instrumental in their financial plan. Since lists are all the rage these days, here is mine.
The Top Three Reasons You Need to Make the 401k the Cornerstone of your Financial Plan (Bonus: the excuses & the reason you should anyway):
The Excuse: People are nervous that they may need to withdraw their money for an emergency expense.
The Reason You Should: Consider this: even if you are forced to withdraw the money (you have an emergency fund, don’t you?!?), you will still do well if the company has matched your funds. The early withdraw penalty is 10% (on top of taxes). If your company match is 50 or 100%, you still come out ahead after the penalty.
The Excuse: We don’t know what tax rates will be in the future. We may have to pay more in taxes when we withdraw the money in retirement than we do now.
The Reasons You Should: We’ve never known what tax rates will be and it would be crazy to think that we know now. Media personalities may claim to know what tax rates are going to do. They just are trying to get page views, or eye-catching headlines… or dates. But they don’t know what tax rates will be 10, 20 or 30 years from now any better than you or I.
The Excuse: But I wanna take a Safari!
The Reason You Should: Exactly. If you don’t put it in your 401k you’ll probably spend it anyway. Be honest.
Math & Tough Love
I recently read a study that laid out estimated replacement rates for incomes in retirement. For an average wage earner who wants to retire at 65, they recommend the following savings rates - assuming a company match (to see the whole study, go here):
Starting at 25: 10%
Starting at 35: 15%
Starting at 45: 27%
Now we’ve all been saving 10% since we were in our 20’s, right? Additionally, if you are an above average wage earner, you have to save more because Social Security won’t cover as large of a percentage of your retirement income.
And this doesn’t even include funding any additional non-retirement goals, like second homes, college or that safari you mentioned.
I wanted to let my loyal readers know that they will be able to get even more Bootstrap Capital wisdom! I have recently become a contributor to nerdwallet. It is one of the premier research sites for personal finance. You all knew I was a nerd anyway, so why try to hide it. You can check me out here. I’ve also updated my website if you like to drop by and check it out. Let me know what you think!
For those of you diligent enough to make it through the letter, super cute picture of Quinn from last Halloween!
If you have any questions about this letter, feel free to contact me. Also, if you think any of your friends or family would benefit from chatting with me, please feel free to make an introduction or forward this letter. We provide Financial Planning and Investment Management services and we would be happy to talk with your acquaintances. We will treat them with the same care and diligence that we treat you.
Brian McCann CFP®
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.