There is much uncertainty when you are an immigrant. There are many decisions to be made. However, there is one thing that is certain- the day will come when you will be too old to work. When that day comes, I want you to walk to your boss`s office and turn in your resignation letter, book your dream trip to a tropical paradise and throw a huge retirement party, knowing that your financial future is solid.
The post offers the four-step guide about how you to use employer-sponsored plans (401k, 403b, 457) to start saving for your retirement and retire a millionaire.
What is a 401K plan?
Before we jump into the “how” of your retirement planning, let’s define what is 401k plan anyways? According to IRS: “401k Plan is s a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage.” (Credit: IRS.gov)
Step 1: Decide how much you will contribute
,I mentioned in a prior post, I made a mistake of not contributing at all for a few years, which cost me thousands of dollars of unearned income. When started to invest I saved 10% of my pay, since it was what we could afford at that time. A few years later I bumped it to 15% of my pay. Fidelity Investments suggests saving 15% of your pre-tax income for retirement.
Tips on deciding your 401k contribution amount:
- Contribute enough to take full advantage of your employer`s 401k plan match
- Start a conversation with your spouse to see how much your family can afford to save now
- Use a 401k Calculators to estimate your savings and their impact:
How to Start Now and Retire a Millionaire
Depending on your income, age, risk tolerance and so on you can start today and retire with a seven-figure portfolio. The rule of thumb is: the sooner you start saving, the less money you would need to contribute to achieving your retirement goal. Let`s review an example:
- You are 30 years old; your annual salary is $50,000 per year
- Your current retirement savings = $0
- You save 10% of your pay to 401k Plan or roughly 208 dollars per pay period
- You earn 8% on your savings until the age of 65
- Your employer matches 50% up to 6% of your salary
Results at the age of 65 years old:
- Your personal contributions = $175,000
- Your employer match contributions = $52,500
- Your Retirement Portfolio Value = $1,168,032 (Credit: Bankrate.com)
Million dollars in retirement may provide for a great lifestyle. That said, we all are different, and our life situation and our retirement goals also may vary. You might be older, or significantly younger, then in our scenario. You might have a high-risk tolerance, or you might get stomach cramps when you see a 5% drop in your portfolio value. You may not be able to afford to save 10% of your pay at this time, or you may think 10% is not nearly enough.
To get started use retirement calculators to figure out what can you start saving today. The key is this- pick a number even if it is 5% and get started today!
Step 2: Select your mutual funds
There are many approaches on how to allocate your assets or invest your money. Of course, the best and the safest approach is to hire a financial advisor or a retirement planning professional you can trust.
There two important points to consider while determining which mutual funds you should buy and hold in your 401k portfolio.
The first consideration is your risk tolerance. Are you an investor that has stomach cramps, just imagining losing 5% of the portfolio value or you are a risky investор that can stand crazy value fluctuations?
Risk and reward are highly correlated, the more risk you can tolerate the higher loss or gain you will have. Aggressive investors that tolerate risk well tend to own equity (stock) based portfolios. On the other hand, if you do not like an idea of losing money at all, you are more likely a conservative investor and may enjoy holding more debt investments in your portfolio.
The second key point is diversification. Diversification is what allows us to reduce company-specific risk and influences your portfolio returns. Equity investments tend to earn higher returns but also come with more market volatility. Debt investments tend to be more stable in value but have lower returns.
The reason I can not tell you how to invest your money is that every single employer has a very different selection of funds that they offer within their 401k plan. Additionally, depending on your age, risk tolerance, retirement horizon, and goals your asset allocation mix will change.
It is truly the best to meet with a professional to assure your asset allocation reflects your situation, risk tolerance and goals.
Tips on how to invest your 401k:
- Call your company HR department, inquire if free 401k plan consultation is available
- Take Vanguard Investor Questionnaire and assess your risk tolerance
- Find a Fee-Only Financial Advisor: Use NAPFA website to find an Advisor in your area
- Make an appointment and ask for a free or a fee-only consultation to determine your 401k plan asset allocation
Step 3: Leave your money to grow
The magic of 401k like any other savings account is the compounding interest. This last step is by far the most important one. When you are a new investor, you will ( I certainly did) open your online banking page every single morning to see what is your current balance. It is truly best that you sort of forget that you have 401k at for at least six months. Let it grow and build up.
Next, please keep in mind IRS Early Withdraw Penalty Rules that states that all 401k withdrawals before the age of 59 ½ will be subject to ordinary tax income plus an additional 10% IRS penalty fee.
Tips to Keeping Your Money Growing:
- Form Saving Habit. Get used to saving for your financial future. Forming a habit and getting exciting about building your nest egg is the most important skill that will serve you for years to come.
- Buy and Hold. 401k is not your savings account; it is your retirement planning account, you will get the most benefit if you apply to buy and hold strategy
- Check your Asset Allocation at least once a year, rebalance your portfolio if necessary, otherwise, let it be
- Ride the Market Waves. When market drops and so as the value of your portfolio, do not panic and do not sell any of your investments. Buckle up and ride the waves.
The three simple steps will help you to get started on your journey to build a retirement portfolio that will assure your financial well-being in your golden years.
Copyright @ Logio Solutions LLC 2018. All rights reserved.
Questions to my readers:
- what made sense from the three steps above?
- what puzzled you?
- what other questions you have that stop you from acting now and start saving?