Retirement is one area that we have fallen short. As Christy mentioned in our story, when the stock market took a plunge in 2008 we stopped contributing to my work 401k. Although that was a mistake because we lost 10 years of growth during a great market run, it wasn’t a total loss because the money we sacked away in the bank enabled us to may off our house 13 years after buying it. We lost the compound interest on that money over my working life, but at least we didn’t fritter that savings away.
About 2 years ago, Christy said she wanted to start contributing to my 401k again. My work matches 50% up to 6%, so we started putting in the 6% on our end to get the full company match. Why not get the free money? Even then, I still didn’t pay attention to my investments. I never have. I picked these investment options when I started with my company in 2005 and never even looked at them! Pretty stupid, right? I would even get letters over the years saying this fund or that fund has been closed and my money was reinvested in a new fund. I was naive. I thought “They are the professionals. I’m sure they are doing the best thing for me.”.
Well, I was wrong. 401k providers are not managing your investments. There may be an option to pay for help managing your investments through your provider, but they aren’t doing it out of the kindness of their heart. Every one reading this is probably thinking “No crap”, but I honestly didn’t know. It’s not even that I didn’t know. It’s more like I didn’t really ever think about it. And if I didn’t have my financial awakening, I may still not be thinking about it.
When I finally did check my retirements savings, I only had around $40,000 in there. Did I mention that I’m 45? That wasn’t even a year ago. Seeing that gave me the kick in the ass I needed to start paying attention. How would Christy and I be able to provide for ourselves in retirement at the rate we were going?
When I took at look at my year to date rate of return that day, I was hovering around 4%, which is not good. I made some changes that day, but I still didn’t really know what I was doing. I was invested in about 12 different things. I took all my money and put it in a prepackaged investment that the website suggested for my age. I started reading up on investing. I started listening to podcasts. I started watching YouTube videos. After I gained some knowledge about the subject, I went back and made two more changes.
First, I changed all of our contributions from a traditional 401k to a Roth 401k. I know there are different outlooks on that and many, including our representative from my companies 401k provider that gave me a free consultation, believe it is better to get the tax benefit now and invest in a tax deferred account. I don’t know what taxes will be like when we get older, so how do I or anyone else know how much of a benefit that will be? I know we won’t need as much once the kids are out of the house, so our annual income might bring us down to a lower bracket, but what if we do keep our income level within our current tax bracket? What if we want to travel? Spoil our grandchildren? I don’t want to just sit around and watch television when I retire. I want to live and living takes money. Plus, I think it makes more sense to let the money grow tax free.
Let’s say that from age 45 to 67 we contributed $1,200 a month with a current balance of $59,000 at an average return rate of 8%. Over the next 22 years there would have been $316,800 in contributions and $825,282 in growth. At our current tax bracket of 22%, that would be $69,696 that we paid in taxes for those after tax contributions. Now let’s say that we pulled off $60,000 a year in retirement. If the tax brackets were the same as they are today, we would pay $7,200 at 12% on that money if it were from a traditional 401k or IRA. In less than 10 years, we would have paid the same amount of taxes that we paid on our after tax contributions over 22 years. Plus, that money is STILL growing tax free in our investments in retirement. I hope to live more than 10 years after retirement. If I did, I would get to the break even point. Christy is 7 years younger than me, so she’ll benefit from that tax free growth even longer.
The second thing I changed was our investments. I moved our money out of the prepackaged investment and into four categories. Large Cap, Mid Cap, Small Cap, and International. With these changes, I brought our rate of return up from 4% to over 17%. That of course was until COVID-19 came along and screwed everything up. Before that, we went from around $42,000 to $68,000. During the pandemic we did go as low as $48,872, but as I write this, we are back up to $59,451.
I’m optimistic that we will meet our retirement goals. The three important things to me are: That we have enough to where Christy will never have to worry about money after I’m gone, have enough so that we can travel and do things for our children and grandchildren, and never be a financial burden on our children. I don’t want to be situation where I have to work and be re-tired. Maybe I’ll want to work because there will be too much time to fill, but I don’t want to be forced to.
So what do you think? Do you prefer to invest for your retirement in tax deferred or after tax accounts? Do you favor one or do you invest in a mix to get some tax benefit from each?