Rock Your Retirement Plans — Tips For Older Young Adults

By Richard Reis

Hello dear,

Did you read last week’s letter on taxes? If not, I highly recommend you do (it’s like a “part 1” to today’s letter).

Retirement plans are finicky. Small details make a huge difference.

Besides, their names differ from country to country. So it’s hard to give a great solution for everyone.

But I’ll be damned if I don’t help my ‘Murica friends!

“Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts.” — Teresa Ghilarducci (The New York Times)

As you can see, there is a HUGE problem.

This needs to change. Starting with you.

So let’s get going.

What Are Retirement Plans?

Simply put, these plans were designed to help you have money after you retire.

This is why they have awesome tax advantages (which change depending on your plan).

Fun fact: The first “retirement plan” was created in 1717 by the Presbyterian Church to provide for retired ministers.

For a complete list of Retirement Plans, the IRS has got your back.

In this letter, I’ll only talk about four plans; Traditional IRA, Roth IRA, 401(k), Roth 401(k).

Bonus: Once you’ve read this letter and applied its lessons, read The Mad Fientist’s posts on Tax Avoidance so you can go to the next level.

Personal Plans

Traditional IRA (Individual Retirement Plan)

  • How much can you contribute per year: Currently $5,500.
  • Tax: If you remove money from your account before you reach age 59½, you’ll pay a 10% penalty fee and will likely be subject to federal, state, and local income taxes.

Roth IRA

  • How much can you contribute per year: Currently $5,500.
  • Tax: You can only contribute with after-tax money. But you’ll pay no taxes on that money and its earnings ever again!
  • Negative: You can’t contribute to a Roth IRA if you make more than $132k per year.

Employer-provided Plans

401(k)

*403(b) if you work for a nonprofit, religious group, school district or governmental organization.

  • How much can you contribute per year: Currently $18,000 (woo!).
  • Tax: You pay no taxes on the money that goes to your 401(k). You only pay when you withdraw your money. How much depends on your individual circumstances.
  • Positive: Generally, employers will match 3–6% of how much you put in (or some gibberish like “100% up to $1,500”).

Roth 401(k)

  • How much can you contribute per year: Currently $18,000.
  • Tax: You can only contribute with after-tax money. But you’ll pay no taxes on that money and its earnings ever again!
  • Positive: You can participate no matter how much money you make (woo!).

And that’s it!

Sidenote: Wondering why some of these plans have “Roth” attached to their name? It’s because they were named after Senator William Victor Roth II of Delaware, who proposed them in Congress (where they got established in 1997). Thanks, Senator Roth!

Should You Put Money In Retirement Plans?

Thanks to all the tax benefits, the short answer is yes.

“But if I touch that money before I’m 59½, I’ll get taxed! What if I retire early?” You do what most early retirees do, learn the loopholes so you don’t get taxed.

What Retirement Plans Should You Have?

Technically, you can have as many plans as you want. However, I’ll let the pros answer this for me.

(I know I said this before, but it’s important) Read The Mad Fientist’s posts on Tax Avoidance to see what he recommends:

Finally, he recommends learning to do something called a Roth Conversion Ladder. This will allow you to move money in and out of your retirement accounts without paying taxes!

As someone recently commented on the Mad Fientist’s Facebook page:

“Can I just say, that Madfientist combination of: 401k, traditional Ira, HSA, and Roth conversion, is the equivalent to the ‘fucking Catalina wine mixer’”

I heartily agree.

Sidenote: What do you do with your 401(k) plan once you leave your job? Easy. Roll it over into an IRA. This will help it preserve its tax advantage.

Look Out For Fees

For evil reasons, most company 401(k) plans invest in terrible funds.

Why are they terrible? Because they have an enormous amount of fees!

“According to our fee model, a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns.” — Robert Hiltonsmith

$154,794 in 401(k) fees! Imagine what you could do if you kept that money?

As it turns out, you can keep it.

How To Kill Your Fees

Know Your Enemy

After reading Tony Robbins’ money book, I believe the best 401(k) provider is “America’s Best 401(k)” (fitting).

In fact, they’re so confident, they even built an online fee checker. Use this tool (for free!) to compare your plan to theirs. See for yourself how much more money you’d have if your employer switched.

Control Your Fund

Your employer doesn’t want to switch? You should at least make sure your funds are good.

DO NOT trust the “best choices” funds on your plan. Mutual funds will pay employers a lot of money to be on your 401(k) plan. The funds win, the employers win, but you lose.

The best thing is to put your money into a US or world index fund with an expense ratio under 0.25% (as any smart blogger will tell you, Vanguard is the best option).

Ask Your Employer To Switch Plans

You could also talk to your employer and suggest they switch to a better 401(k) provider. This will benefit every employee in the company.

If you find resistance, know that the law is on your side. Since 2012, the Department of Labor requires that employers compare their plan against other “comparable” plans to make sure they have reasonable fees. This law is so new, most employers don’t even know it exists!

If the Department of Labor knocks at your employer’s door and they don’t have their plan benchmark, they could get in some serious doo-doo. This is great news for you.

However, if your employer doesn’t switch plans even after seeing the numbers, leave the pompous b****rd and start shopping around for a new job. It’s better.

How To Fund Your Accounts

Here’s what I believe is the best order to fund your accounts. Why? Because this will guarantee you get all the benefits.

  1. Fund your employer-provided plan to the full employer match.
  2. If you have money left, use it to completely fund your personal plan(s). Total per plan is $5,500.
  3. If you have money left, max out your employer-provided plan. Total is $18,000.

And that’s it for today!

Today, we learned about personal and employer-provided retirement plans (and which you should have).

We also learned that fees are quite the quagmire, but thankfully there are several ways we can deal with them.

See you next week (follow the series here to be notified).

Be well.

R

P.S.: If you want to see why you shouldn’t trust the financial “experts” (and why I get my advice from real-life early retirees), watch this PBS documentary; “The Retirement Gamble”. It will make you sick to your stomach. But, you’ll understand why it’s so important for you to read these letters and shield yourself from all the evil advice out there.

P.P.S.: I know all this “retirement plans” stuff is confusing. But remember, your real goal is to save 20–50% of your income until you’ve saved 25x times your spending. That’s when you can TRULY retire (and anyone can do it). Talking about retirement plans is pretty neat for saving on taxes, but that’s it.


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Hello!

Since I write about finance, legal jargon is obligatory (because the guys in suits made me). Before following any of my advice, read this disclaimer.