Anytime I start reading or researching investing or taxes or money in general, it prompts a bigger topic: What are we saving FOR? No matter how far off retirement is for you, one day we'll all want/need to stop working and need to have enough money stored away to finance our life. Cause who wants to downgrade their lifestyle right when you finally have time to enjoy it?!

I've got a lot to say on this one, fair warning :)

Saving for Retirement

Do I have to start now? 

There's no rule about this, but you should! Compound interest (my favorite thing!) will make it way easier AND Mr. Tax Man gives you a break annually if you do.

To make it a little more tangible...

Scenario 1: 

You're 25. You commit to putting $20 a month, skipping one Starbucks trip a week, in to a brokerage account (still keeping it simple here) and do that until you retire 40 years later.

Years Saved: 40

Monthly Contribution: $20

Total Amount Contributed before Retirement: $9,600 

Final Retirement Balances*: $62,173 

Scenario 2: 

You're 25. Because you're not making that much, you commit to to start saving when you're 35 and making more money. When you turn 35, you start putting $40 a month (double the previous plan, since now you're making more and you're trying to catch up) and do that until you retire 30 years later.

Years Saved: 30

Monthly Contribution: $20

Total Amount Contributed before Retirement: $14,400

Final Retirement Balances*:  $54,375

*For those who care: assumes the same investment strategy, an average 8% annual return, compounding annually. Obviously the above is a very simplified example. 

In Scenario 2, you end up with $7,798 less at retirement even though you contributed $4,800 more!

And if right now, you've got a pit in your stomach that you haven't been doing enough, don't despair! The key takeaway is simply start now! You can always level up your savings as you start to make more money or pay off student debt BUT in terms of having the most money when you retire, the easiest it will ever be is today, because you have time on your side!

Okay, Samantha, I get it. Start saving now. So, where do I start... 

• Here's a good primer from Girlboss

• If you don't feel like it's in your financial cards right now, I'd encourage you to read this one. It's looooong but with tons of awesome information.

Why is saving for retirement different than savings in general?

Because the U.S. government makes it extra easy for us. Unlike a typical investment account, contributions to your retirement plan (like your 401K) is tax deductible. (Refresher: tax deductible = any amount put toward your retirement is pulled out of your taxable income, reducing the number your taxes are calculated off of!)

How much do I need to save?

Average life expectancy for a woman in the US is 81. If you stop working at 65, you need to have 16 years of expenses saved when you retire based on whatever your living expenses were at 64 (unless you think you want to seriously adjust your lifestyle in retirement). For most of us, you'll want to have AT LEAST $2M+ saved! 

Holy S#!T. $2M?

Let me circle back to the magic of compound interest so you all can take a breath.

If you're currently making $75K a year, you've currently got at least $15K saved and you continue to put away 10% of your pre-tax income into your retirement account each year, then you'll retire with $2.1M dollars. That assumes you don't get any raises, don't contribute more at any point in your life, etc which obviously a kickass, ambitious and financially savvy woman like you will! TRUST ME YOU CAN DO THIS.

Has saving for retirement always worked like this?

Nope! Most people used to depend on pension plans to fund them in retirement. Ready for a quick vocab lesson? Here we go!

• Pension Plan: A plan for the employees of companies where, once they retired, the company continued to pay them (generally some portion of their paychecks at retirement age) until they died. Paid for by the company setting aside portion of employees paychecks over time and investing them in one big "pension fund." Caveats: if the company doesn't invest the money responsibly, employees can get screwed. You also generally have to retire with the company (or at least have worked there for a while) to be eligible - not ideal for the millenial job-hopping era!

• Social Security: Basically a pension plan run by the government for all Americans. Put into place by FDR in 1935. Caveats: At this point, the Social Security payouts that most of us will receive when we retire won't be close to enough to live on.  

If you're in a nerdy mood, you can read more here. 

So what changed?

The 401K was introduced! Now 401K's are great and for most of us, will be some of the most important accounts in our financial plans, when the change happened it negatively affected a lot of people, if they didn't understand the shift and plan accordingly. (For most people, unless they proactively changed the way they saved to actively contribute to their 401K, the shift meant that they received half as much from their company when they retired.)

Enough history! What do I need to be doing to save for my retirement? Is a 401K the only option?

Definitely not. Here's a breakdown:

If you have a fulltime job:

• 401K: sponsored by your employer. May be eligible for "match." Annual contributions capped at $20.5K (for 2022)

• IRA: an "individual retirement account" which can be on top of your 401K, with fairly strict contribution limits ($6K for 2022). This article will explain some of the differences between the two!

If you freelance or are self-employed (note: there are lots of options and this stuff can get complicated, I'd say check this out for more info.)

• IRA: always an option, but the contribution limits means this probably shouldn't be your only plan!

• Solo 401K: works like a 401K but only available to those who have no employees

• SEP IRA: Self-employed IRA is fairly similar to a solo 401K and with less paperwork

If you run a business (with employees), definitely talk to a professional! (Both for your employees sake, and your own!)

What's this Roth thing I hear about?

That's a good question. It's actually both an "it" and a "who." Senator William Roth of Delaware invented the investment type as, what he hoped would be a way to get America to save more. And it worked! You can read more about the history here. 

So what's the "it"?

The idea that Senator Roth introduced was the idea of post-tax income as eligible contributions to retirement savings. Refresher: your traditional 401K or IRA comes out of your income before you pay taxes (reducing your taxable income) and then you pay taxes on that amount at retirement age when you pull the money out. On the other hand, a Roth contribution will come out of the money after you've paid taxes BUT when you pull it out, it's tax free!

Why is that a good thing?

The benefit of Roth contributions is, if you think your tax bracket will be higher when you retire than it is today, it might be in your financial best interest to pay the taxes now (when you won't have to pay as much). The good news is for the most part, you don't actually have to choose, you can do both!

Okay, this seems pretty simple. What's the big deal?

Well there are some key terminologies you have to get right here. There is a Roth IRA (Individual Retirement Account) and a Roth contribution to a 401K also referred to as a Roth deferral. The key thing to understand is "Roth" refers to a contribution type, not an account type.

A key callout: Colloquially, when most people say Roth, they're referring to a Roth IRA. If you're ever confused, make sure to clarify!

Walk me through that difference again?

• Roth IRA: Individual Retirement Account. Generally happens outside your employers plan (although some super nice employers will offer the ability to contribute). This can be entirely in addition to your 401K and that also applies to contribution limits. This is one of the key benefits of the Roth IRA - youcan contribute an entirely additional $6K to your IRA (Roth or traditional) on top of the $20.5K you are eligible to contribute to your 401K annually. There is also some flexibility in the rules around when you can withdraw (most retirement accounts have a serious penalty if you withdraw before you hit retirement age) including waived penalties for qualified educational expenses and certain costs around buying a home.

• Roth Deferral or Roth Contribution to a 401K: These are dollars you are contributing to your 401K through your employer but you are electing to pay taxes on the dollars now rather than contribute "tax deferred." These dollars track toward that $20.5K contribution limit (it was $19K before, but 2022 increases the limit! Yay more money saved for retirement).

But you said this is an investment product type, right?

Correct. Just like a normal brokerage account or your 401K, contributions will be put toward purchase of some sort of investment. And like those other accounts, you have the choice of what to purchase - mutual funds, ETFs, single stocks, etc!

So what's the catch?

When Senator Roth originally proposed this idea, one of his main motivations was to get lower income Americans saving for retirement with the promise of a reduced tax burden down the line. Because of the way the tax benefits work, the government did need to put regulations on who can take advantage of this benefit. SO there's an income cap on when you can contribute to a Roth IRA. It's right around $125K (but with a sliding scale, so as you approach the cap, you can contribute some but not all of that $6K cap). 

How do I know if I've hit the cap?

This article is a good guide and if you're in that blurry zone, it has a calculator to help you figure out exactly how much you're eligible to contribute. It'll ask you for your Modified Adjusted Gross Income (which I'll technically define below) - for a rough estimate, think of it as your total income (salary, bonus, investment income combined!)

Modified Adjusted Gross Income (MAGI) is basically your total income (salary, bonus, any investment income) with the value of certain deductions added back in (yes, that's a double negative the deductions have been taken out and then added back in). This is different from your "adjusted gross income" where the deductions only come out - the nicer number that your taxes are calculated on. Read more here if you're interested. 

I'm right at the edge of the limit - is it worth contributing?

Two parts to this answer:

1. Probably. Remember the magic of compound interest. If you are 26, even if you contribute just one year, that $6K could be worth (assuming our normal average returns of the market) close to $90K by retirement. A 15X return is pretty damn good!

2. There are also some loop holes to get money into your Roth IRA even after you reach the contribution limit. They're a bit over my paygrade so if you want to learn more, def talk to a professional!

Takeaways:

1. Do you know where your retirement money is? Take a few minutes to check your balances and contribution rates. Do you understand the logic of where you're putting your retirement money? Are you using a traditional or Roth style deferral? If any of this is not clear, try to reach out to the help service for whatever company runs your 401K! (And as always, if you can, up your contribution!)

2. Do you expect to be eligible to contribute to a Roth IRA next year? If so, consider opening an account now so you can contribute small amounts over the course of the year! 

3. If you aren't in a traditional full-time job, set aside some time this week to make sure that you are putting aside enough of your money to be generally on track for retirement!

4. Make it a goal to ask someone else in your life how they're saving for retirement and share some knowledge!