Volume #7 - 💰 WHY and HOW invest in my retirement?

HI THERE! 

💰 Today is about 401K or Pension 💰

Before you read this volume, make sure that you go through the first volume about wealth building: Volume #4 – Money is Freedom, where I talked about the first steps before 401k or Pension. It’s imperative getting your expenses and debts on track, as the percentage you allocate for your 401k will directly impact how much money you take home.

So let’s go through a quick decision tree about 401k or Pension:

To be super transparent, I also panicked with the responsibility of activating my 401k. I had 1:1 support from my ex-partner when setting up my Pension from Ireland. This time, one of my girls called me out for not having it activated after three months in the new role for the USA. I LOST $13k for not starting my 401k on time in 2022.

So, before we start - take a de-e-e-p breath -

And if you’re an expert on 401k and Pension, share your knowledge with your friends or share this newsletter.

Back to those still figuring out - like me ❤️. This newsletter uses a hypothetical profile of:

Where should we start?

Firstly, the individual in question should review the initial volume's procedures. After gaining clarity about the expenditures, she can determine the percentage % she wants to allocate toward the 401k. However, what are the benefits of investing in a 401k or Pension Account?

Because we have seen our parents and family members struggling with finances, budgeting, and savings, the 401k or Pension, in simple words, is a SAVINGS ACCOUNT for your expected retirement (you can start withdrawing without penalties after age 59½ in the USA), that allows you to invest from your paychecks and in some case add FREE MONEY from your employer matching program. If something happens, you could withdraw your 401k in tough financial situations like preventing eviction or foreclosure, covering medical expenses, or paying for certain educational expenses.*

Additionally, some 401k, like the pre-tax option, LOWER YOUR TAX payments because it reduces your taxable income.

Again, SAVING even on your income taxes.

All of this happens AUTOMATICALLY; you don’t see it as it is taken from your paycheck before it lands in your bank account and makes your path to investment, as it typically offers a range of INVESTMENT options, such as stocks, bonds, and mutual funds that will your contribution + employer matching grow 5%-8% annually (this is the average).

*Remember to confirm this information in your country.

Let’s get into HOW the hypothetical person can move forward:

1. The hypothetical person realizes that after adjusting her expenses, she has a positive bank account balance at the end of the month.

2. She creates a plan to increase the emergency fund to 3 months of expenses in case anything happens that she needs available cash. To fight inflation, she opens an HYSA (High-Yield Savings Account) with Ally Bank, Wealthfront, OR any bank offering it at the % rate you like. My HYSAs have between 4%-5%, and the current inflation rate is 4% which battles our money-losing value over time.

3. Then checks the 401k enrollment process at her company; once the account is activated, she needs to decide on the % she will allocate per month.

Important to mention: Most companies will automatically enroll you at a pre-tax contribution rate of 3%. But you might need more than this 3% to have the lifestyle you dream of when you retire. Let’s assume the hypothetical person earns $50k annually and doesn’t get any salary raises in 30 years:

$135,000 difference when increasing from 3% to 12% contribution… Now, let’s add the 6% employer contribution:

We see the difference increasing to $189,000… but what about the investment returns? As this account is being invested, it’s supposed to be growing over time. With a ~5% annual growth rate:

Now the difference between 3% and 12% is ~$334,000…

WITH 12%, YOU WILL GET HALF A MILLION TO RETIRE IN A BETTER SPOT!

(THIS WILL DEPEND ON YOUR LIFESTYLE)

So make your numbers and DECIDE on a reasonable % for you (💡 FYI! The IRS in the USA has a 2023 contribution limit for Traditional and Roth 401(k) of $22,500 for employee contributions and $66,000 for combined employee and employer contributions - more info here); in my case, my goal is to max out my employer contribution, and after I hit the number, I will sit down and ask myself where do I want to put this money….

💭 Do I want to put the money into buying an investment property? Do I want to keep contributing on an After-tax option? Or will I become Yane Buffet and start investing in a business that I believe can be successful?

As you know, this is not financial advice; let’s get back to YOU…

For the 401k strategy - choose what best suits you; you need to check the options offered by the employer’s plan, but one feasible way is choosing Target-Date Funds, as these funds automatically adjust their asset allocation based on your expected retirement date. They typically offer a diversified portfolio that becomes more conservative as you approach retirement.

IF YOU WANT A GUIDE TO FINANCIAL INDEPENDENCE…

P.S. My opinions are my own + ChatGPt helped with the calculations - work smarter, not harder.

👀 AND I’m not a financial investor; just someone who has learned a lot through my own mistakes. You should confirm all the information you read on the internet before making financial decisions - there are differences in laws between Puerto Rico and the USA or European countries. If you see a mistake - reply to me calling it out!

Cliqué by Yane

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