Financial Checklist Plan Part 4:
Establish a Personal Reserve Fund
Saving for Retirement and College seems to be the great mystery of our times. Everyone wonders "How Much?" or "Will I ever retire?" or "Will I ever be able to save enough to send my children to College?" Chances are you've thought of these questions many times and trying to answer them has left you either paralyzed or without a solid plan. It's time for that to change.
This great mystery need not be so scary, challenging or seemingly impossible to tackle. All that is necessary is to step back, work the Financial Checklist steps in order, and then execute wisely when you make it to this step (Step 4) toward these goals. |
|
Retirement: When you have eliminated all your personal debt, you are in the perfect place to begin saving for your retirement. There are several savings vehicles that are available to consider, and we have a formula for utilizing them in the best order to your benefit.
First, how much should be saved for retirement. We recommend 12% to 15% of your income pre-tax. So, if you earn $50,000 a year and wanted to save 15% toward retirement, you would need to save $7,500 per year. This would work out to about $625 a month saved for retirement.
Second: Now that you know how much to save, save for retirement using these savings vehicles in this order:
1. 401k (or 403b if working for a non-profit) at work, if offered, up to the amount that is matched by your employer. If your employer will match your first 3% of your salary put into your 401k, then put in the 3% of your salary into your 401k. This is free money added to your retirement you don't want to miss out on.
2. Roth IRA: IRA's (sometimes known as Individual Retirement Accounts) are tax beneficial methods to save for retirement and come in two flavors, Traditional and Roth. You can set up either type of account at a variety of places, but we recommend that you consider doing so with the care of a financial adviser (who should be carefully selected via their reputation and your comfort in working with them). Traditional IRA's allow you to put money toward your retirement from your income tax free, but when you retire, that money, along with any investment gains it has earned is fully taxable as income. Roth IRA's allow you to put money toward your retirement from your income after income tax has been paid. The big benefit to Roth IRAs over Traditional IRAs is that when you go to take the money out in retirement down the road, your money and any investment gains it has earned are all tax free. For this reason, we recommend setting up a Roth IRA and placing the remainder of your retirement savings into this IRA until the max yearly contribution has been reached. The current max contribution per year is set at $5,500 per person (though those age 50 and older may put in an additional $1000 per person per year toward their IRAs).
3. After funding your IRAs in full, if there is any retirement money left, put the remainder into your 401k at work.
First, how much should be saved for retirement. We recommend 12% to 15% of your income pre-tax. So, if you earn $50,000 a year and wanted to save 15% toward retirement, you would need to save $7,500 per year. This would work out to about $625 a month saved for retirement.
Second: Now that you know how much to save, save for retirement using these savings vehicles in this order:
1. 401k (or 403b if working for a non-profit) at work, if offered, up to the amount that is matched by your employer. If your employer will match your first 3% of your salary put into your 401k, then put in the 3% of your salary into your 401k. This is free money added to your retirement you don't want to miss out on.
2. Roth IRA: IRA's (sometimes known as Individual Retirement Accounts) are tax beneficial methods to save for retirement and come in two flavors, Traditional and Roth. You can set up either type of account at a variety of places, but we recommend that you consider doing so with the care of a financial adviser (who should be carefully selected via their reputation and your comfort in working with them). Traditional IRA's allow you to put money toward your retirement from your income tax free, but when you retire, that money, along with any investment gains it has earned is fully taxable as income. Roth IRA's allow you to put money toward your retirement from your income after income tax has been paid. The big benefit to Roth IRAs over Traditional IRAs is that when you go to take the money out in retirement down the road, your money and any investment gains it has earned are all tax free. For this reason, we recommend setting up a Roth IRA and placing the remainder of your retirement savings into this IRA until the max yearly contribution has been reached. The current max contribution per year is set at $5,500 per person (though those age 50 and older may put in an additional $1000 per person per year toward their IRAs).
3. After funding your IRAs in full, if there is any retirement money left, put the remainder into your 401k at work.
College: Save for college based on your anticipated need for your children's college years. Anything saved is much better than nothing saved, but saving early in your child's life can net them a huge benefit toward affording college. We recommend working to put $2000 or more toward college savings per year per child as your children grow up. Consider saving this money for college by utilizing a Coverdale Education Fund you can set up for each of your children or a 501b College Saving Fund. Both of these funds offer some tax advantages, but these are best purchased with the help of a trusted financial adviser. They can provide you the ins and outs of what these two investment vehicles offer and how to strategically maximize your savings.
Along with setting up these college savings vehicles, it is also wise to consider the cost and value of college for your children. Consider that college is an education purchase and that you want the best value for your expenditure. There is often a huge difference in cost between private universities and public universities, but the value of those degrees earned may not be worth the large variance in cost.
College Affordability Tip: Consider with your children the idea of attending a community college for the first 2 years of their college education and then, if they desire to continue their education, transferring to a public university to complete their education. This method can save tens of thousands in the cost of college and yet yield the same degree and the same credentials upon graduation.
For both Retirement and College savings, it is important to invest those funds wisely. We'll talk more about that in the Checklist Execution section, but if you want to skip ahead, you can check that out here: Invest Wisely
Now for Step 5, which is performed along with Step 5: Paying off your House and Cars
Along with setting up these college savings vehicles, it is also wise to consider the cost and value of college for your children. Consider that college is an education purchase and that you want the best value for your expenditure. There is often a huge difference in cost between private universities and public universities, but the value of those degrees earned may not be worth the large variance in cost.
College Affordability Tip: Consider with your children the idea of attending a community college for the first 2 years of their college education and then, if they desire to continue their education, transferring to a public university to complete their education. This method can save tens of thousands in the cost of college and yet yield the same degree and the same credentials upon graduation.
For both Retirement and College savings, it is important to invest those funds wisely. We'll talk more about that in the Checklist Execution section, but if you want to skip ahead, you can check that out here: Invest Wisely
Now for Step 5, which is performed along with Step 5: Paying off your House and Cars