What are your plans for the offseason?

[Brownfan80]

The bottom line :

If your company has a 401K you HAVE TO max it out. Any matching is great but it's pre tax so you have HUGE $$$.

If not, or if you want to go in addition to, Roth IRAs are great. No tax benefit now but you all the earnings are tax FREE (not deferred) when you retire. Every cent in the account is yours and when you take it out the government gets NOTHING.

Traditional IRAs are fine, they're pre tax now but taxed when you get the money out. Much like 401Ks but no matching.

Thank you so much for the advice BF. I don't know that I have the extra money to max out my 401k right now, but I'm def getting one started (a little late in the game at 27, but you gotta start somewhere). I'll increase it as some of my current bills fall off (several of them will over the next few months) and as my pay increases.

 

[Oswlek]

The bottom line :

If your company has a 401K you HAVE TO max it out. Any matching is great but it's pre tax so you have HUGE $$$.

If not, or if you want to go in addition to, Roth IRAs are great. No tax benefit now but you all the earnings are tax FREE (not deferred) when you retire. Every cent in the account is yours and when you take it out the government gets NOTHING.

Traditional IRAs are fine, they're pre tax now but taxed when you get the money out. Much like 401Ks but no matching.

Just because it is my business, I have to disagree with this statement a little. There are many, many reasons why maxing out a 401(k) is *not* the right thing to do. Up to the match is a no brainer, but beyond that is not always a given.

As a general rule, you could certainly do a lot worse, but at least 30% of my clients do not max out their 401(k)s (or 403bs, 457s, whatever) and instead direct a portion of their money elsewhere.

I would go into some of the reasons, but I don't want to bore all of you with the details. If anyone is interested, feel free to ask me, but the real bottom line is that hiring someone who is in the business of financial planning is the first thing to do.

 

[BelichickFan]

Just because it is my business, I have to disagree with this statement a little. There are many, many reasons why maxing out a 401(k) is *not* the right thing to do. Up to the match is a no brainer, but beyond that is not always a given.

As a general rule, you could certainly do a lot worse, but at least 30% of my clients do not max out their 401(k)s (or 403bs, 457s, whatever) and instead direct a portion of their money elsewhere.

I actually do think that what I said is correct simply because it FORCES you to save for retirement.

Other than that I kind of agree. The non matching part isn't wholly different from putting the rest in a Traditional IRA - you get the tax benefit now but pay taxes when you retire. Now, in my situation I'm being inconsistent - the combined income of my wife and I is too high for the benefits of an IRA, I can still contribute but without the tax benefits. Based on that I choose to put the money in my Vanguard mutual funds instead - this costs me a little money having to pay tax on the dividends and capital gains but that small cost is worth it to me to keep the money more liquid than it would be in an IRA.

But I basically stand behind my statement, too many people just don't save for retirement. I understand some can't but a LOT of people who can choose not to. That's why I like my blanket "max out your 401K (if you can)" so that you guarantee yourself a good amount of retirement savings. If you will actually save the money in other ways, there are certainly other options. Like tax free college savings accounts, etc.

 

[BelichickFan]

Thank you so much for the advice BF. I don't know that I have the extra money to max out my 401k right now, but I'm def getting one started (a little late in the game at 27, but you gotta start somewhere). I'll increase it as some of my current bills fall off (several of them will over the next few months) and as my pay increases.

Remember that it's off your pretax income so you'll only see a 65-70% hit on your paycheck for the amount you put in the 401K - and also remember you can NEVER get these years of potential compounding back. The quicker you get a big chunk in, the quicker you'll start to make lots of money simply by having it invested.

 

[BelichickFan]

I forgot my biggest offseason plan - I plan to turn 40 on March 10

 

[Oswlek]

I actually do think that what I said is correct simply because it FORCES you to save for retirement.

Other than that I kind of agree. The non matching part isn't wholly different from putting the rest in a Traditional IRA - you get the tax benefit now but pay taxes when you retire. Now, in my situation I'm being inconsistent - the combined income of my wife and I is too high for the benefits of an IRA, I can still contribute but without the tax benefits. Based on that I choose to put the money in my Vanguard mutual funds instead - this costs me a little money having to pay tax on the dividends and capital gains but that small cost is worth it to me to keep the money more liquid than it would be in an IRA.

But I basically stand behind my statement, too many people just don't save for retirement. I understand some can't but a LOT of people who can choose not to. That's why I like my blanket "max out your 401K (if you can)" so that you guarantee yourself a good amount of retirement savings. If you will actually save the money in other ways, there are certainly other options. Like tax free college savings accounts, etc.

Like I said, you could do worse. But economically, it is just not always the most efficient way to save. I agree that the forced savings is a wonderful aspect of company plans. Hell, I have a handful of clients that have so little discipline that they choose to have extra withholding from their pay just to get a huge refund. It is the only way that they can save for vacations or other short-term items because they spend everything they get.

But, if you have discipline than you will often find other opportunities. For instance, I have a client that just closed out a position of 1244 stock from a company that he started. He has another job and could afford to put money into his 401k, but it makes no sense because 1244 stock is deductible as income up to $100,000 (rather than the $3,000 ordinary income deduction regularly on investment losses). His income bracket will be far lower than normal, even lower than what it will be in retirement. Deducting anything this year will actually *cost* him taxes.

Another example is a family that has a few foster kids. Because the income they get for being foster parents is tax exempt, all the examptions that they receive actually put them in a negative bracket. No joke. They get more back than they withhold every year. These people were stuffing their 457 plan only to find out that it saved them nothing and will be taxed later.

These a just a few examples. I am not disagreeing with you, I am saying that blanket statements like "always max the 401k first" can be big mistakes to the wrong person.

You are right that people don't save enough for retirement. When young people come into my office, they build up these gorgeous retirement dreams and then almost universally are shocked when they find out that the $200/mth they are saving isn;t even close to enough.

It is funny how even those in their late teens have already felt the effects of inflation, but people just forget about it when thinking about their future.

 

[BelichickFan]

These a just a few examples. I am not disagreeing with you, I am saying that blanket statements like "always max the 401k first" can be big mistakes to the wrong person.

For a layman like me it's a good rule

I don't really know much about money but just maxing out the 401K, putting $3K a year in each of the kids' tax free college savings accounts and putting any leftover money in my mutual funds really gets things going.

The key is to have as much money invested as you can for when there's big years. When I first started working we have several straight years of 30%+ in the S&P 500 but I had almost no money in. Now those 30% years are huge for my retirement (and being close to 40, I'm within distance of it, I plan to be retired no later than 55). Thankfully neither my wife nor I is a big spender.

 

[Oswlek]

For a layman like me it's a good rule

I don't really know much about money but just maxing out the 401K, putting $3K a year in each of the kids' tax free college savings accounts and putting any leftover money in my mutual funds really gets things going.

The key is to have as much money invested as you can for when there's big years. When I first started working we have several straight years of 30%+ in the S&P 500 but I had almost no money in. Now those 30% years are huge for my retirement (and being close to 40, I'm within distance of it, I plan to be retired no later than 55). Thankfully neither my wife nor I is a big spender.

Sorry if I jumped down your throat a little. I just get kind of touchy when people spout of blanket statements that hacks like Suze Ormon say (not that you did, but it just falls in the same "blanekt statement" zone) as it makes my job harder. There is no such thing as a universal rule in the financial planning arena, and it gets my goat that the mass public doesn't understand that Suze is more interested in selling her books than really helping people.

 

[BelichickFan]

Sorry if I jumped down your throat a little. I just get kind of touchy when people spout of blanket statements

I didn't take it that way - I'd bet that just about everyone here has a generic enough situation that it's generally the way to go.

Otherwise, plan on working into your 70s and then living on social security. Ick.