How To Absolutely Get Yourself FIRED Today

A Slice Of Paradise

My primary goal is to reach Financial Independence and retire early and work because I want to and not because I have to. Whether you want to join and retire early, or work until you are 62 or 67 or wait until you after you turn 70,  having a  retirement fund is must.

There are many tools available and you need to make use of these as soon and as often as possible. You can actually start using these tools before you reach the normal retirement age.

First some of the tools.

The 401K is the a tax-qualified account where, retirement savings contributions are both provided by the employer and deducted from the employee's paycheck usually before taxation.  Most employers will match a percentage of employee contributions, up to a certain portion of total salary. The maximum pre-tax annual contribution is set at $18,000.  Employees aged 50 by the end of the year and older can also make additional catch-up contributions of up to $6,000.

Traditional 401Ks are a retirement savings plan sponsored by an employer.  It allows employees to save and invest a portion of their paycheck before taxes are taken out.  The maximum annual contribution is set at $18,000.  Employees aged 50 and older can also make additional catch-up contributions of up to $6,000.   

SIMPLE 401(k) plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation.   This was created so that small businesses could offer their employees cost-efficient retirement benefits.  The employer is required to make contributions that are fully vested.  

Most plans offer mutual funds composed of stocks, bonds, and money market investments. You control how your money is invested. A very popular option is the target-date fund.  This fund is a combination of stocks and bonds that gradually become more conservative as you approach retirement.    

You should attempt to contribute the maximum allowed into your retirement plan and if possible front-load as much you can thus taking advantage of the compounding interest.  You will need to look into how your company match is calculated.

The IRA or Individual Retirement Arrangement, may be the ideal way to save for retirement. The most common types of IRAs are the traditional IRA, Roth IRA, SEP IRA, and SIMPLE IRA. Each has restrictions based on income, employment status and if you have other types of retirement plans. All have caps on annual contributions and most have early withdrawal penalties.

Traditional IRA - A tax-deferred account. Meaning you will pay taxes when you make withdrawals in retirement. Deferring taxes means your savings compound and your balance grows each year without being taxed. Uncle Sam will collect payment at time of withdrawal, when theoretically both your income and tax burden will be lower.  If you are under 701/2 years old and earned taxable income you are eligible to contribute. you must start making withdrawals after you reach age 70 ½.

Roth IRA - Works somewhat differently. Contributions are made with post-tax dollars; meaning  all earnings accumulate tax-free and remain so upon distribution.   Roth IRAs also let you leave your money untouched for as long as you like.  You can keep contributing  regardless of your age.

Both currently have a cap on contributions set at $5,500, but those 50 years of age and over have a catch-up provision and can contribute up to $6,500

These two IRAs are solely dependent on the owner.  Your choice… the brokerage firm, the level of aggressiveness, the type of fund, it is all up to you.  I have opted to invest in  low-cost index funds. Studies have shown that index funds steadily outperform the returns of most actively managed funds.  

Index funds match the component of a specified index.  Take an index  fund that tracks the Standard & Poor's 500, you will see that the fund owns the  same stocks that make up the actual S&P 500 , and because they do not require an investment analyst, the funds have operating expenses much lower than actively managed funds.

Index funds reduce risk because of  high diversification.  While this does not guarantee higher performance,  it does guarantee lower risk.  Many funds have come and gone but Index funds have withstood the test of time; the crashes and corrections. Your broker may not even push these  because of the lower profit margin for him.

Simplified Employee Pension Individual Retirement Arrangement- SEP IRA is a variation of the Individual Retirement Account utilized by business owners to provide retirement benefits for themselves and their employees.  All employees must receive the same benefits. At present an employer can contribute the lesser of 25% of employees total compensation, or $54,000.  These are solely employee funded.

Savings Incentive Match PLan for Employees- SIMPLE IRA Is a tax-deferred employer sponsored retirement plan that allows both employees and employers to contribute into an account that has been set up for the employees.  Every eligible employee can  make a salary reduction contribution of no more than $12,500  and the employer must either have a non-elective contribution or match the employee contribution.  This is best suited as a start-up retirement savings plan for small employers not currently sponsoring any other retirement plan.

For those that may want to retire a few years earlier there are several things that can be done to get there earlier.   

IRS rule 72(t) allows for penalty-free withdrawals from IRA accounts.  This has to be done utilizing substantially equal periodic payments (SEPPs).  This rule permits IRA owners to benefit from their retirement savings before retirement age, without having to pay the required 10% penalty. The withdrawals are still taxed at the normal income tax rate.  These payments must occur over the span of five years or until the owner reaches 59.5, whichever time period is longer.  Neal Frankle over at explains it in detail.

Your contributions, the money that you put into your Roth IRA can come out at any time, tax and penalty free after only five years.  That refers to your deposit only and not the gains.  The IRS counts the five years from the first day of the tax year in which you make your contribution. For example, if you make a deposit into your account on December 1, 2017, the IRS sees it  as a January. 1, 2017 deposit, the start of the calendar year.

This, in some manner is being done every day.  People are retiring as early as in their 30s. Some into a life of leisure; others have continued to work, not for the money, but because they enjoy what they are doing.  Others are able to follow their passion and change course into a more fulfilling career; one that may have a much lower earning potential but their retirement has been secured.

Many people do not see the numerous advantages of contributing into 401Ks and IRAs both now and in the future.  Do not be one of them.  Look into both and maximize the benefits the provide.  Your future self will thank you.
These are not the only tools out there.  Please share any others that have worked for you.

I am not a financial advisor. I hold no fancy degree and as such this is not financial advice. This is simply what I have done and recommend my children do when the time comes. Due diligence is key

Popular posts from this blog

Do Not Let This Be You, A Cautionary Tale

Embracing Frugality For Easy Savings

Life Experiences Are What Really Matter