Wednesday, July 28, 2021

My 3 Bucket Approach to Retirement Savings

When I first transitioned from the banking industry into teaching, I was flat broke.  Generally speaking, I don't like to use that term because its connotation creates an emotional and psychological momentum in the wrong direction.  That being said, I had a mountain to climb if I ever intended on reaching financial independence.  My idea of financial independence at the time was to have secured my retirement so that I could focus my time and attention on living my day-to-day life in whatever manner I saw fit.  It wasn't until much later that I discovered that there was a term for this concept, which is CoastFI. Despite, not knowing what to call it, nor having the income to achieve it, I had it set in my mind to achieve by the time I turned 45.

That's the amazing thing about having faith and a certain amount of surrender.  At the time I had made such bold declaration as to simply decide that by the age of 45 I would have already secured my retirement, there were no facts about my life that would support such a claim.  I was making less than $30k per year.  I had credit card debt, student loan debt, and had just bought a home.  While none of my debts were very large in and of themselves, my income didn't support making much of a dent in them either.  I was contributing to my employer-sponsored 401k plan; just enough to get the match.  I believe that would have been about 4% at the time.  I was doing okay given my situation; although, no one would look at that exact moment of my reality and agree with the declaration that I would secure my retirement by the age of 45.  At the time, I had not learned about the Universal Law of Belief, but seemed to intuitively embody the understanding that "You can have whatsoever you want so long as you can give up the belief that you can't have it."  Having that sort of unshakable faith is powerful when as a result we allow ourselves to be open to possibilities.  I surrendered a certain amount of my path to the Universe, and as a result, began to notice a myriad of opportunities presenting themselves to me.  I remembered feeling a pull back to NY (I was living in Portland, OR at the time).  As I allowed myself to consider the possibilities, I found myself thinking back to the time when I lived in the city and worked at one particular middle school as a substitute teacher and taught a theatre elective.  Remembering how much joy that brought me, I went down a bit of a rabbit hole and discovered that there were programs in the city that would help me to obtain my teaching license without incurring more debt.  So, I returned to the city (with my partner shortly to follow).  It's amazing how the acts of faith and surrender lead to inspired action and ultimately results.

The first couple of years were rough in many ways.  It took some time before we recovered from the financial ramifications of turning our Portland home into a rental, moving across the country, and successfully transitioning my partner into her new career (also in education).  On the surface, I still didn't look like someone who would have a secure retirement by age 45, but inspired action kept flowing.  In those first two years, we eliminated my private student loans and all credit card debt.  That's when I learned about the TDA (tax-deferred annuity) offered for additional retirement savings through my employer.  At that time things were tight, but I felt moved to begin contributing something to this pre-tax retirement account.  So, I started off by contributing 5% of my income to it.  Now, in my opinion, 5% isn't really enough, but it was a great place to start.  First off, we didn't really have the income available to do more.  But even if we did, it would have felt entirely too alarming to suddenly be missing 15-20% of my paycheck!  Quite frankly, I noticed that 5% and if felt like a lot!  But over time, more and more money started to become available in our budget: no more private student loan payment; no more credit card payment; my partner got her Master's degree and the resulting pay raise; our employer stopped deducting our paychecks for our contributions toward our Master's degrees, and we got periodic, regular pay raises. All of these things added up; and with each of these events, we took the opportunity to increase our retirement contributions by anywhere from 1-3%.  It's funny that 1-3% can add up so much time, and yet it looks like such a small change to your paycheck.  Psychologically, it's a great little trick when trying to beef up your retirement savings.  It doesn't feel like much of a difference, but over time it really adds up.  In fact, over time, I've increased my contributions to more than 20% of my income, and not really felt any pinch at all.  It's especially easy when I know that a raise is coming.  If I know that I'm getting a 3% raise on a certain date, I increase my retirement contributions by 1-3% and set it to start on the raise effective date.  I never know the difference, but my retirement account sure does.

A few years into my teaching career, I was sitting with a group of teachers at a table grading a standardized test.  A veteran teacher from another school was saying something about some "retirement accounts through the city."  My ears perked.  According to this teacher, since we were technically also employees of the city, we could use the retirement savings accounts that the city had to offer!  Why wasn't anyone telling us about this!  

I started to do my research and realized that the city had way more options!  While the union set us up with the TDA as a retirement savings option, the city gave us access to a 401k and a 457, both of which have Roth options!  I immediately requested my plan materials and opened the Roth 401k.  The IRS has set an annual contribution limit for what I can put into my TDA and 401k.  In 2021 it's $19,500 which could be contributed to the TDA, 401k, or a combination thereof.  The TDA only operates using pre-tax dollars which gives me a tax benefit in the current tax year, but a Roth uses after-tax dollars.  So, when I contribute to my Roth 401k, I don't receive any tax benefit right now.  I pay taxes on that money.  Then it grows tax-free and when I take the money out in retirement, I won't have to worry about paying taxes on that money because I already did so (and that includes its growth)!  That's a great opportunity!  Now, I know that many people like to try to figure out if their tax bracket will be lower in retirement, and if that feels good to you, go for it! As for me, I can't imagine a version of me that is on a fixed income being excited about paying taxes on all of that retirement money.  I feel really great about taking care of Uncle Same now and minimizing the amount I owe him in the future.

Frankly, I wished that I had learned about the 401k and 457 through the city much sooner, but was very excited about the opportunity.  The way I see it, I was given multiple "buckets" within which to save for my retirement.  Once I hit my maximum allowed in the first bucket (any combination of TDA, Roth 401k, and Traditional 401k), I can move on to the 457 account!  A 457 is very similar to a 401k in how it behaves.  It's just less common for people to have access to a 457 because those are generally only used for those working for some sort of government entity.  Since that does apply to me, I can take advantage of a separate savings "bucket."  This is because the IRS will allow a separate maximum contribution of $19,500 into a 457 (FYI, the annual limits on 457s and 401ks change periodically, so you should double-check them annually to see if they go up from one tax year to another).  So, once I've maxed out on my first "bucket" (TDA/401k), I can start putting money into a 457 in that same calendar year and still be within my limits!  Also, the 457 though my employer has a Roth option!  Are you getting excited yet?!  I know that I sure am!  

Now that's a lot of money to be contributing to retirement, and it could take some time before you're able to allot that much of your income in that direction, but don't you kind of want to try?  Dare to be different, right?  Besides, the sooner we can secure our future retirement, the sooner we can refocus our attention to other things in life, right?

For those that are still with me, and wonder what else they can do, there's a third "bucket" that I haven't even mentioned yet, and that's an IRA.  IRAs are individual retirement accounts and are separate from your employer-sponsored plans.  Although you have to have earned income to contribute to them, you can open them on your own at any discount brokerage and can contribute up to $6000 to one annually (2021 limit).  I prefer to use a Roth for my IRA as well because of the tax-free growth; however, it's important to make sure you fall within the income restrictions (otherwise you need to look into doing what's called a "backdoor Roth").  For the 2021 tax year, it's a MAGI (Modified Adjusted Gross Income) of $140,000 for single filers and $208,000 for married people filing jointly.  Of course, if you are married and file separately, that income restriction is way lower.  We're talking a MAGI of $10,000.  So, watch out for that!  Anyway, regardless of the restrictions, it's a really great deal, one I'm definitely taking advantage of myself!

For people getting closer to retirement, there are a number of ways to catch up, too.  People in the 50+ age category can have what's called a catch-up contribution, which allows them to contribute an extra $1000 to an IRA and an extra $6500 to a 401k. If you have a 457, you can also have an extra $6500 contributed there.  In fact, the 457 has a strange little catch-up provision referred to as a "double limit" for people that have entire years where they were eligible but not contributing to one.  They can actually contribute double the annual contribution limit in one calendar year in order to make up for lost time so-to-speak.  You can only take advantage of that in the last few years prior to retiring though.  So, if that applies to you, it would be a great idea to contact your plan administrator and maybe your tax professional to investigate further.

When I think back to where I was when I first resolved to have secured my retirement by age 45, it's amazing to think of how far I've come.  It started with the power of belief and flowed into the land of inspired action where a little knowledge and some smart money moves are allowing me to take advantage of the power of compounding interest... and yes, I'm on track to meet my goal.  In fact, I will reach CoastFI before I ever reach 45... Life is good. 

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