@100MPrince1 The introduction of the 401(k)-retirement savings program in 1978 marked the advent of the obligatory transfer of employee retirement financing from ‘the employer’ to the ‘employee’. To date, American workers have saved over 6.5 trillion dollars in 401(k) accounts, becoming one of the most popular retirement savings vehicles, all but replacing pensions in the retirement savings marketplace. 401(k)s supplanted pensions at such a rate that by 1981, almost half of all major companies in the United States were offering 401(k) plans or were at least considering it.
The transfer from pension offerings to 401(k) offering by major companies silently passed on the tremendous responsibility and risk of ensuring retirement financial security for employees to the minds and shoulders of the employees themselves. At this juncture, an employee’s retirement funding had become more of an unbalanced two-legged stool consisting of personal savings (401(k)/IRAs/Annuities) plus social security benefit payments as opposed to a more reliable three-legged stool (Social Security + Pension + Personal Savings) retirement funding model relied upon by prior generations. Among private industry workers, pensions are rarely even discussed and have swiftly advanced into the rear view in terms of company benefit offerings. However, some local, state, and federal government employees are still fortunate enough to have pension programs which are further supplemented by their social security benefit payments. Unfortunately, social security compensation was intended to replace only forty percent (40%) or less of an employee’s pre-retirement income. This simply means that accumulating the remaining sixty percent is all on YOU. Having pension benefits most certainly lightens your load toward achieving this sixty percent target. However, the majority of employees simply are not provided the proper education and guidance on how to intelligently start and maintain a self-directed retirement investment program.
Knowing how to start wins half the battle. Creating an investment program without a planned objective is tantamount to starting a journey without knowing your destination or, even worse, starting a journey without planning how to get to your destination. The necessary time must be invested in this pivotal first step before investing a dime in any investment plan or program. First, complete a financial needs analysis or financial plan. This exercise reveals the status of key markers to be examined before embarking on a personal investment journey.
Markers such as debt-to-income ratio, liquidity (available emergency funds = 3 – 6 months of living expenses), current cash flow allocations, tax filing status, modified adjusted gross income (MAGI), location of other available assets, income replacement needs (life insurance), investment risk profile, college education needs for children and most importantly your financial independence number (FIN). This entire game, called personal finance, aims to achieve your Financial Independence Number (FIN). This number represents the amount of money one must accumulate in order to retire and never have to work for money again. Essentially, the passive-residual earnings generated in the form of dividends, capital gains, interest, and appreciation by this lumpsum, once accumulated, are sufficient to pay for your chosen standard of living in retirement. I would say this is quite an important number - wouldn’t you? Yet, millions of Americans go through their entire working career without once trying to calculate this number or worse, not knowing how much money needs to be invested monthly and at what rate of return to achieve this goal. I assure you, simply investing a percentage of your income into a 401(k) or IRA is not sufficient to guarantee a secure retirement. Today’s employees must know exactly the required investment input and performance in order to obtain the desired result of a secure retirement. Success in this effort is very much a mathematical formula that must be satisfied in order to realize financial peace in your later years. Therefore, to make an intelligent start, we must not only calculate our destination (Financial Independence Number) but also plan our journey to account for the inevitable changes along the way.
Assuming you have sufficient emergency funds, you have determined your investment risk profile, financial independence number, monthly investment amount and required rate of return – you are now ready to get the ball rolling with contributions to your employer-sponsored plans such as 401(k)/403b/457b/401a or your personally owned Individual Retirement Accounts (IRA).
Most experts recommend making contributions sufficient enough to employer sponsored plans to secure the company match. After all, this is free money, and your contributions to the plan are tax-deductible. Meaning you pay fewer taxes since the amount of your contribution reduces your taxable income. The allowable annual contribution to a 401(k) for 2021 is $19,500 for participants under the age of 50. Participants 50 and older are allowed to contribute an additional $6,500 for a total annual contribution of $26,000. Be sure to allocate contributions per your investment risk profile and re-balance these allocations periodically to maintain your desired allocation. This is where most employees, in my estimation, could use some help. If asset allocation seems confusing or overwhelming, please seek the guidance of a professional. It is critical that you get this right.
On the other hand, if you have maxed out contributions to your employer-sponsored plan; your employer does not offer a retirement plan; you have changed jobs; you are about to retire; you have a non-working spouse; or wish to plan for unexpected health care cost, establishing an IRA may be a good fit for you. One must have earned income to contribute to an IRA. IRAs are of two main types - Traditional IRAs and Roth IRAs. Business owners, independent contractors, and sole proprietors may also establish SEP IRAs or SIMPLE IRAs. Only Traditional and Roth IRAs are discussed here.
Contribution limits for both Traditional and Roth IRAs in 2021 are set at $6,000 per year for account owners under age 50. Account owners 50 and older may contribute up to $7,000 per year. Tax deductibility of contributions to a Traditional IRA are dependent on three factors:
To be withdrawn Tax-Free, the earnings within a Roth IRA must have been in the account for at least five years, and one of the following conditions must also be met:
Both versions of the IRA offer tax benefits that can help you accumulate funds for retirement. Your choice of IRA depends on your unique financial circumstances and how you would like to best position yourself to presently accumulate funds then preserve and withdraw funds in the future. Once again, your contributed funds must be properly allocated per your determined investment profile to limit risk exposure and maximize the rate of return.
Andre Prince is a financial services entrepreneur based in Maryland with strong background in engineering and mathematics. Raised by his extended family on the small island of St. Vincent and the Grenadines, Andre began his journey to the United States as junior tennis player starting at the age of 10. He quickly showed promise and advanced to become the first junior tennis player from St. Vincent to achieve an International Tennis Federation (ITF) junior world ranking. He represented St. Vincent at the Pan American games in 1999 and the junior Olympic Youth Camp in Sydney Australia in 2000. The next year he start pursuing a Civil Engineering degree at Morgan State University where he was awarded a full tennis scholarship. He also completed a Masters degree in Environmental Engineering at John's Hopkins University in 2008 before starting his transition to the financial services industry in 2009. Andre is passionate about increasing financial awareness among youth and families in general. Today, he helps families across Maryland and seven other states namely New York, New Jersey, Pennsylvania, Virginia, Georgia, California and Florida.
The transfer from pension offerings to 401(k) offering by major companies silently passed on the tremendous responsibility and risk of ensuring retirement financial security for employees to the minds and shoulders of the employees themselves. At this juncture, an employee’s retirement funding had become more of an unbalanced two-legged stool consisting of personal savings (401(k)/IRAs/Annuities) plus social security benefit payments as opposed to a more reliable three-legged stool (Social Security + Pension + Personal Savings) retirement funding model relied upon by prior generations. Among private industry workers, pensions are rarely even discussed and have swiftly advanced into the rear view in terms of company benefit offerings. However, some local, state, and federal government employees are still fortunate enough to have pension programs which are further supplemented by their social security benefit payments. Unfortunately, social security compensation was intended to replace only forty percent (40%) or less of an employee’s pre-retirement income. This simply means that accumulating the remaining sixty percent is all on YOU. Having pension benefits most certainly lightens your load toward achieving this sixty percent target. However, the majority of employees simply are not provided the proper education and guidance on how to intelligently start and maintain a self-directed retirement investment program.
Knowing how to start wins half the battle. Creating an investment program without a planned objective is tantamount to starting a journey without knowing your destination or, even worse, starting a journey without planning how to get to your destination. The necessary time must be invested in this pivotal first step before investing a dime in any investment plan or program. First, complete a financial needs analysis or financial plan. This exercise reveals the status of key markers to be examined before embarking on a personal investment journey.
Markers such as debt-to-income ratio, liquidity (available emergency funds = 3 – 6 months of living expenses), current cash flow allocations, tax filing status, modified adjusted gross income (MAGI), location of other available assets, income replacement needs (life insurance), investment risk profile, college education needs for children and most importantly your financial independence number (FIN). This entire game, called personal finance, aims to achieve your Financial Independence Number (FIN). This number represents the amount of money one must accumulate in order to retire and never have to work for money again. Essentially, the passive-residual earnings generated in the form of dividends, capital gains, interest, and appreciation by this lumpsum, once accumulated, are sufficient to pay for your chosen standard of living in retirement. I would say this is quite an important number - wouldn’t you? Yet, millions of Americans go through their entire working career without once trying to calculate this number or worse, not knowing how much money needs to be invested monthly and at what rate of return to achieve this goal. I assure you, simply investing a percentage of your income into a 401(k) or IRA is not sufficient to guarantee a secure retirement. Today’s employees must know exactly the required investment input and performance in order to obtain the desired result of a secure retirement. Success in this effort is very much a mathematical formula that must be satisfied in order to realize financial peace in your later years. Therefore, to make an intelligent start, we must not only calculate our destination (Financial Independence Number) but also plan our journey to account for the inevitable changes along the way.
Assuming you have sufficient emergency funds, you have determined your investment risk profile, financial independence number, monthly investment amount and required rate of return – you are now ready to get the ball rolling with contributions to your employer-sponsored plans such as 401(k)/403b/457b/401a or your personally owned Individual Retirement Accounts (IRA).
Most experts recommend making contributions sufficient enough to employer sponsored plans to secure the company match. After all, this is free money, and your contributions to the plan are tax-deductible. Meaning you pay fewer taxes since the amount of your contribution reduces your taxable income. The allowable annual contribution to a 401(k) for 2021 is $19,500 for participants under the age of 50. Participants 50 and older are allowed to contribute an additional $6,500 for a total annual contribution of $26,000. Be sure to allocate contributions per your investment risk profile and re-balance these allocations periodically to maintain your desired allocation. This is where most employees, in my estimation, could use some help. If asset allocation seems confusing or overwhelming, please seek the guidance of a professional. It is critical that you get this right.
On the other hand, if you have maxed out contributions to your employer-sponsored plan; your employer does not offer a retirement plan; you have changed jobs; you are about to retire; you have a non-working spouse; or wish to plan for unexpected health care cost, establishing an IRA may be a good fit for you. One must have earned income to contribute to an IRA. IRAs are of two main types - Traditional IRAs and Roth IRAs. Business owners, independent contractors, and sole proprietors may also establish SEP IRAs or SIMPLE IRAs. Only Traditional and Roth IRAs are discussed here.
Contribution limits for both Traditional and Roth IRAs in 2021 are set at $6,000 per year for account owners under age 50. Account owners 50 and older may contribute up to $7,000 per year. Tax deductibility of contributions to a Traditional IRA are dependent on three factors:
- Are you covered by an Employer-Sponsored Retirement Program at Work?
- Your Tax Filing Status.
- Your Modified Adjusted Gross Income (MAGI)
To be withdrawn Tax-Free, the earnings within a Roth IRA must have been in the account for at least five years, and one of the following conditions must also be met:
- Account Owner is Age 59 ½ or older;
- Disability;
- First-Time Home Buyer ($10,000 Max.)
Both versions of the IRA offer tax benefits that can help you accumulate funds for retirement. Your choice of IRA depends on your unique financial circumstances and how you would like to best position yourself to presently accumulate funds then preserve and withdraw funds in the future. Once again, your contributed funds must be properly allocated per your determined investment profile to limit risk exposure and maximize the rate of return.
Andre Prince is a financial services entrepreneur based in Maryland with strong background in engineering and mathematics. Raised by his extended family on the small island of St. Vincent and the Grenadines, Andre began his journey to the United States as junior tennis player starting at the age of 10. He quickly showed promise and advanced to become the first junior tennis player from St. Vincent to achieve an International Tennis Federation (ITF) junior world ranking. He represented St. Vincent at the Pan American games in 1999 and the junior Olympic Youth Camp in Sydney Australia in 2000. The next year he start pursuing a Civil Engineering degree at Morgan State University where he was awarded a full tennis scholarship. He also completed a Masters degree in Environmental Engineering at John's Hopkins University in 2008 before starting his transition to the financial services industry in 2009. Andre is passionate about increasing financial awareness among youth and families in general. Today, he helps families across Maryland and seven other states namely New York, New Jersey, Pennsylvania, Virginia, Georgia, California and Florida.