Menu #14: Maximizing your retirement savings through proper planning

STATS STACK 🥞

60 is the age Gen Z expects to retire, twelve years earlier than Boomers who plan to work until age 72 (Source: Northwestern Mutual).

$1.5 million is now seen as the target for retiring comfortably. Over a five-year span, people's “magic number” has jumped a whopping 53% from the $951,000 target Americans reported in 2020. (Source: Northwestern Mutual).

11,000 Americans per day will reach retirement age, continuing through 2027. This marks the largest surge of Americans hitting traditional retirement age in history (Source: Northwestern Mutual).

DEEP DISH 🍕

Maximizing your retirement savings: Roth 401(k) vs. Traditional 401(k)

Let's chat about one of the crossroads you might encounter on your journey to retirement bliss: the choice between a Roth 401(k) and a traditional 401(k). Now, we know retirement planning can sound as thrilling as watching paint dry, but stick with us. Understanding the difference between these two can greatly impact how you spend your golden years.

So, here's the scoop: When you opt for a Roth 401(k), think of it as paying your taxes upfront on your contributions. The magic happens when you retire because you get to withdraw your contributions and the earnings on them without giving Uncle Sam (aka the IRS) another dime. Pretty sweet, right?

On the flip side, there's the traditional 401(k), which is kind of like saying, "I'll pay you later" to the taxman. You get a tax break now because your contributions aren't taxed when they're made. But—and it's a big but—when you start making withdrawals in retirement, you'll need to pay taxes on that money. 

Diving into Roth 401(k)s

Let's dive a bit deeper into Roth 401(k)s, shall we? Picture this: You contribute to your Roth 401(k) with money that's already had taxes taken out. Yes, you're sharing a slice of your pie with the taxman right away. But here's where it gets good: as your money grows over the years, all of it—every single penny of your contributions and the earnings they've generated—is yours to keep, with no taxes on withdrawals in retirement. It's like planting a tax-paid seed and getting to enjoy the entire harvest tax-free. And if your employer matches your contributions? That's just icing on the cake, adding more to your retirement savings without costing you an extra dime. 

Understanding Traditional 401(k)s

Now, let's talk about the traditional 401(k), a more classic approach to retirement savings. With a traditional 401(k), your contributions are made with pre-tax dollars, which means you get a tax break right now. It lowers your taxable income today, so you pay less in taxes each paycheck. But here's the catch: when it's time to retire and start withdrawing your money, those withdrawals are taxed as regular income. Essentially, you're delaying paying taxes on your contributions and their earnings until you're ready to use them in retirement. It's a "pay taxes later" plan, offering immediate tax benefits but with a tax bill waiting for you down the road.

Alright, let's break down the Roth 401(k) and traditional 401(k) debate into plain English, shall we?

Roth 401(k) vs. Traditional 401(k): A simple breakdown

5 Steps to Get Your 401(k) Rolling

1. Ask HR or your company's people team: Start by asking your company's HR folks about your 401(k) options and if there's a company match.

2. Review company match and service provider details: Find out if your employer offers a match and the brokerage that is handling the 401(k) plan, like Fidelity or Vanguard. You can usually get this info from HR or find it in an online employee portal.

3. Dive into mutual funds options: Check out the mutual funds available through your plan. Pick ones that match your investment goals and risk appetite.

4. Get your 401(k) started: Open your account, decide how much of your paycheck you want to go into it, and choose when to start. Then, pick your mutual funds.

5. Don't leave money on the table: Contribute enough to snag any company match. If they'll match up to 5% of your pay, for example, make sure you're putting in at least that much to max out this free money perk.

So, whether you're leaning towards the Roth 401(k) for its tax-free retirement perks or prefer the immediate tax relief of a traditional 401(k), the key is to start saving now. Both options offer unique advantages that can help secure a financially stable future. Remember, the best retirement plan is the one you start today. With a bit of research and some proactive steps, you're paving the way towards a retirement filled with peace of mind and financial freedom. Cheers to taking control of your financial future—your retired self will thank you!

SWEET LINKS 🍰
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