How I’m saving and investing in 2020

Hey Money Nerds! 

I wanted to share how I’m saving and investing in 2020. Because I’ve worked hard to live frugally, on much less then I earn. I’ve been able to be very intentional on where my money goes in term of retirement and investment accounts. We always have heard the old adage, “pay yourself, first.”  That’s kind of my strategy here. I’d like as much of this to be automatically deducted from my paycheck, and therefore I’m left with what’s left to live on. 

One of the first things I look at is the 401k.  This is employer-sponsored, qualified retirement plan that allows eligible employees of a company to save and invest for their own retirement on a tax-deferred basis.  There are multiple types of 401k.  There is the traditional, pre-tax 401k, where contributions to the account are pre-tax and we are taxed upon the withdrawal during retirement.  There is also. There is also a Roth 401k, in which contributions are after tax, and all the growth happens tax-free! When you withdraw on this during retirement we are not taxed.   I’m contributing 8% of my gross income to my traditional, pre-tax 401k and 7% to the Roth 401k. This a mix, or blended strategy that I’ve decided to do based on some conversations with my financial planner at Personal Captial. I really like my guy, Willem, and if you use my link we’ll both get a kicker!  

Taking advantage of your employer match is a critical step in paying yourself first. If your employer offers any match to your 401k contribution it may be wise to at lease contribute at least the amount to meet your maximum match. Employers offer all kinds of matches, so it’s a good idea to double check with your employer. In my case, the employer matches 50% on the Dollar up to 6% of my overall contribution.  My previous employer offered 100% (dollar for dollar) up to 3% of your contribution.  

In my case,  my employer also allows me to contribute an after tax contribution above and beyond the 2020 $19,500 IRS limit I can contribute to my 401k. This goesinto an after tax investment account.  After working closely with my financial advisor via Personal Capital my strategy will be to perform what is called a Mega-Backdoor Roth Conversion. This is where the amount that is contributed into this account is converted to a Roth IRA upon tax time. We’ll pay my income tax rate when performing this conversion, but then I’ll continue to not be taxes on any growth, now when I take the withdrawal during retirement.  I, then, contribute twenty percent to my after-tax contribution. 

For more information on a Mega Back Door check this post out over at The Collage Investor.

One of the benefits via my employer is we can use a portion of our income to purchase company stock at a discount.  In out case, we can max this out at 10% of our income.  The cool thing is that every six months there is an event where we exercise those shares of stock.  It then goes back the previous six months, and locks in the lowest value the stock had traded at, and you buy the shares of stock at a discount off this lowest price.  Then upon the exercisable event, you get at least growth of what the discount would be.  Plus you also realize any gain in stock value at the time of the event.  Keep in mind… this can be risky.  Of course, there is the possibly that the value of your company stock may decrease in value. 

Another thing that I have elected to do is participate in a higher deductible Health Insurance Plan offered by my employer.  One of the reasons I do this is that this plan comes with the ability to contribute pre-tax dollars into a Health Savings Account, or HSA.  The cool thing about this, is that The HSA is yours forever, you can contribute up to $7,100 per year for me and kids.  My employer also deposits an amount per calendar year into this account. It’s like free money!   This can be used for any health-related expenses now, or in the future. This is why I like the HSA. I’m continually contributing to it now, while I can, and I can use it when I’m older and in retirement for my healthcare costs.  Another benefit of the HSA, is that this can also be invested into the market, and this may continue to grow for the next 30 years.  I’m currently allocating about 6% of my income to my Health Savings Account.

Thanks for following along, and I hope this helps those that wanted a little bit more on how best to pay yourself first when it comes for planing for retirement.