Coach Scott joins us to discuss the various ways to save money, invest for retirement, and save on taxes.
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Where to save money
You can save money in a bank account, but does that help you reach your goals. There are certainly times when a simple savings account at the local bank is the right choice but the money won’t grow much in our current economic environment.
There is a rule of thumb about investing: The riskier the investment, the greater the returns.
How to balance risk and reward
There is another rule of thumb: You can reduce the risk by spreading the money into multiple investments (diversification).
Don’t bet it all on black! It makes sense to save money in a bunch of different places. Some of those places appear to be the same but are actually diversified.
Here is an example:
Coach Steve talks about 12 shares of Boeing stock he bought back in 2001. If Boeing went broke then Coach Steve would have a worthless piece of paper.
However, if he were to take the money and purchase a stock mutual fund then he would own a handful of different stocks.
The risk is reduced while maintaining the reward.
OK, here is where I have to say “I am not a Financial Planner and past results do not guarantee future returns. Seek the advice of a competent professional that knows YOUR financial situation.”
Why save for retirement? Answer: Goals
The first step to knowing how much to save for retirement is to know what your ultimate goals are.
The Coach: “Why do you want to retire?”
The Client: “So I don’t have to work a job anymore”
[Family Feud buzzer noise here] BLAAAT!!! Not working a job is not a goal.
Your time will be spent somewhere:
- Travel
- Volunteering
- Spending time with the kids (or grandkids)
- Hobbies
Is it worth saving some of your money today in order to reach your future goals?
Different types of investments
Whether you are investing for retirement or not, there are a number of different types of investments that the average American has access to.
These are in order of lowest risk to highest risk:
- Bonds
- Mutual Funds
- Exchange Traded Funds
- Stocks (single stocks)
- Rental real estate
- Building a business
Which type is best for you? Only you and your goals can decide.
Save taxes with retirement accounts
Do you have a 401(k) at work? If so, you already have access to a tax-favored retirement account. All you need to do is put money into it.
However, is that the best option for you? A 401(k) is taxed differently than a ROTH IRA. Why? It depends on the Federal Tax Code.
The following retirement accounts give you a tax break today:
- 401(k) (an employer provided plan)
- 403(b) or TSP (teachers and government employees)
- Traditional IRA (Individual Retirement Arrangement)
- SIMPLE or SEP IRAs
The money you put into these accounts are not taxed. This lowers your tax bill while saving for retirement.
The following accounts give you a tax break in the future:
- ROTH IRA
- ROTH 401(k)
- Non-deductible accounts
The money you put into these accounts are taxed as income today. The advantage is you won’t be taxed on it, or the growth from it, when you pull it out at retirement.
A step-by-step plan save tons in retirement
Here is the process we recommend you follow in order to solidify your finances and maximize your savings for retirement:
- Pay off all consumer debt (does not include the mortgage)
- Build an emergency fund equal to 3-6 months of expenses
- Begin saving in retirement plans – start with matching funds in a 401(k)
- If no match is available then consider a ROTH IRA, 401(k)
Reminder: These are general recommendations. Seek the advice of a competent professional that knows your specific situation before making any major money moves.
Don’t let retirement take you by surprise. Write down your retirement goals and lay out a plan for how to start saving for retirement.
If you would like to know more about Coach Scott or want help with your personal finances then go to http://FinancialWellnessShow.com/FindACoach
