Let’s go back a decade or two. You were in college starving yourself of nutrients and cash flow. The task at hand was simply to make it through the month on Tombstone pizza and $348 in your bank account. Fast forward a couple of years to when you landed that first job out of college. You enter the workforce in the awkward professional attire you obtained 3 years prior for your first internship. Here you are today with a much different outlook on life. Your income is much higher, your vegetable intake has drastically increased, and your work clothes are much more appropriate.
Thanks to our friends' submissions on Instagram, we were inspired to write this week's blog on strategic saving. Why? Because ya’ll are doing a great job at saving, but could use some extra guidance on where to save, how much to save, and other things to consider.
How much should I be saving for retirement?
When saving for retirement, I like to start at 20% and increase or decrease that figure according to your specific situation. 20% isn’t as arbitrary of a number as you may think. It actually stems from the ‘4% Rule.’ The 4% Rule is simply a recommendation to withdraw no more than 4% of your total portfolio when you reach retirement.
Check out my blog on Honeyfi that discusses this topic and more: How to Allocate Your Income
In order to withdraw 4% of your dollars, you need 25 times your annual distribution by retirement. For example, if you need $50,000/year from your account, your portfolio should be $1,250,000 upon retirement (4% of $1.25mm is $50k -and- $50k x 25 = $1.25mm). If you obtained a modest rate of return of 5% and contributed 20% throughout your career, it will take you 41 years to accumulate 25 times your distribution need (or in this example: to $1,250,000).
The number of years needed to obtain your ideal balance at retirement vary significantly when your rate or return is higher or lower than the 5% stated above. Do you want assistance with your investments? We can help!
Also, your distribution from the portfolio may not match your total income need in retirement. You may also have pension income, an inheritance, or Social Security (yes, I strongly believe there will be some form of Social Security by the time we all retire).
How much should I be saving outside of retirement?
This depends! First off, if you’ve established a comfortable retirement contribution level, pat yourself on the back. You are way ahead if you are able to afford retirement savings and then some. Our clients tend to be in this group (#soproud). An appropriate amount of savings above and beyond retirement will look unique to what exactly it is you are saving for!
What I can tell you is that we are huge advocates for establishing investment accounts outside of your employer sponsored plans and IRAs. Ideally, we work towards building up three major buckets for our clients: tax advantage assets (Roth IRAs and HSAs), tax deferred investments (Traditional IRAs and Pre-Tax Accounts), and taxable investments (Joint or Individual Brokerage Accounts). We will talk about the latter in our next section below.
Where do I put my surplus cash flow?
Like I mentioned above, this is a question we discuss often with our clients. We evaluate both their gross and net pay to help determine how much of a surplus they are really working with. Once we have that figure, we start discussing their options on what to do with the money. We list some of those options below.
Filing Status: 0% Rate Applies 15% Rate Applies
Single Up to $40k $40k-$441,450
Married Filing Joint Up to $80k $80k-$496,600
Kids Savings Accounts:
Roth Conversion Tax Payment:
Employer Provided Savings Options:
Earmarked Savings for Future Purchases:
The key to be strategic with your savings is knowing exactly what you are saving for. Retirement is broad, but still purposeful. Whereas ‘the future’ is plain and indecisive. This is where Dan and I come in. We help our client’s establish purpose with the dollars they bring home. We all want more intention in our life. Saving strategically brings that intention to the finances we all desire. If you are experiencing a continuous surplus of cash flow, talk to us today on how you can become more strategic with savings.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.