Making sure your golden years are covered is all about strategy.
Whether you’re a financial whiz or can’t tell your 401(k) from your IRA, figuring out the best ways to save for retirement can be intimidating. But with any luck, you’ll be able to stop working when you get to the right age and focus on whatever you like, be that birding, crosswords, or cross-country road trips.
That’s why we checked in with Ramit Sethi, author of the New York Times bestseller, I Will Teach You To Be Rich. He breaks down where to put your funds so they grow the way you want them to, so you’ve got a financial cushion that’ll carry you through retirement.
There are so many different types of retirement accounts. Can you explain the difference between a 401(k) and an IRA, and how people should use them?
Ramit Sethi: What people really want to know is: “Where should I put my money so that it grows and it does the things that it needs to do?” I have a ladder of investing that explains where your money should go — meaning, which accounts it should go into, in order to grow best. If you want to invest and your work offers you a 401(k) match, you want to put your money there. A 401(k) is a retirement account, and a match means they’re going to take some of the money you put in, and match it. Basically, it’s free money.
Number two, if you’ve got credit card debt, pay it off. Number three, look into an IRA , another type of account that gives you more control than a 401(k). It lets you choose more investments and typically has lower fees. Then if you’ve still got money, you want to go back to your 401(k) and max that out. In 2021, you’re allowed to deposit $19,500 annually into a 401(k), or $26,000 if you’re over the age of 50.
There are two more steps on the ladder of investing: Check out a health savings account (HSA), if you have access to one. And then finally, if you still have money leftover after all of those deposits, then you can just open up a taxable high-yield savings account and continue investing.
For those of us who feel behind when it comes to retirement savings, what should we consider when we’re figuring out how much to put aside?
The usual advice most financial advisers give you is some complicated formula that just makes your eyes glaze over, right? The way I see it, if one-size-fits-all formulas worked, people would have already done them. So I’m going to give you a different way of looking at it.
The goal is to spend less than one hour per month sorting out your finances. That means you need to set up automatic systems to do the right thing for you. Also, you should know exactly when you’re going to have $500,000 or $1 million, or whatever number you want in your retirement account, and you can do that mathematically. Same thing with people in debt. The number one question I ask them is, “Do you know how much you owe?” 90% of people don’t. And then I say, “Do you know when your debt is going to be paid off?” 99% of people don’t know. You should be able to know which month and year your debt will be paid off.
And the third thing about retirement in terms of goal-setting is , you shouldn’t be waiting around until you retire to live your rich life. In fact, I was just posting on Instagram yesterday about people who wait. “I’m going to take that cruise when we retire,” they say, and suddenly their partner falls ill, or something happens. I’m a huge believer in the idea that you shouldn’t wait to live that life. You can start living parts of it right now.
You already took us through your ladder, but do you have any other tips for saving for retirement?
There are some basic formulas for how much you want to be saving and investing — but it ultimately depends on your income, age, and goals. In general you should be investing a minimum of 10% of your gross income every month.
People will say: “I’ve cut to the bone, there’s nothing else I can cut.” And I have two responses to that: One, let me take a look at your spending and I can find some things you may not know you’re spending on. Typically when I work with people, I can find hundreds of dollars per month within just about 10 minutes. The second thing is there’s a limit to how much you can cut, but there’s no limit to how much you can earn.
When most experts talk about money, it’s all about restriction: “Don’t spend money on lattes, don’t go out to restaurants.” That never works. Nobody wants someone telling them what not to do. So I flip it and say, “What do you want to spend on?” And then they tell me, you know, “I want to take a trip.” And my philosophy there is that I actually want people to spend extravagantly on the things they love, but cut costs mercilessly on the things they don’t. That’s how we’re able to find hundreds of dollars of savings, because people are like, “I actually would love to travel more to see my grandchildren, but I actually really don’t care about these current things that I’m spending money on every day.” So that really changes their savings and retirement.
What are some common mistakes when it comes to retirement saving plans?
Most people are asking $3 questions and they really need to be asking $30,000 questions. Most people are feeling guilty about spending $3 a day on lattes, but that just doesn’t matter. Buy as many coffees as you want — that’s irrelevant and not going to change your retirement. What really matters is getting the big wins in life: That means that if you’ve got high-interest debt you make a plan to pay it off, and know the exact month it’s going to be paid off. If you’re paying investment fees, you’re probably paying $50,000 to $100,000 too much over a lifetime
Many people are uncomfortable with the idea of taking control of their own money, so they hire a financial advisor. Now there are some very good advisors, but no advisors should charge you a percentage. Many Americans are unknowingly paying thousands of dollars every year in unnecessary fees. There’s no amount of coffees you can buy that’ll add up to that.
