How I Plan for Retirement | brokeGIRLrich
Retirement is such a crazy concept. Like, how on earth are we expected to know how much money we will need that far in the future?
And every estimate you’re given regarding how much money you will need seems like a blatantly insane amount of money in your 20s.
What is a brokeGIRL to do?
Personally, I started by using some retirement calculators and while I completely agree some of this feels like rubbing a crystal ball and gazing hopefully into the future, I’m a big fan of the idea that most of the time all we need is a plan to succeed.
And then we just have to do the plan and get it right like… 80% of the time. And maybe not wildly screw it up in that other 20% of the time.
So. To the retirement calculators.
This one from TD Ameritrade is pretty easy to use. Most of the answers are pretty factual though you do have to guess how much you want to spend in retirement. I currently use $70,000 and honestly, I’m not totally sure it’s correct in either direction – maybe it’s a bit too high. Maybe it’s a bit too low. But it seems like a very comfortable number to me. There are plenty of years when I haven’t made nearly that much and I’ve been ok.
It also lets you play around with various factors such as retirement contributions and age of retirement.
When I played with this just now, I set my retirement age to 60, an income goal of $70k and an annual contribution of $9,000 to retirement accounts.
TD Ameritrade essentially laughed at me and told me I’d have a $953,300 shortfall but it told me that if I just wait till 66, I’d be fine. Which is a fairly traditional retirement age.
So evidently that advice to start maxing out my IRA early on was legit and is well on track. With a little extra boost from now maxing out my Health Savings Account most years too.
Alternatively, I could increase my annual retirement contribution to $24,400, which is actually only an additional $15,400 so that’s not insane. That’s actually so not insane, that is pretty much the tuition I’m paying each year now, so if I ever manage to graduate, I could actually be back on track to do that.
Bankrate has a slightly weird calculator that doesn’t include any social security but has a little function that assumes your income will probably increase over time – which is likely true.
Nerdwallet also has a very visually fun calculator that is also easy to use. If you’re keen on multicolored graphs, you might prefer this one.
A key thing I noticed is that trying to span a few years before social security kicks in is like wildly expensive. On every one of these, I have no trouble hitting my goals for retirement as long as I wait till 65 to retire. Anything sooner everything gest iffy.
Of course, there are also ways to mitigate this when the time comes. I could drop down to part time and only need a much smaller portion of money each year since I’d still have some coming in.
I could spend the first few years of retirement in a really low cost of living country.
But for now, I just keep squirreling away money.
I started maxing out a Roth IRA at 25. Currently you can put up to $6,500 a year into an individual IRA, assuming you’ve made at least that much in income.
And I think this is a great starting goal for retirement. I am a Roth sort of human – pay the taxes now and let it all grow tax free, but if you’d rather get the tax benefits, you can open a Traditional IRA too. A lot of studies recently seem to indicate it’s really six in one hand and half dozen in the other for most people in the long run.
And $6,5000 can see like a lot – and is a lot – but it’s a really good initial goal. Just do what you can at first and keep it a priority to reach a point where you are maxing that account out.
Once I max out my IRA each year, I try to also max out my Health Savings Account (HSA). For 2023, the individual limit there is $3,850. HSA’s can take a second to figure out the rules, but they are pretty powerful little accounts and way more accessible to get the money back out of them when you need it during most of your life.
And though it’s rare, once in a while I work somewhere that gives me access to a 401k or 403b. Pretty much if they are offering a match, I aim to contribute to the match and bump this option up to my first retirement saving goal – though I have also worked at places that have no match and, in that case, it becomes my last choice for when I find I still have some extra income that can go towards retirement savings.
To be honest, the idea of having extra income for my retirement savings really wasn’t a thing until into my 30s, but the day did come. It’s not a guaranteed every year thing, but it’s good to have a plan for when you find yourself in that position.
For years when I don’t have access to a 401k or 403b, I do also have a SEP 401k, which stands for self-employed 401k. The paperwork on these things is kind of a nightmare, so I don’t recommend bothering with it at all until you can max out an IRA and HSA, but you may do some research and find other opinions. The tax benefits for claiming deductions can be quite substantial here.
And for a little while before sorting out the SEP 401k, if I had anything extra, I just popped it into a brokerage account, which is sort of tentatively earmarked for either retirement or buying a home.
Those little steps over and over again for years seem to be working in regards to creeping me toward my retirement goals. Maybe in my 40s and 50s I’ll be able to supercharge them a bit and escape the rat race a little earlier than planned.
