Before we answer this question, ponder to yourself what you think the number one indictor would be for building wealth and having a successful amount in your retirement account(s). There are many answers and logics behind each answer.
Is it the rate of return? 4% vs 12% performance.
Paying the least amount of expenses? Management and custodial fees.
DIY (Doing it yourself)? Personally, researching and investing yourself.
Allocating the correct assets in your portfolio?
While all these have some impact on building wealth, it is not the number one indicator. Finally ready for the answer? It is something so simple but yet so profound. Ready…?
74% of the indication of your ability to retire wealthy is your savings rate! Your income is your most powerful wealth building tool and the more of your income you can save into tax advantaged accounts, the more you’re setting yourself up for a great retirement. The greatest investment strategies in the world, can’t pull you up, if you have a poor savings rate. Think about it this way, a 12% return on $0, is still $0. Therefore, what are ways to increase your savings rate to your retirement accounts?
Pay off all non-mortgage debt
Proverbs 22:7 – The rich rule over the poor and the borrow is slave to the lender. It’s hard to achieve a respectable retirement savings rate, which we would define as 15% of your income, if you’re having to make payments to Mastercard, Discover and Visa. We’d rather collect a dividend from Visa stock than pay Visa interest each month.
Budget, Budget, Budget
Almost every time you begin to budget, you begin to find places you’re over spending and therefore creating opportunities to save and invest more for retirement. Using tools such as Dave Ramsey’s Everydollar Budgeting App, make budgeting easy and fun (keep in mind I am a Financial Advisor!) and allow for changes instantaneously, if things come up that were unexpected or unbudgeted.
Taxes, Taxes, Taxes,
If you’re getting a refund each year, you’re doing it wrong! Giving the government a free loan, each year is not prudent money management. You could be putting that money into your Baby Step 4 and earning stock market type returns on that money, as opposed to letting the government borrow your money for 12 months and paying it back to you once you file your return, with zero interest. Please contact our Tax ELP for tax advice or to ensure you’re withholding at an appropriate level.
Increase your income
There are currently around 11 million job openings in the US. This is a record for the country, which means the economy is still in pretty good shape (you can’t have that kind of job demand in the midst of a bad economy) and it means employers are willing to pay to get employees in the front door. This may be the opportunity for you to make the career change that will enhance your income and create an opportunity for you to do work that matters!
Baby Step 4 Execution
Matching your employers’ contributions in your 401k
If your employer offers a match on 401k contributions, you should contribute whatever they are matching. Let’s say that XYZ company offers a 3% match. You should put in at least 3% of your pay into your 401k. You are doubling your savings rate by obtaining a match. If you can afford to go higher, then go for it, after you have maxed out your Roth IRA! Consider having your Financial Advisor, help you manage your 401(k) to ensure its properly diversified and not chasing returns, within your plan. According to a recent Aon Hewitt study, having an advisor help you with your plan, increased the return by 3.32%
Contribute the maximum amount to a Roth IRA or Traditional IRA
If your employer does not offer a retirement account, then it would be in your best interest to open an IRA (Individual Retirement Account). There are two types of IRAs. Traditional and Roth. Both of these vehicles have a contribution limit of $6,000 per year, with an additional $1,000 per year catch-up contribution for those age 50 and older. As a general rule, you have until Tax Day to make IRA contributions for the prior year. In 2022, that means you can contribute toward your 2021 tax year limit of $6,000 until April 15. And as of Jan. 1, 2022, you can also make contributions toward your 2022 tax year limit until tax day in 2023. So how do these differ from each other?
A traditional IRA is a type of individual retirement account in which individuals can make pre-tax contributions and the investments in the account grow tax-deferred. In retirement, the owner pays income tax on withdrawals from a traditional IRA.
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years.
If you can take away one concept from this article, it is that “Building wealth means nothing if you do not put money way!” -Dave Ramsey
NUMBER ONE INDICATOR OF WEALTH
March 26, 2022
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