How My Wife and I Were Able to Start Maxing out Our Retirement
- October 7, 2019
- by Michael
Here’s how my wife and I got to a place where we could max out our annual retirement contributions. By doing so we gave ourselves a nice raise in the form of a tax cut.
Consider deferring $38,000k per year, at a 40% tax rate. That avoids having to pay $15,200 per year in taxes! Over 20 years that really adds up. Not to mention those contributions grow tax free.
There is a financial tipping point in life that allows this:
- You must be earning enough income.
- Yet in spite of #1 you must be frugal enough to allow yourself to max out your retirement contributions (or at least be able to prioritize your retirement over your next big purchase).
- You should be comfortable investing in paper assets like stocks, bonds, mutual funds and EFTs.
- You should know the mechanics of how tax deferred retirement contributions work.
Doing so is a big swing in terms of future net worth. Saving $38,000k per year for 20 years at 6% interest comes out to $1.4M! But, if you consider earning $120k per year for 20 years, deferring $38k per year vs deferring zero leads to a difference of $560k - try it in this simulation by editing and unchecking the ‘defer’ box under the income line.
The Essentials are Financial Compatibility, Hard Work, and Delaying Gratification:
We believe in the idea of “getting rich slowly”, and that is exactly what we are doing. Thankfully we have always been on the same page in terms of budgeting throughout or marriage. I'm very grateful that we are both of a frugal mindset.
Currently our modest net worth is positioned well in the market (50% stocks 50% bonds). According to the Nest Egg Saving and Investment Calculator, we can afford to reduce our risk by putting more into bonds, which is a nice place to be. It took us years of hard work to get into a position to even have the choice of doing this. Our parents are still figuring out their own retirement.
In terms of our education and our home, we had to do it on our own. We had to work hard from the start and we knew that going into the marriage. There will be no large gifts or windfalls coming from our parents.
To be fair, we are not ‘rich’ by any means… we don’t drive fancy cars or wear expensive watches. In fact, I'd rather not do that and become a target. Looking rich and being rich are differently things. My first new car wasn’t until 2012 when I was in my mid / late 30’s!
In spite of our accomplishments there is still a lot of risk on our plates. If one of us becomes disabled that would be a major setback requiring some hard decisions. There is also the possibility of another great depression which would make a lot of our hard work moot.
If we assume a 5% real rate of return we will have a comfortable retirement. Depending on what the market does we may end up leaving a lot of money to our children. If things continue to go well, we should be able to retire early or purse career opportunities for reasons other than just the money. Bosses come and go, some are good, some are terrible, and it will be nice to have more control over our work environment.
What our financial life looked like in the early years of our marriage:
- We opened a savings account at our bank and setup an automatic contribution every paycheck to start building an emergency fund / down payment for a home.
- We always paid down our credit cards first, drove used cars, and kept consumption to a minimum. We had fun, ate out a lot, went on trips (mostly nearby), but saving money was a core value for us both.
- After we had enough of a down payment, we bought our first home and started to rebuild our emergency fund (six months of living). That was a risky time!
- Once our emergency fund was re-established, then we started thinking about getting aggressive with some kind of investment, a rental, or possibly retirement contributions. There was a lot to learn about finances at that phase of our lives. In the end we decided to play it safe. First we prioritized paying down our mortgage. Then we started contributing to our retirement accounts. As for a rental we are staying away from that for now. In hindsight it would have been better to invest in the market from the beginning and simply refinance to take advance of the low rates at the time. But from an emotional standpoint paying down the mortgage was worth more than the chance of ‘gambling’ it and getting a higher return in the stock market.
As the years rolled on we realized we could take greater and greater advantage of retirement savings vehicles and this has driven up our net savings considerably. We had been paying way too much in taxes and interest (especially interest on our home).
How we decided to prioritize our money:
- Always pay off credit cards each month and pay down the highest interest debt first. This we were always good at, but it is worth mentioning in any financial strategy - credit card debt sabotages everything else.
- Max out any employer match in retirement plan at work – this is free money, so might as well take it.
- Save up an emergency fund (6 months of expenses). With this in place we could avoid needing to take on credit card debit in an emergency. It also gave us more flexibility in our career choices since we could afford to take more risks.
- Stay in perfect standing with our credit cards and student loans. With good credit, if we needed a loan we could get one easily at a great rate. This came in very hand when it came time to buy a house, and a new car - at the time we got 0%.
- Save up down payment for home. Home ownership has been a time consuming money spending operation, and it isn’t for everyone. We did it for the location, proximity to schools and nearby job opportunities. With recent real estate tax increases and repairs, we are certainly paying for the privilege. Even with the recent real estate boom in our area the aggregate compound return on our house is something like 2.5% which is barely keeping up with inflation.
- Consolidate debt such that it is a tax write off (interest on a home loan can be tax deductible, but interest on a car or student loan is not).
- Pay down mortgage and student loan debt or at least get a handle on it with a reasonable, mutually agreed upon goal.
- Begin contributing to retirement accounts in an automated way.
The last four - getting a home, consolidating debt, paying off debt completely, and contributing to retirement are a very personal and highly emotional thing to prioritize. The list above is the order we did it in. I’m very emotional about debt as it was a source of argument between my parents. I wanted it out of my life and out of my marriage, so I attacked it by working crazy hours, nearly burning myself out, and sticking to older cars. Please don’t be stupid and in a hurry like me and burn yourself out over what amounts to figures in a spreadsheet. If I could do it again I’d go easier on myself, let time unfold, and balance it out more.
Our path attempted to minimize both taxes owed and interest paid to banks. Some people really like to avoid paying interest and taxes. I’m one of those people. However, others are more comfortable gracefully paying down debt and making allowances for life experiences, vacations, and nicer stuff. There is no right or wrong, and it really depends on what feels best to you personally.
Hope this info helps! Please check our our financial calculators and other resources. Wealth Meta is here to help you master your finances. I love being a part of the team and look forward to contributing more posts!