Are you a super saver? If so, you may feel like you are doing a lot of the right things to save for retirement, but you are not sure where to go next.
Check out our Youtube channel for a short video recap: https://www.youtube.com/channel/UCw9vXJ3JyO-pHEcQ1p9O-Lw
In this episode of Financial Symmetry, we explore the different ways to save for retirement outside of your 401K. You’ll learn what each type of account is used for, how you should save in each one, when is the best time to save, and how to withdraw. Let’s explore the various ways that you can save for retirement.
If you have been maxing out your 401K, you are ready to move onto the next step in retirement savings, but with so many different types of accounts to choose from, it can be hard to know which one to choose. All you have to do is learn about them to choose from the different investment vehicles. To make the various types of accounts more memorable, we are equating these investment vehicles to actual vehicles. Listen in to hear how to use the right set of wheels to drive you to retirement.
The health savings account can be compared to a Jeep Wrangler. Like the Jeep Wrangler, the health savings account has a specific purpose, but it also has added benefits. The purpose of a health savings account is to be used for medical expenses, however, it also has a triple tax advantage. You must be enrolled in a high deductible health insurance plan to qualify for a health savings account, but if you can use one, this is a fantastic way to save and invest for future healthcare expenses.
The backdoor Roth is the Rolls Royce of retirement savings. Like the Rolls Royce, the backdoor Roth is unique and specifically designed for high-income earners. A regular Roth IRA maxes out at $6000 per year. With the Roth and the backdoor Roth, you will save so much in taxes that it will offset any fees that you incur.
The mega backdoor Roth can be compared to the Koenigsegg Gemera. Similar to the Koenigsegg Gemera, you may not have heard of the mega backdoor Roth. You’ll need to buckle up to drive both of these vehicles because the mega backdoor Roth will turbocharge your retirement savings. The mega backdoor Roth allows you to contribute an extra $35,000 in a Roth. You won’t see any tax savings upfront, but you will see it in retirement since this is a tax-deferred account. This account will provide a huge impact on your long-term saving for retirement. If you want to take your savings to the next level, check out the mega backdoor Roth.
Many people don’t even consider this account a retirement savings account, but like the trusty Honda Accord, a common brokerage account can be just as dependable. You can use a brokerage account like a super-charged savings account. Yes, there are more tax-efficient accounts, but the benefit of a brokerage account is that there are no restrictions which gives you more flexibility. If you feel restricted by the other retirement accounts, you may want to consider saving for retirement in a brokerage account.
You won’t want to miss our last comparison, the DeLorean. Listen in to hear which type of account we compared to this unique car.
Which investment vehicle sounds right for you?
Recent headlines have people thinking more about investing for inflation.
Video Recap: https://youtu.be/50PlOwAM4OM
It's the most recent economic worry, but there's always something to scare or concern investors. Think about the last 16 months. We've had:
Now it's inflation. But it's a good reminder that listening to the media can be expensive.
In this week's episode, we are breaking down how to think about and prepare for inflation as it relates to your investment strategy.
What is inflation?
Increases in prices over time. For example, a gallon of milk cost ~$0.26 in 1926 and has increased to ~$3.00 today. Since 1926, inflation has averaged ~3% per year.
On the other hand, deflation is when prices decline over time. These periods are generally driven by economic downturns such as the depression in the late 1920’s/early 1930’s or a brief period during the financial crisis. While the media can make the threat of inflation sound scary, it is a normal part of time passing.
Hyperinflation, however, can be very damaging. While regular inflation has averaged ~3%/yr, hyperinflation is when prices spike very quickly and at much higher rates. For example, Germany in the early 1920’s and more recently, cases in Venezuela and Zimbabwe.
Hyperinflation it typically driven by two primary causes: Government debt in another currency (Germany after WW1) and supply chain shocks (no access to necessary products).
We are not concerned about hyperinflation today.
The last twelve months ending April 30th, 2021 saw an annualized inflation rate of 4.2% after averaging 1-2% over the last 10 years. This is the largest jump in inflation since September 2008.
It is important to keep in mind, however, that these numbers were coming off March/April 2020 lows where inflation declined due to lack of demand for products and services – driven by the COVID crisis.
Transitory increases are those that are shorter-term or temporary. These have been driven by stimulus checks and government support from the $1.9 trillion American Rescue Plan passed in March 2021.
Permanent increases on the other hand are those in which prices are expected to increase materially year over year. Today, this can be seen somewhat in the Real estate markets.
It is too early to tell which route it will take, but keep in mind that the Federal Reserve wants some inflation as that is their mandate and is healthy for the market. If inflation begins to rise too quickly, they can always raise interest rates to slow down the economy.
Inflation is good for stocks and real estate over the long-term. Companies can raise prices leading to higher gross sales and companies have claims on their real assets (buildings, plant, land, equipment, etc.).
Since 1926, US Large/Small cap stock returns have outpaced inflation by ~7% and 9%, respectively. During that same time period, cash and bonds have barely exceeded inflation.
While cash can feel like a safer option in the short-term, over long periods of time, you can lose purchasing power. For example, if inflation averages 3%/yr while your cash holdings earn 1% or bonds earn 2%, you are losing purchasing power.
Although we can speculate, we don’t know whether we’ll have material or stable inflation over the next decade. Rather than being driven to change strategies based on short term media noise, we recommend sticking to your investment plan and maintain a diversified portfolio constructed based on your capacity and tolerance for risk.