Everything you ever wanted to know about retirement

[Fllwoman]

Retirement can be defined as achieving financial independence. It is the stage in life when one chooses to leave the work force and live off sources of income or savings that do not require active work. The age at which a person retires, their lifestyle during retirement, and the way they fund that lifestyle, will vary from one person to the next, depending on individual preferences and financial planning.

Retirement is actually a relatively new concept, as a little over a century ago, people regularly worked until they died (life expectancy was much lower and there was no such thing as a pension plan / 401k / social security. (Please note this will be US focused as I’m not knowledgeable enough about how retirement works in other countries.)

For the majority of people, this flowchart will get you on the financial independence path:

If you made it to the green section in the flowchart, congratulations! You finally have enough money to start investing (outside of a 401k).

There are two types of IRA: the traditional IRA and the Roth IRA. Though their goals are similar, traditional and Roth IRAs differ in some key ways.

The traditional IRA allows you to contribute a portion of pre-tax dollars. That reduces your taxable income for the year while setting aside the money for retirement. The taxes will be due as you withdraw the money. The Roth IRA allows you to contribute post-tax dollars. There are no immediate tax savings, but once you retire, the amount you paid in and the money it earns are tax-free.

If you withdraw money from a traditional IRA before age 59½, you’ll pay taxes and a 10% early withdrawal penalty. You can avoid the penalty (but not the taxes) in some specialized circumstances like when you use the money to pay for qualified first-time homebuyer expenses (up to $10,000) or qualified higher education expenses.

Unlike a traditional IRA, you can withdraw sums equivalent to your Roth IRA contributions penalty- and tax-free before the due date of your tax return, for any reason, even before age 59½.

Here’s a chart for visual learners (the numbers in the chart are $6,500 for the contribution limits in 2023):

Using myself as an example, I want to retire at 52. As my retirement funds aren’t accessible without penalty until a number of years later, I spend a lot of time focusing on growing my taxable brokerage account and my Roth IRA.

I tend to lean toward long term holds in the taxable account so they grow until I need them, so it tends to be heavy VGT, MGK, and VO, and a LOT of individual stocks that I bought at a low cost basis (XOM, MCK, MAR, MSFT) and a few deep in the red that I believe in (PLTR, SAVA). I also sell CSPs for either AAPL or TSLA in my Roth and if assigned wheel them.

I’d like this to be a discussion, so please feel free to share how you’re funding your retirement.

[HankPym]

Perfect primer on this discussion @Fllwoman!

It’s important, and I don’t think we can say this enough, that you must take care of your needs and the needs of those whom you are or will be responsible for first, then (and only then) is the kind of self-managed investing we discuss really an option.

Spend all your focus and energy on doing the flow chart steps you’re at (see @Fllwoman’s original post above) . If you’re early on that chart, get yourself out of whatever holes you might be, whether it’s experience, education, poor past decisions, lack of opportunity, or whatever. I have a good friend who walked with his family almost two thousand miles to give himself and his family opportunity to better their lives that they would not have any other way. No excuses, just get to work and do it. And then, once you are at the point where trading is an option (and if you still want to self-manage that aspect of retirement), come back here and spend the time and energy on learning this stuff. We’ll still be here. There’s no fomo. Here’s another (more classic) way of looking at this:

Start with the bottom. Take care of things in their proper order and you’ll be able to address all of this in time.

So before we start talking about how to invest for retirement, I’d like everyone to think about what their ideal retirement will look like. Answer the “why retirement?” question for yourself. As @Fllwoman said, she’s looking at a very specific date for retirement and I’m sure she has a good picture of what that 52yr old version of herself will be doing with her time and energy. While we all have preconceived ideas (and should), the actual reality of what the retired version of ourself morphs over time. Personally, I’m not sure I will ever truly retire, and this is something I learned over the course of 20+ years of running my own company. I love to work. I love to be engaged with helping people succeed. I know what I’m good at and where I find value in myself, and a good chunk of all of that is in workplace interactions. Understand that what we’re really discussing is financial independence and the freedom to not NEED to work in order to be happy and fulfilled. What that looks like will be different for each of us. The only one whose retirement planning you need to worry about being in sync with is your own.

For me, I don’t need to be running my own company anymore to obtain what I need to be fulfilled, nor do I need the responsibility that goes along with it. This is a more recent revelation for me. I can obtain my value from doing less and spend more time and energy on other aspects of my life that I also love, so I’ve shifted my plans accordingly. Don’t fret that you’ll need/want to do this (probably more than once). Change can be exciting and I’ve found most of life’s fulfilment comes when we make ourselves uncomfortable and start doing things we’re not already good at or used to.

Looking forward to getting into some meat and potato discussions on retirement, but we really do need to be in the right place and mindset when we’re making these decisions or we end up in the wrong place, with someone else’s retirement plans, and still feeling unfulfilled.

[DankeDeNada]

@Fllwoman

I absolutely love this flowchart and generally agree with all steps. I like how your “stuck” at a step until you can clear that step and move on to the next. Two callouts I would make:

• Instead of paying minimum balance, pay off your credit card debt in full each month. I think this step could be misinterpreted if your charging unnecessary expenses here in the first section. Make sure your not charging excessive entertainment expenses if you still have high interest debt and no emergency fund established.
• Maximize your Roth IRA. Are they implying to setup a Roth FIRST? Before a traditional? @Fllwoman perhaps you can clarify to folks on which you setup first? Based on the steps it also implies maxing out your 401k match first, so if your employer offers a 401k but no match perhaps there’s some finagling to the steps to maximize your retiring opportunities with these different types of retiring “vehicles”.

All in all great stuff and I love how we’re shading light on an area that’s oftentimes overlooked or misunderstood l.

[Ranger_Oz]

I know you were addressing Fllwoman, but I have a decent amount of experience in these two departments and have helped many people boost their credit scores and successfully utilize their retirement plans:

1. The only time you should be paying the minimum balance on your credit cards is if you are in a tough spot and trying to avoid making it worse/buying time to pay off/down the debt. Ideally, to maximize your credit card usage and really capitalize on any bonuses/perks/rewards, you should use your credit cards as if they were your debit card and NEVER spend more than you can immediately make a payment for.

Example: you have a card that gives you bonus points groceries, use that card to buy groceries and then make a payment BEFORE you start paying interest on that purchase (usually before the end of the month/bill cycle for most cards) and cover those costs. Now your earning points for something you needed anyway.

If you’re trying to build up your credit score, however, you do want to maintain a 1-3% balance month to month, as this will check off the “utilization” box for all major credit entities, including the reporting bureaus. Paying it down to 0% is not a BAD thing, but it will be slower in boosting your credit score than that 1-3%. And it’s important to know you also want to pay this off the following month AFTER it’s reported to avoid paying much/any interest.

The biggest mistake people make is using their cards as an extra bank account and “paying over time.” Don’t get me wrong, in an emergency it can come in handy if you don’t have the cash, but ultimately the idea is for the credit card to “pay you” not for you to pay the card company. Happy to go over this in more detail or answer any questions on “credit hacks”

2. I’m not sure the idea is to setup a Roth IRA first instead of a Traditional account, but a lot of this also depends on how your job has their employee benefits setup, unless you are doing this by your own accord which I don’t usually recommend unless you have the disposable income already generating, along the lines of what @HankPym mentioned in his post showing the “hierarchy of needs.”

If your company offers matching on both types of accounts, like it shows in the flow chart @Fllwoman posted, maximize at whatever the full company match requirement is, and not a penny more until/unless you can afford it or you are closer to retirement. Personally, if you have to choose, I guess do the Roth first. Although you should do both if you can, in the event that you need to withdraw early for some reason (life event, emergency, etc.) you will see much more of your balance from a Roth vs Traditional due to the taxes. Where possible, however, if you need a large sum of money from your account but not all of it, look into loan options with the institution holding your account. Many offer it and usually it’s in a way that allows you to essentially pay yourself back, since the money comes out of your own account balance. Be sure to research this prior to doing it however, since there are companies that charge interest or have policies that will hinder your account growth by doing this (MMV warning - Mileage May Vary). Happy to discuss this in further detail as well

If your employer does NOT offer matching options, find a new employer…

But seriously, make sure your needs are met first. Take some time, sit down, and write out your expenses. Just go through your last two months of bank statements and see what you NEED to spend monthly and where you can cut on things you WANT. Repurpose those funds to growing your funds. But, I think this is kinda getting into another topic outside of just retirement and just kinda diving into everyday budgeting so I’ll end it here!

[Fllwoman]

I 100% agree that people should pay their credit card balance in full each month. However, I get the sense on the TF that there are people that are trading and have credit card debt that is not paid off in full each month. Their focus should be on getting out of debt (other than long term lower interest debt like mortgage and/or student loans) so they have disposable income for trading purposes.

When considering a Roth versus a traditional IRA - it all depends on your plans. If you dream of retiring before the traditional retirement age, a Roth IRA provides more flexibility. Those retired prior to age 59 ½ can withdraw previous Roth contributions and Roth conversions aged at least 5 years at any time tax and penalty free for any reason, unlike a traditional IRA. One way to get around the tax and penalties is is taking 72(t) payments. The idea is that if the taxpayer takes a “series of substantially equal periodic payments” they can avoid the penalty.

72(t) payments must be taken annually. Further, they must last for the longer of (a) 5 years or (b) the time until the taxpayer turns age 59 ½. This creates years of locked-in taxable income. (Here’s a good article about 72(t), it’s not commonly used, but is an option for early retirees. 72(t) Series of Substantially Equal Periodic Payments Update – The FI Tax Guy

To your 401k question - if there is no employer match, employees should be screaming at HR to get a match. Nevertheless, I would still recommend contributing because it lowers your tax basis for the year and it allows you to contribute substantially more than an IRA ($22,500 vs. $6k). It’s also scary how little people have saved for retirement, so any amount is better than nothing.

[puttytangnutbags]

As far as traditional and Roth 401ks go, I have both through my employer and always have. I do this because you get a match on both, or at least I always have. So say your employer matches 25% of up to 5% of your pay, enrolling in both Roth and traditional 401k means you will be putting away 10% of your pay with a 25% match instead of just 5% with a 25% match

[Ranger_Oz]

That’s a great example! Be sure to check that the percents are indeed combined. My job, for example, did a 6% match. That was a combined percentage though, so whether I was contributing 3% to my ROTH and 3% to my traditional, or all 6% into one or the other, they would match that. It confused many people, as they thought they would get a match of 6% into EACH, but it was 6% TOTAL. Very minor verbiage change in the fine print and it made all the difference!

[puttytangnutbags]

Good point, read the policy and ask questions. I’ve only had 2 employers and guess I got lucky because both gave a match of 5% pay on both 401ks.

[HankPym]

Getting back to actual investment vehicles and how to manage those in a retirement account, here are a few ideas I use as a basis to investing long-term:

1. Just like shorter term trading, have an overall market thesis from which you are going to make individual trading decisions from. Are we moving into a deep recession or soft-landing? Do we have sector rotation, and if so, which sectors are we rotating from and which to?
2. Invest initially in some mutual funds and etfs that directly support your overall market thesis. See how they perform while you take time to move down this list further.
3. Identify companies you believe in and have a passion for following. Try to figure out WHY you are drawn to those companies and use what you learn to grow this list. How do they fit into your thesis?
4. Do some actual dd and figure out if those companies identified are valued properly by the markets according to your research and market thesis timeline. Identify the companies into groups of overvalued/undervalued/correctly valued and adjust this as you continue to watch/trade them.
5. In addition to all your other research, you NEED to identify well-paying dividend stocks that fit into your long-term goals (preferably ones you already identified as companies you’re passionate about). Earmark these for special consideration, as they are good to purchase most of the time whether they are going to go down in value or up (as long as they eventually go back up within the thesis timeline…). The only time I avoid buying more on these is right before ex-div or I find them significantly overvalued and risky.
6. If a stock you want to invest in falls into the under valued category (low hanging fruit), determine WHY they are there. Begin trading them accordingly with initial seed positions if it appears the the reason isn’t likely to become systemic.
7. Slowly rotate those fund/etf positions over to the specific stocks that you now wish to trade/own. In a perfect world, this would be early/mid-sector rotation and you’d be rotating from losing sectors to winning ones, but we don’t choose the when and starting each of these steps is always better now rather than later. Also, it’s always a good idea to keep some funds in these mutual funds/etfs so you are a little more buffered from being wrong.
8. Understand that you are focused on increasing your overall account value over very long periods of time. Cost basis and decreasing it as much as possible is still of value, but mostly you want to focus on increasing your holding size of the companies you value. So don’t be sad if the positions come down; be ready to buy more!
9. Remember that trading from a retirement account isn’t like our normal day trading accounts, and you won’t be doing many (if any) scalps. Use longer term options or (preferably) shares. Protect your investments first and grow it second.
10. Do not get out of positions you believe in. The only occasions it’s okay to take profit is if your thesis supports a better buy-in opportunity in the near term and you need the capital from the shares to make that happen (I still don’t recommend this one). But never get all the way out unless your long-term goals for that company have been met and you don’t intend to go back in, or your thesis is truly broken and you need to reassess.
11. Diversify the hell out of your portfolio. Start researching sectors you are less passionate about and you will find new trading opportunities.

I’ve been doing this retirement formula for over 20 years in varying amounts of involvement. I have almost always beaten the market or the accounts I didn’t self-manage.

I do like to use my day trading to inform my retirement trading, and vice versa. If I take a day trade long position in JPM because I think the banking crisis is near it’s end and am looking for a quick flip, I’ll also be looking to grab leaps or shares of the same in my retirement accounts for the same reasons. Likewise, if I was expecting NVDA to drop due to having finished what I expected it to do and now being significantly overvalued and near incredible long-term resistance, I’d deleverage my retirement position and then switch accounts and look for short term put plays to day trade. You trade both very differently, but they can always be helpful in informing your decisions for each.

[DonDegenerate]

All great stuff here.

I wanted to share my experience trying to time the market and why you should not do it. I am 100% long equities in my retirement accounts and will remain that way until I’m within a few years of needing the funds. Why? Because to time the market correctly, you have to be right twice: when you sell and when you buy back in. I dumped equities in early February 2020, but didn’t fully buy back in until October 2020. I missed out on large fed-endorsed money printed gains that would’ve compounded over time. Don’t make the same mistake. Make a plan and stick to it.

Here’s two charts on why passive investing works:

Missing out on just a few critical days will cost you big time.

If you’re trading regularly, keep your positions small and only trade with what you can afford to lose!

And, a quick note on 457(b) plans. There’s two types: governmental and non-governmental. Governmental 457s rock: they reduce your tax going in and can be withdrawn tax-free upon separation from employment or retirement. Non-governmental 457s have more restrictive withdrawal rules that can vary, so make sure you understand them. Non-governmental 457s may also be subject to the claims of your employer’s creditors.