Episode 1: How to Save $80K for Retirement In One Year

Acquania Escarne 0:04

You are listening to The Purpose of Money Podcast, a podcast where we talk about ways to build wealth and create more freedom in your life today. I am your host Acquania Escarne.

Hey guys, welcome to The Purpose of Money Podcast. This is Episode One, How I Saved Over 80k for Retirement in 2019. I'm so excited to have the opportunity to talk to you today about how to use your retirement plan to create freedom for your future self. Most of you are joining me for the first time because I'm launching this podcast January 22 2020. I'm so excited to be able to use this platform as an opportunity to talk to you about ways to break free from the golden handcuffs. I'll feature different stories about my life and how I created more freedom for myself. But I'll also feature stories from women who are creating financial freedom in their life as well. And doing so through entrepreneurship, saving, investing, and more. My goal is to really provide you with resources and techniques that you can apply to your own life so that you can find freedom, not just now, but also 20 years from now, or whenever you decide to retire or pursue another career. So without further ado, let's talk about retirement.

When it comes to freedom for your future self, you need to be saving today. That's the whole point in retirement plans. And the best way to save for your future is to take advantage of what your job may already be offering. If you have an employer that offers you a retirement account and you qualify to invest because you're either worked enough hours, you've been there long enough to qualify for all the employee benefits or you're a new hire and they let you start saving right away, I encourage you to take advantage of your employer's retirement plan. The best way to figure out if your plan is worth using, is to look at what it offers. Does your employer offer any matching funds? That's essentially free money that your employer puts in your retirement account for you to enjoy later. So if you qualify, maybe now, or a few months from now, when you get off probation from your job, I strongly consider you to look into your retirement plan and figure out how you can invest today and maximize your retirement income in the future. My job, for example, lets you invest from day one in a retirement account where they offer you 5% free money aka matching funds, if you invest at least 5% in your own plan. And I think it's really important that you take advantage of any free money that your employer gives you. It's essentially the same as picking up free money on the ground. So when it comes to my retirement account, I take advantage of every percentage that my job is willing to offer and then when I decide to retire I'll enjoy those free bucks and mine.

The first thing you need to do in order to really provide for your future is to invest. I know it seems simple, but you could be surprised. There are a lot of people who are not investing in their own retirement accounts. And they're also not taking advantage of the free money. I've chosen to invest money in my retirement account every single paycheck. So that means every time I get paid, I'm putting money into my retirement account. I am paying myself first, which is rule one when it comes to personal finance, always find a way to pay yourself first. So I don't even see the dollars that are going into my retirement account. When I see the paycheck hit the bank, so I don't miss the money. Everything else that I spend from my day to day and my expenses is after I've saved for retirement. When I first started at my job, I actually was only investing the minimum you needed to invest to get the free money. Like I said, my job offers 5% and matching funds in exchange for me contributing 5% of my base salary. So when I started my job, I was only putting in 5%. Now I know you might be wondering, why is that? And truth be told, it was because I told myself, I needed the money in my bank account more than I needed it for retirement. I had gotten out of grad school and I wanted to take advantage of having a real job. I wanted to pay down student loans, I wanted to save, and I wanted to do a lot of things with my money now that I had a paycheck. But truth be told, I really didn't need all that money to be in my bank account. And I was about to be married in a few months. My husband and I were living in his condo that he already had bought, and he had the income to pay for. And we had no children at the time. So honestly, I wasn't going to miss the money. And I wish I had chosen to max out my retirement account early, but it took me a few years to realize that. But I'm glad to say that now, I've been able to max out my retirement contributions for at least the last four years. So what does max out mean? For those that don't know, the IRS sets limits on how much you can contribute to your retirement account each year. And in 2019, the max was $19,000. But in 2020, they actually increased that amount to $19,500. So if you have the income, and you can afford it, max out, especially if you're getting any free money from your employer as well. Last year, I was able to put $19,000 into my retirement account and get the 5% from my employer, and a couple of other things too. So I'm going to go into that, once we get deeper into our discussion. I made sure before I started to max out that my family could afford it. But it took me a long time to really buckle up and invest. I knew that I'd be a better person by investing more in my retirement account, versus having the money sitting in our checking or savings account. So I progressively increased my contributions so that I could get comfortable with the idea of investing as much as I wanted to. It was a challenge at first, just realizing that that money would not be in my hands and would be safe for my future self, but something that I had to actually adopt in my mindset and get used to. So I'm going to be honest guys, I didn't completely go all in in the beginning. What I tried to do, however, is double my contributions. One year, I decided I'm going to do twice as much as I did per paycheck last year. And then eventually I realized, "Hey, we can still get the groceries, go on the trips, we want, have all the things we need and still have money for me to invest more in retirement. I think I need to invest more." And that's exactly what I did. I pushed myself to contribute more and more until eventually I maxed out. And by the end of the year, I realized we were able to make a huge difference in our retirement savings without causing a huge burden to our families' finances. And I asked myself, :Why wasn't I doing this all along?" So guys, my first tip is try it. If you really want to save more for retirement, push yourself, challenge yourself to save 1% more than you did last year. And if you think you can save even more than that, increase your contributions and see how it goes. You might find that you can increase your contributions and not miss the money at all. And then you'll really be going on high speed to saving as much as you can towards retirement. The main point is that you shouldn't be investing more than you can afford. And it shouldn't be stressing you or your finances. So make sure you're taking a good view of how things are going after you've made your ncreases and make sure that you can still pay all your bills.

This is the first year that I've really been able to see the benefits of maxing out my retirement account and the result of the gains and how much I've been able to see my money double faster than I ever thought possible. I really learned this year, that money makes money. And the more money you have invested in the market, the more potential you have to make money from the market. It's not a guarantee. But of all the types of investments you have, the stock market has proven to show that over time, it will rebound and it will correct itself and potentially give you a 10% return on average. But in my case, I've actually been able to double my money faster from when I first started, because I've increased my contributions. It took me five years to save $100,000. I was putting in the minimums and I wasn't really pushing myself until the end of that five year period. But when I realized my money was able to double in about three years after that, then I said to myself, "Wow, what would happen if I put more? What if I maxed out?" And that's when I found that in 2019, my money is about to double again. And it's been less than three years.

So, lesson number two, invest money to make money, keep paying attention to your gains, and watch your money grow. I made a sacrifice to invest more money than I did in previous years. And now I'm finally seeing the results. I'm starting to have even more fun investing for my future self.

Hey, guys, I hope you're enjoying the episode I just wanted to take a break to share with you one quick tip on how I am creating more free time in my life today. I'm a busy mom, entrepreneur, and a nine to five employee. And I have to be honest, I used to use trips to the grocery store as an opportunity to relax and go up every aisle and take my time and sort of have "Mommy Me Time." But since I've taken on more responsibility and extracurricular activities, I just don't have the time trying to go grocery shopping anymore. So I've embraced Instacart, which has helped me save hours of my life and get the grocery shopping done without me having to step into a store. Instacart delivers groceries from your nearby grocery stores right to your home, and saves you hours on shopping. You literally can do everything online or even from your mobile phone. And most of the time, they can deliver the groceries within an hour. So you get the food that you need. You save time, and you create more freedom for you to do other things, which is what I love. Checkout Instacart for yourself, I have a code that allows you to earn $10 off and a free grocery delivery on your first purchase. My code is ESCARNE14C or check out the shownotes where I have a special link now include the code there too, just for you. Hope you try it out. And let me know what you think.

Now, let me break down the numbers so you understand exactly how I was able to save over $80,000. In 2019, I made $83,000 in gains that basically breaks down to this. I was able to make $30,000 in contributions or additions to my account. But that wasn't all money from me. Because remember I said the max the IRS allowed me to contribute was $19,000 for 2019. So I'm sure you're wondering where'd that money come from? Well 5% came from my job. I earned over $6600 in matching funds from my employer, simply because I invested in my own retirement account. And then I have some money that came from another source, which I'm going to dive into right now. $5300 of those contributions actually came from me paying myself back for a loan that I took out in 2016. So I admitted in the beginning that I'm going to share with you my money success and my money mistakes. I honestly believe taking a loan out in 2016 from our retirement account is one of my money mistakes, but I'm going to explain to you why I did it, what impacted my decision, and what that looks like now.

So in 2019, my husband and I decided to purchase a home together. We had properties that we had purchased separately, but we wanted to get a home for our family with each other. And I had the option to use cash, $20,000 cash towards the down payment or take a loan out of my retirement account so that I could hold on to my cash and have some liquid savings. And then I also use some money from my investments and some other cash that we had on hand. I took the $20,000 dollar loan, because I wanted to have money or cash, just in case of an emergency. Something comes up, you want to be prepared. And I knew purchasing a home comes with responsibility and expenses that you may not be prepared for. So I wanted to make sure my family had the income set aside to cover whatever may happen. So I chose to borrow from my retirement account. Because at the time the interest rate for borrowing the money was extremely low. It was less than 2%. And I knew that liquid savings was just as important as well. And I just didn't want to use all my cash to buy a home. So this was money I had access to. This is money that was costing me a very low interest rate to use. So at the time, I thought it was a good idea. But by taking the $20,000 out of my retirement account, I also was not able to make any gains on that money while I had it in my possession and put it into my home. But ever since the first paycheck from taking a loan, I've been paying myself back that money. So last year, $5300 was actually me paying myself back.

Now I know this title is how I made $80,000. So I'm sure you're wondering if I only talked about 30, where does that other 50 come from? Well, the other 50K is my gains on paper and I want to explain what that means. So basically, the stock market did really well last year, at least in my retirement account. And the funds that I'm invested in, performed well in the market. So the shares increased in value, which increased their value and my retirement portfolio. Gains on paper essentially means that at this moment, the $50,000 is there. If I was to go into my retirement account for any reason, and I wanted to tap into that money, it is available. However, as the market fluctuates, which we know it does, the value of those shares can also change and so it's possible they'll go higher than $50,00 in 2020 or they can go lower, depending on performance of the market. That's why I say they're gains on paper, but they are there. And if the market continues to do as well as it did last year and continues to increase, then I can expect to see that money in retirement.

In my particular situation, I've made a conscious effort to repay myself for the loan that I took out in 2016. But I want to talk a little bit more about why you should avoid taking loans from your retirement account. For one thing, your retirement account is supposed to be money that you use later, and not now and you want it to be there for you when you retire. So that's one good reason not to take any money from your retirement account. But another reason is because it can come with some hefty tax penalties. In the event, you take money out and you're not able to pay it back. For example, if I took out the $20,000, and then the very next day, stopped going to my job or decided to quit, I could be held responsible for paying that money back right away. I would have had to either write a check to put it back into my retirement account, or I would have faced at least a 10% penalty of what I took out so that's $2,000. Plus, the money would have been taxed at whatever my current tax rate is. So if you're currently being taxed at 30%, for example, because of your tax bracket, then taking money out of your retirement account means you'll pay a 10% penalty, plus the money you take out will be taxed at 30%, just like it was income. Those are things you definitely want to avoid, since the whole point in saving for retirement is to save for your future self. For a lot of people, saving for retirement also comes with some really nice tax benefits too. For example, if you're putting money into your retirement account before you pay taxes on that money, you're also lowering your taxable income, which works out for you and for your employer because they get a tax break too. But if you're lucky like me, you might have the option to invest in your retirement account after taxes as well. At my job, we call this our Roth Option. It's named after Roth, the same person who they named the Roth Individual Retirement Account after. And it has the same perks, which is I get to put money in after taxes today and withdraw tax free later, but they're not actually the same thing. But some employers do have Roth Options, which means you can invest money after taxes and take the money out tax free in retirement. This is a really important benefit, because we don't really know the future of taxes, a lot of us think that taxes are going to be higher, but some people think they're going to be lower in retirement, because they assume that in retirement, you're going to be at a lower income bracket. But the truth is, none of us have a crystal ball. And we actually don't know if the taxes are going to be higher or lower. It's really going to depend on the President and Congress at the time and what they decide to do. But I've taken the mindset that at this point, we're probably going to need more money to support Social Security, public goods, services, education, roads, and all the things that our tax dollars pay for. So I am being aggressive in trying to save as many tax free buckets as possible, which includes my jobs' option to save money now that I can withdraw tax free later.

If you don't have this option at your job, you can also look at investing in a Roth Individual Retirement Account. Now, I get to invest money into a Roth retirement account at $19,000 a year or $19,500 in 2020. But if you invest in a Roth Individual Retirement Account, your limits will be much lower. But if you're over 50, you actually get to make additional contributions, which they call catch up contributions. So think about whether or not you want to get your tax breaks now or your tax breaks later, and if you have any Roth options, and ways to invest in tax free buckets, consider doing that as well.

Another tip I have for you is to be aggressive. But don't be more aggressive than you can tolerate. What that means is only invest in things that you can sleep at night knowing you're invested in them. I have clients I work with all the time where I help them invest their retirement funds and their investment funds. And we go through what it is that they're trying to accomplish, and what types of investments they're comfortable with. I've always been an aggressive investor. I started saving for retirement at 16 years old because I didn't want to work forever and I knew I wanted to retire early. I also know that some more aggressive investments have the potential for higher gains in earnings. Nothing's guaranteed. But I realized that with me investing more in slightly riskier Investments, I have the potential to have higher gains. But that's not meant for everyone. There are some people out there that if they can't sleep at night, because they're worried about what they're invested in, they are not invested in the right products for them. I encourage you to invest in stock investments and assets that you're comfortable with. I don't want you to lose sleep at night because of the investments you're invested in. You have to be able to still maintain your composure, even when the market is at its worst, like in 2008. And remember, this is money that you're not trying to use today. So don't let it stress you out or give you a heart attack, because this is money that has time to rebound and grow. And if it has great gains even better, but don't give yourself more anxiety than you really need. Don't be overly aggressive. If you're not an aggressive investo, make sure you pick out things that are a little more moderate, if you can't handle all the swings. This is called getting investments that meet your risk tolerance. It's important that you work with a professional that encourages you to always invest in products that are best for you and your risk tolerance. Next up, review your retirement account at least annually. Not all retirement accounts are created equal. In fact, some of them suck. So it's important that you take a look at your account and figure out what is it really invested in and what investments are best for you? My rule of thumb is if they offer you any free money, you should at least invest enough money in your retirement account to take advantage of the free money. But if you look at the funds that your jobs invested in, and they're overlapping, all in tech stocks, or all company stock, beware! No one should put all their eggs in one basket, as they say. And sometimes it's better to invest in accounts outside of your employer, if your account is not offering the best diversity. The other thing you want to make sure you know is what fees are you paying for your employer's Chosen Company to manage your retirement funds. Truth is, you don't really get a lot of say on who your retirement account is with, because that's normally chosen by your employer. But the person managing your retirement funds should at least be able to tell you the performance of your account in the last year, and what fees you're paying on a quarterly or annual basis in order for them to maintain your money. Work with a professional, if you're not sure, who can help you review the performance of your retirement account and determine if it's best for you to put your money elsewhere in a Roth or traditional Individual Retirement Account outside of your job. Those are the things that professionals and others who help you with your money I can help you sort out or talk through. I talk to a lot of clients about these kinds of decisions every day, because I want people to know exactly what they're invested in, and how they can make the most gains and bang for their buck. And I'm very honest, if the employer account is not a good one, I explain why. A lot of times, it's because it's limiting what you can invest in, the funds are not performing very well, the fees are very high, or it's just not in line with your risk tolerance. There's a lot of reasons on why your employer account may not be the best one. And in those cases, take the free money and invest the rest somewhere else. Make sure that you review your accounts annually to see how much you've earned but also to see how much you've lost and make adjustments. It's important to rebalance your portfolio and make sure you're not heavily invested in one thing versus another. It's important to rebalance every year because your shares will change in value, given the performance of the market. And you want to make sure you understand what's going on. And don't assume that everything's going well. Make sure what you're invested in matches your values, and is meeting your financial goals, and make sure you know where your money is going.

So guys, this is how I saved over $80,000 for retirement in 2019. And in 2020, I'm gonna do the same things. The only difference is now the IRS has raised the amount that you can contribute to retirement to $19,500. So in 2020, I'm contributing even more to my future self. You actually get to contribute even more than that if you're over the age of 50, thanks to catch up contributions. So if your goal is to max out, make sure you're depositing at least enough to do $19,500 over the number of pay periods that you have for this year. Normally, the simplest way to do that is to count how many times you'll get paid and then divide $19,500 by that number. Make sure that each paycheck, you've asked your payroll to deduct that amount from your paycheck to deposit into your retirement account. I hope this advice has been helpful to you. And I hope that you take advantage of it by starting to review the performance of your retirement accounts from 2019 as soon as possible. As always, if you have any questions or want to talk more, feel free to send me an email. My email address is info@thePurposeofMoney.com. I'm happy to talk to you more about your particular situation, and how I can help you create more moments of freedom in your life today.

Thank you for listening to The Purpose of Money Podcast. For more resources and information, check out my website, thePurposeofMoney.com, and while you're there, please sign up for our newsletter so you have the latest information on new episodes and blog posts. Until next time, keep creating freedom in your life today.

Transcribed by https://otter.ai