Retirement Planning During the Accumulation Phase

Written By: Anthony Striker, MBA – Senior Wealth Manger

Here at Wheelhouse, we specialize in helping families get “to and through retirement” as comfortably as possible. For that reason, we usually work with families and individuals who are within 5 years of retirement or are already retired. However, we also work with our clients’ children who oftentimes have great work ethic, financial discipline, and a willingness to save and make decisions that will benefit their financial future. In this Monthly Money Minute, I wanted to highlight a few of the tips we discuss or suggest for those who are either just starting to save for retirement, or those who have been saving but are still 7-10 years from being ready to retire.

If you have a work retirement plan such as a 401(k), 403(b), 401(a), etc. Make sure to contribute at least the amount needed to max out/earn your employer’s match benefit.

If your company matches your contributions to your retirement plan in any way, think of it as free money, because it is! If possible, we advise that our clients contribute the amount that will at least give you the highest match that your company will offer. For instance, if a company matches 50% of your contributions up to 5% of your salary, we’d likely recommend contributing 5% of your paycheck so you can receive an additional 50% of that amount by your employer.

When the option is available, save in your company’s ROTH 401(k)/403(b) instead of the traditional 401(k)/403(b) which is pre-tax. Growth in a Roth account is tax-free!

We often emphasize and joke that “tax-free” are 2 of the most important words in retirement planning. What better way to have tax-free money in retirement than starting early in your work plan? In 2001, the Economic Growth and Tax Relief Reconciliation Act authorized Roth 401(k)s, but they were not actually implemented until 2006. One benefit of the Roth 401(k) is that it allows for more annual contributions than that of a Roth IRA ($23,000 in 2024 versus a Roth IRA contribution maximum of $7,000; these limits are $30,500 and $8,000 for those over 50 years old). An increasing number of companies are offering Roth options with their 401(k)s and 403(b)s each year. It is important to take advantage of this in your working years to build tax diversification with your assets.

If a Roth 401(k) is not an option, consider opening a Roth IRA to contribute funds to that exceed the amount needed in your employer sponsored account (401(k) or IRA) to reach the full match amount.

For those of us who do not have access to a Roth 401(k) or 403(b) through a work plan, it can be a good idea to get the match in your pre-tax plan at work and then contribute any additional retirement savings to a Roth IRA outside of the work plan. When contributing to a Roth IRA, there are some annual income restrictions to keep in mind, $146,000 for ‘Single’ filers and $230,000 for ‘Married Filing Jointly’ in 2024.

As an example, let’s say that Sue makes $80,000/year. Using our contribution matching example from the first tip above, she is contributing 5% of her salary each year ($4,000) and her company is matching 50% of that ($2,000). Thus, after a full year, she has $6,000 in contributions in her work plan. If Sue has the cash flow and flexibility in her budget to contribute 7% of her salary to her retirement, and her employer does NOT have a Roth 401(k) or 403(b), it may make sense for Sue to open a Roth IRA to contribute the additional 2% or $1,600 to that exceed the 5% needed to maximize the match benefit from her employer sponsored retirement savings plan.

Become familiar with what your “comfort level” is in terms of cash in the bank.

This “comfort level” is different for everyone. A good starting place is having 6 months of living expenses in a liquid savings account. For example, if you spend $6,000/month on average, having somewhere around $36,000 in the bank MAY be a good goal for you. Some people like to hold very little in the bank while some prefer to hold a large amount in case of emergencies. My advice to clients about bank money is this: “I won’t bug you about your bank money unless you have less than 1% of your net worth in the bank, or more than 10%. If you have1% or less, you likely need to focus on building or creating an emergency fund. If you have 10% or more in the bank, your whole portfolio can be dragged down by inflation.” Finding your comfort level within these guidelines is something that our clients find very important as they enter retirement, so I believe it is integral to get familiar with your comfort level early on vs. waiting until retirement.

Keep investments simple!

Many people in their 20’s, 30’s, and even 40’s do not need a financial advisor, as their goal is to simply grow their assets for retirement. For these investors minimizing fees and diversifying are the name of the game for retirement savings. When choosing investments in a 401(k) or Roth IRA, look for funds that follow the entire US Stock Market instead of trying to hit “home runs” with specialized funds or individual stocks. Once a certain level of savings is reached, you can then dedicate a portion of “fun money” to invest with greater risk. There are of course some situations that may warrant a more complex approach to the investment plan for this phase of life, such as someone who self-employs, owns a business, or owns rental properties.

At Wheelhouse, we believe in building a generational practice. We typically do not take on individuals or families in the accumulation phase of life, but for our clients’ children, we are happy to make an exception. Feel free to share these tips with your adult children or any other family members who may find these tips valuable. As always, do not hesitate to reach out to our team if you have any questions or would like to connect with us.