Tag Archives: 401K

Keep Your Hands Off My 401K

This morning, I sent an email to my Congressman.  The Financial Journeyman is not a political blog.  This blog is not right or left leaning.  In general, I do not oppose or support any political party.  The only time that I will write about politics is when it is related to personal finance.

Over the past few weeks, there has been many news reports about Congress wanting to reduce the amount that an employee can contribute to their 401K from $18,500 (2018 limit) to only $2,400.  There have been other reports that suggest it might be capped at $9,000.  There are even other conflicting reports that state it will be increased to $20,000, but switched to a Roth based format.

The reason for these proposed limits on 401K contributions are due to the tax cuts and tax overhaul that is being drafted by Congress.  To fund these tax cuts, Washington will need a boost in revenue to prevent the deficit from skyrocketing.  A quick solution is to drastically reduce the amount of money that 55 million American’s put into their tax deferred retirement accounts.

As a member of the financial independence community, being able to save as much as possible in a 401K account is important for me to reach my retirement goals.  Since most American’s do not have a defined benefit pension, they are left with a defined contribution plan such as a 401K.  If these accounts are capped at $2,400, it will have a negative impact on how many people are saving for a secure retirement.  That can ultimately lead to more people having to rely on government assistance later in their life.

You might be thinking, there is nothing that I can do about this.  The next election will not be held for a year.  All I can do is sit back and hope for the best.

That is not entirely true.  Yes, the next election is not for twelve months, but you still have a voice.  You have a voice and there are many channels to express your concerns to your Congressman.

You might not realize this, but your Congressmen whats to hear from you.  They want to know what they can do to help the constituents they represent.  They do not want to wait until Election Day to learn if they are doing a good job or not.

If you feel as strongly as I do about reducing the limits on how  much you can save in your 401K, reach out to your Congressman.  You can send them an email, a fax, or a written letter.  Below is the email that I wrote and sent to my Congressman Tom Marino:

Sample Email

Subject: Tax Cuts & Reducing the Contribution Limit on 401K Plans

Dear Congressman Marino,

As one of your constituents, I am writing you this email to voice my concern over the proposed reduction in contribution’s that people will be able to make to their 401K retirement accounts.

Since most employees do not have access to a defined benefit plan, making contributions to their 401K is their primary source for retirement savings.

While tax cuts are important, they are not more important than middle-class Americans having access to an adequate retirement savings plan.

Without having enough money saved for retirement, people will be forced to demand more out of entitlement programs such as Social Security and Medicare.

I strongly suggest that you vote “No” when it comes to reducing how much your constituents can save to secure their financial future.

Based on your history of being a fiscal conservative, I know that I can count on you to not jeopardize the defined contributions retirement system that most of your constituents are relying on to support themselves when they retire.

Thank you,

My Name

My Contact Information

Keep it Simple

The email that I wrote was short and to the point.  Contrary to popular belief, these are extremely busy people and are always being pulled in many different directions.  I feel that there is a better chance of having your email or letter read if it is not full of fluff.

In this email, I stated my concern, why he should be concerned, and what he can do about it.  Be positive, show support, and be respectful.  Do not be condescending or threatening in any way.

Who to send it to

It is important that you send your letter to the correct legislator.  To find out who your Congressman is, go to https://www.house.gov/representatives/find/.  Other than being able to identify who your Congressman is, you will be able to find their email, address, phone number, and fax.  You can call their office, but I suggest a written communication.  That way you can be sure to not come off as being subversive.

Conclusion

Now is the time for you to communicate your concerns to your Congressman.  Remember, even if you did not vote for them, they work for you.  If your goal is to reach financial independence and retire early, voice your concerns over these proposed changes that could prevent you from reaching your financial goals.

I am challenging you to become an advocate for your financial future.  Please take 10-15 minutes of your time and send an email to your Congressman.  If you don’t communicate this message to them, how will they know that it is such an important issue?

Early Retirement Portfolio & Plan

Thank you for reading part-4 in my series on asset allocation.  In my last post, I wrote about our current balanced-growth asset allocation.  That is the asset allocation that we plan on maintaining until we retire in 2028.

In this post, I will be considering the future.  This post is about how I foresee our assets being allocated at the time of retirement.  I use the word foresee because it is what I am anticipating.  As I stated in my previous post, I don’t have a crystal ball.  Nobody can predict the future, but this is what I am optimistically forecasting.

At the time of retirement, I will be age 52 and my wife will be age 60.  At age 60, my wife will draw a Pension equal to 70% of her last annual salary.  The Pension technically has a cost of living adjustment (COLA), but there has not been an adjustment in over 15 years.  Moving forward, we are not going to count on any COLA adjustments.

By 2028, we plan on having about 50 years of annual living expenses in investable assets.  To come up with that amount, I have run our figures on many different financial calculators including AARP, Charles Schwab, and Fidelity that take future projected growth of different asset allocations into account.  The 50 years of living expenses is based on what we currently have saved, the amount we plan on adding to our savings, as well as projected market performance.

The asset allocation that we plan on using at retirement will be 50% invested in stocks and 50% invested in bonds/cash:

S&P 500 Index Fund – 32%

Extended Market Index Fund – 8%

Total International Stock Market Index Fund – 10%

Intermediate Term Bond Fund – 32%

TIPS Fund – 10

Cash – 8%

At retirement, we are planning on withdrawing only 1.8% per year from our portfolio.  Based on the Vanguard Monte Carlo Nest Egg Calculator, our success rate is projected to be 100%.  We also have a greater than 100% projected success rate on Firecalc.com and the Trinity study.

Between the pension and withdrawing 1.8% from our portfolio, we will have $112K per year to live on.  Just based on simple math, if we are taxed at 25%, we would have $7K per month to live on.  That would be more than double of what we live on now with less expenses.

For the first 10 years of retirement, we plan on withdrawing from our taxable account.  When my wife is age 70, we will be forced to withdraw from her Traditional IRA because of Required Minimum Distributions (RMD).  At that point, we will still be 8 years away from having to withdraw from my Traditional IRA.  We might never have to touch our Roth IRA accounts.  If we do use our Roth IRA accounts, it might just be to withdraw extra money without causing us to go into a higher tax bracket.

We are currently planning on being flexible when it comes to Social Security.  Our goal is to take it when my wife is 70 and I am 62.  We are, however, keeping the option open of taking it early based on retiring during a prolonged market correction. Otherwise, the amount that we will collect will compound 7% annually for every year my wife waits between age 62 and 70.

For some people, this plan might seem too conservative.  For me, being a little on the conservative side is important.  That is because I am retiring at a young age.  I have to plan on being able to fund a retirement of at least 35 years for both my wife and myself.

For me, I don’t see it as being overly conservative.  I see it more as being flexible.  By only planning on a 1.8% withdrawal rate, we have a great amount of flexibility.  If we had to increase it to 2.8%, our success rate only falls to 98% on the Vanguard Monte Carlo Nest Egg Calculator.  If my wife had to work two more additional years, her pension would jump to 80% of her last annual salary.  Also, I will most likely still work part-time because I want continue to take advantage of my catch-up contributions in my retirement accounts.

That is how our future plan looks.  It is over 11 years from now.  I don’t want to get too excited.  Between now and then, we will work hard, save, invest, take care of our health, and enjoy every day.

Also, please check out the following links from some of the top personal finance blogs to learn about the #DrawdownStrategy Chain:

Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement

Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy

Link 2: OthalaFehu: Retirement Master Plan

Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement

Link 4: Freedom is Groovy: The Groovy Drawdown Strategy

Link 5: The Green Swan: The Nastiest, Hardest Problem in Finance

Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan

Link 7: Cracking Retirement: Our Drawdown Strategy

Link 8: The Financial Journeyman: Early Retirement Portfolio & Plan

Link 9: Retire by 40: Our Unusual Early Retirement Withdrawal Strategy

Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan

Link 11: 39 Months: Mr. 39 Months Drawdown Plan

Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang

Link 13: Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?

Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement

Link 15: Penny & Rich: Rich’s Retirement Plan

Link 16: Atypical Life: Our Retirement Drawdown Strategy

Link 17: New Retirement: 5 Steps for Defining your Retirement Drawdown Strategy

Link 18: Maximize Your Money: Practical Retirement Withdrawal Strategies Are Important

Link 19:  ChooseFI:  The Retirement Manifesto – Drawdown Strategy Podcast

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Financial Independence: A Universal Goal

While reaching early retirement is my goal, it might not be suitable for everyone.  On the other hand, the goal of reaching financial independence should be the focus of everyone during their working years.  Even though most careers seem to drag on forever, the amount of time that we have available to work and save money is truly finite.  Everyone should have the goal of saving enough money to cover at least 25 years of living expenses.  It does not matter if you enjoy your career or not.  This rule applies to everyone.  The sooner you start working towards reaching financial independence, the better off you will be.

Reasons to Achieve Financial Independence

Job Loss

Today, the unemployment rate in the U.S. is around 4.5%.  Most employers are now hiring.  Many jobs are even going unfilled.  Unfortunately, this can change in a flash.  Recessions occur as part of the business-cycle.  When business slows down, companies need to reduce expenses to remain profitable.  One of the easiest ways to reduce expenses is to reduce labor costs.  When this transition occurs, hard-to-fill jobs become hard-to-find jobs.

Losing a job is one of the most stressful situations that a person or a family might face.  By being financially independent, the stress can be removed or drastically reduced.  If you have many years of living expenses stashed away in savings, a job loss can be viewed as an opportunity to take an extended vacation from work, start a business, or explore working in a different line of work.  Financial independence affords options.

Defined Benefits

Since the start of the new century, employers who offer defined benefit plans have been on the decline.  Gone are the days when people work for a company for 35 years and receive $40,000 per year for the rest of their life after they retire.  Employers do not want to have to pay the costs or take on the risk of being liable for underfunded pension promises.  Defined benefit plans are even on the decline in government jobs.

This now puts the responsibility of paying for retirement on the employees in the form of a defined contribution benefit (401K).  The individual is now burdened with the responsibility of saving enough money for retirement.  Many people lack the sophistication to correctly determine how much they need to save and do not have the ability to manage this type of investment account.

If managed correctly, defined contribution accounts are great tools for saving money that can contribute to a person’s financial independence.  The money that is invested grows in a tax deferred account.  Most defined contribution accounts now offer low-cost index funds and target-date retirement funds.  In some cases, employers also match a percentage of their employee’s contributions.

Everyone should start by contributing 15% of their salary to their 401K.  After that, work on increasing contributions by 1% per year.  Increases the contributions every year until you are contributing the maximum amount allowed by the IRS.

Social Security

Social Security is going to run out of money by 2034 unless the government makes some major changes.  That does not mean that Social Security is going to go away.  At that point, Social Security will be funded by payroll taxes.  Based on the current projections, Social Security will be able to pay $0.75 for every $1.

By reaching financial independence, a person does not have to rely solely on Social Security to fund their retirement.  Even if Social Security was fully funded, it does not provide enough in benefits for most people to enjoy a high quality of life.  To ensure a high quality of life in the future, switch your focus from relying on Social Security to cover your future expenses to working towards becoming financially independent.  By doing this, you will be able to view Social Security as a nice supplemental income stream.

Health

Too many people think that, they can work forever.  You might be healthy today, but that can and will most likely change with age.  Yes, we can eat right, exercise, and keep up with doctor visits.  In some cases, we can take measures to improve our health.  The gross reality of the situation is that most people cannot keep up the physical and mental pace of a demanding career once they reach a certain age.

By being financially independent, a person has the option of being able to retire on their terms and to enjoy life while they are still young and healthy.  Life is not too much fun without money.  Life is less fun when you are in poor health.  Once your reach financial independence, you will not have to stress about being forced to work because you do not have the resources to sustain your lifestyle without the income from a job.

Family

Not only do we owe it to our self to reach financial independence, but we also owe it to our family.  We only have one shot at life.  By reaching financial independence, we can do so much for our loved ones.

By being financially independent, a parent or grandparent can better provide what their children or grandchildren need to be successful in life.  Financial independence provides security for a spouse and can reduce the  financial stress in the relationship.  Also, by being financially independent, you can be present in the lives of those you live with, extended family, and friends.

Conclusion

When you think of financial independence, do not only think of it in terms of being able to retire early or live a luxurious lifestyle.  Look at it as necessity.  Life happens and we do not know what is around the corner.  By being financially independent, you take more control over your life.  People who are financially independent have options that others who lack resources do not have.

Some say that control is an illusion.  On some levels, it is.  For example, we do not have control from one breath to the next.  However, losing a job and not having money is not an illusion.  By becoming Financial independent, you can take control where it is possible.  You are also able to enjoy a freedom that is available to almost everyone, yet experienced by so few.