Let’s go back a decade or two.  You were in college starving yourself of nutrients and cash flow.  The task at hand was simply to make it through the month on Tombstone pizza and $348 in your bank account.  Fast forward a couple of years to when you landed that first job out of college.  You enter the workforce in the awkward professional attire you obtained 3 years prior for your first internship.  Here you are today with a much different outlook on life.  Your income is much higher, your vegetable intake has drastically increased, and your work clothes are much more appropriate.  

Thanks to our friends' submissions on Instagram, we were inspired to write this week's blog on strategic saving.  Why? Because ya’ll are doing a great job at saving, but could use some extra guidance on where to save, how much to save, and other things to consider.  

How much should I be saving for retirement? 

When saving for retirement, I like to start at 20% and increase or decrease that figure according to your specific situation.  20% isn’t as arbitrary of a number as you may think.  It actually stems from the ‘4% Rule.’  The 4% Rule is simply a recommendation to withdraw no more than 4% of your total portfolio when you reach retirement.  

Check out my blog on Honeyfi that discusses this topic and more: How to Allocate Your Income 

In order to withdraw 4% of your dollars, you need 25 times your annual distribution by retirement.  For example, if you need $50,000/year from your account, your portfolio should be $1,250,000 upon retirement (4% of $1.25mm is $50k -and- $50k x 25 = $1.25mm).  If you obtained a modest rate of return of 5% and contributed 20% throughout your career, it will take you 41 years to accumulate 25 times your distribution need (or in this example: to $1,250,000).  

The number of years needed to obtain your ideal balance at retirement vary significantly when your rate or return is higher or lower than the 5% stated above. Do you want assistance with your investments?  We can help!  

Also, your distribution from the portfolio may not match your total income need in retirement.  You may also have pension income, an inheritance, or Social Security (yes, I strongly believe there will be some form of Social Security by the time we all retire).  

How much should I be saving outside of retirement?

This depends!  First off, if you’ve established a comfortable retirement contribution level, pat yourself on the back.  You are way ahead if you are able to afford retirement savings and then some.  Our clients tend to be in this group (#soproud).  An appropriate amount of savings above and beyond retirement will look unique to what exactly it is you are saving for!  

What I can tell you is that we are huge advocates for establishing investment accounts outside of your employer sponsored plans and IRAs.  Ideally, we work towards building up three major buckets for our clients: tax advantage assets (Roth IRAs and HSAs), tax deferred investments (Traditional IRAs and Pre-Tax Accounts), and taxable investments (Joint or Individual Brokerage Accounts).  We will talk about the latter in our next section below.

Where do I put my surplus cash flow?

Like I mentioned above, this is a question we discuss often with our clients.  We evaluate both their gross and net pay to help determine how much of a surplus they are really working with.  Once we have that figure, we start discussing their options on what to do with the money.  We list some of those options below.

Taxable Investments:

• Yes, you can invest in the stock and bond markets above and beyond your retirement accounts!  It’s taxed differently, too.  There are a few reasons why you would do this.  The first reason is that you want to access these funds prior to 59.5 (the minimum age to access IRA dollars without incurring an early distribution penalty).  The second reason is the taxation on the account.  Taxable investments accounts are typically taxed at long term capital gains rate if held for longer than one year.  See below!
• If you find yourself with a surplus cash balance in your savings account (our clients are almost always guilty of this!), then it may make sense to transfer dollars to this type of an account.  If you transferred $10,000 and 5 years later it grew to $15,000, you will pay long term capital gains on the growth in the account ($5,000).  Long term capital gains rates are as follows:

Filing Status:         0% Rate Applies          15% Rate Applies

Single               Up to $40k         $40k-$441,450

Married Filing Joint             Up to $80k         $80k-$496,600

Kids Savings Accounts:

• We wrote a lot about this topic previously in our blog, Kids Savings Accounts- How to Save for Your Kids Future.  There we break out the description of each option, tax ramifications, college aid impact, and control.  It’s worth the read if you are considering this option!  Please note, we do not recommend utilizing this savings vehicle until you take care of YOU first.  As the saying goes… you can take loans out for college, but you can’t for retirement.  I guess that’s not even a saying, that’s just the truth!  Once you’ve taken care of you, then consider helping out the next generation.  Maybe that’s not even your own children, maybe that’s your niece/nephew!  Instead of getting them tangible gifts each birthday, consider establishing a 529 Plan or another kids savings vehicle!

Real Estate:

• If your cash cushion is built up for yourself, maybe it’s time to consider investing in a rental property, whether that’s commercial or residential.  There are various tax benefits such as deductions, depreciation, passive income, capital gains tax, and possibly tax deferral or tax free treatment.  There is a lot more to this topic than what I am sharing here.  I strongly advise doing extensive research to anyone who is considering investing in tangible real estate.  If you’d like to keep your real estate holding smaller and more diversified, you may want to consider including real estate in your investment portfolio through REITs and/or REIT Exchange Traded Funds.

Roth Conversion Tax Payment:

• If you decide to conduct a Roth Conversion this year, then you may want to squirrel away funds for the additional tax payment you may need to make when you file your 2020 tax return.  In our recent blog, Should I Be Doing a Roth Conversion?, we discuss the ins-and-outs of this strategy.  To make this strategy as advantageous as possible, you will likely want to pay the taxes on the conversion using your savings, rather than retirement assets.  Setting aside extra cash flow to pay Roth Conversion taxes next year is a great strategy for surplus savings.

Employer Provided Savings Options:

• Your employer plan may allow for 457(b) contributions and/or After-Tax contributions.  Both of those options allow you to contribute above and beyond the $19,500/year 401(k)/403(b) maximum!  
• Have you been maxing out your HSA (Health Savings Account) each year yet?  If not, this is a MUST!  The HSA is LITERALLY the best account I’ve ever seen (please re-read that in your best Chris Traeger voice).  Why do we love it so much here at Fyooz?  Because it is the only account that provides tax deferral contributions, tax deferral growth, and tax free distributions (if funds are used for medical expenses).  There is no other account that exists currently that provides this much tax incentive!
• Employee Stock Purchase Plans (ESPP) are another viable option if you aren’t already taking advantage of this.  ESPP allows employees to purchase company stock at a discounted price.  It’s a pretty great deal when it comes to stock ownership.  However, be careful to not get too concentrated in any one investment, including your company’s stock!
• Note: RSUs (Restricted Stock Units) and Stock Options are not included here since this is compensation directly from the company.  Read more about how these work in Dan’s blog, Should I Sell My RSUs?

Earmarked Savings for Future Purchases:

• It feels really pointless and unfulfilling when you sock away money and have no purpose for it.  You lack a sense of accomplishment if you never have an end goal in sight.  We’ve seen it too many times where our clients have a huge amount of cash on hand with absolutely no plan on what to do with it.  If you find yourself in that situation, start brainstorming!  You will feel SO MUCH BETTER when you have a plan and see those funds working towards that intentional framework.  Here are a few examples:
• Travel Savings Account:  Dan and I have a separate savings account earmarked for travel.  That means we know exactly how much we have to spend on our trips!  It also means we know when we need to replenish the funds when that balance gets spent.
• Business Savings Account:  Dan and I set aside surplus savings for two years before launching our business!  We wanted to be sure we had a runway for both our business and personal expenses.  If you have always had the itch to start a business, you will be much more comfortable to launch it if you have savings set aside.
• Down Payment on a Home:  Please don’t invest your down payment dollars in the market.  My guess is that if you want to purchase a home, it will be in the next 1-2 years.  That is not an adequate timeline to invest your hard earned dollars.  Instead, keep it in savings!  Think of all those people who did invest their dollars last year, in hopes to buy a home this spring/summer.  YIKES!!!  

The key to be strategic with your savings is knowing exactly what you are saving for.  Retirement is broad, but still purposeful.  Whereas ‘the future’ is plain and indecisive.  This is where Dan and I come in.  We help our client’s establish purpose with the dollars they bring home.  We all want more intention in our life.  Saving strategically brings that intention to the finances we all desire.  If you are experiencing a continuous surplus of cash flow, talk to us today on how you can become more strategic with savings.

- Natalie

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.