A Knight’s Guide to Retirement

As Knight Investor, you are the investor trusted with guarding the stability of your kingdom.  You will fight many battles, encounter many recessions, and lose many allies along journey.  But every Knight must remember that their time is a Knight is temporary.  There will come a time when you will need to lay down your sword and let the next generation of Knights take your place. 

That is why it is important for a Knight to start planning out their retirement as early as possible.  According to Investopedia (https://www.investopedia.com/articles/personal-finance/032216/are-we-baby-boomer-retirement-crisis.asp)  over 55% of Baby Boomers claim that they did not save enough for retirement.  This is a very frightening statistic as Baby Boomers are increasingly staying in a workforce because they did not save enough for retirement.  By the time most Millennial will retire, it will be virtually impossible to find work past 60.  This is due to Artificial Intelligence, automation, and outsourcing of these types of jobs.  That is why it is imperative that Millennials start thinking about retirement early.

Tax Free Retirement Accounts: The Backbone of American Retirement

The United States has built as huge portion of our Economy around the concept of “Tax Deferred “Retirement accounts.  These are essentially savings accounts that reward you with major tax perks.  The idea is that by rewarding retirement savers, people will save more money inside of these accounts.

The way this idea works is every American is allowed to skip paying taxes on money they are saving for retirement.  The money placed inside of these accounts is then used to purchase assets such as stock or bonds.  These stocks or bonds are held while someone is working, and sold when someone enters retirement.  

Not paying taxes on these types of investments are what allows millions of retirees across the US enjoy a comfortable retirement.  While there are many types of Tax Free accounts the two most popular are a 401k and an IRA.  Let’s look at those in detail.

401k: A Tax Deferred Account

A 401k an employer sponsored account that allows you to take Pretax income, (income you earn before taxes are taken out) and save it for retirement.  Currently you may place up to $19,000 a year per individual or $36,000 per married couple.  These accounts are popular because they allow you to skip paying taxes on thousands of dollars every year.  The money inside of these accounts is also allowed to collect interest tax free.  In addition to tax free growth, most companies that over these plans will also offer “match”  meaning they will also contribute money into those plans on your behalf.  In exchange for this free money

The only catch to this plan is that you are not supposed to make any withdraws from this account until you turn 55 1/3 years old.  This rule helps ensures that all your tax free money is only being used for retirement.  In the event of a financial hardship, you may always withdraw your funds and pay a penalty for early withdraw.  Many plans will allow you to take a loan out of your 401k and pay yourself back over time with no penalty.  But either way, you want to avoid pulling money out of these accounts and only use them for retirement.

Employer Match

 In addition to tax free growth, most companies that over these plans will also offer “match”  meaning they will also contribute money into those plans on your behalf.  In exchange for this extra tax free money you will have a “vesting period”  Vesting simply means you will need to work at that job for anywhere from 1-3 years (avg.) in order to receive that free money.  Should you leave or get fired, you will forfeit the money your employer set aside for you.

Signing up for a 401k

A 401k is an employer sponsored account.  These means your place of employment will offer this as a perk.  In order to get started simply get in contact your HR department for information about your company’s plan offerings. 

IRA (Individual Retirement Account)

An IRA is different take on a 401k.  In an IRA the plan is “self-directed” meaning you run your plan, not your employer.  And there is a much different perk.  In this plan you put after tax money, or money you’ve already paid taxes on, into an account.  That money is then allowed to grow tax free over the years and you never have to pay taxes on the growth.  These plans are popular mostly because you’re never paying tax on the money in them.  Plus if you get started in one of these accounts while you’re young, you’ll enjoy years upon years of tax free compounding interest. 

Bonds

A bond is a type of loan that you collect interest on over time.  The most common type of Bond is a US Treasury Bond.  Buy a US Treasury Bond is simply put/ loaning out your money to the USA Government.  When you buy a bond there is a “maturity date” when then loan expires and the government has to give you your money back plus interest.  

The reason bonds are so popular is because they are consider one, if not the most, safe invest in the world.  This is because the only way you would not get payed would be if the United States suddenly went completely bankrupt.  And while there are many Youtube mouth pieces claiming that is coming, the reality is the United States is quite unlikely to fail as a country. 

Another benefit of bonds is that you often don’t have to pay taxes on the money you make on them.  This is another way to enjoy tax free saving on your long term income.  Bonds are virtually immune to downturns in the market.  In addition to government bonds, you can also purchase bonds from specific states or cities.  So if you plan on living and retiring in the same state or city, It’s not a bad idea of invest in bonds for that state or city. 

As a Knight you will want to do a combination of all 3 of these.   Ideally you’d want to take advantage a 401k to get the free matching money from your employer, you’d want to set up an IRA that you direct, and buy some bonds to offer protection against any down turns in the market.  Here are 3 tips to using these accounts.

401k

Pros:

Enjoy paying less taxes every year you’re working

Employer Match means free money every year

Set it and Forget it Type approach.

Cons:

Taxes MUST be paid once you start withdrawing

Employer match means usually means working at the same place for 3 years minimum. 

Plans often charge hidden fees that can eat away at your retirement overtime.

IRA

Pros: While you put after Tax money into the account, you never have to pay taxes on any earnings ever.

Self-Directed:  You get to invest in what in exactly what you want.  Many 401k plans offer limited options.

Will often receive more individualized customer support with these plans

Cons:

May require more of a learning curve as the plan is self-directed

Mostly geared towards people frequently switching jobs and the self employed

  By focusing on these 3 simple assets, combined with having a paid off home, you will be able to enjoy a healthy and stress free retirement.