Harness Money

If your employer fired you, would you be prepared?

How long could you survive financially?

In the United States there are around 134.82 million full time employees in the workplace. That is a lot of people working hard everyday to earn money to support themselves and their families. Building wealth beyond your 9 to 5 does not happen by accident. It takes careful planning and execution. Receiving a paycheck from your employer is just the beginning of your personal money machine.

There are several different kinds of financial accounts that can help you build long-term wealth. Many of them, but not all, are considered retirement accounts. Retirement accounts are financial accounts created by U.S. laws and provided by financial organizations that allow individuals to save and/or invest money to be used once they reach pass a certain age, their ‘retirement’ years. The most famous of retirement accounts is the US Social Security program.

For most former employees the Social Security program is not enough to live off of in retirement. The average retiree in the US spends about $52,000 per year which breaks down to about $4,333.00. Even if you wait and take the max of Social Security it is not going to provide that much funding to live off of. Employees should save money outside of the Social Security program while they are in their working years in order to live comfortably in retirement.

This is where the different retirement accounts come in to play. There are several different retirement accounts each employee should have. As you contribute to each account you are adding a financial layer of protection to your life. Once you have each of these accounts full funded you will be able worry less about money and enjoy other parts of your life.

Emergency Savings

This should be a building block of your financial life.

Emergency savings, often referred to as an emergency fund, is a financial safety net that individuals set aside to cover unforeseen expenses or financial emergencies. The primary purpose of an emergency savings fund is to provide a financial cushion, allowing individuals to weather unexpected events without resorting to high-interest debt or compromising their long-term financial goals.

Financial experts often suggest building an emergency fund equivalent to 1 to 2 years worth of living expenses. However, the ideal size may vary based on individual circumstances. Those with more stable income or additional financial support may lean toward a smaller fund, while others with more variable income or dependents might opt for a larger reserve.

Building an emergency fund is typically done incrementally. Individuals can set a monthly savings goal and gradually contribute to the fund until it reaches the desired size. Windfalls, such as tax refunds or work bonuses, can also be allocated to the emergency fund.

After you have set up and funded your emergency then you be participating your employer provided 401(k) plan.

401k, ROTH 401k 403b, Thrift Savings Account etc.

A 401(k) plan is a type of employer-sponsored retirement savings plan in the United States. It is named after Section 401(k) of the Internal Revenue Code, which outlines the rules governing these plans. The primary purpose of a 401(k) plan is to provide employees with a tax-advantaged way to save for their retirement. These plans are offered by employers to help their employees build a nest egg for the future.

Within a 401(k) both employees and employers contribute a portion of the employees pre-tax income into the account, reducing the employees yearly taxable income. But the funds must stay invested until the employee reaches a defined retirement age when they are then allowed to withdraw the funds and pay yearly taxes. This system allows the money within the 401(k) to grow without larger because they did not pay tax on the income until it is withdrawn.

There are limits to how much a person may contribute to their 401(k). In 2024, the limit is $23,000. There are also limits to what the employee may invest into within their 401(k), generally there is a list of mutual funds that an employees selects their investments from.

A good goal for any employee is to try and max out their yearly employee contributions. Keep in mind that any money added to the this account must be withdrawn at some point. Individuals are required to start taking minimum distributions from their 401(k) accounts after reaching age 72 (or 70½ if you turned 70½ before January 1, 2020), known as Required Minimum Distributions (RMDs).

If you start at 20 years old, $30,000year and retire at 60 you have $718,831.77.

The 401(k) is just on type of employer provided retirement account. If you work for a Federal or State government or a nonprofit they may offer a different form of the 401(k) plan, such as the Thrift Savings Plan etc.

A 401(k) plan is provided by your employer. The ROTH IRA is an account that you will set up on your own. You will open the account, you will choose the investments and you will fund the account.

ROTH I.R.A.

A Roth Individual Retirement Account (IRA) is a tax-advantaged retirement savings account that offers unique benefits compared to traditional IRAs. One of the primary distinctions is in how contributions and withdrawals are taxed. With a Roth IRA, contributions are made with after-tax dollars, meaning that you contribute money on which you’ve already paid income taxes. The advantage lies in the tax treatment of withdrawals during retirement. Qualified withdrawals from a Roth IRA, including both contributions and earnings, are tax-free.

This can be especially advantageous for individuals who anticipate being in a higher tax bracket in retirement or those who prefer tax-free income during their later years.

Only the ROTH IRA and the HSA accounts allow a person to grow their investments completely tax-free.

Another notable feature of Roth IRAs is the flexibility they offer with contributions. Unlike traditional IRAs, Roth IRAs don’t have required minimum distributions (RMDs) during the account owner’s lifetime. This means that individuals can choose to leave their money invested for as long as they like, allowing it to potentially grow over many years without being compelled to take withdrawals. Additionally, Roth IRAs allow for penalty-free withdrawals of contributions (not earnings) at any time, providing a degree of liquidity that can be beneficial in emergencies.

Roth IRAs are subject to income eligibility limits, determining who can contribute directly to the account. However, a strategy known as a “backdoor Roth IRA” allows high-income earners to make indirect contributions by first contributing to a traditional IRA and then converting it to a Roth IRA.

While there are rules and considerations associated with this strategy, it provides a potential avenue for individuals who would otherwise be restricted from contributing directly to a Roth IRA. Overall, Roth IRAs provide a valuable tool for tax-efficient retirement savings, offering flexibility and tax advantages that can complement a well-rounded retirement strategy.

If you maxed out your ROTH each year at $6,500/year for 20 years invested into the US stock market you would have $265,650.00.

The ROTH IRA is one of my favorite account because you are allowed to withdraw anything that you add to the account. You can use that money to spend on anything you need.

But the next account is specifically designed for Healthcare expenses.

HSA – Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with high-deductible health plans (HDHPs) cover qualified medical expenses.

One of the key benefits of an HSA is its triple tax advantage. First, contributions made to the account are tax-deductible, meaning individuals can reduce their taxable income by the amount contributed. Second, the funds within the HSA grow tax-free, allowing for potential investment growth over time. Finally, qualified withdrawals for medical expenses are tax-free, providing a tax-efficient way to cover healthcare costs.

To be eligible for an HSA, individuals must be covered by a high-deductible health plan, which is a health insurance plan with a higher deductible than traditional plans. HSA contributions are subject to annual limits set by the IRS, and these limits may vary depending on whether the account holder has self-only or family coverage.

HSAs offer flexibility in how the funds are used, allowing individuals to pay for qualified medical expenses, including deductibles, copayments, prescriptions, and certain preventive care costs. Moreover, HSAs are portable, meaning the account travels with the individual even if they change employers or retire, providing a long-term savings vehicle for healthcare expenses.

Do you have recurring medical expenses?

The downside of an HSA is that you MUST be enrolled in an HDHP High-Deductible Health Plan. Which means that your out of pocket deductible will be higher than if you were to enroll in a PMO plan.

If you have consistent medical bills then you may want your insurance provider to pick up the bulk of these expenses and have a lower out-of-pocket premium.

Make sure to consider you and your family’s circumstance before you completely embrace this account.

The next account is another one that an employee will set up outside of their employer. It is one of my favorites because it has the most flexibility of any of the accounts mentioned.

Stock Brokerage Account

A stock brokerage account is a financial account that allows individuals to buy and sell a variety of financial instruments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). These accounts are typically provided by brokerage firms, which act as intermediaries facilitating transactions in the financial markets.

Opening a stock brokerage account provides investors with a platform to access and engage in the buying and selling of securities, enabling them to build and manage their investment portfolios.

Investors use stock brokerage accounts to execute trades based on their investment goals and strategies. These accounts offer a range of features, including market research tools, real-time quotes, and various order types, such as market orders and limit orders. Investors can choose between different types of brokerage accounts, including individual accounts, joint accounts, retirement accounts like IRAs, and custodial accounts for minors.

It’s important for investors to consider factors such as fees, account minimums, and the range of available investment options when selecting a brokerage account that aligns with their financial objectives. Additionally, the ease of online trading and the ability to monitor and manage investments in real-time have made stock brokerage accounts widely accessible, empowering individuals to take an active role in their financial future.

Your stock brokerage account is one of your most important employee accounts, because like your emergency funds this is one the accounts you are allowed to tap into before you hit retirement age without penalty. You will income tax on any funds you withdraw, but there is no early withdraw penalty.

These financial accounts will help you build wealth over time. If you fully fund these accounts you will be financially prepared for retirement. But there are a few more things you should consider before you are actually ready to retire.

Optional things to consider

We have discussed the financial accounts, but there are few more life things you should consider before you actually retire. I love a good plan. Whatever stage of life you are at, I am still in my working years, you should create a plan and work toward executing it. I will briefly discuss a few things you should consider adding.

Long term care insurance

If anything were to happen to you, like an illness, LT care could help go to a nice healthcare facility or be treated in your home. Medicare/Medicaid only goes so far.

Vacation/Play fund

If you want to see the world in retirement it is a good idea to create a separate savings account specifically for traveling. Flights, hotels, cars, tours etc. can add up.

Essential financial documents: Will, Power of Attorney, Revocable Trust

The retirement accounts will help you build wealth. But you also need to protect that wealth. What if something happens to you? Communication is important. You need to spell out in writing while you are young what you would like to happen to you and your assets. Also, the people around will be grateful they have these documents and know what to do.

Conclusion

Start as early as possible.

We all know that compounding takes time and investing today can lead to enormous wealth over time. But more than building wealth, having each of these accounts provides you a level of safety. It will help employees prepare for the unknown future.

Everyone is going to need healthcare at some point in our lives. We all age and god willing reach an advanced age where we are not able to work any more.

Don’t wait. Open these accounts now and start funding each one. Even a small amount of money invested each money has major impact over time.

And do not stop there.

Create clear and specific financial goals that you will work to achieve. Too many people have vague ideas about what makes them feel good or what ‘safety’ actually means. Define it. Be explicit about what you want your future to look like.

Don’t forget to leave a comment. I want to know if you agree or disagree with any of the things I have mentioned. I read every comment.