How Do I Fund My Nest Egg?
We go into step 6 of our 10 steps to financial freedom. We talk about saving for retirement different ways to fund your nest egg.
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Step 7 is Maximize 401(k) Contributions and Use Taxable Accounts.
In this goal we will fully fund your nest egg.
In the previous step, we calculated your nest egg number. Once that was calculated, we utilized IRAs and HSAs to begin getting to that savings goal. In most cases, this may not be enough to get to your nest egg, so now we have to find the next best option.
First we use our employer plan.
This is commonly a 401(k), but there could be other plans that your employer may offer. Most retirement plans allow you to contribute over $25,000 a year. The huge benefit with the 401(k) and other retirement accounts is that you get a tax benefit for using them. Using traditional contributions, you get a tax break up front at your highest tax rate. Typically, traditional contributions are the best option. You may also have a Roth option available. Roth is typically best when you are in low-income years relative to your retirement expectations. The typical example is an entry level employee at a low salary and low cost of living, but they expect at retirement to be living a bigger lifestyle.
When the 401(k) isn’t enough, use taxable accounts.
If you need to save more than what the 401(k) offers or don’t have an employer plan available to you, then you can use taxable accounts.
There are no contribution or income limits to taxable accounts. This allows you to fund as much as you need to get to your goal. You are able to put this savings into investments that will do much better for you over the course of your life than keeping it in a savings account.
Taxable accounts give you flexibility in your financial plan.
Two main benefits are no early withdrawal penalties and tax diversification.
Taxable accounts allow you to take out your money without having any additional penalties. This is great for early retirees (before 59.5 years old).
The tax diversification allows you to be more strategic in your withdrawal phase (in retirement). You can take from both retirement accounts and taxable accounts to ensure you pay the least amount in taxes (keeping more of your money).
Funding your nest egg is a major goal.
Once your nest egg is funded, you will have enough money to take care of yourself. You will not need to rely on others or rely on needing a job.