Retirement Investing: Our Strategy for 2018

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How to Optimize Your Investments in 2018As I sit here now writing this almost half way through February (2018), the stock markets have been on a wild roller coaster. Some investors who were not around in 2008 to 2010 have never witnessed this type of volatility and correction. Others may have forgotten that … yes the market does go down.

I’ll be honest and say that it does hurt watching our net worth drop like a brick. And log into our investment accounts and see that they fell by thousands and thousands of dollars in a day.

The good news for us, is that I was around investing during the last recession and learned a bunch. Last time I wanted to panic and sell everything. But I reluctantly decided to stay the course and keep investing. I am so glad that I didn’t panic last time.

This time will work out too. And the one bright spot is that all those investment options everybody loved so much a month ago … they are still the same investments but on sale!

So what better way to take advantage of this sale than to pump a bunch of money back into the market? Just like my wife and I did 10 years ago.

Based on the great sale in the market and recent tax law changes, I decided to put together a list of how we plan to invest our money this year. The following list are not specific investment options … but rather the different plans or “retirement buckets” as I like to call them.

So here is our investment plan for 2018 –

1. Pension – 6% of Paycheck (Pre Tax) = $6,000

My employer requires all full-time employees to contribute 6% of their pre-tax income to a pension. The employer also kicks in a little over 8% match into the pension.

Pensions are a different beast when it comes to retirement savings. Since I don’t have the option not to contribute and my employer more than matches my contributions, this is my first retirement bucket to fill.

As long as I remain with my current employer, this will continue to be my first bucket each month of retirement savings. My approximate contributions to this pension are a little over $6,000 pre-tax dollars per year.

Pension (Pre Tax) – $6,000 per year

2. Spousal Roth IRA (Post Tax) – $5,500

Next up on our hit list, which is new for us this year, are contributions to a Spousal Roth IRA for my wife. As a one income family with my wife staying at home and raising our kids, we wanted to get an IRA setup for her.

This was initially going to be a traditional IRA contribution of $5,500. However, based on our 2018 FREE Money calculation, we won’t have to worry about needing to reduce our taxable income. A traditional IRA would have reduced our taxable income but the Roth IRA won’t.

The awesome news is that we can contribute and max out her Roth IRA now and still pay almost $0 federal tax this year.

Since the Roth will have huge tax benefits someday when we need the funds … this is a perfect scenario in my opinion.

The money is not taxed going in … and shouldn’t be taxed coming out! So our 2nd bucket of retirement savings will be filled up to $5,500 this year in a spousal IRA.

Spousal Roth IRA Contributions (Post Tax) – $5,500

3. My Roth IRA (Post Tax) – $5,300 (probably)

The cool thing about these Roth accounts is that we can take advantage of two of them … one for my wife and one for me!

We are currently way under the maximum $189,000 income limits for contributing to a Roth IRA, since we are “married filing jointly”. So if the numbers work out, then we can possibly double dip on Roth contributions this year.

Remember … our goal is to still pay $0 in federal taxes this year, so if we need to lower our taxable income more, then this money may need to go into a pre-tax bucket.

If the calculations all work out, then we will try and fill up this Roth IRA bucket with another $5,300!

Note – At the time I write this, we already invested $200 into my rollover IRA … which means I can only fill up my IRA bucket with $5,300 more dollars. We are limited to $5,500 per person this year in the combination of IRA accounts – Roth + traditional. So I used up $200 already going into the traditional bucket.

Again, just like with the spousal account … if we can put our funds into this Roth IRA account, then we don’t have to worry about paying taxes on the capital gains later in life.

My Roth IRA Contributions (Post Tax) – ~$5,300 (if possible)

4. 457b (Pre Tax) – $10,000

As a way to lower our taxable income last year, we started contributing to a 457b plan through my employer the last couple of months. We have continued these contributions early into the new year (2018) and will keep them going.

We could potentially max this account out at $18,500, but we also want to try and fill up buckets #2 and #3 first for our Roth IRA contributions.

The amount we end up contributing in this bucket (#4) will be impacted on how we run the numbers for my Roth IRA (#3). There is no doubt we will need to contribute to our 457b in order to lower our taxable income and still pay almost $0 in federal taxes. But at what limit can we switch these contributions off? I still have some work to do figuring out just how much.

For now though, we will estimate putting $10,000 of pre-tax dollars into retirement bucket #4.

457b Contributions (Pre Tax) – $10,000 (if possible)

5. Brokerage Accounts (Post Tax) – up to $10,000

For the past several years … this was our 2nd choice for retirement savings after my pension contributions. We have slowly built a portfolio of around 30 dividend paying stocks. In 2018, this portfolio should pay us at least $3,300 in dividend income.

These are all after tax investments in brokerage accounts like Robinhood and Fidelity. For years we were focused a little too much on building this income stream and ignored some of the tax implications.

Now in 2018, we plan to optimize how we invest to keep as many dollars now as we can … while balancing out future taxes on our retirement savings. This portfolio is still very important to us, but our focus has switched a bit this year.

The goal for these accounts is to fill them up with whatever may be left over from our previous 4 buckets of retirement savings. We put a cap of $10,000 on these investments and would be ecstatic if we could hit that target. I’m just not sure we have the funds available to hit that goal, but you never know?

Brokerage Accounts (Post Tax) – up to $10,000

6. Rollover IRA (Pre Tax) – up to $200

This is our last bucket to put retirement savings into for 2018. Remember that I can only invest a combined $5,500 between my IRA accounts (Roth + Traditional).

My first choice would be to fill up the Roth IRA bucket (#2). However, if we determine we need to lower our taxable income … then we can flip the switch back over to the traditional IRA.

I would prefer not to at this point as our capital gains in this bucket would eventually get taxed when we start to use them.

Since I have already put in $200 in 2018, I had to include this as our last retirement savings bucket.

Rollover IRA (Pre Tax) – up to $200

2018 Retirement Investing Blueprint

So there you have it. That is our plan (at least for now) on how to optimize our retirement savings for 2018.

Many of the choices we made were a direct result of the recent tax changes put in place starting this year. For example, up until now we had basically abandoned investing in my Roth IRA. And my wife didn’t even have a Roth IRA up until now.

But after calculating our FREE Money for 2018, we realized we could optimize our tax burden now and in the future by putting money into our Roth accounts.

What I have laid out above is simply a blueprint for this year. Things could change a week from now, or in a month, 3 months, or not change at all. It is simply a plan that we are working from to put us in the best position to save as much of our income as possible.

What changes have you made this year on how you invest for retirement? Are you leveraging any of the tax changes to fully optimize your savings?

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