Q&A: What more can we be doing to invest for our retirement?

Greetings from California, TJA fam! It’s Douglas and we’ve got a fantastic reader question this week. We’re getting technical, so let’s jump right in.

QUESTION:

Me and my husband are in our late thirties. We both max out our 401(k)s and still have room to save. I know, champagne problems. What more can we be doing to invest for our retirement?

ANSWER:

We can all agree that this is a fantastic problem to have. Seriously! Our readers should give themselves a ton of credit for putting themselves in such an amazing financial position. To be clear, in 2024, they are each putting $23,000 into their respective plans for a total of $46,000. It takes hard work and a lot of discipline to put that much money away for retirement. Even the savviest of us allow our lifestyles to creep up without intending to.

401(k) contributions are considered tax advantaged; meaning, employer-sponsored retirement plans have various tax benefits. Things only get sweeter if your employer matches some of your contributions. If feasible, I advise people to contribute at least the amount of their employer’s match, because who doesn’t like free money? But what do you do when you’ve reached the limits of your work-based retirement plan? Bigger picture, how do you know when you’ve saved enough for retirement?

Let’s start with the first question.

One way to contribute additional money to a retirement account is through a strategy called a backdoor Roth IRA, which individuals can make regardless of their income. FYI, joint tax filers earning more than $228,000 per year cannot simply deposit money in a Roth IRA and call it day. But they can use a Traditional IRA as an above-board way to navigate these tax limitations and “back in” to a Roth IRA. Annually, two partners can contribute up to $7,000 each to a Traditional IRA.

Then, you can use the Traditional IRA as a conduit to convert those contributions to a Roth IRA. There’s no income limitations when you do it this way. And if you’re wondering why people would even bother converting their funds from a Traditional IRA to a Roth IRA via this backchannel, this answer is simple: taxes. Money that is converted to a Roth IRA will ultimately come out tax-free at retirement.

Here’s the catch, though. The IRS states that any pre-tax money in an IRA must be converted before after-tax money. Converting pre-tax money is considered taxable income, so that could mean a significant hit to any couples already holding significant pre-tax dollars in their IRAs. But there’s a work around for this, too. The IRS doesn’t care if pre-tax money lives in an employer-sponsored plan like a 401(k). They only care if it’s in an IRA. So, if you transfer your pre-tax IRA dollars to a 401(k) or another employer-sponsored plan, you’re paving the way to only deal with converting your after-tax dollars from your Traditional IRA to your Roth IRA. At that point, it’s an administrative matter more than anything. Most major brokerage platforms have a way to facilitate conversions either online or over the phone. Once you convert your after-tax dollars to your Roth IRA, you can finally invest them with the tax advantages you’d want.

The backdoor Roth IRA is an excellent way to get additional tax-advantaged dollars put away for retirement. While I’ve laid out a basic understanding of how the strategy works, this guide from Investopedia covers the finer details regarding the conversion process. I highly recommend reviewing it and consulting with a tax advisor to ensure everything is being done properly.

After you’ve funded your retirement accounts to the max, your next move is to establish a consistent investment plan in a taxable brokerage account. Begin by examining your cash flow to come up with an amount you can consistently invest each month. Then, establish a monthly transfer from checking to your brokerage account. Automate as much of this as you can. After transferring money to your brokerage account, you should invest it. Our readers who wrote in are in their late thirties and have time on their side, so they can afford to be aggressive and should consider investing mostly in stocks. How they choose to invest, however, will ultimately come down to their appetite for risk, investment time horizon and personal preferences. For example, a younger investor with time on their side might have a greater tolerance for risk than someone approaching retirement in a few years. What’s most important, however, is that they’re consistent and disciplined in their approach.

For most people, saving for retirement doesn’t need to be more complicated than this. You don’t need to use exotic or alternative investments like real estate and hedge funds to steadily accumulate wealth over time, even though those opportunities are the noisiest these days. Maxing out retirement plans and regularly investing in a brokerage account is a tried-and-true way to achieve financial independence.

So, how do you know when you’ve invested enough? Because, at some point, your goal is to work less or not at all.

There is no shortage of online retirement calculators you can use for free. Some, like this one from SmartAsset, take into account a number of variables and do a pretty good job calculating how much you need to reach a specific retirement goal. These calculators can provide a general understanding of where you currently stand and what you need to continue saving to replicate your paycheck during retirement. However, the financial planner in me believes they are no substitute for a detailed retirement plan incorporating financial factors that go well beyond what generic online calculators provide. Taxes, distribution strategies, inflation assumptions and rates of return are just some of the variables that financial planning can account for.

Our readers are doing an incredible job when it comes to saving for retirement, but there’s certainly more they can do once their work-sponsored retirement plans are fully funded for the year. By taking advantage of backdoor Roth IRA contributions, consistently investing in a brokerage account, and tracking their progress over time, they can ensure that their hard work is being fully maximized. As always, everyone's financial situation is unique, and it's essential to tailor your strategy to your specific goals, lifestyle, and risk tolerance. Above all, staying disciplined and consistent in your savings and investment efforts will pave the way for long-term success.

Do you have a love and/or money question for our Q&As? Let us know by dropping us a line: themergebook@gmail.com.

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Heather and I flew out to California to speak at our favorite wealth management festival, Future Proof! Not only did we have the opportunity to talk about love and money to financial advisors from all over the world, we got to reconnect with some of our closest friends and colleagues, too. While out here, we celebrated Investopedia’s 25 anniversary. Having worked closely with them for years, I can tell you there are few organizations that champion financial literacy quite like them. It’s such an honor to be appointed to their first ever advisor council!

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TJA in the News!

It’s fall, y’all! You know what that means? No, not PSLs and overpriced apple picking. It’s open enrollment season! Yay? So, before selecting this year’s employee benefits, check out our latest CNBC article where we examine how partners can navigate open their company’s open enrollment when their benefit windows don’t align.

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The content shared in The Joint Account does not constitute financial, legal, or any other professional advice. Readers should consult with their respective professionals for specific advice tailored to their situation.