# Retirement Issue 01

Meet Janna. Janna is a newly employed college graduate with the urge to invest. Janna just finished our two videos “Why Invest” and “How to Invest,” so he understands how he can easily and effectively invest his money through a robo-advisor. While Janna is proud of this newfound knowledge, one obstacle remains in his path: alphabet soup. Everyday, Janna is confronted by a terrifying array of terms: 401(k), IRA, the list goes on and on. Luckily for Janna, we have him covered. Let’s start with most basic: 401(k)s and 403(b)s.


These are tax-advantaged investment accounts, designed for retirement, and offered by either a for-profit employer, in the case of a 401(k), or a nonprofit or government employer, in the case of 403(b). In either case, both accounts are virtually identical, and come in two forms, Traditional and Roth. So what’s the difference? Well, with a Traditional 401(k), the money you put in is pre-tax, and then only taxed when withdrawn at retirement, while with a Roth 401(k) it’s the opposite. So which one should you choose? Well, as the math turns out, Roth 401(k)s are perfect for most people, especially for those in a low to moderate tax bracket, like 25% or below. In contrast, traditional 401(k)s are generally better for those in a higher bracket. In either case, your employer may match your contributions up to a certain amount, like 5% of your total salary. Sounds pretty great right? After all, free money and tax-advantaged growth, what’s not to love?


Well, a few things. One: As of 2016, your contributions are limited to up $18,000 per year. Two: Not only will your employer restrict you to a specified list of funds, you’ll also have to pick them yourself, which can be a real challenge. However, you can avoid this, either by using our recommended robo-advisor to manage your 401(k), or by manually selecting what’s called a life-cycle or target-date fund, which operates much like the robo-advisors we described in our previous video, just with less flexibility and personalization. Three (and here’s the real kicker): you generally can’t cash out of your current 401(k) unless you meet a hardship exemption, like excessive medical expenses. Plus, even if you do meet them, you’ll still generally have to pay a 10% penalty, plus taxes, on money withdrawn before age 59 and a half. So that’s 401(k)s. Let’s move onto the next account, IRAs.


IRAs come in the same two forms as 401(k)s, Traditional and Roth, and for the most part, they have the same tax advantages, withdrawal rules and selection criteria: Roth favors those in low to moderate tax brackets, like 25% or below, while Traditional favors those in higher ones. However, there’s a few differences between IRAs and 401(k)s to be aware of. One: Your contributions to an IRA are more limited, currently only $5,500 per year across both Traditional and Roth accounts. Two: You’re barred from contributing to a Roth IRA at certain high income thresholds. Three: If you’re a small-business owner or freelancer, you can also open a SEP IRA, which operates like a traditional IRA, just with a much higher contribution limit. Four: Unlike a 401(k), almost every brokerage firm, including robo-advisors, will allow you to open an IRA and select whatever fund you want. This is incredibly useful, especially if your 401(k) has costly or undesirable options.

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Plus, withdrawing money is also easier in an IRA, as you don’t need a hardship exemption, though, if you’re below age 59 and half, you’ll still have to pay the 10% fee and taxes. So that’s IRAs. So how do you choose between them and a 401(k)? Well, we have simple rule of thumb. First contribute to your 401(k) until you’ve hit maximum matching, then max out your IRA, and then finally, return to max out your 401(k). Of course, for most people this is unrealistic, especially considering we only recommend you invest 10-15% of your paycheck for retirement. However, for educational purposes, let’s say you’ve maxed out both. What do you do then? Well, you can then put the remainder of your investing money into a taxable investment account offered by any brokerage firm, including robo-advisors. While these accounts lack tax advantages, they also have zero limitations on contribution size and withdrawals, making them a great home for the rest of your money.


Finally, a bit of house-keeping. Whenever you change jobs, you start a new 401(k) with your new employer and leave the old one behind. Whatever you do, don’t cash out of the old one. Instead, roll it over into a matching Traditional or Roth IRA. This will allow you to consolidate your funds and lower your fees, while avoiding any tax or withdraw penalties. And don’t worry, robo-advisors make this process a breeze. Congratulations! You have finished the investment basics curriculum! If you want to see great robo-advisors or stockbrokers, or just more educational content, be sure to check out our website.


# Retirement Issue 02


Meet Janna. Janna has watched our first three videos: “Why Invest?”, “How to Invest”, and “401(k) and IRA 101”, so he now understands exactly how to invest and manage retirement accounts. However, he’s still confused about the process of retirement and wants to learn more. What should he do? Well, we’ve got him covered. The first thing Janna needs to understand about retirement is that it revolves around two huge government programs, Medicare and Social Security.

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Medicare is the government’s health insurance plan for individuals over 65, and it’s traditionally made up of two parts: A, which covers inpatient expenses, like hospitals. And B, which covers outpatient expenses, like doctor’s visits and lab tests. However, because these plans don’t cover everything, and don’t cap out-of-pocket expenses, three products have emerged to bridge this gap: Medicare Part D, which covers prescription medication. Medigap, which covers out-of-pocket costs. And Medicare Part C or Medicare Advantage, which is actually a full private replacement for Medicare, covering all parts, including D, and capping out-of-pocket expenses.


So what should should you choose? Well, it depends, but as a rule of thumb, the Original Medicare, Part D, and Medigap combo, has higher premiums, low out-of-pocket costs, and is accepted everywhere, whereas Medicare Advantage is the opposite arrangement, especially because it’s limited to a specific insurance network. However, this is only a generalization, and Medicare is a complex beast at best. That’s why, when it comes time to choose your plan, we highly recommend using our prefered website, which makes it easy to speak with a licensed professional and select the best plan for you. So that’s Medicare. The second major part of retirement is Social Security.


This a federal program that takes money automatically out of your paycheck when you’re young, and then gives you money back once you reached retirement age. As for how much you get back, it depends on three factors: your average career earnings, your employment status during retirement, and the age at which you claim benefits, which can be as early as 62 and as late as 70. Not surprisingly, this decision has major consequences. The earlier you claim your benefits, the smaller they’ll be, so unless you’re on your last legs, it’s probably worth delaying as much as possible. However, with that being said, this math goes often out the window when confronted Social Security’s other wrinkle: spousal and survivorship benefits. Spousal benefits allow the husband or wife to claim up to 50% of their living spouse’s retirement benefits, whereas survivor’s benefits are similar, just with a higher percentage, and a deceased spouse. So what should you do? Well, don’t worry, we understand this math is confusing.


That’s why we recommend using our recommend calculator, which makes it easy to run the necessary valuations and make a great retirement decision. Janna is stunned by this, and excited to get started. However, he probably shouldn’t be. By the time Janna actually reaches retirement age, forty years from now, Social Security will have likely changed dramatically and not for the better. That’s why, when calculating how much to save for retirement, we recommend Janna ignore Social Security, and instead focus on what’s called the safe withdrawal rate.

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This is the amount of money that Janna can withdraw on the first year of his retirement, and then adjust for inflation every year after, without going bankrupt under almost any scenario, even the Great Depression! Historically, this bulletproof rate was 4%. However, because it doesn’t include taxes or investment fees, we now recommend a 3% withdrawal rate, just to be extra safe. Helpfully, this translates into a simple rule of thumb.


Once you have 33 times your annual expenses saved up, you can safely retire at any age, no matter what Social Security is doing! In fact, if you can get to this 33 times number unusually quickly, either by increasing your savings rate or decreasing your expenses, you could retire as early as 30 or 40! For more details on this, be sure to check out our recommended calculator, and remember, no matter what your situation, saving 10-15% of your paycheck for retirement remains a great rule of thumb. Finally, before we conclude this video, we just have three more things to say: One:


Although long-term care insurance sounds great, as it covers things that aren’t well covered by Medicare, like nursing homes, it’s generally too expensive to be worth the cost. Two: At some point during your retirement, you’ll probably be offered annuities, which are contracts with insurers that guarantee you a fixed stream of income over a set period of time.


While that consistency may sound tempting, especially to retirees, just know that the cons of annuities, namely their high fees, extreme complexity, and limited cash-out options, generally outweighs any of their pros, especially if you’ve been investing with a robo-advisor, detailed in our video “How to Invest.” Three and Finally: If you’re married, have kids, or possess significant wealth, don’t delay, hire a lawyer to create an estate plan, as detailed in our video, “Estate Planning 101”. Congratulations! You have finished the retirement basics curriculum! If you want to see great robo-advisors, retirement calculators, or just more educational content, be sure to check out our website.

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