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John Yeigh

WITH THE ADVANTAGE of advanced age and flawless hindsight, I now believe the three most important contributors to retirement prosperity are a robust savings rate, an aggressive allocation to stocks and funding tax-free accounts, both Roth and health savings accounts (HSAs).

What about other financial factors, such as the investments we pick, whether we buy income annuities, when we claim Social Security and what Medicare choices we make? These matter on the margin, but I don’t think they’re as crucial to a successful retirement.   

My three key contributors to a financially comfortable retirement are, I believe, especially critical in our early adult years. At that juncture, young earners have a long runway to capture the benefits of compounding, an aggressive stock allocation comes with relatively little risk and their low marginal tax rate makes tax-free accounts particularly appealing.

Save big early. I’d argue that the FIRE movement—financial independence, retire early—promotes a level of frugality that’s too extreme and that its “retire early” concept is unnecessary for most folks. The usual recommended savings rate of 10% to 20% of income is far more palatable than FIRE’s 50% to 70%.

Still, FIRE’s emphasis on saving early in life is spot on. My children’s small Roth contributions when they were 15-years-old will likely deliver more bang for their retirement buck than maxing out their 401(k) contributions at the end of their career. Similarly, a number of my wife’s and my early investments, made during the 1970s and 1980s, are now 20-baggers or more.

We tend to zero in on our retirement finances during our later working years, as we approach retirement. At that point, we also often have ample discretionary income to ramp up savings. The 401(k) and 403(b) rules even allow extra contributions after age 50, appropriately named “catch-up” contributions. But while such late-stage savings are good, incrementally higher savings rates during the first 30-years are a far more powerful contributor to investment compounding.

Go all stocks. Along with paying off personal debt, establishing an emergency fund and purchasing a primary home, those in their 20s, 30s and 40s also focus on stashing their savings in stocks and bonds, with an eye to reaping the rewards of compounding.

Stocks are clearly more volatile than bonds, but I’d argue they aren’t very risky if we’re investing for the longer-term. In fact, stocks are undefeated over 20-year time horizons and have always scaled investors’ “walls of worry.” This is nicely reaffirmed by financial writers Nick Maggiulli and Sam Ro.

Over our lifetime, we’ll encounter financial risks that can be more damaging than the occasional bear market, including decades of inflation, a surprisingly long retirement, health issues, getting laid off, forced early retirement, increased tax rates and all sorts of family challenges.

My contention: Young workers should maintain an aggressive tilt toward stocks, preferably using index funds, and even consider a 100% stock allocation if they can stomach the volatility. As Teddy Roosevelt once stated: “Old age is like everything else. To make a success of it, you’ve got to start young.”

Fund Roths and health savings accounts. We boomers didn’t have Roths or HSAs until the end of our careers, plus the Roth IRA’s income limits often stymied our ability to play. By contrast, today’s younger workers can profit by funding these tax-free accounts during their career’s early low tax-rate years. Roth accounts are winners when retirement tax rates end up being higher than those during the contribution years.

Today, 90% of workplace savings plans offer a Roth option, plus individuals can fund Roth IRAs up to $7,000 a year if they fall below the income thresholds. Meanwhile, more than 50% of employer benefit plans offer HSAs, the only savings vehicle that offers both tax-deductible contributions and tax-free withdrawals.

Over our lifetime, many of us suffer tax-bracket creep. Like me, retirees are often surprised to discover that their marginal tax rate easily exceeds their tax rate early in their career, especially once required minimum distributions start. On top of this, government deficits are growing and Social Security will require additional funding, so there’s a decent chance that tax rates will climb.

For those in the workforce, if tax rates rise or their own marginal rate increases, they can always redirect new savings from Roth accounts to traditional, tax-deductible retirement accounts. What if their tax rate declines once they retire? They can again look at funding Roth accounts, but this time via Roth conversions.

For today’s retirees, it may be too late to take advantage of the above three strategies. But we can still promote these strategies to our children and grandchildren, and maybe even help fund their accounts. Do your adult children need financial guidance to help them get going? Here are four websites I like: OfDollarsandData, AffordAnything, YoungMoney and Kyla’s.

John Yeigh is an author, coach and youth sports advocate. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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Jamie
9 days ago

Very few people have the fortitude for an “all stock” portfolio. We think we do (especially after a long bull run), but the vast majority of us do not. The challenge is not just being able to handle the stress when your investments decline by 30+%. The bigger challenge is that the decline usually is happening in conjunction with some other scary / terrible news. Your stocks are down 30% and you were laid off and unemployment has tripled in the past few months. Your stocks are down 30% and so many people are dying in NY that they are parking refrigerated trucks behind the hospitals to hold all the bodies. Your stocks are down 30% and terrorists just attacked a US base abroad and killed several hundred who serve in our military. Etc.

Patrick Brennan
9 days ago

Great article John. I’m at the end of the baby boom and was all in on stocks for my retirement investing since my mid-20s. Although I missed out on the greatest bond market ever, I saw no need for bonds figuring I’d miss out on at least some return. Glad I did, and I don’t even mention bonds to my kids. And yes, getting started early, learning to spend less than you make and invest the difference is so important. In fact, that’s the hard part. Once people can do that, investing can be quite easy.

Last edited 9 days ago by Patrick Brennan
Charles Moser
11 days ago

HSAs are a great deal if you are young and helathy. Mine (with an allocation of 50% Equity Income and 50% Short term bond) has allowed me to fully cover all my health care costs in retirement. Making a withdrawal once a year in Dec – withdrawal mostly from whatever fund has done the best that year.

stelea99
11 days ago

Most people share their life with another person. Unless they pass together from some common cause, they are guaranteed to spend some portion of their retirement alone and filing their taxes as a single person. The difference in tax rates is substantial enough to favor continued attention to building Roth accounts even when the tax advantage seems minimal when they are both alive.

OldITGuy
11 days ago
Reply to  stelea99

Good point. Then there’s related “tax like impacts” such as IRMAA which essentially function as a tax in this context and support your point.

Dan Smith
11 days ago

John, I suspect that someone will comment about how difficult it is for young adults to save at a time when they are raising a family, buying a house, and etc. But looking back on my life, saving would have been totally possible if only I had made it a priority on par with those other things. Retirement saving became a goal of mine at age 32, imagine the difference had I started 10 years earlier. 

John Yeigh
11 days ago
Reply to  Dan Smith

Dan – Exactly. This is why the older generations are wise to explain these long-term financial impacts to younger generations. For all the cash-strapped children in their early working years, those parents having the means might really help them out for the long term with a bit of assistance helping to pay Roth taxes.

Edmund Marsh
11 days ago
Reply to  John Yeigh

Funding early Roths might turn out to be a better legacy than inherited accounts.

Jon Daley
9 days ago
Reply to  Edmund Marsh

My father-in-law has a percentage tier system for funding my kids’ Roth’s accounts.

80% when part-time until age 19

60% when part-time until age 21

50% when full-time until age 21

The younger kids don’t realize the value, but my older ones have read enough books to realize the value of time/compounding.

Rick Connor
11 days ago

Great advice John. I think helping fund a child or grandchild’s Roth is a great way to get them started, especially with that first job. With Roth 401ks now widely available, I wonder what you think someone in their early career, who does have a high wage, should do? Maybe split their contributions 50/50 in trad and Roth?

Last edited 11 days ago by Rick Connor
John Yeigh
11 days ago
Reply to  Rick Connor

Hi Rick,
For young people with higher incomes (ie solid tax rates), I now believe they should continue to lean-in toward Roth versus tax-deferred (maybe 75/25 or 60/40) unless their marginal tax-rates have really jumped above the 22-24% brackets for a bunch of reasons: 1) successful young folks’ incomes are likely to increase further, 2) their early-year savings should compound to added wealth and later income – they may want to avoid the RMD trap of only ending up with huge tax-deferred savings, 3) they’ll likely receive inherited wealth which will further push up incomes, 4) their taxes will increase after the first spouse dies, 5) inheritance is generally better for Roths versus tax-deferred, and 6) someday tax rates may have to increase to stabilize deficit spending and those with savings or solid income (think social security taxes or Medicare IRMAA premiums) will be the ones bearing proportionately higher taxes.

As both you and I have written before, we wish we had more balanced buckets of Roth tax-free and after-tax accounts in addition to concentrated tax-deferred accounts.

My children had mainly been Rothing retirement savings through their 20s, but the married child in their 30s has recently started a portion of tax-deferred as incomes and tax rates have risen. A bit of after-tax savings of the emergency fund isn’t bad as well to capture the 15% capital gains rates. 

David Lancaster
10 days ago
Reply to  John Yeigh

I am trying to balance our Roth and traditional balances by attempting to covert all of my wife’s retirement funds (which is about 2/3 of my balance) before we turn 70 and are both claiming Social. If I can accomplish a complete conversion I will only have to take RMDs from my account simplifying my finances. I am currently dealing with RMDs from inherited IRAs with multiple mutual fund companies and know how much work that is especially at tax time.

Randy Dobkin
9 days ago

Why not transfer them all to where your other accounts are?

Edmund Marsh
11 days ago

Wonderful article. I didn’t start investing until my mid-30s. At nearly 63, I look back thankful that my wife and I put a big chunk of our earnings in stocks, but realizing what a benefit an earlier start would have delivered. But out daughter is reaping the benefit of our hindsight.

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