On Confucius Confusion, Thousand Mile Journeys, and Actionable Efforts in 2021
“A journey of a thousand miles begins with a single step.”
I’m the first one to roll my eyes when I hear an overused cliché expressed, so let’s at least get a brief history lesson out of this one before we make like Vanessa Carlton and start walking those thousand miles. (My apologies for those of you who will now have her song stuck in your head the rest of your day…) The ever-infallible Wikipedia informs us that this quote is erroneously attributed to Confucius when in fact it was penned by a contemporary of his by the name of Laozi as part of the latter’s fundamental text for Taoism, called “Tao Te Ching.” Evidently, even if Laozi had the foresight to stop by the copyright office of 4th century BC Zhou China, protection on his quote has long since expired—2,400 years later it can be found on stock photos everywhere.
With that being said, I’m batting toward the top of the blog lineup early in this new year, and historically that has been as good a time as any for reflection and meaningful change. I’d like to propose for your consideration a few actions that are easier to start at the beginning of the year than at the end, with the goal of covering the miles toward your financial destination at a quicker pace.
Before we take off on our journey, there are a few key numbers we should review first. The friendly neighborhood IRS sets the “speed limit” for the maximum amount one can contribute to certain types of accounts, and those amounts can change year-to-year. The most common of these accounts are IRAs, employer-sponsored plans such as 401(k)s and 403(b)s, and Health Savings Accounts. By no means do these need to be the numbers you need to shoot for, but it is helpful to know the maximum amounts so that you don’t exceed them and suffer a headache come tax season. The key figures for 2021 are as follows:
IRAs (combined Roth and Traditional amounts)
- $6,000 (those turning or over age 50 are eligible to contribute an extra $1,000)
- $19,500 (those turning or over age 50 are eligible to contribute an extra $6,500)
Health Savings Account (must be on a high-deductible health plan)
- $3,600 if single coverage, $7,200 for family coverage
If you think some of these number look familiar, you’d be correct—employer plan and IRA contribution limits did not change at all from their 2020 limits while HSA contribution maximums increased only slightly.
To learn more on our retirement planning services, visit this page and contact one of our financial advisors for more information at (509) 735-7507.
Now that we have the rules of the game framed out, we can get to work on playing the game itself. If your goal is to max out your 2021 IRA contribution, for example, $6,000 is likely a bit much to come up with all at once. However, if you get paid twice a month and commit to starting your contributions on your first paycheck, that number goes down to $250 per check. While still nothing to sneeze at, that’s a much more manageable amount to come up with. If $250 would stretch your monthly budget too far, you can use a smaller number as a target using the chart below. The habit of paying yourself first each paycheck is more important than the dollar amount you’re contributing, especially when you’re just getting started.
Automating your savings is a great way to take out some of the effort needed to save consistently. For me personally, it can be a little discouraging to see my paycheck hit my bank account and know that I have to manually go in and contribute to my IRA or else a) it won’t happen and b) I’ll see that there is some extra money in my account at the end of the month and
get my lovely wife something nice see something shiny and be tempted to spend frivolously. 401(k) and 403(b)s bypass this completely by taking contributions out of your paycheck directly, and there’s a decent chance your IRA custodian likewise has a direct deposit option. Whether you’re looking at contributing to an IRA because you don’t have access to an employer-sponsored plan, your employer plan’s options just aren’t very good (make sure you’re still contributing enough to get the full employer match!), you value the flexibility of broader investment options, or you have extra savings capacity beyond your employer plan limits, you’ll simply need to contact your custodian and request the routing and account numbers that correspond with your IRA. Once you have those details, you’ll need to provide them to your HR department so they can add your IRA to your pay stub.
If your IRA custodian doesn’t have a direct deposit option or your HR department is unable to split your paycheck across multiple accounts, setting up a recurring ACH transfer from your checking account to your investment account is another great way to eliminate an obstacle that your future self will be thankful to have out of the way. If you haven’t done so already, you’ll need to link your bank and investment accounts, then you can choose the frequency and dollar amount of the transfer. This will take the number of times you have to actively commit to saving down from once per pay period to just once. The less effort a good habit requires, the more likely it is to take hold and be successful.
For those more inclined to break up the trip and walk 500 miles, then walk 500 more, I have a Proclamation for you too. If your budget is already tight but you want to start saving for the future, it is perfectly reasonable to feel some apprehension about putting money toward future goals when you may need it for unexpected nearer-term expenses. If this sounds like you, consider opening a completely separate savings account and automatically directing part of your paycheck there each time you are paid. If you would feel tempted to spend money accessible under the same login credentials as your primary bank account, consider opening an account at a different institution (Community First Bank offers an interest-earning account with additional services included). Once this separate account is open and you’ve set up automatic transfers from your primary bank, set a calendar reminder for yourself to check in on it in 3-6 months. If you haven’t needed to access the account since you began contributing to it, consider it a sign that you can feel comfortable putting those funds in an account that is more long-term oriented. This method shouldn’t be viewed as a replacement for a standalone emergency fund, but it can step in as a temporary stopgap if you are also working to shore up your liquid savings.
As is the case with any journey, it is important to not lose sight of the destination you are working to reach. Let’s say I want to visit our neighbors to the north of us in Canada. From our headquarters in Kennewick, I can jump in the car and be in Vancouver in about six hours. However, if my intent is to visit Montreal, there will certainly be some similarities in comparison to a Vancouver trip (government-issued ID requirements, cooler temperatures, understanding that $1 CAD ≠ $1USD, etc.), but there will be stark differences in other areas – such as planning for a 40-hour drive or a multi-stop flight itinerary instead of a half-day’s drive, knowing that French is more commonly spoken than English, and historical and tourist attractions that are different from those found in Vancouver. Even who joins me on my hypothetical trip to Montreal changes the way I go about my planning. Traveling with just my wife? She’ll have researched the top 89,745,619,842 things to do, grouped them by how close they are to each other, and prepaid for the ones that look the most interesting so that we for sure have to do them. We’ll try and see everything we possibly can until we’re too tired to see anything else that day, go to bed, and do it again the next day. Bringing our little one with us? Much slower pace, along with a nap schedule to work around lest we risk the fury of a sleep-deprived child who has traveled through multiple time zones in unfamiliar surroundings. My in-laws are making the trip with us? My father-in-law lived in Montreal for a period, so of course we’d want to spend time visiting different places he has strong memories of and see how much has changed since he last visited.
In a similar manner, the steps that you need to take toward your desired financial destination depend on a myriad of different wants, needs, preferences, timelines and circumstances, even if your only goal is “retire someday.” Some steps will be the same for nearly everyone, such as regularly saving in tax-advantaged accounts, while others will be unique to your personal situation. If you find yourself not knowing what you need to do now in order to reach the financial destination you want, we here at HFG Trust can help. If you don’t know what kind of financial destination you want in the first place, we can help with that too. We have been helping clients articulate, plan for, and reach their financial goals for over 35 years, and we invite you to make 2021 the year that you take deliberate action to reach yours.
Visit our retirement planning services page or get in touch with an HFG Trust advisor by calling (509) 735-7507.
Wealth Planner, HFG Trust