As importantly, IRAs have different types of asset protection levels. A Roth IRA, by way of illustration, is generally protected from creditors for amounts up to roughly $1.25 million (the amount is adjusted for inflation and changes over time so be sure to check the most recent tables) in the event of a bankruptcy, with only a few types of liabilities being able to invade the protection, including tax liens and divorce settlements. Other types of IRAs have no limit on the amount of bankruptcy protection they offer.
Take Full Advantage of Employer Matching on Your 401(k)
Many companies will match a significant portion of your earnings based on the contributions you make to your 401(k) plan. If you are fortunate enough to work for such a business, and millions of Americans are, take advantage to the fullest! If you don’t, you are walking away from free money. Even if all you do is have your 401(k) contributions parked in cash and cash equivalents, it’s often an instant, practically risk-free 50% to 100% or more return.
Don’t Cash Out of Your Retirement Plan When You Change Jobs — Use a Rollover IRA to Avoid Early Withdrawal Penalties and Taxes
If you are anything like the average American worker, the odds are fairly substantial you are going to change jobs at some point during your career. When this occurs, the most foolish thing you could possibly do under most circumstances is to cash out of your retirement investments.
Instead, roll over the proceeds into a rollover IRA or your new employer’s 401k plan. In addition to avoiding the significant taxes and early withdrawal penalties that you otherwise might have incurred, you will be able to keep your money working for you tax-free or tax-deferred, making it a lot more likely you’ll reach retirement with more money than you otherwise would have had. Given enough time — you already saw the power a few decades can have on seemingly small amounts of money — this could mean the difference between vacationing in Tahiti and having to take a part-time job to supplement your income.
Use Your Surplus Funds to Acquire Productive Assets and Avoid Liabilities
Ultimately, for most people, the best way to get rich by retirement is to get your hands on ownership of productive assets, particularly equity stakes in excellent businesses. A truly remarkable business, bought at an intelligent price, can work wonders in ways very few people seem to understand. The general public foolishly focuses on short-term market value — I usually define anything as less than five-years being short-term — and, in the process, misses the forest for the trees.
Look at a company like Hershey. An example of how intrinsic value can deviate from market quotation is the experience of an owner who held it between 2005 and 2009 when the stock lost 50% of its value, slowly declining despite profits being fine, dividends increasing, and the p/e ratio, PEG ratio, and dividend-adjusted PEG ratio all being fine. You’d have been a fool to sell it or even lose a moment’s sleep over it. The company’s market share is extraordinary. Its returns on tangible capital are breathtaking.
This is a business that has been around for more than a century. It sailed through the Great Depression, which was the worst economic catastrophe in 600 years. It made it through the 1973-1974 meltdown. It survived the dot-com bubble. It kept on going during the 2007-2009 collapse. Today, the firm announced its 346th consecutive quarterly dividend; an uninterrupted chain of checks sent out to owners going back generations. Everybody has known how fantastic this enterprise is but few people actually do something about it.
Consider this: Imagine that it is late 1982. Hershey is the largest chocolate company in the country; a name practically every citizen, young and old, knows. You decide you want to buy $100,000 worth of ownership. It’s the bluest of the blue chips. It has a strong balance sheet. It’s just what you want in your brokerage accounts and trust funds.This is not exactly a radical proposition by any means. What would have happened?
As of May 2016, you’d be sitting on somewhere around 49,739 shares of the stock with a market value of $4,582,951.46 plus you’d have collected $1,174,337.79 in cash dividends along the way for a grand total of $5,757,289.25. This assumes you didn’t reinvest any of those dividends, either, and that you never bought another share for the rest of your life!
Yet, how many people do you know own shares of Hershey? How many people around you have shares of it tucked away in their accounts?
In my family, this behavior is now part of how we operate. For Christmas, my husband and I gave shares of Hershey to the youngest members both sides of the family tree. We have it in our portfolio. We have it shoved in our parents’ portfolios. It is stuffed in portfolios we designed for our siblings. It’s so simple. Nobody does it. Nobody takes advantage of it, it seems. Often, getting rich requires doing something that is right in front of your face; so ubiquitous that you’ve become blind to it. We’ve made a substantial bet that 25, 50+ years from now, Hershey will drown our family members with torrents of cash. Whenever we believe it is reasonably valued, we buy more.
Find your Hershey. There are often things right in front of you, things you know have a low chance of losing money over long periods of time and are no-brainers. Take advantage of your specialized knowledge. Make sure you have ample diversification to protect yourself if you’re wrong. Don’t buy stocks on margin. It isn’t that complex. Time and compounding will do the heavy lifting if you let it. You have to plant the right seeds in the right soil and then get out of the way.
Be Willing to Find Ways To Expand the Pie
Don’t just cut expenses, find a way to make more money! By taking on side work or turning a hobby into a business enterprise, you can create additional streams of income to help fund your retirement. In many cases, this is an excellent alternative to cutting costs because it allows you to maintain your current standard of living while providing for your future.
As full-time college students more than a decade ago, my husband and I were making almost $100,000 a year from part-time side projects and work. It allowed us to fund our investments as we lived well below our means. We weren’t telling anybody about it. We didn’t wait for people to offer us opportunities in most cases. We figured out what we could sell the world — what goods and services we could provide other people and for which they would be happy to write us a check — and we set up systems that worked for us while we slept. If we’d focused on merely cutting coupons, it would have taken us far longer to be where we are today.
More Information on How to Retire Rich
This article is part of the How to Get Rich guide for new investors on forexsq.com. You may also want to read our guide on building wealth. I wish you the best of luck on your journey. If nothing else, know that I am rooting for you. Good luck!