Saving for retirement is a big problem in the United States. Many retirees have no savings at all and they will have to keep working to pay the bills. Social Security helps, but that isn’t enough for most people. It’s a tough situation to find yourself in at that age. My retirement saving is in good shape compared to most people, but I still worry. You never know if you will be able to work or find a good job when you’re older. When it comes to retirement savings, having extra is better than not enough. That’s why I’m still saving more in my 401k.
When I retired from my engineering career in 2012 to become a stay at home dad/blogger, I wasn’t sure if I could continue to save for retirement. My original plan was to use my small blog income to help fund our expenses. That way we could put off withdrawal and let our retirement savings grow. However, life rarely turns out as planned. In my case, that’s a good thing. The last seven years of early retirement has been much better than expected.
Mrs. RB40 is still working full time and her income increased significantly since I retired early. Amazingly, my blog income also grew from $10,000 per year in 2011 to $75,000 in 2018. It’s simple, our income exceeds our living expense so I continue to save. Today, we’ll take a look at my solo 401k and how it did over the last few years.
I’m sure most of you are familiar with the employer sponsored 401k. Almost every employer offers this plan which everyone should take advantage of. It’s one of the easiest ways to save for retirement. You will be very well off in retirement if you always max out your 401k. The solo 401k is similar to your regular 401k, but it’s only for self-employed people. Let me tell you more about this plan.
The solo 401k (aka individual 401k) is only available if you’re self-employed with no employees or just the spouse. My goal is to contribute as much as possible to my solo 401k. The more I contribute the less tax I have to pay. You only pay tax on the traditional retirement account when you make a withdrawal. Here is how much you can contribute to the solo 401k in 2019.
- As an employee, I can contribute up to the standard 401k limit. The 2019 maximum contribution is $19,000. If you’re 50 or older, you can add $6,000 catch-up contribution limits.
- As an employer, I can contribute up to 25% of my “net earnings from self-employment.”
These two components add up to a significant amount. However, the total contribution can’t exceed $56,000 in 2019.
It’s even better if you have a full-time job and a small business on the side. You can contribute to your employer-sponsored 401k and also contribute to your i401k account on the side. That’s what I should have done during my final year of working full time to reduce our taxes.
In 2018, I made $74,597 from blogging and my contribution limit was $36,649. I contributed $18,500 as an employee and $18,000 as the employer. That’s $36,500 of tax deduction. We needed as much tax deduction as possible because Mrs. RB40 still works full-time. I don’t want to pay more taxes than necessary. Now, let’s take a look at how my solo 401k is doing.
My solo 401k
The solo 401k is really great because I was able to save more than I ever did as an employee. Here are my contributions over the years.
|2019||$7,000 by 5/1/19|
That’s a lot of money stuffed into a retirement account in 6 years. I’ve been very lucky so far because the stock market did quite well since I started investing in my solo 401k. Now, the balance has grown to nearly $200,000. Here is the graph from Vanguard.
The green area is where I contributed since 2013. For the most part, I consistently add a fixed amount every month. The amount is the employee maximum contributions divide by 12. That’s dollar cost averaging at work. Also, I add the employer contribution periodically.
The blue area shows the investment returns. 2018 started off really well, but we had a rough Q4. My account got hit pretty hard because I had a significant percentage in the emerging market. We’re doing a bit better in 2019.
Investing with Vanguard
I wrote a more detailed post about Vanguard’s solo 401k plan a while back. You can read more there if you are considering working with them. My experience has been largely positive. I’ll give a quick summary of that post here.
- Cost– $20 per year for each Vanguard fund held in the Solo 401k account. This fee is waived if you have more than $50,000 invested in Vanguard funds.
- Investment choices– More than 100 Vanguard mutual funds. Previously, we couldn’t invest in the Admiral shares, but this rule changed in 2018. Now I can have Admiral shares in my account. That’s great!
- Roth option– Vanguard is one of the few companies to offer Roth 401k. I’m going with the traditional 401k for now because we need the tax deduction.
- No Loan – You can’t borrow from your i401k account at Vanguard. This isn’t a big deal to me because I don’t plan to borrow anyway.
- IRS– You will have to file form 5500 EZ with the IRS if the i401k plan asset is over $250,000. See the IRS page on form 5500for reference. This is the rule no matter where you have the solo 401k. Unbelievably, we’re getting close to $250,000. I might have to file this form soon.
In 2018, I had 4 funds in my solo 401k. The value of my solo 401k is over $50,000 so they don’t charge me the $20 per fund fee anymore.
- VTSMX– Vanguard Total Stock Market Index Fund
- VGTSX– Vanguard Total International Stock Index Fund
- VBMFX– Vanguard Total Bond Market Index Fund
- VMFXX– Vanguard Federal Money Market Fund
This year, I moved a big chunk into the money market fund. I’m just very nervous about the stock market. Now, I only have two funds.
- VMFXX – Money market fund. 90%
- VTSAX – US total stock market fund, Admiral Shares. 10%
All in all, I’m pretty happy with Vanguard. The solo 401k plan improved immensely this year when they let us invest in Admiral Shares. I’m being very conservative right now. I plan to move the money back into the stock market at some point, but I’m not quite ready yet.
Lastly, I’d like to remind you to check your asset allocation at least once per year. The stock market did very well so far in 2019 and your asset allocation might be out of balance if you haven’t checked in a while.
I maintain a spreadsheet to keep track of my net worth and investment, but I don’t update it very frequently. It’s easier to log in to Personal Capital to get a quick glance on my asset allocation.
Personal Capital takes all our accounts and calculates the asset allocation. It’s a quick way to check your asset allocation. Sign up with Personal Capital if you don’t have an account yet. They also have a very good retirement planner/calculator and other useful tools. I highly recommend them for DIY investors.
Are you self-employed? If so, are you saving for retirement? It’s difficult to save for retirement if your income is unstable, but you need to plan for the future.
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