There’s a limit to some kinds of retirement accounts…but what if you want to save even more? Michael walks us through the options for maximum retirement potential.
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Michael Reynolds Hey, everyone. Welcome to the Massage Business Blueprint podcast, where we discuss the business side of massage therapy. I’m Michael Reynolds.
Allissa Haines And I am Allissa Haines.
MR And apparently my voice is shot today. So sorry if I keep clearing my throat and sounding like a frog.
AH Hey, we’ve got a mute button for that. It’ll be okay.
MR Oh, that’s what that button’s for.
AH Who knew.
MR It’s so I can silence myself when all sorts of unwanted noises come through.
AH Information we’re bringing to all of you in the new year. Mute buttons are gold. They’re gold.
MR The more you know. The more you know.
AH How are you, Michael? How was New Year’s, buddy?
MR I’m doing just fine. I am — you know what? I always feel like a scrooge when I say this, but I’m always happy to get back to work when it’s January 2nd. Isn’t it — I don’t know if you feel that way too. But I love the holidays, I love time off, I love all the stuff that comes with it, but man, by January 2nd, man, I am ready. I am done.
AH I was so ready that I spent the first half of yesterday in my little office knocking out a bunch of stuff. Partly because it was the only day I was going to have actual time to do that. But, yes. I felt like for the past three or four days that I just wanted to put my head down and plow through a bunch of work and it felt so good to do that yesterday. So I am with you.
AH I was delighted to send the children off to school this morning —
MR [laughs] Right. [laughs] Day care is open today.
AH — and knock out — yeah, I’m so happy. So I hear you. I hear you.
AH What are we doing today? I like it because I’m doing very little today. You are in charge.
MR Cool. Let’s talk money today. We have gotten a question — this similar question over the years, and then, just recently, we had another question kind of on the same topic, and that is specifically on retirement contributions. So you were posting in our premium member group about your objective for this coming year or the next few years to kind of get to a place where you’re putting a certain amount in retirement. And it was a good amount, so —
AH Yeah, so how about you — I don’t have that comment in front of me, but if you have it, can you read it?
MR Do you want me to specifically read it?
MR Sure. I can do that.
AH Because someone in the premium group asked, like, what do you consider success in your massage business? And so a lot of people were putting in like, well, when I think I have this many clients, or when I can do this, this, and this, or when I can make enough money to do these other things I want in my personal life. And then I replied, which led to today’s question. So, Michael, why don’t you read my reply.
MR Yeah. Your reply is working about 48 hours — sorry — about 48 weeks of the year, about 35-ish hours a week, about 20 clients. And you wanted to be taking home 60k and putting 30k into retirement once your debts paid off, obviously. So once you get past that point, you want to start putting 30k a year into retirement.
AH Yep. So I just want to be clear there that I want my gross income to be high enough so that I am taking home 60 grand from my massage practice.
AH I like to clarify that gross and net stuff very clearly.
MR Right. Right. And then someone asked, well, how do you put that much in retirement past the limits? And then I actually answered in the group, but I’ll expand on that a little bit today. So that’s kind of where all of this came from.
So we kind of titled this Retirement Contribution Options for Massage Therapists Past the Normal Limits. Because a lot of people kind of are aware of the limits of IRAs and 401(k)s, et cetera. And for most massage therapists, they don’t have a 401(k), obviously, so an IRA is one of your best options. In particular, a Roth IRA is very attractive to many people. The 2019 contribution limits are — they got raised a little bit so you can put 6,000 into an IRA in 2019 up from 5,500. If you are past age 50, you can put an extra 1,000 in for that as well. So it’s nice. We can actually put a little bit more in. But still that’s a limit. You can’t — I mean, you can put more into retirement in general, but as far as the IRA vehicle, that’s your limit for that.
So we thought we’d kind of expand on that a bit. I actually answered brief — I gave a short answer to the person who posted, but it was a very brief answer. So what we’re going to talk about today is how to get past those limits. And first of all, I want to say two things. First, there is no magical trick. There’s no weird trick that only rich people know or that only certain financial people know or something. It’s pretty cut and dry. There’s not magical tricks or anything; there’s just rules to follow. And so we’ll talk about that. And then, two, everything we talk about today, this should not be taken as investment advice. This is not specific investment advice. This is very generalized educational material; this is meant for educational purposes. So people do not take this as specific investment advice. Talk to a financial professional if you do want specific advice. That being said, there’s the disclaimer.
The general kind of conceptual model for what a lot of massage therapists might look at is — the first thing they would look at is an IRA. IRA stands for Individual Retirement Arrangement. A lot of people say individual retirement account as a slag term, but an on-the-street term. But the literal meaning is Individual Retirement Arrangement. And it is simply a vehicle that allows you to put tax-sheltered money into retirement. There is an article on — that we wrote for Massage and Bodywork magazine, which is ABMP’s publication, on retirement planning. I encourage you to talk a look at that because it’s going to go a lot more in-depth. That is in the — which issue is this? I got to find the right issue here. Maybe you can look that up because I’m having a hard time finding it. It looks like it is sometime last year? [laughs] I’m trying to find the right issue. So we’ll get back to you on that. It’s one of the recent issues.
An IRA is, again, a way to put away retirement money without having to be tied to a company. So if you’re just any individual with earned income, you can put money into an IRA. There’s two kinds of IRAs. There is a traditional IRA and a Roth IRA. A traditional IRA is pre-tax money. A Roth IRA is post-tax money. The differences are if you put money into a traditional IRA, you save money by not paying taxes now, but as it grows, you’re going to be paying taxes on the money you take out later at retirement. The Roth is the opposite. If you put money in now, you’re putting in money that’s already been taxed, and later at retirement and you take all that growth — the money that’s grown out of it, you don’t pay taxes on it because you’ve already paid taxes on it. So a lot of people really prefer Roth for that reason because you’re paying taxes early and on the lower amount and the higher amount later at retirement, you’re saving taxes by not having to pay on that. So that’s kind of the difference there.
So what do you do if you want to put away more than 6,000 a year? And again, I’m saying the limits — kind of the standard limits. If you’re over 50, just add 1,000 to that for the IRAs. I’m just going to say the standard limit. So let’s say you want to put more than 6,000 a year into your IRA. What’s your next option as a massage therapist? Well, a lot of our listeners are solo practitioners and they don’t have access to a big, fancy 401(k) plan through a company or they don’t have — it’s not practical to — it’s just not possible for them. So there is something called a solo 401(k). A lot of people don’t know about this still. It’s still kind of an underutilized vehicle in my opinion. And a solo 401(k) is a 401(k) plan that an individual business owner can set up for themselves. There are some other little detailed rules around it like you can have maybe a part-time person or certain things. But anyway, the general idea is that if you’re a solo practitioner, you run a solo business, it’s just you as the owner, not a bunch of employees, you can set up a solo 401(k) plan for yourself very inexpensively. Most fees are about $30 a year, just kind of the administration fee; it’s really not much at all; it’s basically nothing. And that allows you to have your own little 401(k) plan for yourself, which is through your business, but it’s for yourself. And you can put away up to 19,000 per year into that in 2019. The limits were raised from 18,500 to 19,000. And again, over 50, add 6,000 to that, actually. Again, the standards are 19,000 per year in that 401(k) plan.
So at that point, you can put away 6,000 into your IRA, 19,000 into your 401(k) — solo 401(k) for a total of 25,000 so far you can put into retirement if you want to. Does that make sense so far, Allissa? Following?
AH I am, sorry. I was muted. But yes, I am following.
MR You are correctly using your mute button.
AH I am using my mute button. And also it’s the May-June 2018 issue of Massage and Bodywork.
MR Thank you.
AH And we’ll put the link to that in our show notes.
MR Thank you for that. Sorry I couldn’t find it. In Allissa’s case, though, Allissa wanted to put away 30k. So what do we do with the rest of it? Well, a lot of people think that retirement accounts are, like, again, kind of these magical things that, you know, you can only put retirement in those accounts and once you’re done, you’re done and there’s no other options. Like, that’s what it’s for. All a retirement account is is a tax treatment. And retirement accounts, they contain the actual investments. The investments themselves just exist no matter what. And typically, they’re mutual funds, and I’ll explain that in a minute. But you can invest in mutual funds directly or you can invest in mutual funds inside of an IRA or a 401(k). All an IRA or 401(k) does is just shelter it from taxes either now or later.
So back to our example here. We’ve got 25,000 put away; 6,000 in the IRA, 19,000 in the solo 401(k). What do we do next? Well, a lot of people like the simple option of investing the remaining 5,000 directly into a mutual fund, which is the next obvious thing to do. The trick — not really the trick, but the idea to that is it’s useful to take a look at what type of mutual fund to invest in to save on taxes. So mutual funds have what’s called a turnover ratio. And whenever the stocks inside — the stocks or bonds or whatever’s inside the mutual fund is bought and sold and turned over and changed, you potentially pay taxes on that when the sale happens, when the gains are actually realized. And so when that happens, you end up paying taxes at that point. So what you want to do is you typically want to find a mutual fund that is going to have a low turnover, because there’s not going to be a lot of buying and selling happening inside the mutual fund, which means you’re not going to be paying as much in taxes.
So a really good option a lot of people like for this remainder is going to be an index fund. Index funds are getting really popular. They’re talked about a lot. They’re fine. There’s nothing inherently wrong with them. They have a place when fitting into a strategy like this because index funds mirror the S&P 500, which is the 500 largest companies on the stock market. And so an index fund is not going to change a whole lot. You’re not going to have a lot of buying and selling because it’s just going to kind of invest in these companies, it’s going to pretty much stay the same, and the gains and losses are going to follow the S&P 500. There’s not a lot of active management going on. And so as a result, you’re going to save on — you’re not going to pay as much in taxes due to the low turnover. Allissa may want to consider putting the extra 5000 per year into an index fund or some other type of low-turnover mutual fund or a combination of low turnover mutual funds that would almost kind of act like a Roth in that you’re saving taxes on it.
That is kind of the short answer that I gave to our premium member who posted. Now, before we get to — I’m sure, Allissa, you probably have a few questions or things you want to clarify or we can talk about a few of the definitions there. But before we do that, we should probably do our halftime sponsor if you’re up for it. Are you ready?
AH I am so ready.
MR All right.
AH Today’s halftime sponsor is ABMP.
Sponsor message ABMP goes above and beyond great liability insurance to make it easier for you to succeed at what you love. Membership combines the insurance you need, the free CE you want, and the advocacy and personalized customer service you deserve. New for 2019 — this is very exciting — ABMP certified membership now includes the most free continuing education in the world with full access to the World Massage Conference vault of more than 400 on demand massage and bodywork CE courses plus the 200 free CE courses available in the ABMP education center. You can go to abmp.com to learn why you can expect more from ABMP membership. And, you know, one of the ABMP certified member benefits is a discounted subscription to Massage Business Blueprint premium membership, which is awesome. And it’s a few of our — Michael and I have done a few webinars for them that are also in the ABMP education center. All things free with your certified membership at ABMP.
AH So that’s my little spot for them.
MR We love ABMP.
AH I am a member myself and I was a member before I even started working with them. And I love that they are sponsoring us. So thanks, ABMP.
MR Good people.
AH Yeah. Yeah.
MR All right.
AH Carry on.
MR I feel like I totally geeked out. I try really hard to not get, like, super, like, eyes glaze over mode here. Because I’m sure it’s a lot of stuff that’s not terribly exciting. But anyway, did all of that make sense and what questions do you have, Allissa?
AH I guess my question is kind of like — okay. So this goal is a little out for me, like, actually being able to put that kind of money into my retirement. But it’s a goal. So where do I start? I guess.
AH I don’t know. I don’t think I was prepared.
MR Where do I start? [laughs] Always the question. Well, there’s a couple ways I’m going to interpret that. As far as the surface answer in terms of specific vehicles, an IRA is probably a really good place to start because it’s super easy to set up, you don’t have to go through a bunch of paperwork for your 401(k) yet. Just open IRA and dump money in, and it’s real easy. Next would be your solo 401(k) to set that up, and then next would be the mutual funds. Which, by the way, there’s no limit on mutual fund contributions. So once you get past those IRA and 401(k) vehicles and you start to put money into an index fund, you can put as much as you want into an index fund. It’s just an index fund. So there’s no — the sky’s the limit there, so that’s kind of nice.
As far as start in terms of how to start doing this, more behavior-wise or habit-wise, I really like — I mean, the default answer is put a financial plan together. And that’s obviously a bigger conversation. But I’m really a big fan of paying yourself first. You probably heard that before if you read any kind of money books, or I’m sure a lot of our listeners have read some money books and heard that term. But paying yourself first is a pretty important concept. And what that means is a lot of people, when they get money in, they scramble to pay this bill and that bill and those bills. And paying your bills is something you should do. I’m not saying don’t pay your bills. But when you pay your bills first and pay all your expenses before you pay yourself, you tend to end up with not enough for yourself. It’s just one of those things that happens to us. But if you end up budgeting money for yourself first, you know, paying your compensation, paying into your retirement accounts, paying into your quarterly taxes, all that stuff that you need to take care of for yourself, we find a way to get our bills paid, usually, and that kind of helps us to prioritize. And you’re not sacrificing your own compensation and your own income and your own future for stuff that is being put in front of that. If that makes sense.
So what that means is at the beginning of every month, one of the first things that is probably a good idea to do is budget for retirement contributions and make that just a monthly expense like your mortgage tor your rent or whatever. Make it that important. Make it more important. That’s something that’s really going to help you prioritize that. And then start to increase it little by little. So maybe every month add $10,15 a month to what you put in until you get to the point you want to be at. Or maybe every year raise it 10% or something, or every quarter, whatever works for you. So that’s how I would answer that question from both a logistically and a conceptual standpoint. Is that helpful at all?
AH It is. And I think that will get me going.
MR Cool. What else?
AH This is one of those episodes where I’m going to have to listen to it like twice to really grasp it all. I’m overwhelmed and I’m going to be okay with that. This is a think — and I like that we’re kind of starting off the year on this. Because we should have big retirement goals.
MR Yeah, it’s super important. It’s one of those things that’s no fun to think about because it’s like that’s 30 years away, blah, blah, blah, and I live in the now. Well, no, you got to think about this stuff. [laughs] Yourself 30 years down the road is going to be really happy when you make good decisions now. And you’ve got to think about that. It’s the same thing we teach our clients when they come in. It’s like take care of your body because the older you is going to be happy that the younger you decided to take care of your body and part of that may involve getting regular massage. And so we got to think about this stuff.
I also want to add a couple more notes. There are some differences and caveats. So let’s say you’re a massage therapist who does have employees. A lot of our listeners have, I know, maybe two or three employees and they’re growing their practice. That excludes you from a solo 401(k) if you get to that point. So at that point, you have some other options. You can set up a regular 401(k), which is more expensive. It may be prohibitively expensive for some because you get into kind of the — you get into the thousands. Not really super-expensive, but you might spend $1,000 a year on maintaining a regular 401(k) plan. And that might be cost prohibitive. It might not be. It’s a good idea. But there’s some options like, for example, a SEP, a simple IRA. Those are retirement vehicles that you can use as you grow as well. The caveat and what I’m not crazy about it that they don’t have Roth options. I’m very — I’m generally very pro Roth because I would rather pay taxes now than later. Because you’re going to be having a lot more money in your account later and paying taxes now is going to be more advantageous. But there are options.
The point of all of this is save something. It’s not really about — I mean, you need to pick the right vehicles, you need to pick the right mutual funds, you need to pick — follow the guidelines and create sensible investments. But overall, if you’re saving something, that’s better than nothing. And if you’re saving in a vehicle — whatever it is, whether it’s pre-tax or post-tax — it’s better than doing nothing. So don’t let paralysis of “what do I do” get in the way of saving something. I mean, if you just don’t want to think about talking to a financial planner or researching mutual funds or figuring it all out for three months, start saving money into a money market for three months. That’s better than nothing, you know? At least you’re getting 1% or whatever. The habit of saving is more important than a lot of other things. And a lot of financial experts, including Dave Ramsey, who is one of the guys I like, is he always cites this research that — I forget where the research came from, but it basically says rate of savings is the number one factor of your success in retirement over anything else. Rate of savings meaning how often and how much you save every month or every whatever. That’s more important than the right mutual funds you pick or whatever. I mean, picking the funds is important, but rate of savings is the number one factor. So all the fancy retirement vehicles and the analysis and all this stuff doesn’t mean a think if you’re not actually saving money. So there. That’s my story and I’m sticking to it.
AH And I’m with it. And the thing I wanted people to know about this was that you can save beyond what limits are for certain vehicles. And you can do that. You can. You’re allowed to.
AH There are ways to do it, and you should get yourself a financial advisor to help you figure out how.
MR And by the way, one thing I may not have mentioned I think might be important to clarify is the reason we want to save money into vehicles that contain investments like mutual funds is rate of return. So for example, if you put money into your savings account at your bank, I mean, you might get 1% if you’re lucky. There are some online banks that have 2% money markets which is great. But most brick and mortar banks, they will hover in the 0.2, 0.3% rate of return. So it’s basically useless. When you save money for retirement, you want to take advantage of compound interest, which is that every — when you put money in and it compounds based on the interest rate, it compounds on top of itself. So the money — the interest you gain adds to it, the interest on top of that adds to it, and the higher the rate of return, the faster the interest compounds.
I’m not going to give specific rates of return. I don’t want to get into murky area of legal or compliance or anything. But be aware that the investments that are inside these vehicles or the investments that you directly invest in, like an index fund for example, the rate of return is going to be a lot different than the rate of return of a savings account. And by “different,” I mean higher, typically. There’s always exceptions, there’s always lots of things to think about, but that’s why we use these vehicles to invest for retirement. I wanted to add that. Thank you. I think I am officially done now. Maybe.
AH You nailed it, man. And the big takeaway here is, everyone, if you’ve stuck along this far, good on you because you care about retirement and that can be tough to grasp and actually throw yourself into. If you’ve — do one thing. Do one thing in the next few days. Do it today. Go into whatever retirement vehicle you have set up and increase your contribution by whatever. If you can do $10 more, great. If you can do $50 more a month, great. I just doubled mine for 2019 and set some big income goals for myself, and I’m hustling to make them happen. And just — if you can increase the amount that you are saving by anything, do it. If you need to start saving, if you haven’t even started yet and you want to take one step towards starting, then we can totally help you with that. You can email us at email@example.com, and say, I’m ready to take one step, and we’ll help you figure out where to go from there.
AH Yay, that’s it. Good job, people.
MR Good job, people. All right. Well, with that, should we wrap up?
AH Bring it home.
MR All right, that’s it for today. And if — like Allissa said, if you glazed over and felt like this topic was a little too heavy, hey, next week, maybe we’ll talk about something fluffy. We’ll see. Hang in there. Thanks for sticking with us today. Thanks for being a listener. Our website is massagebusinessblueprint.com. Check us out there if you’d like to learn more. And again, we love all of the iTunes reviews. We’re probably going to read a few more here coming up. We really appreciate that if you like what you hear on our podcast, feel free to give us a review on iTunes. We appreciate that. As always, as Allissa said, email address is firstname.lastname@example.org. Send us a note and thanks for listening. Have an awesome day. We’ll see you next time.