Beyond Financial Independence

BeyondFI: Know Your Money: What is VAULT?

May 23, 2012 · Jay Bugg · Comments

What is VAULT?

Vault in the method of financial independence represents all of the accounts that most people classify as retirement accounts. These accounts, in most cases, cannot be accessed without severe tax penalties until age 59½ . If you are searching around for financial independence then you are likely ready to start as soon as possible, and waiting until you are 60+ is not part of the plan. Good, you are mentally far ahead of most Americans when it come to financial planning. With that said there are a few places where it makes good sense to stack up assets in your vault. Next we will review the vault accounts that should be part of your financial independence plan.

401k and 403b – How Much? – Roth or Traditional
Max Annual Contribution 2012: $17,000

If you are currently working for someone at a day job you likely have access to a 401k or 403b. The 403b is the 401k that most not-for-profit organizations use but to the employee that are basically the exact same thing as the 401k.

How much should I save in my 401k? Variations of this question are constantly being asked all across America. The sad part is most people who are asking this question are doing so with the mind set that they will work until “retirement” age, as such they want to put in as little as possible and still have enough to retire on.

You should save at least whatever your company will match at any percent. If your company matches 100% of the first 2% and 50% of the next 3% then you should contribute at least 5%. The reason for this is company matches represent a clear rate of return that cannot be consistently duplicated. In the example above when you contribute 2% and the company matches it at 100% you get a 100% return on your money. Then you get 50% on the next 3% so you should at least save 5% using your 401k. We suggest you to get at least all available matches because we are presuming you will be doing a lot of after tax savings as well, with your take home pay. If you are unwilling to do any investing outside of your 401k then the standard is advice, save 15% for 43 years!

Roth or Traditional

This is the second most popular question. Most financial advisers will tell you to use the Roth 401k as much as possible. This is sound advice. If you are serious about financial independence then it is acceptable to use the traditional 401k. By taking the tax break now you have more dollars to save and invest now toward financial independence. Just be sure you are investing at least 50% of your take home pay in after tax accounts.


Max Annual Contribution 2012: $5,000

Once you have taken your company match in your 401k you should to max out a ROTH IRA. Based on how much you make you might not be able to contribute the full amount to a ROTH IRA. Consult your tax adviser on the specific limits based on your income and filing status. If you are unable to use an IRA cause you make “too much money” and you are covered by a 401k plan at work then add 5% over the minimum to your 401k contribution.

Wrapping it up

That covers the basics of Vault. Look out for another article on SEP-IRAs coming out later.

Vault money will not help you in the short term for financial independence but having that money growing either tax free or tax deferred can be a big boon in the offsetting higher health insurance and health care costs at age 59½ when health care costs are likely going to be increasing for you and your family. This makes investing for the traditional retirement age a part of any sound plan for financial independence.

CommentsTags: Vault · BeyondFI method