Retirement account advice?

[whybenormal]

Hey all. I was looking through my finances and considering what I can do with my money, and I figured it'd be a good idea to start a retirement account. I'm only 22 and can reasonably expect to work for the next 50 years or so, but saving early seems like a good idea considering that I'm going into the so very well paid field of social work.

But I'm so confused by all this stuff! Credit, checking, savings, and the like I'm fairly good with. But I can't get a handle on what would be the best idea with these various retirement options. Figured the gentlemen on B&B would be able to point me toward some good resources or something.

 

[gaseousclay]

if your place of employment offers it, get a 401k and maximize the amount of money you put into it - for example, I contribute a maximum of 5% of each check and my boss will match it up to 4%. You can contribute more than 5% if your budget will allow it, but the majority of businesses will only match your contribution up to 4% from my understanding.

you could also start a Roth IRA through your bank or a financial advisor. this would be another option to consider on top of a 401k. then of course there's savings, but I think you're more than likely to dip into that if times get tough.

 

[dklaiman]

+ 1 on the 401(k). The gains are taxed, but you invest pretax dollars. As the money is taken out of my paycheck before I receive it, I don't miss it/have a chance to spend it.

 

[Leche]

+ 1 on the 401(k). The gains are taxed, but you invest pretax dollars. As the money is taken out of my paycheck before I receive it, I don't miss it/have a chance to spend it.

Also when you take it out your typically at a lower tax rate. For the OP your desire to save for retirement is good, do well enough you won't have to work 50 years. Also I wouldn't bank on Social Security.

 

[whybenormal]

I have two jobs. One at a drive-through beer store with zero benefits (my boss laughed when I asked about direct deposit), and working a front desk at The University of Akron. UA might have something available for students if I look, but I doubt it.

Also I wouldn't bank on Social Security.

Oh god, never. SS desperately needs to overhauled but it isn't politically expedient for either party. At least, not to do it right. I'm just waiting for it to collapse.

 

[raisindot]

EDIT: I posted this after your posted your job situation. If you don't have a 401(k) in your jobs, the IRA will probably be your best choice. However, you definitely will get a job someday that offers a 401(k), and when you do you should make it your primary retirement savings vehicle.




Congratulations for thinking about such an important issue at a young age! I have worked in the financial/investment business (not as a broker or advisor) for twenty years, and even today the percentage of people under 25 who have established retirement accounts is still less than 50%.

Now that you've committed, rather than trying to explain the different options to you, here's nearly bullet-proof advice on how you should save. (Note: what you should invest in will be after this)

1. If your employer offers a defined contribution (401K, 401a, 403b) plan, absolutely enroll in it as soon as possible and contribute as much as you can to it. Your contributions are removed from your paycheck on a pre-tax basis, so it's like giving yourself a tax cut. If you don't own a home or have other deductible expenses, a 401(k) is just about the best tax-advantaged investment you can have. Also, hopefully your employer will match a certain percentage of your contributions, so your account can grow even more.

2. If your employer doesn't have a 401(k), see of they have small-business options such as a Keogh or SIMPLE-IRA. Some of these options let contribute from your salary on a tax-deferred basis as well.

3. If your employee doesn't have either, or you're already contributing the maximum amount you can contribute to your 401(k), a brokerage IRA is your next choice. There are two kinds of IRAS: Traditional and Roth.

4. With traditional IRAs, you contribute with after-tax dollars, but you can deduct your annual contributions if your income is below a certain amount. However, when you withdraw money at retirement (you can start withdrawing at 591/2, and must start taking minimum withdrawals around age 70 1/2), you will have to pay taxes on the amount you withdraw.

5. With Roth IRAs, you contribute your money with after-tax dollars, but you don't deduct these contributions from your taxes. For giving up this immediate tax benefit, you will never have to pay taxes on any withdrawals from your Roth IRA and you don't have to start withdrawing them at age 70 1/2, which is a good thing if you're still working then or want those assets to keep growing when you're retired. To be eligible for a Roth IRA, you and your spouse must be making under a certain amount (it used to be $100k for individuals and $150K for couples; this limits have grown). The other advantage of a Roth IRA is that you may remove any principal (i.e., amount you contribute without earnings) at any time without paying taxes. You may also withdraw both principal and earnings tax free for special situations (such as buying a first home or paying for a child's higher education)

Both IRAs allow you to contribute up to $5,000 per year ($10,000 combined) if you are your wife have a "spousal IRA) if you meet the eligibility requirements. If you and/or your spouse make more than $150,000 the limits vary. Fidelity.com has a nice, easy calculator to help you determine eligibility and contribution limits.

The other great advantage, as said before, is that all of these retirement options let your money grow on a tax-deferred basis, so you never have to pay annual income taxes on earnings until you withdraw them at retirement (and, as said, you'll never pay taxes when you withdraw Roth IRA assets).

Other considerations:

1. Start by estimating your current savings and future retirement needs. "Experts" say that your retirement account will need to earn enough to pay between 60%-80% of what you're making now (or believe you'll make in your peak earnings eyars). You may need several million dollars to retire on, particularly if you or your spouse needs long-term health care. And, chances are, we'll all need long-term health care. The first thing you should do is use any of the many free online retirement planning tools that you can show you how much you may need and how much you'll need to contribute each you to have any chance of reaching your goals. There's a really cool free financial planning tool at a site called Omyen.com. (www.omyen.com) It's called the "PFI Score" and it covers not only retirement but your credit, housing, loans, college savings and budget needs, so it gives you a "score" of your financial health and tells you how much you may need to reach all of your different goals. Fidelity, Schwab, Vanguard and other many other sites have these tools as well.

2. Choose a brokerage IRA. Most mutual fund companies offer both mutual fund IRAs and brokerage IRAs. With a mutual fund IRA, you're limited to that company's own mutual funds. With a brokerage IRA, you can invest in stocks, bonds, ETFs and potentially thousands of different mutual funds from different fund families. And while you will pay commissions for securities trades, you don't have to keep track of their cost-basis for tax purposes. Fidelity and Schwab tend to be the first choice for brokerage IRAs.

3. Invest aggressively. The big mistake many younger people have done since the market meltdown of 2008 is to invest all of their contributions in money market funds. While these funds are stable, their returns are so low that they'll never earn enough to meet your future retirement needs. At your age, you should invest anywhere between 60%-80% of your contributions in a combination of stock funds, 10%-20% in bond funds, and no more than 10% in money market funds.

4. Choose lower-cost fund options. I've worked for some of the largest mutual fund companies in the country and I can tell you that you're much better off investing in "index funds" rather than "actively managed" funds. Index funds don't stock-pick--they just invest to mirror the makeup of an index (like the S&P 500). Actively managed funds are the ones fund companies are also hyping--these are managed by portfolio managers who make bets on stocks on sectors. However, actively managed funds charge higher investment fees--that are taken as a percentage of yoru account, and once these fees are taken out very perform better than lower-priced investment options. Or, consider Exchange Traded Funds (ETFs), which invest like index funds but cost less.

5. If you get a brokerage IRA, don't invest too much in stocks. It's tempting to play the market with an IRA, but small investors nearly always lose when they buy stocks. Stick with mutual funds or ETFs if you're not a market wizard.

6. If your 401(k) offers a company stock fund, put no more than 10% of your assets in it. The reason why many retirement savers got bankrupted in 2008 was because they invested too much of their portfolio in their company stock funds. When the company stock price tumbled, so did their account value.

7. Make sure your account is diversified. This means making sure you've got a mix of equity and bond funds in your account. There's nothing wrong with having 5, 8 or 10 different funds in your portfolio if their investment objectives are differentiated enough to protect you against losses in particular market sector.

8. If you're not a savvy investor, look at "blended" funds. These funds, which are often named "balanced" or "equity income" funds, invest in both stocks ad bonds. You may also want to consider "target date" funds. These funds, which usuall have names like "Target date 2030," are designed to provide good returns until the specified year, which is supposedly the year you will retire. They adjust proportions of stock and bond funds over time.

Whatever you do, do a lot of research up front. Calculate your future retirement needs and current savings targets. Learn about investing from mutual fund and brokage sites. Ask people you know how they've invested. How you save for retirement is the most important savings goal you'll ever have, so the more you know up front the more educated decisions you'll make further on.


Jeff in Boston

 

[CPA]

If a 401(k) is not available to you, I would suggest investing in a Roth IRA. The money you contribute to the plan is already taxed, so when you withdraw the money there is no tax.

It appears you are just starting to work, which means you are probably not making very much money. I would guess that you are in the lowest tax bracket. When you retire, hopefully you are in a higher tax bracket than you are now. Since the money is taxed now (when you are in a lower tax bracket) and not later (when you are in a higher tax bracket), investing in a Roth IRA can save you from paying higher taxes down the road.

Also, if you do not already own a home, you can withdraw up to $10,000 from a Roth IRA for a down payment on your 1st home.

 

[Bertilak]

You are on the right track, but shouldn't take investment advice from us.

Do look into IRAs (traditional and Roth) and 401k. I suggest working with an investment advisor, at least to start with. Continue to educate yourself and assess your investment advisor's value to you once you have learned a bit.

The more money you have to invest the more flexible your choices will be, so as you accumulate savings you should occasionally rethink what you are doing.

 

[the beav]

You don't seem to have much money, so I wouldn't put it in the stock market since it's gone nowhere for ten years and is currently being propped up by the government. If you still want to get in the stock market anyway, I'd research gold stocks and get in a good gold fund. From what I read recently, it's one of the top performers for the past ten years.

 

[Troggie]

Raisindot has it pretty much covered. The only thing I would say is since it is a long term investment if you really want a stock and know you will be holding onto it for 20 or 30 years don't be afraid to pick some up after doing the research on the company. I primarily do that with the larger companies that are in my area ( major pharmaceutical and medical supply companies ). I would still put the majority of it in mutual funds. Even with the market being down/flat due to the economy the past few years there are still funds making money.

As far as gold/precious metals those can be just as fickle as stocks depending on the market demands.

 

[raisindot]

I think a gold or precious metals fund is okay if it's one of many funds in your portfolio and you don't put more than 5% of your portfolio into it. Personally, I feel that commodity funds (which can invest in gold) are a better long-term bet if you're looking for a specialized sector investment. No matter what the global economy does, nearly half of the world is in the developing stage and at some point will be needing raw materials (zinc, copper, gold, silver, etc.) to build their infrastructure. But, as I said, this should be only one of many funds you invest in.

Jeff in Boston

 

[whybenormal]

DUDE YOU ARE 22 YEARS OLD, YOUR RETIREMENT PLAN SHOUDL BE "DIEING IN THE NEXT 8 YEARS", OR "WIN THE LOTTERY"

seriously, stop making me feel old.

hahahahaha. Dude, I'm going to be making between 30 and 40 thousand a year with little opportunities for moving up. Don't get me wrong, I'm really excited about where I'm going in life and the chance to make a difference; but I want to be smart about saving so I'm not struggling through life.

 

[Schick_Fan]

DUDE YOU ARE 22 YEARS OLD, YOUR RETIREMENT PLAN SHOUDL BE "DIEING IN THE NEXT 8 YEARS", OR "WIN THE LOTTERY"

seriously, stop making me feel old.

This is exactly the wrong way to think. The more money you put away sooner, the bigger it will grow. I'm 20 and I'm already thinking of starting a retirement account, or some sort of large savings account. Hard to do when you're broke and in college, but always doable.

 

[auk1124]

I'm going to be making between 30 and 40 thousand a year with little opportunities for moving up. Don't get me wrong, I'm really excited about where I'm going in life and the chance to make a difference; but I want to be smart about saving so I'm not struggling through life.

If you are going into a 30-40k per year job market it is going to be tough as hell for you to save any kind of significant money back for retirement and do the wife/mortgage/kids/cars thing. Not saying you shouldn't try, not trying to spew doom and gloom, just saying you got a long road in front of you so don't beat yourself up if you can't dump several thousand a year into an IRA. You have the right attitude but be realistic about what you can set back for retirement each year - otherwise you'll get discouraged and not put anything back at all.

 

[Danuhoh]

Do the employer 401k option, you can defer up to $16,500 pre-tax for 2010. This will also reduce your taxable income for tax purposes. Your employer most likely matches to some extent so this will be "free" money being added to your account.

As a supplement, if you can, do the Roth IRA. If your adjustable gross income (AGI) is under $105,000 you can contribute up to $5,000 annually. You don't get a deduction like an IRA on your taxes but the real benefit is tax free withdrawals when you retire after age 59 1/2. So, it is a hedge against an increase in taxes.

There are studies that show the power/benefit of saving at an earlier age as compared to waiting until later years. Good for you to start wanting to do it now.

Investment wise, until you become a savvy investor I would choose mutual funds; some sort of balanced fund or target date fund. They provide good diversification.

Good luck.

 

[raisindot]

If you are going into a 30-40k per year job market it is going to be tough as hell for you to save any kind of significant money back for retirement and do the wife/mortgage/kids/cars thing.

This is absolutely true, but generally, it's said people should save to fund 60-80% of their highest pay. If you peak at $40,000, then your aim would be enough income from all sources (including retirement accounts, pensions and social security, which I do believe will still be around for awhile) to fund, say, a $30K-$35K a year lifestyle. This means that a 401(k) or IRA may have to deliver $500K-$600K of this money over the course of one's retirement. Putting in $2,000 a year over 40 years, with the aid, hopefully, of some very good double-digit equity market years, could result in these figures, particularly if most of the money can continue to grow during retirement and withdrawals are kept to a minimum.

This is not going to be a "luxury" lifestyle, but if one has managed to live all these years at this income then one gets used to it. Also, hopefully one will have the chance to get a home, which, upon being sold, will hopefully bring in some level of profit to provide further assets.

It ain't easy at all, that's for sure. But not saving for retirement can be a lot worse.

Jeff in Boston

 

[PedroNavaja]

Be very careful with the advice from Financial Advisors wannabees . . .

 

[BladeRunner001]

EDIT: I posted this after your posted your job situation. If you don't have a 401(k) in your jobs, the IRA will probably be your best choice. However, you definitely will get a job someday that offers a 401(k), and when you do you should make it your primary retirement savings vehicle.




Congratulations for thinking about such an important issue at a young age! I have worked in the financial/investment business (not as a broker or advisor) for twenty years, and even today the percentage of people under 25 who have established retirement accounts is still less than 50%.

Now that you've committed, rather than trying to explain the different options to you, here's nearly bullet-proof advice on how you should save. (Note: what you should invest in will be after this)

1. If your employer offers a defined contribution (401K, 401a, 403b) plan, absolutely enroll in it as soon as possible and contribute as much as you can to it. Your contributions are removed from your paycheck on a pre-tax basis, so it's like giving yourself a tax cut. If you don't own a home or have other deductible expenses, a 401(k) is just about the best tax-advantaged investment you can have. Also, hopefully your employer will match a certain percentage of your contributions, so your account can grow even more.

2. If your employer doesn't have a 401(k), see of they have small-business options such as a Keogh or SIMPLE-IRA. Some of these options let contribute from your salary on a tax-deferred basis as well.

3. If your employee doesn't have either, or you're already contributing the maximum amount you can contribute to your 401(k), a brokerage IRA is your next choice. There are two kinds of IRAS: Traditional and Roth.

4. With traditional IRAs, you contribute with after-tax dollars, but you can deduct your annual contributions if your income is below a certain amount. However, when you withdraw money at retirement (you can start withdrawing at 591/2, and must start taking minimum withdrawals around age 70 1/2), you will have to pay taxes on the amount you withdraw.

5. With Roth IRAs, you contribute your money with after-tax dollars, but you don't deduct these contributions from your taxes. For giving up this immediate tax benefit, you will never have to pay taxes on any withdrawals from your Roth IRA and you don't have to start withdrawing them at age 70 1/2, which is a good thing if you're still working then or want those assets to keep growing when you're retired. To be eligible for a Roth IRA, you and your spouse must be making under a certain amount (it used to be $100k for individuals and $150K for couples; this limits have grown). The other advantage of a Roth IRA is that you may remove any principal (i.e., amount you contribute without earnings) at any time without paying taxes. You may also withdraw both principal and earnings tax free for special situations (such as buying a first home or paying for a child's higher education)

Both IRAs allow you to contribute up to $5,000 per year ($10,000 combined) if you are your wife have a "spousal IRA) if you meet the eligibility requirements. If you and/or your spouse make more than $150,000 the limits vary. Fidelity.com has a nice, easy calculator to help you determine eligibility and contribution limits.

The other great advantage, as said before, is that all of these retirement options let your money grow on a tax-deferred basis, so you never have to pay annual income taxes on earnings until you withdraw them at retirement (and, as said, you'll never pay taxes when you withdraw Roth IRA assets).

Other considerations:

1. Start by estimating your current savings and future retirement needs. "Experts" say that your retirement account will need to earn enough to pay between 60%-80% of what you're making now (or believe you'll make in your peak earnings eyars). You may need several million dollars to retire on, particularly if you or your spouse needs long-term health care. And, chances are, we'll all need long-term health care. The first thing you should do is use any of the many free online retirement planning tools that you can show you how much you may need and how much you'll need to contribute each you to have any chance of reaching your goals. There's a really cool free financial planning tool at a site called Omyen.com. (www.omyen.com) It's called the "PFI Score" and it covers not only retirement but your credit, housing, loans, college savings and budget needs, so it gives you a "score" of your financial health and tells you how much you may need to reach all of your different goals. Fidelity, Schwab, Vanguard and other many other sites have these tools as well.

2. Choose a brokerage IRA. Most mutual fund companies offer both mutual fund IRAs and brokerage IRAs. With a mutual fund IRA, you're limited to that company's own mutual funds. With a brokerage IRA, you can invest in stocks, bonds, ETFs and potentially thousands of different mutual funds from different fund families. And while you will pay commissions for securities trades, you don't have to keep track of their cost-basis for tax purposes. Fidelity and Schwab tend to be the first choice for brokerage IRAs.

3. Invest aggressively. The big mistake many younger people have done since the market meltdown of 2008 is to invest all of their contributions in money market funds. While these funds are stable, their returns are so low that they'll never earn enough to meet your future retirement needs. At your age, you should invest anywhere between 60%-80% of your contributions in a combination of stock funds, 10%-20% in bond funds, and no more than 10% in money market funds.

4. Choose lower-cost fund options. I've worked for some of the largest mutual fund companies in the country and I can tell you that you're much better off investing in "index funds" rather than "actively managed" funds. Index funds don't stock-pick--they just invest to mirror the makeup of an index (like the S&P 500). Actively managed funds are the ones fund companies are also hyping--these are managed by portfolio managers who make bets on stocks on sectors. However, actively managed funds charge higher investment fees--that are taken as a percentage of yoru account, and once these fees are taken out very perform better than lower-priced investment options. Or, consider Exchange Traded Funds (ETFs), which invest like index funds but cost less.

5. If you get a brokerage IRA, don't invest too much in stocks. It's tempting to play the market with an IRA, but small investors nearly always lose when they buy stocks. Stick with mutual funds or ETFs if you're not a market wizard.

6. If your 401(k) offers a company stock fund, put no more than 10% of your assets in it. The reason why many retirement savers got bankrupted in 2008 was because they invested too much of their portfolio in their company stock funds. When the company stock price tumbled, so did their account value.

7. Make sure your account is diversified. This means making sure you've got a mix of equity and bond funds in your account. There's nothing wrong with having 5, 8 or 10 different funds in your portfolio if their investment objectives are differentiated enough to protect you against losses in particular market sector.

8. If you're not a savvy investor, look at "blended" funds. These funds, which are often named "balanced" or "equity income" funds, invest in both stocks ad bonds. You may also want to consider "target date" funds. These funds, which usuall have names like "Target date 2030," are designed to provide good returns until the specified year, which is supposedly the year you will retire. They adjust proportions of stock and bond funds over time.

Whatever you do, do a lot of research up front. Calculate your future retirement needs and current savings targets. Learn about investing from mutual fund and brokage sites. Ask people you know how they've invested. How you save for retirement is the most important savings goal you'll ever have, so the more you know up front the more educated decisions you'll make further on.


Jeff in Boston

+1. Jeff pretty much covered everything you need + all the options available.

Do it and forget about it...Put as much as you can in it...well the limit is $16.5K. Don't think about pulling money out until retirement. If you do you have to pay taxes on it plus IRS penalty.

 

[raisindot]

Immediately stop seeking advice on Internet chat areas (like this one) and see a REAL, licensed, financial adviser. Rules, regulations, etc. differ greatly locale to locale and situation by situation. Poor advice now could have huge financial/tax consequences down-the-road. Don't risk it.

The rules around retirement savings options don't change from locale to locale, nor do the federal tax consequences (state taxes are another thing). 401K plans and IRAs aren't regulated by states and are exactly the same wherever you invest.

I do agree that if you don't know what you're doing it makes sense to talk to a financial professional, whether it's a licensed advisor or a financial planner.

Jeff in Boston

 

[hifigeezer]

First, bravo for thinking ahead;raisindot also posted very good recommendations.

Nobody knows what will happen in the future, so diversify. That can be hard when you are sure that houses will go up, or tech stocks will go up, or gold will go up.

In 1982 when unemployment was 10% I could have bought stocks with the Dow at 800 but I "knew" better; it went on to peak at 14,000.

Efficient market theory isn't alway right, especially in the short run, but in the long run very few people beat the market in anything. Good luck!