Earning in Retirement Savings While most workers are responsible for their own retirement savings today, high schools do not have mandatory classes on 401 (k), s and individual retirement accounts (I, R, A, s). And universities usually don't teach anything about Roth I, R, A, s or 403 (b), s. Here's what you need to know about saving for life after you stop working and set out on the path to a comfortable retirement, no matter your career or the size of your paycheck. The best day to start saving is today, even if you can only save a little.
Now that you've made the right decision when deciding to save for retirement, make sure you invest that money wisely. The first thing to know is that your account options will largely depend on where and how you work. If you work for the government or for a non-profit institution, such as a school, religious organization, or charity, you probably have different options. In some cases, especially if your employer is not matching your contribution, you may want to skip using 403 (b) altogether and instead use the I, R, A, s discussed below.
People who are creating their own retirement accounts will generally deal with I, R, A, S, available from financial services firms such as big banks and brokerage firms. In general, what you invest tends to have a much greater impact on your long-term earnings than where you store the money, since most of these companies have fairly competitive account fees today. With the Roth, you pay taxes on the money before you deposit it, so there is no upfront tax deduction. But once you do, you'll never pay taxes again, as long as you follow normal withdrawal rules.
The Roth I, R, A, S are an especially good deal for young people with lower incomes, who now don't pay much income taxes. The federal government has strict income limits for these types of daily contributions to a Roth. You can find those limits here. What are S, E, P, s and Solo 401 (k), s? Another variation of I, R, A is as, E, P.
What is short for Simplified Employee Pension), and there is also a Only 401 (k) option for self-employed workers. They come with their own set of rules that can allow you to save more than you could with a normal I, R, A. You can get information about the different limits in the links above. When you leave an employer, you can choose to take your money out of your previous 401 (k) or 403 (b) and combine it with other savings from other previous jobs.
If that's the case, you'll usually do something called “transfer the money to an I, R, A”. Brokerage firms offer a variety of tools to help you do that, and you can read more about the process here. That said, some employers will try to convince you to leave your old account under your care, while new employers may try to get your old account into their plan. Why are they doing this? Because the more money they have in their accounts, the less they have to pay in fees to run the program for all employees.
However, leaving your money behind or transferring it to your new employer's plan can have disadvantages. Most employer plans may have only a limited menu of investments, but their I, R, A. The provider will usually allow you to invest in the cheap index funds you want. Plus, it's usually best to keep all your retirement money in one place — it's easier to keep track of it that way.
So, place all your retirement accounts in an I, R, A. Once you leave a company to simplify things, especially as you approach retirement. You can't count on previous employers to keep in touch when they change their email or home addresses. Nor will all entities that have an account in your name necessarily track you when you are close to retirement.
You don't need to be financially literate to make smart investment decisions. There are dozens of books on the right way to invest. Tens of thousands of people dedicate their careers to suggesting that they have the best formula. So let us get to the point with a simple formula that should help you do it right as long as you save enough.
Think humble, boring, simple and cheap. Yes, there are people who can choose stocks or mutual funds (which are collections of stocks, bonds, or both) that will work better than anyone else's picks. But it is impossible to predict who they will be or if people who have done it in the past will do so again. And it is unlikely that you, when researching stocks or industries or national economies, will be faster than markets on your own, part-time.
The best thing to do is buy something called an index fund and keep it forever. Index funds buy all stocks or bonds in a particular category or market. The advantage is that you know that you will get all the available returns on, for example, US big stocks or emerging market bonds. How much of each type of index fund should I have? They come in different flavors.
Some try to buy every stock in the United States, big or small, so you have exposure to the entire US stock market in one package. Others try to buy all the bonds issued by a company in a particular country. Some investment companies sell something called a publicly traded fund (E, T, F. Either flavor is fine as you won't be buying or selling the funds much anyway.
As for your own allocation between, say, stock funds and bond funds, a lot will depend on your age and how much risk you are comfortable taking. Equity funds, for example, tend to bounce more than bond funds, and stocks in certain emerging markets tend to bounce more than an index fund that holds, for example, the shares of every big company in the United States (or all of the world). Is there no help available? If you're alone, one option is to choose a single target-date fund made up entirely of index funds and simply put all your retirement savings into that fund. That way, you have all your savings divided into a proper mix that the fund manager will adjust as you age (and presumably less tolerant of risky actions).
Some companies called roboadvisers offer a different service. These robots will first ask you a series of questions to assess your goals and your risk tolerance. Then, they will create a custom-made portfolio of cheap indexed investments. Nothing in life is free, even when it comes to saving for retirement.
Retirement accounts aren't free and the fees you pay affect your returns, which can cost you a lot when you retire. If you are an employee, the company that administers your plan (and whose name appears on the statements) is charging your employer fees for the service. In addition, each individual investment fund in the plan has its own costs. If you are self-employed, you will be charged for your I, R, A.
At the mutual fund level and then pay any commissions (if any) that the brokerage firm charges annually or for each trade you place on your account. If you want to learn more about how to identify and decipher retirement account charges, start with this series of stories. However, since most of us don't have much context for what is reasonable, employees of large organizations should turn to Brightscope to get the ranking of thousands of employer-based plans. If you are saving on your own and are curious about a particular investment fund with a target date and its fees, you can check its ranking on Morningstar and compare it with other funds.
As for those roboadvisers, the funds they will put you in are usually quite cheap. You will typically pay another quarter of a percentage point of your balance each year in exchange for your help to build your portfolio and maintain investments in the right proportions. You can absolutely save that money by handling those trades on your own. But the question you should ask yourself is whether you will have the discipline to continue doing it year after year after year.
If not, then that fee might seem like a reasonable price to pay for the aid (and to prevent you from making bad deals). Don't you like how high your fees are? You can try to push for better 401 (k) or 403 (b) plans. After you set up automatic paycheck savings, it's easy to forget about it. And if you do, it's okay, fine.
You're likely to be pleasantly surprised when you register your funds in a few years' time. If you followed our previous tips, you set it up to have money automatically withdrawn from every paycheck in your retirement account. You barely miss it, right? So increasing your savings by another percentage point probably won't hurt your budget much. Over time, you could add up to six figures in additional savings.
Are you saving too much for children's down payment or college tuition, but not enough for retirement? The house may be able to wait, and it is easier to borrow money for a child's education than to get loans to pay for his retirement expenses. Make sure you invest wisely for the most important things. It's been a big half decade for stocks. So, if you created accounts five years ago with the intention of holding 70 percent of your money in stocks, the growth of those stocks may mean that your investments are now in a share allocation that is many percentage points higher.
If so, it's time to sell stocks and buy, say, more bond investment funds to bring things back into balance. Every week, get tips on retirement, paying for college, credit cards and the right way to invest. If you want to withdraw money from a 401 (k) plan permanently before the statutory retirement age, it may be possible depending on your plan. These retreats are generally referred to as difficulties, and you can read more about the rules for them here.
That's why talking to a financial professional about your entire financial life as you approach retirement is probably a good idea. Make sure you talk to someone who agrees to act as a fiduciary, which means they are committed to working in your best interest. If you are not looking for a long-term relationship, look for a financial planner who is willing to work for hours or with a flat rate project. However, before you pay someone for financial aid, do some careful work (with your partner, if relevant).
Better yet, start thinking about those questions decades before retirement. The sooner you start, the calmer you are likely to be about the money you save, and the more determined you are to save enough to meet all your lifelong goals. We've addressed some of the most common questions about saving for retirement. Social Security will most likely continue to exist once you reach the eligibility age, but it probably won't provide you with enough money, after taxes, for all the expenses you'll face in retirement.
Also, some rules may change before it's your turn to collect. Two of the biggest potential expenses in retirement are health care and long-term care, such as paying for a nursing home. Both of you may need above-average amounts of treatment and assistance, so more savings will mean more options later (and more tax breaks today if you save). It's hard to know how long you'll want to work, how long you'll be able to work physically, how long an employer or clients will be willing to allow you to work for them, how much money you'll actually want to spend once you retire, and how long you'll live when you finish working.
In addition, you can't predict the returns on your investment. Given all the variables, you may be tempted to raise your hands and postpone the decision to start saving or increasing your savings. If the possibilities feel overwhelming, just save as much as you can reasonably, as our Sketch Guy columnist Carl Richards says. Again, more savings now will mean more and better options later.
The standard tip is to talk to someone you trust and see who likes them and who likes them. But many smart people know very little about money and have no idea if a financial advisor is treating them badly. First look for some counselors to interview. Two good places to start are the National Association of Personal Financial Advisors (Napfa) and the Garrett Planning Network.
Members of both organizations tend to be transparent about their fees. Sure, there are some bad seeds in these two groups (as there are everywhere else), and there are many excellent advisors who work for more traditional brokerage firms (who are not members of both groups). But your chances of quickly finding someone good will be high in these two organizations. There are other tips that can help you find a good advisor.
If an advisor is a certified financial planner (C, F, P. Other titles and acronyms can mean much less. Ask each one if they commit to acting in their best interest, always. The fancy term for this is to act as a “fiduciary” and, of course, ask your advisor to take the fiduciary promise we created a few years ago.
Then ask a prospective advisor questions about the fees you'll pay the advisor, for your investments, and anything else. Here are 21 questions to get you started. Also check an advisor's industry disciplinary records. While RMDs are legally required for traditional IRAs and Roth 401 (k) plans, they are not required for Roth IRAs.
Once you have maximized the subsidy, you may be able to deposit additional sums into a Roth IRA or a traditional IRA (even if the contributions are not deductible). If your spouse has a 401 (k) or other work plan and you exceed the income limits of the IRA, you cannot deduct contributions to a traditional IRA. While long-term savings in a Roth IRA can produce better after-tax returns, a traditional IRA can be a great alternative if you qualify for the tax deduction. You are also not required to withdraw from your Roth IRA for as long as you live if you don't want to, which makes Roth IRAs quite valuable estate planning tools.