By Jon L. Ten Haagen, CFP
Q: I just got a job with a company that does not offer a retirement plan (401k). What should I be doing in terms of saving for retirement?
A: First, let me congratulate you on your forward thinking. Most people starting out in life look for joy and fun before thinking of their future. By starting early you will find it just that much easier to succeed.
The first thing to address is the 401k you still have at the old company if one was offered to you. Consider rolling it over to you own Individual Retirement Account (IRA). Most 401k plans have a limited number of sub accounts to choose from, so by rolling over your account you can go with more investment choices. Make sure you do a trustee-to-trustee transfer (where the funds never come to you) which will protect the tax-exempt status of your account. The world is your oyster!
Next, you should consider whether an IRA or a ROTH IRA is best for you. Confer with a Certified Financial Planner (CFP) to determine the tax ramifications and long-term advantages of each. Things to consider include your current income tax bracket versus your potential bracket in the future – will you be in a higher or lower tax bracket down the road?
An IRA can give you a tax deduction for the amount you contribute each year if you are under a qualifying threshold – check with your accountant/CPA. The monies grow tax-deferred until you take them out after the age of 59-and-a-half years old. If you remove monies prior to 50-and-a-half, there is a 10-percent penalty and ordinary taxes on the amount withdrawn. At age 70-and-a-half, you must start taking money out each year based on an IRS formula. Each year after, the amount to withdraw is slightly higher. This is called the Required Minimum Distribution or RMD.
A ROTH IRA allows you to invest monies into an account which will grow tax-deferred also. The main difference is you are investing after-tax money and will not get a deduction. The monies grow tax-deferred, and at 59-and-a-half years old, you may start withdrawing your monies; there is no tax because you paid the tax before you invested the money. With the ROTH you never have to take the monies out, so if you have done well with other investments you could name a beneficiary (for example, your great-grandchild) and this money can grow for decades.
I have always suggested to clients that they should consider themselves the first bill they have to pay every payday. Take 15 percent right up front and invest it in your future (IRA or ROTH). If you can’t currently afford 15 percent, then consider 10 percent or even down to 5 percent, but also promise yourself that each year you will increase the amount by at least 1 percent until you get to the 15 percent. You will find once you have started, it will be out of sight and out of mind, and it will become automatic.
Alongside the investment in your future you should start an emergency fund – an investment into something you can turn into liquid cash within 30 days or less. It is there for emergencies and not as a piggy bank, so take this seriously. A short-term mutual fund, which is in fixed income vehicles, is not subject to market volatility. There are funds which are taxable and non-taxable to fit various people’s needs. You initial goal is to build this fund (over time through dollar-cost averaging) to an amount equal to nine months of your living expenses. As you get toward retirement, I would suggest you consider building this amount up to two years of living expenses. (Remember 2008-2009!) This way, if there is an extended down market, you will not have to invade your market investments, which are for you future.
When considering what investments to consider, look to growth vehicles. You are not going to need these monies for decades, so look for quality and let it grow. The best thing to do once you have a good investment and good management is to stop looking at what the market did today. It does not matter what it does today or tomorrow, but what it is going to do over the decades until your retirement. And come to think about it… If you retire at age 65, statistics say you will most likely live another 20-plus years, so your money has to work for you for a very long time.
Disclaimer: The advice offered in this column is intended for informational purposes only. Use of this column is not intended to replace or substitute any professional advice. This column, its author, the newspaper and publisher are not responsible for the outcome of following any advice that appears here.