It's a known fact that there have been some amazing medical advancements in the past 50 years. Medicine has come leaps and bounds from where it used to be. Seth tells me about babies in the Neonatal Intensive Care Unit (NICU) that can be saved at 23 weeks..that's crazy when you consider that full term is 40 weeks. Had these babies been born during the caveman era..let's just say they wouldn't be a hunter or a gatherer, they would be 6 feet under..if caveman could dig that far. But this blog entry isn't about small babies born during the time of the wooly mammoths- it's going to be about retirement. :)
Everytime I turn on the TV to watch a financial show I hear: "People are living longer and longer." and along with this sentiment, we keep hearing that Social Security is a broke system and that that it's going to run out sooner rather than later. It's totally depressing knowing that I'm probably paying into a system that I won't benefit from. However, I can't let the unknowns of the future distract me from focusing on how I can prepare for our future retirement. If I stick with the conventional retirement age of 65, I have 40 years to go before I retire. But as you can see from my title, who knows...it might be even longer that I'm in the workforce. Forty years may be a blip or a speck in the large spectrum of time, but it's quite a long period to invest in something and watch it grow due to compounding interest and earnings.
If your workplace offers a 401k match of any sort, it's important to make the effort to to contribute enough to at least get the maximum company match account. My finance professor once said that if there is one investment to make, it would be contributing to the 401k match since there is a guaranteed 100% return. A typical match is along the lines of the company matching 100% of the first 3% you contribute and 50% of next 1% you contribute. This is the equivalent of 3.5% by doing the following: (1 x 3%) + (0.5 x 1%) = 3.5%. I'm not sure why they have to make 3.5% sound so fancy, but that's the way it is. Let's use a nice round figure of $100,000 for an example:
Sally Beri Gather earns $100,000 a year. In order to maximize her match, she would contribute $3500 a year, or $291 per month and her company would automatically match that by depositing $3500 over the course of the year.
Anything that she contributes over $3500 would not be matched, but just because it's not matched doesn't mean that it's not a good idea to keep contribute. The more you contribute now, the more you potentially have for the future. Another conventional breakdown that I have heard is the 80-10-10 rule in which you live off of 80% of what you make, put 10% into savings, and put 10% in to retirement. Of course, this formula may not be a good fit for everyone and it just depends on your situation. For example, you may be saving up to buy a home, thus you may try to live off of 60% of your income and trying to save 30% and putting 10% into investments/retirement. In our household, our goal is to pay off Seth's student loans in the next 10 years so we are putting less towards savings and more towards the loans. By keeping in mind how your finances are broken down, you get the big picture which will help you in achieving your financial goals.
In the situation that your company doesn't offer a company match or you are looking to compliment your retirement- you should definitely look into opening up a Roth IRA (Individual Retirement Account). Named after Senator William Roth of Delaware, a Roth IRA is a popular retirement vehicle because the money that you put it into is after-taxes. Since you're putting away money that has already been taxed, when you take out the money at age 65, you don't have to pay any taxes on it. You get it free and clear at the end. The Roth is also subject to income eligibility limitations. For single filers, the modified adjusted gross income (MAGI) on your income taxes must be less than $105,000 and for married filing jointly, the MAGI limit is $169,000. Thus, for individuals with high earning potential, they may only have a few years where they are eligible for a Roth.
For 2011, the contribution limit for a Roth IRA is $5000 and $6000 for individuals over 60 years of age. The contribution deadline is before the tax filing deadline which is April 15th, 2012. The other great benefit of a Roth IRA is that if something were to happen to you, your beneficiaries also get the payout tax free.
Then of course, there's the Roth IRA vs. traditional IRA discussion in which people may say that it's a disadvantage to put your money in a Roth IRA if you think that you will be in a lower tax bracket when you retire. This means that you are paying more taxes on it now than you would be paying when you retire. With a traditional IRA, your contributions are deductible in the current tax year, but you have to pay taxes on it when you take the money out. My personal thought on this issue though is that if I set myself up right through 401k contributions and all other income sources, I will probably be in the same tax bracket. In addition, with the debt situation, the move towards universal healthcare, and the general direction our country is heading, who knows where taxes will end up by the time I retire. With a Roth, I will know that I paid my dues and I get the money free and clear.
Setting up a Roth IRA literally takes 2 minutes. I set up my husband's Roth IRA at Fidelity today and the form is simple & straightforward. There are also other licensed brokers out there such as Schwab, Scottrade, T.Rowe Price. You can look around and see who who is the best match. I actually have mine through Bank of America/Merrill Lynch and that makes it easy to link it to my checking account to make contributions. I think the trading fees are all comparable - between 7.95 and 9.95. You can choose to purchase stocks, mutual funds, bonds, etc. with your Roth IRA and with each trade, there is a fee.
So, look around and educate yourself on what fits your retirement goals! Happy retirement thoughts!
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