Posted on 04/22/2008 9:18:45 PM PDT by BenLurkin
Have you started preparing for your retirement? If not, you should -- now.
The 401(k) is Americans' chief retirement plan, and the money you contribute at the beginning of your career has the most power to grow over time. A bill sponsored by Rep. George Miller (D-CA), likely to be voted on next month, would make it easier to make good decisions about your 401(k) by requiring clearer disclosures about fees and commissions, and requiring plans to offer a low-cost index fund option.
That's great, because if you're like most young people -- heck, most people -- you feel you don't know enough, or you don't make enough, to get started with investing for retirement. But you shouldn't wait for the laws to get less confusing. There's no day like today to start contributing to your future.
Marc Bruno would certainly agree with that statement. He's a journalist in his early 30s who started working for Crain's Pensions & Investments, an industry publication, a few years ago.
"Every other week we were writing about a different company freezing its defined benefit [pension] plan and enriching the 401(k) for new workers," Bruno says. "And it dawned on me, I'm that new worker and so are my friends and peers."
So he wrote the book "Save Now or Die Trying: Achieving Long-Term Wealth in Your 20s and 30s" to give us the information that's not always included in that confusing packet Human Resources provides. Here are Bruno's essentials.
Just Do It "The biggest mistake people make is just not participating," says Bruno. "It's amazing how many people don't bother. You just don't realize how much money you're leaving on the table."
Shockingly, only 18 percent of workers under 24, and just 38 percent of workers under 35, contribute to employer-sponsored retirement accounts even when they are available.
The rewards of contributing are threefold. One reward is the employer match: If you put in money, your employer will put in money, too. The second is the tax-sheltered nature of 401(k) contributions -- money that you put in is deducted from your taxable income. The third is the time value of money; thanks to compounding, money you save in the beginning of your career will grow much more than anything you sock away in your 50s.
Bruno spells all of this out with real-world examples. Here's one:
Let's say you make $50,000 a year and have a 100 percent employer match on your 401(k). You contribute just 6 percent of income, or $3,000 a year. At the end of the year, you have $6,000 saved for your future, and you bring home $34,310 after taxes. When you retire, 30 years later, that one year's contributions could be worth $45,674 or more.
Your sister is making the same salary, but she chooses to save $3,000 in a regular savings account. At the end of the year, not only does she have just $3,000 banked (plus maybe 2 or 3% interest), she's netting just $33,500 in take-home pay, because she took neither the tax benefit nor the employer match. That's what they call leaving money on the table.
So call up your HR department today, and say you want 6 percent to 10 percent of your paycheck placed into your 401(k).
The Circle of Life Have no idea where to put your 401(k) money? Don't want to spend more than five minutes deciding? Bruno has this advice for you: life-cycle funds. These are the options with dates at the end like "Fidelity Freedom 2045" or "State Farm LifePath2030." There's a list of low-cost life-cycle funds here.
The beauty of a life-cycle fund is that it has a predetermined mix of stocks, bonds, and other investments that automatically rebalances over time for the correct mix of growth and stable value. It is designed to be a one-stop shop -- theoretically, you could put all your money into a single life-cycle fund from now until retirement and be just fine.
"I'm a huge fan of autopilot," says Bruno. (Remember, this guy makes his living writing about investments.) "It's like having your own money manager."
But if you want a little more control and you've graduated from the fingers-in-your-ears stage of investing, listen up. In your 20s, your retirement money should be invested in 80 percent to 100 percent stocks. This is important -- the stock market has been volatile lately, but as a young investor we have the luxury of taking the long view, and stocks simply provide the best options for growth.
First, look to the U.S. market, where you want to own a mixture of large-company stocks, known as large-cap, for capitalization (like the S&P500) and small-cap stocks (the precise proportions will depend on your risk tolerance).
Then, Bruno and I agree that the most important direction for diversification is in international funds -- both developed countries and emerging markets like China, India, and Brazil -- such as the Fidelity Spartan International Index or the Vanguard Total International Stock Index Fund. This is true especially now, because U.S. markets represent less than half -- and falling -- of the value of global equity markets.
Be a Cheapskate Overall, Bruno says his best piece of investment advice came from Christine Benz, the director of mutual fund analysis at Morningstar and co-author of the "Morningstar Guide to Mutual Funds": "The investor who shops for the cheapest funds will usually be far better off than the investor who chases the funds that have had the best past performance."
This means you want to look at the expense ratios of your funds, which are published right up front in any prospectus, and try to make sure they're well below 1 percent. Index funds tend to be the cheapest because they are not actively managed. That means, rather than buy and sell the stocks in the fund often to try to get the best returns, an index fund simply holds a little bit of a very large number of stocks, aiming to replicate a stock index such as the S&P 500. (See a long list of no-load index funds here.) The original index fund was the Vanguard S&P 500, which still has some of the lowest costs in the business -- currently an expense ratio of just 0.15 percent.
Beat Debt One of the common excuses Generation Debt gives for not saving for retirement is that they have student loan and credit card debt to pay off first. In most cases, that argument just doesn't wash. Are you really dedicating every extra cent to paying down debt, or will you not even miss a 6 percent deduction from your take-home pay every two weeks?
If you have student loans, make the standard payment each month and contribute to your 401(k), too. 401(k)s, with the employer match and tax benefits, offer a return that beats the pants off of the 3 percent to 7 percent interest you're paying on your student loans.
The only time it may make sense to defer retirement savings for a bit is if you have a massive amount of high-interest credit card debt. Then Bruno has a suggestion for you: Consider taking a loan from your 401(k) balance. Instead of paying back 10 percent to 20 percent to a credit card company, you'll be repaying a low level of interest to yourself. But be careful. Some of the risks are summarized here.
You Can Take It With You A final wrinkle that comes up in employer-sponsored retirement plans is that young people switch jobs a lot -- according to the Bureau of Labor Statistics, 10 times by age 36 is the new norm. The youngest workers, those younger than 25, are also twice as likely to hold a temp, contract, or other type of job without benefits. This all means we're very unlikely to have our retirement decisions taken care of with a single 401(k) plan. But that's okay, as long as you're prepared to take the correct steps to roll it over.
If you’re 35 and you can put away the maximum salary deferral of $15,500 a year and you never change it (increase it), and IF you can earn an average 8% rate of return every year, by age 65 you’ll have approximately $1,827,927.
And that doesn’t count your employer’s match (if there is one).
I'd take that with a huge grain of salt. There are plenty of guys who make their living writing about sports, who can't play for beans.
unless you're a big shot lawyer or doctor or have a "pat" govt job, contributing to your retirement under age 24 is very unrealistic for our young people...they just don't have the money for it and the cost of EVERYTHING is very high....
8% is completely plausible over a 20 to 30 year period.
The S&P 500 has averaged 10.4% annually over the last 80 years.
A diversified portfolio of large cap, small cap, international, some bonds, etc. could EASILY average 8%, through good times and bad.
“Shockingly, only 18 percent of workers under 24, and just 38 percent of workers under 35, contribute to employer-sponsored retirement accounts even when they are available.”
And how many of those withdraw even that when they switch jobs, just to pay down the debts they’ve accrued?
I don’t know anyone that has been able to save this way without any withdrawal, and I certainly don’t know anyone saving since they were 24...except, of course, the people that have been in the same government job since they graduated from high school. The economy isn’t that steady, and most people switch jobs too often these days, to accrue that kind of savings. Add in paying for divorces and crippling student loans and you have a generation that will be worse off than the previous one for the first time in American history.
Ping list for the discussion of the politics and social (and sometimes nostalgic) aspects that directly effects Generation Reagan / Generation-X (Those born from 1965-1981) including all the spending previous generations are doing that Gen-X and Y will end up paying for.
Freep mail me to be added or dropped. See my home page for details and previous articles.
I have an excellent retirement plan.
It's my grandparents' retirement plan.
I plan to work as hard as I can, and earn as much as I can, until I'm dead.
Seriously.
I would rather help my kids through college and drop dead with a big fat life insurance policy so they can live a better life, then fret away about a future that might never come. We're living simply - but we're living!
My parents were squirrels. Saved like crazy, did without, lived modestly, never treated themselves to anything. Now they have more money than they will ever need. You would think they could live large, enjoy life? Nope. Mom's knees are crumbling and she can barely walk. Dad has terminal cancer. They are lucky they can make it to the grocery store, let alone the trips they always wanted to take.
I'm not saying my approach is the right approach for everyone. I just have different expectations on what the future will bring.
For the folks that want to retire, though, this article is correct. Save now, as much as you can. Treat your savings like a bill that MUST be paid every month, and you'll be surprised where you can cut your budget.
God bless the folks that can retire; I wish them all the best!
God Bless your parents, TX. My heart goes out to them.
I had a neighbor who was on SS and a minimum pension. The city decided to put a new sewer system in, and charged every home owner. She was an elderly widow, and was struggling just to keep her little home and survive.
She had to put her house up for sale because she couldn’t come up with the $4,000 dollars demanded by the city.
Her house did not sell (shock, shock), and she had to leave as it went into forclosure. She could be living on the streets, now, for all I know.
Somethin’ ain’t right, here.
“”average” of 8%???....I think that is pie in the sky for most people....if 8% is achieved,”
8% is very conservative. It is actually realistic to expect an average of 12% in a growth fund.
I disagree with this method. Do not take hardship loans from your 401(k) unless it is a true emergency. If credit cards are starting to pinch, negotiate a fixed-rate installment (debt consolidation) loan with your local credit union and then close the credit cards. Alternatively, use lower rate balance transfer offers (look for offers of a fixed rate for the life of the balance), close the old credit cards, and make your payments on time every month.
Taking loans from the 401(k) is like playing Russian roulette with the Federal government. You get to pay interest back to yourself, but it's with after-tax money, and that interest gets double taxed on the way out during retirement. And, on top of that, if you leave your job for whatever reason, the entire 401(k) loan can be immediately repayable (or treated as an early distribution and thus subject to both income tax and penalties).
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