When I get older, losing my hair, many years from now....
October 27, 2010 9:17 AM Subscribe
How can I get a handle on saving for retirement? Where do I even start?
I'm mid-30s, married, own a home. Both my husband and I have some individual retirement accounts and investments (mutual funds, IRAs, 401(k)s) and a savings account with about a 3-month rainy-day fund in it. We are about to have our first kid and we started talking about college savings funds. I think we need to square away our retirement funds first and get a handle on what we ought to be doing. But, it seems like a vast, dark well of information that is incredibly hard to slog through.
How did you or are you putting together a picture of your retirement plan? Did you hire a financial planner? How much did that cost and was it worth it? Do you trust their recommendation? Are there worksheets out there that help you figure it out?
Assume that I am only smart enough to figure out that setting up a 401(k) to get employer matching funds was a good thing to do.
I'm mid-30s, married, own a home. Both my husband and I have some individual retirement accounts and investments (mutual funds, IRAs, 401(k)s) and a savings account with about a 3-month rainy-day fund in it. We are about to have our first kid and we started talking about college savings funds. I think we need to square away our retirement funds first and get a handle on what we ought to be doing. But, it seems like a vast, dark well of information that is incredibly hard to slog through.
How did you or are you putting together a picture of your retirement plan? Did you hire a financial planner? How much did that cost and was it worth it? Do you trust their recommendation? Are there worksheets out there that help you figure it out?
Assume that I am only smart enough to figure out that setting up a 401(k) to get employer matching funds was a good thing to do.
This seems like too big of a topic for a simple question/answer format. Others may share their personal scenarios and anecdotes -- I would suggest you start reading personal finance sites like getrichslowy.org or thesimpledollar.org and see where that takes you.
posted by devbrain at 9:33 AM on October 27, 2010
posted by devbrain at 9:33 AM on October 27, 2010
#1 most important thing - put money aside.
Subpoint 1 - get as much money as possible. 401(k)s often have employer matches. Use it, and take their money.
Subpoint 2 - don't lose money. Any investment you don't understand will end up screwing you. Focus on stuff you do understand. "Index Fund" or "Target Age Retirement Fund" let other people deal with the complexity, but in a very rule-based manner (so they can't screw it up).
Subpoint 3 - tax advantage what you can. 401k and IRAs both don't have you pay any taxes up front, and only when you are making less at retirement do you pay taxes. That'll save ya a few bucks. Roth IRAs are the other way around (taxes up front, but no taxes on gains, they work best for longer time periods - 30s is ok)
#2 Fire and Forget. Make it automatic, just setup the bank to invest some $ amount in an account every month. 401(k) is the easiest, IRA is next easiest to set that up.
#3 Understand the difference between an account type, and an investment. A 401(k) or IRA is more like a box than an item. It's a way of storing investments in a way that has additional rules and benefits. Typically the rule is a penalty on early withdrawl, and the benefit is tax advantage. Within an account, you can have lots of investments. Anywhere from Government Bonds (super conservative) to Index Funds (stocks) to Individual Stocks, to Physical gold, or real estate, or.... etc. Lots of different ways to invest. But it all would fall under the heading of "IRA" in terms of tax advantage.
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This is of course nowhere near a full list of things to consider, but it should get you started. Spend a few hours reading up on wikipedia or somewhere on what Index funds are, and how IRAs and 401(k)s work. Well worth the time.
posted by cschneid at 9:42 AM on October 27, 2010 [2 favorites]
Subpoint 1 - get as much money as possible. 401(k)s often have employer matches. Use it, and take their money.
Subpoint 2 - don't lose money. Any investment you don't understand will end up screwing you. Focus on stuff you do understand. "Index Fund" or "Target Age Retirement Fund" let other people deal with the complexity, but in a very rule-based manner (so they can't screw it up).
Subpoint 3 - tax advantage what you can. 401k and IRAs both don't have you pay any taxes up front, and only when you are making less at retirement do you pay taxes. That'll save ya a few bucks. Roth IRAs are the other way around (taxes up front, but no taxes on gains, they work best for longer time periods - 30s is ok)
#2 Fire and Forget. Make it automatic, just setup the bank to invest some $ amount in an account every month. 401(k) is the easiest, IRA is next easiest to set that up.
#3 Understand the difference between an account type, and an investment. A 401(k) or IRA is more like a box than an item. It's a way of storing investments in a way that has additional rules and benefits. Typically the rule is a penalty on early withdrawl, and the benefit is tax advantage. Within an account, you can have lots of investments. Anywhere from Government Bonds (super conservative) to Index Funds (stocks) to Individual Stocks, to Physical gold, or real estate, or.... etc. Lots of different ways to invest. But it all would fall under the heading of "IRA" in terms of tax advantage.
------
This is of course nowhere near a full list of things to consider, but it should get you started. Spend a few hours reading up on wikipedia or somewhere on what Index funds are, and how IRAs and 401(k)s work. Well worth the time.
posted by cschneid at 9:42 AM on October 27, 2010 [2 favorites]
I'm younger than you; I used a couple of online calculators (CNN Money had an OK one) to sort out how much I should need, and looked at what my employer's deferred comp and defined-contribution pension plans offered in the way of index and target-date funds to decide where I was comfortable investing. My next step is to work with the fee-only financial advisor through my credit union, once my 6-month savings cushion is in place.
posted by SMPA at 9:51 AM on October 27, 2010
posted by SMPA at 9:51 AM on October 27, 2010
First, figure out how much you need to be contributing for retirement. There are many, many Web sites out there that will help you do this. You tell them how much you already have, how much you make, how much of your current salary you want to be able to have each year of retirement, and how long you want your retirement money to last. They will tell you how much you should be putting in each year.
BTW, such a calculator will probably make certain assumptions for your investment returns, inflation, and so on. Check these. I would not rely on 10% return from the stock market, for instance.
The order you should be contributing to your various retirement accounts is: Contribute enough to take full advantage of any matching offered by your 401(k). Then max out your Roth IRA, if you are eligible for this type of account. Then max out your 401(k).
You should probably put the money in an index-based "target retirement fund," where you tell them when you want to retire and the fund adjusts the mix of investments each year so they get less risky as you approach retirement. I specify index-based because their expenses are much lower than for an actively-managed fund. You are already paying a fee to the firm that manages your 401(k); don't put any more friction on your investments.
If you have 401(k)s from former employers, roll these over into a traditional IRA at a discount brokerage. This will almost certainly reduce your fees. I use Wells Fargo because there are no fees and they give you 100 free trades a year. You should buy Exchange-Traded Funds (ETFs); these are mutual funds that trade like stocks, and almost all of them have very low fees because they are index-based. They have target retirement date ETFs now.
Next, figure out how much you will need to save each month for your kids' college education and set up an education savings account for that. There appear to be plenty of Web sites for this as well.
Good job on the emergency fund, by the way. With a child on the way, you may want to increase that to six months.
posted by kindall at 10:01 AM on October 27, 2010
BTW, such a calculator will probably make certain assumptions for your investment returns, inflation, and so on. Check these. I would not rely on 10% return from the stock market, for instance.
The order you should be contributing to your various retirement accounts is: Contribute enough to take full advantage of any matching offered by your 401(k). Then max out your Roth IRA, if you are eligible for this type of account. Then max out your 401(k).
You should probably put the money in an index-based "target retirement fund," where you tell them when you want to retire and the fund adjusts the mix of investments each year so they get less risky as you approach retirement. I specify index-based because their expenses are much lower than for an actively-managed fund. You are already paying a fee to the firm that manages your 401(k); don't put any more friction on your investments.
If you have 401(k)s from former employers, roll these over into a traditional IRA at a discount brokerage. This will almost certainly reduce your fees. I use Wells Fargo because there are no fees and they give you 100 free trades a year. You should buy Exchange-Traded Funds (ETFs); these are mutual funds that trade like stocks, and almost all of them have very low fees because they are index-based. They have target retirement date ETFs now.
Next, figure out how much you will need to save each month for your kids' college education and set up an education savings account for that. There appear to be plenty of Web sites for this as well.
Good job on the emergency fund, by the way. With a child on the way, you may want to increase that to six months.
posted by kindall at 10:01 AM on October 27, 2010
You are right to focus on your retirement before the college fund. Scholarships, grants, loans, work, etc can all help pay for college. You can't borrow for retirement, and there are no grants!
posted by COD at 10:10 AM on October 27, 2010 [1 favorite]
posted by COD at 10:10 AM on October 27, 2010 [1 favorite]
You can't borrow for retirement
You can borrow for anything! :-) If you own your own home by retirement, you can take out a reverse mortgage on it, or use a home equity line of credit even if you don't own it fully. Of course, this means that you will likely give the house to the bank rather than to your heirs.
posted by kindall at 10:23 AM on October 27, 2010
You can borrow for anything! :-) If you own your own home by retirement, you can take out a reverse mortgage on it, or use a home equity line of credit even if you don't own it fully. Of course, this means that you will likely give the house to the bank rather than to your heirs.
posted by kindall at 10:23 AM on October 27, 2010
Just to chime in, don't worry about your kid(s) college to the detriment of your retirement. I know many parents want to help out, but I've seen some families exhaust their own funds for their children and now will have a hard time retiring.
Definitely research funds and fees. Stay active in managing your account. Remember, this is YOUR money and it never ceases to amaze me how few people truly understand how money works for them.
It can be daunting, but if you understand the basic principles you will be better off to make good, informed decisions.
posted by handbanana at 10:47 AM on October 27, 2010
Definitely research funds and fees. Stay active in managing your account. Remember, this is YOUR money and it never ceases to amaze me how few people truly understand how money works for them.
It can be daunting, but if you understand the basic principles you will be better off to make good, informed decisions.
posted by handbanana at 10:47 AM on October 27, 2010
Response by poster: Remember, this is YOUR money and it never ceases to amaze me how few people truly understand how money works for them.
Well, and this is what I'm struggling with. I've come a long way in educating myself in order to take control of our personal finances (this is why we have a cushion and no debt other than house and student loans). But, once you start talking about retirement funds you are almost always talking about investing and then you are talking about products, returns, fees and taxes and it starts to get really overwhelming really quickly. I feel like I've made the baby steps into the basics but now I just don't quite know how to get my arms around all this so that it makes sense to me so that I can develop a plan of action.
posted by amanda at 10:56 AM on October 27, 2010
Well, and this is what I'm struggling with. I've come a long way in educating myself in order to take control of our personal finances (this is why we have a cushion and no debt other than house and student loans). But, once you start talking about retirement funds you are almost always talking about investing and then you are talking about products, returns, fees and taxes and it starts to get really overwhelming really quickly. I feel like I've made the baby steps into the basics but now I just don't quite know how to get my arms around all this so that it makes sense to me so that I can develop a plan of action.
posted by amanda at 10:56 AM on October 27, 2010
what devbrain said. He brought up two of my favorite blogs. A few posts on thesimpledollar to get you started:
http://www.thesimpledollar.com/2008/12/26/new-years-resolution-workshop-1-get-started-with-retirement/
http://www.thesimpledollar.com/2008/04/26/retirement-savings-how-im-doing-it/
http://www.thesimpledollar.com/2008/05/29/my-retirement-portfolio-as-i-approach-30/
read those and browse thru the other posts at thesimpledollar on retirement and other finance blogs like getrichslowly. Personally I like the plans that make it both automatic and low-fee. You may want to look into index funds. You didn't mention any, but unsecured debt should also be taken care of if it exists.
Personally I am not in favor of paying for education, or letting children know of any savings you have for them. That being said, my wife and I ARE saving money for our children to give them a start in life. Not sure yet when we're going to give it to them - perhaps at the start of college , or maybe the end, or for their wedding or first house. Anyways, I want my kids to grow up knowing that they need to pull their own, but sometimes life gives you happy surprises. I think that teaching my children about personal money management and budgeting [along with a happy and fun childhood] will provide them with much more value than any dollar amount I would be able to give them.
Good on you for thinking of all this now, tho. Good luck!
posted by cheesyburgercheese at 11:01 AM on October 27, 2010
http://www.thesimpledollar.com/2008/12/26/new-years-resolution-workshop-1-get-started-with-retirement/
http://www.thesimpledollar.com/2008/04/26/retirement-savings-how-im-doing-it/
http://www.thesimpledollar.com/2008/05/29/my-retirement-portfolio-as-i-approach-30/
read those and browse thru the other posts at thesimpledollar on retirement and other finance blogs like getrichslowly. Personally I like the plans that make it both automatic and low-fee. You may want to look into index funds. You didn't mention any, but unsecured debt should also be taken care of if it exists.
Personally I am not in favor of paying for education, or letting children know of any savings you have for them. That being said, my wife and I ARE saving money for our children to give them a start in life. Not sure yet when we're going to give it to them - perhaps at the start of college , or maybe the end, or for their wedding or first house. Anyways, I want my kids to grow up knowing that they need to pull their own, but sometimes life gives you happy surprises. I think that teaching my children about personal money management and budgeting [along with a happy and fun childhood] will provide them with much more value than any dollar amount I would be able to give them.
Good on you for thinking of all this now, tho. Good luck!
posted by cheesyburgercheese at 11:01 AM on October 27, 2010
D'oh! here are some live links...
Getting Started
"How I'm doing it"
Approaching 30 - retirement portfolio
posted by cheesyburgercheese at 11:05 AM on October 27, 2010
Getting Started
"How I'm doing it"
Approaching 30 - retirement portfolio
posted by cheesyburgercheese at 11:05 AM on October 27, 2010
The finance blogs mentioned above probably have some reading lists. I highly recommend going through some starter books to give yourself a better understanding of investment vehicles, how much risk you are actually comfortable with, and what kind of asset allocation you want to have. Since you've already done the work to understand that credit card debt is generally not good (it's not clear if you got rid of cc debt or just never had any) and to build up an emergency fund, you can definitely get a handle on how to deal with retirement.
The start up reading list by the bogleheads is worth working your way through. I sometimes find it easier to read dead tree books rather than online bc I never get to the end of the web and that contributes to the sense of getting overwhelmed by information.
posted by tangaroo at 7:16 AM on October 28, 2010
The start up reading list by the bogleheads is worth working your way through. I sometimes find it easier to read dead tree books rather than online bc I never get to the end of the web and that contributes to the sense of getting overwhelmed by information.
posted by tangaroo at 7:16 AM on October 28, 2010
Response by poster: I sometimes find it easier to read dead tree books rather than online bc I never get to the end of the web and that contributes to the sense of getting overwhelmed by information.
That is a very good observation!
And, yes, we have overcome large amounts of credit card debt and continue to struggle with making sure we don't develop more. It's an ongoing process.
posted by amanda at 7:49 AM on October 28, 2010
That is a very good observation!
And, yes, we have overcome large amounts of credit card debt and continue to struggle with making sure we don't develop more. It's an ongoing process.
posted by amanda at 7:49 AM on October 28, 2010
I second tangaroo's Bogleheads reading list, and I'd like to add a link to the Bogleheads Wiki Financial Start-Up Kit page (which is incomplete but has a good list of topics for you to think about). There's a ton of good advice at the Bogleheads site, including a lot of folks who would agree with you that now is a good time to think about your retirement plans - as they often point out, you can borrow money for your children's education if you have to, but no one will lend you money for your retirement.
Another good bit of advice I see on there a lot: it's more important to start, rather than waiting until you know exactly what you're doing. Also: you WILL make mistakes, and you shouldn't be too hard on yourself when you do ... just try to make them small mistakes, if you can.
You've got 401ks, IRAs, and an emergency fund, so you're already off to a terrific start. Take your time, and just keep reading and discussing things with each other.
Good luck!
posted by kristi at 6:57 PM on October 28, 2010
Another good bit of advice I see on there a lot: it's more important to start, rather than waiting until you know exactly what you're doing. Also: you WILL make mistakes, and you shouldn't be too hard on yourself when you do ... just try to make them small mistakes, if you can.
You've got 401ks, IRAs, and an emergency fund, so you're already off to a terrific start. Take your time, and just keep reading and discussing things with each other.
Good luck!
posted by kristi at 6:57 PM on October 28, 2010
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I also spent a lot of time digging out all my paperwork to all my various pensions in order to work out what I really had, how it was performing, and what fees I was paying on it (far more than necessary, it turned out). Then I consolidated all those pensions in one place where I could see everything online, and it was really plain what all the fees were and how well everything was doing. Now I can tell you exactly how much I have in pension funds, and I know how much I need to pay in every month to be pretty sure that I will have enough money to retire comfortably.
I did not hire a financial planner but I did spend a lot of time doing research into what to invest in. I wouldn't advise anyone else to go solo in this fashion unless they really really want to!
posted by emilyw at 9:33 AM on October 27, 2010