Personal Dividends - Money+Lifestyle » retirement plan

Bad Company 401k? There May be Other Options

Miranda — Fri, 26 Feb 2010 17:03:18 +0000

Source: sxc.hu Photo: wax115

It’s a good idea to invest in some sort of retirement plan at work. There are tax advantages, and your company might offer a matching contribution. Unfortunately, though, there are a number of bad 401k plans that include a variety of fund choices that are costly — with high fees that eat into returns. Others offer little in the way of diversity away from company stock. (You can get help evaluating employer 401k plans at www.brightscope.com.)

If you are dissatisfied with your company’s 401k, there is no reason to put too much of your money into it. Put in enough to earn your company’s highest match — you don’t want to leave free money on the table — and then consider these other retirement options as supplements:

Individual Retirement Account (IRA)

Anyone who has worked and has a tax return can open an IRA. Even spouses that don’t work can open a spousal IRA. Using Roth and traditional IRAs can be very helpful in terms of providing you a way to investing in a retirement plan without relying on what is available through your employer.

Traditional IRA: You get to contribute to this account before taxes, lowering your taxable income. The deduction is completely phased out by the time you earn $66,000 in adjusted gross income. You can contribute up to $5,000 in 2010 (or $6,000 if you are at least 50).
Roth IRA: If you are more concerned about tax-free withdrawals later in life, you can contribute to a Roth IRA as long as you earn less than $176,000 married filing jointly (phase out begins at $166,000). You contribute with after-tax dollars, so it doesn’t change your current tax efficiency, but you don’t pay income taxes on your withdrawals, like you would with a traditional IRA. Yearly contribution limits are the same as with a traditional IRA.

You can set up different IRAs for you and your spouse in order to contribute more.

Consider your spouse’s retirement plan

If you have a spouse that works for a different company with a better plan, you can coordinate your retirement plan investments accordingly. Run the numbers, and consider your asset allocation. If it works out, you can incorporate a good plan from your spouse into your overall retirement portfolio. Do what you can to make sure that your spouse’s plan offsets the weaknesses in your own company 401k plan.

Self-employed retirement plans

Some folks don’t have a company to work for, because they are self-employed. The good news is that you don’t have to work for “the man” in order to get the benefits of a retirement plan. You don’t even have to give up the 401k. If you are self-employed, you can create your own solo 401k. This is a way for you to direct your own retirement plan investments, while still getting a tax advantage, even if you don’t have a traditional job that provides traditional benefits.

It is also worth noting that if you have a side business, you can open your own self-employed retirement plan. Keogh plans, SIMPLE IRAs and other options exist, and you can use your side business as a way to boost your retirement plan contributions outside what is offered from your more traditional day job.

Bottom line: You have to watch out for your own retirement, since no one else is going to do it for you. Do your due diligence on your company’s 401k, and decide whether or not it is something that works for you. Contribute only what you must to get the match, and then put your head earned cash into retirement plans that align more closely with your retirement goals.

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Bad Company 401k? There May be Other Options

The 3 Most Neglected Aspects of Preparing for Retirement

Miranda — Thu, 03 Dec 2009 21:49:12 +0000

I recently interviewed Craig Israelsen, a Personal and Family professor at Brigham Young University, and one of the authors of Your Nest Egg Game Plan: How to Get Your Finances Back on Track and Create a Lifetime Income Stream [Buy at Amazon]. One of the questions I asked him was this: In your experience, what is the most neglected aspect of preparing for retirement? “I’m going to cheat and give you three things,” Israelsen replied. His insights provide some helpful information about getting ready for retirement, and how you can increase the chances that you will be able to retire comfortably and do a little more of what you want. Here are the three things that Israelsen believes are most neglected when people start thinking about retirement.

#1: Not Doing Enough

“This is really obvious,” Israelsen told me. “But one of the worst things you can do is to not do enough. Most people either start too late, or don’t put away enough.” He went on to explain that, many people don’t realize the benefits of putting money into a retirement plan as soon as possible. Additionally, he cautions against not putting in enough. “If you want to buy an annuity,” he explained, “you need to have at least $200,000 to $300,000 so that you can carve that investment out.”

Source: sxc.hu Photo: Avolore

Israelsen recommends thinking about retirement now, no matter your age. Think about Social Security, and recognize that while it will help, it will not be able to come close to replacing your income. Estimate how much income you will need each month, and work out a plan to save up enough. He also says that you need to think about how your nest egg will behave when it comes to taking distributions.

Finally, Israelsen told me that it is vital that those with company matches take full advantage of them. “Part of not putting enough money in your retirement accounts is not taking advantage of employer match programs. You’re leaving free money on the table. Max out your employer match, and use that to grow your retirement funds.”

#2: Getting Out of Debt

“You don’t need as much if you have no debt,” Israelsen pointed out. And he’s right. If you don’t have monthly debt obligations (and this includes your mortgage), then you can get by on surprisingly little, and still have enough left over to travel or do some other things. “Debt reduction is a huge part of preparing for retirement, and many people neglect this. If you have a small nest egg, and no debt, it is usually possible to work something out. A medium sized nest egg, and a lot of debt, isn’t doable.”

In order to limit the amount of debt that you have, Israelsen recommends living within your means. “Think about what it’s important in your life. Having lots of things really doesn’t matter in the grand scheme. Instead, put yourself in a position to live modestly now, and then live modestly in retirement.” Living within your means, and paying down your debt, can be one of the most important things you do to get ready for a prosperous retirement.

#3 Figuring Out Want You Want To Do

“I hear from people all the time who just talk about generalities when it comes to retirement,” Israelsen commented. “I’m going to retire. Yes, but what are you going to do?” He recommends that you start when you are younger to think about what you would like to do. Whether it’s volunteer work, spending time visiting your grandchildren, traveling the world, or developing a hobby or skill, you should have an idea of what you want to do, and how much money you will need to do it.

“We weren’t put on Earth to watch TV,” Israelsen pointed out, “but if you don’t have some sort of idea of what you want to do, and how you are going to do it, that’s what you’ll end up doing.”

With proper planning — and the earlier you start the better — you are more likely to retire with enough of a nest egg to create the income stream you need to do what you want. And that’s something worth thinking about.

(Disclosure: I received a free copy of Nest Egg Game Plan to review. I was not compensated in any way to interview Israelsen or share portions of the interview.)

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The 3 Most Neglected Aspects of Preparing for Retirement

Planning for a Prosperous Retirement

Miranda — Fri, 07 Aug 2009 15:51:50 +0000

Source: sxc.hu Photo: CraigPJ

Retirement is one of those nebulous goals that we set for the future. Often, we do little beyond think about retirement, and perhaps set money aside through a retirement plan offered by an employer. However, preparing for a prosperous retirement requires active planning and action now. Otherwise, you’ll find yourself, five years away from your target retirement date, wondering how in the world you will ever catch up. Here are a few things worth considering when preparing for a prosperous retirement:

1. Where you are now

Before you can plan for the future, you have to have a pretty good idea of where you are right now. Once you have taken a brutally honest look at your present situation, you can start planning what to do in order to change the path you are on and reach your retirement goals. Look at your debts, expenses and income. Consider what you can do to pay off your debt (including your mortgage, if possible) by the time you retire. Look for ways to boost your income through active or passive means.

2. How much you need for a comfortable retirement

Once you know where you are, you need to figure out where you need to be. Figure out how much money you will need to live comfortably during retirement. There is no one way to determine this. In the end, you have to look at what you can expect from Social Security (not much), company retirement plans and pensions, savings, and any passive income you have set up. You will also need to look at your expenses. If you create a plan to help you pay off debt by the time you retire, this will dramatically reduce your outflows. Add up you current expenses, and estimate how much future expenses for things like long-term care, travel, setting up college funds for grandchildren and health care might add to that. Personally, I think that my expenses overall will be very similar to what I have now. My mortgage, car and student loan payments will be replaced by other expenses (hopefully involving lots of travel).

Using the 4% rule to figure out how much of a nest egg you need

After deciding how much you will need to live comfortably, it is time to estimate how much of a nest egg you will require. Most investment and personal finance experts agree that, in order to make your money last indefinitely, you can withdraw no more than 4% of your assets each year. This will help shield you from inflation and years when returns may not be as good. The idea is that you will be living on your returns, without touching the principal. If you think that you will need $60,000 a year to maintain a comfortable lifestyle, take that number and divide it by 0.04. The answer is $1.5 million. That is how much you will need to have saved up in order to live indefinitely on $60,000 a year. If you think that you will only need $40,000, you can perform the same calculation: 40,000 / 0.04 = $1 million.

Naturally, if you don’t mind having the money run out in 20 or 30 years, or if you keep some source of income going, you can adjust your withdrawals to fit your needs.

3. Make a plan

Now that you have a goal to reach, it is time to make a plan to reach it. Look at what you are setting aside, and figure out whether it is enough to grow your money sufficiently. There are a number of investment calculators and asset allocation models that can help you figure out how much you need to be setting aside now to help reach your target later. Once you have a plan, you need to start following it in order to increase the chances that you will reach your goals. Of course, the earlier you start, the more success you are likely to have. You may even need to see a financial planner or adviser to help you map out a way to save, invest and spend in a way that will lead to later prosperity.

4. Other things

There are plenty of other things that are worth looking into as you prepare for a prosperous retirement. Here some questions to ask and avenues to explore as retirement draws near:

Open as many tax-advantaged retirement accounts between you and your spouse as possible.
Question your company retirement plan, and find out if you can change the allocation in your account, or self-direct some of the investments.
Find out about the tax implications of moves you make now, and when you withdraw funds during retirement.
Remember that inflation is always waiting to erode your earnings.
Think about down-sizing as retirement nears. Consider a smaller, less expensive home, fewer cars and getting rid of stuff you do not normally use.
Consider income investing and other passive income streams.

In the end, it is possible to plan for a prosperous retirement. But you have to take an active role in its accomplishment. It may seem like a lot of work to figure out how much you need and put together a plan, but it is worth the time and effort. After all, the earlier you start, the longer compound interest will have to work wonders in your favor.

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Planning for a Prosperous Retirement

Spousal IRA: Retirement for Stay at Home Parents

Miranda — Thu, 26 Mar 2009 14:04:43 +0000

Retired Couple Source: stck.xchng Photo: Egilshay

Marriage is expected to be a partnership, and when the marriage involves a stay at home spouse, the partnership takes on one of different roles and responsibilities. One person earns the requisite funds to run the household, while the other person cares primarily for the children and the home. Unfortunately for most stay at home parents, fulfilling this necessary and thankless job can actually put their finances at risk. Without their own retirement and/or savings accounts, stay at home parents may find themselves in even more difficult circumstances should the relationship change. A Spousal IRA can help reduce the financial risk to stay at home parents, allowing them to save for the future.

What is a Spousal IRA?

The Spousal IRA is designed for marriage partners who do not have jobs. If your spouse works, you can open one up and contribute up to $5,000 in 2009. (If you are at least 50, you can contribute an extra $1,000 as a “catch up” contribution.) Your spouse must have earned enough income to cover the contribution, and you must be married filing jointly. In a traditional IRA, this contribution is tax deductible. You can also open a Spousal Roth IRA for a non-working spouse, but, as with a “regular” Roth IRA, the contribution is not tax deductible. The advantage of the Spousal Roth IRA is that after age 59.5, and if the account has been open for at least five years, withdrawals are made tax free from the Roth IRA — since contributions aren’t tax deductible, you’ve already paid taxes.

IRS guidelines for the Spousal IRA

Obviously, though, it’s not as simple as staying within the contribution limits. There are all sorts of IRS guidelines, income phase-outs and mumbo-jumbo about who already has a qualified retirement plan. Here are some of the basic limitations:

A non-working spouse can contribute his or her $5,000, and a working spouse can also contribute $5,000, bringing the total to $10,000. But only if neither partner already participates in a qualified retirement plan.
A “qualified” retirement account includes accounts set up by self-employed persons.
Non-working spouse’s deductibility phases out when couples have an adjustable gross income of between $166,000 and $176,000.
A working spouse’s ability to make a deductible contribution for the non-working spouse starts to phase out with an adjustable gross income of $89,000 to $109,000.

Can gay couples open a Spousal IRA?

With marriage laws in Massachusetts and in California (until the Prop 8 ban is carried out), there are questions about whether stay at home gay spouses can take advantage of the Spousal IRA. The answer is an unequivocal “no.” This is because in 1996 Congress passed the “Defense of Marriage Act.” The act basically precludes any state laws allowing gay marriage by requiring that for purposes of federal laws, marriage is only between one man and one woman, and that a spouse can only be a member of the opposite sex. This means that the federal law pertaining to IRAs does not recognize gay spouses as actual spouses.

Gay spouses can open their own IRAs, however, just like any other person who is not recognized as married by the federal government. However, gay spouses cannot fund the IRA with money earned by their partners. Instead, they must have a job and earn the money going into the IRA. Of course, because the federal government doesn’t recognize the marriage, gay spouses’ earnings aren’t ever combined. So that makes staying withing the adjusted gross income limits a little easier (although it doesn’t help non-working, full-time parent gay spouses, and is probably poor comfort).

Speaking with a knowledgeable tax planner or accountant, or visiting the IRS Web site, might be a wise idea before deciding what to do. Most married couples, however, find that a Spousal IRA offers peace of mind for stay at home parents, and a certain amount of financial protection. A stay at home spouse does a great deal of work that is not recognized with a paycheck, and he or she should be well taken care of.

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Spousal IRA: Retirement for Stay at Home Parents

Retirement Plans – Managing Risk with Safe Investments

briskycapital — Thu, 12 Mar 2009 18:58:20 +0000

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The chaos in the market and overall economy has left a lot of people worried and confused. People are extremely eager for information and advice. I can’t tell you how many people have asked me “what should I do with my retirement accounts?” Sell? Hold? Buy More? To that, I’d say take step back and think for a bit. If you’re still holding most of your investments, there isn’t the downside risk that existed a year ago. So the good news is you have some time. You can still take control of your retirement plans by adding some safe investments to your asset allocation and that will help in managing risk in your portfolio.

Managing risk in your retirement plans

The answer to the question will lie in your personal situation and where you’re at in your life. If you have a low risk tolerance, its important that you don’t own things that will keep you up at night. You are best served to sit in cash or low risk investments or at least make some of these cash equivalents a part of your asset allocation to aid in managing risk in your portfolio. Although cash isn’t yielding a whole lot, the good news is that it is easier than ever to invest in bonds. Bond funds, and specifically exchange-traded funds (ETFs) have made the process very easy. Vanguard has a great group of ETFs with very low costs which I would recommend. The Vanguard Total Bond Market ETF (Symbol BND) is an excellent fund if you’re looking for a simple, diversified bond investment. The fund pays monthly dividends, yields 4.64%, and has an expense ratio of 0.11%. You can buy this fund right through your brokerage, for the same price as any stock. Also, if its inflation you are worried about, you can take a look at Inflation-Protected Securities, or TIPS. Their yield is determined by the CPI, and pays out corresponding to increases in that. ishares has an ETF to buy these securities (Symbol TIP).

Manage Risk with Diversification

If you have a little higher appetite for risk, or have awhile until you retire, you’re probably best served getting into some stocks. Quality blue-chip stocks historically have outpaced inflation, and have provided the best overall return. This doesn’t mean you have to buy Citigroup stock and watch CNBC 24/7 to make sure the company is still afloat. Here, diversification is the key to managing risk in your stock investments. The easiest way to do this is again through funds. For example Vanguard’s Total Stock Market ETF (Symbol VTI) will do the trick. It owns the largest 1,300 in the U.S., and yields 4.26%. The expense ratio is 0.07%. Don’t overlook the value of low costs when looking to funds, and Vanguard does the best job of that. Holding investments like this for the long term is one of the best, most stable ways to save for retirement.

With the market experiencing unprecedented volatility, these types of investments can offer stability to the average investor who doesn’t need to be concerned with daily market fluctuations. If you’re looking to get your retirement plans back on track, I’d take a look at these funds.

Disclosure: Author owns BND.

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Retirement Plans – Managing Risk with Safe Investments