“Have Enough Retirement Income” is a guest post by Jeff Rose. Jeff Rose is an Illinois Certified Financial Planner and co-founder of Alliance Investment Planning Group. He is also the author of Good Financial Cents, a financial planning and investment blog. One of his most interesting posts lately is Illinois Term Life Insurance Quote.
Do you feel like your retirement and financial plan need a boost? Unfortunately, drinking a V-8 or heading to a motivational workshop will not take care of this. One of the traditional ways to retire financially stable is to start saving long before you reach your retirement years. Here are some tips to help you retire with a nest egg large enough to support your needs and wants:
Start Saving.
More. And now. The only way to augment your retirement plan is to make starter investments, contribute more money and to do it now. Even the smallest additional amount added to your savings will add up significantly over time. And time is key; compound interest means little in the short term.
Find out what your employer can do for you.
If a 401k plan is offered to you through your job, you definitely want to take advantage of it. Money is automatically taken from your paycheck. These funds are tax-deferred and subject to early withdrawal penalties; this is a good thing as you will be unlikely to touch it, thus allowing your plan to grow (Read “IRA Restrictions.”) Many employers offer a matching program. This means exactly what you think: whatever you contribute is matched by your employer, usually up to 6% of your income. In order to receive this additional funding, you need to participate to a certain level in your 401k plan, but who would say no to free money?
Open an Individual Retirement Account.
Another savings plan with tax advantages is the traditional IRA. With this type of retirement account, individuals save money on a tax-deferred basis to be invested in various ways. Even if you have a 401k through your job, you can still put aside extra earnings (usually up to $5,000) in an IRA. This money can be invested in a variety of ways.
- CDs and Money Markets – These options are considered “safe” but only give you 4-5% interest over time.
- Bonds – This is a good choice for the risk-adverse and will give you more than CDs and money markets, usually 6-8% over time. Dividends can be reinvested or spent. Bonds can be a good way to stabilize your portfolio.
- Stocks and Mutual Funds – These choices are the most popular and the best way to increase your wealth. Though volatile in nature, stocks and mutual funds tend to beat inflation and allow your money to compound via dividends and increases in share prices.
Consider a Roth IRA.
A Roth Account is a special type of retirement plan where you pay taxes upfront and then sit back and allow your earnings to grow tax-free (as long as you hold the account for a five-year minimum). This means you will not be hit with taxes when you tap into your account in later years. Another advantage to this kind of account is that fewer restrictions are imposed upon the investments that can be made. For example, withdrawals are generally tax-free, although certain stipulations may apply. Transactions occurring within your account, such as capital gains, interest and dividends) are not subjected to a current tax liability. Although you will not receive any tax deductions for contributions made, your money will grow tax-free, and you can’t argue with that. Here’s some information regarding the Roth IRA rules for 2011.
Don’t Forget Life Insurance
Look into a permanent, or whole, life insurance policy if you are looking for other ways to fund or supplement your retirement. (Read “Term Life Insurance vs. Whole Life Insurance” for Neal’s perspective.) Most permanent life insurance policies can also function as a kind of savings account. And with this kind of policy, these savings can be tapped into without canceling your policy. A single life insurance policy with a survivorship rider will ensure that you or your spouse will be provided for. The provision makes the death benefit payable to the surviving spouse after the death of either one.
Jeff Rose is an independent financial advisor who loves Crossfit workouts and craves In-N-Out burger. You can follow his updates on Twitter: @jjeffrose.
Ronald R. Dodge, Jr. says
Start saving now and lots, I agree with 100% given my own self study of retirement along with the various risk factors. My main rule is this:
25% of “Actual Gross Earned Income” (Gross earned income plus employer’s funds into employee’s retirement accounts not part of gross income as reported on the pay stub) must go to “Countable Savings”.
What is “Countable Savings”?
Net Contributions into Retirement funds. Doesn’t matter if it’s by the employer, employee or both. Of course, can also include the employee’s spouse and spouse’s employer, if the employee is married, as this is done on a per household basis.
Net Debt Reduction. Given debt is a tax on savings, debt is one issue that has to be dealt with ASAP, brought into control, and then eventually eliminated. As such, this is one such thing that will hold back retirement saving quite a bit, thus why I count net debt reduction as part of countable savings.
Net Contributions into Emergency/Short-Term Investment Fund. This is important as there 3 types of financial emergencies to cover.
First type of financial emergency is when Cash flow demands need to be covered for those time periods when cash inflow is pretty tight (Thus one such reason why I am very much so a big proponent of cash flow management worksheet).
Second type of financial emergency is dealing with long-term assets need to be repaired/replaced. This type of emergency also need to be covered. However, to cover such thing, one really should have a depreciation schedule. I know, most people think of one of three things, taxes, business, or charity, when it comes to depreciation. For me, I use depreciation at home, but not for any of those 3 reasons. My 3 reasons are:
First, to know what is the real cost of such assets (aka Total Cost of Ownership or TCO)
Second, to have an amount dictated as to how much should be put off to the side, so as…
Third, when such funds are needed for such situations, we can rely on the fund instead of having to take out another debt with more fees.
Third type of financial emergency is dealing with sudden losses. That is when things happens that either causes your income to go down greatly (such as job layoff) or your household sudden have a loss of something (either material things like the case with us when our van got totaled by one of the 4 semis involved in the wreck, or immaterial things outside of financial losses such as the health of someone has majorly declined or that someone had died for whatever the reason may be). In this case, when I mentioned financial losses, I meant in regards to things like financial losses in regards to market risks such as benefits but down by 50% or investment accounts fell 75% due to market losses as just a couple of examples. For those types of losses, I follow other rules.
As for using the employer’s retirement funds, who would give up free money? Good question as you would think on the surface, that’s 100% of the time bad to do. However, I have known of one type of situation that could very well be better to leave the extra money on the table. Of course, for this, you have to think long-term.
In my case, the funds within our 401(k) plan performance net of fees trend about 2% below their respective market benchmarks. My own stuff within the ROTH IRA (both my wife’s and my own) trend about 1% above respective market benchmarks. Even though we get a 2% of gross wages put into such funds if we put in 4% of our own wages into the 401(k) plan (that’s with the matching policy maxed out), but yet, with that sort of performance laggard, does it make financial sense to do this? Eventually, that 3% performance difference will be a much bigger impact than that 2% matching policy will be.
Note, I didn’t include 2010’s results cause my own stuff outside of the 401(k) plan performed some 15% above market benchmarks, which is the first time ever my stuff had performed outside of the 2% below market benchmarks and 4% above market benchmarks range. As for the 401(k) performance, for the longest time, it was trending with the market benchmarks, but then in early November, it suddenly dropped 2 percent below market benchmarks, so that 2% was still within it’s normal annual tendency. Prospectus of such funds stated fees are between 0.50% and 0.75%, but obviously to me, it’s 2% of assets annually, as the remaining 1.25% to 1.50% is hidden via the reduction of the NAV (Fund share price).