Dollars & Sense Education

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA.  Signing up for a 401K or 403B is quite easy.  Picking the right company for your IRA is more complicated.  In this post I will attempt to make picking a company for your IRA as easy as possible.

Where to Open a 401K and 403B 

If your company offers a 401K or 403B, opening one is quite easy.  Just contact the HR office of your company and ask them for the paperwork!   

Where to Open a Traditional or Roth IRA

1)    Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc.  These are my least favorite options unless you really feel like you cannot do this on your own.  They provide investment advice but are very expensive.  If you want to use this option you can go online to find your nearest branch office. 

2)    Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc. 
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies.  Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.   

3)    Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies.  This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company. 

4)    Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA.  However, they have fairly high minimums for investing.  Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online.  I will provide key details for each company so that you can properly evaluate which company best suits your needs. 

Fidelity Investments

Fees: No fee.

Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.

Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.

The Vanguard Group

Fees: No fee

Minimum Investment:  $1000 minimum initial deposit to purchase the company’s STAR fund.  (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.)  Most other funds at Vanguard have a $3000 minimum.

Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.

T. Rowe Price

Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.

Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

How to Open an IRA

Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:

• Social security number
• Bank account information
• Employment information
• Money

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment - Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. Stay tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101? seminar to your company or organization! 

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834

Okay, I think we are well on our way to saving for retirement.   In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In this installment, I will show you how to efficiently use the options that exist for your retirement savings. 

In order to make an informed decision, the first thing you need to do is decide how you see your lifestyle during retirement.  There are three options:

1)  You will not work at all. 

2)  You will work in some capacity.

3)  You are not sure if you will or will not work after retirement.

Your retirement savings decisions are highly dependent on which of these categories you see yourself in. 

If you are not going to work and will live solely off your retirement income, it makes more long term sense to max out your 401K, 403B or traditional IRA before investing in a ROTH IRA. 

If you are going to work or are not sure if you are going to work in retirement, it makes more long term sense to contribute to your 401K/403B up to your company match, then max out your Roth IRA and then max out your employee sponsored plan.  If you do not have an employee sponsored plan, max out your Roth IRA first and then max out your Traditional IRA. 

These assumptions are made based on the current income tax rates.  If these were to increase significantly, my advice would be very different.     If you are not sure if you are going to work in retirement or you are wary of income tax increases in the future - by all means utilize the ROTH IRA after taking advantage of any free money match from your employer.  It is a way to diversify your tax risk.  But if you know you want to relax on the beach, not work, and are confident that tax rates will stay constant or decline than make the most of your employer sponsored plan or Traditional IRA before participating in the ROTH IRA. 

Now you know that you should save for retirement, you know what vehicles are out there and what make the most sense for you to use - In Part 4 I will show you how to sign up for these retirement vehicles and get in the game.  Stay Tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101? seminar to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834 

Hopefully, in Part 1 of this series I convinced you to start saving NOW for retirement!  If are convinced or if you were already doing so, read on.  Part 2 discusses the different types of retirement vehicles available to us and explains why we want to maximize their use.  Let me start with why you should maximize your 401Ks and IRAs for your retirement savings versus other types of accounts such as a savings account, online or traditional brokerage account.   One word, TAXES.  When you invest in retirement accounts your money grows tax free.  The amount you will save in taxes as your retirement account grows tax almost always outweighs the benefit of taxable accounts. 

Ideally you should maximize your retirement accounts before you begin after tax investing.  What retirement vehicles are available in the marketplace?  There are many, but the two major types are employer sponsored plans and IRAs.  The ability to participate in them is based on your employer and income.  I describe the most common vehicles below. 

Employer Sponsored Plans:

401(k) – For profit companies offer 401(k) plans.  These plans allow you to save up to $15,500 per year (for 2007), usually through payroll deductions.  If you are 50 or older, you can put away $20,500 for 2007.  Your employer’s plan may have lower limits.  Your contributions to a 401(k) are excluded from your reported income and thus are generally free from income taxes.  Your withdrawals at retirement are taxed at regular income tax rates.  Some employers don’t allow you to contribute right away.  Some employers match up to a certain percent; so in addition to saving on taxes, you get extra money.

403(b) – Not for profit companies offer 403(b) plans.  These plans allow you to save 20% or $15,500 per year (for 2007), whichever is lower usually through payroll deductions.  If you are 50 or older, you can put away $20,500 for 2007.  Your contributions to a 403(b) are excluded from your reported income and thus are generally free from income taxes.  Your withdrawals at retirement are taxed at regular income tax rates.

IRAs:

Standard IRA - Anyone with employment income can contribute to an IRA.  For tax year 2007, you may contribute up to $4,000 per year, $5,000 if you’re age 50+.Your contributions to standard IRAs may or may not be tax deductible.  If you are not covered by an employer sponsored retirement plan, you can take a full deduction regardless of salary.  If you are covered by an employer sponsored retirement plan, for tax year 2007, if you’re single your tax deduction is phased out when your AGI is between $50,000 and $60,000 - for couples they are phased out between $80,000 and $100,000.  Your withdrawals at retirement are taxed at regular income tax rates.

Roth IRA – Your contribution is not tax deductible but the money grows tax free and is withdrawn tax free.  For tax year 2007, you may contribute up to $4,000 per year, $5,000 if you’re age 50+.  However, there are income restrictions - Single: Up to $99,000 (full contribution); $99,000-$114,000 (partial contribution) Married: Up to $156,000 (full contribution); $156,000-$166,000 (partial contribution)

All individuals have at least one type of Retirement Account they can participate in, many have more than one.  As you plan your retirement savings, utilize these tools to their fullest potential. In part 3 of this 5 part series “A Primer on Retirement Saving”, I will discuss the best use of these retirement investment vehicles to meet your retirement needs.    Stay tuned! 

Please contact Dollars & Sense Education to bring our “Financial Health 101? seminar to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834 

Save for Retirement?  C’mon, that is soooo far away.  This is the last thing on most people’s minds.  They want to travel, they want to buy nice clothes while they still look good in them, they want drink good beer.  I get it, I get it.  So do I.  But you need to realize that you are going to want to do all of these things when you retire and you need to have a way to pay for it!  So a little self sacrifice now will go a long way later.

 Let me use an analogy: Say Jim graduates from college and makes $40,000 a year.  His company offers a 401K plan and he decides to put away $4,000 annually.  His 401K returns an average of 9% per year for the next 43 years.  He does this until he retires at age 65 with $808,000* in the bank.

Aaron also makes $40,000 dollars per year.  He does not begin investing for retirement until he turns 40.  At this point he starts to sock away $8,000 per year in his employer’s 401K plan.  Like Jim his investments earn about 9% per year.  He does this until he retires at age 65 with $462,000* in the bank.

In terms of sheer dollars Jim saved $28,000 less than Aaron but he retires with $346,000 more than him. 

How did that happen?  Compound interest!  Compound interest is the concept that your interest earns interest and this makes you more money.

So moral of the story…Start saving early.  If I haven’t convinced you to start saving for retirement, well, don’t bother reading parts 2-5 of this series.  But please don’t cry to me when you are 85 and still working.  The most critical part of this whole process is to just do it - start planning for retirement early.

 In part 2 of this 5 part series “A Primer on Retirement Saving”, I will discuss the different investment vehicles you can use to save for retirement.  Stay tuned!

*adjusted for 3% inflation per year

Please contact Dollars & Sense Education to bring our “Financial Health 101″ seminar to your company or organization!
Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834