Retirement Archives - Page 10 of 10 - Making Sense Of Cents

Roth IRA vs. 401(k)

June 26, 2012 BY Michelle Schroeder-Gardner - 2 Comments

This post may contain affiliate links. Please read my disclosure for more info.

This is Part 1 of my Investing for Beginners Series. If you have any retirement/investment questions, please ask below or e-mail me so that I can make a future post. Or e-mail me to guest post on investing. I always love hearing about what others have to say.

A common question that I am asked is regarding the differences of Roth IRAs and 401(k)s. However, I don't know everything about them and all of the differences. I mainly have a Simplified Employee Pension (SEP) plan but I will go in depth on all three in order to give you a better idea.

I do have a Roth IRA account but I do not contribute enough (also, my work does not offer 401(k)s, so I don't participate in that). Yes, I know, I'm a bad personal finance blogger since I am not investing in myself nearly enough, but instead I am mainly paying off debt.

SEP Plans
SEP plans are where employers set aside money in retirement accounts for themselves and their employees. This is mainly done by smaller companies. Everyone in the company gets the same percentage in their SEP plan, and only the company puts money in.

I don't put in a dime (and I don't have the option, as with SEP plans, only the employer can put money in) and this is the main difference between the others. Also, you pay tax when you take it out. You can take money out for certain events (such as school) without paying a penalty (only taxes will have to be paid).

A SEP allows for a contribution from the employer of up to 25% of the employee’s pay and benefits. Last year I received a contribution of around 16-17% of my yearly salary (salary plus health benefits cost). And my company guarantees at least 5% of your quarterly pay will be put into the account each quarter.

SEP plans are very nice to have (at least for me). It requires no contribution from me and is not allowed. I am very grateful that my company offers this. However, unless your company offers this, you cannot participate, so I will go into more detail on Roth IRA and 401(k)s instead!

With Roth IRAs and 401(k)s, it really depends on you and what you plan on doing. There are pluses and minuses for both (as with most things in life!). The Roth IRA and the 401(k) are not tax free, as taxes are due at different times (this is the main difference).

Roth IRA

Roth IRAs are offered by company's such as Fidelity (anyone can sign up), which is another difference from 401(k)s as described below. With a Roth IRA, the tax is paid immediately once you get it. Then the money is put into your Roth account. This money is then compounded over time and is tax-free. This means whenever you do decide to withdraw funds from this account, it is not taxed. Being taxed immediately with a Roth IRA can be a good idea if you think tax rates will only go up and/or if you think you will only continually make more higher (and thus taxed at a higher rate). Read More.

In 2012, you can contribute up to $5,000 (after-tax income), or $6,000 if you are 50 or older. Similar to the SEP plan, if a person withdraws money from their Roth IRA account before they are 59½, they will get a penalty. With a SEP plan this penalty is 10%. However, similar to the SEP plan again, a person can avoid the penalty in certain instances, such as when buying a house or paying for school.

401(k)

These are offered directly by employers. Many employers provide a “match” for what you contribute (I will be talking about company matches in a post coming soon by the way). If you're company matches, sign up! This is FREE money.

Now with the 401(k), it is taxed AFTER you withdraw the money. You put money into your 401(k) account pretax, and then when you withdraw, you pay taxes.

Getting taxed afterwards isn't always a bad idea though. If you make a lot of money now and suspect that once you retire you will be making less, then it can be a good idea. This is because your tax rate will most likely be lower since you'll be making less. In 2012, the 401(k) contribution limit is $17,000. People age 50 and over can contribute $22,500 (an extra $5,500).

Find more about Roth IRAs here, and how to start one here.
Find more about 401(k)s here.

Which do you have?

Why did you choose it?

Any questions?

Side note: I highly recommend that you check out Personal Capital if you are interested in gaining control of your financial situation. Personal Capital is very similar to Mint.com, but 100 times better. Personal Capital allows you to aggregate your financial accounts so that you can easily see your financial situation. You can connect accounts such as your mortgage, bank accounts, credit card accounts, investment accounts, retirement accounts, and more, and it is FREE.

Investing for Beginners

June 14, 2012 BY Michelle Schroeder-Gardner - 1 Comment

This post may contain affiliate links. Please read my disclosure for more info.

Some of you have asked me to make a post about investing for beginners. I've decided to make this sort of like a series because of course it's way too hard to sum everything about investing into one blog post.

P.S. I am not an investing genius. I almost have my Finance MBA and I work in the financial field, but I am not an investment/financial advisor, so if you don't agree with any of this, then speak up 🙂 All advice is wanted.

I don't do a whole lot of investing, mainly because we are so focused on paying off debt. However, once my student loans are done (hopefully next summer), then I do plan on heavily investing. Right now we invest around 10% of our after-tax pay every month, but this isn't very much.

What is investing?

Investing is putting your money somewhere in expectation of some sort of return (hopefully a monetary return!). You want your money to grow for you

Warren Buffet is a great investor. I've had lots of classes on his investment strategies. He only invests in things he knows. If he doesn't understand the company or the business entirely then he doesn't invest in it. So for example, if you don't know a ton about the oil business, then you probably won't want to be investing heavily in it until you understand.

Now, of course I'm not saying that we can all be the next Warren Buffet, but I do believe that only (or mainly) investing in what you know can be extremely helpful and beneficial. This is something that I'm working on right now.

As long as you put enough effort into it and aren't just investing in anything you see, then you should see some sort of positive return.

I've talked about our retirement plan (well, a rough draft), and without compounding and returns, it would most likely be impossible to reach this amount unless we won the lottery.

Different styles for different people
There are many different methods for investing as well. You can invest in individual stocks and try to determine the risk you want to engage in.

Or you could invest in funds so that you are more diversified. It all depends on your individual risk tolerance and how risky you really want to be.

It also depends on when you plan on retiring. If you plan on retiring soon, then you most likely want to minimize your risk in your investments so that nothing bad happens. However, if you're young, then you can ride the fluctuations in the market without it hurting as much.

Eventually in this series, I'd like to talk about everything that comes along with investing: more in depth about compounding, stocks, funds, bonds, options, and so on. Hopefully I don't bore you too much, but I think it would be helpful!

P.S. If anyone wants to guest post on their investment strategies, please e-mail me or leave a comment below! I'd love to hear from others and I'm sure others would want to read it. And even if you have no experience, I would still love for you to guest post on your thoughts and why you haven't started investing yet.

What are your investment strategies, thoughts, etc?

Share any tips!

Also, what do you not understand about investing? I'll try and include it in my series!

Rough Draft of our Retirement Plan

March 13, 2012 BY Michelle Schroeder-Gardner - 39 Comments

This post may contain affiliate links. Please read my disclosure for more info.

I know all of us love to dream about our retirement, right? I like to think about retirement all the time. Yes, I realize it's forever away and it's hard to know exactly what your life or the world will be like then. You also don't know what you'll like when you're older or how you want to spend your retirement.

I'm not sure when I would want to retire, but hopefully somewhat young. 55 at the latest? I honestly have no clue. I think about retirement but it still seems so far away, and so many variables can change before I get to that age, or even just 10 years from now.

I typed in retirement calculators into Google, and a ton pop up. I set all of the variables in the chart, and I set our income replacement at 85%, even though I heard that you should set it at 95%, and some say 70%. What do you believe is best? I also set the return at a moderate 8% just to cover myself by a good percentage so that I have a good cushion.

I always love how on these retirement calculators they let you choose whether or not you want to factor in possible Social Security benefits into your retirement plan. We all know that will not exist 45 years from now.

Now the question is, how much should I save for retirement? My results were:

“To provide the inflation-adjusted retirement income you desire, you may need to save 31.7% of your yearly income (less any employer match, if applicable). This year, for example, the amount would be $22,164 or $1,847 a month. The total amount needed for retirement, including amounts already saved, is $5,320,545.
If you wait just one year to start saving for retirement you may need to save 34.8% of your annual income, which amounts to $24,352 in the first year.”

Wow that number seems high! 31.7% also seems like a lot, but I'm sure if I don't go to crazy with lifestyle inflation and also have good passive income, then I should be able to do this eventually in my life. That number just seems extremely high. I also don't know if I'll ever fully retire. I would like to have a source of passive income for way past when I eventually leave my career.

There are a lot of things we need to do in order to retire younger as well. Of course it would be nice to retire at 40 (but still have passive income), but that can be hard to attain. The things I am doing or want to do in order to retire before 65:

Create passive income. This will help make our financial life more stable and secure if there's another source of income coming in.
Cut costs. If there are things that we can cut that won't make us unhappy, then we should be doing them.
Pay off debt. I don't want interest compounded and I want to increase my cash flow by eliminating all debt. Student loans and mortgage debt should be gone within 5 years (as long as our plan works out!) so this is good! We should be completely debt free by time we're 27 or 28.
Not living beyond our means. Yes, there are things we buy that we probably shouldn't. I have a bursting closet full of clothes that I hate. I realize I do have a problem and I wish I didn't buy so many clothes. It's honestly my weakness. I also don't want us buying a bunch of things that we don't need. Our friend's family has 2 yachts and the yachts are over $1 million. They have a successful business, but I honestly could NEVER see myself spending that kind of money. However, we are going on a weekend trip with them in 2 months, so that will be nice! (I am not saying that I use people for their yachts, that sounds ridiculous)
Take as many opportunities that I can. I went to college and I'm about to have my MBA. I try to say yes to any opportunities that come across my way, and to at least try new things. You never know where this will lead you! New sources of income, new networking, and so on. Maybe you'll love what you learn more than what you're doing now.

What's your retirement number? When do you think you'll retire?

Do I need a financial advisor?

December 29, 2011 BY Michelle Schroeder-Gardner - 27 Comments

This post may contain affiliate links. Please read my disclosure for more info.

I'm off today (and tomorrow), so this will be a nice, long weekend. I'm not sure what I'm doing today, probably just going to bum around. And I'm sure most of you noticed, but I changed my blog up a bit, how does it look? I'm still making changes, but I got tired last night and stopped. Let me know about any opinions you have! As I always say, any comments, good or bad, are always welcome.

Anyways, to get to the topic of this post, I've been thinking about getting a financial adviser. I recently received a pretty big bonus, and I also just realized that I got an extra $630 as well (I forgot to read a page that I got which explained my bonus), so my bonus amount is actually around $6,730. Also, I'm getting a big tax refund this year, so that will be another windfall in another couple of months.

So because of all of this money that's pretty much landing in my lap, I would like to start investing more, as I have barely done this (because I have been paying down debts), and also to do other things with this money, but I'm not really sure what I should do.

Some of you are probably wondering, “Aren't you in the financial services industry?” Yes I am, but I don't handle these type of investments, just mainly large portfolios (lots of money and/or companies that people own). We don't actually advise on how you should invest or spend money. It's tough to explain what I do, one day I will make a post on it.

Anyways, I don't have the slightest clue as to where to start with getting an adviser. I plan on eventually just doing all of this on my own, but for the beginning, I'd like to get at least some expert help to help me in a direction.

I do know that most of them get paid commission based on certain things though, so I think this is swaying my decision. I am not good with investing, I've thought about reading books, but honestly, I just don't have a lot of time right now.

I know that financial advisers are trained and have great expertise with financial matters. They can help you with investing, retirement and anything financial related.

Where do I start though? Can anyone tell me what exact type of things they tend to help with?

Do you have an adviser? Or have you thought about it?

When do you think you’ll retire?

November 18, 2011 BY Michelle Schroeder-Gardner - 11 Comments

This post may contain affiliate links. Please read my disclosure for more info.

Yahoo! Finance had an article the other day talking about how 25% of Americans expect to retire at the age of 80. This age is 2 years longer than the average U.S. life expectancy. 80 years old just sounds crazy to me, but I know this is what many people have to do now due to not saving enough or just the economy wiping out all savings.

“While respondents (whose ages ranged from 20 to 80) had median savings of only $25,000, their median retirement savings goal was $350,000. And 30% of people in their 60s — right around the traditional retirement age of 65 — that were surveyed had saved less than $25,000 for retirement. “

That quote scared me. 30% had less than $25,000!?! I can't even imagine how these people feel.

When do you think you'll retire? Do you plan on working a part-time job/gig while you're in retirement?

I'm sure that I'll be doing something, as I like to keep busy. I'd like to run my own non-profit or be heavily involved with a good animal shelter. I won't be retiring for a REALLY long time, so it's a little crazy to think about because it just seems so far away.

Retirement Costs in 13 Countries

November 14, 2011 BY Michelle Schroeder-Gardner - 9 Comments

This post may contain affiliate links. Please read my disclosure for more info.

I constantly dream of retiring (who doesn't), and I would either like to retire abroad or constantly be on vacation. I found an article on MSN about 13 places to retire abroad and their average living costs. I thought it was a good article since I want to travel or retire abroad.

There are a lot of things to consider when retiring such as:

Health insurance
Food
Utilities
Phones
Internet and cable
Cars/Transportation
Fun, entertainment and traveling
Personal (clothes, hair, etc)

Of course, all of this adds up like crazy, and it's recommended that in retirement that you have around 70% to 100% of your past salary for your yearly expenses. Many people think that you should save less, but not everyone will have their homes paid off. I plan on having around 85 or 90% per year.

Here is what the article says about places to retire abroad (these are all per month):

Argentina – $4,000
Belize – $2,200
Brazil – $2,700
Colombia – $2,000
Chile – $2,500
Ecuador – $2,000
France – $3,000
Italy – $2,400
Malaysia – $1,600
Mexico – $2,500
Panama City – $2,500
Thailand – $1,200
Uruguay – $2,300

You can obviously find places for MUCH cheaper than this, but I think these costs are for living very well in most of these countries, while some are just average living.

Have you thought about your retirement? Is retiring abroad something that you've thought about?

Also, Daily Worth is having a $10,000 giveaway (5 winners will each win $2,000). Sign up under my link. All you have to do is enter your e-mail!

Secrets of Early Retirees

October 27, 2011 BY Michelle Schroeder-Gardner - 10 Comments

This post may contain affiliate links. Please read my disclosure for more info.

Everyone wants to retire early right? Retirement seems so far away for me (and it is) but I still want to retire early. But am I prepared?

Yahoo! Finance had an article about early retirees and I thought it would be helpful to compare myself and see where I am.

1. Do you save for retirement outside of just your workplace plan? I save, most of my retirement fund is from my work though, because I'm trying to pay down debt first.

“69% of early retirees do this vs. 60% of those who plan to retire after 65 and 49% of those who say they'll never retire.”

2. Do you defer a high percentage of their salary into a retirement plan? No. I feel like I'm already failing at this article.

“Early retirees defer a median of 10% vs. 6% for those who plan to retire after 65 or don't plan to retire.”

3. Did you start saving at a young age? I started saving awhile back! This is something that I did not fail at. I expect all of my debt (besides my mortgage payment) to be done in a couple of years, and then I will start heavily saving and investing.

“The median age early retirees begin saving is 25 vs. 30 for those who will retire after 65 and 31 for those who never plan to retire.”

4. Do you have a thought-out retirement savings strategy? No I do not. All I've really thought about is that I want to retire.

“71% of early retirees have either a written plan (16%) or a non-written plan (55%), while just over half of those who plan to retire after 65 do and just one-third of those who will never retire do.”

5. Are you very involved in managing and monitoring your retirement accounts? I monitor them all the time. Nearly everyday.

“71% of early retirees say they are very involved vs. 58% of those who will retire after 65 and just 45% of those who say they will never retire.”

6. Have you saved the same amount or more since the recession began? I have saved more. Considering I was only around 18 when the recession started, of course it's more.

“71% of early retirees are doing this compared to 61% of those who will retire after 65 and just over half of those who never plan to retire.”

How are you doing? What are your retirement plans?

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