Monday, March 22, 2010

Money for Nothing Monday: Opening Retirement Accounts

Once you’ve completed the steps in the first Money Monday segment, (the principles for most of which, once again, were instilled in me by Ramit Sethi of I Can Teach You to Be Rich) you should begin to think about your retirement accounts. Hopefully you’re already taking advantage of any pre-tax savings plan your company offers, most commonly a 401(k). Contribute the minimum to your 401(k) that will enable the company match (if any, in this economy), and then gauge your ability to live without a little bit extra, up to the max (usually $15K/year or thereabouts). At a young age it’s unlikely you’ll contribute any more than 5% or so, but the more you do, the lower your taxable income right now. The older you are, the more you should (and can legally) contribute.

Your company's plan will have a financial adviser who can help you understand the mutual funds offered in their particular plan, but you will need to choose your own. Think about how many years your money will spend in the market before you want to draw it out (i.e. retire). If you have many working years ahead of you, be more aggressive in your allocation; if you’re retiring soon, choose conservative—thankfully the work is done for you when they categorize the various funds.

If you are not employed by a company offering a 401(k), pension or profit-sharing scheme of some sort, you will need to look into a personal retirement fund like a Roth IRA (Individual Retirement Account). You can pay to have these managed by a professional broker, of course, but another option is to use an online trading site like E*Trade or TDAmeritrade, where you can buy into funds and individual stocks for a low per-trade fee and barely any maintenance (monetary or time-wise). Ramit suggests you buy a target-date fund, which basically manages your money for you based on when you plan to need the money (again, the formula has to do with how much risk you can withstand in the short-term; historically, the stock market does always return). Once you have selected your retirement account provider, research the various options they allow you to buy into. Most have a minimum contribution, so you should have $500 to $1000 transferred to the account in order to buy (plus any applicable fees). If you don’t have that much to put away, you can wait until you do, or you can get yourself excited about retirement funds (woo-hoo!) and buy a small amount of some stock that you really love or believe in (yeah, I mentioned I have a little Harley and Vicky’s stock?) and then wait until you have enough for a (boring old) target date fund.

If you contribute annually to your Roth IRA, your tax burden will be lower (you can contribute a few months into the new year for the previous year, too) and you will, of course, be growing your savings for the long run. Try not to trade too much unless it’s just fun money for you—trades cost money and the way to make money is to stick with a good stock or fun for the long haul. The best thing about the target date fund (or perhaps just not caring if your favored stock does well for the moment) is the “set it and forget it” (probably Ramit’s via the infomercial guy, I don’t recall) mentality. Once you are contributing regularly to a fund like this, your money will grow without you even paying attention. Try not to freak out at minor ups and downs. Mantra: Long Haul.

If you have at least one of these retirement accounts, you’re on your way to being able to maybe retire! Nice. If you do not, maybe get rid of some of the stuff you’ve accumulated and stop buying stuff for a while so you can get on that. It’s never too early, and it’s really never too late unless you want to be rich and not just get by (in which case it’s now or never).

Happy Saving!

1 comment:

  1. Ok first: I have a lil somethin somethin for you on my blog!

    Second: This is perfect!!! And so funny b/c my hubby and I have JUST got all into opening our own IRA although we have 410k at work, and investing more to build up our future retirement. Great post, thanks for all of the tips!

    Have a lovely day:-)


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