401(k), Roth IRA, or Pension... or none (or all) of the above?

[naaman]

UPDATE in new post.



Financial technical stuff.... not my area of expertise...

I've started my post military career and just received my benefits briefing... and I have no idea where to start. :redface:

My goals, however, could provide insight into what would be the best decision for me.

I would like to retire after no more than 30 years. I would like to have enough money (either income or just cash on-hand/in the bank) to carry me and my survivors (wife) through the rest of our lives.

Within 5 years (hopefully less), I want to be on a program that I can ride all the way through to retirement (i.e., put X dollars into retirement plan, Y dollars into savings, Z dollars into investments etc). I would like as hassle-free of a set up as is prudent and wise.

The lifestyle I would like to achieve in the meantime is pretty simple: a house large enough for my family of 5 (maybe 6), and 2 or 3 "toys" (read: cars) in addition to my wife's grocery-getter/family mobile.

So, of course, the kids are an expense, and they're still very young, so there are roughly 20ish years of parenting left ahead of me.

All said and done, at the level which I am entering the organization, I can't afford the most luxuriant benefits offered (full medical etc), so I'll have to piece together my benes package with the more humble options to start, which will include my contribution to retirement (there are matching options in the benefits).

My understanding of these things is that bigger risks come with potential for bigger rewards... but I don't really understand what an IRA or a 401(k) is... so I'm not sure how to proceed. I would also prefer not to have to constantly monitor my finances, but rather to just know what I'm putting away each month/year and project what will be there in 10, 20, 30 years.

So what does everyone think?
Thanks in advance for the input :smile:

 

[jaybird]

OK - good thinking and you have lots of areas to consider. Here are a few thoughts:

1) Real key is to have a disciplined approach to putting money aside on a consistent basis - there is no substitute for that. Then you need to figure out where to put the $$.

2) With the young children I assume you have an appropriate amount of life insurance. At your age you should be able to purchase a large term policy that is really affordable.

3) For kids college planning, consider a 529 plan -- no deduction for putting money in, but it grows tax-free and comes out tax-free when used for their education.

4) You mentioned your employer offers a match on their 401k program - absolutely take advantage of that!! Some 401k plans offer a "Roth" provision - I'd definitely consider that (Tax-free when withdrawn in retirement).

5) Since you don't want to "constantly monitor the finances", both 529's and 401k plans offer "Target Date" type of plans, where you simply choose the appropriate model, and let them do the investing in a professionally managed manner - sore of like flying on autopilot.

6) The 401, 529, IRA's are all great - but they kind of "tie your money up" - as they are designed for longer investment periods and offer tax benefits. So for purposes of saving for a home, etc, you need to put those monies into "non-qualified" types of accounts - regular accounts in your names that allow you to access them at any time - can be at the bank, or investment firm etc.

Hope these thoughts help a bit. Good luck. Jay

 

[VampNSXX]

A 401k is only worth to have if the company you work for matches dollar for dollar or at least 75%.

Also you need to put aside money for a rainy day. I had the same idea you do but the economy tanked and well my plan did not go the way I wanted. I had always put money away for a rainy day and that is what saved my ass. If you really want to retire 30 years from now then don't but expensive cars for one thing unless you know that you will get money from inheritance or something like that. If you are like me and have ZERO help from any one then it's going to be hard to do.

 

[flaminio]

A 401k is only worth to have if the company you work for matches dollar for dollar or at least 75%.

Please elaborate. I've always considered tax deferred growth to be a Good Thing. The match is icing on the cake.

 

[docjohn]

google can be your friend...start off with looking at investment plans that use pre tax $ vs plans that use post tax $'s.Then you have to learn how much controll over your money will you have in a 401k vs an ira vs a non structured retirement account.

 

[naaman]

I appreciate the feedback so far. This stage in life is definitely an adventure.

google can be your friend...start off with looking at investment plans that use pre tax $ vs plans that use post tax $'s.Then you have to learn how much controll over your money will you have in a 401k vs an ira vs a non structured retirement account.

Of course independent research continues... what I'm looking for here is some input from folks who have been down this road, and who share some of my interests (they can look back to when they were in my shoes and remark on what they did/would do differently, etc).

Also, interpreting jargon and technical talk is something that requires peripheral research, which compounds the complexity of the task; my question here is sort of a check to determine whether I have the correct interpretation of what I am reading and that my projections, based on what I'm reading make sense.

 

[PHOEN$X]

Mark, lets have lunch this week and I can share with you some of what I've learned. Personal finance is a big interest of mine, I like numbers and I want to achieve financial independence, so it's been a high priority for me. I don't have a family so I won't be able to help much in that area, but some other people can help fill in the gaps.

 

[docjohn]

take up phoenix on his generous offer.Think about what you'd like your retirement income to be each year and then calculate what number of total money you would need such that 8% of that total equals the amount you wish to live on.so if you needed 50k/year income you would need your "retirement acounts to total at least 650k and be invested in stocks/funds/bonds ect that yield on average 10%

 

[naaman]

Mark, lets have lunch this week and I can share with you some of what I've learned. Personal finance is a big interest of mine, I like numbers and I want to achieve financial independence, so it's been a high priority for me. I don't have a family so I won't be able to help much in that area, but some other people can help fill in the gaps.

You have PM.

take up phoenix on his generous offer.Think about what you'd like your retirement income to be each year and then calculate what number of total money you would need such that 8% of that total equals the amount you wish to live on.so if you needed 50k/year income you would need your "retirement acounts to total at least 650k and be invested in stocks/funds/bonds ect that yield on average 10%

Ah! Here is something tangible. Some numbers for a starting point. Thank you very much, sir.

 

[sahtt]

Given your current level of expertise, I'd suggest two things: 1) keep learning on your own as much as possible 2) invest in at least one visit with the best financial planner you can find.

I am a consultant to financial advisors 8-5pm. Stay humble and realize not everyone has the capacity or time to handle all their financial matters on their own. You wouldn't train yourself to be your own surgeon or pharmacist to save money for similar reasons.

 

[flaminio]

I'm a big fan of saving as much as possible for retirement. It's really a simple question: do you want to be old with money, or without money? If you choose "without", then go ahead and spend up a storm -- no worries. But if you'd like to retire in relative financial comfort, then you should start saving. Now. As much as you can. But even if you can't save that much, save something. It's better to save a little now than more later -- the growth over time will more than make up for it.

(Aside -- if you have any debt, especially credit card debt, pay that first. It doesn't make sense to invest and earn 4-8% while paying debt at 12-18%. The only exception would be a home mortgage, for which rates are so cheap these days that when you consider the tax savings and inflation, it's basically free money.)

I'm also a big fan of tax-free and tax-deferred growth. My recommendation (as just an internet guy, and not a CFP or anything) is to save maximally as follows:

1) 401(k) up to your employee match limits -- to not do this is simply throwing away money. If you do nothing else, you should do this.
2) Roth IRA, up to the max, if you qualify ($5500 for 2013, but if you hurry you can sneak $5000 in by April 15 as a 2012 contribution).
3) Back to 401(k), up to the max ($17,500 for 2013, if you are under 50).
4) Traditional IRA, if you do not qualify for the Roth. If you have a 401(k), this will be a non-deductible contribution, but the growth will be tax deferred.
5) Coverdell Education Savings Account, if you have college bound child(ren). $2000 per year per child.
6) 529 plan, again if you have children. No yearly max, and you won't likely hit the lifetime max of $200,000+.

Just MHO...

 

[Vega$ NSX]

You wouldn't train yourself to be your own surgeon or pharmacist to save money for similar reasons.

He's right. I found that putting myself though medical school, doing my residency and buying my own medical equipment didn't come close to the amount I saved by doing my own open heart surgery, including the savings from skimping out on the anesthesiology and anesthesiologist! I'm hoping I break a leg (or two) so I can try to recoup my money! :smile:

As for your questions here are some very basic basics:

401K (traditional) - A 401K is where you can invest in investment funds (like stocks and bonds etc.) through your employer. The main benefit to a 401K is that any growth is tax deferred. You don't pay taxes on the money you put into your 401K (pre-tax dollars), and you don't pay any taxes on any growth. That's very important because interest/growth/rate of return, can compound when it grows (in other words, the more you have the more it grows). The only time you pay taxes is when you pull your money out. However, you don't have to pull it all out at once. Hopefully if you are retired, you can meter out only what you need, with the idea that you will be in a much lower tax bracket and pay lower taxes than what you were when you were putting money in. The maximum you can put in your 401K per year is $17,500. Some additional benefits to a 401K is that if you have a nice employer plan, they will often give some match or percentage of your investment to encourage you to invest. In other words, a dollar for dollar match would be them giving you an equal amount for ever dollar you invest. So you would only have to put in $8,750, to reach your 401K limit of $17,500 because the employer would match the other $8,750. Dollar for dollar matches are becoming pretty rare however. Most companies will only match only to a certain % or limit.

401K (Roth) - The main difference between a Roth and a traditional is that instead of paying taxes when you pull your money out as in a traditional, with a Roth, you pay taxes up front and then don't have to pay taxes when you pull out. Everything else is pretty much the same. The money grows tax deferred and whatever match your company has also applies. It is hard to say which is better as, it cost more money to invest today with a Roth because you have to pay taxes on it. However, depending on if you believe taxes will be higher or lower in the future (when you retire) one may make more sense then the other; the main appeal to the Roth is that when you pull out money from the Roth, it is yours completely (you pay nothing on it: no taxes). You can invest part of your money in a Traditional 401K at the same time as a Roth 401K in the same year, as long as the total combined doesn't exceed the 401K investment limit of $17,500 in one year.

IRA (Traditional) - An IRA is very similar to a 401K except that it is not sponsored by an employer. You can always invest in an IRA regardless if you are working for a company or not. This investment is separate to a 401K so you can invest in both at the same time as a 401K independently of each other. Like a 401K your investment is in the form of stocks, bonds etc and all growth is tax deferred. The annual limit to a traditional IRA however is only $5,500 per year. Like a traditional 401K, you do pay taxes when you pull your money out and there is a penalty if you withdraw your money too soon.

IRA (Roth) - This is just like a Roth 401K; you pay taxes up front and no taxes when you pull your money out. There is a catch. If you make more than $112,000/yr as an individual, $178,000/ yr married, you may have limitations or not be eligible to invest in a Roth IRA at all.

529 Savings Plan - A 529 is very similar to a 401K and IRA in that your investments are again in the form of stocks and bonds and again grow tax deferred. The main difference is that instead of going towards retirement, all of the funds must be used for educational purposes only. Also, there is no pre-withdrawal penalty (like a 401K/IRA) as long as the funds are used for education purposes. This is great for things like college tuition. The other big advantage is that it is fully transferable, so say your first born does not go to college, you can then transfer the 529 to your second child for their education funding. You can even transfer it to yourself should you decide to go back to school for continuing your own education.

 

[Daedalus]

The maximum you can put in your 401K per year is $17,500. Some additional benefits to a 401K is that if you have a nice employer plan, they will often give some match or percentage of your investment to encourage you to invest. In other words, a dollar for dollar match would be them giving you an equal amount for ever dollar you invest. So you would only have to put in $8,750, to reach your 401K limit of $17,500 because the employer would match the other $8,750. Dollar for dollar matches are becoming pretty rare however. Most companies will only match only to a certain % or limit.

The $17500 is the employee's limit, regardless of company match. There are limits on combined contribution, but it was over $50k last I checked, and will impact very, very few people.

Something I like about the Roth is that it allows a larger "effective" contribution than a traditional IRA. Since the limits are the same, and since taxes are already paid for with the Roth, it's kind of like scaling up the benefits of a traditional IRA on a larger sum. Regarding taxes, unlike most, I fear my tax rate in retirement will be higher than it is now. Anyone paying attention to all this talk of deficits and underfunded liabilities? Scary stuff.

 

[NSXrunner]

All the advice on here is pretty good but I wanted to chime in my two cents and personal style of investing, don't put all your eggs in one basket (or type of retirement account). Mix it up with a few different kinds.

Cheers,
Ed

 

[jond]

When I was starting out, one thing I did was use a few different free online retirement calculators.
Put in what you have, when you want to retire, etc and just play with the numbers. See what happens if you put in X%. See what happens if you want to retire early, etc, etc.
One thing I would say is make sure you assume lower than average growth. Maybe 6% in stocks would be my guess.

And, IMO, risk doesn't always mean more return. That's an illusion. The best way to get a higher return on your investments is to simply add more money to it every month.
Instead of trying to game the system and make 1-2% more interest, just invest 1-2% more money and be safe(and don't lose your money).

Also, you won't miss money that you don't see. If every year you always take your x% yearly raise, and just add it into your 401k instead of letting it ever hit your paycheck, the next thing you know you're putting in 15% and don't even notice it.


Calculators:
https://www.google.com/#hl=en&tbo=d...74,d.eWU&fp=9adb9986d41db8e2&biw=1600&bih=814

 

[naaman]

Okay, so I'm looking at my Roth 401(k). I have not been on the job long enough for company match to kick in (which is 75% of the first 6%), and I'm seeing something that looks a little unnerving. I'm a little over $500 invested, and the value is sitting at $410. Its a Vanguard type account.

I've noticed some fees are coming out of my account, so that should account for some of the gap.

Here're my questions:

Is the gap simply a reflection of the market performance being poor?

If my company match were in effect, all other things unchanged, would the value be proportionately bigger?

The way it looks now, I'm losing 20% of my investment overall. Am I misinterpreting?

 

[docjohn]

how long has your money been in this fund?

 

[naaman]

Just about 3 months or so. I'm putting in 6% of my check twice a month.

 

[docjohn]

the market has cooled recently..you missed out on the big gains earlier in the year.I would get a detailed list of the fee structure in your plan.Also get a prospectus of that fund to see past performance.

 

[jond]

Just type your fund into yahoo finance and look at the graph for the time period.
If it's down around that amount, then you know.
Vanguard is usually pretty low fees.

.

 

[BATMANs]

401(k), Roth IRA, or Pension in my 'hood is really for handling inflation.

You need real $ made from real estate and/or IPO to be very comfy.

Also, I don't plan on retiring and want to work til I physically can't.

I've seen people "retire", travel to where they want to see places and sit on the coach waiting for death - a slow death.

F that.

 

[naaman]

the market has cooled recently..you missed out on the big gains earlier in the year.I would get a detailed list of the fee structure in your plan.Also get a prospectus of that fund to see past performance.

Yeah... seems I'm missing out on a lot of the good opportunities. Moved to Phoenix to take advantage of the low housing costs, but have not been able to get the financial momentum to buy a house. But that's life, I guess. Win some, lose some.

Checked the account today. Employee match just kicked in and I'm $506 into it, and it's worth $563. The total invested, however, is $582, so there is still a deficit, but not out of my pocket, anymore.

- - - Updated - - -

401(k), Roth IRA, or Pension in my 'hood is really for handling inflation.

You need real $ made from real estate and/or IPO to be very comfy.

Also, I don't plan on retiring and want to work til I physically can't.

I've seen people "retire", travel to where they want to see places and sit on the coach waiting for death - a slow death.

F that.

I would not mind flipping houses after I have one of my own!