Savings?

[Maggie]

Recently I started wodering about my retirement and my options. I know I am far away from retiring, but I was wondering if someone could help me out.
I am 26, working in IT field. I'v been working at the same place since I graduated from college. I am constantly being told that I need put aside more for my retirement. I am only contributing 7% and my employer is contributing 9%. I am constantly told that's not enough. I do not know anything about investing money, I don't understand most of the things you guys are talking about when it comes to retirement.
My problem is that if I contribute more to my retirement through my employer I can't have that money until I am in early 60s or so. Well, what about if I need it sooner? What is I am not intending to work until I am in my 60s. At that age there are many things you can't do any more. I would like to enjoy my life before that. I have so many interests that I would like to explore that waiting until I am in 60s just doesn't make sense. There is no way I can retire early since I know I won't have enough income. What can one do? Should I invest in something else, like mututal funds instead?
Please help, I am perplexed.

 

[retire@40]

 I know I am far away from retiring.

Far away from retiring You're 26!!! You only have 9 years to go babe, so you better get moving!!!

The point I'm trying to make is that you immediately need to put on paper (or an excel worksheet) when you want to retire and how you plan on getting there. You are already way ahead of most people in that you have planted the ER seed in your mind and you have come to this board for water and miracle grow.

The first thing I would recommend is to read as many posts on this board as you can. You will learn more about how to ER here than in any 4 year college program. Then take what you have learned, buy some of the recommended books, ask more questions here, etc.

What you will find is that you will develop a plan and keep refining it as you learn more and more. I developed my plan at 20, and now that I'm 36, I'm still refining it. I've got 4 years to ER because my plan has worked out and I've been lucky enough to have no major stumbles along the way.

Good Luck!

 

[Maggie]

any specific books in mind?

 

[Cut-Throat]

Maggie,

Don't panic ! - You're only 26 and I did not think about retiring until I was 30 - 52 now and retired.

A good book is William Bernstein's "The four Pillars of Investing" - A bit deep for beginning investors, but take your time with it and you'll do fine.

Life is a balance and you want to make sure you are enjoying life, while saving for retirement. That said every dollar you contribute to your retirmement fund is usually before tax, so it doesn't hurt that much. Take your pay increases and save them. Pay yourself first and live beneath your means.

 

[BigMoneyJim]

Maggie, the first step is to be out of consumer debt (credit cards, cars, boats, etc.). Next I think you should understand what type of account you're saving in.

Is it a 401(k)? If it is, then normal retirement age is 60, but you can withrdaw as early as 55 if you retire then. If you retired earlier you could roll the 401(k) into an IRA and retire anytime under special conditions (called the 72t exeption where you take "SEPP"s, but we won't go into that now).

If you're paying into some sort of defined contribution pension plan then learn your future options for it.

The next step is to understand how your money is invested. In most companies you have a choice of mutual funds, but some companies have you invest in their stock which I think is a terrible idea.

There's lots to learn, and there always is, but you don't have to learn it all today. You're on the right track by saving what you are and finding this board.

 

[Maggie]

Ok, this is my situation.

I do not have ANY debt. NONE. I am not paying any mortgage. I pay pretty much nothing at this time other than little things such as my car insurance and other little things.

My 401K is through TIAA-CREF.

This is how it is allocated:

15% in Global
30% in Growth
10% in Stock
10% in Equity Index
10% in Bond Market
25% in Real Estate

I do spend a lot of money on travel, because that's what I love to do and would like to continue for the rest of my life.

what else do you think I should do?

 

[retire@40]

Find a great CPA/financial advisor who is interested in your early retirement plan.  Use that CPA to help you do some of the things below if you are not sure how to do it yourself.

Prepare a current budget and a retirement budget (remember to factor in inflation).

Open a Roth IRA (or traditional IRA if you don't qualify for the Roth) and make the maximum contribution.

Forecast the future value of your investments at 5, 10, 15, and 20 years.

Use FIREcalc.

Save as much as you can without depriving yourself of what you enjoy (within reason).  Life is too short to sacrafice beyond reason.  If you enjoy traveling like I do, don't eliminate that from your budget.  I budget travel and entertainment expenses at about 10% of my current income and when I retire it will probably be closer to 20% of my retirement income.

"You've got to enjoy living baby because dying is a pain in the ass." -FRANK SINATRA

 

[JWR1945]

Maggie

My problem is that if I contribute more to my retirement through my employer I can't have that money until I am in early 60s or so. Well, what about if I need it sooner?

Keep in mind that you can withdraw all of your contributions to a Roth IRA at any time without a penalty. There are many other advantages, but I have forgotten the details. In any event, find out about Roth IRAs. They can be self-directed through stock brokers and/or mutual funds. You are not stuck with banks and insurance companies.

Have fun.

John R.

 

[Nords]

Re:  As much and as often as you can!

Maggie,

You also fit the demographics & interests of "Cashing In on the American Dream: How to Retire at 35" by Paul Terhorst. I didn't run across this jewel until I was 40 and I envy your foresight. Try your local library's copy and visit the Terhorst's website at http://www.geocities.com/TheTropics/Shores/5315/.

Other books include, and I'm not trying to be patronizing here, "Investing for Dummies" or "Mutual Funds for Dummies". Between the Dummies series and Bernstein you'll find a broad spectrum of books that will help you educate yourself to the extent that you desire.

If your employer is going to contribute 9% to your retirement, then you should contribute as much as you can to get every penny of their contribution. It's free money, even if it's in company stock. When you're no longer with that employer (in nine years?) then you're able to roll that retirement account into other individual retirement accounts with better early withdrawal choices (and you can divest yourself of that company stock as well).

Cut your expenses wherever you're comfortable doing so without sacrificing your lifestyle. Try to save pay raises instead of spending them. After maxing out your contribution for your employer's match, start your Roth IRA (which has a number of early withdrawal provisions).

I'm loathe to jeopardize my ER by putting its planning in the hands of a financial advisor. They have to be knowledgeable about everything but they'll never have enough time to be the expert on yourself and your investments that you can become. If you learn enough to manage your own investments and your own ER, then you'll also be motivated enough to live a lifestyle that supports the process instead of accidentally sabotaging it.

If you hang around here long enough and click enough links, you'll learn what you need to know. John Greaney's website is also a great reference, as are websites like http://www.investopedia.com. You probably don't spend your evenings reading dictionaries & encyclopedias, and you shouldn't do it with these websites either. Just use them as references to look up answers to your specific questions, or post the questions here. This board will continue to answer questions and offer support whenever you ask.

 

[newellcr]

Hello Maggie,

Congrats on the savings. Congrats on being debt free. I'm glad you are here. Most of what you have heard (around the water cooler, in the lighter financial magazines, and almost all news papers and TV) about saving for retirement are simplified "rules" that apply to most of the public that isn't thinking about, let alone saving for, retirement. You mention that you don't understand what we're talking about when it comes to retiring. Learning about 401k's, IRAs, investing, and other financial topics really isn't that hard. The investment selection process gets considerably more easy if you buy into the idea that you can't beat the market so just invest in it cheaply. Simplified, that translates into buy low cost index funds and "buy and hold" thru dollar cost averaging. It gets more complicated in proportion to how convinced you are that you can beat the market and then try to...

See if you can find a good book or three. Take a look at what the others suggest here. I've never found the "one" book that has it all. If it gets to complicated, put the book back and try another.

You mentioned in your post that you might want access to the money before you are 60. You can have access to your money without penalty before age 60. There are a couple of ways to do it depending on your investment type (Roth, 401k, etc.) and what you want to use the money for. It really isn't that confusing, but you need to look at the rules as they apply to you. Look around here in the other topics or ask specific questions as it applies to you. There is a lot of good info here.

Cheers,

Chris

 

[BigMoneyJim]

Ok, this is my situation.

[... situation ...]

what else do you think I should do?

So far so good Maggie. You should relax. You can take your time learning what you could do because your money sounds like it is safe where it is. Go travel somewhere. I'll pay off my debt shortly and that money is already starting to burn a hole in my pocket as I look at Caribbean cruise packages...

EDIT: I went back and reread the original question; you were more concerned with whether you should be saving more. Tough call, and only you can decide. After my debt is gone I'll be putting 25% of gross (with a $500 capped company match) into my 401(k) and had planned to put another 10% of gross into after-tax savings, but like I say that 10% is already heating up my pocket linings, and as John Galt is fond of saying tomorrow is promised to no one.

Oh, and I hope to start withdrawls before age 55 by rolling the 401(k) into an IRA and beginning 72(t) SEPP's. (That is if I don't save enough in after-tax accounts to tide me over to normal withdrawals.) That plus the tax-deferrence makes the 401(k) probably a good idea if you want to save more for retirement.

 

[Maggie]

How can you roll your money from 401K to IRA? Under special conditions? And what are the special conditons? How do I know I qualify for that?

 

[Whakamole]

How can you roll your money from 401K to IRA? Under special conditions? And what are the special conditons? How do I know I qualify for that?

Sure. You can quit your job (or get fired, laid off, etc.)

 

[BigMoneyJim]

How can you roll your money from 401K to IRA? Under special conditions? And what are the special conditons? How do I know I qualify for that?

Now that you ask that, I realize I'm not 100% up on the IRS particulars, but I know what I did. I quit a job 3 or 4 years ago and the company offered the options (as long as the value was greater than $5000) of leaving the 401(k) with the existing trustee, distributing it to me with 20% withheld for the IRS, arranging my own direct rollover or rolling into my next employer's 401(k).

I got paperwork from Vanguard's website for a direct rollover. Direct means the assets are transferred directly from one plan to the other without passing through me. This is better because if they cut a check to me they are required by the IRS to withhold 20% to cover taxes and penalties (although 20% isn't enough to cover it!).

Like I say I'm not 100% sure about the IRS particulars, but as I understand it you can certainly roll into an IRA after leaving the company. Once the money is in an IRA the IRA rules apply, so you can take the 72(t) exemption or convert partially or wholly to a Roth IRA.

(Got diverted from this half-composed post for an hour or more...where was I?)

Here are some possibly helpful links:

http://www.irs.gov/taxtopics/tc413.html
http://www.irs.gov/publications/p575/ar02.html#d0e3329
Google search yielding above results and others

 

[bongo2]

Part of your question seems to be how much you should be saving (more than 7+9 = 16%) as well as what you should do with it. Here is a simple (very simple) projection of how long you will work at various savings rates:

% Saved Years Worked
10% 46.00
15% 39.00
20% 34.00
25% 30.00
30% 26.00
40% 21.00
50% 16.00
60% 12.00
70% 9.00
80% 6.00
90% 3.00

This assumes you start with nothing, earn 6% on your investments, are willing to withdraw 4% of your nest egg, and ignores inflation, taxes and raises. What you do not save you spend. Rough as it is, if you only save 15% of income, you might be working 40 years. If you can crank it up to 40% you might get out in 20.

That's the choice, how much do you want the money now vs how long do you want to work.

As for where to put it, I agree with what has been said so far:

1. make sure you get the match on your 401k
2. put $3k in a Roth (unless you make over $150k)
3. max out the rest of the 401k (that 10% penalty aint the end of the world)
4. build up an emergency fund of 3-6 months income in "safe" investments like i-bonds, money market account or CD's.
5. get some low tax index funds in a taxable account.

You can argue about the order. Some put #4 at the top, some might put 5 before 4.

As for books, I really like "the only investment guide you'll ever need" for its entertaining style.

 

[newellcr]

Maggie,

It would help if you told us what your plans were. An "I don't know." is just fine, but give us some idea what your plans are and I'm sure the group will help you. You ask about rolling your 401k into an IRA. Most 401k plans are set up so that you can't roll the money over into an IRA before you retire/quit. Some plans are set up to allow you to borrow against your 401k money at a low interest rate for various purposes. Some won't let you do this. The various purposes might be to buy a home, emergency needs, large health related expenses, etc. There are also some plans that let you borrow against this money just because you want to (the federal employee TSP is this way).

The plans are set up this way because they hold retirement funds, it's not a general savings account. Again, what are you looking to do?

Cheers,

Chris

 

[Maggie]

What do you mean by "1. make sure you get the match on your 401k "?

 

[ats5g]

Maggie,

Are you sure you have a 401(k)? TIAA-CREF is usually involved with 403(b)s. There are some slight differences. One is that some 403(b) plans allow what's called a 90-24 transfer, where you can transfer money from one 403(b) to another. For example, if I'm not happy with my current employer's 403(b) vender, I can transfer the money to a 403(b)(7) custodial account with someone like Vanguard (assuming that my employers retirement plan allow 90-24 transfers).

Here are the pertinant IRS publications for 403(b) plans and IRAs:

Publication 571: Tax-Sheltered Annuity Plans (403(b) Plans)

Distributions and Rollovers

Publication 590: Individual Retirement Arrangements (IRAs)

Your employer (HR dept) should have a Summary Plan Document/Description (SPD) they can give you that describes all the rules of your retirement plan, including moving money into and out of your retirement plan (rollovers, distributions, etc.). I recently rolled my previous employer's 401(k) over to an IRA with Vanguard. Even though I stated specifically that I wanted the money sent directly to Vanguard, the vender still mailed me a check that was made out to Vanguard. I called Vanguard to see what to do. We had a good chuckle at the ineptness of my 401(k) vendor, and I just mailed the check on to Vanguard.

As far as company matches go, each retirement plan is set up differently. Some 401(k)/403(b)'s are set up so the company only contributes when you contribute. For example, the company will match your contributions dollar for dollar (or 100%) up to 4% or whatever. You have to contribute to get this money. Other retirement plans are set up so that the company/organization contributes money to your account whether or not you contribute at all. You don’t have to contribute to get this money. See your SPD for more exact info. From your description in the original post, it sounds like your retirement plan is set up as the latter.

The company match is free money. After getting this, as bongo2 listed, it is usually recommended that one max out a Roth IRA, and then max out retirement plan after. I think I'd put the 3-9 months of living expenses at #1, but that's probably from me wishing I had done so after I got laid off.

For books, I started off with the Dummies books: Personal finance for Dummies, Investing for Dummies, Mutual funds for Dummies, Insurance for Dummies. Then I moved onto more advanced books: Common Sense on Mutual Funds (by John Bogle); The Four Pillars of Investing (by Bill Bernstein).

- Alec

 

[Maggie]

I have to contribute at leat 5% and my emplyer always contributes 9% no matter what. I can go up to 20%. I have TIAA. Yes, my plan is 403(b). I just asked the HR person. Is that good or bad?

 

[BigMoneyJim]

Yes, my plan is 403(b). I just asked the HR person. Is that good or bad?

It's fine, but it has different technicalities than a 401(k). I'm not sure what all the differences are, but the links I gave earlier mentioned that 403(b)'s are eligible for rollovers to IRAs, too.

 

[John Galt]

Not asking your employer about this stuff reminds me of
a rule taught trial lawyers. Never ask a question unless you know the answer. I suspect this could be applied
to other areas besides the law.

John Galt

 

[Maggie]

Thank you very much for all your responses.
I am so dumb when it comes to investing.
I know you have given me lots of advice here already, but would anyone tell me whether I should contribute more than 7% to my 403(b) plan or should I open some other account somewhere else. Note, I want to be able to retire early and with the 403(b) plan I can't touch that money until I am really old. Someone mentiones about rolling it to Roth IRA, but I am not sure if I qualify for that. If so, when would I do that and where can I calculate how much money I will have in about 10 years?

 

[retire@40]

Thank you very much for all your responses.
I am so dumb when it comes to investing.  
I know you have given me lots of advice here already, but would anyone tell me whether I should contribute more than 7% to my 403(b) plan or should I open some other account somewhere else.  Note, I want to be able to retire early and with the 403(b) plan I can't touch that money until I am really old.  Someone mentiones about rolling it to Roth IRA, but I am not sure if I qualify for that.  If so, when would I do that and where can I calculate how much money I will have in about 10 years?

Maggie,

Try to learn as much as you can yourself about taxes, investments, and retirement so you have a general idea about those topics and how they relate with one another. But I would also strongly recommend you find yourself a local CPA who understands your interests and is willing to help you with all the details that take months if not years to understand. He or she can help you "crunch the numbers" and start you on the right track to developing a solid plan. Once you understand the plan, you can refine it yourself on a regular basis and use that CPA from time to time when you get stuck.

 

[Bob_Smith]

Maggie, the 403(b) has upper limits and you must understand those before you plunge in. In 2004 the limit is $13,000 unless you will be 50 by 12/31/2004 - in that case it is $16,000. If you qualify for the 15 year rule you can contribute up to $19,000. This rule is more complex, so you'll want to study it. Also be aware that the 15 year rule has an aggregate maximum of $15,000. In other words, you must keep track of all contributions that apply to the 15 year rule and do not exceed $15,000 in your lifetime. $13,000/year is always safe assuming you earn that much. And keep in mind that the amounts increase annually.

Regarding your question about contributing 7% to your 403(b). I maxed my 403(b) and my IRA for about 13 years. My wife did the same with her IRA and SIMPLE plans through her part-time work. We also saved in taxable accounts at the same time, and now we have enough in those accounts to cover our expenses until I'm 62 (I'm 52 now). I would venture a guess that most people who actually achieve ER were very aggressive savers. If you can afford to do so, try to max every tax advantaged account available to you while also saving in taxable accounts at the same time. Watch investment expenses. 403(b)s are notorious for high expenses so be careful when you choose. The employer (and their HR depts.) are usually clueless, so avoid seeking advice there unless you know for sure they know their stuff.

I agree with retire@40 regarding the use of an accountant. They will be able to advise you regarding the advantages of a Roth vs. a 403(b). Most probably won't understand 403(b) rules, however, so make sure they do before you choose one. I was not able to find one in Iowa, so I learned it myself with the help of my mutual fund company. If you are able to use Vanguard as a 403(b) provider, I'd recommend that. Wendy Duetsch at Vanguard knows everything there is to know about 403(b)s and she is willing to share her knowledge. Email her specifically and she'll help you. Good luck.

 

[John Galt]

You know, my initial reaction was to discourage the use
of a CPA (to save fees). Then I considered the fact that
even though
I made a living in accounting/financial management
for a long time, I still use a CPA for some stuff.
The tax laws are amazingly complex and you could easily make a decision with unintended consequences
that won't show up for years. I know I have.

John Galt