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I have a problem. When I entered the work force it was pointed out to me that after I leave I will live another 30-50 years.  During this time I will not have a income Social Security is a mess that should never have existed so I needed to do some retirement planning. What I found was that its very easy for the middle class 20 something to save for a comfortable retirement without government help as most people think.

Now many of my friends who went on to grad school and are now getting jobs have been asking me what they should be doing I figured I would write some posts.  Note I am not a CPA be sure you understand any product before you buy it.

1. How much to save?

You should save at-least 15% of your pre-tax income.  This number can include employer matching in a 401(k) or 403(b) but if you go for 20% you can be much safer.

2. Roth or traditional IRA? Roth or traditional 401(k)? 403(b)? 457(b)?  Where should I put this money?

First Never touch money for retirement unless you have to. Getting a new car is not a have to and nether is collage for your children (I will cover this later). Some of the accounts (401(k,b)) let you take loans, don’t do it. First If your employer provides matching funds on your money contribute enough to get all the match.  That is if they have 50 cents on the dollar for the first 6% put in the entire 6%.  Its free money don’t ever pass it up.  If the employer provides a Roth 401(k) or 403(b) use the Roth option over the traditional (I will cover why latter).

Once you have maxed out the match open a Roth IRA at a company like Fidelity or Vanguard (I use Vanguard). Once you have hit the limit for the Roth IRA any extra money you need to save should go into your 401(k) or 403(b) until you get to at least your 15% total in.

3. There is so many options to put my money in and I really don’t know what ones to put my money in!

Use a target date fund. These funds are a collection of mutual funds that have a target date on which you will begin to draw money.  The farther out the date the more stocks and aggressive they are.  These funds provided by most major mutual fund companies take out the guess work that used to be provided my your employer.  So if you don’t want to learn where you should put your money let experts do it for you. I personally use Vanguard target date 2050 (VFIFX) for my Roth IRA. 

4. What should I not use for retirement? 

Don’t use the following in a tax advantaged account. All IRA’s and 401(k)’s 403(b)’s and 457’s are tax advantaged accounts.

• Annuities
• Variable Annuities
• Whole Life (Cash Value) Life Insurance
• Hedge Funds
• Any fund that has expenses over 1%
• Loaded Funds

Really avoid Variable Annuities they provide no advantage for long timer periods and are very expensive. Don’t be taken in about principle protection or death benefits. If you want to know why email me at brockp@mlds-networks.com

Stick to low cost mutual funds like those from Fidelity, Vanguard, Tiaa-Cref or T-Rowe Price.

Please put any questions in the comments. Do not use any numbers if you want some help going over some options talk to a planner or you can email me at: brockp@mlds-networks.com 

Thats really all you need to know, I have some other information below like:

• Why Roth over traditional for young people?
• How to make your own pension plan.
• What is a 401(k) 403(b) and 457?
• Why to save for retirement before your children’s collage

1. Why a Roth over traditional for young people?

First a Roth plan (401(k) or IRA) is after tax. The money you use to pay in you have already paid income tax on it will grow with no taxes on it and when you withdraw you pay zero taxes. A traditional IRA you pay no taxes putting the money in grows without paying any taxes but any money you withdraw in retirement you pay income tax on. 

Young people in their 20’s are just starting the workforce there will be promotions and bounus in the future and our tax rate will climb. So while we are making the least we ever will pay the taxes now in your lowest tax rate and get the money tax free when you retire in a higher tax bracket.  You can also look at political topics where the answer is cut benefits to medicare SS and others but the feel good way is to raise taxes.  We are also in a low tax environment post Regan.

Now for our parents who are in their peek earning years maybe want to avoid taxes now and pay them latter when they have a lower income in retirement.  It all depends but in most cases the numbers point to if your young use a Roth. 

2. How to make your own pension plan.

Upon retirement buy Immediate Annuities. Annuities? Didn’t I just say don’t put money in Annuities. Yes I did and if you do you will be sorry.  Annuities are awful to accumulate money in but great for keeping your income stable.  An Annuity is a contract where you pay a insurance company some amount of money and they will send you a check for the rest of your life.  Don’t worry about this at this point in your life right now you need to accumulate as many assets as you can to take care of your life and family when you stop working.

3. What is a 401(k) 403(b) and 457?

401(k) and 403(b)’s are the same thing. The only change is that 403(b) worker are non-profit and government employed. 401(k)’s are for profit organizations.  A 457 is treated the same tax wise as the 403 and 401 but has slight changes.

These traditional plans are pre-tax. Money goes in without income taxes being paid. Grows tax free but you have to pay income tax when you withdraw money.  Roth versions of these plans are after tax and you never pay taxes again just like the Roth IRA. Note that even with the Roth version employer matches are pretax and will still have to pay income tax on these contributions when you withdraw. Your own personal contributions you will not pay taxes.

A 457 only changes when you can withdraw the money. You can access 457 money when you leave that employer. The 401k and 403b require that you have of a age before you can access the funds this is not true for the 457.  457’s are great for those who are on track to retire before the age limits of the other plans or who have maxed out the limits of the others.

4. Why save for retirement before collage.  

While I know you all want to save for your kids school they can get loans and have their entire working life ahead of them. There are no loans for retirement and unless you want to be living with your children you better take care of your self before you do their collage fund.

When you do have funds for collage be sure to use a 529 plan. Right now its the best way to save for collage. And this like retirement the sooner you do it the simpler it is to do.