(krodinjw)
You’ll be excused for worrying more about your day-to-day financials than those of your future, 65-year-old self. But it’s important not to let your 401(k) or other long-term investments become afterthoughts. One reason to think big-picture is that decisions you make in retirement investments now will have ripple effects that turn into tidal waves in your golden years.
Financial Highway warns about mistakes to avoid when arranging your retirement savings:
* Failing to keep your beneficiaries list updated. Sure, you love your husband now and want him to get your life savings if you die. But you’ll feel differently after he runs off with his secretary. Whenever you go through major life changes, such as marriage, divorce or having kids, you’ll want to give your beneficiaries list a once-over.
* Invest without knowing what you’re doing. It’s foolish to choose your investments without doing research or understanding what fees are involved. Talk to someone who knows what they’re doing about selecting the right mix of conservative and higher-yield investments.
* Missing out on an employer match. You may feel like you’re making more money if you sock away a minimal amount, but you may really be giving yourself a pay cut. If your company offers matching funds and you fail to contribute enough to get the maximum, you’re leaving money on the table.
5 Retirement Plan Mistakes to Avoid in the New Year [Financial Highway]
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How about “not realizing that putting even $5 a week towards retirement in your twenties can matter more than putting aside 5 figures a year later on”?
That’s actually a good one to remember. If you can put anything away, do it.
I think they need to show every person that gets a job a graph that shows how compounding interest works. I was stupid and didn’t start contributing until my 30s. That’s 10 years down the tubes. And what’s dumb is I knew how powerful it was from many classes in college…I just wanted to buy a nice car, or more video games instead of investing. If I had just put in at least 3-5% back then, I’d be so far ahead. Now, I’d have to put like 15% to make up the difference.
Yea I’ve been putting money into IRA/401K since I was 22 (almost 30 now) … haven’t compounded much interest over that span … hopefully the next couple decades will make up for it. Oh well, at least I have a solid base built up despite not much growth.
The returns from the stock markets have been poor for the last decade or so. I really hope that the economy recovers in the next few decades so we Gen Y guys have a chance to retire when Social Security dies.
Ahh yes, compounding interest. That was great when people actually made returns on their investments.
I sock away considerably more then that, but I’m looking at 2% annual growth (especially once you factor in the massive loses that everyone took in 2008). If, as you suggest, you put $5 a week away for 35 years, at the current 2% interest, you’ll have $13,000. Back when interest rates were 8%? $50k.
As always, there is an xkcd comic to address this: http://xkcd.com/947/
I’m kind of looking at it like “Well, as long as share prices stay down, I am buying more. Hopefully by the time I retire, they’ll have jumped up to where they should be.” It’s sad that after a year of putting into my 401k, even with 3% matching, it is pretty much where it was at the start of the year.
You’re exactly right, though…unless you’re only a few years away from retirement, you’ll see the market go back up, and then you’ll be glad that prices were as low as they have been. Think of it as getting huge bargains that will pay off big in 10, 20, 30 years.
That’s basically how I handle it too. My company stopped matching contributions for a while due to the downturn, so I increased my contribution level to make up for it and more because stocks were/are so low. I figure it’ll have to go back up eventually and I will have bought low. At least that is my hope. I’m putting away much more then most people my age, but that’s because when I paid off a personal loan I had, I rolled half of the payment in to my mortgage, and the other half in to my retirement.
But I’m more referring to what we were sold as kids – stick $5 a week in to a savings account and you’ll have a million dollars by the time you are able to retire because OMG compound interest. I’m not sure how long we are going to see 2% interest rates, but I don’t foresee them rising much any time soon.
That social security benefits mailing they send to you encourages you to save even minimally uses a chart to illustrate the point that assumes a 5% return. A lot of on-line retirement calculators also use this as a presumed return too. (I also like the “you don’t have to worry about social security not being there until [year I'm going to retire]” footnote).
#3 is a little difficult for me to work with now. I give enough to hit the IRS limit at the end of the last pay period, so unless that changes, I can’t increase it.
What kind of plan are you in? 401k, SEP, SIMPLE? Congrats on hitting the max though.
I was just researching this the other day. For 401(k) plans, employer contributions don’t count towards the maximum. Only elective contributions — in other words, if you could have taken the money home, but put it in the plan instead.
(Disclaimer: Please do your own research, of course. My company’s profit-sharing contribution is actually listed in my statement as a “non-elective distribution”, but matching funds should count as non-elective, because it’s not like you could have gotten the cash as salary instead.)
I don’t know that much about it, but there’s also some kind of “fairness” test for large group plans, and the rules are that highly-paid employees can not benefit too much, as compared to non-highly-paid employees. So, you can find out after the end of the year that you have put too much in, and have to take a refund and file amended income taxes.
It’s not too hard to find out how much you can put in. Most plans tell you also. If you happen to do, you will know with enough time to correct so you will not have to amend.
You’re right, but that’s just it, my own contributions hit the limit at the end of the the year. What my emplyer kicks in is gravy.
Amen to keeping your beneficiaries updated. My mother-in-law passed away earlier this year. She wanted to give her grandchildren each a fixed amount and then split the remainder among her children. She had more than enough assets to do this but had them in a large number of financial instruments. Most had a different beneficiary designated and so we could not divide her estate per her stated wishes. In the end, one of her children got a huge portion of her assets and the grandchildren got far less than her intentions as stated in her will. My wife was the executor and it was a real mess with some really sore feelings where some of the family felt they were given less than their due.
Heed this warning.
Short version: the designated beneficiary on each of your assets will override any stated wish in your will. Period.
That’s a shame she should have had a trust. You get around having to pay probate, generally its quicker process than a will, and its extremely hard to contest. So her assets it would have been divided up based how she designated them to be divided up in her trust.
Depending on the individual facts and circumstances, there are many issues that come with placing assets into a trust. The biggest one of the top of my head involving grandchildren is the GST Tax.
Then she would have had to make the trusts irrevocable and satisfy the time period requirements so the assets are not pulled back into her estate.
Since it most likely will be set up as complex trust. You need to file a 1041 every year. I’m assuming this is being done prior to death. If not, the assets will go through probate and then into the TUW.
I suggest doing a lot of reading on retirement/financial planning until you think you get it. Avoid any books/articles on get rich schemes. Educating yourself is most of the battle.
Not me. I know this kid that made this computer program that guarantees 8% return every month, indefinitely! I’m giving him my life’s savings.
maxing out the employee match is crucial.
don’t turn away that “free” money.
How about “this stuff is really complicated, don’t be afraid to consult a pro”?
I am pretty good with the maths and all that, but I still need help deciding how much to put in my 401(k) vs. my Roth vs. paying down my mortgage early.
It is not rocket science.
- if employer matches, always max out 401K. Then Roth IRA if you have money left.
- if there is no match, then you are between 401K/IRA and Roth IRA. If you are young and in low tax bracket, put more into Roth IRA, otherwise
- paying down mortgage early almost never makes sense.
Contribute as much as it takes to get a full employer match in the 401K. Then Fund Roth as much as possible. If you reach limit, start funding the 401k again.
Roths are the best.
Don’t forget that the tax rate for investments, if you’re semi-low income, is currently 0%. Personally, I’d max that out first, before putting too much into retirement vehicles.
Why? It’s more flexible, and you need an emergency fund as well.
My rules:
1. Contribute to whatever you have that gets matching funds. Low income types even get a income tax credit for contributing to a retirement fund. Take advantage.
2. Make contributions to investments with the highest expected rate of return, starting with the most flexible. Keep in mind that taxes can take a bite each year.
My general list:
1. Employee Match 401k
2. Roth IRA with federal retirement savings credit*
3. Credit card or other high interest debt
4. Regular mutual fund/money market account as long as you’re under the 0% long term gain tax bracket ($34,500 net income after deductions). Even if not, consider keeping ~6 months income in the fund as emergency money. In which case, go more for stability than fantastic returns.
5. Roth IRA if you’re anticipating that your marginal tax rate is lower than it’ll be at retirement(mostly benefits younger workers).
6. regular 401k/IRA if you anticpate being in a lower bracket at retirement, or the Roth is maxed and you still have money to invest.
7. Regular Investments, extra car/house payments, etc…
*I no longer qualify, but others do, and if you’re low income enough to qualify, you’re not paying much in income tax on it anyways.
Many employers stopped matching in 2009 and 2010…
when they stopped, I stopped.
so because they stopped matching you stopped putting away for retirement?
What’s this thing called “retirement”??
I’m actually going at retirement in a little different manner. My goal is to save up enough money to pay for things outright, rather than getting a mortgage or car loan (This may not actually happen, but so far so good). At the point where I have these things purchased free and clear, I’ll have a significant amount of money to put into savings and a much lower level of expenses that I might be able to simply retire.
This said, I am currently contributing the maximum amount that is matched by my employer.
My employer matches 3% and then has a 7% profit sharing contribution as well. I’m contributing 10% myself. So my 401k is pretty good. It was looking bad earlier this year when returns were actually negative but they are back above positive now and keep going up. I’m only 30, so retirement is not a dream for me. I feel really bad for people in their 50s who were closely approaching retirement and got screwed over.
First retirement mistake is not even thinking about retirement until the year before.
Second retirement mistake is not actively investing until the final year before or the year after retirement.
Third retirement mistake is NOT dealing with retirement issues your entire adult/working life.
One thing I would like to say, having educated myself on the basics of investing AND receiving lots of advice from people and institutions is to look at the biases of the financial advisors before you take their advice. Someone who has been through tough times may be conservative with investing strategy, an advisor from a bank will often push that bank’s products, they may genuinely be giving the best advice they have, but that advice may not be the best for you. Always do independent research and look at all the options and ask a lot of people.