[Laminar]

Well folks, real life is here, and I'm trying to figure out how I want my retirement benefits set up. My company offers a Roth 401(k) option, so I looked into it a bit. All of the online calculators had me with about 30% more money at retirement if everything went into the Roth, and over the course of my career I'd be out about $1000 in take-home pay, if I remember correctly. It seems like a good option, especially since I don't see taxes going down at all anytime soon. Is there anything else I should take into consideration?

[SpaceMonkey]

It's a fine option. The standard advice is to go with a Roth over a traditional 401(k) or IRA if you expect to be in a higher tax bracket at retirement, but that is difficult to estimate, especially if you are just starting out. I wouldn't worry too much.

I have a 403(b) (contributions are pre-tax) and a Roth IRA, so I'm covered either way.

[shifuimam]

I'm fan of the traditional 401(k)/403(b), particularly if employer contributions are part of the picture.

However, I have far more generic advice to provide:

Whatever you go with, take an active interest in your retirement until you actually retire. This means diversifying your investment across the options available to you (rather than going with a premix, which is popular now), as well as keeping track of where your money is. I'd recommend making a Google Money portfolio of all the funds and stocks your retirement is invested in. When something starts sinking, pay attention. If it looks like things are going downhill, be proactive. I know people in their 40s and 50s who have lost tens or hundreds of thousands of dollars of their retirement in the last three years because of the economic shift and their lack of interest in keeping track of these things.

On the other hand, I've kept close attention to this stuff. When I saw that things were starting to go south, I moved nearly all of my 401(k) balance into a tax-exempt bond fund. While such a fund gains less than 2% interest annually, it doesn't lose any money because it's backed by bonds, so your funds will be safe there when the market is very unstable. Right now, I haven't really had a chance to sit down and move my money around since I changed jobs in the middle of the current economic situation, so all my money is in a premix until things balance out (that was easiest to move it into from my 401(k) into my current 403(b). It was a mistake - I've already lost several thousand dollars and now have less money in there than when I quit my previous job.

Just operate on the notion that Social Security will be nonexistent by the time you retire, and do as much as you can early on to protect yourself. It's better to lose a few grand now from making mistakes than to lose $150,000 three decades from now.

[Jawbone54]

Great information, shifuimam. I'm taking this all in as well.

I've only recently actually started thinking about all this. I'm glad Laminar brought this up.

[shifuimam]

Also, if your employer matches contributions to a certain point, don't feel pressured now to contribute more than that.

For instance, my previous employer allowed up to 10% paycheck contribution, and they matched up to 6%. I originally was contributing the full 10%...however, I was only 22 when I started at that job. I have a long time to save up, and I realized it was more important to be building my savings right now for big stuff, like putting a down payment on a house and buying a car when that need arose. I dropped it to 6%, which I think was a good idea. As I my income increases and I build more savings, I can change my contribution in relation to those personal financial changes.

[SpaceMonkey]

Originally Posted by shifuimam 

I'm fan of the traditional 401(k)/403(b), particularly if employer contributions are part of the picture.

However, I have far more generic advice to provide:

Whatever you go with, take an active interest in your retirement until you actually retire. This means diversifying your investment across the options available to you (rather than going with a premix, which is popular now), as well as keeping track of where your money is. I'd recommend making a Google Money portfolio of all the funds and stocks your retirement is invested in. When something starts sinking, pay attention. If it looks like things are going downhill, be proactive. I know people in their 40s and 50s who have lost tens or hundreds of thousands of dollars of their retirement in the last three years because of the economic shift and their lack of interest in keeping track of these things.

On the other hand, I've kept close attention to this stuff. When I saw that things were starting to go south, I moved nearly all of my 401(k) balance into a tax-exempt bond fund. While such a fund gains less than 2% interest annually, it doesn't lose any money because it's backed by bonds, so your funds will be safe there when the market is very unstable. Right now, I haven't really had a chance to sit down and move my money around since I changed jobs in the middle of the current economic situation, so all my money is in a premix until things balance out (that was easiest to move it into from my 401(k) into my current 403(b). It was a mistake - I've already lost several thousand dollars and now have less money in there than when I quit my previous job.

Just operate on the notion that Social Security will be nonexistent by the time you retire, and do as much as you can early on to protect yourself. It's better to lose a few grand now from making mistakes than to lose $150,000 three decades from now.

I will be contrarian.

Most definitely everyone should take an active interest in their retirement portfolio, and keep in mind the need to diversify. However, I would not advocate market-timing. For example, say you pulled out of the stock market back in September. Should you have gotten back in during one of the December rallies? How would you know when? Your risk of inadvertently buying high and selling low is great. Your portfolio will go down for stretches of time, but this is not something to worry about as long as you know your need and your willingness to take risk. You're in this for the long haul, remember? If one is not willing to risk losing several thousand dollars, then one should devote less of their portfolio to equities. The standard rule of thumb is that your maximum equity allocation should be twice your maximum tolerable loss. In other words:

Max Loss...........Max equity
50%...................100%
40%...................80%
30%...................60%
etc.

I feel for people who have lost a significant portion of their portfolio right when they are about to retire. However, as you get older, you need to re-evaluate your need and willingness to take risk, and adjust your portfolio accordingly. Unfortunately, in the last few years, stocks have been heavily pushed by the investment industry, so many people have probably been taking on more risk than they should.

[shifuimam]

True, you can afford to take losses now, but I see it as getting into a good habit of keeping track of things, rather than waiting until you're in your 40s to start caring about it.

Although I do agree that you should be willing to take some risks when you're younger. It can provide a big payout later down the line.

[Laminar]

Originally Posted by shifuimam 

Also, if your employer matches contributions to a certain point, don't feel pressured now to contribute more than that.

For instance, my previous employer allowed up to 10% paycheck contribution, and they matched up to 6%. I originally was contributing the full 10%...however, I was only 22 when I started at that job. I have a long time to save up, and I realized it was more important to be building my savings right now for big stuff, like putting a down payment on a house and buying a car when that need arose. I dropped it to 6%, which I think was a good idea. As I my income increases and I build more savings, I can change my contribution in relation to those personal financial changes.

While this is true, you have to remember that every dollar saved early on is worth many times each dollar saved later on.

[Doofy]

All of this pension stuff confuses me (what with me having an irregular pension arrangement and all that).

So you get a 2% interest rate. Inflation is over that, so what about the effects of inflation on such a nest egg?

Wouldn't it be more efficient to throw your money into shares in an industry which ain't going away (i.e. energy) and keep re-investing the dividends?

[Laminar]

Given the choice, I'd put my money in Chrysler.

[shifuimam]

Originally Posted by Laminar 

While this is true, you have to remember that every dollar saved early on is worth many times each dollar saved later on.

True - it's just a matter of priorities. I will be investing as much as I can once I buy a house, but that's more important at the moment.

[Dakar V]

Retirement plans? I got plans. I'm gonna turn my on/off switch to off.

[Laminar]

I'm going to put 6% towards retirement - if I do that my company will match with an additional 7.5%. I think for right now I'm going with 75% Roth 401(k), 25% traditional 401(k). We'll see what happens, I guess.

[Rumor]

I have money in a Mutual Fund. I was getting around a 6% or so return until recently. However, I am guaranteed 3% no matter what. However, when I have a chunk of money to throw down, I'll put it somewhere else, if only for the reason to have money in different places.

[SpaceMonkey]

Originally Posted by Laminar 

I'm going to put 6% towards retirement - if I do that my company will match with an additional 7.5%. I think for right now I'm going with 75% Roth 401(k), 25% traditional 401(k). We'll see what happens, I guess.

What are you investing in?

[Laminar]

There is a list of funds, with 5 "premade" mixes ranging from Conservative to Aggressive. I figured I'd go with Moderate, but it might be beneficial to bump it up to Moderately Aggressive or even Aggressive at this point in the economy.

[E's Lil Theorem]

I'm relatively young and I go with the roth. With previous employers I didn't have a roth option so I've already stashed away enough into traditional 401k accounts. I guess I'm hedging, too.

[Chooglin']

Retirement plans are BAD idea. Anyone who knows their stuff knows that 401ks etc. are a complete gamble. So don't believe that because you are putting away money now that it will be there later on. Ask most people nearing retirement and 9 times out of 10 you'll hear the same story about how they lost a big part of the money they had been putting towards retirement.

[mattyb]

I think that what is called a Mutual Fund in the US, is what in the UK is called a Unit Trust. If it isn't, someone please correct me.

There are Unit Trusts that allow you to put in £10 or £20 per month. The Unit Trust then invests this money into different companies. You can obviously choose the type of Unit Trust : green tech, bio tech, Dow only, etc. If you start one now, you will basically be buying parts of companies extremely cheap. After 15 or 20 years, you will have a substantial return. AND, you will probably not have even missed the £10 or £20 per month.

I have recently opened 2 Unit Trusts (€30 per month each). The types of companies that are covered by these Unit Trusts are : oil, energy, green tech, utilities (water and gas) and a couple of high tech. Even though some of the shares have fallen since I started the Unit Trust, I am now getting more for the money that I put in each month. Not sure what the tax rules are in the US, but if I keep this going for a set amount of time, I pay no tax on the benefits. I also have it organized so that if I die before recuperating the benefits, it goes equally to my kids.

HOWEVER, I would be very careful when considering a Unit Trust with : banks, insurance companies, high tech (I've got IBM and Microsoft in my Trusts) and emerging markets. I don't know anything about big pharma, although I *think* that I have some Glaxo.

[turtle777]

For me, the deciding factor is flexibility of investments. I would never invest in a (Roth) 401k where I don't have the option of a self-managed brokerage account.

My advice:

1) Put enough into a (Roth) 401(k) to get the full employer match
2) Next: use up the yearly limit that you can put into a regular Roth IRA. The advantage: at any time, you can pull out your contributions (not the gains) w/o a tax implication.
3) Also, start building a emergency fund.
4) Rest goes into a regular savings / MM / brokerage account.

I'm currently saving about 30% of my net income, trying to live as frugal as possible.

As far as investments goes, I like the MERKX Hard Currency fund. I also like Gold, of course.
For the paranoid / ultra-pessimists: buy pre-1964 US coins in bulk, they contain 90% silver.

I stay increasingly clear of US stocks, because I still believe we're going to get massive inflation.

-t

[turtle777]

Originally Posted by Chooglin' 

Retirement plans are BAD idea. Anyone who knows their stuff knows that 401ks etc. are a complete gamble. So don't believe that because you are putting away money now that it will be there later on. Ask most people nearing retirement and 9 times out of 10 you'll hear the same story about how they lost a big part of the money they had been putting towards retirement.

I dunno what you mean by "retirement plans".

I use the current "plans" (Roth IRA, 401k...) to "save" on taxes.
I still have all investment options open, so I don't have to take risks in terms of the actual investments.

-t

[Laminar]

Originally Posted by turtle777 

For me, the deciding factor is flexibility of investments. I would never invest in a (Roth) 401k where I don't have the option of a self-managed brokerage account.

My advice:

1) Put enough into a (Roth) 401(k) to get the full employer match
2) Next: use up the yearly limit that you can put into a regular Roth IRA. The advantage: at any time, you can pull out your contributions (not the gains) w/o a tax implication.
3) Also, start building a emergency fund.
4) Rest goes into a regular savings / MM / brokerage account.

I'm contributing 6% of my income to a 75/25 mix of Roth 401(k) and tradition 401(k). My employer adds another 7.5%. My goal for my next two paychecks is to have a $1000 emergency fund ready, and after that I'll build up an account with at least six months of expenses and toss it into a basic MM, or at the least something I can write a check against for easy access. I spent a couple hours today putting together a whole Excel spreadsheet that distributes my income according to a budget I set so that I can keep track of exactly how much I'm spending in each of about twelve categories.

I'm also currently taking Financial Peace Universtiy, which I really like so far.

[turtle777]

Originally Posted by Laminar 

I'm also currently taking Financial Peace Universtiy, which I really like so far.

Yes, that's good stuff. Dave Ramsey is highly entertaining.

-t

[SpaceMonkey]

Originally Posted by turtle777 

For the paranoid / ultra-pessimists: buy pre-1964 US coins in bulk, they contain 90% silver.
-t

For the über-paranoid: guns, ammunition, bottled water, vitamins, canned/dried proteins, and sacks of flour.

[SpaceMonkey]

Originally Posted by Chooglin' 

Retirement plans are BAD idea. Anyone who knows their stuff knows that 401ks etc. are a complete gamble. So don't believe that because you are putting away money now that it will be there later on. Ask most people nearing retirement and 9 times out of 10 you'll hear the same story about how they lost a big part of the money they had been putting towards retirement.

Stocks, or rather, long-term contributions (over decades) to a broadly diversified stock mutual fund are a basic gamble that capitalism works, and the aggregate wealth in an economy will increase over the very long term. This comes with a significant volatility risk, as you've noted. Stocks are just one type of investment that one can hold in a "retirement plan." It's a good idea to do some basic research into what the risks are, what you will need for retirement, and how to get there with the least amount of risk, rather than miss out on the big tax advantages that you can get with a 401k or Roth/traditional IRA.