Rob C: Your expected expenses in retirement will dictate how much you should be saving currently. It also depends what you will be doing in retirement Some people love to travel and "experience" retirement, some enjoy relxing at home a bit more. One is quite more costly than the other. Will your pension cover most of your expenses? Keep in mind some pensions have been reduced recently so they are never a guarantee. Its hard to tell someone they are saving too much, but you are doing a good job to this point. Remember after taking inflation into consideration, 100 dollars today does not buy the same amount of goods/services as it will in 15 years. You might be coming to a good time to get a financial plan done which will take into consideration many more variables than we talked about here. Please don't pay an arm and a leg for one though. Some really good advisors provide this type of service very cost effectively.
Thanks, Phil. When you're ready, here is another one from Lisa
No problem Lisa, Take advantage of an employer sponsored retirement Plan if you can. If not, for your non-qualified after tax contributions for retirement, you should invest in low-fee stock and bond index funds that provide a cost effective way to invest. Individual bonds, TIPS, stocks are also a tax-advantaged way to invest for the long-term.
Chad, here is a question for you from Eric
Eric, While I love the Roth - especially at your age - I would guess that you are getting hammered in taxes right now. So until you buy your home I would focus on your 401k. Then after you realize the tax benefit of your home you can begin funding your Roth.
Delia, you can take this one from rshin
rshin: You're right to be concerned about inflation in retirement. But first and foremost, the biggest issue with retiring before Medicare-age 65 is having medical insurance. You don't mention it, so that's the first thing you need to address.
50 is just so young to retire. I like to say that the most important piece of information I need to help someone with retirement planning is the exact date of your death * Do you expect any inheritances? Or will you be responsible for caring for a family member? These are also costs to consider in retirement.
* Do you have sufficient funds to either pay out of pocket for long term care costs or do you have long term care insurance? Costs vary, but in California a long term care facility could cost $5k/month, and 85% of the people who need care in a facility stay for 2.8 years. So I like to have clients have approximately $180k set aside for that purpose, or consider buying long term care insurance.
* What's your current income/cost of living? How's that going to change in retirement?
. Which means I'm concerned about longevity and making the money last, and yes, inflation and how it can cut into your investments. So here are some things to consider:
* How are your investments doing now? How are they allocated and therefore what kind of rate of return can you expect, and does it meet your income needs?
* Are you eligible for Social Security?
* Keep in mind that inflation at just 3% means your cost of living will double in 24 years; you'll only be 74.
This why people need an overall plan for retirement.
Chad, you can take this next question from PGH Scott
PGH Scott- I would need to know more about you. Annuities can be effective retirement vehicles but they do have higher fees because you are insuring your money. I funding one typically occurs after you max other retirement options.
PGH Scott- if you are at the younger end of the age spectrum you will likely want to focus on your 401k if you have one and your Roth IRA if your income allows.
Thanks, Chad. We have a follow up for you from PGH Scott, I believe, but for some reason it is not letting me post it. Here it is:
"Thanks for the answer on the variable annuity. I put approx. $14.5 into my 401-k (getting entire firm match) $4200 in my IRA and $3600 into my wife's IRA. I also invest $7200/year in taxable accounts for a diversity of investment vehicles. Should any of these dollars be directed toward the annutiy?"
PGH Scott- I think you are doing great! Unless you are a nervous investor (it does not sound like it) I would not put more in the annuity. I like maxing the 401k and keeping some money in taxable accts for the flexibilty. No need to pay for the insurance.
Phil, here is one for you from Darnita
Your welcome Darnita. First ask if your workplace if you qualify for the employer’ retirement plan. If you qualify and they offer an employer matching program, go with that up to the match. If you don’t qualify for the employer sponsored plan then I would recommend opening a ROTH IRA account. See how much you can afford to save and put the same amount of money in the ROTH account each month. Invest 70% in a low-fee total stock index fund and 30% in a total bond index fund. But please make sure you have a 6-month’s worth of income in an emergency fund first.
Chad, when you're ready, here is one from Jimmy
Jimmy, do you have a retirement plan through your work? If so and especially if they match your contributions you will want to start there. If not, then I like Roth IRA's. You can open one at a discount broker like TD Ameritrade, etc. and pick some nice index funds to start. If you are not sure about picking funds you can find a good fee only advisor by going to the NAPFA web site
Delia, you can take this one from Matt W
Hi Matt: Congratulations on saving money. Let's first be sure you can afford to invest it. Here's how to prioritize:
1. Do you have any high-interest credit cards? Pay those off first.
2. Be sure you have a plan to save 3-6 months' of expenses in an emergency fund
3. Be sure you have medical and disability insurance at work if they offer it and require you to pay for it. We don't want you to have to pull out all your savings to cover you in an emergency or disability
You don't say how old you are, nor do you mention whether you have a retirement plan at work. If you do have one at work and they are offering a matching contribution, please take advantage of it; it's free money! Otherwise, I do love Roth IRAs (if you qualify). Singles earning up to $112,000 can contribute $5,500 this year. You don't get a tax deduction but your money grows tax free, and you can always withdraw your original contribution without penalty.
I like to start with a good low-cost balanced fund or target-date fund that you can tailor to your risk tolerance and goals and objectives, such as those offered by Vanguard.
Here is Matt W's followup question
Matt W: So given that I'm going with a Roth IRA so you can tap your original contribution if you need to.
Chad, here is a question from Allie
Allie- by backdoor Roth I'm assuming you are talking about converting your old IRA to a Roth and paying the taxes. I always do this with caution. In order to make it work you must be at least 10+ years from retirement and must be able to pay the taxes with money outside of your IRA. If you use money in the IRA it defeats the purpose and you will have to pay a penalty onthe tax portion.
Allie, before doing an IRA conversion I would check with your CPA and Financial Advisor. Unless you are simply converting a single years contribution of $5k.
Phil, when you're ready, here is one from Dennis
Dennis, Your advisory fees are way too high. You should not be paying 2%. For your IRA of 38k, transfer 50% of your current investment within your account to a low-fee total stock index fund, and also 40% to a total bond index fund and 10% in a cash money market mutual fund. These funds should have annual fees of less than 0.10% vs. 2.00%. That’s a big difference compared to what you are paying now. Your best bet is to stick with your employer’s matching retirement plan and more if you can to take advantage of all that free money!
Delia, here is one from Brian
Brian: Good thinking. That's why developing a financial plan for your specific needs and circumstances is so important. You want to customize it to you, not just follow a general rule of thumb.
But on the other hand...a secret about real-world retirement planning is that often retired people spend more than working people; they want to go out and have fun with all their leisure time. Planners often say that especially young retirees may spend 120%-130% of what they spend when they're working. Again, customizing is important.
And there are also the additional costs that come with retirement, such as increased medical insurance and out-of-pocket costs, and perhaps long term care. Then some retirees also want to help out family members, which can cut into assets.
So the best thing to do is to have a plan customized to your situation. Naturally, I recommend a CFP to help, even if it's just to give you a second opinion on the plan you've already outlined.
Delia and Phil, perhaps you can both weigh in on this question from John.