Hi wreckon95, excellent work contributing to the 401k in these tough times and picking up that company match. What will really boost your balance over the long haul is the tax-deferred growth that you get inside the 401k. Sticking with index funds is a great idea, because they tend to have lower fees. Keeping fees to a minimum is one of the few sure-fire ways to boost your returns.
Thanks, Eleanor. Some great tips.
I agree. Sounds like you're doing everything right. What gets people into trouble is when they start looking for higher returns. Higher returns often comes with higher risks. With four kids, you want to steer clear of risk.
I would also suggest setting up a Roth IRA ... that will give you a stream of tax-free income in retirement. And you can take out your contributions tax- and penalty-free if you get into a financial pinch before then.
wreckon95, you might also want to watch for the new 401k fee disclosure, which you should receive by the end of this month. This will give you a better look at the investment-related and plan-related fees in your 401k and help you choose the lowest-cost options.
Good point, Susan. Everyone has a different tolerance for risk, and that will change depending on your stage in life.
See if your company has a Roth 401(k). Remember, though, in exchange for the tax-free money down the road, you will have to make contributions with after-tax money.
And here's a follow-up from Cindy
Sounds great, Cindy. It's always nice to have a guaranteed income stream. That way you can let your investments grow for the longer term.
A great question from Mars435 about long-term care.
Mars435, there are several things you can do. I would wait until you're in your 50s--just a couple of years--to purchase a policy. Then, depending on what's available, I would pursue a "hedge your bets" strategy. Find out the cost of nursing home care in your area and buy a policy that covers just part of it. Also, because the average stay is about three years, purchase a plan with three or so years of coverage--five or more may not be necessary. Make sure you get inflation protection, but you don't need the gold standard of 5%. 3% will do. Also, look into a "shared care" policy where you and your wife can share perhaps six years of coverage. If you need five and she needs one year of coverage, you're covered.
Thanks, Susan. Certainly some great tips there.
Mars435, another thing to consider is a policy that combines long-term care with insurance or with an annuity. These are called hybrid plans. It pays out no matter what. For instance, if you never need care, it pays an insurance death benefit to your heirs (if you pay the insurance hybrid) or a stream of income (if you buy the annuity). Or if you need care, it pays for that.
Alright, looks like we have time for one or two more questions.
Our next question comes from Sara.
It can make a big difference tax-wise on which accounts you pull from and when. For instance, the conventional wisdom has been to wait to pull from a tax-deferred IRA until you absolutely have to. But if you have a sizable IRA, you could end up with very large required minimum distributions. Someone in this situation may want to start tapping his IRA earlier in retirement to minimize future tax bills.
Having the option to pull from a tax-free Roth in retirement may help you keep a lid on other taxable income streams, such as Social Security benefits, capital gains and IRA distributions.
Susan, we have a follow-up from Wreckon about the hybrid plans.
If you withdraw from a traditional IRA, you will pay taxes on the withdrawal. If you withdraw from a Roth, you won't owe taxes, but you will not get a deduction when you make the contribution. To follow on Rachel's comment, that's because withdrawals from a Roth won't add to your taxable income. Also, you never have to take required distributions from a Roth.
Several things to consider. Thanks, Rachel and Susan.
It depends on the coverage you're buying. The best bet is to look around at several of the bigger players out there and compare prices. Figure out whether you want insurance or an annuity. Then figure out how big a death benefit or annuity payout you want. I can get very complicated. Pay close attention to fees.
Alright, looks like it's time to wrap up today's chat.
Thanks to all of you who joined us today, and a special thanks to Susan, Rachel and Eleanor for sharing your time and expertise!
Thanks, Eleanor. That's a great article to point out.