Day 11: Open Long-Term/Retirement Accounts

by Jason Unger

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Today’s post may be one of the most important chapters in the entire book. It’s a perfect example of the mentality that, if you just get it done, you will be set for the future.

We all love a little bit of procrastination, but given that saving for retirement is all about maximizing your time, you just need to get it done. No excuses. Just make it happen.

This is definitely easier said than done for younger folks, but you definitely know someone who isn’t prepared for retirement. If they were in your position, they’d do things differently. Be smart and get started now.

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Retirement.

Depending on where you are in life, it’s either the furthest thing from your mind or your biggest up-and-coming worry.

Wherever you are, saving for retirement needs to be a priority. You may already be started with a 401(k) at work, or have a rolled-over IRA from a previous job. You may have nothing at all, and that’s okay, too.

We won’t get too deep into retirement planning, but you likely want to spend less time worrying about saving for retirement and more time enjoying life.

5 Principles of Smart Retirement Savings

  • Start early – The earlier you start saving for retirement, the more time you have to grow your money, ride out the bumps in the market and establish a mindset for long-term saving.
  • Take free money – If your company matches a percentage of your 401(k) contributions, make sure you are saving at least up to that level.
  • Don’t time the market – Trying to find the best time to invest in the stock market is a loser’s game. Professional money managers can’t beat it consistently, and neither can you. Live with it.
  • Ride the waves – When you’re investing for the long-term, your retirement funds will go up and down with the market. Don’t lose sleep over seeing your account shrink, and don’t get excited when it balloons.
  • Own the market – Stock picking is not a long-term investment strategy. The best investments for your retirement account are low-cost mutual funds that track a particular financial index, like the S&P 500. These are called index funds.

How to Get Started Saving for Retirement

If your employer offers a retirement program, like a 401(k) or 403(b), with matching savings, this is the first place you should go.

Most retirement planners suggest you save at least 10% of your income. You should at least be saving enough to get the company’s matching contribution.

Since 401(k) and 403(b) contributions happen pre-tax, your paycheck will drop less than the percentage you’ve set aside. So it’ll actually cost you less to set aside the money that you’re saving.

Using the money you still have from your flux account, it’s time to set up a Roth IRA. This retirement account has tax-free withdrawals at the age of 59½ with a number of benefits.

But first, the rules:

  • In order to be eligible, your modified adjusted gross income needs to be less than $107,000 for single filers and $169,000 for joint filers
  • You can contribute a maximum of $5,000 after-tax dollars ($6,000 if you are 50 or above)
  • Contributions are not tax-deductible

For a broader look at the history and advantages/disadvantages of the Roth IRA, check out the Wikipedia entry.

Why Index Funds are Your Best Retirement Option

When it comes to picking your investments for your retirement accounts, you may or may not have a choice. Most likely, your company’s retirement plan limits – or heavily suggests – what you should invest in. But for your Roth IRA, you have the freedom to determine where your money is going.

If you’re looking to spend less time managing your retirement accounts and still come out near the top with your long-term investments, look to index funds.

Index funds are the investments that professional retirement planners don’t want you to invest in. They’re not actively managed by a fund manager, they can never beat the stock market, and they rarely change their holdings.

Guess what? Those are all great things.

Because index funds are consistent in their investments, they have low turnover (buying and selling) fees. Thanks to fewer transactions, they don’t need a money manager who takes a cut of their earnings (win or lose). And despite the fact that they will never beat the stock market, they will outperform almost every other mutual fund over time.

Where Should I Open a Roth IRA?

While many financial institutions offer Roth IRAs, it’s my experience that the best one to use is Vanguard.

Vanguard founder John Bogle created the first index fund in 1976 and is undoubtedly the leading name in passive, low-cost index investing. Using his philosophy, Vanguard offers a large selection of index funds, including that first index fund – the Vanguard 500 Index, now one of the world’s largest mutual funds.

Head over to Vanguard’s Web site at www.vanguard.com and sign up for access. You’ll need to have some personal information handy to fill out.

Follow Vanguard’s prompts for getting started. Once you get your account set up, come back and we’ll continue.

TIP:  Because understanding your retirement goes well beyond what we’ve covered here, a must-read is “The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindauer and Michael LeBoeuf. The book – written by followers of John Bogle’s investing philosophy – breaks down everything you need to know about investing for retirement. It’s a great read for everyone, no matter where you are in your savings journey.

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