In our last post we talked about the importance of saving enough in your employer sponsored retirement plan and cautioned that even if you were contributing your full match, it might not be enough. The vast majority of us will need additional savings and a good place to accumulate that is in a Roth IRA. A Roth IRA is an excellent savings vehicle because, unlike the traditional IRA, the money in a Roth grows tax free and the withdrawals are not taxed either. This makes it preferable to the traditional IRA for retirement savings, but there are other advantages to a Roth IRA as well. Here are four reasons you should save money in a Roth IRA: The Roth IRA gives much more freedom of choice. In an effort to keep the plan simple, many 401(k) and 403(b) plans do not include investment choices that would help diversify your portfolio, nor do they offer the most cost-effective investments available. Most employer plans limit you to investing in only a handful of mutual funds. While mutual funds are good investment vehicles, ETFs (Exchange Traded Funds) have emerged as a favorable alternative to mutual funds because of their lower cost and flexibility. In a portfolio that is large enough to accommodate them, individual stock holdings are also a good choice for low expense and diversification. The money in a Roth IRA that is not inherited is not subject to a Required Minimum Distribution (RMD). Roth IRAs are funded with after-tax money and the withdrawals from a Roth are not taxed on the way out. Because of this, the IRS has no need to force withdrawals from a Roth because there are no taxes to collect. Not being subject to an RMD makes the Roth IRA a more flexible option for retirement income. You can also continue to contribute to your Roth after the RMD mandatory age of 70½ if you are still… | Read More »
Month: August 2017
There’s no free lunch (except in retirement plans)
We’ve all heard the saying, “There ain’t no such thing as a free lunch.” It’s used to remind us that there is a cost to everything even, or especially, if it is hidden from view. The phrase actually comes from the once-common practice of saloon owners advertising a “free lunch” for patrons who would purchase a drink at their establishment. Of course, the fare offered at these banquets was heavily salted to induce patrons to imbibe more of the money-making beverages. Social critics at the time were keen to point out the hidden costs of this “free lunch.” The average price of drinks where a free lunch was offered were higher than at other establishments. Less obvious, but just as consequential, were the societal costs associated with higher rates of alcohol consumption. And so, as an admonition against thinking that you can get something for nothing, the phrase, “there ain’t no such thing as a free lunch” entered the American lexicon. The phrase achieved its current popularity when the free-market economist, Milton Friedman, used it as the title of a book in 1975. For sure, nothing comes for free. But when we’re talking about saving for retirement there is something that comes as close to a “free lunch” as you can get, and that is the employer match in your 401(k), 403b or other employer sponsored retirement account. As employers have moved away from providing a life-long pension to retired employees, they have stepped up with a commitment to help their employees contribute to their own retirement accounts and the “Employer Match” was born. The Federal government supports employers by making the “match” tax deductible. As of 2016, 66 percent of workers had access to an employer sponsored retirement plan, yet only 49 percent of workers participate in the plans available to them. And worse, of those taking advantage of the employer match about one in four is not getting… | Read More »
The changing world of rotary phones and retirement
Time was when a pension and Social Security would provide most people all they needed for a secure retirement. But, back then, people were content with working the same job all their lives, watching just three TV stations, and using a rotary phone with no texting or video. People now have an infinite number of choices for career opportunities, entertainment and social engagement. Furthermore, today’s technology is powerful enough to meet our needs almost instantaneously. These innovations have made our lives better in ways that are almost too numerous to count, but there’s a trade-off. We didn’t have as many choices in the age before cell phones and the internet, but most of us could rely on a pension that was provided for us, risk free, by a company that assumed all of the responsibility for our retirement. So, the trade-off has been that we now have more individual freedom in the form of greater choices, but we have less security in that employers no longer take on the responsibility for providing us with a secure retirement. Under the pension system, workers didn’t have a choice about how their retirement would be funded. The company took care of everything. Those days are gone. Providing for a secure retirement is now another of the many “choices” we are free to make on a daily basis. It’s up to us and, apparently, left to our own smart devices, we are not faring well. Only a third of working Americans are saving money in an employer-sponsored or tax-deferred retirement account, according to U.S. Census Bureau’s recent figures. And, according to the Economic Policy Institute, the average retirement savings of all families in America is just $95,776. Even those frightening numbers don’t tell the whole story because many of the surveyed families reported zero savings, with ultra-wealthy families pulling up the average. A more accurate gauge may be the median savings rate, or those at… | Read More »