Monday, February 16, 2009

Roth's and Retirement

In the comments section, Shopgirl Chicago asked a great question:

"...We have opened up a roth IRA what else should we be doing? (besides depending on our pension??)"

Retirement is a very important question for everybody, no one wants to end up on public assistance or as a burden to friends and family. Every retirement plan has it's positives and negatives, and how long until you retire, what kind of lifestyle you want to live when you retire, and what you're willing to live on now are all factors that play a part. Shopgirl: you already have a pension (as do most of you, social security...which may or may not be around in the future is a pension) which will pay you a certain percentage of your salary based on years of service and income. It's a great idea to start something else as well and a popular choice is a Roth IRA.

First of all, some notes about IRA's. There are a few types of IRA's out there but the two most popular are Roth and traditional. The main differences are tax liability and dispursement rules. Unlike a traditional IRA, Roth IRA contributions are not tax deductible, but the withdrawals are making them a tremendous option to grow your money in a tax free environment (one of the great enemies of retirement are taxes). There are income limits to contributing to a Roth, if you are married and filing jointly your not able to contribute to a Roth if your income is above $169,000 (you can only partially contribute if your income is between $159,000 and $169,000). If you are under the age of 50 (by the way, the magic number to take your money out without penalty is 59.5) you can contribute $5000 a year per person, if you are over 50 you can contribute $6000 a year. If you're married, you can each contribute this amount. Anyone can open and contribute to a traditional IRA (as opposed to the Roth which has the income limits) but you only realize certain tax benefits from a traditional IRA if you are below a certain income level. Another nice benefit of an IRA is that you can take money out to pay for education expenses for you, your spouse, or dependants. This makes them a better option, in my opinion, than the state sponsored education accounts that MUST be used for education or else they incur large penalties.

Other people might be eligible for a 401k (or similar product such as a 403b). Before doing anything else, I would at least be contributing the minimum amount that your company will match. Companies will usually pay a certain percentage out of their own pockets. For instance, if you contribute 25 cents, they will contribute 75 cents so every dollar in your account is 3/4 covered by a business. This benefit is starting to disappear in the current tough economic situation but many companies still offer some sort of match.

If you are paying in to your pension, AND fully contributing to an individual retirement account you are way ahead of 95% of the people out there. If you still have extra money to invest, it might be time to do something more unconventional. Investing in real estate, commodities such as gold or silver, individual stocks, mutual funds or a new product called a ETF might be worth exploring. One thing that's important to remember is that outside of some of the government-recognized retirement funds there aren't a lot of tax advantages out there and you will be paying taxes on the gains you manage to generate during the year.

The simple fact is that most people aren't able to live, pay payroll taxes, pay in to a retirement account at work, fully fund an IRA account, AND still have plenty of extra money to throw around at other investments. It's important to live a life as well and do things you enjoy doing. Just as an example, if I had an extra:

$1,000 to invest right now - I'd take a road trip to somewhere interesting

$10,000 to invest right now - I'd buy individual stocks in a strong company that is currently trading at a historically low level, something like General Electric

$50,000 to invest right now - I'd pay off my car loan and do some remodeling to my house (with interest rates at a very low level, it's not a bad idea to do this now anyway as money is fairly cheap.)

$100,000 to invest right now - This is tough because you're starting to get in to numbers that are life changing for people, but I'd probably go in to several mutual funds both in emerging markets and something that will take advantage of the current economic situation like precious metals or foreign currency.

$1,000,000 to invest right now - I'd take a bunch of friends and family on a great trip to Maui and endow a scholarship at a college.

It's important to balance saving for retirement with living a life that is fulfilling to you.

Excellent question Shopgirl. What ways are other people saving for retirement?


Shop Girl said...

Here is some interesting info... cps teachers don't pay into Social Security! (which I think is a good thing - I would rather invest in my own retirement) I submitted this question to Suzi Orman on the Oprah show and this was how I was given tickets to the show. I raised my hand during the show to ask this question and Oprah said I was next... and then a stupid girl started comparing money to food and used up my time and I didn't get to ask my quesiton :(

George and I have also bought stocks (GE to be exact) What about educational funds? Are they a 529??

Rob said...

I don't think any public school teachers in illinois pay in to social security. Can you opt out of the fund entirely and invest the money completely on your own or do you have to be in the state retirement system? The university retirement system in Illinois allows you to not pay in to social security or the state pension and completely control your own money, that's the preferred method.
GE is a great company to own, one of the best run companies in the world and they pay a dividend which is a nice bonus. It's also very cheap right now from a market cap's at about a 50year low. Can I ask what market price you paid?
Not sure what you mean by an educational fund? I'm of the opinion that 529 funds are a waste of time because of all the rules associated with them, there are much better places to save your money.

Cecil said...

What's that smell? Is it the blog getting a bit stale? We need some more updates.