I am a natural born worrier -- I remember being unable to sleep at night because I worried about vampires at the age of 9 or so. In fact, according to everyone who watched me grow up, and everyone who knows me today, I am a serial worrier. I am the mom who hears sirens and calls the kids on the phone to make sure they are okay (even when I know they are someplace safe). I am the one who is constantly fretting over something that needs to be done or is bothering me. My husband says to just let it go, but, it just isn't that simple.
So it is no wonder that I worry about our retirement savings: I check the individual stocks we own in an IRA a bit obsessively; in fact, so much so that we may stop investing in individual stocks and just go with funds -- but then I will probably worry about whether or not we have picked the right funds. In fact, when it came to retirement, I worried so much about what to do that it took me four years to sign up for my retirement account at work: a waste of lots of good stock market returns.
But now, for those of you who may be procrastinating because you cannot make a decision about what to do, Congress has created some new rules that may be helpful. These rules allow employers to make retirement savings automatic. If your company offers retirement plans and adopts the new rules, the company will automatically deduct a certain percent of your pay for your plan. And, if you do not deal with it yourself, the company will also decide where to put that money. This has consequences so, if you have been putting off retirement to the future, get on it now.
First, talk to your employer about retirement offerings. One thing that held me up from investing in my newest job's retirement savings was the paralysis over filling out the forms and setting up the account: I could not make a decision. Basically, my employer gives us a list of places where we can set up an account and has us just do it. Once we have the account in place, we then need to fill out forms to make the payroll deductions into the account. It definitely is not the most efficient way to handle the retirement planning because so many people know so little about retirement savings vehicles that it is difficult to make a choice.
Fortunately, I already had some savings from a former job in a retirement plan at Vanguard. This summer, when I finally figured out it was time to take control over our money (about 20 years late by my calculations), I bit the bullet and got the ball rolling and I am happy to report that I am saving about 6% of my gross pay. I get a raise every year and will be adding to that amount by a portion of my raise until I eventually max out my retirement savings.
Luckily, I had some savings and my husband has been contributing to his 401(k) so we are not so far behind in our retirement planning as we could be. However, I did waste four years of potential growth in my new plan and, because I never dealt with it, I had about 10% of my Vanguard account in a money market account: STUPID. Once I dealt with it all, I actually have seen some amazing returns this year. SMART.
I did a lot of research to figure out where to put all of our retirement money. We had it all of the place, so we consolidated it all to Vanguard because they offer a lot of what we are looking for in an account -- this is a big process though that has taken us months and is still not fully complete.
However, you no longer need to wait to start your retirement account. You just can do it by picking one of the larger fund families and keeping two simple strategies in mind: first, if you are young, just pick a fund that has growth possibilities. The only rules: Pick a no-load fund and go for low expense ratios (under 1%). You can start with two types of funds that are currently offered until you have the time or the inclination to pursue greater strategies: an index fund or a retirement target date fund.
The retirement target date funds offer an excellent option for people who do not want to choose now or ever: they offer a balanced allocation based on your estimated target date, and, later on, if you become more involved and decide to diversify further, you can do so. But they are a great starting point.
Again, however, you need to be a bit proactive by talking to your employer. Even if the company has automatic investing rules, if you do not choose an account, your company chooses one for you. Some are picking the retirement target date funds; if your company is, no problem, move on until you feel like you want to deal with it further. But other employers are putting retirement money into money market accounts. Because stocks are a better long-term value, you should choose at least an index fund if a retirement target fund is not available. (Although a money market is better than nothing, you really do want to put your money into at least an index fund -- it will not be hard to do, I promise -- no load and low expenses, that's it.).
An article in the February 2007 Kiplinger's had a very interesting point about retirement savings: when it is not automatic and employees actually have to do something to sign up for a plan, they are far less likely to do so. However, when they have to do something to get out of a plan, they are equally unlikely to do so. Thus, these automatic enrollment plans will help people to save: and if you save from the beginning of your employment, you won't really miss the money.
Retirement plans have so many advantages that they are simply a no-brainer regardless of your age. In fact, the younger you are, the less you need to save per year to become a millionaire by retirement. According to the Kiplinger's article, a 25 year old who has not saved any money can save $286.00 per month to age 65 and become a millionaire at that time. If the person were to increase that by a fraction every year, they could come out well ahead of that amount by age 65 -- and most of us think that we have no chance to become a millionaire.
It does get harder the older you are when you begin savings. If you have no savings at 35 and want a million by 65, the monthly contribution must be $671.00, at 45, it is $1,698.00 and at 55, it is $5466.00. If you already have savings, those amounts go down considerably. So, starting early and keeping going is the best thing regardless of where you put the money (so long as you are relatively safe and do not keep losing money on the money saved).
Although many people may feel that they just cannot afford retirement contributions along with all their other expenses, just think about the idea of retirement with no money: if you are counting on social security, think twice, you may not get as much as you hoped. If you have a pension, that is great (so long as you do not work for a company that can take the pension plan away as many companies, such as IBM, have recently done). Thus, you cannot afford NOT to save.
Moreover, there is a huge tax incentive to save for retirement. The amount you put into a qualified plan (not a Roth 401(k) although that has other advantages) is taken off of your gross adjusted income. Thus, if you are in a 28% tax bracket, and you invest $5,000 per year, you will save $1400.00 in taxes. So you are really only putting aside $3600.00 out of your pocket for the chance to save $5000.00 -- where else can you get a 28% return on your money? That is why if you increase it every year by a small percentage, you barely notice it. Thus, assuming again a $100.00 increase per month next year so that you are saving $6200.00 per year, instead of $5,000.00 as you might be this year, you will see a reduction in a weekly paycheck of $18.00, $36.00 for a twice a month paycheck and $72.00 for a monthly paycheck -- yet you are saving an additional $100.00 per month toward retirement.
If someone said to you, "hey, if you give me $72.00, I will give you $100.00," wouldn't you do it? This is exactly the same thing. And for some of you lucky folks, your employers might match a portion of your savings: that $72.00 out of your pocket might really be $172.00 that you get -- that's an amazing rate of return of about 238%. I'd love to make that on all my investments.
If you increase your amount by half of your raise yearly, you will still see about three quarters of the raise anyway -- so, you might as well do it when you get a raise, then you really won't miss the money.
As if all of this is not incentive enough to save money for retirement, I have one other thought for you: picture yourself a millionaire and never having to go to work again (although I am well aware that a million dollars may not allow you to stop working by the time you are 65). It sounds like a pitch for one of those get-rich quick schemes, doesn't it? But this is legitimate: it is getting rich slowly. As Nike says, JUST DO IT!