The Average American’s Saving Rate

According to the Bureau of Economic Analysis, the average American was only saving 1% of their disposable personal income as recently as the first quarter of last year. That number has jumped to 5% in the 2nd quarter of 2009, the highest percentage in the last decade.

At the same time, according to the US Census Bureau, the average retirement age in America is 62 and average life expectancy is 77, meaning that 20% of the average American’s lifespan would need to be financially covered between personal savings and Social Security. Yikes!

Long-Term Sustainability for the Country

For long-term sustainable economic growth, that’s simply not good enough. The White House realizes that if Americans are saving only between 1 and 5% of their income per year for retirement, then just about everyone is going to need to live almost entirely off of social security. Not only is that unsustainable, it is downright frightening to think of what that might mean for the nation’s financial health.

In his weekly address, President Obama explains, “We cannot continue on this course. And we certainly cannot go back to an economy based on inflated profits and maxed-out credit cards; the cycles of speculative booms and painful busts; a system that put the interests of the short-term ahead of the needs of long-term. We have to revive this economy and rebuild it stronger than before. And making sure that folks have the opportunity and incentive to save – for a home or college, for retirement or a rainy day – is essential to that effort.”

Federal Changes to Retirement Plans

According to White House analysts, half of America’s workforce doesn’t have access to a retirement plan at work. Additionally, fewer than 10 percent of those without workplace retirement plans have one of their own. The federal changes will take effect to address these issues. Some of the biggest changes that could impact you are:

1. Auto enrollment in retirement plans: It will now be easier for smaller and medium-sized employers to automatically enroll workers into retirement plans due to an elimination of paper-work hurdles for employers to offer that option. Employees could still choose to opt out of the retirement plans if they choose to.

2. Saving tax refunds: To make it easier for those owed tax refunds to save, the IRS will allow tax filers in 2010 to recoup their refund by issuing US savings bonds. Last year, over 100 million US households received check refunds. And we all know what happens to most of those.

3. Sick and vacation days can become 401k contributions: It will now be easier for employers to convert (or allow workers to convert) unused vacation and sick leave pay into 401k contributions. Historically, this money is almost always converted into cash.

4. Automatic Percentage Increases: Many 401k administrators already have this, but now employers can boost contribution amounts automatically unless employees opt to have them not to.

Even if you’re not impacted by the government’s plan, there are still a lot of things you can do yourself to make sure you are in good shape for retirement. Start by asking yourself two questions:

What percent of your income are you presently savings towards retirement?

What percent do you need to save in order to retire when you want to?

Then follow this four step action plan to ensure you’re doing everything you can.

1. Boost your Savings. If you’re presently saving 10% of your income, boost it to 12%. If 20%, boost it to 25%.

2. Start a Roth or Traditional IRA. You can contribute up to $5,000 in 2009 ($6,000 if you’re 50 and above).

3. Take advantage of 100% of your company’s 401k match. You can’t beat free money.

4. Run the numbers. The Social Security Administration, Bloomberg, and AARP all have free retirement calculators to help you determine how much you need to be saving.

For more of GE Miller’s writing, visit personal finance blog 20somethingfinance.com.

(NathanFromDeVryEET)

Tax season is almost over but there’s still time to maximize the tax benefits of your 401k(s) and IRA(s). Before you can begin reaping the potential benefits however, you’ll need to ask yourself a few questions relating to your current station in life and where you’d like to be come retirement age.

1. Do you plan on working to the age when you can withdraw retirement funds penalty free or retire early?
2. Do you need the benefit of tax deductions right now due to a tough financial situation?
3. Are you in a higher tax bracket right now than you think you will be in retirement?
4. Do you think your lifestyle will be less or more expensive in retirement?

Without an answer to these tough questions, it is very challenging to know whether to invest your retirement savings through the traditional or Roth options available to you. And what about an SEP IRA? When can that come into play?

When it comes to choosing the retirement account that makes the most sense for you, there are some general tips you can follow. Your answers to the previous four questions will only enhance your ability to get the most out of these tips.

1. Get Free Money First
Before considering an IRA, you should first make sure that you are getting the maximum benefit out of your employer’s 401k plan. What this means is that before contributing funds to any IRA, you should get the maximum match from your employer in your 401k. If you’re not sure what that amount is, you have some homework to do. Once this maximum match has been achieved, you can move over to IRA’s.

2. Know Your Limits
They can change annually so it’s worth checking. For 2009, the IRS maximum allowed contribution per individual for 401k’s is $16,500, with an additional catch-up contribution for those 50 and older. For both IRA’s, it is $5,000 (combined per individual), with a catch-up contribution of an additional $1,000. In 2010 and beyond, limits are indexed to inflation.

3. Understand What a Tax Deduction is
Every dollar you contribute to a traditional 401K or IRA is a dollar taken off the top of your taxable income for the present year. For instance, if I earned $40,000 this year and maxed my traditional IRA and 401k contributions, my taxable income would be $18,500 versus $40,000 ($40,000-$16,500-$5,000 =$18,500). If I’m in the 15% tax bracket, this would shave $3,225 off of my $6,000 tax obligation for the year.

4. Understand the Term ‘After-Tax’
Both the Roth 401k and IRA options are ‘after-tax’. This means that your contributions are after taxes have already been subtracted. You are getting taxed today, for the benefit of not being taxed when you start getting distributions later on. With the traditional options, you are getting the benefit of not being taxed today, but you will be taxed on your distributions later on.

5. Understand the Trade-offs
If you plan on retiring early, opting for the traditional options versus the Roth can allow you to save your tax cuts towards this goal, if you are disciplined enough to do so. But there is always a catch, right? You will have less money in retirement because you are taxed on your distributions through the traditional.

6. Know Yourself
If you plan on traveling the world and living lavishly in retirement, it makes sense to take the tax hit now with the Roth options so that you have more money in retirement. If you plan on living humbly in retirement (after all, any mortgages should be paid off by then), then you may want to take the tax hit down the road.

7. Understand Your Current Situation
If you are making a fair wage but are drowning in debt and will be in the red for the year, then it would rarely make sense to opt for the Roth options when you could be getting the tax benefits of the traditional options today, which could be a life saver for you.

The Third Option

We’ve discussed Roth and traditional options fairly extensively, but have not yet discussed the SEP IRA. The circumstances allowing you to contribute to an SEP IRA differ from the traditional and Roth IRA options. You may open an SEP IRA if you have self-employment income from freelance or other work. Other than contribution limits, SEP’s pretty much operate in the same way as traditional IRA’s.

As we discussed in the previous IRA article, SEP’s are a highly desired option for the self-employed who have already maxed out on their traditional and Roth contributions, yet still want additional tax deduction benefits. The maximum dollar allocation is $49,000 in 2009.

For more of GE Miller’s writing, visit 20somethingfinance.

To learn more about contributing to an IRA, visit Mint’s IRA Advisor.

(source: cowbite)

Choosing where to put your personal retirement savings can be a difficult choice. What do Roth and SEP even mean? Hopefully, the summary and comparative visual chart that follows will help to take the stress out of choosing where your retirement funds should be located and reaffirm the decision for those who have already made the choice.

The Traditional IRA

A traditional individual retirement account (IRA), is a retirement investment account that allows you to save up to an IRS set level each year towards your retirement ($5,000 is the maximum in 2009). Any contributions you make to a traditional IRA can be deducted from your taxes, however, you must pay taxes on your distributions when you withdraw money (contrary to a Roth IRA). Distributions can be made without penalty at age 59 and 1/2. Traditional IRA’s differ from Roth IRA’s, which allow you to get distributions tax free in exchange for contributing post-tax funds.

One very nice aspect of traditional IRA’s is that you can contribute for the previous tax year up until the tax filing deadline of the present year (i.e. you can contribute and get a tax deduction for 2008 up until the April, 2009 tax deadline for 2008’s taxes). You cannot do this with a Roth IRA.

The Roth IRA

A Roth IRA is a retirement investment account that allows you to save up to an IRS set level each year towards your retirement. The ‘Roth’ in ‘Roth IRA’ simply comes from its legislative sponsor, William Roth, and has no definitive quality. Any contributions you make to a Roth IRA are after tax, however, you do not have to pay tax on your distributions when you withdraw money in retirement. Distributions can be made without tax and penalty at age 59 and 1/2. Any contributions to a Roth IRA may be withdrawn tax free. It’s money that you’ve already paid taxes on, after all.

Roth IRA’s differ from traditional IRA’s, which allow you to deduct taxes when you contribute funds in exchange for having to pay tax on distributions down the road. It’s also worth noting that you can contribute to both a traditional and Roth within the same calendar year, but the $5,000 max is combined. In other words, you can’t be sneaky and contribute $5,000 in each for a total of $10,000.

The SEP IRA

An SEP (Simplified Employee Pension) IRA is a type of retirement account that an employer or someone who is self-employed can establish. SEP IRA’s have the same contribution limits as Keogh plans and contributions are tax deductible. You may open an SEP IRA if you have self-employment income from freelance or other work. Other than contribution limits, SEP’s pretty much operate in the same way as traditional IRA’s.

The maximum amount that you can contribute to an SEP IRA is capped at 25% of an employee’s compensation. The maximum dollar allocation is $49,000 in 2009, with the maximum considered compensation being $245,000. Because of this, it is a highly desired option for the self-employed who have already maxed out on their traditional and Roth contributions, yet still want additional tax deduction benefits.

A Comparison Between the traditional, Roth, and SEP IRA’s

Conclusion

There’s still time to benefit from contributing to an IRA before the end of tax season. If you contribute within the next 19 days you may qualify for a tax deduction of up to $1500. Mint’s IRA Advisor can walk you through the questions you need to ask yourself in order to know if you qualify and help you determine which IRA is right for you.

For more of GE Miller’s writing, visit 20somethingfinance.

Whether you’ve just been laid off or have finally decided to follow your bliss, there’s no question that you need to start thinking differently about your finances. When you had a job, your checks were deposited automatically in your bank account, your taxes were taken out each pay period, your health insurance was paid for, and your employer matched your automatic contributions to your 401k. In part one we took a look at the most important and potentially confusing change, your change in tax status. But freelancers also need to handle the cost of their healthcare, plan a bit more carefully for retirement, and may even need to be concerned about whether they will be paid for their services at all.

Health Insurance

This is perhaps the scariest part of deciding to go freelance. Health care is expensive and individuals looking for health insurance don’t get the same kind of group rates that employers can offer. Many freelancers, especially when starting out, forgo health insurance entirely because of the cost. But don’t make this mistake. One motorcycle accident that puts you in the hospital could be the end of your brilliant career. And there are alternatives that can save you money on this most essential of expenses.

Full-time freelancers paying out-of-pocket for health insurance can deduct the premiums on the first page of Form 1040, says Mark Luscombe JD, CPA Principal Tax Analyst for CCH. He goes on to say that, “If the health insurance is provided through an employer, any portion of the expense that the employee is required to pay can only be deducted as a medical expense on Schedule A of Form 1040, and then only if the taxpayer itemizes deductions and the total medical expenses of the employee, including health insurance premiums paid, exceed 7.5 percent of adjusted gross income.”

Finding appropriate medical coverage might not be easy, but by researching your options thoroughly, you might be able to find good coverage with lower rates. Look into large professional organizations, more often than not, if the organization is large, it will more likely offer lower rates. Check out the Freelancers Union and see what kind of coverage they provide and if it is adequate for you. You can also call insurance companies directly, thus avoiding the middleman such as membership organizations. This can help decrease your costs. Ask your doctor for information. Since they deal with insurance everyday, they might be able to give you advice or at least lead you to the right direction. Some big wholesale stores like Costco also provide insurance at a discount as well as big name department stores. The NASE, National Association for the Self-Employed also has information on insurance. Try contacting your state insurance department; you can obtain a list of insurance companies registered in your state through them.

Retirement

The type of retirement plan freelancers choose depend on how much the freelancer can afford to put aside for retirement and how much expense they want to incur to administer the plan, according to Luscombe. He goes on to say, “The plans range from SEP IRAs and SIMPLE IRA or 401(k) plans to Keogh plans, with the contribution limits going up and the administration expense going up with each type of plan. They would be available to both full-timers and part-timers.”

Pay Refusal

Just dealing with the sporadic nature of freelance work can be an adjustment for someone accustomed to receiving a regular paycheck. You’ll want to be sure to maintain a regular savings account and it is a good idea to have a larger savings stockpiled for those times when the work dries up. But there’s a darker side to getting paid that, sadly, afflicts many freelancers. In all too many cases, you may not get paid at all.

According to Barbara Mende, Grievance and Contract Division Coordinator for the National Writers Union, The Grievance and Contract Division (GCD) gets several emails each month asking for legal help in getting publishers and clients to pay up. As she puts it, “We always say no. We’re not lawyers. We don’t even play them on TV. But most members don’t need a lawyer. They need an advocate. Our grievance officers are thoroughly trained in helping writers deal with deadbeats. And our track record is excellent. We’ve won nearly $1.5 million for members since we started keeping records.” She goes on to say; “The GO helps the member craft a demand letter, threatening to file a grievance with the NWU if the publisher doesn’t do X by Y date. The demand letter works surprisingly often. If it doesn’t, the GO will follow up with an NWU demand letter, noting the clout that comes from being part of an organization affiliated with the labor movement, and threaten such non-legal actions as publicity. That works extremely often.” She says most often, you just need to keep persisting until you get paid.

No matter what type of freelancing you specialize in, to protect yourself before initiating a project, create a contract that is detailed and dated and that the client is required to sign before work is started. The contract should list the fee the client agrees to pay for your work, the job description and any other terms agreed upon between you and the client. One other way to increase your chances of getting paid is to have your clients pay in installments. After each phase of work, have your client pay for it before proceeding to the next phase. With certain kinds of consultancies, a “retainer” fee can allow you to receive a partial payment upfront, before you’ve even begun the work. It’s fair and expected since you will be committing time to that client during which you can’t accept other work.

If you’ve got the temperament to deal with the peaks and valleys of freelancing, it can be a wonderful way to make a living. Take care of these basic financial needs and there’s no reason you can’t be successful

If you’ve been carefully tucking money away in a 401k plan and dreaming of the day you can retire, you may be shocked to learn that money is being withdrawn from your accounts without your knowledge.

Beware of Hidden Fees

Before you call the police, you’ll need to understand how 401k plans work. A number of administrative fees are built into and deliberately buried within the plans. Twenty years ago, the cost of administrating a 401k was the responsibility of the employer. Today that burden has shifted to the employee. It’s up to you to do the detective work to ferret out the hidden fees so you’ll know exactly what you are paying for.

The Disclosed Fees

It’s relatively easy to find the first set of fees you are paying. If your plan invests in mutual funds, look at the expense ratio, which is found in the prospectus. These fees are commonly referred to as management fees. Participants are usually familiar with them, as they are routinely disclosed by plan administrators and employers.

Mint Tip: You can evaluate expense ratios for mutual funds using the FINRA Mutual Fund Expense Analyzer and tools from the SEC.

The Hidden Fees and How to Find Them

Administration fees are the fees that most participants don’t know about. They are in addition to the management fees, but much harder to find. Here’s where to look:

1.    Transaction History. Look at your transaction history for removal of partial shares. If you see a transaction that doesn’t look familiar, you can bet that the shares are being removed as part of an administration fee. Don’t be surprised to find that the plan is routinely removing enough shares to cover a standard fee on a regular basis.

2.    ERISA filing. If you can’t find any fees in the transaction history on your account statement, ask your human resources department. Most companies, depending on size, need to report the expenses of employee benefit plans to The Department of Labor in an annual Form 5500 filing. The filings are available to the public.

3.    Employer. Don’t expect your employer to give you the answers you are really looking for. Because employers and 401k providers negotiate packages, chances are they won’t tell you all the options they had to choose from and whether or not they picked the least expensive option. The reality is that you may never know how much of your retirement money is being eaten up by fees.

The $660,000 Example

The Street recently detailed an example that shows the long term impact from fees:
“A 25-year-old employee who currently has around $25,000 in his or her retirement account, and whose annual contributions (and employer matches) total only $2,500, in a plan that is allocated 80% to stocks and 20% to bonds, could forfeit more than $660,000 by age 65 — if the plan charges excess fees totaling just 1% a year.”

Saving More Can Penalize You

Personal finance experts will tell you that the most surefire way to make sure you’ll have money for retirement is to put as much as possible into an interest earning savings account within your 401k. Makes sense, but believe it or not, your employer could be penalizing you for being a good saver! Fees are often charged as a percentage of balance. Diligent savers pay much more than people with lower balances. Shouldn’t administrative fees be the same for everyone? After all, mailing costs and administration procedures wouldn’t change based on the size of your account. However, if you have a large balance because you’ve done a good job at saving, you’ll be taking a bigger hit.

What Other Options Do You Have?

Of course if the bill doesn’t pass, or until it actually does, you should be evaluating your options. Unfortunately, you’re pretty much tied to your 401k plan since your employer provides it as an employee benefit. However, here are some things you can do:

• Utilize an IRA to save some money. See the comparison between a traditional IRA versus a 401k to determine which retirement saving option is right for you (taking into consideration the 401K’s employer match).
• Use the 401k shaft detector. This money management spreadsheet helps you determine if your 401k is the best option for retirement savings. The spreadsheet was created almost 9 years ago, but the calculations still work as long as you enter the correct tax brackets.
• Determine if your employer adopted an amendment to permit in-service, non-hardship withdrawals. This amendment will allow you to roll over your 401k money to an IRA.
• If you switch jobs, compare the costs of moving your money to an IRA instead of leaving it with your old plan or rolling it into your next one.

Be sure to provide feedback to your benefits department about your 401k plan. Ask them questions and voice your concerns. After all, your 401k plan is part of your compensation package and you should take responsibility for it, just as you would for your salary and other negotiable benefits.

If you’ve been contributing to a 401k and socking away money for retirement, you probably think you have enough. But you’d better brace yourself for the shocking truth. Unless you’ve taken into account how old you were when you started on your retirement plan, you most likely don’t.

The bottom line is that most people don’t really know how much they’ll need for retirement and without knowing that how can you be sure you’re on the right track to get there? Consider that the average American works hard and plays hard, but reaches age 65 with a median 401k balance of $110,000. Is this enough?

That depends. You’re going to need a bigger nest egg than you probably think – 10/10/4 is a handy principle you should learn.

What is 10/10/4 and how can it help?

In short you need to save at least 10% of your income for retirement. You need to have a nest egg lump sum which is 10 times your annual earnings upon retirement. Finally, you should withdraw up to 4% of your next egg in retirement to avoid outliving your money.

Put simply, 10/10/4 is a strategy that takes into account which leg of the journey toward retirement you are on and provides appropriate recommendations along the way. It’s easy to remember and can be put into practice at any time.

Rule #1

If you are in your 20’s now is the best time to start contributing to your eventual retirement. The first “10″ in 10/10/4 refers to the idea of contributing 10% per year to your 401k or IRA.

At age 25, only saving 10% of your income per year into a 401k or IRA, is required to replace 70% of your pre-retirement income, and at age 20 it’s only 8%. Note this includes any company matching, so if your employer matches 2% for example, you would only need to save 8% per year. At age 20 or 25, time is on your side.

If you did start saving at age 20 or 25, go out and celebrate, you are on the right path already. You can enjoy 90% of your income today and save 10% for tomorrow – this will take some sacrifice, but it’s doable.

However, most of us did not do that early enough.

Missing this “window” is all too common. After many years go by, you will eventually wake up and look around, and see time is the real problem. The closer you get to retirement, the harder it gets to save for it.

For example, if you start saving for retirement at age 35, you would have to save 17% of your income to achieve the same goal, a daunting task. At age 45, the percentage of your income you would have to save is 31%, which, for most of us is essentially impossible.

All of these questions assume you start at a set age and continue to save at a set rate. But in reality, life is much more complicated.

For example, what if you start saving at age 25, then move to another job; stop saving for a few years and then start again? In other words, what if your savings are not linear?

There is no calculator we have ever found that will model this real world possibility of skipping years, or playing catch-up very fast without making the estimation process extremely cumbersome.

This is where the second “10″ comes in. This means that if you missed rule #1, and your life got complicated, then you must save enough to reach rule #2, which is often much harder than starting early.

Rule #2

Rule #2 says that, by the time you are 65, you will need 10x your income immediately prior to retirement to retire at the level you want. Therefore, say you plan a lifestyle of living in the south, on a beach, but with health care coverage, some travel and a few hobbies. You’ve calculated that will require $100,000 in yearly income.

Therefore, you will need 10x that income, or $1,000,000 at age 65. The second “10″ gives you the proper perspective.

Even if you get your target income down to $80,000 before taxes, you will still need $800,000 at age 65, significantly more than $110,000.

Rule #3

Okay, now you are ready for the third and final level of 10/10/4, so what is the “4″? The “4″ means 4% is all you can take out – especially in the early years of retirement and still have confidence that your money will last throughout retirement. If you plan to take out more in the early years, you could have a big problem in volatile market times such as those we are experiencing now.

The issue is the fluctuations in the stock and bond markets are a natural occurrence. Therefore if you retire at age 65, and have 60% in equity and 40% in bonds (a moderate investment allocation), you might still have 30 more years to live and no job because there are not a lot of jobs of jobs available for a 65 year old. Yes, the problem is that we live too long after age 65 – health care advances have been too successful.

The related problem is the wide range of normal volatility in these stock and bond markets and the fact that you may end up retiring in some very difficult times for returns, such as 2000, 2001, 2007, or 2008. If the markets are in decline right at the time you retire, it is going to be much more difficult than anticipated to make ends meet.

The experts look at all the probable outcomes and the models show that a 4% withdrawal rate in the early years is the maximum rate that will preserve capital with normal volatility, until you have been retired for 5-10 years. That means that if times are really rough in the first few years that you retire, and your target was $1,000,000, you might really have to live on 4%, or $40,000 per year until you get through the bad years. That is the realty for many people who have retired recently.

Think of 10/10/4 as 3 windows into your life plan. If you are fortunate enough to have succeeded in hitting the first “10″ (saving 10% of our income and you started in your 20’s) and the second “10″ (on track to hit 10 times your income goal at age 65), then to be sure of a secure retirement work on this third and final goal, “4″.

There are practical ways to live for a few years on 4% of your retirement balance if times are tough in the early years of your retirement. You may want to work part time if needed by obtaining a skill that does have a market at age 65. Perhaps you can turn a hobby such as photography or playing a musical instrument to your financial advantage? Or build an extra cushion in your balance for these contingent years if you retire and then experience some bad stock and bond market performance in your first few years.

10/10/4 is a tool you can use at any age and it will serve you well. If you are in your 20’s sign up for 10% in your 401k or IRA and think of the 90% you get to enjoy today. Live 90% today and 10% tomorrow. You will have to make a few sacrifices but you can do it.

If you are in your 30’s or 40’s you are starting to see the problem. If you do not see progress toward the 10x goal, usually because you started too late, or skipped some years, then you will have to save much more now to catch up.

That’s why it’s so important to make sure you aren’t leaving money on the table. If you’re in your first job, make sure you are enrolled in your employer’s 401k plan. If you’ve just changed jobs, don’t leave money sitting in your previous employer’s 401k account. Instead, move it into an IRA rollover account where you have more control over fees and more investment choices.

Start today because your future depends on it.

You were miserable in your old job and you’re excited to be starting a new one that’s much more to your liking. Say good riddance to an overbearing boss, long hours, low pay and high stress. But there’s one thing you shouldn’t leave behind.

If your money is still sitting in your previous employer’s 401k account, it’s time to move it into an account where you can control the fees and investment choices instead of letting your old employer make those decisions. This move is commonly referred to as a “401k rollover,” and depending on how quickly you act, it can have a significant impact on how much you’ll have at retirement.

Why Roll Over?

Rolling over your previous employer’s 401k account into a single IRA is the only way to make sure that your 401k accounts follow proven investing strategies such as asset allocation and diversification, as well as paying the lowest fees you can and being able to invest in the best performing securities. And with an IRA rollover, you preserve all of the existing tax advantages of your 401k. Here are some of the advantages to rolling over:

1. More and Better Investment Options

In an IRA, you can select your own investments. You won’t be limited to the funds and managers selected by your employer. Consider that the average 401k employer plan contains just 13 investment choices making it difficult, if not impossible, to achieve a diversified portfolio whereas an IRA can give you access to thousands of investments, including stocks, bonds, CDs, and mutual funds.

2. Lower Fees

Under a 401k, the average annual administration fee charged to your account is 0.50 percent. These fees represent money that is being wasted and worse, this money isn’t being used to fund your investments. Most IRA rollover accounts do not have any administrative fee associated with them and this represents an immediate saving. In addition, because you can choose where to invest with an IRA account, you’ll get to take advantage of funds that typically have lower expense ratios than funds available through your 401k.

3. Easier Account Management

With your retirement money earned from prior jobs in a single place, you’ll be able to see whether you are on track for retirement, without having to check multiple accounts. You can easily calculate your real return and drill down into the performance of individual funds or other investments.

4. Easier Asset Allocation

With one account for consolidating your retirement assets, you’ll be able to more readily see the mix of investments in your portfolio and adjust the balance as necessary to stay on track with your retirement goals.

How Mint Can Help

Let Mint track your new IRA. Mint can provide unprecedented visibility into your retirement accounts. You’ll see how much you are holding in your preferred asset classes and if your portfolio matches your intended asset allocation. In addition, Mint will show you how your portfolio is performing compared to the S&P 500 index, right down to the level of individual stocks.

The financial meltdown of late 2008 may have left you with a feeling of uncertainty about your financial future. But death and taxes notwithstanding, there are still some things you can control. First and foremost is taking charge of your 401k. Don’t leave money on the table. Rollover those 401ks from a previous employer today and start taking advantage of the broader investment choices, lower fees and simplified account management that comes from an IRA rollover account.

financial planning is something that we care about here at Mint. Learn more with great financial planning tips in our blog article index.

You know that good financial planning requires a smart strategy for retirement savings. But with the alphabet soup of retirement accounts available, it may be hard to decide which way to go. How can you tell if you should invest in an IRA or 401k? Or both? Which one is better? Let’s explore the features of each to get you moving in the right direction.

401k

A 401k provided by your employer can be one of your best financial planning tools. 401k’s allow you to save money in a tax deferred account via payroll deductions. Here are situations where you might want to take advantage of your 401k:

• Employer Match. If your employer matches your contribution, this is free money, and you should take advantage of it. Note that there are typically vesting rules which state how many years of service you will need to claim the entire employer match.

• Higher limits. During 2008 you can contribute $15,500 to your 401k. If you are 50 or older, you can contribute an additional $5,000. The 2008 IRA limits are $5,000 and an extra $1,000 for catch-up contributions if you are 50 or older. The higher limits on the 401k may come into play depending on how much you plan to contribute.

• Tax-deductible contributions. You can deduct your contributions from your taxable income in the year your contribution is made. This means that you will pay less taxes for that year.

• Defer your capital gains taxes. The gains on your investments will not be taxed while held in your 401K..

Note that the Traditional IRA also allows for deductible contributions and defers taxes, on capital gains but there are income levels that will disallow the deductibility of IRAs if you have a plan available with your employer.

IRA

While Individual Retirement Accounts don’t offer the matching funds that some 401k’s do, there are many situations where an IRA investment makes good sense instead of, or in addition to, a 401k. Here are some IRA benefits to consider:

• More investment options. With an IRA, you’re able to select the financial institution that holds your investments and you also have a greater variety of investment choices. You may be able to meet your ideal asset allocation much easier than in your 401k, where you are limited to the investments offered by your employers’ plan.

• Lower expenses. Often, with greater choices come lower fees. You will be able to utilize low cost index funds that may not be available in your 401k. Lower expense ratios will likely result in a larger portfolio balance for you by the time you retire.

• Later due date. While all your 401k contributions must be made during the calendar year, IRA contributions are not due until April 15. This later deadline gives you the time to estimate the taxes you’ll owe, calculate and make your IRA contribution, and then enjoy the opportunity to write a somewhat smaller check to Uncle Sam.

• Immediate enrollment. There is no waiting period to set up an IRA. Employers typically require a waiting period before a new employee can enroll in a 401k plan.

• Save for your spouse. With the use of a spousal IRA, you can contribute to both of your retirement savings. A 401k is only available for the employee.

Mint Financial Planning Tip: Find out what kind of IRA is best for you.

In this article, “IRA” refers to Traditional IRAs. If you are considering a Roth IRA, but unsure about which is right for you, check out Mint’s IRA Advisor. It’s a financial planning tool which can help you make this decision. Participation in either Traditional or Roth IRA’s could qualify you for the Retirement Savings Contributions Credit. See IRS Publication 590 for more information.

Availability of conversions. Consider as part of your long term financial planning that you may be able to convert your IRA to a Roth IRA in the future. And while rolling over a 401K to an IRA is not typically allowed until you leave your employer, there can be exceptions. Please check with your company’s plan about your specific circumstances.

Mint Financial Planning Tip: Consider leveraging the benefits of both a 401K and an IRA.

You may want to contribute to a 401k and an IRA to take advantage of their different benefits. For example, you could invest enough in your employer’s 401k plan to soak up all the matching funds that are offered. Then put the balance of your annual retirement savings in an IRA to increase your investment options and often lower investment expenses.

By understanding your tax-advantaged retirement savings options, you’re following Mint’s second Principle of Personal Finance: Making your Money work Hard for You. Any dollar you don’t pay in taxes is another dollar you can invest toward achieving the retirement lifestyle you want, sooner.

Further Reading:

1. There are so many important things I need that money for NOW. An extra dinner out this week with the family. That new driver to revolutionize my golf game. The fancy pair of sneakers that make the whiz bang noise with each step.
   

   Mint’s Note: Ah. The consumer lifestyle, where delay gratification is an unknown concept and future needs should never be a consideration. The IRS may be joking, but unfortunately this may be one of the top reasons why people put off saving for their retirement.

2. There’ll always be time to save later. Who needs a Personal Budget now? Let’s just focus on the here and now. Never do today what you can put off until tomorrow.
   

   Money Saving Tips: The power of compound interest works best when time is on your side. Just by starting eight years earlier, you can put away 23% less money than someone who starts later, and still end up with more money than them when it comes time to retire.

3. Maybe I won’t live long enough to retire. Life is so uncertain. Why should I miss out on the high life now when I might not even need to have money put aside for my old age? (If married, change pronouns in this reason to the plural.)
   

   Life expectancy has been steadily increasing across the globe. Sorry buddy, but it’s not over until the fat lady sings.

4. I love a challenge. Working into my 70’s or 80’s or 90’s can’t be that hard.
   

   Perhaps not, especially since health and life expectancy is on the rise. On the other hand, according to Career Journal, more than one in four U.S. businesses has failed to plan to hire or retain older workers.

5. Social Security payments alone will take care of my needs. I know the average Social Security payment is $838 a month. And I’ll only need money for things like food and housing.. and medical care.. and clothing and..
   

   And maybe everything else. That’s only if you want to have a life beyond the basic minimal needs, of course.

6. I don’t know how to begin. There are so many ways to go about saving for retirement that I need more time to think about it. After all there’s the retirement savings plan at work and IRA’s and even investing in things like real estate. I just don’t know where to start.
   

   Money Saving Tips from the IRS. Start by checking out your employer’s retirement savings plan such as 401k or individual retirement account options at various financial institutions.

7. I don’t know how much I need for retirement. But I bet it’s a huge number and I don’t think I can do it. So I won’t do anything.
   

   Please refer to Mint’s comment in number two and six. Want a ballpark number to the amount necessary? Check out the retirement calculator at CNN Money.

8. Planning for retirement is such a big, complicated undertaking. There’s no one I can talk to about it. They’d know that I haven’t really started a personal budget yet. That would be embarrassing. And how should I invest the money I save? Who can you really trust in this day and age?
   

   Living in poverty due to financial inaction might just be a little bit more embarrassing than the actual inaction itself. Who to talk to and who to trust? Consider a Certified Financial Planner or a Chartered Financial Analyst.

   Would you be embarrassed to contact a health professional if you accidentally contracted a serious disease? If the answer is no, then you should also not be embarrassed in consulting a trustworthy, certified financial professional with your financial troubles.

9. I might get lucky. You never know, I may win the lottery. Or I may be remembered in the will of a long lost relative. Or I might find that my house is right in the middle of a diamond field.
   

   With odds such as ranging between 1 in 146, 107,962 and 1 in 175,711,536; the lottery is a sure bet.

10. Taking care of me financially will provide wonderful character-building opportunities for my children. And so many chances for me to feel warm gratitude toward them.
    

    The IRS has outdone themselves with this one. It’s so far fetch that we couldn’t come up with a witty response or follow-up.

Want to do something about your retirement?

Check out this nifty 32 page PDF, Saving Fitness: A Guide to Your Money and Your Financial Future from the U.S. Department of Labor (with help from Certified Financial Planners).

Sure, the booklet may not be as funny as the article from the IRS, but once you’re living a comfortable and secure retirement life, you can always splurge for the occasional tickets to The Improv.

Further Reading on the Topic:

Money Saving Tips

Personal Budget

Budget Planning

Financial planning and debt planning are two of the issues that we care about here at Mint. Learn more with great financial planning tips in our blog article index.

For most young professionals in the lower tax bracket, choosing a Roth IRA (Individual Retirement Account) is generally a no-brainer. As a thrill-filled retirement account, the Roth IRA allows you to grow, accumulate your retirement savings tax-free and avoid hiring a financial planner. If you cash it out during retirement, you won’t owe Uncle Sam a cent!

For those that haven’t considered a Roth IRA (or a traditional one), it’s highly recommended that you take the time out to research more on the topic. Although the deadline for the 2007 contribution has already passed (April 17 tax day), learning more about your choices now will enable you to better allocate your future budget to maximize your 2008 IRA contribution.

To better help you see the process in choosing and opening a Roth IRA account, let’s take a look at the thought process of Trent from The Simple Dollar, who has chosen Vanguard to start his Roth IRA.

When am I going to retire?

I plan on “retiring” (which may involve working a part time job of some sort) as early as possible, which for most of my assets (save Social Security) means at age 59 1/2. I’m currently roughly 28 1/2 years old, which means I’m 31 years away from retirement, and my financial planner says my year for retirement is 2038.

How much risk am I willing to take on?

I’m fine with carrying quite a bit of risk until I get pretty close to retirement, after which I want to shift back to bond holdings rather strongly. This means that I might put my retirement date even a bit later in terms of picking out a “target retirement” fund, to 2045 or so.

How much do I want to micromanage?

Admittedly, not much. I plan on keeping an eye on the funds and expense tracking, but in terms of investigating individual stock picks, I’ll save that effort for my own individual stock investments outside of the Roth IRA, thank you.

Given that I have an approximate target retirement date (2038 to 2045) and that I want to do minimal research for the Roth IRA, I’ve elected to try out the Vanguard Target Retirement Funds — more specifically, the Vanguard Target Retirement 2045 Fund. All of their funds start out aggressively and then gradually shift your assets from stocks into bonds and eventually even into a bit of liquid cash holdings as you enter retirement age.

What’s in the Vanguard Target Retirement 2045?

It’s a combination of five separate funds: four stock funds (Total Stock Market, about 72% of total holdings), European Stock (10.5%), Pacific Stock (5.0%), and Emerging Markets (2.7%)) and a single bond fund (Total Bond Market, about 9.9%). Through 2020, the portion of stocks to bonds (9:1) will remain the same, and then will move about 1.5% a year from the stocks into the bonds until 2045, where the split will be about 50/50. After that, the portfolio becomes more and more conservative as you use it to live out your golden years.

It’s reasonably diversified and has returned 13.84% annually since inception (yes, past is no indication of future), which is a rate of growth that has strong appeal to me. I think I’ll buy this one and just let it sit, reinvesting any dividends and capital gains, and keep an eye on it over time.

There are a few key points you should note from this specific example.

• Be like Trent and start expense tracking. When you have a more specific goal, choosing the necessary investment strategy to reach that goal will become much easier.
• Assess your risk tolerance. Once you figure out how much risk you can handle from your investment, the better you can narrow down your investment fund choices.
• Figure out how much involvement you want with your IRA. Do you want to pick your own stock or do you want to let someone else do the work? Knowing the answer to this question will allow you to better pick the correct institution for you to open your IRA.
• Understand how the fund is allocated and how the assets will shift based on the retirement time frame and risk tolerance (e.g., a fund shifts from stocks to bonds as it reaches the target retirement date to decrease risk to the fund).

Other key notes:

• When you choose an institution to open your IRA, you should consider the account fees and minimums. If you do decide to go with a fund like the Vanguard Target Retirement Fund, you need to consider its expense ratio.

Utilize the Cost comparison calculator from Vanguard to compare and contrast the cost associated with various funds.

The above post contains content written by Trent of The Simple Dollar.

Further Reading on the Topic:

Financial Planner

Expense Tracking