3/24/2011 12:15 PM ET|
No 401k? Save for retirement anyway
You don't need a boost from your employer to take charge of your retirement. These 6 tips can help you craft an after-work life that's even more golden.
Only about half of the workforce participates in a pension, 401k, or similar type of retirement account at work. When you don't have help from your employer, you have to save and invest for retirement completely on your own. Here's how to build a nest egg without any help from your company:
1. Take advantage of tax breaks. You can contribute up to $5,000, ($6,000 if you are age 50 or older) to an IRA, a Roth IRA, or a combination of the two accounts. Traditional IRAs give you a tax break in the year you make a contribution to the account, but you'll have to pay income taxes on that money and the earnings upon withdrawal. You contribute after-tax dollars to a Roth IRA; distributions that are made after age 59-1/2 from those accounts that are at least five years old are tax-free.
To decide which type of retirement account is better for you, compare your current income tax rate to what you expect your tax rate to be in retirement. If you expect to be in a higher tax bracket when you reach retirement than the bracket you are in now, it's often best to pay the taxes upfront using a Roth account. But if you expect your tax rate to drop in retirement, consider saving in a traditional IRA and taking the tax break now. Investing in both types of retirement accounts allows you to hedge your bets against future tax increases.
2. Consider flexibility. Traditional IRA account owners are required to take distributions from their retirement accounts and pay the resulting income tax each year after age 70-1/2. Those who fail to withdraw the correct amount must pay a 50% tax penalty on the amount that should have been withdrawn. Roth IRA account owners are not required to take annual distributions, which gives them more flexibility to time withdrawals or pass on tax-free money to heirs. Roth IRAs also give you easier access to your money before retirement.
While traditional IRAs levy a 10% penalty on distributions before age 59-1/2, the early withdrawal penalty on Roth IRA distributions applies only to the portion of the withdrawal that comes from earnings. Penalty-free early withdrawals are also allowed from both types of accounts for a variety of reasons, including first-time homeownership costs, health insurance premiums after losing your job, significant unreimbursed medical expenses and college costs.
3. Set up automatic deposits. Just because you don't have a 401k doesn't mean you can't set up a direct deposit from your paychecks to an IRA.
"By segregating those dollars into an IRA, you are less likely to use them for short-term needs, since there are some penalties associated with early withdrawals," says James Miller, a certified financial planner and president of Woodward Financial Advisors in Chapel Hill, N.C. Once you have maxed out your IRA contributions, consider redirecting a portion of each paycheck into an investment or brokerage account.
4. Hold equities outside of your IRA. Regular income tax is due on withdrawals from traditional IRAs, but equities held outside of retirement accounts can be taxed at the typically lower long-term capital gains tax rate. To minimize taxes on your savings, consider holding equities outside of your IRA and investments that are taxed at regular income tax rates inside your IRA. "Things like bond funds or investments that would pay out on a regular basis, you want to put those inside the IRA, and funds that don't have cash distributions or low cash distributions should be in a brokerage account," says John Deyeso, a certified financial planner for Financial Filosophy in New York, N.Y.
5. Aim for low costs. While you can't control the return you will get on your investments, you do have some control over how much you pay in fees. Make sure you compare the expense ratios of similar funds before selecting a long-term investment. "We've gone the rout of using ETFs (exchange-traded funds) as opposed to actively managed mutual funds because you can cut the fees dramatically by doing this," says Chip Addis, a certified financial planner for Addis and Hill Financial Advisors in Wayne, Penn. "A 1% difference in fees can add up to tens of thousands of dollars more that you will have when you retire."
6. Maximize Social Security. Almost all Americans are saving for retirement through the Social Security program. The amount you get is calculated based on your 35 highest-earning years in the workforce, and it varies based on the age you first sign up. "In general, you are better off waiting, because every year you wait past your full retirement age you get about an 8% bump in your benefit by waiting to collect," says Miller. "If you can wait until age 70, you can get a pretty significant bump." After age 70, there is no additional advantage to further delaying claiming your benefits.
This article was reported by Emily Brandon for U.S. News & World Report.
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That's what's happening right now in both Wisconsin and Ohio, they vote them in and then they redistribute all of the wealth to their corporate buddies and cut the rights to collectively protest (i.e. they spit in your face). In a way, its funny. People need to understand how divide and conquer works. Politicians are taking orders from the corporate Nazi's that are sucking the blood out of the country. They give nothing, they sacrifice nothing and we are arguing over why government employees and teachers get 2 week vacation. They keep us all distracted and divided by exploiting peoples natural tendency of prejudice. It's so sad.
I totally agree with your comment on the topic of Social Security in this article. While the other areas the author covered seem to have good merit, I believe she is still beating that same "out of date" drum that if you wait longer to collect on your social security you'll earn more (perhaps per month, but overall you stand to come away with much less).
With each month and year you wait for that "magic monthly figure at 70" you are actually denying yourself benefits that you've earned. All those "unpaid" months/years continue to accumulate. When you finally do start collecting at 70's higher monthly rate, it would still take you about 18 years just to break even, on what you passed up for the previous eight years. With mortality statistics being what they are, I don't think I'd want to gamble on being around 18 more years after I turn 70, just to break even. Besides, as you mentioned, the cost of living continues to go up, and waiting till you reach 70 may end up being of little or no value. If I had the choice of having a social security check starting at 62, or nothing until I reach 70.... Let's just say eating is more important to me than imaginary numbers.
Maybe someone who doesn't have our best interests at heart wants us to believe that we are better off waiting until we are 70 before we start receiving social security. The fewer years we actually collect, the more money for them to waste. Maybe they are trying to fend us off, so they can continue trying to "shore up the system" to keep it afloat. What if we waited until we were 70, and that's when social security disappeared? That's a possibility that needs to be considered as well.
If you are DAV 100% & SSD from serving our country, IRS will not allow you to to put what they call unearned income into to A IRA, Roth acct or any other. You can buy all the CD's you want paying 1.1% per year, which gets you about $22.00 per $1,000 a year. 6 years ago I cashed in $10,000 worth of CD's put in stocks after a year+ of research, now up to over $54,000, all paid for themsleves, when I buy/trade, I'm using their money not mine. and I don't pay taxes on what they call unearned income. I worked for 30 years after being drafted in the 60's. Got audited in the 70's, wrote them a check that night, 3months latter got a letter from IRS thanking me for my proment payment, then in the 80,s got got a refund check from IRS saying due to their error heres my money back, (should of framed that letter). Don't know if this will help anyone, hope it does.
you are a bitter,bitter man , who if would just look around would see just how well off you are.
would you really deny others of a livable middle class existence. you sir, and i do not pay ENOUGH taxes,
for the privilege to live and prosper in this great country.
AND, i would suggest that if you ever need a cop, fire fighter, paramedic, or snow plow......you keep your fat trap shut!
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