401k: Are you in?

[ZacFields]

After talking to some of my coworkers, I've come to the conclusion that there's too many young people who aren't aware of the extreme advantage you have by contributing to your 401k early.

I'll make this short as possible so people will actually read it, but if you're not in 401k yet then you need to see this.

I'm going to show you all a little 401k calculator action. Here are the example criteria I've entered:

Percent to contribute: 10% (If you can afford it, this is the best percentage to put it at. If you're living at home, this example may influence you to raise it to something more like 15%)
Salary: I put $20,000 for an example. If you're young and working full time, this is likely your salary if you're not a college grad.
Current Age: I put 21 for example, because most companies won't let you contribute to 401k prior to 21.
Current 401k Balance: $0.00
Age of retirement:65 (By the time we're 65, people will probably be working until they're 70 or older due to health care advances and people generally just living longer)
Annual Rate of Return:9.00% (My 401k was up 12.5% midway through this year, and barring an economic meltdown should finish around 15-18%, but 9-10% is the average rate of return for a 401k)
Expected Annual Salary increase:3% (The standard is actually between 5-10% per year, but that's more realistic if you graduate college. We're going for simplicity sake, so the average person can expect their salary to rise AT LEAST 3% per year, which I'll remind you would actually be slower than the rate of inflation)
Employer Match:75%
Employer Max:5% (I chose this based on the company I work for. They do 100% up to 3% then 50% for the next 2%)

And the grand total that this example person's 401k account would be at age 65 is: $1,775,925 , yes that's almost 2 million.

Now lets do some tinkering: Lets say this example person decided to wait until 30 instead of 20, and lets say their income at age 30 was $28,000 instead of $20,000. Now the grand total dwindles all the way down to $1,076,063. Okay, lets say they decided to wait until age 40 and were making $35,000/year, now all the way down to a staggering $399,199.

Get the big picture? Now lets assume a 21 year old who's making 20k per year got REALLY lucky and averaged 12% per year. (Not likely, but yet still a possibility). That person could have $4.64 million at retirement.

Keep in mind that this will also not be the only money that you have in retirement. There will be (hopefully) a little social security, any savings you've earned in your lifetime, possibly a Roth IRA set up if you are particularly financially smart that could also have a million dollars or more in it by the time you retire (if you start early). Then let us not forget that you will probably have a spouse who hopefully made the decision early in life to start up their 401k and a ROTH.

If you start at age 21 with a 401k and start up a Roth IRA within a few years following, there's no reason you and your spouse couldn't have upwards of $5 million available to you when you retire.

Then you could go even deeper and realize that even if that $5 million only made you 5% interest when you retire, you could withdraw $250,000 per year in interest alone and not even touch that $5 mil.

Food for thought, kids. Get those 401k's started early, and allocate as much as you can afford. You've got to work hard to have a good and healthy retirement, and that means giving up just a litle bit of your money now, but you could potentially be far richer in retirement even than you were while you were working. Travel the world with your spouse or simply be that awesome grandma/grandpa who has all kinds of cool things.

BTW: If you want to play with the 401k calc, visit this link: http://www.bloomberg.com/invest/calculators/401k.html

Zac

[Ricky]

what about 40,000 a year and 10% in starting at my current age 21. and say i retire at 65? What is ROTH ira any how and how would that benift me more?

[DustinsDuster]

i had mine set up as soon as they'd let me through this job, so going on two years now. i think its important that kids know that just because they leave a job, it doesnt mean anything happens to their 401k plan. you just keep putting money into it at your new job, nothing really changes. just one reason more to quit the job you hate....

[ZacFields]

Ricky you're on a good pace to have $5,075,550 in your 401k.

I know the line of work you're in will probably give you at least a 5% raise every year, so I used 5% for you. If you only average a 3% salary increase per year, you'de be looking at 3.9 million.

You're in a great situation right now Eric. Because you have the option of moving out of your house and planning your finances around 10% into your 401k rather than trying to justify raising (or even creating) your 401k after you already have a mortgage and such.

A Roth IRA currently allows you to contribute up to $4,500 per year, and should rise by $500/year every year to account for inflation. As far as returns go, your Roth IRA should also average at least 9% per year. The difference is that you're putting money into this Roth IRA that has already been taxed (You'll actually have to transfer this money yourself) and the government will allow you to withdraw this money when you're age 59 and a half COMPLETELY TAX FREE. So if you save up $1.5 million in your Roth IRA, you will literally be able to withdraw $1.5 million when you retire. The only bad thing about 401k is that since you put pre-taxed dollars into it, you will have to pay taxes on the money that you withdraw from it after you retire. So if you withdraw $250,000 per year, you'll probably pay 28% tax on it, leaving you with about $180,000.

Ideally, the best thing you could possibly do (if you're able) is allocate whatever percentage to your 401k that will leave you with enough money to max out your Roth IRA (provided you're taking at least full advantage of the employer match on your 401k) because then you're allocating more money to an account that will be completely tax free when you retire.

Also, a Roth IRA is nice because after 5 years ( i believe) you are able to withdraw the amount of money you put into it penalty-free (you just can't withdraw the interest your money has earned). This is nice in the case of an emergency like some unexpected medical expenses or other debt.

But yeah Ricky, stay on track. If you're able to get a Roth IRA going as well as that 401k, you should be sitting on at least 5-7 million when you're 65, barring an economic depression between now and then (which is not likely).

Zac

[ZacFields]

Good deal Dustin. I think you're around 24-25ish, right? If you're 25 then you started a good 7 years before the average person. Most people don't bother with 401k's until they're about 30.

Kids don't understand that while it will start slowly, once you've got $100k in there, 9% of $100k is $9,000 plus whatever contributions you put in there yourself. And it just gets better. 9% of $500k is $45,000 and so forth. It's amazing what you can accomplish simply by setting aside a little money from each of your paychecks starting at a young age.

Zac

[DustinsDuster]

just turned 24, so yeah, i knew it was a smart move to start as early as i possibly could.

even better, i am hoping to move to a new job sometime soon, making more money and putting more into the 401k. its a neat deal....

[Stg4raddo]

its a good idea to to get into your 401k as soon as possible. and the roth is also a good back/second retirement investment. I currently have company match 401K i should proly put the full 6% my company matches but don't really feel like it right now. I also have a pension and im looking into the option of a Roth ira right now to just put a lil money into every month and proly start out with a 2k initial investment.

[slobalt]

My stratagey in the begining was to contribute the min amount to recieve the max company match, after all it was free money. I then started learning about investing. I realized I could have more money if I didn't give it all to Uncle Sam during the year. I know most people like that big income tax check but I calculated what was needed for the IRS and kept the rest for myself. With my last check from the IRS I opened a ROTH and a personel investment account. There was a group at work who were into investing and I joined and learned even more. After a few years the ROTH and my personal investments were outdoing my 401k choices.

When my spouse began working after she graduated college we were bumped into another tax bracket, the 401k was helpful to bring us back down, plus buying a home really brought us back to our original tax rate. Buying a home and investing in 401k's are the best ways to keep your tax rate down. Plus not living beyond your means.

[ZacFields]

All great advice Slobalt. I had a feeling you'de chime in with some good advice as you seem like you've got a good head on your shoulders so it's not a surprise to me that you've got a Roth and 401k going.

I guess the best piece of advice I can give to anyone is this: Even if you decide not to go to college, or you did go to college and your yearly salary isn't quite what you had always dreamed of when you were a little kid, that does NOT mean you can't still be rich and happy when you retire. It's possible to double or even triple your yearly income during retirement if you save correctly.

Slobalt, I've considered doing exactly what you've done with your taxes. When I get my tax return this year, I've been pondering the thought of doing some things so that I just pay less tax in and am more even at the end of the year. Currently I'm going to be claiming this house on my income only, since Ash and I aren't married. So I should see a nice return this year due to my mortgage interest. I've calculated that my interest on my mortgage will basically pay for all the taxes I need under an itemized deduction, so everything else (like the federal taxes I paid and such) should all come back to me. I'm shooting for $3k but it could be higher or lower. Taxes can be unpredictable. lol

Zac

[logans dad]

It is a good thing but 5 million is a little extreme I think. Ive been in for like 15 years and over what ive paid in is only up about 10 thousand. But thats 10 more then what I had. I put in 6 % and have it broke into 5 parts from some in real risky to very secure. Most my money has come from the risky tho.

[slobalt]

It is a good thing but 5 million is a little extreme I think. Ive been in for like 15 years and over what ive paid in is only up about 10 thousand. But thats 10 more then what I had. I put in 6 % and have it broke into 5 parts from some in real risky to very secure. Most my money has come from the risky tho.

I've noticed that most people that open a 401k will usually allocate what percentage goes to the funds they want to invest in and then forget about it. While this works its not the best way to do it. The best approach is to redistribute your portfolio at least once a year. This will help you keep some of the gains you may have recieved for the year because you have now put some of those gains in the secure fund. It will also help even out the losses over the years.

People also tend to forget to change their allocations as they get older. The young can take the chance with the high risk but as you get older you need to start to move it towards the secure side for retirement.

[JustinS]

It is a good thing but 5 million is a little extreme I think. Ive been in for like 15 years and over what ive paid in is only up about 10 thousand. But thats 10 more then what I had. I put in 6 % and have it broke into 5 parts from some in real risky to very secure. Most my money has come from the risky tho.
You're forgetting about compounding interest. The longer it is in there the larger the amount grows because the interest will build on interest + principal. 15 years for you is what someone one at 35 would have if they began at age 20, but the difference is that they still have 30 more years of deposits and interest to accumulate whereas you have 10 (?) years left before retirement. That's just a guess though since I have no idea how old you are.

[DustinsDuster]

I've noticed that most people that open a 401k will usually allocate what percentage goes to the funds they want to invest in and then forget about it. While this works its not the best way to do it. The best approach is to redistribute your portfolio at least once a year. This will help you keep some of the gains you may have recieved for the year because you have now put some of those gains in the secure fund. It will also help even out the losses over the years.

People also tend to forget to change their allocations as they get older. The young can take the chance with the high risk but as you get older you need to start to move it towards the secure side for retirement.

we've talked a lot about that at work. i plan on trying to keep an eye on it; but it's kindof intimidating when you dont know much about finances.

[ZacFields]

Vic are you sure that you've only got $10k in there after 15 years? That can't be right unless you've taken a huge loss somehow. I've got $4k in mine already and its only been going for about 1 year and 6 months and I also am currently putting 6% in there.

If you made only 20k per year, 6% would be $1,200 per year that you put in there yourself. Multiply that times 15 years and if you were only making 20k/year then you would have already put in $18,000 on your own. There's no way you've lost that much money. The years 2000-2003 you could have seen a little bit of a loss but not enough to put you anywhere near that low.

Did you mean to say $100k? Because if so, that sounds about right. But you've got to remember for someone who started at age 20 or 21, they'll have about 45 years for that money to continue gaining an average of 9-12% per year. So in your case, if you had 30 more years left and already had $100k in there, you're talking about between 1.6 and 3.4 million. As it lies, if you actually have $100k in there, I'd say you're still on a pretty good track. Even with 15 more years you could have between $450 and $650 thousand, which is still a pretty nice nest egg I'd say considering you're talking about only 15 more years of inflation as well.

$5 million sounds like a lot, and even in 45 years its still going to be a ton of money, but at the same time inflation will make it so $5 mil isn't near as much as it is now. In 45 years, just having $1 mil probably will be a little tight in your retirement. It will still be a pretty good amount, but people will be shooting to have more like $1.5 to $2 million by the time my generation retires due to the effects of inflation.

Zac

[Fire Hawk]

So from what I'm gathering here is a 401k once your retire at age 65 if you choose to. When you start withdrawing all that money you've taken out your getting taxed on it then rather then now cause it's all pretax?? I'm setup with my job with the 401k now and still a little confused. I did select the 2050 pllan so it will automatically change investments over the years as you near retirement.

As for the roth IRA I'm understanding that's something you put money into aftertax when your paid and at age 59.5 you can withdraw 100% tax free?? So how do you go about getting a roth ira setup ie start up cost, and do they have the same thing along the lines of the 2050 plan to be able to let them do the investing for you?

[logans dad]

I have made a little over 10 thousand on the money Ive put in but is what I forgot to mention is that my employer did pay half of that so I guess I have made a lot more then what Ive paid in. With my employers match plus my donations it is up over 10 thousand Made on the money we have put in to it. Remember Ive got mine broke into 5 parts and the risky is where Ive made the most profit. The not so risky Ive lost money but I'm still in the good by far.

I might have made a 100 thousand on what has been put into it so yes, When I retire there will be a nice chunk Of money there but not even close to a million.

The younger people would have a lot more so I hope they all go for it!!

Just think Of the car I could build then. Just kiddin.

[ZacFields]

You're exactly right Micah. Getting taxed on your 401k isn't a huge deal.... it kinda depends on how much you want to withdraw when you're retired, you know? If you plan on living a lush and rich retirement, and you're going to want to withdraw $100k/year then you're going to probably end up in that 28% tax bracket and so you'll pay a 28% tax on that.

A roth is unique because the government allows you to withdraw all your money completely tax free since you paid taxes on the principle already anyways, and then the government just sorta gives you a "freebie" on the capital gains you will incur. (again, at at 59.5)

As for how to start your Roth IRA, there are many different places online for you to do this, but my best suggestion would be at http://www.etrade.com E*Trade has been named the best online bank by CNN money. They also have a savings account that you all should check out that will earn you 5.05% APY, which is the highest rate you can get in the country right now on a public bank. To get money into it, all you'll need is your checking account number and you can make quick-transfers right there online and it only takes about 3-5 business days to completely transfer over.

And like I said about the Roth. Lets say over 5 years you have put in $2,000 per year, so $10,000 total. And say your account has grown to $15,000. In most circumstances after 5 years (i'm not 100% on the situational rules, but in general) that $10,000 you put in is available for withdrawl during an emergency if you needed it without penalty. The only part of that that you can't touch would be that extra $5,000 in gains. I believe you could still take that out, too, but it would be at a penalty.

They say the general rule of thumb is that if you can be disciplined enough to fund a Roth IRA, it's best to only put into your 401k whatever your employer will match and then try to max out a Roth IRA. Plus with a Roth you can do it on your own terms... like you could use your tax return to fund your Roth and then just leave it alone for the rest of the year, or whatever. etc.

Zac

[Rollin on Dubs]

I currently I contribute 10% and have a company match of 20% (of my 10%) the calculators that my investment group used said that i would have a 3.3 million investment when i retire. I move my accounts around quite a bit and i have 70% or more in high yeild high risk accounts. Which for the past three years i have averaged over 22% return. And the major benifit i see right now is the amount of my taxible gross income. ( i make around 44k yr) and it drops my taxible gross down to somwhere that i actually get a decent return.

[Fire Hawk]

What does starting up a roth ira consist of? I've heard you have to have like a $1000 to start up or something. I was wondering about that and did you know if they do the plans that change as you get closer to the retirement age?

[ZacFields]

Well for the E-trade ROTH there is no minimum opening amount. You can just open the account and leave it at zero if you want until you get comfortable to make your first deposit.

The target retirement thing that you're talking about is offered by the funds that you can invest your roth in, so yeah you will be able to find that option.

And one more thing about a Roth, I've confirmed that you can withdraw the amount that you've invested at any time for any reason. After 5 years, you could withdraw 100% of your account (including earnings) to buy a house, pay for college, or to pay an expensive medical bill.

So essentially, a Roth IRA is risk-free for you to invest in. You can pull out the money that you put in there at any time. Obviously the idea would be to not pull that money out, but it is nice to invest in a fund where you have the option.

Zac

[slobalt]

The biggest cost with the Roth IRA is the buying of Mutual Funds, they usually have a minimum buy in. I opted to buy stock to fund my Roth since it requires no large buy in plus I like the research. If your really interested in Mutual funds and don't have enough to start one you can always try Exchange Traded Funds, (ETF's). These can be bought and sold just like regular stocks with the same basic principal of a Mutual Fund. They are focused on certain sectors of the stock market but have no fund manager keeping an eye on it .

A small example with Gold

Mutual Funds: Fidelity has a Fund, stock symbol FGDAX, which will invest in companies that engage in gold related activities. There are quite a few of those companies and a fund manager decides which ones will be bought and sold for this fund. These tend to have fees associated with them. Though there are some that have no fees, research to find out which ones. To get started with this fund you'll need $500 for the initial investment with an IRA or $2500 without.

ETF's; In the ETF world there is a fund, stock symbol GLD, which just follows the price of gold. No fund manager to buy and sell. There are fees here also just not as much as Mutual Funds, plus they are already factored into the price so you never see it taken away. The cost is currently 74.08 per share plus the trade fee. 7 bucks through Scottrade.

Stocks: With stocks you just buy one company or more if you so incline. I'll use Randgold Resources since I own this one, stock symbol GOLD, these guys just mine gold that is all. No fund manager, no fees. Cost is currently 35 dollars a share plus the trade fee.

So as you can see there are many choices once you start to invest. Mutual Funds, ETF's, and Stocks, of course there are the CD's and Money Market accounts, minimums there vary from $500-$5000 to start.