Feb 24 2012

A birthday party, retirement calculator, and a roundup


This has been a fun week. My husband turned 27 on Tuesday and we’ve had a nice time celebrating. Johnny was really excited about his daddy’s upcoming birthday, and talked it up for weeks. He wanted to be sure we had balloons and a candle for the cake (we had apple pie, actually). I thought we still had birthday candles, but couldn’t find them so I lit a votive candle. Hey, it’s fire. It worked.

We bought SpongeBob plates, napkins and party hats just for the fun of it. I took a paper bag and cut it opened and had Johnny color on the non-marked side and we used that to wrap Shane’s present — a photo collage of the kids in a frame for his desk at work.

It happens to be Shane’s twin brother’s birthday as well (no kidding!) as well as their father’s birthday. Johnny enjoyed wishing all of them a happy birthday, and said “It makes them happy when I tell them happy birthday!” Oh man I love three-year-olds so much; it’s so fun!

I can’t believe Shane and I are heading into our late 20s. We met each other when we were 18. It’s been great growing up together. We’ll celebrate our fifth wedding anniversary in a few months.

Please take a moment and check out the retirement calculator Shane worked very hard to make for me. He did a great job with it!

The calculator should tell you how long your retirement funds should last, and if you have a shortfall, how much extra you’ll need in your nest egg at retirement to meet your goals. Would love any feedback you have on it.

Oh, and remember when I announced I was joining the Yakezie Challenge with the goal of dropping under 200k in Alexa? I’m at 198k today. Whoa! Thank you everyone for your readership. Still not sure what this will mean for my blog, exactly.

And now, a roundup:


Feb 22 2012

Where should we invest our retirement funds?



{This post is a part of my retirement guide. Be sure to check out the retirement calculator my husband made!}

Last week, we talked about how much of each paycheck we should invest for retirement. Today, we’re going to talk about where we should put that money. Next week, we’ll talk about how to choose investments.

Employer sponsored retirement account (such as a 401k)

If your company offers a 401(k) or 403(b), find out what you need to do to get that full match.

Unless your employer’s 401(k) has crazy-high fees or lousy investment options, you should consider putting enough money into your 401(k) plan to get that full match.

If you are age 50 or younger, you can contribute up to $17,000 to your 401(k) in 2012 (or an extra $5k if you’re older). This limit does not include company match.

If you’d prefer to deal with just one investment account, you can choose to put your entire retirement contributions into your 401(k). But, there are other options to consider first.

Individual Retirement Accounts

If you don’t earn an income but you’re married, did you know you can still contribute to an IRA? As long as one spouse earned income, you can BOTH contribute to an IRA for that year. It’s called a spousal IRA. As long as you’re within the income requirements, if you’re married and under age 50 you can contribute $10k as a household ($5k to each of your IRAs) in 2012. Older than 50? You can contribute an extra $1k per year, per eligible spouse.

If you make a withdrawal from a traditional IRA before age 59.5, you will pay a 10% penalty and income tax. Yuck. There are a few exceptions to this.

Related: Get much more info on IRAs at this CNN Money guide

Roth IRA

Not everyone can contribute to a Roth IRA since there are income limits.

Roth IRAs do not receive an upfront tax benefit. It’s taxed just as if you earned $5,000 and put it in a box in your backyard, at least for the year you make the contribution. But then, it grows. Tax-free. Year after year. And when it’s time to withdraw your money, you will not pay taxes on any of it. Amazing!

Further, your direct contributions to a Roth IRA can be withdrawn at any time without penalty (here’s more info on making early withdrawals from traditional and Roth IRAs). Don’t do this unless your circumstances are dire, because you won’t be able to “pay back” your Roth IRA with the balance, and you’ll miss out on future earnings. Still, it’s nice to know our Roth contributions can serve as a catastrophic-event emergency fund.

Traditional IRA

When you make a contribution to a traditional IRA or traditional 401(k), you are reducing your taxable income for that year (as long as you meet the requirements). So, say you contribute $5,000 to a traditional IRA in 2011. You would reduce your taxable income by $5,000 for that year and will have a smaller income tax burden as a result. Your IRA will continue to grow, tax-deferred, until you start making withdrawals. Those withdrawals will be taxed at your income tax rate at the time.

This calculator at Bankrate can help you determine which is better for your particular situation — a Roth IRA or a traditional IRA?

Where should you open your IRA?

There are a number of investment firms where you can open an IRA. Here are some popular choices:

  • Vanguard ($3,000 minimum to open an account, usually — but Target Date funds have a $1,000 minimum!)
  • Fidelity ($2,500 minimum to open an account or $200/month)
  • T. Rowe Price ($1,000 minimum to open an account)
  • Schwab ($1,000 minimum to open an account)

Some banks and credit unions like to advertise their IRAs, but are probably not the best bet.You’ll want to get some more info from them, including the fee schedule and investments available to you. If your only options are in a money market account or CD or other low-interest investment, that’s probably not going to cut it for long-term growth.

Consider the fees

One of the most important things to consider when deciding on where to open your IRA is to understand the fees. Account maintenance fees, transaction fees, the expense ratio, and if there’s a “load” are all ways the investment firm can nickel and dime your investment to bits.

A fund with a “load” is another type of fee you’ll pay with certain investments (oftentimes mutual funds). This fee is not a part of the expense ratio. If you’re paying a front-load of 5%, that comes straight off the top of your contribution. Invest $1,000, pay $50 right off the bat, plus other fees.
Keep your fees as low as possible since they will have a big impact over the life of your investments.
Our situation

Shane and I are each contributing to Roth IRAs at Vanguard, and Shane is contributing to his traditional 401(k). We chose Roths because we aren’t high-income earners and we like the increased flexibility with accessing our money before retirement, should we need to. Before we had the $3,000 minimum for each account at Vanguard, we stashed the money in a savings account at our bank.

Shane is contributing 6% to his 401(k) to get the full match. He’s not fully vested, which means he needs to stay with his company for four years before 100% of his employer’s contribution are his. If he left the company after 1 year, he’d only get to keep 25% of the employer’s contributions (but all of his). Your company may have different requirements. Shane was fully vested from the get-go at his previous company.

We have our checking account automatically send our IRA contributions to Vanguard. So, 9% of our total retirement contributions are going to our IRAs (4.5% to each). We’d like to increase our IRA contributions until we’re maxing both out.

If we ever reach the point where we’re able to max out both IRAs and still have additional funds to invest, we’ll put the remainder back in the 401(k) until we’re maxing that out, too. That would mean we’d invest $27,000/year for today’s limits! Beyond that, we’ll open a regular taxable brokerage account. I don’t expect we’ll get to that point anytime soon, if ever.

Action steps:
  1. Decide what percentage of your retirement investments you want to contribute to your company’s 401(k), if applicable. Go to HR and fill out whatever forms are necessary to make that happen.
  2. Decide where to put the rest of your retirement investments (probably a Roth or traditional IRA).
  3. Consider various investment firms mentioned above, and research still others to decide which is best for you. Open an account there, or start saving in a regular savings account until you have enough to open an investment account.

Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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