Retirement savings, fund up to employer match, then what?

Andy

Fund it up to the match. And contribute the maximum to it, as long as its not invested in an annuity or B shares or something with high fees. Then open an IRA

Blaine

The reason you only want to have withheld enough to get your employer match on the 401 K is that adding more does not give you any benefit. It is the match you want, you put in one dollar, someone else puts in one dollar, so you have 2 dollars in the account. These accounts are regulated and in most instances insured by the government, as some companies have set them up and then the money was lost when the company went out of business. But not all are so protected. You may wish to ask. As to other investments, you can have your own IRA. But only to the maximum for a years. You put the money in because all this money is not taxed untill you take it out when you are retired. The hope is that your tax rate will be lower when you are taking the money out because your expenses are less. You will find if you marry and have children, there will be a point when you will have no money to put away unless you are very lucky or your wife works. Right now instead of spending all yur income, it is wise to get started on retirement because over 50% of the people have not retirement at all and the baby boomers are all reaching that age they want to stop working. We shall see what happens. They may become the greatest drain on resourses that has ever hit, or all die off younger than expected. The next 10 years are going to really interesting.

Hazel

The advice you got is excellent - max out the Roth IRA NO MATTER WHAT! - and yes, max out your employer contribution for the 401k or you’re throwing money away.

When you open up a Roth IRA, you should do it with an investment firm so that you can purchase shares of mutual funds, equity funds, stock funds, whatever - go AGGRESSIVE because you have 40 years to invest and you can really turn today’s investment into a ton of money later.

**NOTE: NEVER PAY LOADS OR HIGH FEES FOR YOUR FUNDS. There are plenty of good no-load, low-fee equity index funds out there - choose those.

It’s very intelligent of you to plan for your retirement. You could always borrow for a home, or borrow for your children’s college, but no one will let you borrow for your retirement. It’s now or never. I’m afraid to think of all the young people today who do not plan for retirement - they will be in a heap of trouble when they’re older.

If you want to see how much retirement savings grows over 40 years, there are some great online calculators:

You will see that investing a little today can be more lucrative than investing a lot later in life. The great thing about Roth IRAs is that they grow tax-free - so you pay taxes on what you put in, but you don’t pay on what you take out - which is obviously different from the 401k.

The maximum for Roth IRAs is $4000 for 2007, then it increases to $5000 in 2008. By all means, MAX IT OUT. And really, don’t be afraid to put your money in a diverse group of mutual funds, equity funds, stock funds, with an aggressive growth strategy. Make sure it’s diversified, but go aggressive - you can definitely afford to ride the waves of the market for a few decades! You will get higher returns that way - and by reinvesting all your dividends, you’ll see the money grow surprisingly quickly.

Congratulations on your decision to invest in retirement in your early 20s - if you continue to invest throughout your working years, it almost guarantees you’ll be a millionaire a few times over by the time you retire!

If you max out your Roth every year from age 24 to your 65th birthday, and invest aggressively so you average a 12% return on your investments, you will have almost five million dollars! And that’s not even counting the 401k! (Remember, of course, the cost of living will be much higher in 40 years… but still!)

Monique

Assuming your investment options within your 401K are comparable to your Roth IRA options, you have a simple formula to consider.
The short answer is money contributed to your 401K is pre-tax, a Roth IRA is post taxes. That means there is a cost to contributing to your Roth IRA, which is equivalent to the income taxes paid on the money you put in the Roth.

Unless the Roth is paying signficantly higher returns, or you plan to need the money for use before the age you can draw from your 401K, I suggest maxing out your 401K and use the Roth only for other contributions such as a roll-over when you change jobs. If you have excess income and wish to save more, contribute to the Roth after the 401K is maxed out, just be sure you stay under the Annual Income limit for contributing and are within the limits for annual Roth contributions from the IRS.

Both of those limits can change annually, so check the IRS.Gov website for more info or call any financial advisor and they’ll tell you for free.

Cynthia

You’ve been given decent info…fund up to the match…and definitely max a ROTH ….if you want to save a little more increase contributions to the 401..( you can always reduce when things change)
Your absolute best bet for the ROTH…look into an investment company…not the bank. Log on to Fidelity, E-trade, Vanguard…and open a ” self-directed” ROTH IRA. It simply means that YOU will decide where your money is invested and you can move it as you see fit.
Look at your 401 statement or quarterly report… see where your money is invested…which funds…do a little reading and find out where you can do a little better… a couple of percentage points better will make hundreds of thousands of dollars difference in 36 years!! That is not an exagerration!
With a ROTH account at a broker, you can add to it every year…and for the first few years be a little ” aggressive” in your investments… international funds, energy companies, shipping, raw materials…things like that will get you returns of 20% or more for a few years to come…get the nest-egg off to a running start.
A few nights or some rainy weekend just look at a few sites on the web….finance/ yahoo…or moneycentral/msn..they have beginner’s investing guides….it’s not rocket science, give it a shot…millions of people do, and they end up better off learning to look out for their money, themselves and their families.
P.S.
Go to that site and put in $ 400. a year at 8% ( a fair return for the 401) for 34 years….then put in $4000. at say..13%…big diff? try 16 or 20… and now you know what a little knowledge can do for YOU.

Ellis

It might help you to look at your bottom line goals first, and then figure out what accounts to put money into.

First, do you want to buy a car and some real estate soon? If so, you should put some money into short term investments so that you have a decent downpayment for the car and house. These savings would not go into retirement accounts like a 401(k) or a Roth IRA.

Second, do you want to retire early, say around 55? If so, you’ll have to save aggressively, possibly more than the amounts permitted for 401(k) and Roth IRAs. In that case, you might want to save extra money in taxable accounts.

It’s difficult to say whether you should fund a Roth IRA after getting the 401(k) match or whether you should fully fund the 401(k) first. The answer depends on where income tax brackets will be 30 or 40 years from now, when you retire. That’s essentially beyond prediction. Forty years ago, federal income tax brackets were close to double where they are today, so whatever investment strategies were used in 1967 based on the tax brackets of the day probably wouldn’t have worked out so well today. Most likely, very few people in 1967 would have predicted that today we’d have much lower tax brackets.

Having said that though, there may be a rational answer to your question. The 401(k) and Roth IRA are funded in opposite ways. The 401(k) is funded with pretax dollars that generate a deduction today and taxation when you’re money is withdrawn, while the Roth IRA is funded with aftertax dollars with its earnings not taxed. They therefore can be used to balance each other’s weaknesses and hedge your tax bracket risk. Think about funding the 401(k) enough to get the match, then fund the Roth IRA, and then, if you have any money remaining, fund the rest of the 401(k).