I’ve Paid For This Twice Already…

Archive for the ‘retirement’ Category

Last week, my spouse’s work rolled out a new option for retirement investing – the Roth 401K.  We’ve been given a lot of information about it, and my spouse and I are in a bit of disagreement on whether or not we should utilize it.  Since this was a new (to me) investment vehicle, I wanted to explain what it is, how it works, the options we’re given through my spouse’s work in utilizing it, and then what we’re deciding on so far (although we have a little while to make a decision, and then we can change our mind every quarter if we’d like, so we’re not locking into anything permanent).

The Roth 401K is basically a retirement savings option quite similar to the traditional 401K.  The big difference is that with a traditional 401K, taxes are deferred until you retire and start taking money out of the plan, but with a Roth 401K, you pay taxes now on your contributions, and not when you retire and start taking money out.  You also do not pay taxes on any earnings from the Roth 401K contributions (you do in a traditional plan).  This is because when you put the money into a Roth 401K, you pay taxes on it immediately.  In a traditional plan, you pay taxes on your withdrawals, which include the earnings on the money.

For our particular offerings, we can choose to have a traditional plan, a Roth plan, or a combination of both.  My spouse’s employer pays a 20% match on the first 6% of salary in contributions (so 20 cents per dollar up to the first 6% of their salary they are investing), and will pay that to match either plan.  The one difference is that no matter which you contribute to, the employer match will go into a traditional 401K since you did not pay taxes on their match.  We also cannot move money we previously invested in the traditional 401K into the Roth 401K, just new contributions can go there.  the total allowable contributions to both plans combined is still the maximum allowable to a 401K, you can’t contribute the maximum to each plan to double your retirement savings each year.

For us, right now we are sticking with the traditional 401K we are already investing in.  This is my spouse’s decision, and I am fine with his choice.  We’ve discussed it at length, and although I would personally change over to the Roth 401K plan myself, he thinks that the tax benefits serve us better now than they will in the future when we retire.  This is, however, an ongoing discussion and we may change it at some point.  I’m not surprised, for I am the one with the Roth IRA and he has a traditional IRA.  Since we have to pay a big tax bill this year as it is, I suspect that is factoring into his current decision.  But in the future we may adjust or change completely over, we’ll see.

Do you have multiple 401K offerings through your workplace?  What’s factored into your current investment decisions?

BeThisWay at Are You Going To Be This Way The Rest Of The Time I Know You (whew!) started her personal finance confession project to get something off her chest – she has no idea what the interest rates on her credit cards are.  Since she pays them off every month, it hasn’t mattered, but you never know if it might become important and she wants to know she has one with a decent rate just in case the unthinkable happens.    She tagged a number of other people to do the same and confess something, including me.  And so here it is, my personal finance confession:

Although we do save for retirement, we don’t save enough (not the confession part) and I still have almost zero idea how much we have saved, and what we actually need to save to be able to retire (there’s the pesky confession).

This is something I keep meaning to do and get never get around to.  I know how much (approximately) is in my IRA, but I really have no idea what is in my spouse’s 401K, and also, although we’ve increased the contributions to it, I don’t really know how close we are to contributing enough for a comfortable retirement.  The idea of it still intimidates me so I keep putting it off and putting it off until I just don’t get to it at all.

I don’t really think that is a surprise to my regular readers, but when you discuss every aspect of your finances every day online there isn’t much you haven’t covered.   I’m hoping this kicks me in the butt to get calculating and figuring and actually start making a plan and some progress.  I work best with a plan.

So, what about you?  What’s your personal finance confession?  I’m going to tag five bloggers but if you aren’t tagged, feel free to share in the comments or on your own blog and when I am back from my colonoscopy, I’ll put a link to you at the end of the post. 

I am tagging:

• Gather Little By Little
• Being Frugal
• Cash Money Life
• Blueprint for Financial Prosperity
• Five Cent Nickel
  

What’s your financial confession?

Being forced to stay in a reclined position for a few days after my wisdom teeth surgery, I had the opportunity to observe some TV. I don’t have a laptop computer and the pain medicine made concentrating on reading almost impossible, so TV occupied my brain when I was awake. Mostly, I slept, but I did see snippets of television here and there when I was conscious. And I noticed a lot of commercials about retirement. Most of what I remember are beaches, golf, traveling to fun locations, and a whole lot of relaxing. It made me consider what I envision retirement for my spouse and I to be like, and I realized, I honestly don’t have a clue.

Our retirement plans – what we save, how much we save, and what we want to accomplish – are fuzzy, to say the least. We, of course, want to be able to retire, and we don’t want to be a burden to our children when we do. Self sufficiency is our goal, but beyond that, we’re decidedly unsure. We’ve been slowly increasing the amount my spouse saves in his 401K from 3% when I started this blog almost a year ago, to 6% today (the extent of his company match). That won’t be the end of what we save, but for now it is our start. But the question is – what are we saving for? A house on the beach where we sip cocktails and laze under an umbrella all day? Travel? It probably won’t be golf, since my spouse doesn’t play and I declared my distaste for the game at the tender age of 6 when I threw my clubs into a water hazard.

And I realized, that one of the problems we have with saving for retirement is that we don’t have a vision or something that we’re aiming for. And that is fundamentally tied into the fact that until a short time ago, I couldn’t picture being able to save money for retirement. We were saving, a bit, but we were not doing it with any real focus or purpose or direction because the idea of saving enough while still surviving our present seemed rather impossible. But now that I do feel that saving money for the future, and enough to make a difference, is a real possibility, I’m starting to try and envision that future. And I realize – I don’t expect retirement to be any different than my present, because I haven’t learned how to see beyond the present and into the future.

What does your retirement look like to you? Can you see beyond the present to what you’d like to happen in the future? Are you already retired and living out your dreams? Are they what you expected when you were still planning for it? As I evaluate my goals, hopes, dreams, and reality, I need to learn to see past the present so that I know what I’m aiming for. Without a vision, motivation is hard to maintain.

My spouse received his social security statement in the mail yesterday.  I opened it thinking it was mine, because I read somewhere that you received it around your birthday each year, and his isn’t for a while, but it was his.  Which I realized as soon as I saw the income listed.  It didn’t really matter though, because we share all of that information anyway.  We sat down together to look at it, and I pointed out about how the longer you wait to receive benefits, the higher that monthly benefit is.  If you start drawing benefits at 62, you receive a certain amount a month, but if you wait until 67 (his “full retirement age”) you receive a higher monthly amount.  And if you wait all the way until 70, you receive an even higher monthly amount.

I started thinking about how many extra years you have to live to balance out the money you don’t get by drawing at 62 if you wait until 67 or 70 (a calculation I still have to figure out how to make past the basics to include inflation, interest, and other factors) as I scanned the rest of the document.  A small fact about “social security’s future” seemed to jump off the page and hit me between the eyes.  In 2017, according to the document, social security will start paying out more in benefits than they collect in taxes.  And in 2041, without any changes to the current system, the Social Security Trust Fund will be exhausted and there will only be enough money to pay 75 cents for each dollar of scheduled benefits.

What is the Social Security Trust Fund, you ask?  Basically, right now social security takes in more in taxes then it pays out in benefits, and the trust fund is where the excess resides.  It actually doesn’t reside there from more than a bookkeeping standpoint because it then gets invested in government securities, but for all practical purposes one can think of it as the social security surplus.  Which will begin to shrink in 2017, and will be gone by 2041, according to current projections.

2041 also happens to be the year both my spouse and I turn 67, our “full retirement age” according to social security.  What fortuitous timing.

Now, does this information surprise me?  No, not really.  I am one of the people who “say” they aren’t expecting anything from social security when they retire.  But it does depress me – not the lack of a retirement benefit as much as the fact that we pay money into it every year that I doubt we’ll ever see again.  I guess the more I try and plug the holes in my own budget and the more I try to control all of our outflows, the more I notice the outflows I can’t do anything about.  I don’t, of course, know that the depletion will hold true by the time we turn 67 – apparently the trust fund was almost depleted in 1982 and measures were enacted to restore it, but we’ll see.  I’m not making any plans for the benefit we’re supposed to get at this point.

I wonder if Medicare will still exist when we turn 65.

Compound interest has me under its spell. And so does the idea of free money.

When my spouse first took the job he has now, he had to wait a year to contribute to their 401K program. He had a 401K at his previous position, which he rolled over into an IRA when he was laid off from that job, so he had experience contributing to 401K plans before. But I would call us the people that the “forced savings” and “company matches as motivation” were created for – we didn’t really have much of a plan or reason behind how much we contributed, we just picked a number that seemed okay and went with that. The definition of seemed okay is debatable.

This position he has now, the company matches 20% of your contribution up to you contributing 6% of your income. To explain that further – for every dollar my spouse contributes, the company contributes 20 cents. Once my spouse reaches a 6% contribution, the matching maxes out and any money my spouse contributes on top of that is not matched. Once he is there for 5 years, the company contribution fully vests (which means it then completely belongs to my spouse), which actually will happen this year – next month to be exact. This is not the most amazing 401K program ever, but at least there is matching of some sort – and a 20% return on investment immediately is not too bad at all.

When my spouse started contributing, we started at 2% because we felt we wouldn’t notice the change in paychecks too much. In hindsight, we should have just started at 6% and been done with it but hindsight is always 20/20. We have increased it twice since then, once about a year later to 3% and then once when I started this blog to 4%. This year, when my spouse got the notification that he could change his % contribution, we upped it to 6% at once instead of just 5%. His next paycheck will be the first the the new amount (hopefully followed within the next month by a raise since his annual review is at the end of April, but we’ll see) so we’ll see what the effect on his paycheck is, but I know we’ll adjust. With my new position bringing in more money per month, I knew it was the right thing to do to stop leaving part of the company match on the table and take advantage to the fullest any free money we can get. As well as increase our retirement savings – because every minute that passes is a minute of compound interest we’re not getting back.

Our retirement investing will not stop there of course, but until sometime next year (hopefully) or however long it takes us to get out of all but mortgage debt, this will have to do. And then the real fun of saving 15% or more of our income begins. But this is a positive step in taking control of our retirement for us.