December 2009 e-Wealth Coach
The Basics of Retirement Saving
Jean C. Setzfand is the Director of Financial Security at AARP. She leads AARP’s educational and outreach efforts aimed at helping Americans have financial ‘peace of mind’ in retirement. Her work focuses on providing consumer-friendly information on money matters, protecting consumers from investment fraud and influencing needed changes to employer-based retirement benefits (such as automating 401Ks).
Dear Saver,
Given the current economic climate with families losing their homes and millions out of work, the last thing some people want to think about is saving for retirement. Don’t make that mistake. If you are not in a crisis situation, save now for a secure retirement later.
1. Invest for the Long Haul
With the recent volatility in the markets, it’s natural to be anxious and confused. But using your emotions as a basis for financial decisions is a losing game. Hasty decision-making often leads to selling low when the market has tumbled and buying high when the markets are bouncing back. Pulling out of your investment plan may have unwanted consequences. For example, taking money out of your IRA too early can trigger penalties. Set up a solid financial plan that fits your stage in life and comfort level and stick to it.
Over the long term, stocks have returned 10.4% per year on average, far ahead of bonds and cash. People are living longer in retirement, and while exposure to stocks should moderate with age, even retirees often need some stock investments for growth. In addition, stocks have historically come back after major financial downturns. The past is no guarantee of the future, but being an informed investor helps smooth out concerns over sudden market moves.
2. Select Investments Carefully
With a 401(k) or an IRA, you still have to choose where to invest your money. To reduce risk, spread your investments among different asset classes—stocks, bonds and cash. That way, when one asset class declines, others may go up. Don’t get caught with all of your money tied up in one stock, even if it’s the company where you work. Consider life-cycle or target date mutual funds. They provide automatic diversification within one fund according to when you expect to retire.
3. Keep Fees Low
Getting the most out of your investment dollar is a key to investment success. Fees reduce your returns over time. If you are looking for a mutual fund, for instance, consider “no-load” funds that don’t charge a commission. Also, look for financial products with low management fees. Index mutual funds that mirror the stocks or bonds of a particular financial index are solid choices with low fees because they require minimal professional management.
4.Participate in Work-Based Retirement Accounts
The best way to build a retirement nest egg is to participate in an employer-based retirement plan, such as a 401(k). Not only do your contributions grow tax-free, but the amount of your contribution is deducted from your paycheck and lowers your taxable income. Contribute as much as you can, up to the annual limit of $16,500. At a minimum, contribute enough to get any company matching funds—don’t leave free money on the table! If you are over 50, you can put away an extra $5,500 to help you catch-up on your retirement savings.
5. Open an IRA
If you don’t have access to a work-based retirement account, consider putting money into a tax-advantaged IRA or Individual Retirement Account. There are two types with different eligibility rules:
- Traditional IRA - you receive an immediate tax deduction when you contribute, your money grows tax-free, but the withdrawals will be taxed.
- Roth IRA – your contributions are taxed, your money grows tax-free and your money is withdrawn without paying taxes. In 2010, income limits will be suspended and there will be the opportunity to transfer money from a Traditional to a Roth IRA.
With fewer employers offering traditional pensions, the new retirement reality is a more active role for you in retirement planning. You are in the driver’s seat, and we want to help steer you in the right direction. You can find information and tools at www.aarp.org/money to map out your retirement course.
Sincerely,
Jean C. Setzfand
Director of Financial Security
AARP
AARP is a nonprofit, nonpartisan membership organization that assists people 50+ have independence, choice and control in ways that are beneficial and affordable to them and society as a whole. The association has staffed offices in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands.