Resources
Retirement
This is a quick overview of retirement for employees with
access to a 401(k) or 403(b) plan. For most people, it's just
a two-step process. If you are self-employed or need more
information, visit the links at the bottom of this page.
From page 159 of The Neatest Little Guide
to Do-It-Yourself Investing:
Retirement is in your hands, one way or another. You cannot
depend on Social Security because the money you pay into the
program today is not being saved or invested for you. It's
being spent on the current generation of retirees. When you
retire, your payout will come from the paychecks of people
working at that time. The size of that workforce is due to
shrink as compared to the number of retirees drawing from
Social Security. Translation: you won't be drinking a Mai
Tai on Mallorca courtesy of the Social Security program. You'll
be lucky to get a jar of peanuts.
Don't panic because there are lots of ways to add more money
to your retirement kitty. In fact, I suggest you assume that
Social Security will provide you with nothing. If it does
trickle a few dollars in your direction, consider it a nice
little bonus.
The simplest and best way to plan for retirement
is by participating in your company's 401(k) plan. If you
work for a nonprofit organization, it's called a 403(b) plan
but works the same way. The plans are not only easy to use
because they take your contributions straight out of your
paycheck, they can also give you free cash. Many employers
and organizations will match every dollar you contribute with
10 cents, 25 cents, or 50 cents extra. Plus, your contribution
to the pot is taken from your paycheck before you pay income
taxes and it grows tax-free until you begin withdrawing in
retirement.
That means you put your $1.00 into the plan before the government
turns it into 72 cents. If your company also matches 25 cents,
you just put $1.25 away for retirement while in effect spending
only 72 cents out of pocket. That's an immediate 74 percent
return on your investment.
If you can't see the wisdom in that, nothing I write will
ever help you.
Here's a simple two-step plan for your 401(k) or 403(b):
1. Contribute the maximum amount.
2. Put your entire account
in the stock market index fund.
If your plan allows you to contribute up to 10
percent of your paycheck, contribute the full 10 percent.
If it allows you to contribute up to 15 percent, contribute
the full 15 percent. You will soon get used to living on less
and won't even know you're doing it because the "extra"
money won't ever show up in your bank account. There was a
time in your life when you managed to live on 15 percent less
than you make today. There are other people doing it right
now. Don't be a fool. Take advantage of the tax savings, convenience,
and potential free money that are yours in a 401(k) or 403(b).
Almost all 401(k) and 403(b) plans offer a stock market
index fund as one of several places you can invest. The index might
be the S&P 500 or Wilshire 5000 or some other broad-based market
index. Choose it for 100 percent of your account. This piece of advice
rankles my prudent peers who say your account should be diversified,
but I don't care. The S&P 500 is not Las Vegas or pets.com or a
pyramid scheme. It's the collective potential of the U.S. economy and
it has proven to be the best long-term investment out there. It is not
a foolhardy choice. It will fluctuate, as you know by now, but your
automatic regular contributions will take advantage of that fluctuation
by buying more shares when the price is down and fewer when it's up.
(See “Keep Investing -- The Advantage of Dollar-Cost Averaging”
on page 105. It's not available online. You'll need to buy
the book.) Your retirement account is nearly guaranteed to have
a long enough time frame to be safely invested in the stock market because
your retirement age is not when the fat lady sings. Life expectancy
is increasing every year. Many of today's retirees live another 25 or
30 years after they stop working. As every valedictorian will say in
her trite graduation speech, "it's not the end, it's just the beginning."
Don't put too much money in your company's stock. An automatic
benefit of choosing the stock market index fund in Step 2
is that you diversify your financial health beyond your employer.
You already work at the company so all your money comes from
the company's good fortune. If that fortune disappears, your
income might too. You don't want to be looking for another
job while your retirement account sinks with the company stock
price. Do your best for the company, keep your income rising,
but invest your retirement in the overall U.S. stock market.
What's that you say? You're self-employed and don't have
a 401(k)? Same here. You should open an IRA and/or a SEP-IRA.
There's no matching, but you have more control over where
you put the money. Any brokerage firm can open a retirement
account for you. You can then choose where to invest it, although
I still recommend the market index route. Simple and effective.
Learn more about retirement here:
Fidelity Retirement Resource Center
Motley Fool Retirement Planning Page
MSN Money Retirement and Wills Page
Vanguard Retirement Center
Yahoo Tax-Deferred Savings Page
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