Penny Wise, Pound Foolish: Retirement
I’ll cut straight to the chase’“if you aren’t saving for retirement, you are taking money out of your future pocket and wasting it. If you’ve been following the blog, you know that I posted earlier about JJ, the 30-year-old Manhattanite who had no retirement savings. If you saw the video, you’d know that I ripped him a new one for not having anything in his retirement fund. There’s good reason behind that!
It wasn’t that he wasn’t contributing to it, though. Many of you out there have a retirement account through your employer and you contribute the maximum to your 401(k). That’s fine, but that doesn’t mean that you’ve saved for retirement! I’m contributing 3% of my total paycheck right now, but that isn’t enough. That’s less than what’s optimal for retirement. You should be saving at least 10% of your total annual income in retirement, which means that a lot of the legwork isn’t up to your employer, it’s up to you.
There are a number of options to go with, so I’ll touch on a couple briefly. The first one is getting a Roth IRA, which is a pretty smart move. You can put money into it, which also later is deductible on your taxes. The only issue there is that, like a 401(k), your contribution is maxed out per year. Again, if you’re trying to put money into your retirement account, that can be a serious hinderance. For most people, between those two retirement funds, that doesn’t cover even 5% of their total income. What should you do with the rest?
Well, at that point, you need to take a risk. You can invest in a mutual fund, an index fund, a CD, just play the stock market, or play it super safe by getting government bonds. I personally am setting up a mix so that I have some high-risk stuff I can afford to lose and some low-risk stuff so I have a backup. I think of my retirement as a pie with a number of slices in it. I can afford to lose a couple, but the majority of it will still hold up. That’s precisely why so many people were screwed during the market downturn because they had failed to diversify their retirement portfolio. It’s a classic case of too many eggs in one basket.
Do you pay your future self first? Let me know in the comments below.
Question: I recently came on my job full time, but won’t get to contribute to a 401k until my first year is over. Do you recommend me contributing to an IRA in the mean time (I’m turning 20 in 2 weeks)
“For most people, between those two retirement funds, that doesn’t cover even 5% of their total income. What should you do with the rest?”
The combined annual limit of a 401(k) and a Roth IRA is over $20,000. While I would love to have a job where that amount was only 5% of my income, that’s nowhere near the case for most people. In fact, there’s no way I could possibly save that amount each year for retirement unless I lived in a box and defaulted on my student loans. While there are certainly many people who earn enough that they can save more toward retirement than those annual limits, I don’t think it’s the case for most Americans.
@Briana: Oh my god, yes. What a great time to start investing!
OMG, those old guys are so cute!
I’m all about the Roth IRA – only downside is that you max out at $5000 in contributions a year.
Article says: “…The first one is getting a Roth IRA, which is a pretty smart move. You can put money into it, which also later is deductible on your taxes”.
Contributions to a Roth IRA are never deductible.
“The first one is getting a Roth IRA, which is a pretty smart move. You can put money into it, which also later is deductible on your taxes.”
Just to be clear, a Roth IRA is not deductible now on your taxes, but you can withdraw the principal and earnings free of tax in retirement.
I agree with Becky – I’d love to max out my 401 (403b actually) – but even with me putting in 5% and my employer matching at 7% – i’m nowhere near the limit. and i know that my employer contribution is extremely generous!
Hi Clint,
I was just reading your article and I thought it was really thought provoking, especially the picture. I am an occupational therapy student in Canada. As part of our Affirmative Action we are trying to highlight prominent social influences in the society. We were wondering if we could use the picture in our poster board about social influences? If so, would it be possible to get a larger sized image?
Thanks!
Anuja