Iím doomed and will have to work 'til I drop, paying for socialist
programs. I'm 47 and have about 20k in my 401(k) and about 200(k) in my
IRA. I'm putting 16 percent of my income into the 401(k). I don't own a
house or even a pot to p** in.
Is there any way that I can retire some day?
Dear Jerry, Fear not! You're in much better financial shape than you realize.
I ran your situation past John Burton, a chartered financial consultant with
Robert W. Baird in Pittsburgh, Pa. We both crunched the numbers and came to
the same conclusion.
Given the amount you've saved
up to now in your 401(k) and IRA, plus the contributions you will make over
the next 18 years, you should have close to $2 million dollars by the time
you retire at age 66! (Since you're a baby boomer, that's the age at which
you will qualify for full Social Security. Just think, at that point you'll
be benefiting from one of those "socialist" programs you rail about today.)
We came to this conclusion by starting with the $220,000 you currently have
in retirement accounts (401k + IRA). Then we figured you would continue to
add $10,500 annually. We assumed your retirement portfolio would receive
an average return of 10 percent per year over the next 19 years and
voila! You'd end up with just over $1.9 million bucks. Should be enough
to allow you to buy a home with more than one "pot to p** in."
Now if you're really serious about socking away the money, Burton suggests
you also consider "contributing to a Roth IRA, provided your adjusted gross
income is below $95,000." (You don't mention a spouse or family, so we're
assuming you're single. If you're married, the income limit goes to
$150,000.) Roth IRAs are a tremendous retirement savings vehicle that is
sadly unappreciated. Unlike a traditional IRA, you arenít allowed to
deduct the $2,000 contribution from your income. However, if you're putting
that much into your 401(k), you probably don't qualify anyway. (In order to
qualify for the full deduction, a single individual who is covered by a
retirement plan at work cannot earn more than $32,000 this year.)
The real beauty of a Roth is that your money grows- not tax-deferred
but income tax FREE!
According to Burton, investing $2,000 a year in a Roth IRA over the next 19
years would give you another $112,000, provided it earned an average of 10
percent a year. And every cent would come out tax-free.
So, how do you make sure your retirement monies earn the 10 percent we've
been talking about? Burton recommends a diversified portfolio divided in
the following way: 20 percent large cap growth; 15 percent mid-cap growth;
15 percent small cap growth; 30 percent growth & income; 20 percent
international equities. Think of your separate retirement accounts as a
single pool of money and spread this allocation across your entire "pool."
By the way, as I'm sure you know, 10 percent is less than half the average
return in the U.S. stock market in recent years. While past performance is
not indicative of future results, this could mean that you might not have to
load up on high risk, Internet stocks to achieve this.
Thanks for allowing me to be the bearer of such good news!
I have a 401(k) plan that I started 4 years ago and am now looking for
advice on what to do with the 401(k) from my previous employer. I amassed
about $16,000 dollars in value with the 401(k). Should I move these funds
into my current company's 401(k) plan or go with an IRA? I'm only 26 and
want to be an aggressive investor. What can I do to maximize growth
Dear Thadious, Congratulations on recognizing the wisdom of keeping your 401(k)
contributions in a tax-deferred account! This, plus the magic of
compounding, enables your money to grow much faster.
Not all 401(k) plans will accept money from a previous plan. I'm assuming
yours does, or you wouldn't be asking about this. The first thing I'd
suggest is to take a close look at the investment options available to you
at your new company. Does your new 401(k) offer a range of mutual funds,
including international, small caps and mid-caps? How do all the funds
stack up in terms of performance? If you want to "be aggressive," make
sure there's a way you can do this in the new plan.
If, on the other hand, you roll your old 401(k) money into an IRA, you have
more than 10,000 mutual funds, plus individual stocks to choose from. While
it may not be important to you right now, some day you'll probably have a
family. An IRA usually gives you much more control over what happens to
the money if you die. So, without knowing the details of your new 401(k), I
favor rolling your money into an IRA.
Good luck and keep that tax-deferred growth coming!
have a question for Gail Buckner and the Your $ Matters column,
send them to email@example.com
along with your name and phone number