Help planning for future

[thegameksk]

Hey all. I just got a job with a company that sells life insurance. THere is no pension or anything but what they have is for every year you work there you get 10% of the profits for the people youve brought in. After 10 years with the company you are 100% invested so you are locked in for life. I want to save some of my pay as well to plan for future. I dont know much about investments since this is my first real job outta college. On average I should make 1500 a week. 15% of which ill put away for taxes. I am wondering what % I should put away? Also what should I do with that percentage? Stocks, savings account, etc? Thanks!

[jpg7n16]

On average I should make 1500 a week. 15% of which ill put away for taxes.

Tax should be withheld from your paycheck in the 1st place. You shouldn't have to save up your own taxes.

Why are you saving for taxes?

I am wondering what % I should put away? Also what should I do with that percentage? Stocks, savings account, etc? Thanks!

Your savings should be invested based on the goal they are for.

If you are saving your own tax money, you will need it within the next 12 months, will be adding to it 2x/month, and cannot afford any risk with that money. That leads you to a money market/savings account type.

If you are saving for a trip in 4-5 years, you cannot afford to have the funds locked away in a retirement account where you would be charged a penalty for early withdrawal. You also have enough time to make a little risk worth your while, as money markets don't pay much - you could consider a bond fund, or a bond, or a long term CD. But no stocks. Stock market investments take time.

For retirement: The goal is 15-20% of income saved for retirement. Start with 7-10% and increase a little over time. If your company has a 401k, you should start there.

These funds you do not need for a very long time, and can afford to take risks with. (risk means that you run the risk of actually losing money. it happens. But hopefully, the investments will return enough on average to beat out inflation and build up a nice retirement nest egg.) And remember, retirement acconts are for retirement money.

Since you admitted you don't know what you're doing, the standard option is to use a target date fund of some kind. These are funds that allocate for a moderate (not too aggressive, not too conservative) investor, and automatically adjust over time as you get closer to retirement.

Low upkeep + moderate allocation + automatic diversification and rebalancing = good for a beginning investor

Hopefully, your 401k offers some sort of 'year based' (aka target date) mutual fund. I'd put 100% there until/unless you learn enough to intentionally deviate from its allocation.

[thegameksk]

Hello. Thanks for your response. The company has no retirement package. I am not sure how long ill stay with them for but I wanna start some type of retirement package for myself. Im not sure what to do.

[Petunia 100]

Will you be an independent agent, in other words, self-employed? If so, 15% is not enough to set aside. Self-employment tax is 15.3% (though it was 13.3% for 2011). Federal (and state, if applicable) is in addition to that. Start making estimated tax payments, don't wait until your income tax return is due.

A great way to save for retirement is with IRAs, though you will be limited in how much you can put away. Anyone with earned income can contribute to a traditional IRA (5k annual limit for those under age 50). If your income is indeed 78k per year, you could fund a Roth instead, or even split between the two.

Beyond that, look at tax-efficient investments, such as index funds and muni bonds.

If you start young consistently salting away 15% of your gross income into retirement funds, you should do fine.

[thegameksk]

Yes I am considered an independent contractor. I should make 55k my first year. I have questions:

1) What do you mean estimated tax payments? How can I know how much per check id have to pay?

2)How can I get an IRA and what exactly is it?

3)What are index funds and muni bonds? How can I find other tax efficient investments?

I am also planning on getting an accountant to help out with all this.

[bjl584]

Yes I am considered an independent contractor. I should make 55k my first year. I have questions:

1) What do you mean estimated tax payments? How can I know how much per check id have to pay?

2)How can I get an IRA and what exactly is it?

3)What are index funds and muni bonds? How can I find other tax efficient investments?

I am also planning on getting an accountant to help out with all this.

1) Tax payments for independent contractors are collected quarterly. So, you estimate 55K a year. That's 13750 a quarter. That's what you base your tax payments on. It doesn't have to be perfect. Just reasonably close. The IRS will either send you a bill or a refund at the end of the fiscal year.

2) An IRA is an account. An individual retirement account (IRA). You can set them up through any broker such as Vanguard, Fidelity, your bank, an independent broker, and so forth. Basically, you can invest in anything that you want to within the account. Stocks, cash, bonds, or mutual funds. It works somewhat like a 401K, but typically gives you more investment options and has different contribution limits.

3) Muni bonds are municipal bonds. They can be a good part of any portfolio due to their high return, relative safety, and their tax advantage. I would start with something more basic though. Maybe a targeted retirement fund to get started.

[MonkeyMama]

Here is info re: Estimated Tax

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

Opening an IRA - most funds will require an initial investment of $3,000 or so. I would start setting aside 10% minimum to retirement. 15% is good, if you can swing it. Vanguard is certainly the lowest cost place to put your IRA - so start looking into that while you save up the money to open an account. I believe you only need $1,000 to invest in their Target Retirement Fund - which is a great place to start.

Of course, if you are an employee, the most you can put into an IRA is $5k per year. As an independent contractor, you can always open a SEP IRA and put away more. So, that is what I would recommend. (10% of 55,000 is more than $5k, so the SEP IRA would be a better option).

In addition to retirement savings, you will want to build up some cash savings. $15,000 is a good goal to aim for (or about 1/4 of your annual income). It just depends what kind of expenses you have - how quickly you can save that up. From there it just depends what your goals are and what you want to save up for? Retirement savings/IRAs save you taxes. Cash is preferred for money you need in less than 5 years. Money you won't need for 5+ years can be invested. It's impossible to tell you how much to save without knowing what your financial goals are. 3 months' income in the bank (cash) and 10-15% to retirement are just general rules of thumb. A starting point.

Talking to an accountant is a good idea. There may be other tax ramifications of this insurance sales setup. Can get complicated. But, consult with an accountant to get your estimated taxes and retirement on track. Ideally, once you understand all this and get everything set up, you might not need to continue to hire an accountant, but I think it's a good idea to make sure you are paying in enough taxes, and you can get more specific guidance. 15% is probably not enough to save for taxes, as Petunia says.