Retirement savings question

[happygirl]

Hi everyone. I'm thinking of going back to work very part time. I currently have an IRA so I will work on fully funding that, but I probably won't have access to a 401k since I'll probably be doing just temp work. I can open a taxable retirement account on my own though, can't i? Can someone tell me, in very simple terms, what the differences are between retirement options?

Sadly, I depended on my husband's retirement plan for myself and now I'm facing divorce. I haven't worked outside the home in years and although I'll be okay with month to month living expenses, I want to build up my retirement accounts, but without a regular job, I'm not sure how to do that beyond the IRA.

Thanks in advance. I really appreciate being able to ask questions here.

[creditcardfree]

Yes, you can open a retirement account outside of your employer. The most basic options are a Traditional IRA which is tax deferred (paid upon withdrawal, like a 401k would be), and Roth IRA (not deductible, which means taxes on that income paid now).

Contribution limit is $5000 per person. As long as you earn $5000, you can contribute the full amount. You can contribute to both types but no more than $5000 between them.

You can open up IRA's anywhere...but think mutual fund companies like Vanguard, Fidelity and T Rowe Price that don't sell on commission and have lower fees.

[disneysteve]

Contribution limit is $5000 per person. As long as you earn $5000, you can contribute the full amount. You can contribute to both types but no more than $5000 between them.

Actually the IRA contribution limit is $5,500/year if you are under 50. If you are 50 or older, it is $6,500.

[disneysteve]

To expand on what creditcardfree posted...

With a traditional IRA, you fund it and, if eligible, can take a tax deduction for your contribution. The money grows tax-deferred. When you start withdrawing the money in retirement, it is taxable then.

With a Roth IRA, you fund it with post-tax dollars. It grows tax-free and when you withdraw it in retirement, there are no taxes due.

There are some other significant differences between the two but those are the basics.

If you are self-employed to any degree, you can also open a SEP-IRA and contribute to that in addition to a traditional or Roth IRA. So if you do any hobbies or crafts, sell on ebay, have any type of home-based business, etc., that money can go to a SEP.

[happygirl]

I have both a Roth and a traditional IRA. I plan to put 6500 into (most likely) the Roth each year. I'd like to save more than that though. I was thinking of setting up a taxable retirement account since I don't have access to a 401k. I'm 50 now, and I'll probably want to start withdrawing a little each month in ten years, when alimony decreases. I guess I'm not sure if I should look into opening a taxable retirement account of some sort or just start doing ladder CDs. I might only have an extra 3-500$ per month beyond the money I'll be putting in my IRA. And then again, I'm still in shock somewhat so who knows, maybe in 6 months I'll feel like going back to a more steady job that offers a 401k. Alimony will cover all my basic bills. It's retirement I'm really worried about.

[disneysteve]

You can definitely open an investment account that you designate in your own mind as retirement money. It won't get any special tax treatment like an IRA or 401K but that's okay. I have a few accounts like that. Stick to low cost mutual fund companies like Vanguard or discount brokerages like Scottrade to keep costs down. And focus on tax-efficient investments like index funds.

[happygirl]

You can definitely open an investment account that you designate in your own mind as retirement money. It won't get any special tax treatment like an IRA or 401K but that's okay. I have a few accounts like that. Stick to low cost mutual fund companies like Vanguard or discount brokerages like Scottrade to keep costs down. And focus on tax-efficient investments like index funds.

Thank you! I'm sure I'll have more questions over the next few months as I adjust to the changes and start to take action.

[snafu]

The problem with laddered CD just now is the miserable interest rate being paid currently. You will be well served by reviewing your risk tolerance from one of the online questionnaires like www.bankrate.com. Your lawyer can negotiate a retirement contribution from EX to help fund your retirement. For 2014 you can use income earned in 2015 but need to verify the cut-off date.

[happygirl]

The problem with laddered CD just now is the miserable interest rate being paid currently. You will be well served by reviewing your risk tolerance from one of the online questionnaires like www.bankrate.com. Your lawyer can negotiate a retirement contribution from EX to help fund your retirement. For 2014 you can use income earned in 2015 but need to verify the cut-off date.

I am getting part of his 401k, but we'd only begun to focus on that in the past several years. If the marriage wasn't ending, I wouldn't be afraid because we were fully funding our IRAs as well as his 401k to make up for lost time. We're doing a QDRO to roll part of his 401k into my IRA but even with the max IRA contribution, it won't be where I'd like it to be to feel comfortable. I've been fairly safe about my IRA, while my husband was more of a risk taker with his. We balanced one another pretty well, but now I really need to educate myself and it isn't coming to me easily. It's almost like a different language! I've even tried reading the "for dummies" book and it confused me. I'm sure some of my problem is fear and lack of self confidence at this point, but I can't let that slow me down too much.

I think I need to get through the holidays and focus on finding a job of some sort, then my next priority will be retirement. 2014 has been funded, thank goodness.

[Petunia 100]

I have both a Roth and a traditional IRA. I plan to put 6500 into (most likely) the Roth each year. I'd like to save more than that though. I was thinking of setting up a taxable retirement account since I don't have access to a 401k. I'm 50 now, and I'll probably want to start withdrawing a little each month in ten years, when alimony decreases. I guess I'm not sure if I should look into opening a taxable retirement account of some sort or just start doing ladder CDs. I might only have an extra 3-500$ per month beyond the money I'll be putting in my IRA. And then again, I'm still in shock somewhat so who knows, maybe in 6 months I'll feel like going back to a more steady job that offers a 401k. Alimony will cover all my basic bills. It's retirement I'm really worried about.

Good choices for taxable accounts include total stock market index funds, growth funds with low turnover, municipal bonds, and most especially international total stock market index funds. You want to avoid taxable bonds, funds with high turnover, and funds which pay a lot of dividends. Keep those investments in your tax-advantaged accounts.

Don't put your retirement money in CDs.

Also, make sure you have adequate cash reserves before putting money into investments.

[Petunia 100]

I am getting part of his 401k, but we'd only begun to focus on that in the past several years. If the marriage wasn't ending, I wouldn't be afraid because we were fully funding our IRAs as well as his 401k to make up for lost time. We're doing a QDRO to roll part of his 401k into my IRA but even with the max IRA contribution, it won't be where I'd like it to be to feel comfortable. I've been fairly safe about my IRA, while my husband was more of a risk taker with his. We balanced one another pretty well, but now I really need to educate myself and it isn't coming to me easily. It's almost like a different language! I've even tried reading the "for dummies" book and it confused me. I'm sure some of my problem is fear and lack of self confidence at this point, but I can't let that slow me down too much.

I think I need to get through the holidays and focus on finding a job of some sort, then my next priority will be retirement. 2014 has been funded, thank goodness.

I've been right where you are now, Happygirl. Take it slow and be patient with yourself.

Good investing is simple. Choose a reasonable asset allocation plan, keep your costs low, and rebalance annually. That's it.

Are you familiar with index investing? The goal is to match the returns of the market, minus expenses. There is no attempt to "beat" the market. Over time, 80% of funds which attempt to beat the US market fail to do so. This is due to higher costs and bad decisions. Most index funds have ultra low costs. There are no bad decisions, because they own a little bit of everything.

I use index funds only, as do many of the posters here. You can learn more about index investing here:

http://www.bogleheads.org/wiki/Main_Page

Since you are investing via your own IRAs and a taxable account, you have the freedom to choose your own custodian. Choose wisely. You want a custodian who offers plenty of low cost investment vehicles. Vanguard and Fidelity are excellent choices. If you plan to go with a brokerage account, Charles Schwab is another excellent choice.

Best of luck to you for a happy future. I hope you will stick around, and maybe even start your own blog.

[happygirl]

Thank you Petunia. I have a good EF and I just got YNAB to help me keep track of my regular budget. I think I've got all that pretty well covered.

I saw boglehead mentioned by someone else, so I've been looking at their site although a lot of it is over my head for now. I appreciate that people are willing to be helpful. Life has to go on, even when it didn't turn out like I thought it would.

[Petunia 100]

Thank you Petunia. I have a good EF and I just got YNAB to help me keep track of my regular budget. I think I've got all that pretty well covered.

I saw boglehead mentioned by someone else, so I've been looking at their site although a lot of it is over my head for now. I appreciate that people are willing to be helpful. Life has to go on, even when it didn't turn out like I thought it would.

That makes me laugh, because a decade and a half after discovering Bogleheads, much of what they discuss is still over my head.

But they discuss a lot of finer points, which have very little impact on your total return. The most important decisions, which they acknowledge time and again, are just to make a reasonable plan and stick with it, rebalancing along the way. (The low costs are a given with Vanguard index funds and etfs, Fidelity index funds, and Schwab etfs).

Yes, life has to go on and your financial security is still very important. Life has more good things in store for you.

I met my ex-h at age 19, married him at 21, and divorced him at age 40. All of a sudden, I was re-evaluating the meaning and purpose of my life. There is an adjustment period and it takes some time to find your way. You will get there.

[creditcardfree]

Actually the IRA contribution limit is $5,500/year if you are under 50. If you are 50 or older, it is $6,500.

And I knew that when I was posting! We saved $5,500 each this year in our IRAs.

[sandrark]

Investing isn't brain surgery - you are smart and articulate and thoughtful, so you can do this.

My recommendation as a framework to thinking about it comes from Get Rich Slowly - which used to be an excellent blog. My favorite article is this one:

http://www.getrichslowly.org/blog/2009/06/02/the-lazy-way-to-investment-success/

JD breaks it down into easy, manageable goals, and does so with low-cost Index mutual funds. Which the Bogleheads totally agree with.

I would also encourage you to fund a Roth IRA over a traditional one, if you can afford to. If and when you take the money out, it's tax-free. And it does not REQUIRE minimum distributions when you get to age 70.5, the way the traditional IRA does.