Tips for starting on the road to retirement
Money is one of our most pressing concerns throughout adult life. From school graduation until the first day of retirement and beyond, a person's financial net worth plays a large role in his or her ability to fully enjoy life.
Finding a good job can be a challenge when you are a wet-behind-the-ears college graduate. Once you have found employment, you soon are faced with questions that will not be answered for decades to come, such as:
- Am I saving enough for retirement?
- Will my 401(k) plan provide the returns I need to build a substantial nest egg?
- Should I save in a tax-deferred account, or choose a Roth option?
There are many different roads that can lead you to a sound retirement. But the earlier you start your retirement planning, the more likely you are to arrive at your intended destination, says Kenneth E. Williams, a visiting lecturer and faculty member at the Kettering University Department of Business in Flint, Michigan.
In the following interview, Williams tackles questions surrounding various career and retirement concerns, and maps the journey from college days to golden years.
What's the single most important thing that people should know as they enter the workforce from college?
College graduates must take their skills and knowledge in their field of study and professionally apply their skills and knowledge in the workplace. This is achieved through:
- Effective communication.
- Utilizing critical thinking and quantitative reasoning skills.
- Embracing diversity and having a global awareness.
- Being a team player.
- Exhibiting leadership skills and ethics.
College graduates must also be informed about important issues.
As today's workforce is being transformed by scientific and technological advances, college graduates must be familiar with the basic concepts of science, technology, engineering mathematics and business to think critically about the world and to make informed decisions about personal and societal issues.
As routine tasks become more computerized, more and more jobs require high-level skills that involve critical thinking, problem-solving, communicating ideas to others and collaborating effectively.
With the burden of financing retirement resting squarely on the shoulders of individuals, how much of their income should they allocate to retirement savings?
Most financial planners recommend you save at least 10 percent of your income if possible. However, people should figure out how much their personal household budgets allow them to save each year.
The Internal Revenue Service allows a person to contribute a maximum of $17,500 on a pretax basis in 2014, (or) $23,000 if you're 50 or older. Within that limit, a person has to calculate how much he or she needs to save.
If you're just starting to plan for retirement at age 40, you'll need to put away more than if you were 25.
A lot of focus has been placed lately on 401(k) fees. Are fees generally too high? Is Yale law professor Ian Ayres out of line for telling thousands of plan sponsors that they may have breached their fiduciary duties?
If anything, professor Ian Ayres has provided more attention on the cost of workplace retirement investing. Fees for large 401(k) plans should be under 1 percent. If you're paying over 1 percent of your account's value, you may want to investigate why expenses are that high, especially if you're in a large 401(k) plan.
In 2012, the federal government began requiring 401(k) fees be more clearly disclosed in the statements sent to participants. The statements are a good start in that they provide some transparency on the cost of plans to workers.
The statements provide the expense ratios for the mutual funds you own, and total expenses, which allows you to compare them with published expense ratios for the same funds offered to the public.
Are 401(k) plans the best place for investors to save for retirement?
401(k) plans are still beneficial for retirement saving, especially when some of your contributions are matched by your employer.
Although it almost always makes sense to contribute enough to get your company match, whether you should save more than that in your 401(k) depends on factors such as how much you're being charged in administrative fees or the quality of the investments available.
Alternative retirement vehicles include individual retirement accounts and variable annuities, both of which also can shelter tax-deferred earnings.
For what type of investor is the Roth IRA and Roth 401(k) best suited?
That depends on the investor's tax situation. Generally, the longer you have until you retire -- and if you expect your tax rate in retirement to be higher than your current rate -- the more likely you are to benefit from a Roth 401(k) account versus a traditional 401(k).
Since more money can be accumulated in a Roth 401(k) at any income level, it is best suited for people saving for retirement. The Roth IRA is best suited for retirees because no required minimum distributions are needed, allowing the funds to continue to grow tax-free.