Posted: May 11th, 2011 | Author: Joe | Filed under: Banking, Investing, Tips | Tags: 401(k), Banking, IRA, Refinancing | 2 Comments »
“The open palm of desire
Wants everything
It wants everything
It wants soil as soft as summer
And the strength to push like spring”
-P. Simon, Further to Fly
Spring is here (FINALLY)!
It’s been a long, cold, lonely winter here in the northeast, but the buds are present and the tulips are pushing through. That means it’s spring cleaning time – time to get our (financial) houses in order!
Here’s how I’m cleaning out the financial cobwebs in my life this spring, and using that desire to push like spring into a summer realignment of my retirement planning.
Consolidating bank accounts
Life’s been a bit crazy for me these past 7 years. Here’s what happened to me that had an effect on my finances:
- I moved to a town 2 hours away and changed jobs
- I became a homeowner for the first time
- I had a child
- I had another child
- I moved to another new town (20 minutes away) and bought a new house, to make room for an expanding family
- I had another child (that makes 3!)
- I changed jobs again
That’s pretty much it, but I think that’s enough.
All of the above changes have left me in a situation of having abandoned bank accounts strewn to the four winds. As of just last week, I had 5 bank accounts at four different banks! That’s not counting any high yield, online savings accounts at ING and HSBC either. That’s just local banks and credit unions.
Remarkably, most had little money in them and no fees associated with keeping them open, even though they were dormant. When I cleaned out the two accounts at one bank that had been dormant for more than 2 years, I had just under $50 between the two of them. I probably did them a favor by saving them the money to mail me bank statements every month stating that nothing had changed from the previous month!
Of course, all of these accounts make my book keeping a hassle too. I had piles of useless papers to be keep, or discarded securely and so many accounts in Quicken that my eyes glazed over every time I started to reconcile my banking activity. Not the thing you want to happen when maintaining your finances.
In fact, I made a sort of informal pledge to myself at the beginning of the year to simplify and streamline my financial life as much as possible. It’s already paying off. I no longer feel overwhelmed by the number of accounts and financial detritus cluttering my Quicken records. As a result, I am up to date on my banking for the first time in over a year! Go, Me!
Refinancing
Another effect of all this moving around over the past 7 years is that while I got a decent interest rate on my mortgage in 2008, rates had gone even lower since then.
Rates got so low that I initiated a refinance back in January with a local credit union, which meant yet another bank account (see above), but it was worth it.
It took about two months of processing, but I went from 6% to 4.5% – saving over $200 a month!
I was initially reluctant to refinance, but the rates just became stupid low, and it’s a bi-weekly payment schedule with no pre-payment penalties so it just made sense. Besides, it wasn’t a cash-out refinance, so I wasn’t setting the clock back on owning the home free-and-clear.
Looking ahead
“…And the strength to push like spring”
Rollover to an IRA
That covers what I’ve done so far this year, but the final result of that list of financial changes is due to the job changing: I have a dormant 401(k) plan.
I’ve written about this before. The simple problem is that for the first time in my professional life, I work at a company that offers a terrible 401(k) plan and no company match. I love the job, and it’s in a very secure sector, so it was still the right move to make. But while all this dust was settling on the new job and baby activity, I had put my retirement contributions on hold until I figured out what I wanted to do with it all.
Well, I finally figured it out, and now I need to implement it. No more dawdling, dammit!
In the next few weeks, I will be rolling over my 401(k) to a simple IRA and start implementing my rollover plan detailed here.
Next steps.
After that, I figure it’s a good time to create a new budget to account for the savings from the refinance and the new contributions to my IRA as well as the hidden costs of living in this new house with another child. But more on that another day.
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Posted: February 24th, 2011 | Author: Joe | Filed under: Retirement | Tags: 401(k), Investing, Opinion, Retirement | No Comments »
I came across this article today and what really caught my eye (besides the stark numbers) was that Baby Boomers who are now just reaching retirement age are referred to as “The 401(k) generation.”
It’s true that the 401(K) came into prominence during their working lives, but I would hardly consider them “The retirement savings plans that many baby boomers thought would see them through old age.”
The article seems contradictory too. On the one hand, we are told that these Boomers have relied on them for retirement, and then we’re told that one reason the 401(k) has fallen short for these Boomers is that they never really contributed enough with any consistency. Which is it?
Also, the 401(k) came into heavy use in the 1980′s. These Boomers were well into their 30′s by then. Did they wait until then to start saving?
I realize I’m being a bit over the top, but only because the article doesn’t really portray the situation correctly. For example, it doesn’t really go into how this generation was caught at the crossroads between pensions and individual retirement accounts. That’s a circumstance of the times, and doesn’t really mean that the 401(k) plan has failed as a vehicle for retirement savings.
One thing is certain, retiring boomers have tough road ahead.
Personally, I consider my own generation and the current (X and Y) to be the generation of the 401(k) because we know that social security will not be viable for us and we are responsible for our own retirement. I encourage you to read the article because it may just scare you into action on your own retirement planning!
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Posted: February 23rd, 2011 | Author: Joe | Filed under: Investing, Retirement, Saving | Tags: 401(k), IRA, Retirement, ROTH IRA, Saving | 1 Comment »
I switched jobs last year and along with a better position and bigger salary came a host of benefit changes. One of these changes was my 401(k) plan.
Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.
Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.
I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.
The problem
The problem is this: The investment options in my current employer 401k plan stink.
The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.
I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.
Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.
My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.
So, I have a few options and if you’re in the same situation, you do too!
Retirement plan options
The 3 basic retirement plans available to me in my career are:
- Traditional IRA
- Roth IRA
- Employer’s (lousy) 401(k) plan
Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.
I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.
That leaves the Traditional IRA and the crappy 401(k).
Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:
The contribution limit for a traditional IRA is only $5,000!
By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!
With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!
The total solution
Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).
After much pondering, and poking around the Internet (to no avail), my solution is this…
I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).
For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:
- $5,000 to funds in my IRA
- $2,000 to funds in my 401(k)
I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.
The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.
It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them! 
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Posted: January 4th, 2011 | Author: Joe | Filed under: Retirement | Tags: 401(k), Retirement, Saving | No Comments »
Gen Y often gets a bad rap from Boomers and Gen X-ers for being entitlement minded and lacking ambition. I suppose it’s due at least in some part to the natural tendencies of each generation thinking the next has it easier than they had it, but if this article from The Street is any indication, Gen Y is not on track to show they’re any better at saving for retirement than previous generations.
According to the study, 80% of Generation Y workers (defined by the study as roughly 18-30 year-olds) will fall short of having sufficient funds for retirement by the time they get their last paycheck.
“After factoring in inflation and post retirement medical costs, its researchers project Generation Y workers will need to save 18.7 times their final pay in retirement resources — including Social Security, employer-provided defined benefit and defined contribution plans and employee savings — to maintain their current standard of living in retirement.”
I think there’s a lot of truth at the heart of the study, but not just for Gen Y-ers, but there are also a host of assumptions at play here too – most of which make the picture even more bleak!
For example, does anyone really expect Generation Y members to be able to collect Social Security by the time they retire? If the system isn’t completely bankrupt by that time, it will likely be reduced to something akin to retirement welfare – providing simple subsistence to those below the poverty line who never saved anything for retirement. Like many of Generation X, Generation Y retirees will face saving for their own retirement in their private accounts (401ks, etc..) while funding the retirement of others through the social security tax.
Another point that isn’t made clear in the article is how the unemployed factored into the results. A large portion of the nearly 10% unemployed are in this generation.
The article goes on to point out that 41% of workers with access to 401k plans do not save enough to get the company match (free money people!) I think this highlights another underlying problem – younger workers lack a saving mindset.
It’s not a Gen Y thing, I can remember when I got my first real job out of college and was making what was big money to me at the time, I didn’t think anything about retirement savings. My parents never talked to me about such abstract things, and it seemed a lifetime away at the time. Fortunately, I had a manager who took me aside and told me – in no uncertain term- that I was going to set aside at least 10% of my salary and increase that by 1% every year.
Thanks to her, I had 6 figures in my 401k by the time I was 35.
I didn’t fully understand the Importance of what she did for me until many years, and a few jobs later, but I see the difference it made in my life and I wonder how many in my generation and others never had the same kind of retirement guardian angel I had.
One thing is clear, without sufficient savings rate the standard of living for Gen X and Gen Y retirees will be significantly lower than previous generations.
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