Retirement

What To Do With a Raise?

November 20, 2009 by Eric Rosenberg

I would like to take this opportunity to toot my own horn for a moment. I got a promotion and a raise! Yay! More money, more to do. Good times.

The question of what to do with a raise is often discussed in the personal finance world. People can save more, they can raise their standard of living, they can do some combination of the two. The answer for some is difficult. While we all know that we should keep living just like we are and save our raise, we are not always that good.

I am a big fan of the percent contribution method of dealing with a raise. If you make $40,000 per year and put 10% into retirement savings, you should stick with, at least, a 10% contribution if you get a raise to $45,000. That way, your retirement contributions increase with your raise. This is in contrast of putting in a fixed dollar amount, $4,000 per year at 10%, before and after the raise, because it would decrease to 8.8%.

Optimally, though, it might be even better to increase your contribution by a percent. If you can get by living comfortably at $36,000 per year after retirement contributions before the raise, you can certainly continue to do so after the raise. Why not split the difference? Increase your contribution by half of your raise if you can, or something higher that what you are doing now. It is easier to keep living the way you are today than to try to increase your contribution and adjust down later.

This time around, I am going to keep my retirement contributions the same by percentage, and will use the extra income to pay down student loans faster. Hopefully I can put my next raise 50% to a house purchase fund and 50% to retirement.

That's just my two cents. What have you done with raises in the past? Do you just keep it, keep contribution percentage the same and keep the difference, or raise your contribution? Please say in the comments.

The Easiest Way to Invest for Retirement

September 9, 2009 by Eric Rosenberg

We have talked about automatic investments many times on this blog. I am a big fan of setting up a system that takes money straight out of your paycheck and puts it away for the day you call it quits. However, people often get nervous about investing their retirement savings. I have a couple of suggestions that you might enjoy.

There is a type of fund built specifically for you. I know, you probably think “nothing is done just for me.” If you plan to retire at any time in the future, there is a mutual fund just for you.

Most large investment companies offer what are often called target date or destination funds. Each fund is tailored specifically to the investment needs of someone with a retirement goal of 20xx. I am invested in a fund called “Destination 2050” for people who will be 65 around 2050. There are Destination 2010, 2015, and so on where my 401(k) is stored.

The target date funds take out the guesswork in investing and asset allocation. As you age, the fund will be tailored for your risk profile. In your 20s, the funds invest almost exclusively in stocks. Later on, it moves toward fixed income (bond) securities and funds. As you near retirement, your investments are slowly moved into cash and treasuries, the safest, though lowest returning, investments.

I have a friend who was not putting money into her 401(k) because she didn't know what fund to pick. The target date funds are “funds of funds.” The managers pick the funds for you to make it easy. If you are not sure what to put your 401(k) or IRA investments into, seriously look at funds like this. It is easier to have someone else pick stocks and mutual funds for you. At least I think so.

Starting Your 401(k) at a New Job

August 24, 2009 by Eric Rosenberg

I was on the phone a few days ago with a friend who just started a new job at a big computer company. This friend is a smart girl. She has a college degree. She knows she should be investing for retirement. In our conversation, it came out that she has not set up her 401(k) yet at her new employer. She has been there for a month! On top of that, the employer gives a 5% match for just setting it up. Like most people in their early 20s, my friend was making a mistake. If you are like she was last week, here is what you need to do to get started.

Read your employer 401(k) information. Almost any salary (non-hourly) job has some sort of 401(k) sponsored by the employer. Most big companies, and many small ones, will offer an automatic investment option where the money is taken directly from your paycheck. Learn all you can about your setup and what you need to do.
Go to the website or find the form you need to get started. Most of these forms ask for simply information like an employee ID number and, sometimes, a social security number.
Calculate your investment amount. If your employer offers a match, it is free money! Take full advantage. If you can get a 100% match up to 3%, put at least 3%. If you can get 100% match up to 5%, put at least 5%. Do not pass up free money, that would be stupid.
Pick your fund. This is the part where most people in their 20s give up. They think it is too complicated. Well, have no fear, I am here to help. Look through your fund options. Some employers have 2 or 3, some have 20 or 30. Almost all have a diversified mutual fund with a target retirement date. My employer calls them “destination funds” while some call them “life-cycle funds.” These are automatically allocated to a risk profile for people your age. I am in the “destination 2050” fund for my 401(k).
Forget about it. Increase your contribution if you can over time.

The beauty of most 401(k) plans is that you do not have to think about it. You can set it up and forget about it. Over time, I have increased my contribution from 3% (to get my whole employer match) to about 7% today. Including 401k, Roth, stock purchase plan, and my Schwab investment account, I am now saving or investing about 15% of my paycheck. Over time, I want to increase it even more.

Don't be intimidated by the sign up process. Giving up free money is stupid. You are not stupid. If you were, you would not be here. If you are already investing, look at increasing your percentage. If you are not, what are you waiting for? Start today!

Using Your 401k in a Rough Spot

January 16, 2009 by Eric Rosenberg

Many people are getting worried and are acting irrationally because of the current economic downturn. I have some advice for people. STOP FREAKING OUT!

People freaking out is what causes economic downturns. Everyone hears things are bad so they stop spending. That causes a long chain of economic events that turn into a recession.

Anyway, I heard about a family that liquidated their 401k to pay off their house. Bad idea. There are many drawbacks of dipping into the 401k. Here is what is wrong with it:

You pay mega taxes on early withdrawals from a 401k. 401k is a special type of account with a special tax code that lets you deposit into the account before taxes. Making a withdrawal before retirement means you pay back those taxes and penalties. It is an expensive “cushion”.

It ruins your retirement. You have that money put away for a reason. Do not take a loan off of it. Do not take any of it. Just leave it until you are done with work.

Those are the big two reasons. They are very big. Do not touch your 401k. I know it is tempting, but there is always another way. That money is there for you to retire. Do not count on anything else. That is it. Leave it there.

My Tips in a Recession

December 28, 2008 by Eric Rosenberg

Everyone keeps talking about how the economy is so bad and there is a big recession and the world is going to end. I would not say it is quite an apocalypse. All of the hype is half of the cause of problems. I don't think we are in a traditional recession, I think we are in a transformation. The economy is going to emerge much different than it started. Banks are going away. Loan companies are becoming banks. Employers are slimming. Things are changing, but I do not think it will ever be the way it was a couple of years ago. That said, this is how I am dealing with the recession:

I am doing nothing different from before the recession. That is my secret.

I am working hard at work to keep up with everything. I am trying to make myself more important in operations so I am considered vital if layoffs do occur in my area of the company. Events in my department are actually on track to have an open supervisor position. I am going to try to get it.

I am still saving 10% for retirement. A few bad years in the economy will not derail my retirement plans. I want to retire young.

I am spending the same as before, as my situation has not changed. I still pay off my credit cards in full every month. I still take my girlfriend to dinner and movies. I still pay my rent and utilities on time.

The best way to whether a bad economy is to work hard to ensure your job is safe. Do not feel bad if you are the one still there after a layoff, that means you worked harder and were considered necessary.

If you lost your job, do not just sit and mope. You were probably given a severance. The end date should be your last possible date to get a new job. If you have to take a waiter job or retail job temporarily, do it. Keep an income. No job is below you. In between jobs I was a waiter. I made decent money and quit when I got my new job.

There is no excuse for you to not have a job. Any reason you give why you do not have a new job (if you were laid off) is just an excuse. There is some job you can get. You can make money, it just might be less than before. That happens. Deal with it.

So, as I said, do nothing different from before the recession. Keep going to work. Keep living your life. Spending like before is the only thing that can fix the recession. If you need a new car, go buy one (but not an American car). If you need credit, you can get it. If you have a bad credit score, read my posts on raising your score. Get on the right track. Rates are low, buy a house. Do something with your life, do not just sit stagnant like the economy.