Retirement plans have been in the news a bit lately.
First, President Trump canceled an Obama-era initiative meant to increase entry-level retirement savings. Introduced in 2014, it was called the myRA. It was meant to be an account for anyone — with no fees and no minimum investments, and with funds invested in relatively safe government securities. But with little marketing, the account ultimately had few takers. The 20,000 myRA holders are advised to open a new Roth IRA, as their accounts will stop accepting deposits by December 4. (See more information at https://myra.gov.)
Second, there was a brief uproar over a proposal to cut the cap for pretax 401(k) contributions as part of the Republicans’ tax reform efforts. The president has equivocated on this, but Republicans in Congress seem intent on including it in the final bill.
I hope these episodes served as a general reminder of just how important retirement savings are. And regardless of policy changes that may be in the wind, most people can take stronger steps to protect their future selves.
I got to thinking that retirement is a lot like cooking, one of my favorite pastimes. Here are some cooking maxims that also apply to retirement saving. Share this column with a young friend and let me know what you think.
ª ”Match your meal to the time of day.”
Most people don’t want to dig in to broccoli at breakfast. And with retirement accounts, it’s important to pick the right one for your stage in life.
A Roth IRA is especially well suited to entry-level workers, who are earning less now than they expect to in retirement. With a Roth, you pay taxes on your contributions, but the money then grows and can be withdrawn tax-free.
A traditional IRA works the other way around. You pay no tax on the money you put away, but you do pay taxes when you take it out. This is the right choice for people who are currently earning more money than they expect to be living on in retirement.
A 401(k) is like eggs: good any time of day. As long as you have employer eligibility, a 401(k) should be a good option. Unlike IRAs, which only accept up to $6,500 in 2017, a 401(k) allows you to put away up to $18,000 a year tax-free. If you’re over 50 that goes up to $24,000. You only pay taxes when you start to draw down the benefits.
• ”Don’t let your stomach be bigger than your eyes.”
When it comes to a buffet, many of us take more food than we can really eat. When it comes to retirement savings, we have the opposite problem.
These days, more employers are making 401(k) participation a default. This is good news because without that nudge, many people never sign up at all.
But, that automatic contribution is often set too low to make a big difference down the line. A good rule of thumb is to save 15 percent of your income, including the employer match if there is one.
If you can’t step it up that much immediately, make a note in your calendar right now to increase your contribution rate by 1 or 2 percent next year, and the year after that, and the year after that until you reach your goal.
• ”Cut out the fat”
One potential drawback to 401(k) accounts is that the investment options your employer signed up for may come with unacceptably high fees and expense ratios. This may especially be true if you work for a small company. Short of leading an insurrection against the HR department, you can circumvent the high fees by contributing just enough to get your employer match, and then shift additional savings to an IRA.
• “A watched pot never boils”
Retirement accounts need time and steady contributions to grow. Making lots of trades and letting your account lapse between jobs instead of rolling it over are two mistakes that can torpedo your long-term returns. Timing the market is a fool’s game. Set it and forget it — or rebalance once a year at most.
Anya Kamenetz welcomes your questions at email@example.com.