Have you started thinking about your retirement contributions for 2010? We been swamped with homebuying details over the past month or two, but we closed on our condo on Friday, so we’re finally able to change our focus to planning our finances for the upcoming year.
Our plan for 2010 is getting serious with about saving for retirement, especially now that we’ve reduced our monthly expenses and automated our bill payments. I’m mailing in my paperwork to consolidate my student loans tomorrow and, if all goes well, my interest rate will drop to 2.5%. That’s low enough that we’re comfortable increasing our retirement contributions while paying down our debt.
Setting contribution amounts for his 401(k)
My husband’s job offers a 401(k) with a match of up to 5%. The matching funds are immediately vested which means that even if he left for another company, he can take all of the money in his 401(k) with him. We’re already contributing enough to get the entire company match, but we’re looking to do more.
My husband wants to keep his investments simple and just focus on a few funds. The problem for us is finding the right mix of funds to invest in. In the end, we went with a couple of growth funds for the majority of his holding. We would have preferred to put his contributions into low cost index funds, but there aren’t any offered in his plan.
While a 1% or so difference in expense ratios between a typical index fund and the funds offered in my husband’s 401(k) might not seem like much, it adds up to some significant money down the line. I ran the numbers, and if you invest $100, 000 over 20 years in an index fund with a 0.75% expense ratio vs. a fund with a 1.9% expense ratio, there’s a difference of $216, 700!
Thus, we’re going to focus on funding his Roth IRA instead of putting extra money (beyond the company match) into his 401(k).
Setting contributions amounts for our IRAs
My husband now has to decide how he wants to invest his Roth IRA contributions. When he started a new job here in North Carolina, he started investing with Vanguard because of their low fees and the fact that he had enough money stashed away to meet their minimum investment requirements.
I have my retirement funds with Sharebuilder, and I’ve set up an automatic monthly deduction for my Roth IRA for 2010. Back in 2009, I decreased, and then paused, my Roth IRA contributions so I could devote more money to paying off my car loan and building up our house down payment.
In terms of investments, I’ve been focusing on mutual funds instead of individual stocks since I don’t have a lot of money, and I want good diversification. I actually started setting aside money for retirement through an employer plan when I was 21. I wish I could say that I continued my contributions uninterrupted, but I ended up cashing it out when I left that job.
Not only did I have to pay taxes on the distribution, but there was a penalty on top of that, decimating what little savings I had. I learned my lesson and now I don’t touch my accounts unless I’m contributing more money or rebalancing my portfolio.
Focusing on the future
Since we’re now making regular contributions, and we’re still quite young, we have the powerful effects of compounding on our side. We’ve also learned a valuable lesson about cashing in our retirement accounts, and won’t be taking any early withdrawals. Instead, we’ll be focusing on increasing our contributions each and every year.
I know people who think you need to have a huge amount of money to invest effectively, but that’s simply not true. Even small amount add up — at least you’re doing something. You can always increase your contributions as your earning power increases.
As things stand, we intend to adjust our contributions every January and then automate things for the rest of the year. That way our investment program will be both convenient and sustainable.
So… What do you have planned for this year? Are you increasing, decreasing, or holding steady with your retirement contributions for 2010?