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Preparing for Retirement

Posted February 13, 2013 in Clive

Jeff and Derek Grittmann both have retirement on their minds.

But the brothers from Clive, who are 41 and 27, respectively, have differing expectations for that time in their lives.

Jeff began saving in his late 20s and stopped around 30. His 401k plan offered through his workplace took a huge hit between 2008 and 2009 — he lost about 40 percent of his investment.

While he’s been able to recoup about 20 percent, there are a litany of economic and governmental factors that are affecting his planning, including rising fuel and food prices, Jeff says.

He is unable to save for retirement right now. And he’s currently facing a future where he’ll have to continue working past retirement age, he says.

“I’m waiting for things to change and more opportunities for saving for retirement. But for right now, it doesn’t look possible. At this point, I’m working until the day I die, unless some major event happens like income increases or tax decreases.”

Diversification, done judiciously, is the key for Derek. The 27-year-old began investing with money he made in high school, putting it into a few individual stocks and mutual funds on his own, and with the help of a financial advisor.

Brad and Sarah Smerage of Clive look into retirement and investment strategies.

Brad and Sarah Smerage of Clive look into retirement and investment strategies.

He also has two 401k accounts and a health savings account, along with a basic savings account and joint savings account with his girlfriend (to be used more as emergency funds).

He’d like to learn more about investments and eventually become a day trader, a job that, theoretically, you wouldn’t have to retire from, Derek says.

In retirement, he’s looking forward to traveling, visiting friends and attending sporting events.

“It would certainly be nice to venture out and explore,” he says.

Time is on your side
Financial advisors urge people to start preparing for retirement as soon as possible because when you’re young, you have one huge advantage: time.

Starting to invest when you’re younger can mean decades of opportunity for your money to work for you. The key here is compounding interest, or the interest paid on both the principal and the interest accrued so far.

“The effective compounding of interest or returns over time can significantly help you reach your goals,” says Derek Justice, a financial advisor with Edward Jones in Clive.

Derek Justice

Derek Justice, a financial advisor with Edward Jones of Clive, recommends that people “focus on owning shares of well-run companies.”

Starting early gives investments a longer time frame to work within, which can help them better weather the ups and downs of the market, says Brent Collins, a financial advisor with DeWaay Capital Management in Clive.

“You can withstand a lot more volatility the younger you are because you don’t need to access those funds,” Collins says. And, it’s never too late to start saving.

When discussing retirement, the advisors ask clients what they foresee themselves doing: Do they want to travel? Do they want to be snowbirds, spending their winters in Florida?

They also discuss with clients whether they are conservative or aggressive investors. Using that information, an investment plan is created that will hopefully help clients meet their specific goals.

One thing individuals should currently be doing, advisors stress, is not only contributing to a 401(k) savings account, but taking advantage of their employer’s matching program, if one is available.

“In reality, that money is free,” Justice says of the company match. “It’s icing on the cake.”
Even if your workplace doesn’t offer a match, he adds that it’s still a good idea to put at least a little bit into your 401(k). And, you can also choose to be more conservative or aggressive in your 401(k) investments.

“People tend to think you need lots of money to invest, but when you’re 30 years old, you can invest small amounts of money over a long period of time and be very successful,” Justice says.

Another option to consider is the Roth 401(k), which more companies are offering, Collins says. It involves making contributions with after-tax dollars, but you won’t have to pay income tax on your withdrawals. In contrast, contributions to a traditional 401(k) are made pre-tax, and income tax is paid at the time of withdrawal.

Brent Collins is a financial advisor with DeWaay Capital Management in Clive.

Brent Collins is a financial advisor with DeWaay Capital Management in Clive.13

Collins recommends people opt for the Roth 401k if it’s available, noting that it’s a good fit, particularly for those who are younger.

While each individual’s tax situation is different, in general, Collins suggests this: If you don’t have access to a Roth 401k, contribute to a traditional 401k up to the amount your company matches. If you have additional money to invest, he suggests doing so in a Roth IRA, an individual retirement savings account in which you make after-tax contributions up to a specific amount each year.

Unless you earn too much qualify, the maximum contribution limits to a Roth IRA in  2013 are $5,500 if you’re under age 50 and $6,500 if you’re over 50, Collins says.

“As a general rule, these are the maximum contribution limits. Keep in mind, there are always exceptions to the rule,” he says.

Collins says he’s a “huge fan” of the Roth IRA because individuals in their 30s and 40s are typically looking at their highest income years in the future. So they should take advantage of putting money into a Roth IRA while they’re still within the income limits, he says.

“I believe in our lifetime we’re going to see higher taxes, and you might as well put it into something that will not be taxed ever again,” Collins says.

Some other things to consider as you prepare for retirement include consolidating your loans to get a lower interest rate and refinancing while interest rates are low, he says.

Justice recommends that people should “focus on owning shares of well-run companies.” He defines a well-run company as one that “has historically paid a dividend or even increased the dividend over time,” and whose products and services you easily recognize.

He also warns that retirement plans shouldn’t be ignored for the sake of your children’s college funds. Both are important, so you have to address how you will allocate your money between the two goals.

Two brothers, two retirement strategies
For right now, Jeff Grittmann’s retirement prospects seem bleak.

He talks about the impending bankruptcy of Social Security, and says that “people in my stage in planning can just expect it not to exist. Unless there is some major legislation to change the system, it’s going to be gone.”

There are also increases in food, fuel and medical costs to consider, Jeff says. In addition, the returns on investments are not as high as they once were.

After his 401k contributions were “decimated” in 2008, it’s made him rethink whether he wants to put money back into the account. He’s also concerned about the taxes he’ll have to pay on it later and that the money is not easily accessible, should he need it quickly.

It also hasn’t helped that his employer has frozen the company pension plan.

Still, he doesn’t consider the situation hopeless. There’s still hope for changes in legislation and a reduction in government spending, he says.

Jeff’s ideal retirement would be living in a cabin in the mountains, close enough to town to get the things he’d need.

Does he think it will be his reality someday?

“Nothing is impossible,” he replies.

Jeff’s brother, Derek, has immersed himself in his retirement investments.

He began contributing to a 401(k) as soon as he was eligible, in 2008, Derek says. He’s currently maintaining two such accounts — one through his current employer, the other through a previous job — for a greater diversity of investment options.

For every 401(k) account he’s had, he’s always made sure to invest at least the minimum amount to meet the company match, and has been trying to increase his contributions each year.

Aside from his 401(k) plans, Derek is looking to diversify his retirement savings options. One way he’s doing that is with a health savings account through his workplace, which works basically like a 401(k), but for medical expenses.

Derek says he also wants to pursue more “economy proof” investments, including objects such as gold items and other precious metals.

Though he currently works in information technology, he’d like to  eventually make day-trading his career. By using his knowledge of information technology, he’d like to make investments in that area and create an income source.

This would give him a more intimate understanding of what’s going on in the markets and how his money is performing, as well as flexibility in his work, Derek says.

When it comes to retirement, or just life’s unexpected events, he wants to be prepared.

“I’ve never liked the whole idea of depending on someone else to survive,” he says. “My theory is I’m not going to count on family, friends or even the government to take care of me, and I have to take some of that responsibility upon myself.”

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