Written by When I think about retirement, I often dream of a mansion overlooking a lake. However, there’s a whole lot to do before achieving that dream. For example, I have to save up money in order to afford that mansion.
We can all agree that the earlier you start, the better, but there are so many conflicting views on how to save for retirement. Let’s break through some of the clutter and answer a few of the the most commonly asked questions about retirement accounts.
Is it smart to have accounts at multiple firms?
Imagine trying to enjoy a balanced multi-course meal at multiple restaurants. How would all the chefs know what to cook so each course complements one another. We all want our food and wine to be paired perfectly, right?
The same goes for investing in multiple firms. Unless each firm offers something different and supplemental, there aren’t many benefits. It’s much easier to keep investments balanced if it can all be viewed in one place. An investor can more efficiently manage risk and return, in order to maximize profits, if they can see the full picture. Also, it’s one less statement to throw away, save the trees, people!
Which firm should I choose?
Choosing the right firm really depends on what kind of investor you are. As a young professional starting off your retirement savings, it may be better to go with the low cost, hands off approach. For example, Betterment, the leading robo-advisor in the industry, has no minimum balance requirements and only charges .25% of assets under management (compared to the industry average of 1%). They also offer consulting with a financial advisor via in-app messaging.
For more on robo-advisors check out my blog Do Robo-Advisors Compare to Traditional Wealth Advisors?
If you would like to work with a traditional wealth management advisor, Fidelity has branches in many cities across the U.S. There is usually a minimum of $100,000 in investable assets in order to work with an individual advisor. If you have no interest in self-managing your money and would prefer that a trusted professional guide you, you can also seek out a Certified Financial Planner.
Which type of account(s) should I have?
We all know about our work sponsored 401(k) plan, but what other accounts are available to enhance our retirement income? There are two main types of Individual Retirement accounts that you can open: Roth and Traditional.
A Simple Explanation of Roth IRA and Traditional IRA
A Roth IRA allows a person under the age of 50 to set aside after-tax income of up to $5,500 per year (as long as your annual income is under the threshold). Since the funds that are deposited into a Roth IRA are already taxed there is no need to pay anything additional at the time of distribution. So all the interest you earn can be withdrawn “tax-free.”
The difference with a Traditional IRA is that the monies that are deposited into the account are before-tax dollars. So, you have the opportunity to earn compounding interest on the funds. However, you will be forced to pay tax on the full amount upon withdrawal. Confused yet?
Imagine setting aside one dollar a day for 30 days and being able to earn 50 cents for each dollar. At the end of the 30 days, you would have $45. With a Traditional IRA you would need to pay the 10% tax on the full distribution amount ($4.50). So you would then be left with $40.50.
Now, imagine the same scenario but instead of doing a dollar a day, you are able to deposit 90 cents and earn 45 cents per deposit (you have already subtracted the 10% tax). At the end of the 30 days you would have $40.50 to withdraw. This is similar to how a Roth IRA works, the whole amount dispersed would be yours with no need to pay additional taxes.
In this simplified scenario both amounts withdrawn are the same. In the real world where interest rates continuously fluctuate, the amount held within an account could change dramatically. If it still sounds confusing visit Traditional IRA vs. Roth IRA for an in-depth explanation.
Now, back to the types of accounts you’re able to have. You can have both a Roth and Traditional account at the same time, but your contribution limit stays at $5,500 per year for all of your IRA accounts combined. If you have an employer sponsored 401(k) plan, no worries, you’re still eligible for both IRA accounts.
I hope some of these answers helped you better understand your options, because I’m getting a mansion right next to Oprah and I hope to see some of you there!
If you have any other retirement planning questions, feel free to drop me a line below.
Michael D. Gould 