Question: With all of the things that have happened in the recent economy, my retirement has been hit hard. How do I rebuild my retirement account? - Noel Henderson
Unless you had the intuition to get out of the market a year ago, holding onto your investments is probably a better option than rebuilding. If you sell your losing investments now, you are essentially locking in your loss. By holding onto your losing investments, you still have the shares and, hopefully with time, will get your money back.
Assuming you have plenty of years until retirement, I wouldn’t get caught up in the daily rising and falling of the markets. The stock market’s reaction to news is not an accurate description of our economy; it’s more like a kid who throws a tantrum when he/she doesn’t get candy.
It’s ok to be leery of investing right now, but don’t stop putting money aside. You will be guaranteed a loss if you don't save at all. At the very least, move future contributions into a money market fund until the economy gets better.
Learn How to Save for Retirement
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Whether you are trying to increase your savings for retirement or just starting your retirement account, here’s what you need to know.
Ways to Save for Retirement
- Have a small amount directly taken out of your paycheck. That amount will vary per person, but even if it is five dollars, that is better than nothing.
- The easiest thing you can do is put extra money you get (tax return, inheritance, gift money, bonuses, or yard sale profits) into your retirement account. Though that money is often great for general life expenses, it’s not money you “count” on to live. So setting it aside will only benefit you in the long haul.
- Raises are another great way to build your retirement account. Put at least half, if not the full amount directly into your retirement account. So for example, if you get a 3 percent raise, put 1.5 percent of that additional money or more in your retirement account. Over time this will add up and really pay off in the long run.
Types of Retirement Accounts
- Individual Retirement Accounts (IRA): This allows you to save up to $5000 a year (over the age of 50- $6000 a year). This money is tax deductible as you put money into the account and taxed as regular income when you make withdrawals.
- ROTH IRA: This is similar to an IRA but you do pay taxes on it (it is not tax deductible). The main difference is when you draw out money from a Roth during retirement you do NOT pay taxes on it then. Choosing which type of IRA to use is based on tax planning and when you think you will have the greatest tax burden.
- 401K: This is similar to an IRA, except this is set up within your job. The amount you want to set aside is pre-tax. In addition, many companies will match some of what you put into the account. This could mean free money to you. Check with your company about any plans they may offer. Most financial planners recommend that you have at least the same amount taken out of your pay that the company matches. Some companies do not put any in the 401K unless the employee does, so if you didn’t put any in, you are missing out on free money from the company.
- TSA account: Educational institutions and nonprofit organizations have these, which are virtually the same as 401ks.
Multiple retirement accounts are an option for some people, meaning you could have an IRA and a 401K. Get more information on choosing a retirement account.
Tips on Protecting Yourself
- Keep careful records of the money you put into your accounts.
- Talk to an expert. There are plenty of organizations that work on sliding scales or will do initial consultations for free. Even if you only go in once, you will come out better informed.
- Be comfortable with the risks you are taking. If you are close to retirement, playing it safer is usually the better bet.
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Chicago, IL
