Money Coach: Never Too Early for Retirement Planning
CHERYL CORLEY, host:
I'm Cheryl Corley, and this is Tell Me More from NPR News. Michel Martin is away. In a moment, the Mocha Moms will tell us how we can get through the school break this summer with lots of fun, but first we continue our "Investing 101" series where we are going over the basics. We've talked about stocks and bonds, what they are, how they work, and ways they can fit into or round out your investment portfolio. Today we're adding to that mix preparing for retirement. We thought many new grads would benefit from this information, too because it's really never too early to get ready for retirement. But if you don't fit that category and are in need of a primer, than there's something for you as well, and our finance expert Alvin Hall is here again to walk us through the basics of retirement planning. Welcome back, Alvin.
Mr. ALVIN HALL (Money Coach): Glad to hear you again, Cheryl.
CORLEY: Yeah. Well, again we're hitting the basics, so tell us what is a retirement plan?
Mr. HALL: There are many types of retirement plans, but basically it enables people to put money away for retirement using before-tax dollars, and that's very important because depending upon the type of plan that you're in, the actual back-end tax effect will be a lot less than people think.
CORLEY: Well, how should people in their 20s or 30s plan for it? Should they be aggressive about this or conservative about this?
Mr. HALL: They should be aggressive. If you work for a company that has a 401(k) plan or any type of retirement plan, you should participate in it, especially if the company does a match. Some companies match dollar for dollar, some companies match 50 cents on a dollar, some companies do it up to three percent of your annual salary, and I've run into so many young people who say, oh, I don't have enough money to save in this 401(k) plan. If you look at this realistically, you're giving up a 50 percent bonus on any money you put into the plan, so if all you put in is 3,000 dollars a year, than that means the company will put an additional 1,500 dollars a year. Who would want to give up 1,500 dollars a year? You should always sacrifice, and also when you're young you can be more aggressive with the types of mutual funds that you put into your plan. Remember, time is your friend when you are young. You put in this money today and because of the effect of compounding interest and dividend reinvestment, that money can grow to some surprising sums by the time you're even in your mid-40s.
CORLEY: Yeah. Well, what if you are older, say in your 40s or 50s?
Mr. HALL: If you're in your 40s or 50s than you need to look at the changes that recently occur in the IRA rules, the individual retirement plans, in that because the government had become concerned that a lot of older people had not put money away, they've increased the amount of money you can put into the retirement plan. I think, as of this year, I don't have the numbers right in front of me, but I think you can put in up to 6,000 dollars if you're over 50. I forget what the numbers are when you're in your 40s. So start maxing out that retirement plan. Also, if you're in a company plan, see if you can up the amount that you're putting into the plan, the idea is always to try to hit as a target percentage, 15 percent of your annual income should go into the plan to build for your retirement.
CORLEY: What should you not do when you're planning your retirement?
Mr. HALL: One, you shouldn't ignore it, which is what most people tend to do, right? Oh I won't be old for a very long time and then suddenly you're 30, suddenly you're 40, and then you're looking at ten years from retirement, and then you're scrambling to put money away. You should not fall prey to people who are trying to sell you life insurance as a part of your 401(k) of your retirement plan. Typically, many of the annuity policies and insurance related policies have great payouts for the insurance agencies, but do not necessarily provide the people who buy them with a great return. And the final thing people should not fall prey to is putting tax-free investments into a retirement plan. All retirement plans are tax deferred which means you don't pay any taxes on the earnings of those until at age 62, 65, 70 in my case, right, when you began pulling it out, to put a tax free vehicle like a mutual - like a municipal bond into a tax deferred vehicle is ludicrous.
CORLEY: Well, we only have about a minute, but what are the top three things that anyone can do today to start planning for retirement?
Mr. HALL: Decide what percentage you're going to put into the plan, and start today. Every time you get an increase in your pay raise, put half of that money into the plan. Always adjust your plan once a year. Don't go in for what I call the sleeping beauty method of investing where you put the money in and you hopefully will wake up rich with prince charming or princess charming next to you. It ain't going to happen. So what you do is every year, look at your plan to see how you're progressing toward your goal and if the balance of investments has become a little bit over weighted in one area, rebalance it periodically. Pay attention and monitor your plan.
CORLEY: All right. Well, thank you so much. We could talk about this all day long, I'm sure.
Mr. HALL: Yes. Until we retire, Cheryl.
CORLEY: Finance expert Alvin Hall. He joined us from our London bureau. Thank you so much for joining us, Alvin.
Mr. HALL: Thank you, Cheryl. Glad to be here.