How to plan for retirement

January 11, 2012 By Leave a Comment


Each month, financial expert Shay Olivarria answers personal finance questions from readers. This month she addresses retirement planning.

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Reader: How do you start a retirement portfolio on a budget?

Dear Reader,

What a great question. As the New Year begins, many of us would like to firm up our financial position. The question becomes how to do that when the dollars aren’t making any sense. Starting a retirement portfolio is a bit more complicated than I can cover in one article.

I have a chapter about the topic in each of my books, Money Matters: The Get It Done in 1 Minute Workbook and 10 Things College Students Need to Know About Money. For right now, I’ll offer a brief overview of the process.

If you have an employer-sponsored plan:

• If you have a 401k or 403b at your job, take advantage of it. Many times, employers will offer “matching” to employees. That’s free money that they will contribute to your retirement fund in lieu of a pension plan. If you don’t contribute anything, they won’t “match” it. Talk with your Human Resource Office to find out 1) If your company offers a retirement plan 2) If your company “matches” 3) What the “match” is 4) How you can sign up immediately.

• When you start taking advantage of the employer-sponsored plan the money will come directly out of your check before you get it. That’s great because the money that you contribute to your retirement will not be assessed taxes. If it was going to go to Uncle Sam anyway, why not invest it for yourself?

• Your job will already have an investment firm that they work with and a set of funds you can invest in. You can usually speak with a representative from the company for free if you’re having trouble choosing.

• If you want to leave your job you can take your retirement money with you, but don’t take it out of the company it’s invested in. You want to have the funds “rolled over” from the old account to the new account so taxes won’t be levied. Once the funds are distributed (if they send you a check) then the government will swoop in to take its cut.

If you don’t have an employer-sponsored plan:

• If you don’t have access to an employee-sponsored retirement plan, then you’ll have to opt for a Traditional or Roth Individual Retirement Account (IRA).

• The big difference between the accounts is when you pay taxes.

• You’ll have to find an investment firm that offers mutual funds and then open an account. Most firms will let you start an account with no money as long as you promise to deposit at least $50 per month via electronic transfer from your checking account.

• Start putting all the change in your pocket at the end of the day in a savings jar. The average American will end up with about $50 in change per month. Deposit that money in the bank each month and you have your deposit. If you only invested that $600 per year into a tax-deferred investment account you’d end up with around $163,241.14, assuming a conservative 8% yearly earnings over forty years. You put in $24,000 of spare nickels and pennies and you end up with more than $160k.

• An important thing to look into when choosing a firm to work with is how much money will be taken out to manage the fund. You want a no-load fund with low costs. 1% is average. Try for lower if you can.

• The money is always yours. You can deposit and/or withdraw it as you see fit. Keep in mind that there are limits for how much money you can deposit every year (limits depend on your age, if you have an employee-sponsored plan, and income) and there could be tax consequences for withdrawals.

There are many considerations when dealing with retirement accounts. If you have specific questions please contact a fee-only advisor. Find one near you at http://www.napfa.org/.

About Shay Olivarria
Shay Olivarria is a financial education speaker and the author of three books on personal finance. She has written articles for Bankrate.com, FoxBusiness.com and The Credit Union Times, among others. To find out more about her work, visit her at www.BiggerThanYourBlock.com

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Why saving for retirement is hardest for Latinos

October 21, 2011 By Leave a Comment


Salvadoran immigrant Obdulio Hernández, now a U.S. citizen who lives in South Central Los Angeles with his wife and two daughters, has worked steadily since he arrived in the country 17 years ago. He has some savings for emergencies, but has never saved for retirement.

image“I don’t trust that my money will be there for me at the end,” says Obdulio Hernández. “I’m afraid of the risk. What if the company goes bankrupt? Then I’ll have nothing!” he exclaims. “Maybe if I understood how the plan works, I’d be willing to invest,” he says referring to retirement plans.

He’s not alone. Thousands of first-generation Latinos in the country don’t understand the concept of financial planning for retirement. Fear, distrust of financial entities, and lack of financial literacy contribute to the problem.

Unemployment and the economic recession has also taken a heavy toll on this community. Dreams of financial success – or even sustainability – seem to be further and further away for millions of minorities who can barely make ends meet.

The harsh reality is that Hispanic households suffered the biggest drop in wealth of any ethnic and racial group in the country during the recession.
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According to a Pew Research Center study, on average, their wealth fell by 66 percent. African-American households also suffered a big setback – a 53 percent drop in wealth from 2005 to 2009, the most recent data available. White households, however, only experienced a 16 percent drop in wealth during the same period.

This drop in wealth means there’s less money earned and less money saved. That makes it harder for anyone to think about saving for the future. It’s even harder for many Hispanics, who are less likely to have employer-sponsored retirement plans (such as 401(k)s, because they work in service jobs or small businesses that don’t offer them to their employees.

Hernández, for example, works as a sign installer for a company that hires him as a subcontractor. He gets no health insurance or retirement plan options through his employer. He admits he’s concerned about his finances “cuando esté viejo” – when he’s old.

“I don’t think Social Security is going to be enough for my wife and I to survive,” he worries. But even though he recognizes the need, he’s still hesitant to take the first step in retirement planning. “I think it’s cultural,” he says. “Back in El Salvador, you just don’t think about saving for old age.”

imageFor those Latinos who are fortunate to have employer-sponsored 401(k)s, many don’t participate in the retirement plans or don’t save enough, and some who do, make mistakes that can cost more than they bargained for.

“Latinos stash their money in 401(k)s and then take it out before they’re supposed to,” says expert Julie Stav, who specializes in financial issues and literacy in the Hispanic community. “In doing so they end up paying penalties and fees. The moment you put money into a retirement account, you can’t touch it.”

An Ariel/Hewitt study shows 50 percent of Hispanics with 401(k) accounts were more likely than whites to take hardship withdrawals from their plans.

It may be a tempting proposition to tap into your retirement savings if you’re unemployed, but pulling money out of your 401(k) before age 59-1/2 means you’ll have to pay income taxes plus a 10 percent penalty. Any advantage gained in your investment will be lost.

This is the first in a series of stories on the importance of retirement planning. In part two, we’ll address the problems the immigrant Latino community faces in saving for retirement. Throughout the series, we’ll be providing savings advice and retirement planning tips from expert Julie Stav.

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Why you should invest in a 401K

October 11, 2011 By Leave a Comment


Each month, financial expert Shay Olivarria answers personal finance questions from readers. This month she addresses 401 K contributions.

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Reader: I just got a new job and HR gave me all this paperwork about my 401k. I’m not sure what “matching” is and I’m not sure if I want to give them my money. What should I do?

Congratulations on the new job. I’m thrilled to hear that your company respects its employees enough to offer a 401k retirement plan with matching contributions.

Let’s start from the beginning. Years ago, workers received pensions from their employers. For many retirees the pension, combined with Social Security payments, was enough to cover household expenses. For those with the foresight to save for retirement, the trifecta of savings, pension, and Social Security was enough to provide for many retirees to live pretty well in retirement.

Pensions are now a thing of the past. To make up for that, companies have started offering retirement vehicles that encourage individuals to invest to cover their retirement needs.

Most public companies offer a type of retirement plan called a 401k. The ones that really value their employees also offer “matching” contributions. That means that while you are encouraged to invest as much as possible towards retirement, your company will “match” the dollars that you contribute up to a certain point.

For example, if you contribute up to 6% of your income to your retirement account, then the company will match that 6%. It’s like a buy-one-get-one-free sale. If you earn $30,000 per year and contribute $1,800 per year (6% of your income) to your retirement fund, then your company will contribute another $1,800 to your retirement fund. If you contribute nothing then your company contributes nothing.

Keep in mind that matching contribution amounts differ from company to company, for those that actually offer the benefit.

It’s to your advantage to contribute as much as possible to your retirement account. There really is no down side to investing as much as you can, as often as you can. You’ll be safeguarding your retirement as well as getting free money from your employer.

Do you have a question you’d like Shay to answer? Email Shay at [email protected].

About Shay:
Shay Olivarria is a financial education speaker and the author of three books on personal finance. She has written articles for Bankrate.com, FoxBusiness.com and The Credit Union Times, among others. To find out more about her work, visit her at www.BiggerThanYourBlock.com.

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