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