Saturday, June 28, 2008

Retirement Savings 101: All about retirement accounts (and why to start saving now!)

Are you new to retirement savings and want a simple guide to the whys and hows? Today's post covers two topics: why it's a smart move to start saving for retirement now; and the basics about how different types of retirement accounts work.

(The follow-up post will be about how to apply this knowledge: the pros and cons of using different types of retirement accounts; suggestions about the investments that go into your retirement accounts, including Socially Responsible Investing/SRI options; and some guidelines for thinking about how much to save.)

Why start saving for retirement now?

Well, aside from the fact that it's generally wise to start saving early for a big goal rather than have to play catch-up later, there are two big reasons that it's especially smart to save for retirement today:
  • Compounding returns: It's basic math, but the results of investing early are more dramatic than you'd guess. Compounding returns are the benefit you get from re-investing the returns you get each year. For example, if you invest $1000 and earn 9% a year on it, you'll have $1090 after one year, $1188 after two years ($1090 x 109%), $1295 after three years, etc. Not impressed yet? Think about exponential growth-- it takes 8 years for your money to double at an 9% yearly return. So if you have $20,000 invested at age 25 growing at 8%, it will double five times by the time you turn 65, and become $640,000. If you don't have the $20,000 invested until you're 33 so it only has time to double four times by age 65, you only have half as much-- $320,000. Make sense now? This is such a big deal that (with those 9% annual returns) you actually end up much better off saving $4,000 a year for ten years from age 25 to 35 and stopping than saving $4,000 a year for thirty years from age 35 to 65-- by a margin of $806,303 to $545,230.
  • Employer contributions: If you have any kind of retirement option at work that involves employer contributions, like many 401(k)s or 403(b)s do, it's probably a very good deal. I'll talk more about the details in a minute, but the important thing to remember is that your employer is offering you extra money in exchange for you saving some of your own money.

How does retirement savings work? What kinds of retirement accounts are there?

[First, a point of clarification: terms like IRA, 401(k), and 403(b) refer to different types of retirement accounts. You still have to pick investments (like stocks, bonds, mutual funds, CDs, etc) to go inside of the accounts, but we'll talk about that in the next post.]

The main difference between regular savings and retirement savings is that retirement savings accounts are tax-advantaged. With regular savings or investing, you put your after-tax money into a savings/investment account and then pay taxes on the earnings (in most cases.) But with retirement savings, you save on some of the taxes. There are two basic types of tax savings, and that's one way to divide retirement accounts into two categories:

  • In a traditional IRA or 401(k) [more on IRA vs 401(k) in a minute], you use before-tax money. In other words, if you put $1000 into the account, your taxable income is lowered by $1000, which means you pay less in taxes (for example, $250 less if you're in the 25% tax bracket, which would mean that you add $1000 in the account but only have $750 less in your pocket than you otherwise would.) It's like getting a discount on saving $X amount for retirement. However, once you retire, you do have to pay taxes on what you withdraw.
  • In a Roth IRA or Roth 401(k), you use after tax money-- putting $1000 into retirement savings means you have $1000 less in your pocket than you otherwise would. But then you never have to pay taxes on the earnings. If that $1000 turns into $32000, you can take all that money out after you retire without paying taxes on any of it.
There's another important way to divide types of retirement savings accounts into two categories: work-related and non-work-related.
  • Work-related: 401(k)/Roth 401(k), 403(b), etc. These are taken out of your paycheck at work, and are set as a percentage of your income. [You may also/instead have a pension-- a "defined benefit" retirement plan-- at work, especially if you have a unionized job and/or work in the public sector, but that's a topic for another post. We're talking about "defined contribution" retirement plans here.]
    • 401(k) vs 403(b)? They're basically the same except that the 403(b) is for employees of non-profits. There's also the Thrift Savings Plan for federal employees which is very similar.
    • 401(k) vs Roth 401(k)? Just plain "401(k)" or "403(b)" means it's a traditional account that uses pre-tax money (see above); Roth 401(k)s and 403(b)s are new as of 2006, and use after-tax money. (In other words, if you get $1000 a paycheck and put 6% into a regular 401(k) you get taxed on $940 a paycheck; if you put 6% into a Roth 401(k) you get taxed on $1000 a paycheck.) As described above, the benefit for the Roth 401(k) is that you won't be taxed on the earnings later.
    • Employer match or no match? Many but not all employers offer a match to your 401(k)/403(b) savings. If so, they will probably match some percent of your contributions-- perhaps 25% or 100%-- up to a certain limit-- perhaps 4% or 6% of your paycheck. (For example, if they match 50% of your contributions up to 6% of your paycheck, and your paycheck is $1000, then if you put aside 2%/$20 they'll add $10, if you put aside 6%/$60 they'll add $30, and if you put aside 10%/$100 they'll still put in no more than $30.)
    • Vesting rules? You should keep an eye out for vesting rules which might say that you have to stay at your employer for a certain length of time in order to keep the employer's contributions when you leave. (You always get to keep your own contributions!) Sometimes there is partial vesting-- you may get to keep 20% of the employer match after 1 year, 40% after 2 years, etc.
    • Rollovers? When you leave your employer, there are a couple choices of what to do with your money. You can leave it in its original 401(k) plan, if your employer allows it (they have to let you to keep it there if you have more than $5,000 in it, but if you have less, they can make you move it.) If you have to or want to move it, there are a few options: take the money in cash (generally a bad idea, since not only does it decrease your retirement savings but you also have to pay a 10% penalty on top of the taxes), roll the money over to a 401(k) account at your new employer, or roll the money over to an IRA. What's an IRA? Read on...
  • Non-work-related: IRA/Roth IRA. IRAs and Roth IRAs are non-work-related; IRA stands for "Individual Retirement Arrangement."
    • How and where? There are several places you can open an IRA, including banks, mutual fund companies, and brokerages. Your choice will limit what investment goes in the account, so it generally makes more sense to first pick the investment you want and then open an IRA with whoever offers that investment. This means you may end up with multiple IRAs to hold different investments, which is perfectly allowable, although there are some drawbacks like the hassle and possibly higher administrative fees. (More on how to decide on investments coming soon in the follow-up post!)
    • Contribution limits? You can put in up to $5000 a year combined across all your IRA/Roth IRA accounts in 2008 ($6000 if you're over 50 years old); this will go up in future years to adjust for inflation. However, if you earned less than $5000, you can only put in as much as you earned (there's an exception if you're married where you can contribute based on your spouse's earnings.)
    • Income requirements (as of 2008)?
      • Traditional IRAs (if you have a work-based retirement option available): If you're single, it starts to phase out at $53,000 AGI and you're totally ineligible to contribute tax-free once you hit $63,000. If you're married filing jointly, it phases out between $85,000 and $105,000.
      • Traditional IRAs (if you don't have a work-based retirement option available): No income limit, unless you're married filing jointly and your spouse has a work-based retirement option while you don't, in which case it starts phasing out at $159,000 and you're totally ineligible at $169,000.
      • Roth IRAs: Starts to phase out at $101,000 AGI for single tax filers/$159,000 for married filing jointly; you're totally ineligible at $116,000 for single filers/$169,000 for married filing jointly.

Now what?

In part two: so how do you apply this knowledge? We'll talk about the pros and cons of using these different types of accounts, ideas about how to pick investments within your account (including some of my favorite socially responsible options), and some thoughts about how much to save.

Any questions about what we've covered so far? Any additional information-- or clearer ways to explain things!-- that you want to include in the comments?

Disclaimer: I am not a financial professional. While I consider myself well-informed and try my hardest to be accurate, it's possible that something in here could be wrong. Please try to verify things yourself before making important financial decisions!

Tuesday, June 24, 2008

Weekly round-up: stop and smell the roses, plus free stuff (iced coffee and tacos)

I honestly can't believe it's nearly July; how can half a year go by so quickly? Anyway, here's what I have for you in this week's round-up:

Sunday, June 22, 2008

Work, stress, long hours, and your health-- what's your job costing you?

Do you have a job with high stress and/or long hours? Aside from all the other negative effects it may have on your quality of life (such as having less time with family/friends, less time to spend on hobbies, being less happy and more irritable) and on your pocketbook (like paying extra for conveniences when you're low on time, feeling like you need/deserve to splurge and treat yourself all the time, expressing your love to family through buying gifts in place of spending quality time together), have you thought about the impact your job has on your health? When you take the financial and non-financial costs of poorer health into consideration, are the stress and/or long hours really worthwhile?

Stress levels have been linked to a wide variety of negative health outcomes. Research suggests that, among other effects, stress increases the risk of cardiovascular disease, speeds the progression of HIV/AIDS, and weakens the immune system and decreases the effectiveness of vaccines. In purely financial terms, one study of 46,000 employees found that health care expenses were 46% higher for people who are highly stressed than those who were not.

There's also a significant amount of research that's been done looking at the effects of work stress specifically:

Then there's the long hours:
  • A study of over 10,000 Americans found that working 12 hours a day was associated with a 37% higher rate of work-related illness or injury (per working hour) and working 60 hours a week was associated with a 23% higher rate.
  • A study of 24,000 Californians found a link between hypertension (high blood pressure) and work hours; those who worked 40 hours per week were 14% more likely to be hypertensive than those working part-time, while those who worked more than 50 hours per week were 29% more likely to have high blood pressure.
  • A study of Japanese men found that the longer the work hours in the recent past, the higher likelihood of heart attack; those who worked more than 60 hours had twice the risk of those working 40 hours or less.
  • A study of 10,000 Norwegians found that men and women who worked more than 40 hours a week reported more symptoms of depression and anxiety.
Unsurprisingly, these health problems lead to higher health care use. A study by the Public Health Agency of Canada found that over a six-month period:
  • Individuals experiencing high levels of role overload (having too much to do in a given amount of time) were
    • 1.5 times more likely to have spent at least one night in the hospital
    • 2.6 times more likely to have sought care from a mental health professional
    • 1.8 times more likely to have seen a physician three or more times
  • Those with high work to family interference (work responsibilities interfering with family responsibilities) were
    • 1.4 times more likely to have spent at least one night in the hospital
    • 1.7 times more likely to have sought mental health care
    • 1.6 times more likely to have seen a physician three or more times

So if your job is stressful and/or has long hours, what can you do to protect your health?

  • Learn stress management techniques. These will serve you well to protect you from all kinds of stress.
  • Take individual action at your workplace to decrease your work stress level and/or work hours. If you're choosing to work longer hours and/or taking on a large, stressful workload because you believe it'll help you earn more and advance in your career, consider looking at the big picture and opting out. Are the benefits worth the costs?
  • Take collective action at your workplace to decrease your work stress level and/or work hours. You're probably not the only one feeling the crunch. Rather than an escalating battle of "who can work the longest and hardest," can you work in cooperation rather than competition on the work hours/workload front? Start talking to co-workers about the toll that the stress and hours are taking on your life and get a conversation going about what can be done in your workplace; form a union, get active in your union, organize your fellow union members to make workload and hours a priority if it isn't already; form a health and safety committee that has stress and work hours on the agenda, or get it on the agenda of your existing committee; with your co-workers, make a case to your boss and/or senior management that it's in their interest for you to have reasonable hours and workload since it'll make you healthier and more productive.
  • Find a new job-- or a new career. Ultimately, if you can't change the nature of your job, and the stress and hours are hurting your health, it may be time to look for a different job or even a different career. Think carefully about the true costs of your options-- is extra financial compensation worth the short and long-term health costs?
Do you think that work stress and/or long work hours have had an impact on your health or on the health of other people you know? How have you/they responded? Share your stories!

(See also: Picking money over time-- are we working too much?)

Wednesday, June 18, 2008

6/19/08: Free rides on public transit in 20+ cities/counties for Dump the Pump Day

If you've been thinking about switching to a commute on public transit but aren't sure it'll work, tomorrow is a great day to try. Not only will you be joining others across the country in celebrating public transportation, but in many areas your trip will be free! (And if you already ride public transit daily in one of these areas, well, enjoy your freebie.)

Over 100 public transit agencies are celebrating Dump the Pump Day on June 19th in one way or another-- many including raffles and free food or other giveaways-- but a few dozen places (see below) are taking it to the next level by offering completely free transit. They want to entice customers to give their system a try and see how well it could work for them. (Want to see how commuting costs compare for you between public transit, including variables like different gas prices and maintenance costs? Try this very helpful calculator.)

In just a minute I'll get to the list of the systems that I could find which are offering free transit. But first I must admit that the whole time I was researching and writing this post, I couldn't help singing to myself "Come onnnnn and take a freeeeeeeee ride..."












Washington State:

Have any to add to the list?

Monday, June 16, 2008

Free transit rides on Thurs, free drinks on Sat-- oh, and great posts!

I'm back from New Orleans. It was certainly an experience. The food was fantastic, the people were friendly, the buildings in the French Quarter were charming, the culture and atmosphere was rich and fun, the whole tourist area looked good as new... and then once you got just a little outside of downtown, there were boarded-up houses, damaged and abandoned businesses, and hundreds of people living in tents beneath a bridge.

Anyway, on to the links:

Saturday, June 14, 2008

Search companies' social/environmental records and urge them to improve: visit Responsible Shopper

Looking for information on the social and environmental records of companies? Want to know what you can do to try to change some of their bad practices? Then check out Responsible Shopper, a new website from the ever-helpful Co-op America (the folks who bring you the outstanding National Green Pages, a huge directory of businesses that they've screened for social and environmental responsibility.)

There's a lot to love about the site. Responsible Shopper has info on hundreds of companies-- you can look them up by name, or you can see them grouped into more than two dozen industries. And for each industry, the companies are given letter grades in a range of different areas (environment, human rights, labor, ethics and governance, health and safetey) and are ranked from best to worst within the industry. When you click through to each company page, you can read a quick summary at the top (including the good, if applicable, as well as the bad) and then a list of the problematic behaviors they're involved in, including links to more information.

But the other great thing is that the pages connect you directly to actions you can take to get companies to change their ways. They appear in the profiles and you can jump to an industry-specific list of campaigns from the industry page. (You can also go to a list of all the actions here, sorted by issue category, such as environment or human rights.) There's over a hundred of them-- it's pretty awesome, and I can't wait to start making my way through the list, learning about the campaigns and taking the actions (mostly but not exclusively sending e-mails to corporate decision-makers.)

You can also click through to their "Go Green" section for each industry, which includes tips (i.e. the Fast Food one talks about packing lunch, eating at local restaurants and asking them for local/fair trade/organic choices, and reading books about food and sustainability; the Banking one talks about community development banks and credit unions) and links people through to the National Green Pages where they can find screened socially and environmentally-responsible companies.

The only major drawback for me is that I can't find an account of the methodology they use to do their rankings of companies. I trust the organization so I'm confident that they have a good one, but they need to have it more prominently accessible so everyone can understand it! I'm chalking this up to the site being not-quite-finished (it doesn't officially debut until July), and I bet they'll have that up soon.

But all told, this is a pretty fantastic resource. The company info is great, and I just know I'm going to spend hours clicking through all the actions (and maybe bringing some of them back here to share with all of you!) If you're even vaguely interested in the social and environmental responsibility of companies, I'd urge you to check it out.

What do you think of the site? Do you try to take companies' records on social and environmental responsibility into account? What sources of information do you use?

(Read more on How and why to express your values to companies and other posts about being a conscious consumer.)

Monday, June 09, 2008

Monday links: mini-retirements, prices in human terms, and maximum savings

Hello everyone, from New Orleans! (I'm traveling to a conference for work.)

  • Go check out Part 1 and Part 2 of JD's interview with Tim Ferriss (author of The Four-Hour Work Week.) They gave me a name and a framework for something I'm hoping to make a part of my life: mini-retirements. A quote that jumped out at me: "Long life is not guaranteed. If we define risk as the potential for an irreversible negative outcome, there’s more risk in postponing the things that you would most like to do for 30 or 40 years versus taking a perhaps sub-optimal, less-compounded return on investment because you allocate some of that to these mini-retirements."
  • The Festival of Frugality #128 was at No Debt Plan. Check out What’s a Thing Worth? at Funny about Money. It's striking to see how much more work it takes for certain people to afford the same objects-- and to think about what that work actually entails...
  • The Carnival of Personal Finance #155 was at Moolanomy. I liked A Different Way to View Your “Number” from HarvestingDollars.

Saturday, June 07, 2008

Carpooling: earth and wallet-friendlier, and look who'll pay you to try it!

I love being able to commute by public transit, but I know there are some people who can't, for a variety of reasons. (My boyfriend is one of them!) If you drive to work but hate the costs, the stress, and/or the environmental impact, have you looked into carpooling?

There are tons of inherent benefits to carpooling-- spending less on gas, causing less pollution, spending less time behind the wheel and more time reading or otherwise relaxing (unless you're the one who drives every day), and often getting to work faster if it makes you eligible for express lanes on the highway.

But on top of that, there's the incentives. Many employers offer ridesharing incentives, and plenty of cities, counties, and states are providing their own incentives to new carpoolers; I found a dozen (scroll down for links!) but there may be one in your area that I missed. Other incentives that may be offered to carpoolers near you include free or discounted tolls and free or discounted parking spaces. And many cities and counties across the country also offer the Guaranteed Ride Home program; check your local program for details, but in the DC area, the way it works is that that if you carpool (or take public transit, or bike) and can't use your regular method of getting home due to an emergency, a child's illness, or unscheduled overtime, you get four free trips home a year (even covering cab fare if needed!)

Need help finding people to share your ride? This link has 21 websites that match people up like some with some nifty advanced technology to help you find a carpool that'll really work for your route. You can also try your local Craigslist, or Google your city and carpooling/ridesharing to see if there's a local board, like this one for the DC area.

And now, on to the incentives for new carpoolers...

Seattle, WA: up to $150 plus $20 for referring a friend
Redmond, WA: $50 gift card
Portland, OR: $50 gift card per person
New Jersey: $100 gas card
Atlanta, GA: $3 a day in (for first 3 months)
Bay Area, CA (nine counties): $10 per five days (for first 3 months)
Riverside County, CA: $2 a day (for first 3 months) in gift cards
San Bernardino County, CA: $2 a day (for first 3 months) in gift cards
San Mateo County, CA: $60-$80 per per person
Contra Costa County, CA: $60 gas card
San Ramon, CA: $60 gas scrip
Yolo County, CA: $25 a month per person for two months

If you have to drive to work, do you carpool? Why or why not? Would incentives like these coax you into giving it a try? After researching this post, I've sold my boyfriend on at least trying to find someone(s) to carpool with... it would have to be a morning-only carpool because he leaves at irregular times at the end of the day, but it's worth a shot. I'll keep you posted!

Thursday, June 05, 2008

Carnival of Ethics, Values, and Personal Finance

It's the first Thursday of the month, which means it's time for the latest Carnival of Ethics, Values, and Personal Finance... enjoy these great posts about the connections between values and money!

Editor's Choice:


And then the rest...

Well, that's it for now! But please submit a post for next time at this form, and let me know if you're interested in hosting.

Technorati tags: , .

Monday, June 02, 2008

Monday Round-up: PF Buzz, desire, and Doctor Who

Happy Monday (okay, it's almost Tuesday)! I can't believe it's June already...

  • Check out PFBuzz-- the new site where you can submit and vote for personal finance posts and the highest rated will come to the top-- like Digg, but for personal finance blogs. Feel free to submit and/or vote for some of my posts...
  • I wish I had an iPhone! has No Impact Man's very zen-like musings about the nature of wanting and desire, and how small an effect buying the stuff you want actually has on that.
  • The Festival of Frugality was at Funny Money last week; check out Not Deprived at Remodeling This Life and Putting Your Foot (and Your Pocketbook) Down at The Purloined Letter.
  • I rarely pay much attention to the Carnival of Debt Reduction but I have to link to it this time because it's Doctor Who-themed!
  • And finally, I just switched the blogroll on my sidebar from a static list to a list that shows the 10 most recently updated of my favorite blogs, complete with a link to their latest post. Very cool... scroll on down there and click away!

Sunday, June 01, 2008

Dozens of current discounts for socially/eco-conscious products

Below are some currently active discount codes and coupons for socially/eco-conscious purchases. As always, I'm a big fan of buying less/buying used/making your own, so I urge you to strongly consider that before shopping at the sites below. But if there are things you're set on buying, consider the stores below that may fit your values because they're organic/fair trade/eco-conscious/vegan/independent businesses/sweatshop-free/etc...


Gifts/JewelryClothesBabies/KidsHome Miscellaneous[Disclaimers: I did a preliminary scan to confirm the socially/eco-conscious credentials of the sites above, but do your own due diligence before buying. The descriptions are in the websites' own words, not mine. I stuck my affiliate codes in the links for the small fraction of the sites for which I have one.]

For similar sources which aren't included in this post because they're not running sales right now, see this post. Also, the National Green Pages is a fantastic directory of literally thousands of stores (online and brick & mortar), and despite the name, the listing isn't just about the environment; Co-op America certifies that the companies are both socially and environmentally responsible. I got some of these discount codes from Co-op America, and many others from Happy Hippie, so you can check those sources on a regular basis for discounts (although I'll also try to keep you up-to-date on good discounts here myself!)