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Old 07-16-2008, 12:18 PM   #1
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Supplementing pension ideas

Does anybody have some advice as to finding the right balance of supplementing a pension with other forms of investing and simply using your income for other things in your everyday life. I used to contribute the max to my 401k with my previous job. The employer matched up to 8%. No that I work in the public sector with a pension, I'm struggling with justifying putting the money into the 401k (Fidelity). Here's what I'm thinking:

1)My first choice is to do what I should have done earlier which is to roll it over into a Roth IRA and keep contributing.
2)Another option is to enroll in a 403b plan, which allows up to 15k/year and also a "catch-up" period if I'm lagging behind.
3)Yet another option I have is to put more money into some stock that I own to really boost those shares up. Currently I just automatically roll the dividend check into purchasing more stock certificates but I could set up a monthly payment plan to buy more.

I work for the state/county government so my income isn't particularly enviable but the pension/benefits is pretty nice perk. I can't put my money everywhere and also I want to be able to enjoy myself at my current age.

Any suggestions before I set up a meeting with a financial planner would be most welcome.
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Old 07-16-2008, 12:32 PM   #2
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Re: Supplementing pension ideas

I have a 401k, an IRA, and some stocks I dabble in. Personally I wouldn't get rid of your 401k entirely.
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Old 07-16-2008, 01:54 PM   #3
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Re: Supplementing pension ideas

Quote:
Originally Posted by 724Skinsfan View Post
Does anybody have some advice as to finding the right balance of supplementing a pension with other forms of investing and simply using your income for other things in your everyday life. I used to contribute the max to my 401k with my previous job. The employer matched up to 8%. No that I work in the public sector with a pension, I'm struggling with justifying putting the money into the 401k (Fidelity). Here's what I'm thinking:

1)My first choice is to do what I should have done earlier which is to roll it over into a Roth IRA and keep contributing.
2)Another option is to enroll in a 403b plan, which allows up to 15k/year and also a "catch-up" period if I'm lagging behind.
3)Yet another option I have is to put more money into some stock that I own to really boost those shares up. Currently I just automatically roll the dividend check into purchasing more stock certificates but I could set up a monthly payment plan to buy more.

I work for the state/county government so my income isn't particularly enviable but the pension/benefits is pretty nice perk. I can't put my money everywhere and also I want to be able to enjoy myself at my current age.

Any suggestions before I set up a meeting with a financial planner would be most welcome.
As a financial planner would no doubt advise you, your primary consideration here would be structuring your investments in a manner that will take maximum advantage of tax savings.

Rolling your 401K account, which I presume you contributed to on a pre-tax basis, into a Roth IRA would result in a large one-time tax penalty. This is a terrible idea, obviously.

There's really no advantage to rolling your 401K into a traditional (non-Roth) IRA either, unless you like the investment options at another institution better than Fidelity's. I however would find that nuts. I'm with Fidelity, and you couldn't pay me to move my money from them. They've got some tremendous fund managers.

403b's are identical to 401Ks in that you contribute money on a pre-tax basis, thereby reducing your tax liability. This make maximum use of your money today. You'd pay less in taxes, but would be taxed on your withdrawals when you retire. This is a good option if you're looking to maximize your cash flow in the here and now.

Roth IRAs are best for the long haul. You put money in on an after-tax basis, meaning you don't get any of the aforementioned tax benefits in the present. This puts a bit more strain on your budget in the present. But upon retirement, you make withdrawals on a tax-free basis. Over the long run, this is the most efficient use of your money. But putting $3000 per year into a Roth would leave you with less cash flow than putting $3000 per year into a 403b.

The stock, assuming it's not included as part of your existing 401K or any other IRAs, is a taxable investment. You will be taxed on any dividends and capital gains. If you plan on using this money for retirement, steer clear of this option. Make your investments in either the Roth IRA or the 403b.

In short:
- Do not roll over your 401K, there's no benefit to doing so.

- If you are saving expressly for retirement, use the Roth IRA or 403b vehicles. Choose between them based on your cash flow needs today. Pick an amount to save per year, and decide if you can afford to do it on an after-tax basis. If you can hack it, go with the Roth, it's better. Unless the 403b contains an employer match, then use that under all circumstances.

- Only invest in taxable stocks if you have excess money after socking away your retirement money. If you plan on saving for your kid's college education, do that in a 529 before you start saving money in taxable stock accounts.

Hope this was helpful.
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Old 07-16-2008, 02:29 PM   #4
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Re: Supplementing pension ideas

Quote:
Originally Posted by Schneed10 View Post

In short:
- Do not roll over your 401K, there's no benefit to doing so.

- If you are saving expressly for retirement, use the Roth IRA or 403b vehicles. Choose between them based on your cash flow needs today. Pick an amount to save per year, and decide if you can afford to do it on an after-tax basis. If you can hack it, go with the Roth, it's better. Unless the 403b contains an employer match, then use that under all circumstances.

- Only invest in taxable stocks if you have excess money after socking away your retirement money. If you plan on saving for your kid's college education, do that in a 529 before you start saving money in taxable stock accounts.

Hope this was helpful.
Very helpful. Thanks.

The kids (2) will have a 529 setup for them. The oldest is turning 3 and seems to have a modicum of intelligence so we'll start one up for him soon. Even though I realize the power of compound interest, I was kind of hoping to wait until he's out of daycare and just put that money into the 529. The other is just now starting to recognize me after 7 months so the jury's still out if he'll be able to meet the necessary requirements for admission into a center for higher learning.
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Old 07-16-2008, 02:51 PM   #5
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Re: Supplementing pension ideas

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Originally Posted by Schneed10 View Post
In short:
- Do not roll over your 401K, there's no benefit to doing so.
Great post, Schneed. One exception to this is if you have job hopped, and you have a few 401(k)s out there. It could make sense to roll them into a single IRA to make it easier to manage. Personally, I can barely keep up with my traditional IRA, Roth IRA, 401(k), TSP, and taxable savings (not to mention my wife's plans). What's your thought on that?

It also depends on how old you are. If you are younger, you want to pay your taxes now, not at retirement (because your tax rate is presumably lower now than it will be at retirement). In that case, you would contribute in the following order:
1. Max out your employer matching (i.e., if they match 4%, do that first)
2. Max out your Roth IRA
3. Max out your 401(k)

If you are in the middle of your career, I guess you would max out the 401(k), and then see if you are eligible for a Roth IRA.

Disclaimer: I have zero education in finance - this is advice I have received from others, and it seems to "make sense".
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Old 07-16-2008, 03:38 PM   #6
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Re: Supplementing pension ideas

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Originally Posted by onlydarksets View Post
Great post, Schneed. One exception to this is if you have job hopped, and you have a few 401(k)s out there. It could make sense to roll them into a single IRA to make it easier to manage. Personally, I can barely keep up with my traditional IRA, Roth IRA, 401(k), TSP, and taxable savings (not to mention my wife's plans). What's your thought on that?
I would agree. There is no financial benefit to rolling your accounts over. There is also no financial "loss" from rolling your accounts over. So if it makes it easier to manage by consolodating accounts, go for it.

Quote:
Originally Posted by onlydarksets View Post
It also depends on how old you are. If you are younger, you want to pay your taxes now, not at retirement (because your tax rate is presumably lower now than it will be at retirement). In that case, you would contribute in the following order:
1. Max out your employer matching (i.e., if they match 4%, do that first)
2. Max out your Roth IRA
3. Max out your 401(k)

If you are in the middle of your career, I guess you would max out the 401(k), and then see if you are eligible for a Roth IRA.

Disclaimer: I have zero education in finance - this is advice I have received from others, and it seems to "make sense".
Yes it makes sense to me. Only change I'd make is that instead of evaluating this based on stage of career, I'd evaluate it based on the tax bracket you find yourself in. Which is kinda sorta saying the same thing anyway, because you tend to make more money in the middle of your career.

If your income is below the Roth limit, qualifying you to contribute to a Roth IRA, it is in your long term financial interest to do so rather than maxing out your 401K or 403b. However you give up cash flow in the present day, which can be an issue for some people. Ideal solution is find room in your budget, make spending cuts if possible, to make the Roth contributions.

If you make above the Roth limit, you're forced to max out your 401k/403b anyway. Which is still a good way to go.
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Old 07-17-2008, 05:29 PM   #7
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Re: Supplementing pension ideas

Fidelity is the best i have seen.I still have money in vanguard the funds are not as good.Fidelity is the safest and best performing..
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Old 07-17-2008, 07:39 PM   #8
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Re: Supplementing pension ideas

they got it already, but i'll post it again anyways...

1) ALWAYS max any money that your employer matches (whether 401k or TSP or what have you) since that's free money and a guaranteed 100% return immediately.

2) max your roth ira (if you make under 100k a year or whatever the current income limits are) - roth's don't tax your investment's growth, which is great.

3) ira/etc... tax deferred, but nothing special really...

you can roll over your 401k without penalty if you follow the rules on it, but not into a roth unless you want to pay a huge penalty on it first... unless you're really unhappy with fund performance or you're consolidating or some such, there's really no point...
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