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Decoding the Language of Retirement Investing

   Posted On: April 29, 2019  |    Posted In: Investing  |     Posted by: Broke Millennial®

This post is sponsored by Fidelity

A couple months ago my sister came to me with a request: could I help her open up an IRA? Like myself, my younger sister is self-employed, which means she’s entirely on the hook for preparing for retirement. (Her self-employment is way cooler as she works in film and even had a short she co-wrote and directed premier at TriBeCa film festival!). But due to other short-term financial goals and variable income, she didn’t have a huge lump sum to put into an investment account. Instead, she opted to open one and be able to make modest monthly contributions. She asked me if it was even possible to do that or would she need to save up a bunch of money just to get started?

Investing isn’t just for the wealthy

It’s a huge misconception that investing is something only the wealthy can afford to or have the knowledge to do. Part of the reason that belief exists though, isn’t completely unfounded. Initial minimum investments used to be a big barrier to entry for a rookie investor. Sounding just like the name, an initial minimum investing, was the bare minimum amount you needed in order to gain access to investing in a certain fund. But sometimes those minimums are $1,000 or $3,000 or $10,000. That’s a lot of money and certainly not a sum all rookies have available to put into an investment in one go. It’s part of what made my sister feel as if she wasn’t ready to start contributing to an IRA. Fortunately, there are some options out there for funds with no minimum initial investments, which can help you get started with a more modest sum.

The important thing to recognize is that putting money into a retirement vehicle means you are an investor!

We say “save for retirement”, but really, you’re investing for retirement! You are an investor and you don’t have to be wealthy to get started!

Decoding the language of retirement investing

Types of retirement plans:

  • 401(k)
  • 403(b)
  • IRA

The 401(k) and 403(b) are typically plans offered by an employer. Often the 401(k) are offered by for-profit companies while the 403(b) is utilized by non-profits. These plans usually come with the incentive of an employer match. There is a solo 401(k) option for the self-employed.

The individual retirement arrangement (IRA) is another way you can be investing for retirement on your own accord without the backing of an employer.

Roth or Traditional

Keep in mind there are income limits for a Roth IRA to be eligible to contribute. For a traditional IRA, your income determines if your contribution is tax-deductible, but you are always able to make a non-deductible contribution.

  • Traditional: Should you qualify for a tax-deductible contribution up to the annual limit, you’re investing with pre-tax dollars up to the annual limit ($6,000 in 2019). You get to lower your taxable income today, but you do have to pay taxes when you take the money out in retirement, or take an early distribution.
  • Roth: Investing with post-tax dollars up to the annual limit ($6,000 in 2019). You don’t get a tax advantage today, but you do get to withdraw the money federally tax-free in retirement, provided certain requirements are met, including:  the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase, or death.

 

Expense ratio

A fee you pay which helps cover the operational costs the brokerage incurs to run the mutual fund. It’s important to remember each dollar you pay in fees is a dollar less that’s growing for future you, so you should compare costs of expense ratios and make sure you know exactly what you’re being charged. Expense ratios are generally expressed as a percentage, e.g. 0.04%. An expense ratio of 0.04% means you’re paying $4.00 in fees for every $10,000 invested.

Employer match

Your employer puts money into your retirement plan! Usually the employer will match you up to a certain percentage (e.g. 5%), but the catch is often that you have to also be contributing too in order to get the match. Some employer matches are on what’s called a vesting schedule.

Vesting schedule

A vesting schedule determines when you’ll actually be able to leave your job and take your employer match with you. You always get to keep the money you put into your retirement plan! This is specific to the employer contribution. It’s a way for employers to try and keep employees at a company. There are three main types of vesting schedules:

  • Immediate: The best option! As soon as your employer match is in the account, it’s yours. You can leave the company tomorrow and take all of the employer match + your contributions with you.
  • Cliff: You have to wait out the vesting period. Often times it’s about five years. If you leave before the money fully vests, then you don’t get any of the employer match.
  • Graded: A percentage of the employer match vests each year. Often it looks something like 0% in year one, 20% in year two, 40% in year three…etc. For example, if you had $6,000 in employer contributions and $6,000 of your own contributions, and you left at the end of year three, you could take the full $6,000 you contributed + 40% of your employer contribution ($2,400).

Rollover

So, you’ve decided to leave your job and now you have to decide what to do with your retirement plan. One easy solution is to roll it over either into the retirement plan at your new company or into an IRA. This is actually pretty simple to do and I highly recommend you research all the providers who can do this for you before moving any assets. Then pick up the phone and talk to someone where you decide you want to do the rollover.

Looking for another perspective on some of these must-know financial terms? Fidelity’s Kelly Lannan recently shared a video simplifying some of these concepts, especially when you’re evaluating a job offer. With many in the class of 2019 gearing up for graduation and on the hunt for jobs, these tips from Kelly should come in handy. Go ahead and follow Kelly on LinkedIn for more insights!


Join me on tour

Kelly Lannan recently joined the kickoff event of my new book in my hometown of New York City, which was sponsored by Fidelity! The tour continues, and with each stop, we’re bringing you an educational and, dare I say empowering, evening to learn all about why investing shouldn’t scare you! (Seriously, it’ll be fun.)

Each ticket gets you entry, food, drinks, a copy of Broke Millennial Takes On Investing, and some fun swag to take home with you. Head here to secure your ticket!

Want to learn more about the book and other stops on the tour? Find everything you need at brokemillennial.com/tour.

Investing involves risk, including the risk of loss.

Fidelity Brokerage Services LLC was the paid sponsor of the Broke Millennial Takes on Investing book tour stop in NYC and has sponsored this post. Fidelity and Lowry Media LLC are not affiliated and Fidelity does not endorse or adopt the content of these posts.  

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