Retirement Investment for Newbies

I just realized today that I have a retirement account fully invested in a mutual fund. I contributed nothing to this account, didn’t monitor it, didn’t know the rate of return, and didn’t even know what it consisted of until today.

How is it even possible, you may ask.

Mr. FAF and I haven’t contributed anything to our retirement accounts since we’ve been 100% devoted to paying off our mortgage. But being in my 30s, I’ve been thinking about retirement a lot.

In fact, I looked up traditional IRA, Roth IRA, and the like online to see where to start. Although those articles explain what those accounts are, they just sound like buzzwords to me.

Even the personal finance blogs give very general, high-level explanations. I got a big frustrated since they didn’t address the questions that I had.

Questions

Where do I even start? These are all the questions that ran through my mind but I didn’t find the answers to:

— How and where can I sign up for a retirement account?

— Should I contact the HR department to ask if there’s anyone at the company who can guide me through the process?

— Do I need to sit down with a financial advisor to start the investment process? Do they offer a free one-hour counseling session? If not, how much do they cost an hour?

— If it’s pre-tax contribution, how can I connect my pre-tax paycheck to the retirement accounts? I mean, my paychecks are always post-tax.

The start

I contacted the HR at my job, and they told me there was no one in the department who could help me with that. They directed me to the Transamerica website, where I was totally lost as to what I should do.

Fast forward to one day, I brought this up to some colleagues. They broke the news to me that our employer has already contributed an X% of our annual salary to our retirement accounts with Transamerica regardless of how much we contribute.

Needless to say, I was super happy to hear that. But is it being invested somewhere or has it been sitting there all this time?

Calling Transamerica

I followed the link in the newsletters I got from Transamerica, signed up for an account, and logged in to see what I have. I was totally overwhelmed. I saw a series of numbers and tabs, and felt really disoriented.

Then I a saw a phone number for customer service and decided to call. After a 15 minute wait, I spoke to a real person who was willing to answer all the questions that I had.

I just couldn’t believe it. It was all free! The operator was super eloquent and attentive. He answered every single question that I had.

He told me my fund had already in invested in a Vanguard mutual fund selected by my employer, and that I couldn’t make changes to that fund.

When I asked about what kind of fund I should invest in to earn a higher return, however, he declined to answer, saying that he and the others at the calling center are not licensed to give financial advice.

The enlightenment

Thanks to the operator’s explanation, I gained a much better understanding of the retirement accounts.

1) Employer’s sponsored accounts (ESAs)

— Currently, my employer matches an X% of my annual salary as a contribution to my 403b account.

— On top of this X%, I can select to contribute $18,000/year to the following plans:

a. Pre-tax contribution: 403b account (for nonprofits; it’s 401k for for-profits). It’s also called “Employee Voluntary contribution.”

b. After-tax contribution: Roth account 

The $18,000/year is the maximum amount for (a) or (b) or the total of (a) and (b) combined.

2) Individual retirement accounts (IRAs)

— Besides the employer’s sponsored accounts, I can also open a traditional IRA or Roth IRA account or both.

— The maximum amounts I can contribute to individual IRAs, however, are lower than those for ESAs.

a. Traditional IRA: $5,500; $6,500, if age 50 or older

b. Roth IRA: $5,500; $6,500, if age 50 or older

You can read more details about the plans here.

The operator told me that I would need to open the IRAs separate from the ESAs. Since I’ve heard good things about Vanguard, I will call them once Mr. FAF and I decide to open our own IRAs.

I think we might need a financial advisor to guide us on what funds to select for our IRAs since we have no control over what mutual funds to select for our ESAs.

But I will make sure to use all the free customer service I can get through Vanguard before reaching out to a professional if their service is expensive.

Which account to choose?

According to the operator, young people usually choose post-tax Roth accounts while older people often select pre-tax traditional or 401k/403b accounts. Dave Ramsey also mentioned this point on his March 30, 2017 radio show (hour 2).

It’s always advisable to invest at an early age to take advantage of the compound interest, according to JP Morgan Asset Management.

Our plan

Mr. FAF and I plan to take advantage of our company’s matching. Our number one goal at the moment is to pay off our house. But we might put a little bit more towards our Roth accounts.

Besides the experts’ advice, I just really like the idea of knowing exactly how much money I have in my retirement accounts without worrying about paying taxes on them later.



4 thoughts on “Retirement Investment for Newbies”

  • I’m so glad you took some time to check this out. Knowing where your retirement money is, is a very important thing and once you are comfortable with it, contributing your own money will certainly help you reach your goals faster. While your income taxes are low, considering the Roth contributions is a good idea. However, if your earnings accelerate, using the pre-tax options may be better for the immediate tax savings know. There is no one-size-fits-all answer with pre or post-tax, but I generally recommend considering pre-tax once you are out of the 10 and 15% income tax brackets. Best of luck to you guys!

    • Hi Mrs. Need2Save, thank you so much for your amazing advice! Mr. FAF is currently finishing up his degree and will start a new position in the summer. We plan to up our retirement contribution once he starts working. I’m so new to the retirement scene, but it’s about time we thought about it carefully since we’re both in our 30s now. I really appreciate you took the time to give us guidance on this process. 🙂

  • Generally when you think of saving for retirement it means that you shouldn’t worry about it while your in your 20s and 30s since its a long ways away but I’ve learned that is a big myth. Very happy that you and your husband have started to look at your retirement accounts at work and plan to open an IRA.
    You should take advantage of the your company match for your retirement contribution, that’s like free money into that account. A good start your 403b account is to contribute 10-15% for every paycheck. With your IRA, try to contribute as much as you guys can. The maximum amount would be great but contribute as much as you please. With all of these retirement accounts, I advise that you/husband or your financial advisor should research are the fees the funds will be charging. Try to find funds that have low fees. You don’t want to have funds that have enormously high fees because it will start to add up as the funds in your account grows.

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