Roth right for me?

[Guest Boris]

Hello Folks,

I stumbled onto this site and have been reading for hours now. Those of you who offer information and guidance to those of us who need to hear it in a straight forward manner are rare individuals and my thanks go to you for being so generous.

I am a 47 yo business owner. When I was younger, I did not have the foresight to understand the importance of early savings. I spent 15 years with a very large corporation and thus have a retirement income scheduled from them, provided they do not experience financial difficulties at some future point and simply erase any benifit I have earned. Obviously SS has its own issues and I do not attempt to count on its benifits.

For the past 13 years, I have been unable to do much saving because of the financial burden of starting and maintaining a small manufacturing business. Over this time things have improved financially to the point that I have eliminated all debt, personal and business, except my primary home. I currently have about 12 years remaining on a 15 year fixed mortgage with about 40% equity, and my income is now stable enough that I have begun saving and have resources to fully fund a Roth account and additional each year. I have built an emergency fund for approximately 6 months of expenses.

The problem is I feel like I am trying to play catchup for retirement. Im not so much interested in retiring at a given date as I am simply facing the reality that I will retire someday and want to be as well prepared as possible.

I have enough time, inclination, desire and knowledge to be interested in investing in individual stocks and have opened an account with Scottrade to do so.

My questions to you would be, What opinions would you offer in regard to investing inside or outside of a Roth account? What are your opinions regarding my particular age and situation for retirement planning and is Roth the best place for me, at least to the limits allowed by the program?

Thanks for any help you might provide.

[John G]

Good post. Its good to see a post from an entreprenuer. You are not alone in facing these kinds of issues.

Short notes:

Roth is a great tax shelter, but it is limited by the annual cap. If you are married, cap x 2 is a little better. I would always do a Roth as a starter. But, 4k in 20 years builds to only about 230K at 10% annual return, that if you are married and can 2x.

You should check to see if you can take your pension assets out of the prior companies plan. If you have investment choices, you probably want to avoid a large chunk in stock of that company. Some company plans allow you to rollover assets to other plans. You should ask.

As a business owner, you have a lot of additional options. You can design a employee plan that works well for youself and provides some modest incentives for employees. You should talk to your accountant about the range of options, their costs, and how much you can set aside. My wife and I used a plan available through Charles Schwab in the 1990s that allowed us to set aside over 20% of our income. As we were buying into a generic plan, our annual costs for plan fees was only $135. Note, we were the only two employees at that time.

If these other tax shelter plans do not work, then after funding your Roth to the max, I would consider a systematic investing program. For example, a month ACH (automatic check) to a index mutual fund. Index funds tend to have lower tax impacts because there is less turnover. A tax managed fund might also be a reasonable choice. Most of your gains here would be taxed down the road as long term capital gains.

As to the runnning to catch up anxiety problem.... get a copy of the best seller titled "The Number" by Eisenburg. It looks at different approaches to post-retirement, the mathematics, the marketing hype and gurus, etc.

PS: I have been teaching JA economics at the HS level for almost 20 years. My message is... nobody has told you, but YOU are in charge. I don't expect them all to run out and open a Roth, but a few have! And the others have gotten the message about two decades before many of us did.

[Guest Boris]

Many thanks for the thoughts John. As you are well aware, the more information one can gather before making a choice the better.

I failed to add that I am indeed married and the x2 helps with the choices.

My retirement / pension savings are indeed partially permitted to be rolled into alternate qualified retirement account. I am exploring those options as quickly as I can to fine a better fit for my situation. At least I will have that portion moved into an account that will not be dependant on some companies furtue finances.

I have contacted my accountant and he is supplying me with literature on those options.

The book I will pick up this evening.

Its amazing how people like myself, who conduct business everyday, forget to use the resources we already have. There are often many options offered by those we deal with everyday if we simply would ask.

Well, I guess thats why I made the post.

Thanks