Wednesday, September 17, 2008

A GChat Transcript In Which Financial Knowledge is Power!

My Friend: help i need a financial consultation.
me: shoot.
My Friend: tiaa cref.
what the arse is it?
and how do i know what percentage of what makes good sense>
?
me: It's a retirement thing for non-profit folks.
What kind of account are you looking at?
Is it a 403(b)?
My Friend: yes.
me: Okay, that's the nonprofit equivalent of a 401(k). It's an employer-sponsored retirement plan.
Are you being offered a match of any kind?
My Friend: i have no clue.
they sent me this form.
they said 'return it!'
and then they said 'today!'
me: That probably means no, but I'd ask someone if you have time. Do you have a Roth?
My Friend: no.
me: Does the convenience make a big difference to you? If you start contributing to the 403(b), the contributions will be deducted directly from your paycheck, pre-tax, which is very convenient and doesn't reduce your paycheck the amount of the full contribution, which is also cool.
My Friend: no contribution match from employer.
i checked.
me: Okay.
My Friend: convenience?
no, not a big deal.
me: Ideally, then, I think you'd open a Roth instead.
But that requires a lot more individual initiative.
My Friend: i don't know if i have that option.
me: You do. It's an IRA, not an employer-sponsored plan.
My Friend: ah.
so what about the form that i need to return today?
me: Well, I think if you're up for opening and administrating the Roth yourself, you skip this form.
The advantage of the Roth is a tax advantage: you pay taxes when you put the money in, not when you take it out (that's what happens with the 403(b)), so it grows totally tax-free, and when you retire making more money than you do now, you save lots on taxes.
My Friend: right! which makes so much more sense.
me: Way more sense.
The obstacle is this: a lot of plans require an initial investment of $2,000-$3,000, which you may not have on hand.
My Friend: no, i do.
so that will be okay.
me: Cool. You can open one online at Vanguard in about twenty minutes.
It's way easy.
I would do that instead of the 403(b) if there's no match.
I contribute to my 401(k) at [My Company] because there's a super-generous match.
My Friend: woot!
unfortunately not the case here.
me: Alas!
My Friend: in the short term, my dental insurance is free . . .
me: nice.
me: One more thing: once you set up the Roth (Roth Individual Retirement Account, is its full name, often Roth IRA) with the minimum $$, you can automate contributions by linking your Vanguard account to your bank.
My Friend: wow!
you are the best financial advisor i've ever had!

11 comments:

Money Maus said...

Way to go on being the FA!

Chad @ Sentient Money said...

Good for you, helping a friend out. I've had similar experiences. However, it is a little scary how little people know about all the financial stuff.

savingcent said...

Nice work! I found that to be a helpful refresher.... :)

mOOm said...

Maybe your friend's organization offers no match but the way things are structured at universities for example if usually that the employer puts a certain amount in irrespective of what you put in. For example at my former employer they put in 7% I think and you had to put in 1% of your nominal salary. You could put more in but that didn't change the employer contribution. There was no opt out though. So just be careful on the "match" thing. Downside of a Roth is the maximum you can put in a year is $4000 which may or may not be a problem. Also it is easier to get the money out if you are undisciplined...

Andrew Stevens said...

I can confirm what Moom says about universities. Many of them put money in regardless of whether the employee does or not.

However, a quick correction to Moom: the maximum for a Roth is $5000 (as English Major surely knows). It increased to $5000 for 2008 and should be that (or higher) going forward as well.

Priorities, in my opinion:

1) 401(k) or 403(b) up to maximum allowed by employer with match (no matter what percentage the match is)
2) Roth IRA up to maximum allowed by law
3) 401(k) or 403(b) without match up to maximum allowed by law

So if the maximum isn't enough (no reason why it should be), your friend should certainly sign up for the 401(k) or 403(b) as well and contribute without a match anyway. It still beats taxable accounts.

sara l said...

It's always great helping friends out. And Gchat is the best.

If they can afford it I'd also recommend putting a little in the 401k after funding the Roth.

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Knowledge is definitely power! I work with the Krave and to get more knowledge on one of the hottest phones out check out...motorola.com/krave!

R.

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