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Will I Ever Be Able to Retire?

I'm doomed and will have to work 'til I drop, paying for socialist programs. I'm 47 and have about 20k in my 401(k) and about 200(k) in my IRA. I'm putting 16 percent of my income into the 401(k). I don't own a house or even a pot to p** in. Is there any way that I can retire some day?

— Jerry

Dear Jerry, Fear not! You're in much better financial shape than you realize.

I ran your situation past John Burton, a chartered financial consultant with Robert W. Baird in Pittsburgh, Pa. We both crunched the numbers and came to the same conclusion.

Given the amount you've saved up to now in your 401(k) and IRA, plus the contributions you will make over the next 18 years, you should have close to $2 million dollars by the time you retire at age 66! (Since you're a baby boomer, that's the age at which you will qualify for full Social Security. Just think, at that point you'll be benefiting from one of those "socialist" programs you rail about today.)

We came to this conclusion by starting with the $220,000 you currently have in retirement accounts (401k + IRA). Then we figured you would continue to add $10,500 annually. We assumed your retirement portfolio would receive an average return of 10 percent per year over the next 19 years and — voila! You'd end up with just over $1.9 million bucks. Should be enough to allow you to buy a home with more than one "pot to p** in."

Now if you're really serious about socking away the money, Burton suggests you also consider "contributing to a Roth IRA, provided your adjusted gross income is below $95,000." (You don't mention a spouse or family, so we're assuming you're single. If you're married, the income limit goes to $150,000.) Roth IRAs are a tremendous retirement savings vehicle that is sadly unappreciated. Unlike a traditional IRA, you aren't allowed to deduct the $2,000 contribution from your income. However, if you're putting that much into your 401(k), you probably don't qualify anyway. (In order to qualify for the full deduction, a single individual who is covered by a retirement plan at work cannot earn more than $32,000 this year.) The real beauty of a Roth is that your money grows- not tax-deferred — but income tax FREE!

According to Burton, investing $2,000 a year in a Roth IRA over the next 19 years would give you another $112,000, provided it earned an average of 10 percent a year. And every cent would come out tax-free.

So, how do you make sure your retirement monies earn the 10 percent we've been talking about? Burton recommends a diversified portfolio divided in the following way: 20 percent large cap growth; 15 percent mid-cap growth; 15 percent small cap growth; 30 percent growth & income; 20 percent international equities. Think of your separate retirement accounts as a single pool of money and spread this allocation across your entire "pool." By the way, as I'm sure you know, 10 percent is less than half the average return in the U.S. stock market in recent years. While past performance is not indicative of future results, this could mean that you might not have to load up on high risk, Internet stocks to achieve this.

Thanks for allowing me to be the bearer of such good news!

I have a 401(k) plan that I started 4 years ago and am now looking for advice on what to do with the 401(k) from my previous employer. I amassed about $16,000 dollars in value with the 401(k). Should I move these funds into my current company's 401(k) plan or go with an IRA? I'm only 26 and want to be an aggressive investor. What can I do to maximize growth potential?


Dear Thadious, Congratulations on recognizing the wisdom of keeping your 401(k) contributions in a tax-deferred account! This, plus the magic of compounding, enables your money to grow much faster.

Not all 401(k) plans will accept money from a previous plan. I'm assuming yours does, or you wouldn't be asking about this. The first thing I'd suggest is to take a close look at the investment options available to you at your new company. Does your new 401(k) offer a range of mutual funds, including international, small caps and mid-caps? How do all the funds stack up in terms of performance? If you want to "be aggressive," make sure there's a way you can do this in the new plan.

If, on the other hand, you roll your old 401(k) money into an IRA, you have more than 10,000 mutual funds, plus individual stocks to choose from. While it may not be important to you right now, some day you'll probably have a family. An IRA usually gives you much more control over what happens to the money if you die. So, without knowing the details of your new 401(k), I favor rolling your money into an IRA.

Good luck and keep that tax-deferred growth coming!


The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments, Inc. or any of its affiliates. You should consult your own financial advisor for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.
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