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Time Well Spent: Choosing an IRA or a Restaurant?

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Actually both can be a good use of your time in the right amount.  Living near a major city like Chicago, the dining choices are innumerable.  The worst that can happen is you have a bad meal should you choose the wrong restaurant.  Contrast this with choosing the wrong place for your IRA account and/or the wrong investments and you may end up with less in retirement than you had hoped for.

According to a recent survey by TIAA-CREF:

  •  Americans are more likely to spend two hours selecting a restaurant for a special occasion (25 percent), buying a flat screen TV (21 percent) or tablet computer (16 percent) than on planning an IRA investment (15 percent).
  • Fewer than one in five (17 percent) Americans are contributing to an IRA – a decline from 22 percent in 2012 – potentially missing tax and savings benefits.
  • What’s more, fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013.
  • Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment.

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According to the TIAA-CREF survey:

“An IRA can be an incredibly powerful savings tool that can boost retirement security and offer immediate tax and savings benefits. IRAs can also serve as a valuable supplement to an employer-sponsored plan and help fund a first home or education,” said Doug Chittenden, Executive Vice President, Individual Business at TIAA-CREF. 

Despite these benefits, the survey found that fewer than one in five (17 percent) of those surveyed currently contribute to an IRA, a decline from 22 percent in 2012. 

The survey reveals that the number of Americans who would consider an IRA as part of their retirement strategy has fallen sharply since 2013. Fewer than half (47 percent) of those not contributing say they would consider an IRA, down from 57 percent in 2013. 

It is possible that a lack of understanding is responsible for low IRA contribution levels. More than one-third (35 percent) of respondents do not understand what an IRA is or the difference between an IRA and an employer-sponsored plan. This percentage is even higher among the Generation Y (age 18-34) population surveyed (45 percent). 

“More and more people are unaware of the ultimate value an IRA can have in a building a stable and secure retirement,” said Chittenden. “Americans today bear much more responsibility for their retirement savings than previous generations did. There is a pressing need to educate Americans from all age groups and income levels on the long-term retirement benefits that IRAs provide through compounded investment growth and tax savings.” 

Even among those who already have an IRA, more than half (55 percent) said they spent an hour or less planning for the investment. 

Sixty percent of those who are contributing to an IRA also have an employer-sponsored plan such as a 401(k) or 403(b). Among those with both plans, more than half (53 percent) say they contribute to their IRA regardless of whether they have reached the contribution or matching limit of their employer-sponsored plan. This means they could be leaving money on the table if they are diverting money to their IRA before contributing enough to get their employer match. 

How does an IRA fit with my retirement planning strategy? 

TIAA-CREF is absolutely right in that an IRA can be a great tool in your retirement planning strategy.  If someone has access to a 401(k) or similar workplace retirement plan I generally suggest they contribute at least enough to capture any employer match offered.  This is true even if their 401(k) plan is lousy.

Beyond that it makes sense to contribute more than the amount needed to receive the match if your employer’s plan offers a menu of low cost solid investment choices.  Although 401(k) plans receive a lot of bad press, in fact there are many excellent plans out there.  One advantage to investing for retirement via a workplace retirement plan is the salary deferral feature.  This makes regular savings and retirement investing painless.

An IRA can be a great retirement savings vehicle in a number of situations:

  • You don’t have access to a retirement plan via your employer.
  • You have maxed out your contributions to your 401(k) and want to make additional retirement contributions.
  • You are a non-working spouse and your working spouse makes at least income to cover the amount of your contribution.
  • You are self-employed.  Note there are a number of retirement plan options for the self-employed including a Solo 401(k) and SEP-IRA.
  • You are looking to roll over your 401(k) after leaving a job and also possibly to consolidate several old 401(k) plans in one place to make managing these assets a bit easier. 

Considerations in choosing an IRA account 

In a recent post on this blog 3 Considerations When Opening an IRA Account I suggested the following things to consider when opening an IRA account:

When looking at the cost of an account at a particular custodian consider any annual account fees and transaction costs related to the types of investments you are likely to make.  For example:

  • How much is it to trade stocks, closed-end funds, ETFs or other exchange-traded vehicles?
  • Does this custodian offer a large number of mutual funds on a no transaction fee (NTF) basis? 

While researching a good restaurant can take some time and potentially yield some tasty rewards, time spent on finding the right IRA and on retirement planning in general can pay off handsomely down the road.  This can lead to many fine restaurant meals as well.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

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Comments

  1. IRAs are really a great tool. Too few people really spend the time to consider them properly. You really pointed the reality of what people spend the time on instead of the things which might really help them out.

    • Roger Wohlner says:

      Leonard thanks for the comment. People tend to avoid what is unpleasant and/or uncomfortable and for many that is retirement and financial planning.

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