The pension reform bill that was recently signed in by George W. Bush has changed the future of retirement planning. Businesses no longer have the heavy burden of paying for its former employees to get rich while their profits suffer. This new plan encourages economic growth and will make us twenty and thirty year olds have a successful economy again. This plan also introduced a new forced savings plan for working individuals with a company sponsored 401(k) program. In the past decades people would depend on the government (social security), and business (pension plans) to fund their retirement nest egg. Finally, it is up to the individual to achieve financial independence, but business will still play a key role in the future.

If you read the article “Big changes for your 401(k), retirement” it describes the ways 401(k) plans will be offered when a new employee gets hired by a company. Starting in 2008, companies can automatically enroll new employees into their company sponsored retirement plan. The rules state that they can enroll an employee in a conservative diversification of funds (probably bonds, and other fixed income securities). Even though I think this is a win-win situation, people still need to be proactive in their retirement. Companies will also offer advice to maximize your 401(k) growth potential. Remember that their advice is still somewhat biased to the company you work for. So do your homework and read some books like “401(k) for Dummies” or “A Commonsense Guide to Your 401(k)”.

I have always said that a 401(k) program should be one of the biggest parts of your retirement savings (if you work for a company that offers one), but remember to always do some research in the funds that are inside the plan. Everyone’s plan is unique to their lifestyles (risk tolerance, age, income, how much you have already saved, ect.), but the younger generation should typically invest in 60% high risk and 40% high quality growth. Here are some other great articles to help you understand your 401(k) “7 hot 401(k) trends” and “FAQ about 401(k)s”

Recommended Books for This Topic

401(k) for Dummies

A Commonsense Guide to Your 401(k)

Shopping for a retirement account can be very time consuming and sometimes even confusing. Personally, it took me over a month to find the right place to open my retirement account. Because I am so nice to the devoted eFIPO.com readers I will breakdown the best places for you to start your retirement account.

Before you start shopping, you need to ask yourself some basic investing questions. Here is a short quiz, designed by yours truly, to give you pointers for your investing future. It’s like a Cosmo quiz (for the ladies) or a FHM quiz (for the men). If you answer them based on your independent lifestyle it should give you some good information. So answer them truthfully.

You have to go to http://www.efipo.com/20060914/74/ to take the real test and get your results!

Where should I invest?

1. Do you want to learn about investing?

Yes. I want to read as much as I can about investing
I will read some, but I just want to get started
No. I want everything done for me
2. What is your risk tolerance?

High. Expecting long term growth
Medium. I do not like huge market fluctuations
Low. Slow and steady
3. How much do you want to invest now?

More than $10,000.00
More than $5000.00, but less than $10,000.00
Less than $5000.00
4. How much do you plan to save on a yearly basis? (Invested monthly)

Over $300.00
Over $200.00, less than $300
Less than $200.00
5. How much do you expect your investment to grow on average yearly basis?

Over 15%
Over 10%, less than 15%
Under 10%
6. Do individual stocks scare you?

Yes! They go up and down too much!
Hell no! The stock market has always been the place to make money
Not really, but I like to keep it simple
7. How many books are you willing to read about investing?

Less than 2
3
More than 3
8. When do you plan to retire?

30+, but less than 50
Regular retirement age
Less than 60. Probably late 50’s
9. How much do you plan to have when you retire (with inflation)? Be realistic!

1 million - 2 million
More than 2 million less than 4 million
More than 4 million
10. How well educated are you when it comes to the stock market?

More than most people my age
Less than most people my age
Average

Nice! You completed the test. Click on the “Grade me!” button to get your score. After you obtain your score, scroll to the bottom of this post to get my personal suggestions based on the question you answered. My recommendations will be broad, so I am just going to point you in the right direction. Always ask for professional advice if you do not feel comfortable with investments. This test was in no way to sell you any securities. Decisions based on information contained on eFIPO.com’s site are the sole responsibility of the visitor, and agrees to hold eFIPO harmless against any claims for damages arising from any decisions that the visitor makes based on such information.


What you should do based on your score.

40+ — With 10k to invest or more- Consider getting individual stocks if you are experienced enough to diversify your portfolio. I recommend using Sharebuilder because they have some great investing programs for first time investors.

—-With less than 10k to invest- Stick with mutual funds. You probably don’t have enough money to properly diversify your portfolio. INGDirect, Fidelity, and Vanguard have some great mutual funds to get started. I recommend getting in long-term growth investments such as: small-value cap funds, international funds, large cap growth funds.

30+, but less than 40 — Mutual funds, and ETF’s are the way to go. INGDirect, Fidelity, and Vanguard have some great mutual funds to get started. Go into sectors that you know about. They also have a MorningStar rating for the fund’s financial strength. Go with the highest rated ones for less volatility.

20+, but less than 30 — Mutual funds are sometimes referred to as plain, but they usually work. I still recommend using INGDirect, Fidelity, and Vanguard for your mutuals funds. Stick with large growth funds, large-value funds, and other sectors you feel comfortable with.

10-20 — Yup, you guessed it mutual funds. Invest using balanced funds, and large growth funds.

Recommended books to read about stocks and mutual funds
Rule #1
Jim Cramer’s Real Money
The Intelligent Investor
The New Buffettology
The Four Pillars of Investing

I received this really great question about 401(k)’s and Roth IRA’s: “So my mom just surprised me and said that I have a very small chunk of $$ in a ROTH IRA account with Fidelity that she opened for me over 5 years ago. She said it’s less than $2500 which I think I get fee taken out because of it, so I would like to transfer $$ into this account from my 401K. So here are my questions

1. Can I roll over my entire or partial amt of my 401K into this Roth IRA?

2. Will my 401K penalize me a fee for this rollover other than the tax I will have to pay for going into a Roth fund?

3. I understand the rules that since my Roth IRA account is over 5 years old and I can take what I have in there out now penalty and tax free. So with this in mind, does this apply also if I were to put in my new rolled over $$ or do I have to wait to withdraw another 5 year time frame on this new deposit of $?”

This is a tough question, and it will force me to put on my thinking cap. About three months ago I went through the same scenario. I rolled my entire 401(k) balance into two different Roth IRAs with no problem. The one difference that I see here is that I actually left the company I worked for and it sounds like you are staying. Most of the time companies do not let you take your 401(k) prior to leaving the business unless you are in a huge financial problem. I do not recommend taking any money out of your 401(k) because of the taxes and penalties. Check with your Human Resource department and ask them.

Secondly, if you were to leave the company and transfer your 401(k) balance to a Roth there is something you must do first. You have to open up a Traditional IRA before you make the roll-over. Your 401(k) balance is pre-tax money just like a Traditional so you have to open that first. There shouldn’t be any fees tied with the transfer, but again check with your HR department. After you transfer your funds you can later move it into a Roth IRA. At this point you will have to pay regular taxes on the amount of money you are transferring over. Eventually (In the year 2010), they will be allowing straight roll-overs from your 401(k) to a Roth. So if you have a large 401(k) balance you might want to do it in increments so that you won’t get pushed up to a higher tax bracket.

Your last question is partially true. You can take out the contributions you made to your Roth IRA after five years (again HIGHLY do not recommend this), but the interest that has accrued in the Roth will be taxed and penalized. If you do not like where your Roth IRA is housed then transfer it to another brokerage or mutual fund company.

A rule of thumb that I think young investors should follow is “If you have less than $25,000.00, invest in a good mutual fund. If you have over $25,000.00 you can consider investing in single stocks and ETFs. Remember that diversification is still key, and always do your homework before you invest in single stocks. Unless you are Warren Buffet consider staying in a mutual fund.