Retirement account for travelers

Swellz · Sep 13, 2019

If you search this, I'm pretty sure Ned has answered this in the past.

I haven't put anything in a retirement account as a traveler. I know that's not helpful, but it's true and you did ask lol. It was half that I didn't bother with setting up my own plan, and half that my husband and I are focused on paying down our mortgage so we didn't want to pull any money from my paycheck. But I'll be working another 30-35 years, so I anticipate having time to push those savings when we own our home.

NedRN · Sep 14, 2019

Yes, I'll recap. Vanguard has the lowest overhead of any mutual fund or financial company and is effectively investor owned. So that is where you should set up a self directed IRA. Lots of big debates found online between Roth and traditional IRA. Roth is post tax contributions and the investment gain and income is tax free. Traditional IRAs are a tax deduction off of your income and so you can effectively put more money in pre-tax so there will be more of it in a tax free environment to gain additional value. You do have to pay income taxes on all withdrawals unlike a Roth. The underlying concept is that you defer taxes until retirement when your tax percentage is lower than your working years so you will pay less taxes. You are able to convert traditional IRA funds into a Roth account. As my income swings wildly from year to year, I do convert traditional funds to a Roth in a low income year as the taxes are very low - lower than I anticipate in retirement. If you own a business, you can also set up a self directed 401K (I did mine with Fidelity - the other big name in mutual fund companies - because at the time the fees were less than Vanguard, actually free of 401 overhead. It is a word you don't really have to worry about, completely identical to traditional and Roth accounts in every detail except if you generate business revenue and can afford to contribute more to retirement accounts annually, you can blow through the relatively low blow through limits set by IRAs. You can also can contribute to both IRAs and 401Ks each year further increasing the annual total.

All this and much excruciating detail can be found online, in books, and with investment counselors. So it really isn't relevant to discuss generally on a travel forum, lots of financial forums and FB to yak about it if you get into it, which is why I was reluctant to do basics here.

The above are just the fundamentals, which while clear enough, probably won't make sense to the reader who this is their first exposure. But the deal is, set up retirement accounts, contribute regularly (automatically is best) and as much as you can. Do this starting young enough, and you will be a millionaire when you retire (assuming reasonably conservative investment choices depending on how close to retirement you are).

What is travel specific is that many agencies offer 401K plans for travelers. They usually match the money you contribute (a payroll deduction pretax, with some small percentage). This percentage can be significant and represents money left on the table if you don't take it. There is a big gotcha though, a vesting period for the match. You have to have the account so long, perhaps five years, before the money is really yours. Roll it over earlier to your own IRA (zero cost and I highly recommend it - more below), and you lose that match.

I do recommend contributing the max allowed to an agency 401, or as much as you can afford. These contributions are pretax and more effective than deducting IRA contributions on your tax return (but still do both if you can afford it). Most employers will only allow some relatively small percentage of a match and I don't even worry about it, I like my independence and don't want to be tied to one agency. However some plans allow maximal contributions in a high percentage or dollar amount allowing you to max out total contributions in one assignment - some $19,000. I've done that several times, pretty darned cool if you can afford that.

But there is another catch. These agency plans were sold to them by a random sales person who said it won't cost them anything to offer it to their employees. True, but there is no free lunch, there is an overhead to us! Front end fees, back end fees, annuity wrappers, a number of well hidden ways to get their share. The way to beat these costs (which are at least one percent per year - a staggering difference by the time you remove money decades later) is not to choose any mutual funds. The offered funds appear identical to very well known funds offered by respectable companies like Fidelity and Vanguard, but have hidden fees. Hard to see them even if you get the prospective for a fund, a very legalese document that is supposed to describe full details. So what I do is I put all 401 contributions into a money market fund. May not pay much interest but it will preserve your equity. As soon as my assignment is over, I roll that accumulated money into my own self directed IRA where I can choose mutual funds or other financial instruments that do not have this overhead. These "roll over" transactions have no fees by law, and don't have to be entered on your tax return. Boom, done!

And just to remind you again, doing 401K contributions are separate from IRA contributions. You can max out both (or one, again depending on what you can afford).