$25 is enough to get started saving for retirement

Dear Liz: I am 25 and work part time while I finish my bachelor’s degree. Most of my family thinks the amount I could contribute to a retirement account is too little to bother with opening one, but I would like to get into the habit of having the contributions. I would be contributing only about $25 a paycheck (every two weeks), and this is an optimistic estimate.

I do have about $4,000 in savings right now. Do you think I should go ahead and open an IRA? If so, what should I be looking for in the bank or investment company with which I open the account?

Answer: There’s really no such thing as “too little” when it comes to retirement savings. Everything you set aside can help you on your journey to financial independence.

Furthermore, waiting until you can contribute more is a bad idea, since your expenses will probably rise over time and you’ll always find ways to spend the money if you don’t make saving a habit. Start with those $25 contributions and try to bump up the amount every few months. Once you graduate, look for a job that offers a good workplace retirement plan that will allow you to contribute 10% to 20% of your earnings — preferably with a company match.

For now, though, opening up an IRA or a Roth IRA is a great idea. You may be able to get a tax credit for your contributions if your modified adjusted gross income is below $27,750. (You can learn more about this saver’s credit by reading Publication 590, Individual Retirement Arrangements, or the instructions for Form 8880, Credit for Qualified Retirement Savings Contributions.)

Avoid banks and full-service brokerages, as their hefty fees will eat heavily into your returns. Instead, start with an account at a company that offers low fees, such as discount mutual fund company Vanguard Group or discount online brokerage ShareBuilder.

Vanguard has a $3,000 minimum investment requirement on most accounts and a $100 minimum for additional investments, so you’d need to save up in another account (such as an online savings account) and transfer the money over when you have enough. If you choose its target date retirement funds, though, the minimum is only $1,000 with a $1 minimum for future automatic investments. ShareBuilder allows you to invest without minimums. Automatic investments in certain mutual funds are free, while automatic investments in other funds and stocks cost $4 apiece.

Get a second opinion before buying a variable annuity

Dear Liz: My husband and I are 62 and 58. We both are still working and have IRAs. Our financial advisor of 20 years is encouraging us to use some of our IRA money to buy a variable annuity. We lost quite a bit in the recession and have not recovered it all yet. I have read nothing really good about variable annuities and keep telling our advisor that, but she insists we really need one. We cannot afford to have another big loss either, so we do not know what to do. All our IRA money is in mutual funds. Can you give us any guidance?

Answer: If your advisor gets paid a commission for selling annuities, as she probably does, she’s not an objective source for you on this topic. Consider investing a few hundred dollars to consult a fee-only financial planner, who can review your financial situation and your investments and offer advice.

Variable annuities aren’t always a terrible option, but they’re a poor fit for IRAs, which already offer the tax deferral that’s a big part of an annuity’s appeal. The so-called living benefits that guarantee a certain payoff typically come at a high price, which is why you should always run these investments past an objective source before you buy.

Don’t count on an inheritance to fund your retirement

Dear Liz: I’m 56, make $30,000 and have no credit card debt. I rent and I have no assets except for about $350,000 to $400,000 in cash, stocks, oil and gas leases and property that I will inherit from my mom’s living trust. She is 85 years old. Are there any specific suggestions you would give me to be preparing for my retirement years?

Answer: Let’s be clear: You have no assets. Your mother does, and she may plan to give those to you, but those plans could change. She may well need her money for living expenses and long-term care, which could easily eat up that nest egg.

So you need to start saving on your own for retirement. You may think you can’t live on less than you are now, but make no mistake: You’ll be living on significantly less if you don’t save. Your Social Security benefit, if you retire at 66, will be around $1,000 a month.

If you have a workplace retirement plan such as a 401(k), start contributing to that. If you don’t, put money aside in an individual retirement account. If your adjusted gross income is under $27,750, you may qualify for a tax credit that can help you, known as the Retirement Savings Contributions Credit or Savers Credit. (You’ll use Form 8880 to figure the credit; visit http://www.irs.gov for more information.)

Your broker is not a retirement expert

Dear Liz: We’re in our mid-60s and have $1.4 million in a brokerage account totally invested in stocks. Our broker maintains that we have plenty of money for retirement. Is he right?

Answer: Unless your broker is a comprehensive financial planner — which is highly unlikely, given that you’re 100% invested in stocks when you almost certainly should be taking less risk — he shouldn’t be offering advice. You need to consult a fee-only financial planner who can review your entire situation, including how much you spend, your risk tolerance, your health, your expected longevity, any upcoming purchases or lifestyle changes and any legacies you may want to leave behind. Only then can the planner give you personalized, knowledgeable advice about this crucial area of planning.

You can get referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org, the Garrett Planning Network at http://www.garrettplanningnetwork.com and the Alliance of Cambridge Advisors at http://www.acaplanners.org. Each site offers advice about how to evaluate and choose a planner.

Choosing pension payout? Get expert help

Dear Liz: My husband is planning to retire this summer after 30 years as a teacher. He is 55, I am 56, and I do not plan to retire until I’m 66. He has to choose among several options for his pension: getting the maximum benefit, which ends when he dies; choosing a reduced amount that continues 100% to me when he dies; choosing a less-reduced amount that offers a 50% payment to me when he dies; or a reduced benefit that’s guaranteed to continue a certain number of months if he dies or increases if I die first. We can’t decide what’s best for us. Can you help?

Answer: Not really, but an experienced fee-only financial planner can.

Choosing a pension payout option is tricky, because you’ll be living with the consequences of this decision for the rest of your life. You want to discuss this with a professional who can review your entire financial situation and give you individualized advice. This person should be someone who is committed to putting your interests first, rather than his or her own. You can get referrals to fee-only financial planners from Garrett Planning Network at http://www.garrettplanningnetwork.com.