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Archive for the ‘Retirement’ Category

This is pretty apalling

Wednesday, March 26th, 2008

I happened to overhear a conversation the other day between two 30-something guys talking about their jobs.  One of them said to the other “I don’t waste money in my companies retirement crap.”  A few years ago I wouldn’t have thought twice about it and I would have just gone along on my merry way, thinking about the weather.  Unfortunately now, comments like that make my ears bleed.  Its a good thing that one of them didnt say “yeah, we’ll live on social security” or else I would probably have created a scene, and no one wants a scene.

Here is the problem in my opinion.  Everyone in Gen x, y, z that is of working age has put basically zero thought into what retirement will actually mean.  I think instead most of the retirement thinking going on revolves around thinking about laying by a pool in Mexico drinking a pacifico and munching on chips and queso while their yacht is parked nearby.  Some might contribute a bit to their 401k, but most dont max company contribution out (only 1 in 7 Gen yers!).  Most don’t realize that unless they get on it early the closest they will come to that vision is cleaning that pool, and having a log on the beach to float around on.

If you haven’t maxed out your companie’s 401k match, go do it right now.


Bear Stearns Employees 401ks Bear bad news – Dont make the same mistake

Wednesday, March 19th, 2008

Bear Stearns employees 401k’s were literally loaded with Bear Stearns stock apparently. Here is one blurb about it from Report on Business:

Hot on their heels will likely come lawsuits on behalf of Bear Stearns’ employees. What makes this case interesting is the unusually high level of stock ownership by staff, who hold more than a third of the company’s shares, said Ross Intelisano, a partner at Rich & Intelisano LLP, which specializes in securities litigation.

“We’ve been getting a lot of calls,” said Mr. Intelisano, whose firm has represented employees in other cases against Bear Stearns. “The question would be whether or not Bear, as the administrator of the 401(k) plan, breached its fiduciary duties to the employees.”

A 401(k) in the United States is an employer-sponsored, defined-contribution retirement plan, and many Bear Stearns employees have company stock in their plans.

After doing a little more digging it seems that the major default investment for Bear Stearn’s employees 401k’s was Bear Stearns stock itself.  Does that scare anyone else a little bit?  Honestly, is this Deja Vu?  Enron anyone?

As of right now 14,000+ Bear Stearns employees not only are out of a job, but have worthless 401ks as well… Lets just lay it out there: your livelihood is already tied to your employer, do not tie your retirement funds to it as well, at least, not in great quantity.

Always diversify my friends, ALWAYS.

401k Recession Fears? Recession proof your 401k – another take

Saturday, March 8th, 2008

401k Recession.  Those two words are currently the most searched personal finance words and we can all understand why.  There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long term” which is most manifested in the ultimate long term investment – retirement accounts.  I have also had a lot of reader emails asking about what they should do if they are this age or that age so Ive gone ahead and broken things down into age groups with specific advice for each age group.

Age group 0-35

At this age you should not be worried about how the recession will affect your 401k, but about how you can dump as much money as possible into it.  Now is not the time to think about the short term economic problems because eventually the economy will come out of it – long before you are even thinking about retiring. What we are looking for in this age range is capital growth.  In fact, if there IS a recession you will most likely benefit from it in the long run because in effect it will be a big giant retirement sale.

Asset mix: 80% to 100% of assets into an index fund or a mix of low load mutual funds and 0 to 20% in bonds

Age group 35-50

Ok so you’ve been in the party that is the business world for a while now and you should have a pretty good amount setup in your 401k.  Its enough to if and when a recession hit it would be a little painful to see the money drop.  There is a huge urge to pull out and put your money in something much more conservative.  Don’t do it. You still have quite a few years left until retirement and any setbacks that happen right now will balance out in the long term.  Your number one goal is still long term capital growth.  However, you DO want to be a little less aggressive than your 25 year old counterpart so your mix will be slightly more conservative.

Asset mix: 60% to 80% of assets into an index fund or a mix of low load mutual funds and 20% to 40% in bonds

Age group 50-Almost retired

You should be at the top of your earning potential at this point so its time to really buckle down and save as much as possible, including doing catchup contributions to your various retirement accounts.  You are also the one who is most concerned about this recession talk.  Now would be a very bad time to lose a lot of your money, but you also still need capital growth because you’re investing to keep yourself with money all the way through retirement.  So you need capital growth but you also need to protect your assets that you’ve accumulated so far.  Rough balancing act.

I know what your knee jerk reaction is: pull out of your current investments and put it all in bonds.  Well, don’t.  While bonds most certainly should be part of your portfolio at this point you still want to give yourself a good chance at long term growth as well.

Asset mix: 50% to 70% of assets into an index fund or a mix of low load mutual funds and 30% to 50% in bonds.

Age group-Retired

If you are in this group, there needs to be a large swing in planning.  Since you are pulling money out for living on if there is a large market slump you could end up losing money at an alarming rate.  You now want to completely balance your portfolio so that you still have enough capital growth to support you for years to come, but enough locked down in bonds to get through any very tough times.

Asset mix: 40% to 50% of assets into an index fund or a mix of low load mutual funds and 50% to 60% in bonds increasing the amount in bonds as you age.

401k Recession.  Do not let those two little words scare you.  The main thing to avoid is trying to time the market, that is a surefire way to risk losing a lot of your hard earned savings.  Next Recession proof your life…

One million dollars is not enough

Wednesday, February 27th, 2008

If you are in the generation y age group (as I am) you have grown up thinking about how awesome it would be to be a millionaire. And if I was already a millionaire I would probably be driving around in my money truck with a funnel out the back making it rain ones on you all like we are in the middle of a rap song. Eehh except I am not so I have to resort to helping out giving financial advice.

money truck w

Back to the original point, as we look toward retirement the once-far-off idea of millionaire is not too hard to reach. Infact lets say you are making $40,000.00 a year at age 25 and putting 5% toward your 401k with a company match of 4%. If you get your index return of 10% on investments you’ll be over a million by 59 1/2, hurray! Except uh oh…

Starting total: $1,000,000.00 

Well first there is inflation so lets adjust for yearly inflation of 3.5% (the rough average over the last 100 years).

New total: $450,000.00

Oh and then there are taxes. Lets say you get taxed at 15%

New total: $330,000.00

Hey, where the hell did my million go?

Don’t worry its not all doom and gloom. Chances are very great that you will be making more than $40,000.00 throughout your life.  If you are married, that doubles the retirement income.  The lesson is this: don’t become relaxed about the rest of your financial life because you can “pay it all off in retirement.”  Pay it all off before then, get other investments going before then, get your roth IRA going before then.  Do all that, and Ill see ya on the golf course.

Step 3: Profit! Career and retirement plan (but not like gnomes)

Wednesday, February 20th, 2008

profit gnomesThere is an episode of the TV show South Park where there are a group of “underpants gnomes.” The “Underpants Gnomes” are a community of underground gnomes who steal underpants, notably from Tweek (one of the characters).

The Underpants gnomes have a three-phase business plan, consisting of:

1. Collect Underpants
2. ???
3. Profit

None of the gnomes actually know what the second phase is, and all of them assume that someone else does. This sounds surprisingly like a lot of people I know. And it seems to be pervasive in EVERYTHING.

The Bad Career Plan: In my life I have probably asked at least 3000 people “what is your degree?” and a there was a good splattering of every major you can think of. Unfortunately outside of the engineers, who are a very minor number of total people I know/grads (so we shall ignore them) I would say 80% had NO idea what they were going to do when they graduated.

Career PlanThe Worse Career Plan:
A very large portion of those graduate and STILL don’t know what they are doing

The Ugly Career Plan:
A good portion end up working doing the exact same thing they were doing DURING school, or doing something making comparable money.

The Insane Career Plan:
16% of Americans said winning the lottery is an important wealth building strategy. I should add that you are 4X more likely to DIE driving to buy a lottery ticket than you are to win the lottery.

The Lesson:
If you don’t have one already, make a career plan. No matter what you got your degree in, figure out where you want to be in twenty years and make a plan to get there. The magic-career-fairy is too busy to help you so help yourself. If you are in the career you want to be then for your twenty year plan ask yourself these questions:

1) Is it possible to get there in my current job?
2) What salary do I need to achieve to get to that place?
3) Am I building the necessary connections to help me get there?
4) Where do I want to be living?
5) Does this fit with my family/life goals?

retirement planNext up on our list of “plans people don’t seem to think they need, but they are so wrong I want to give them the business end of a cattle prod” is retirement planning. Most peoples retirement model looks like the picture on the right. This one is both simple and extremely complex at the same time. The simple part: download my 401k/Roth IRA calculator and go to town assuming 8% rate of return (conservative). The complex part: deciding how to setup your portfolio, deciding what age you want to retire at. If you want to retire early, deciding how you are going to get by before you can withdraw from your retirement accounts (and don’t tell me you WANT to pay those huge tax penalties unless your retirement portfolio contains the united states treasury). Next make a plan (just like the career plan….how’d you guess I was heading that way). Ask yourself the following questions:

1) What age do I want to retire?
2) At my current rate of contribution can I retire at that age?
3) How much more can I afford to contribute to retirement?
4) Am I being aggressive/conservative enough considering my current age?
5) What is my favorite golf course?

Just remember, plan your career, plan your retirement, and when we are retired we can crack open a high quality beer on the golf course and talk about how smart we were to plan.

All aboard the Roth 401k train! Everything you need to know

Monday, February 18th, 2008

money trainRecently a lot of employers have started to offer the roth 401k as an option. My employer started offering it last month. The roth 401k, quite frankly, is a dream come true in my opinion. Ok so thats a little exaggeration but it truely is the best of both worlds – 401k and Roth IRA.

So what exactly is it?
It is, in effect, a blend of a the traditional 401k and the Roth IRA. It is a 401k with company match, except that you invest after-tax dollars and pay no tax at the end, just like a Roth IRA.

Why is this so great?
If you are like me you plan on making more money when you retire than you are making right now. I intend to have money coming from stocks, dividends, real estate and who knows what else. Plus I am sure that I will be working at least part time. All of this adds up to me being in a higher tax bracket than I am right now. Does any one of you really plan on being in a lower tax bracket than you are right now? This means that the “roth” plan is the best choice.

Some other benefits:
-Roth IRAs are limited to $5000.00. With a Roth 401k you can contribute up to $15,500.00
-Roth 401k allows you to actually put MORE money in per year than a traditional 401k because it is after tax. Assuming you are in a 25% tax bracket, 15,500 in a roth 401k is like putting 20,667 in a traditional 401k.
-If you leave your job or are fired you can roll the roth 401k into a roth IRA.
-NO income limit

Special rules that are different from all other accounts:

-You can withdrawl contributions as in an IRA however the account must have been open for more than 5 years
-Employer match much sit in a pretax account
-Cannot be converted to a regular 401k

Some other big things to consider:
-These kinds of accounts are only available until 2010. The government may or may not renew them, so don’t waste the opportunity.
-Common sense says that considering our current national debt, taxes will be higher in the future.

Recession proof your 401k? Forget that, recession proof your life…and learn my golden rule.

Thursday, February 14th, 2008

How many articles have I seen in the past month about how to recession proof your 401k? I can think of a couple on MSN, and a bunch on random blogs. Apologies to any of my bloggy friends if you have written on it. Actually I can understand the feelings of panic people are having over 401k, especially those getting ready to retire. If you are getting ready to retire, you can pretty much disregard this article. If not, read on for recession proofing your life, something much more important than worrying just about your 401k….

So I am opening with a disclaimer: I STILL DONT THINK WE SHOULD PANIC OVER RECESSION. Come on people, wheres the widespread unemployment, we are in a frigging correction, not a recession. Though things could get nasty if the fed keeps cutting rates. Inflation is much scarier than a correction. But I digress. But assuming you are scared of the recession, lets look at the effects and how to protect yourself from them:

First what is a recession?

­A recession is a prolonged period of time when a nation’s economy is slowing down, or contracting. Such a slow-down is characterized by a number of different trends, including:

-People buying less stuff
-Decrease in factory production
-Growing unemployment
-Slump in personal income and salary growth
-Stock Market goes down/doesnt grow

Mind you all of this has to happen for 6 months straight to be considered a recession. Now lets see what you should do to your life to handle ICOR (In Case Of Recession)… I just made up that acronym, but I like it so tell your friends and when they don’t know what you are talking about, tell them “What, you don’t know what to do ICOR? In Case of Recession?” And then tell them to visit my site.

Before we go into specifics here is the golden rule: It is not your duty, your responsibility or any other word that implies obligation to SPEND to help the economy recover. Let me repeat that. It is NOT your duty to spend money or acquire debt to help the economy.

1) Make sure you have an emergency fund.
You should have an emergency fund anyway. Start with one month’s worth of expenses and work up to two months worth. Then three months. If you have a family, up it to five to six months if possible. If you’re young and single, or a young couple you can probably find ways to work bizzare/crappy jobs with crappy hours to make ends meet in a worst case scenario. If you have kids, obviously you need to be extra careful because you want to make sure they have stability, shelter, you present as much as possible and have good food. If you have dogs, they will probably eat anything so no problems there.

2) Work harder, work faster, work smarter
This is by far the most important thing to recession proof your life. If you master this one, the rest of them wont matter. If there is a downturn in the job market, employers for the most part are looking to trim the fat, though there are exceptions. Ask yourself, if I were a food to fuel my company, would I be kobe beef or a chunk of spam? So how do you improve? Get involved in more things that are core to your company. Outlying projects can be cut, so too can people working on them. Get yourself into a position where you are generating revenue for your company. Work IN the office. Network with people. Update your resume. This should probably be its own article.

3) Take advantage of the lower interest rates
Refinance, then instead of paying the lower amount due every month, keep paying the same amount and shrink that debt down or use it to grow your emergency fund. The less you owe in principal per month the less your payments will be.

4) Be Frugal
Do I really have to say it again?

5) Look for great bargains
If you are having to do something like buy a house, chances are you can get away with offering much much less than you otherwise could. If you have to buy something, be strategic about it.

6) If you are investing do NOT try to cash out
Trying to time the market is dumb. There are is 50% chance of being wrong each time. I don’t care how much research you did. Im not saying you shouldn’t be strategic but playing stock trader during sketchy times is a bad idea.

7) Keep building your 401k/IRA, DONT panic
Unless you are close to retirement, a downturn in the market just means you can buy cheaper. If you are really worried, mix in some (more)bonds. When the market’s at the bottom, buy buy buy.

The world is NOT ending, its a retirement sale baby!

Thursday, February 7th, 2008

Money truck 401k retirementIf I had a nickel for every time I have heard the words “recession” and “economic trouble” and “disaster” in the past month I would driving my money truck down to the bank with the biggest change counter in town. Im not sure how you count a truck load of nickels but Im sure it cant be easy.

Everyone knows this is the real end of the world.
Exploding Earth Penny Saved Finance

So anyway….
The media is of course going crazy over it, which immediately should raise red flags because they are TERRIBLE at predicting the economy. My favorite of all time is people saying that google stock was super overpriced at $80 a share. Oops. I saw an article in mens health I think it was where they picked some stocks based on an expert, throwing darts, and some other random means. The dart method had by far the best results. In any case there are several key points here:

1) Yes there is a housing bubble but surprise…some of it is ALREADY behind us.

2) One of the key points of a recession is a lack of jobs. Consumer spending may be down, but jobs are not. In fact, I am going to my alma mater’s career fair tomorrow (by the time this is posted it will be the day of) because my company is in desperate need of developers.

3) Regardless of what happens, dip in stocks means one thing. Cheaper stock prices! No matter what happens there will be no massive massive sell off of stocks. There will be no massive crash. A downturn in stocks is a chance to get ahead on retirement saving. Think of it as a sale on retirement!

For every dollar less a stock is right now that you can buy it for for your retirement fund, you are making much more money in the long run. For people wanting to get out right now it is problematic….but for most people that are reading this blog this is like the day after thanksgiving sale…for stocks, except you don’t have to wait outside in freezing temperatures in front of circuit city drinking spiked hot chocolate waiting for 7 am to get a tv in below freezing colorado weather. Oh no bitterness here by the way.

So everyone calm down, don’t pull your money out of your investments. Don’t panic that your 401k went down. Dont try to time the market. I promise it will all be ok. If its not, I promise I will share my box with you.

I apologize for the downtime….and Google Questions #2 – Can i take money out of a roth ira?

Tuesday, February 5th, 2008

Earlier today I had a large amount of downtime (which is actually unusual for my host) so I apologize to the apparently many people that have been following links in today….that being said, here we go: 

The next question coming in from google search:

“Can I take my money out of my roth ira if I leave the country?”
“can i withdraw money from my roth ira to pay off a credit card?”

The answer to this one is fairly straightforward: any contributions can be removed from your Roth at any time tax and penalty free.

Google Questions answered volume 1 – I just received a large windfall, can I put it in an IRA?

Monday, February 4th, 2008

I am trying out a new feature. In my tracking I am going to take queries from google that have led people to this site and answer them in these short bits. First up:

“I just got $20,000.00 can I invest it in an IRA?”

Assuming you have not maxed out your individual contribution for the year, yes SOME (or all, see below) of it. The max contribution is currently $5000.00 per year ($6000.00 if you are above age 50). Depending on your income, to maximize the amount you are putting in, you could put the after-tax five grand in a roth IRA. As for the rest, a high yield savings until the next year is one option, or invest it, or perhaps get a bond. Remember, saving for retirement doesn’t have to be limited to tax-advantaged retirement accounts.

Now heres an entirely different and more creative approach:
Assuming you are working, for the rest of the year increase your income contribution to your 401k (assuming you have one) substantially and use the windfall as your supplemental income. Depending on your income, combining this with an IRA contribution would allow you to invest all 20k into retirement accounts in a year.