12. Create an asset allocation based on you risk tolerance. This is easier than you think.
Simply put, an asset allocation is just how you divide up your savings and investments. Matching your more stable assets (Bonds/Cash/Real estate) to your age is the basic rule of thumb. i.e. if you are 40 you should hold 40% in stable assets and 60% in stocks. If you feel that you would need or like a more aggressive portfolio you could subtract 10% from your age. Or if you think the stock market is too unstable you can add 10% to your age. Make this as simple or as complex as you like. Here are some examples of basic asset allocations. In part B and C I will break down different types funds so you can see more detailed portfolio examples.
Age 20, single, renter
90% Stocks
10% Cash
Your young and can easily recover from set backs. Go with a broad based stock market index fund and just use cash for the safe 10%. A simple and aggressive portfolio is very appropriate.
Age 30, Just married, no children, new home owner
70% Stocks
30% Bonds/Cash
Just starting out in life land maybe a family. An average portfolio is probably the ticket.
Age 40, Married, two children, renter
60% Stocks
40% Bonds/Cash
Average
Age 50, Married, 2 kids in college, 10 years left on mortgage, Health issues
40% Stocks
60% Bonds/Cash/Home equity
With all of your obligations (Tuition, Mortgage, Health care) you should be more conservative with your portfolio.
Age 60, Single, No children, House paid off, Healthy, Not much saved
50% Stocks
50% Bonds/Cash
You don't have a lot of obligations but you don't have a lot saved. An aggressive portfolio may be quite helpful in this situation just remember to always reference your age.
This is completely a judgment call on your part. A financial pros and cons list. Account for all the variables that only you can know and get feel for your risk tolerance. If you just don't know what to do then go with your age.
Friday, January 20, 2012
Sunday, January 15, 2012
11. Then give your raise to your 401k/403b
11. Give every raise you get to your 401k/403b until you hit the annual maximum (2011 = $16,500) This could take a while.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. You also max out your Roth IRA to the tune of $5000.00 annually (6K if your over 50). The next logical tax shelter to take advantage of would be your 401k/403b. You will not receive an additional match but the tax shelter is worth it while your still employed. The idea is to fully fund all tax sheltered accounts first and then expand into more traditional investments.
Every time you receive a raise. Go to HR and ask to up your contribution by the same amount. The total limit in 2012 is $17,000.00. Depending on how much you make that could take a couple of decades worth of raises diverted to your 401k/403b. So what!, Since you already have to work you might as well let it do the heavy lifting when it comes to retirement saving. If you can afford more, do it! Shoot for 17k if you can. You will not regret taking advantage of these tax shelters while they are still available to you.
investing is incremental.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. You also max out your Roth IRA to the tune of $5000.00 annually (6K if your over 50). The next logical tax shelter to take advantage of would be your 401k/403b. You will not receive an additional match but the tax shelter is worth it while your still employed. The idea is to fully fund all tax sheltered accounts first and then expand into more traditional investments.
Every time you receive a raise. Go to HR and ask to up your contribution by the same amount. The total limit in 2012 is $17,000.00. Depending on how much you make that could take a couple of decades worth of raises diverted to your 401k/403b. So what!, Since you already have to work you might as well let it do the heavy lifting when it comes to retirement saving. If you can afford more, do it! Shoot for 17k if you can. You will not regret taking advantage of these tax shelters while they are still available to you.
investing is incremental.
Thursday, January 12, 2012
10. Give your raise to your Roth/IRA
10. Give every raise you get to your online Roth IRA. You can have any amount diverted from your paycheck to another account that funds your Roth IRA. When you get to $5000 a year in your Roth/IRA go to next step.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. The next logical tax shelter to take advantage of would be a Roth IRA. Why not just fund your 401k/403b higher? That is the easier path but not the cheaper one. I pay 2-3 times more in annual fees in my employers 401k/403b than I do in my online Roth IRA. I like using an online discount brokerage to house my Roth/IRA and brokerage accounts. They will help keep your costs down and allow you to be more flexible at re-balance time. Here is a link comparing different online brokerages
http://www.fool.com/how-to-invest/broker/index.aspx
No extra money in your budget? There is still a way. Take every raise you are given and have that money deposited in a separate account. This will take some math. If you make $40,000 a year and receive a 2% raise you get $800 more a year. Take that $800 and divide by your pay periods (26 if biweekly) = $30.00 per paycheck. Then set up your online brokerage to pull from the same account and BINGO you have your own retirement plan. You will literally not notice the difference in your paycheck and save more every year. If you do this with every raise (I even tossed in my Payroll holiday) you will hit $5000 (6K if over 50) fairly soon and move on to step 11.
No raises or hope of raises? Well there is one more stone to turn, Withholding. Do you get more than $500 a year in tax refunds? If so, you are giving the IRS a tax free loan on your money. You could adjust your withholding up and boost your retirement by the same amount.
A lot of families count on that refund being there every spring. So talk this over with your family and HR department before making a move.
So you are out of debt and participate in your companies 401k/403b to the point that you get the match. The next logical tax shelter to take advantage of would be a Roth IRA. Why not just fund your 401k/403b higher? That is the easier path but not the cheaper one. I pay 2-3 times more in annual fees in my employers 401k/403b than I do in my online Roth IRA. I like using an online discount brokerage to house my Roth/IRA and brokerage accounts. They will help keep your costs down and allow you to be more flexible at re-balance time. Here is a link comparing different online brokerages
http://www.fool.com/how-to-invest/broker/index.aspx
No extra money in your budget? There is still a way. Take every raise you are given and have that money deposited in a separate account. This will take some math. If you make $40,000 a year and receive a 2% raise you get $800 more a year. Take that $800 and divide by your pay periods (26 if biweekly) = $30.00 per paycheck. Then set up your online brokerage to pull from the same account and BINGO you have your own retirement plan. You will literally not notice the difference in your paycheck and save more every year. If you do this with every raise (I even tossed in my Payroll holiday) you will hit $5000 (6K if over 50) fairly soon and move on to step 11.
No raises or hope of raises? Well there is one more stone to turn, Withholding. Do you get more than $500 a year in tax refunds? If so, you are giving the IRS a tax free loan on your money. You could adjust your withholding up and boost your retirement by the same amount.
A lot of families count on that refund being there every spring. So talk this over with your family and HR department before making a move.
Friday, January 6, 2012
9. Roth 401k/403b
9. If your company offers a Roth option take it. Any money you put in plus gains will be tax free when you withdraw it.
The money YOU put in goes into the Roth portion of your 401k/403b. It will grow tax free but will (unlike the old 401k/403b) not reduce your annual taxable income. The money your company puts in (The match) will be in a traditional 401k/403b and will not be considered taxable income. You will have to pay ordinary income taxes on that money when you withdraw it (If your at least 59.5). It will also be subject to mandatory distributions at age 70.5.
In my opinion it's a good thing to have multiple types of accounts (Roth vs Traditional). In retirement you may need money but do not want to increase your taxable income. The Roth is the clear choice here. You have already paid the taxes on this money plus the gains are tax free.
Or if you are far enough away from your next tax bracket you can use your traditional account for your needs. Keep in mind the mandatory distributions starting at age 70.5. If you haven't taken your distribution for the year and a need arises then the traditional account or combination of the two would be the winner.
I like to have options!
The money YOU put in goes into the Roth portion of your 401k/403b. It will grow tax free but will (unlike the old 401k/403b) not reduce your annual taxable income. The money your company puts in (The match) will be in a traditional 401k/403b and will not be considered taxable income. You will have to pay ordinary income taxes on that money when you withdraw it (If your at least 59.5). It will also be subject to mandatory distributions at age 70.5.
In my opinion it's a good thing to have multiple types of accounts (Roth vs Traditional). In retirement you may need money but do not want to increase your taxable income. The Roth is the clear choice here. You have already paid the taxes on this money plus the gains are tax free.
Or if you are far enough away from your next tax bracket you can use your traditional account for your needs. Keep in mind the mandatory distributions starting at age 70.5. If you haven't taken your distribution for the year and a need arises then the traditional account or combination of the two would be the winner.
I like to have options!
Wednesday, January 4, 2012
8. SEP IRA
8. If you are Self-employed you can open a SEP-IRA in addition to the $5000 (6k if you are over 50) in your Roth/IRA. This year you can save up to $49,000 in a SEP-IRA. It just has to be 1099 income.
If you receive a 1099 form at tax time you are eligible for a SEP-IRA. In addition to your Roth IRA and 401k/403b you can sock away 100% of your 1099 income up to $49,000. Otherwise they are treated as ordinary IRAs, Funds can be invested the same way as any other IRA just with a different wrapper. Contribution to your SEP-IRA will lower your taxable income that year. Qualified withdrawals at age 59.5 or older will be taxed as ordinary income. You are in control of contributions and can change the amount saved at will. You can use the same discount online brokerage as your Roth/IRA.
My take on the SEP-IRA is that it's a great tool to those of you that have some 1099 income. As long as you are maxing out your personal Roth/IRA and are at least putting in the minimum amount to get the full match in your401k/403b. (Assuming you have one). It may seem easier to just put more in your 401k/403b but the higher fees associated with my 401k/403b make it my last choice when it comes to tax shelters. Don't get me wrong. The 401k/403b are great tools for retirement savings but they are the most expensive of the three tax shelters discussed.
Tax shelters ranked by efficiency and fees
1st - Company matched 401k/403b (No match? move on to 2nd choice)
2nd - Personal Roth/IRA at discount brokerage
3rd - SEP-IRA
4th - Additional 401k/403b (Not matched)
If you maxed out all of these you could save $71,000 a year for retirement! There are other types of shelters to consider (Muni's, real estate, Health care) but work with these 3 first.
If you receive a 1099 form at tax time you are eligible for a SEP-IRA. In addition to your Roth IRA and 401k/403b you can sock away 100% of your 1099 income up to $49,000. Otherwise they are treated as ordinary IRAs, Funds can be invested the same way as any other IRA just with a different wrapper. Contribution to your SEP-IRA will lower your taxable income that year. Qualified withdrawals at age 59.5 or older will be taxed as ordinary income. You are in control of contributions and can change the amount saved at will. You can use the same discount online brokerage as your Roth/IRA.
My take on the SEP-IRA is that it's a great tool to those of you that have some 1099 income. As long as you are maxing out your personal Roth/IRA and are at least putting in the minimum amount to get the full match in your401k/403b. (Assuming you have one). It may seem easier to just put more in your 401k/403b but the higher fees associated with my 401k/403b make it my last choice when it comes to tax shelters. Don't get me wrong. The 401k/403b are great tools for retirement savings but they are the most expensive of the three tax shelters discussed.
Tax shelters ranked by efficiency and fees
1st - Company matched 401k/403b (No match? move on to 2nd choice)
2nd - Personal Roth/IRA at discount brokerage
3rd - SEP-IRA
4th - Additional 401k/403b (Not matched)
If you maxed out all of these you could save $71,000 a year for retirement! There are other types of shelters to consider (Muni's, real estate, Health care) but work with these 3 first.
Subscribe to:
Posts (Atom)