In Part B we will discuss the different types of "Stable" investments.
Lets start off with bonds. Bonds are generally less risky than stocks because they have a face value that is guaranteed by the issuer. They are less susceptible to the swings of the stock market and pay out a fixed interest rate that is promised by the issuer. Stocks in comparison can lose all of their face value and dividends can be suspended at will.
Treasuries-
are considered the safest type of bond since they are backed by the full faith and credit of the U.S.government. This safety comes at a price though. You will get some of the lowest interest rates available. They are tax exempt so they are great for non tax sheltered accounts. This year the Treasury will stop selling paper bonds. You can buy them directly from http://www.treasurydirect.gov/ You can also research the different types of bonds available from the Treasury there. I will discuss the different types in more detail in future posts.
State issued bonds-
are different for each state. Usually the state will offer taxable and tax exempt bonds. Every state has there own website for purchasing state bonds. If you live in the State that the bond is issued you will generally not be taxed (Fed. or state). If you live in a state where there is no income tax you can purchase bonds from any state tax free. There are many variables. So you must do your homework.
Municipal Bonds-
Are issued by a city or other government agency. These can be county's, utilities, school districts, airports etc... As in state issued bonds Municipal bonds are tax free (Fed. and state) as long as you are an in state resident.
Corporate Bonds-
are issued by corporations to expand their business. They are generally more risky than government issued bonds. You need to research companies the same way you would for a stock purchase. They can be a great diversification tool to keep your bonds from all moving together.
Junk bonds-
Or High yield bonds are below investment grade. Because of their high risk you get a much higher yield. You should never hold more than 5% of these in your portfolio.
International Bonds-
Are debt investments issued by countries outside of the USA and are issued in that countries domestic currency. They are a good way to diversify your bond holdings. They will not move in lock step with the US economy. Pay close attention to the ratings of these types of bonds. Currently Greek and Italian bonds offer high interest rates but are way too risky. A balance of risk and return is key here.
Buying individual bonds is the cheapest way to buy bonds. It is also the most complicated. You need to do your homework for each bond. I do not buy individual bonds yet. I have a full-time job already. When I retire I may dive into that world. Bond funds are much simpler. You can find high quality, low fee bond funds that you can use to diversify. I have four funds I use to mix my bond holdings. A US bond fund, TIPS bond fund, Corporate bond fund, and in an International fund.
Cash - Your liquid savings. This includes Savings accounts, Money markets, and Cash on hand.
Real estate - Your home equity minus your total mortgage. Include 2nd homes, REIT funds, Land, or Condos.
CDs -or Certificates of deposit are issued by financial institutions such as banks and credit unions. These "Time deposits" offer a fixed interest rate if the CD is held to maturity. They come in terms as short as a month and as long as 7 years. Generally speaking the longer the term the better the interest rate but don't get trapped in a long term while rates are in an upswing. Due to higher risk the smaller the financial institution the better the rate. They are insured by the FDIC or NCUA just like most bank or Credit union accounts. There are penalties for early withdrawal. Ask about the penalties before buying as they are different for each term and each different financial institution.
Here are some examples of diversification of your "Stable" investments with an average risk tolerance.
Age 20 renter
80% Stocks
5% US bond fund
5% TIPS bond fund
10% Cash in a Money market account
Age 30 new home owner
70% Stocks
5% US bond fund
5% TIPS bond fund
5% International bond fund
5% Corporate bond fund
5% Cash in a Money market account
5% CD's
Age 40 Mortgage 60% payed off.
60% Stocks
5% US bond fund
5% TIPS bond fund
5% International bond fund
5% Corporate bond fund
5% Cash in a Money market account
5% CD's
10% Real estate value
Age 50 Mortgage 90% payed off
50% Stocks
5% US bond fund
10% TIPS bond fund
7.5% International bond fund
7.5% Corporate bond fund
5% Cash in a Money market account
5% CD's
10% Real estate value
Age 60 House paid off
40% Stocks
10% US bond fund
10% TIPS bond fund
10% International bond fund
10% Corporate bond fund
5% Cash in a Money market account
5% CD's
10% Real estate value
You may notice that the real estate value stayed at 10% throughout my examples. This is because as home equity increases so does your other investments. If you end up heavily weighted in real estate near the end of your mortgage that's OK as long as your other investments start to eclipse that value as you progress. Some folks don't like to include the real estate value because you have to live somewhere and homes are not liquid. I personally like to run the numbers both ways.
Sunday, February 19, 2012
Friday, February 17, 2012
Extension of Social Security payroll cuts
So Congress seems set to continue to provide 2% of tax relief for all of us workers. I see this as a political football that will further jeopardize the solvency of the SSA. If the government is not willing to save for my retirement I guess I will have to pick up the slack. The day we got the 2% reduction I went to my HR dept. and asked to up my 403b contributions by 2%. I did not notice the change and I now have control of more retirement money and the government has less. This could work out in your favor if you don't spend that tax break.
I will be back on track with Anyone's financial plan in a day or two. I thought this timely topic needed addressing right away. Thanks for reading!
Brandon thefettler
I will be back on track with Anyone's financial plan in a day or two. I thought this timely topic needed addressing right away. Thanks for reading!
Brandon thefettler
Thursday, February 9, 2012
A question
I got this question the other day and thought I would share.
I have a question not directly related to retirement: do you have any advice on saving a decent amount towards a future expense? i.e. preschool in a year or two for your toddler
I have a question not directly related to retirement: do you have any advice on saving a decent amount towards a future expense? i.e. preschool in a year or two for your toddler
Go to your companies payroll dept or person and ask to redo or update your direct deposit form. Have a predefined amount deposited in a "high" interest savings account biweekly.
If you have a specific amount as a goal lets say $2000 in two years. Divide 2000 by the number of pay periods between now and then, in this case it's 52. That gives you $38.46 or $39 deducted from each paycheck. You can redirect multiple amounts to multiple accounts. You won't even notice it's gone. This is how I fund my wife's Roth IRA.
If you had a five years or more before you needed the money I would recommend an online brokerage account. That way you could invest the money a little more long term.
For your current time window I would use an online savings account or start up a CD ladder (watch your time horizon on CDs). You should be able to find 2% out there. Check bankrate.com for the best interest rate.
Friday, January 20, 2012
12. Create an asset allocation. Part A
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.
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.
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!
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