Fri, September, 4, 2009 at 01:10 PM What program would you advise for a newly married couple to manage their finances? Also, is there a cheaper alternative than purchasing the product from the store?
Thu, August, 30, 2007 at 04:48 PM Okay, now that I have your attention, let's talk. While this is possible, it's quite risky and you may end up with very little. However, here's a one way to make you a millionaire by the time you retire. Best of all it doesn't even take all that much work.
All you have to do is save $4,000 in a Roth IRA for the rest of your life until retirement. With luck (smart management, smart asset allocation, controlled risk, and a hope the market doesn't spiral down) you'll be a millionaire at retirement. As some people like to call this strategy GET RICH SLOWLY or GET RICH EVENTUALLY.
----+---+------------+---+----------+-------------
Year|Age|Contribution|APY| Growth | Balance
----+---+------------+---+----------+-------------
2007| 23| $ 4,000.00 | 0%|$---------|$ 4,000.00
2008| 24| $ 4,000.00 |12%|$ 480.00|$ 8,480.00
2009| 25| $ 4,000.00 |12%|$ 1,017.60|$ 13,497.60
2010| 26| $ 4,000.00 |12%|$ 1,619.71|$ 19,117.31
2011| 27| $ 4,000.00 | 8%|$ 1,529.38|$ 24,646.70
2012| 28| $ 4,000.00 | 8%|$ 1,971.74|$ 30,618.43
2013| 29| $ 4,000.00 |10%|$ 3,061.84|$ 37,680.28
----+---+------------+---+----------+-------------
2014| 30| $ 4,000.00 |12%|$ 4,521.63|$ 46,201.91
2015| 31| $ 4,000.00 |12%|$ 5,544.23|$ 55,746.14
2016| 32| $ 4,000.00 |12%|$ 6,689.54|$ 66,435.67
2017| 33| $ 4,000.00 | 8%|$ 5,314.85|$ 75,750.53
2018| 34| $ 4,000.00 | 8%|$ 6,060.04|$ 85,810.57
2019| 35| $ 4,000.00 |10%|$ 8,581.06|$ 98,391.63
2020| 36| $ 4,000.00 |12%|$11,807.00|$ 114,198.62
2021| 37| $ 4,000.00 |12%|$13,703.83|$ 131,902.46
2022| 38| $ 4,000.00 |12%|$15,828.30|$ 151,730.75
2023| 39| $ 4,000.00 | 8%|$12,138.46|$ 167,869.21
----+---+------------+---+----------+-------------
2024| 40| $ 4,000.00 | 8%|$13,429.54|$ 185,298.75
2025| 41| $ 4,000.00 |10%|$18,529.88|$ 207,828.63
2026| 42| $ 4,000.00 |10%|$20,782.86|$ 232,611.49
2027| 43| $ 4,000.00 |10%|$23,261.15|$ 259,872.64
2028| 44| $ 4,000.00 | 7%|$18,191.08|$ 282,063.72
2029| 45| $ 4,000.00 | 8%|$22,565.10|$ 308,628.82
2030| 46| $ 4,000.00 |10%|$30,862.88|$ 343,491.70
2031| 47| $ 4,000.00 |10%|$34,349.17|$ 381,840.87
2032| 48| $ 4,000.00 | 6%|$22,910.45|$ 408,751.32
2033| 49| $ 4,000.00 | 7%|$28,612.59|$ 441,363.92
----+---+------------+---+----------+-------------
2034| 50| $ 4,000.00 |10%|$44,136.39|$ 489,500.31
2035| 51| $ 4,000.00 | 8%|$39,160.02|$ 532,660.33
2036| 52| $ 4,000.00 | 9%|$47,939.43|$ 584,599.76
2037| 53| $ 4,000.00 | 7%|$40,921.98|$ 629,521.75
2038| 54| $ 4,000.00 | 6%|$37,771.30|$ 671,293.05
2039| 55| $ 4,000.00 | 6%|$40,277.58|$ 715,570.63
2040| 56| $ 4,000.00 | 7%|$50,089.94|$ 769,660.58
2041| 57| $ 4,000.00 | 6%|$46,179.63|$ 819,840.21
2042| 58| $ 4,000.00 | 5%|$40,992.01|$ 864,832.22
2043| 59| $ 4,000.00 | 6%|$51,889.93|$ 920,722.16
----+---+------------+---+----------+-------------
2044| 60| $ 4,000.00 | 4%|$36,828.89|$ 961,551.04
2045| 61| $ 4,000.00 | 5%|$48,077.55|$1,013,628.60
2046| 62| $ 4,000.00 | 6%|$60,817.72|$1,078,446.31
----+---+------------+---+----------+-------------
You can see in this spreadsheet that I took into account variances in the market and also a more conservative spread as you get older. You can see the $4000 contributed anually and you can see the result of your balance: as promised one million dollars at retirement.
You know what's even better? IT'S IN A FREAKING ROTH IRA WHICH MEANS AT AGE 65 AND A HALF... you can take out almost every penny* six months after your 65th birthday... AND NOT OWE A SINGLE PENNY IN TAXES ON THAT MONEY!!! Aren't Roth IRAs great?
Of course you wouldn't want to ACTUALLY do this, but it's great to know you can. What you would want to do is take out what you need to live and allow the money in your account to keep growing and growing. Do you notice that "growth" column? That's the money you make on interest and capital gains every year BY DOING NOTHING! That's why the saying "it takes money to make money" is so true.
Now, you're a millionaire and you owe no taxes on that million dollars you have. And you're probably MORE than a millionaire because (hopefully) by this time you have at least one house paid off. You also probably contributed to a 401(k) which should have your employer's free matching money giving you probably more than a million dollars in that account (you'll have to pay taxes on it when you take it out, however). So when you add all these things up... I bet you ARE a millionaire by 40.
*You have to keep your money in a Roth IRA for at least 5 years before withdrawing it to avoid penalties. So really at age 65 and a half you could take out all but $20,000 penalty free - which, by the way, is still over a million dollars.
401(k), Retirement, Roth IRA, Savings, Subscriber Questions, Taxes Mon, June, 11, 2007 at 11:27 AM I've been reading MSN money and I noticed something in the investing section. It's called investing basics. I went to that section and this link particularly caught my interest.Start Investing with just $100
http://articles.moneycentral.msn.com/Investing/Start Investing/StartInvestingWi thJust100.aspxIs this a good tip for beginning investors?Thanks!
Pros:
Sat, May, 12, 2007 at 02:02 PM My wife and I want to buy some stocks. Especially stocks in companies we buy products from. We have narrowed down our interests to 4 stocks. Is that too many to invest to? Should we decrease the amount?
I want to try another type of investment. I figure I have time to just let my money sit in a brokerage account. I want this money to appreciate and help pay a small amount of a down payment. If anything a vacation or even just reinvesting it would be nice. It would also be good as a security basket. I think we can put about $1500-$2000.
1. Make Your Company Match
Make sure to take all the free money that you can by socking away up to what your company matches in your 401(k). Nothing beats free money.
2. Take Advantage of Your IRA and Spousal IRA
Make sure to put away the maximum contribution for your IRA ($4000 for 2007). Even if your spouse is not working she can have an IRA in her name by way of a spousal IRA as long as you're making more than $8000 year. Of course if she's working she can contribute her own earnings.
3. Liquid Emergency Funding
The experts say that you should have enough in liquid savings to live for 6 months without income. Since you still have strong family support and do not have much by the way of monthly expenses, this shouldn't be a problem for you, but for most people this is a good sum of money to have in a liquid asset and will take some time to save up the required amount.
4. Life Insurance and MAYBE LONG TERM CARE Insurance
Here I would say that single people in their 20s probably don't NEED Life Insurance but it may still be a good idea if you can afford it for the following reasons. If one spouse makes more than the other an unexpected death or debilitating injury the loss of in addition to the emotional grief may derail the surviving spouses life for months if not YEARS. Even a small policy (term if you can't afford GUL) can help pay for all the unexpected (or expected) expenses of death like funeral expenses or lawyer fees if anything goes wrong.
Long Term Care insurance protects you from the expenses of Long Term Care (Hospice, Convalesce, etc.) and may be something to look into. The costs of such care could run hundreds of dollars per day. It's a consideration in this world of rising health care costs where it can seem like one cannot afford for such care.
5. Brokerage Account
Here we can discuss your stocks...
Let us make that assumption and say you invest $2000 evenly in 4 stocks and you hold it for 2 years to sell in 2009. This means you have $500 and put $480 into the stock (the fee to buy). You make 10% in the first year now have $528. You make another 10% the second year and have $580.80 where you sell and get $560.80 after the fee to sell. You have capital gains of $60.80 (I don't believe they count the fees) and pay $6.08 leaving you with $54.72 or $218.88 for all four stocks.
Now let us make the assumption you invest $2000 in 1 stock and hold it for 2 years to sell in 2009. You make the purcase and have $1980 in the stock. It grows the same 10% and is worth $2178 after year one. It grows another 10% and is worth $2,395.80 before the $20 fee to sell. You end up with$2,375.80 and pay taxes of $37.58 leaving you $338.22. All because of the fees you had to pay for the more trades.
Obviously it pays to try to minimize your fees, but the more you diversify (smartly) the less risky your investment becomes. Smart diversification means a blend of value (income) and growth and a blend of sectors. Buying four transportation companies (even if you use all of them) leaves you at great risk if gas prices go up. Buying four tech companies leaves you at risk in a recession. Companies who produce every day products like Proctor and Gamble or Johnson and Johnson do very well in a recession because they produce products people won't stop buying in a recession.
Of course to achieve diversification, you can buy a mutual fund although many have minimums of $2500 which is slightly higher than what you're looking at right now. The downside is that you pay for your fund manager to actively manage the fund (buy this stock, sell that stock to try to make an even gain every year - capital gains hopefully offset by capital losses to keep the fund performing). This fee eats away at your growth! You also have to hope that your fund manager is good and can actually beat the overall indicies.
For this reason you can try an index fund. These funds just buy whatever is in the index that fund is tracking. For example Fidelity has FSMKX which tracks the S&P 500. If you can invest $10,000 Fidelity will even drop it's expense ratios 30% to 0.07%. Vanguard has a similar program in place dropping it's expense ratios by half to 0.09%. FSMKX is a no load fund which means you don't pay anything either at the front end or back end.
If you want to do lots of research in purchasing your stocks, I recommend starting at The Motley Fool and reading and reading and reading. Remember that buying a stock is really trading. What you think is a good idea to buy, someone else thought was a bad idea to stay in that stock. If you can figure out why someone is selling, you'll have an advantage in figuring out whether the stock will do what you want it to or not.
Tue, April, 24, 2007 at 04:01 PM Below are most of the differences between a regular 401(k), Traditional IRA and Roth IRA. I haven’t yet had time to research the impact of the different accounts on estate planning (what happens when the account owner passes). Or how probate, having a Living Will or having a Living Trust will affect each. These are good questions to ask a professional.
IRS Publication 590 will give you the most information when it comes to comparing the rules and restrictions of the Traditional and Roth IRA. See www.irs.gov and look at publications and forms.
INCOME LIMITS
401(k) Generally none, but it could be complicated due to highly compensated employees rules.
Traditional IRA Based on your MAGI. You cam make a full contribution to a Traditional IRA if your income is less than $52k for Single, Head of Household (HoH), orMarried Filing Single (MFS) or $62k for Married Filing Jointly (MFJ) orQualifying Widdow (QW). You can make a partial contribution (see IRS publication for percentage breakdown) if your income is below $83k for S, HoH, MFS or $103k for MFJ or QW. You cannot contribute more than you made in the year.
Roth IRA Same rules as Traditional IRA except income limits are higher. Full contributions up to $99k for S, HoH, or MFS or $156k for MFJ or QW. You can make partial contributions up to $114k for S, HoH or MFS or $166k for MFJ or QW.
TAX IMPLICATIONS
401(k) Money is deposited as “tax deferred” which lowers your taxes now and any distributions are taxed in the year and tax rate the distribution takes place.
Traditional IRA You put in after tax money, but the money you put in is tax deductible reducing your taxable income for the year. Essentially the same end result as tax deferred above. Distributions are taxed in the year and tax rate the distribution takes place.
Roth IRA You put in after tax money so your taxable income is not lowered. When you take a distribution you do not owe any taxes. You do not even pay taxes on any of the earnings and gains you made. This is tax free growth and the key to why the Roth IRA is such a powerful tool.
CONTRIBUTION LIMITS
401(k) Up to $15.5k for under 50 and $20.5k for 50 and over in 2007. Combined employer/employee contributions must be the lesser of 100% of the employee’s salary or $45k
Traditional IRA Based on your MAGI. $4k for under 50 and $5k for 50 and over in 2007. Limits are for Traditional IRA and Roth IRA contributions combined.
Roth IRA Same as Traditional IRA.
QUALIFIED DISTRIBUTIONS
401(k) Distributions can be gin at age 59 ½ or if owner becomes disabled.
Traditional IRA Same as 401(k).
Roth IRA Same as 401(k) except the contributions must have been in the account for 5 years.
FORCED DISTRIBUTIONS
401(k) Owner must start withdrawing minimum funds at age 70 ½ unless still employed. Penalty is 50% of minimum distribution
Traditional IRA Same as 401(k).
Roth IRA No forced distribution.
CONTRIBUTION WITHDRAWALS
401(k) No. Loans may be available depending on the employer.
Traditional IRA No.
Roth IRA Yes. The owner can withdraw up to the total contributions at any time without penalty. Earnings cannot be withdrawn without penalty.
EARLY WITHDRAWLS
401(k) 10% penalty plus taxes including withdrawals for hardships
Traditional IRA 10$ penalty plus taxes but there are exceptions
Roth IRA Withdrawals of contributions carry no taxes or penalties. Withdrawals of earnings are subject to normal income taxes plus 10% penalty.
HOME DOWN PAYMENT
401(k) 10% penalty for purchase of primary residence or avoidance of foreclosure or eviction from primary residence
Traditional IRA Can withdraw up to $10k for a first time home purchase down payment (with stipulations)
Roth IRA Can withdraw up to $10k for a primary home down payment on a house owned by the IRA owner or direct linear ancestors or descendents. Must not have owned a home in the previous 24 months.
EDUCATION EXPENSES
401(k) 10% penalty on payment of secondary education expenses in the last 12 months for the employee, spouse, or dependents.
Traditional IRA Can withdraw for qualified education expenses of owner, children, and grandchildren.
Roth IRA Same as Traditional IRA
MEDICAL EXPENSES
401(k) 10% penalty on payment medical expenses not covered by insurance for employee, spouse or dependents.
Traditional IRA Can withdraw for qualified un-reimbursed medical expenses that are more than 7.5% of AGI or for medical insurance during a period of unemployment or when on disability.
Roth IRA Same as Traditional IRA
Tue, April, 24, 2007 at 03:45 PM What should my parents be doing if they are close to retirement age? My mom has very minimal contributions to a 401(k) and my dad has a federal retirement pension. Should they be contributing to 401(k)? Roth IRA? Traditional IRA?
I’m also working on just this information. I’m assuming they own a home and its going to be paid off soon. I’m assuming they don’t have their own business or corporation and that they don’t have any rental house income. A myriad of different things can really affect the recommendations below.
If your company is matching you MUST take advantage of the free money. Your mother should be contributing up to the maximum of her employer’s matching.
With the left over money or if her employer does not match your mother should be contributing $5k in catch up contributions to a Roth IRA UNLESS she expects to need to start taking distributions at 59 ½ (Remember the Roth IRA must be seasoned before distributions can begin). You can contribute to a Roth IRA up to age 54 ½ and then contribute to a second Roth IRA from 54 ½ to 59 ½ so that at age 59 ½ you can begin taking distributions of the first Roth IRA. Your dad should also be contributing $5k to a Roth IRA.
I recommend the Roth IRA over the Traditional for 3 reasons:
As you get older, your risk tolerance lowers. When it becomes time to start living off your nest egg you cannot afford to lose money since you won’t have time to ride out the market fluctuations. As a general rule of thumb you should have 100-[your age] percent in stocks or stock funds and [your age] percent in CDs or bonds or bond funds. Your situation will vary and some people are inherently more or less averse to risk taking.
401(k), Retirement, Roth IRA, Savings, Subscriber Questions, Taxes, Traditional IRA Mon, April, 23, 2007 at 02:35 PM in Cars I have friends who are in debt. Either with cars, school loans, and credit cards. They often come to me asking what they should do first, invest in their retirement (401k or Roth IRA) or put all their money towards paying off their debt?Lets say they're our age, around 23-26. I have the hardest time answering this question. I would definitely tell them to pay off their credit cards first because they usually have the highest interest rates 15-25%.What would suggest Mr. Financial Penguin?
Starting young allows you to make mistakes. This does not mean I recommend you take obscene risks or that is not a bad thing to make mistakes. Mistakes always hurt, but not as much as when you’re older. Hopefully we’re also learning from our mistakes so we won’t ever repeat them. That itself could make certain mistakes the best thing that ever happened to us.
Debt is a fact of life and there is GOOD debt and BAD debt. Good debt includes things like mortgages and student loans. Bad debt includes all the fun kinds of debt like car loans or credit card debt. Your goal should be to pay off your BAD debt as quickly as possible and keep to a solid schedule to pay off your good debt.
Rates Rates Rates You are absolutely right in looking at the rates in order to help your friends set their priorities. What is the point of putting all your money into savings to make 8% while you still have a debt at 15% to 25%? Let’s be careful now. When just comparing rates make sure you consider tax implications to certain kinds of savings and certain kinds of debts.
Step 1: GET RID OF CREDIT CARD DEBT If your friends still have okay credit to their name encourage them to move their balance into a lower rate card. There are cards potentially available where you can even defer interest payments for a year when you transfer an existing balance to the new card. However, read all the fine print since some of these cards make you pay back all the previous year’s debt if certain conditions are not met. You also want to make SURE your friend gets rid of his/her old card after the balance transfer. That zero balance card may be an incentive to go out and get the newest gadget he/she desires. Also note “defaults to other creditors” in the fine print. This means that if you miss a payment on another debt, your rate on this card can rise. Avoid “two-cycle billing” (Discover and WaMu) or “anytime any reason” (AmEx, BofA, Chase, WaMu) fine print which can cause your rate to rise. Shop around at www.cardratings.com or look into credit unions for cards with fewer and lower fees and rates.
Step 2: Look at that car That car may be your baby, but it might also be sucking you dry. Make sure that your auto loan fits in your priorities. “Trading down” might be the quickest way to get you back on track.
Step 3: Pay Yourself First! That’s the age old adage that never goes out of style. PAY YOURSELF FIRST. Most people must pay rent, need to pay the bills, have to buy food and then save what’s left. The problem with this method is that there is usually nothing left. If you’re like me (and most other people) you can always find more money to spend. With this method, you don’t really even need to make a budget, although that is recommended. Just decide to save so much from every paycheck and you spend the rest as you see fit. Now when you have to decide to fix food yourself or go out, you know you’re not dipping into your long term savings for a convenient splurge now. The best case is if your company lets you direct deposit into multiple accounts to have a certain amount of money go directly into another account that you touch only in emergencies or to move money into long term savings (like IRAs or CDs).
- John is 24 and is making $40,000 a year.
- John just graduated college and has $20,000 in school debts at 5%.
- John lives in an apartment with 3 people and pays $550 a month plus utilities
- John now has bad credit and about $15,000 in debt with him on two cards at 20%
- John also bought a Subaru WRX which cost him $40,000 with a 5 year loan at 8%.
- John’s company has a 401(k) that matches 50% of his contributions up to 5% of his pay, but he doesn’t contribute.
Well, here we have a HUGE problem. Assuming you have no taxes at all to pay, $30,000 gives you $3333 a month. Unfortunately we come to the striking realization that he NEEDS to dump that car. If he wants nice cars for the REST of his life, he’s going to have to drive something more sensible now. Something that doesn’t look half bad, with some power, and at this point used will do the trick. Look for something around $12-15 thousand if looks are still important. Of course the less he spends, the better off he will be in the short term. Dumping that $40,000 loan for a $15,000 loan lowers monthly payments from $810 to $305Now here’s the situation. He’s making $40,000 but he pays $420 to federal withholding, $210 to social security, $50 to Medicare, $110 to California withholding and probably $60 to medical. That means a take home pay of $2553 a month.
Assuming all the regular tax stuff (standard deduction, 1 personal exemption etc.) he will owe $4550 in federal taxes which allows him a $490 refund at tax time.
Now we pay off his college in 15 years for $160 a month. His credit cards in 2 years for $765 a month. His $15,000 car now only costs him $305 a month. He has $550 for rent and about $50 for utilities split between people. That leaves him with $727 for food, gas and personal things. That’s still relatively meager living but you can easily do it if you keep your spending in check and avoid eating out.
A 12% credit card will lower his credit card payments from $765 to $705 a month which helps. That could almost pay for auto insurance for the year!
The problem with this method is that he still isn’t saving. If you assume a 8% return on investment, $1000 invested from 25 to 55 becomes $10,062. However $1000 invested from 35 to 55 is only $4660. THAT’S LESS THAN HALF!! That is the time-power of money. So now we NEED to find a way for John to also save WHILE pay off his debt.
John isn’t contributing to his 401(k) which is a BIG problem because he is losing out on FREE MONEY! 5% of his pay will be $2000 or $170 a month. But remember his company will match his contributions. He’ll get $1000 a year for free! Because the contributions are before-tax they lower his taxable income which drops his federal taxes $435 per year. And now he has retirement income since his $2000 annual contribution along with an 8% growth gives him $246,000 by age 55. $2000 per year is for 30 years is only $60,000. You made FOUR times your money. AND I FORGOT HIS FREE $1000 company match. Now you put in $60,000 in 30 years but because of your company’s matching John is going to have $370,000 at age 55.
Where is he going to get this additional $170 a month? We’re going to extend his credit card payments from 2 years to 2.5 years. That means he pays $640 instead of $765 a month for $125 savings. His bigger income tax refund will make up the rest of the $45 needed. That’s almost like getting a whole lot of something for nothing. He ends up paying an additional $850 in interest payments, but that allows him to make many more contributions to his 401(k).
In 2.5 years, John no longer has his credit card debt and if he’s good instead of spending his extra $640 a month on personal things, he’s going to take that money and put it into a savings account toward a down payment on a house, condo, townhouse. Rent is throwing money away. Once you have your down payment, your house mortgage interest is TAX DEDUCTABLE. This is that good debt.
Why didn’t I recommend to put his money towards paying off his student loans? Because you need a sizeable down payment to buy a house. The student loan will always be there and if you pay it off sooner, the money you save in interest is not even going to come close to the freedom and pride of homeownership and the savings in tax deductions.
401(k), Credit Cards, Debt, Retirement, Subscriber Questions, Taxes 