Dollars & Sense Education

Many individuals feel the 401K is less desirable because they want to retire early and don’t want to postpone their investing gratification until they are 59 1/2.  That is the age that you can withdrawal funds from your 401K without a 10% penalty from the government.  If you have enough money in your 401K to retire at age 45, why can’t you?  Well, you can!!!

Rule 72(t) of the tax code the “equally substantial distribution” eliminates the early withdrawal penalty if done properly!

How It Works

1. Quit working.
2. ROLL your 401k into an IRA.
3. Apply for a 72(t) “equally substantial distribution”.
4. The IRS will offer you (3) optional payout amounts. The (3) IRS optional payout methods will tell you how much the “equally substantial distribution” will be based on your age, the age of your beneficiary, the amount of money you have, the % rate used for the calculation and how long they expect you to live (based on IRS’s mortality table).
5. The rule is, once a rollover is completed and a 72(t) is setup to pay out an income stream, it must
   continue until the age of 59 ½ has been reached or for a minimum of 5 years, whichever 
   comes last. For example, if you start a 72(t) at the age of 57, it must run until you are age 62, 
   then it stops. If you are age 50, then it runs until you reach age 59 ½, then it stops.
6. After the 72(t) has stopped, then of course you can take out of your IRA any amount you might desire or require.

***I need to point out, just for clarification, that YES all the income you receive is fully “income taxable” at your applicable income tax rate but without any added penalty.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In Part 4, I discussed how and where you go to sign up for your 401K, 403B and IRA.  In this final installment, Part 5 of this series, I discuss good investment options for your IRAs, 401Ks and 403Bs.

1)    Determine the Appropriate Asset Allocation for Your Age and Risk Tolerance 
Diversification is a powerful investment concept.  It refers to saving your investments in different baskets.  Diversification requires you to place your money in different investments with returns that are not completely moving in the same direction at the same times.  When some of your investments are up, others will be down. To decrease your chances of getting clobbered at the same time, you must put your money in different investments such as stocks, bonds and cash.  You can further diversify your investments by investing in domestic as well as international markets.  The process of how you spread your money around and diversify is called “asset allocation”.  The wise approach is to have more risk (equities) in your younger years and as you move into retirement move the majority of your money into less risky assets (bonds and cash). There are many different ways to allocate your assets for retirement, but below I outline one possibility. 

Age:  Less than 40 years

Allocation:  100 % in stocks.  Of this, 40% invested in large cap-growth funds, 25% in small-cap growth funds, 25% in large-cap value funds, and 10% in international.

Age:  40 – 50 years

Allocation:  80 % in stocks and 20% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% large-cap value funds, and 10% in international.

Age:  51 – 55 years

Allocation:  70% in stocks and 30% in bonds.  Of the stocks portion, 40% invested in large-cap growth funds, 25% small-cap growth funds, 25% in large cap value funds, and 10% in international.

Age:  55 – 60 years

Allocation:  50% in stocks and 50% in bonds.  Of the bonds portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large cap value funds, and 10% international.

Age:  60 – 65 years

Allocation:  Reduce stocks by 5% per year and increase bonds by 5% per year so that at retirement you have 25% in equities and 75% in fixed income.  Of the equity portion, 40% invested in large-cap growth funds, 10% small-cap growth funds, 40% in large-cap value funds and 10% international.

2)    Choose High Quality/Low Cost Funds
The second factor to take into account when you are choosing the mutual funds in your accounts is cost.   Typically the lowest cost funds that one can buy are index funds.  An index fund is a fund that merely tracks a specific financial market.  For example an S&P 500 index fund just copies the movement of large cap stocks.  A Russell 2000 index is used to track small cap companies.  Index funds do not have managers making decisions about what to invest in so they are less expensive.  They also tend to outperform actively managed, more expensive funds.  So if these are an option within your plan, take advantage of them to carry out your asset allocation strategy.   

If actively managed funds are your only option, invest in them but be wary of expenses associated with the fund. Actively managed funds have expense ratios and loads that eat into your returns.  Minimize these costs as much as possible!

3)    Rebalance Your Portfolio Annually
The great thing about investing for retirement is that once you are set up you really don’t have to do much.  Just once a year look at your portfolio and make sure your investments still match up with the asset allocation you want.  Because your investments grow at different rates, this can throw off your asset allocation.  Make sure you rebalance it every year!

I hope you have enjoyed this 5 part series on Investing for Retirement.  Please contact me with any questions or clarifications!

Please contact Dollars & Sense Education to bring our “Financial Health 101” seminar to your company or organization! 

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834 

In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In Part 3, I discussed how to efficiently prioritize the options that exist for your retirement savings.  In this installment of the series, I will discuss how and where you go to sign up for your 401K, 403B and IRA.  Signing up for a 401K or 403B is quite easy.  Picking the right company for your IRA is more complicated.  In this post I will attempt to make picking a company for your IRA as easy as possible.

Where to Open a 401K and 403B 

If your company offers a 401K or 403B, opening one is quite easy.  Just contact the HR office of your company and ask them for the paperwork!   

Where to Open a Traditional or Roth IRA

1)    Full Service Brokerages – Merril Lynch, TD Ameritrade, Wachovia, etc.  These are my least favorite options unless you really feel like you cannot do this on your own.  They provide investment advice but are very expensive.  If you want to use this option you can go online to find your nearest branch office. 

2)    Online Discount Brokerages – ShareBuilder, Scottrade, Firsttrade, Zecco, ETrade etc. 
Discount brokers appeal to many people because they have low or no minimums to open an account. Short term, online discount brokerages can be a good alternative if you only have a small amount to invest (less than $1,000) and you are not willing to make automatic contributions of at least $50/month. If you are a mutual fund investor, opening an online brokerage account should only be a short term bridge to opening an account at one of the big three mutual fund companies.  Discount brokers are a good option if you’re primarily interested in purchasing individual stocks instead of mutual funds, but for most casual investors this is not advised.   

3)    Banks – Bank of America, Commerce Bank, Citizens Bank, Washington Mutual, etc. Another option if you’re short on cash to open an IRA at a mutual fund company is to open an CD-based IRA at a bank until you’ve saved enough for the minimum initial deposit at one of the three big mutual fund companies.  This is only a short term option. As soon as you have at least $1,000 you should be rolling you IRA over to a mutual fund company. 

4)    Mutual Fund Companies – In my opinion, mutual fund companies are the best place to open your IRA.  However, they have fairly high minimums for investing.  Fidelity Investments, The Vanguard Group and T. Rowe Price are the three largest mutual fund companies and signing up for all three can be done easily online.  I will provide key details for each company so that you can properly evaluate which company best suits your needs. 

Fidelity Investments

Fees: No fee.

Minimum Investment: $2,500 minimum initial deposit, but this is waived if you commit to at least $200/month automatic contributions.

Additional Contributions: Minimum of $250 unless you commit to at least $200/month automatic contributions.

The Vanguard Group

Fees: No fee

Minimum Investment:  $1000 minimum initial deposit to purchase the company’s STAR fund.  (The STAR fund is a mutual fund of mutual funds, a safe choice for beginners.)  Most other funds at Vanguard have a $3000 minimum.

Additional Contributions: Minimum of $100 unless you use their Automatic Investment Plan, in which case the minimum is $50.

T. Rowe Price

Fees: $10/year per mutual fund owned for Roth IRA accounts until you have a balance above $5,000 for each mutual fund or an aggregate of $50,000 invested, after which there is no fee.

Minimum Investment: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

Additional Contributions: Minimum of $1,000, unless you sign up to contribute at least $50/month in automatic contributions.

How to Open an IRA

Some firms require that you download the forms and then to mail or fax them to the company. Most companies, however, provide online applications. Before you begin the application, you will need the following:

• Social security number
• Bank account information
• Employment information
• Money

Once you’ve completed the application process, you will be asked to transfer money to your account. This money will probably earn interest in a money market fund until you choose an investment. In the final installment - Part 5 of this series, we’ll discuss good investment options for IRAs and 401Ks. Stay tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101? seminar to your company or organization! 

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834

Okay, I think we are well on our way to saving for retirement.   In Part 1 of this series, hopefully I convinced you of how important it is to save for retirement.  In Part 2, I talked about the different options that exist for retirement savings.  In this installment, I will show you how to efficiently use the options that exist for your retirement savings. 

In order to make an informed decision, the first thing you need to do is decide how you see your lifestyle during retirement.  There are three options:

1)  You will not work at all. 

2)  You will work in some capacity.

3)  You are not sure if you will or will not work after retirement.

Your retirement savings decisions are highly dependent on which of these categories you see yourself in. 

If you are not going to work and will live solely off your retirement income, it makes more long term sense to max out your 401K, 403B or traditional IRA before investing in a ROTH IRA. 

If you are going to work or are not sure if you are going to work in retirement, it makes more long term sense to contribute to your 401K/403B up to your company match, then max out your Roth IRA and then max out your employee sponsored plan.  If you do not have an employee sponsored plan, max out your Roth IRA first and then max out your Traditional IRA. 

These assumptions are made based on the current income tax rates.  If these were to increase significantly, my advice would be very different.     If you are not sure if you are going to work in retirement or you are wary of income tax increases in the future - by all means utilize the ROTH IRA after taking advantage of any free money match from your employer.  It is a way to diversify your tax risk.  But if you know you want to relax on the beach, not work, and are confident that tax rates will stay constant or decline than make the most of your employer sponsored plan or Traditional IRA before participating in the ROTH IRA. 

Now you know that you should save for retirement, you know what vehicles are out there and what make the most sense for you to use - In Part 4 I will show you how to sign up for these retirement vehicles and get in the game.  Stay Tuned!

Please contact Dollars & Sense Education to bring our “Financial Health 101? seminar to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215 - 499 - 3834