Retirement PLANning

[Fly2Scuba]

go to a financial palnner!

Unfortunately, most financial planners earn the most with commissions on investments and insurance they convince you to purchase. Total conflict of interest. If you go that route, best to stick with flat hourly fees or just a flat out percentage based on amount of portfolio. I personally prefer to control my own destiny and with the amount of reading time available with this job, have no problem finding time to research through books, magazines, newspapers, and of course, the web.

www.scottrade.com - the best place for Roth IRA and general investment accounts IMHO

http://biz.yahoo.com/p/top.html - lists the top performing mutual funds in each category. I then look to invest in only 4 or 5 star morningstar rated funds among the top performing in the 5 year average. In addition, find it best to stick with the solid companies like Black Rock, Fidelity, T. Rowe Price, Vanguard, etc.

http://finance.yahoo.com/q?s=acus - just an example of a stock on Yahoo finance. I like the mean recommendation rating on the bottom right

http://moneycentral.msn.com/investor/srs/srsmain.asp?Symbol=acus - Microsofts rating on same stock. Great way to cross check analysts opinion. There are tons of other statistics to look at; I've found these tools are the quickest.

http://moneycentral.msn.com/investor/srs/srstopstocks.asp? - Same site lists out their highest ranked stocks in each category

Besides the other massive info on the web, Fortune, Money, Smartmoney, Kiplingers, Consumer Reports Money, and the Wall Street Journal all have tons of information. With inflationary pressures and Bear market alarms, latest recommendations I've heard are Japan funds, Latin American funds, banks, health care, basic needs stocks (like food) and gold (which is already way high). Of course those opinions could turn out be wrong. Nobody knows for sure, it's like forcasting the weather. Diversification is always the safest most secure way, while non-diversification is like gambling with better odds than Vegas.

 

[BluDevAv8r]

So... What I've concluded is this: How much to save and what to do with it are dependent on your savings goals, age, and how close to retirement you are. I'm young; I'm saving for short term (moving, house purchase) and long term (retirement). I'm in a fairly low tax bracket now, compared to where I will be when I'm closer to retirement. Somebody closer to retirement has different goals than I do, and therefore they should invest/manage their money differently.

I agree 100%. Also, someone who is 25 has a different risk level than someone who is 55.

Let's start with me and where I'm at. Conventional wisdom states that I should fund my 401(k) to my company max and no more. Why? The company match is free money, and is essentially a 100% ROI. Guaranteed. Nothing can beat that.

I agree to a point...but there is no such thing as "conventional wisdom" here. I have read many personal finance books and for many of these big issues, there always seems to be good arguments made for both sides of the issue. Another big issue is whether or not to prepay extra mortgage payments versus holding the biggest longest mortgage possible and only make the minimum payments. But I do agree that at the very least, employees should be contributing the minimum to receive the maximum amount of matched company money.

But here's the catch: Since my contribution is before taxes, I am opting NOT to pay taxes while I'm in the 17% bracket (or whatever it is I'm at). However, my withdrawls (or capital gains or whatever) will be taxed -- when I am more likely to be making more money and thus in a higher tax bracket. IOW, I am opting to NOT pay income taxes while I'm in the 17% bracket in exchange for paying taxes on a lot more money while I'm in the 50% bracket.

For starters, there is no 50% bracket that I am aware of, but I could be wrong. Secondly, you and I have no clue what the tax rates will be 20-30 years from now.

The company match and compounding and hopeful growth will make up for the higher tax rate. However, anything put into a 401(k) beyond the company match is questionable, because I will be paying more taxes on it later at the expense of less taxes on it now.

I disagree. You leave it out the fact that by contributing more of your own money pre-tax, you are saving on taxes today. If you invest those savings, they will compound over the long term. Don't ignore the compounding of money over time. That invested savings may very well beat out the tax savings that you are talking about downstream. Of course, in order to model this correctly, we'd have to make certain assumptions about the tax rate downstream, income growth, contribution rates, inflation, rate of return on your investment, etc. It is obviously a very complicated investment model when you get down to the facts.

So, let's look at the Roth IRA. My contributions are after taxes -- that means that I'm paying taxes on my contribution NOW, while I'm in the 17% bracket. Later on, when I'm in the 50% bracket, I pay nothing on my withdrawls.

Again, you have no clue what the tax rate will be 30 years from now nor do I know of any 50% tax bracket. You also have no clue what kind of adjusted income you will have 30 years from now - in other words, you have no clue what your taxable earnings will be nor do you know what your effective tax rate would be.

For more on the tax thing... Money you put into the 401(k) and the Roth CAN be taken out early for emergencies, but there's a catch. Under most circumstances, early 401(k) withdrawls will hit you (or expose you) to a lot of tax consequences, such as income taxes and early withdrawl penalties. The principal of the Roth can be withdrawn at any time with no tax consequence.

Of course. I'm well aware of these facts. I'm also aware that you can take a loan from your 401k and when you pay interest on that loan, it goes to you...not some bank. That said, there are some very serious implications of taking a 401k loan that anyone should consider.

Also, in regard to taxes: You talk about the tax break, but what are you trying to gain? For me (and most regional pilots in their early years), I get a deduction on student loan interest, a credit for going to school, and my medical benefits are pretax contributions. I'm not doing poorly at tax time, and in fact, usually get a fat check. Again, I'm in a lower tax bracket, so I just don't pay that much in taxes. Essentially, for every dollar I owe income taxes on now, I pay $0.17 in taxes. Later on, every dollar I owe taxes on I will pay $0.50 in taxes. It doesn't make sense to me to save that seventeen cents to pay fifty cents on it later. I'd rather pay the seventeen cents now than pay fifty cents later.

As I said above, don't ignore the opportunity cost and power of compounded money over time. The goal is obviously to pay zero taxes...and contributing as much to your 401k (get as close to 14,000 this year as possible) will lower your taxable income by that amount. In the perfect world, one can afford to max out both the 401k as well as the ROTH IRA. Also don't forget that your earnings level will grow after year 1 at a regional and also, there are income limits on the ROTH.

The bottomline is that there is no blanket solution or right answer here. It is all subject to a bunch of variables and it would be incredibly difficult to model out the correct decision without a very good CFA. There are pro's and con's to both arguments.

-Neal

 

[Secret Squirrel]

Tax rate

The first $14,000 you make is taxed at 10%. The amount you earn From $14,000-$56000 is taxed at 15%. THe amount from $56,000-114,000 is taxed at 25%. and so on. The max tax rate is 35% for someone who earns more than $311,000. And remember that only the money made OVER $311,000 is taxed at this rate.

You will withdraw your nest egg slowly over 20 years. you do not withdraw in all at once. You can start withdrawing at 59 1/2 years old and I believe you do not have to start taking it out until you turn 70 without penalty. So lets say you withdraw 50 grand a year out of your 401k in retirement. You will only pay around $6800 dollars in Federal taxes, or 13.6% percent effective tax rate.

Max out your 401k first.

 

[BluDevAv8r]

The first $14,000 you make is taxed at 10%. The amount you earn From $14,000-$56000 is taxed at 15%. THe amount from $56,000-114,000 is taxed at 25%. and so on. The max tax rate is 35% for someone who earns more than $311,000. And remember that only the money made OVER $311,000 is taxed at this rate.

You will withdraw your nest egg slowly over 20 years. you do not withdraw in all at once. You can start withdrawing at 59 1/2 years old and I believe you do not have to start taking it out until you turn 70 without penalty. So lets say you withdraw 50 grand a year out of your 401k in retirement. You will only pay around $6800 dollars in Federal taxes, or 13.6% percent effective tax rate.

Max out your 401k first.

Please quit confusing me with the facts.

-Neal

 

[Secret Squirrel]

Facts

Time value of money my friends. Putting more money in now is worth a whole lot more in 30 years.

If you put in 10,000 a year for 30 years you will have over 1.4 million.

If you put 25% more in, which happends when you contribute pre tax money to your 401K, or 12,500 you will have over 1.8 million in savings.

Remember you do not pay taxes on the whole amount. Only the amount you withdraw every year. You can still take advantage of the tax code to keep from paying taxes. And if you can't shelter a lot of that money from taxes then you just are not trying. (ie mortgage interest, MEDICAL EXPENSES because you are old, the list goes on and on)

People do not plan to fail, they just fail to plan.

SS

 

[RJET]

Hey Guys a lot good info.
Thank you Neil and the rest.
I have a silly question. I just want to make sure I am clear on this. IF someone was to opens a traditional IRA they would pay taxes when the money is widrawn at retirement. The question is do they taxes on the earnings or the whole amount that is being widrawn. Assuming they get tax on the amount withdrawn, it seems like they are getting taxed twice. Because you open the IRA account with already taxed dollar, then you get taxed on it again.

 

[Swaayze]

No, a traditional IRA is funded with dollars that are not currently taxed (although you may have tax withheld on that money at the time of your paycheck, that money is deducted on your tax return and you will not be taxed on it), then the whole amount withdrawn at retirement is taxed.

 

[Carl_Spackler]

I would reccomend Dave Ramsey Total Money Makeover book and radio show.
common sense advise.

 

[LAZYB]

Cheap way to educate yourself...

to make your own investments or evaluate and judge those that will invest for you. Mutual fund guide is helpful.


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