Retirement PLANning

[psysicx]

If your roth is maxed out get another one. The best thing to do is put as much money in your 401K that will be matched. There is no reason to put anymore. Then put it in a Roth and max it out. Don't they have a limit of $2,000 a year that you can put in Roth?

 

[AZ Typed]

If your roth is maxed out get another one. The best thing to do is put as much money in your 401K that will be matched. There is no reason to put anymore. Then put it in a Roth and max it out. Don't they have a limit of $2,000 a year that you can put in Roth?

The limit for 2005 is $4,000 if under age 50 ($4,500 if over). Even if you have 10 ROTHS...your contribution limit is still $4,000 or $4,500 - divided up among the 10 ROTHS. You only need one with a reputable company. And toss it into a VA with living benefits and you have an insurance policy on your IRA - a great strategy for those concerned about losing money in their IRA.

AZT

 

[miles otoole]

I know you probably know this already and decided to not get too detailed, but to those uniformed on Roth IRA's, you will pay taxes on any earnings earned on your contributions that are considered after-tax.

Not true. Roth IRA contributions are ALL after tax and therefore never subject to any taxes. You put in $4,000 when you are 18, it grows to $100,000, and you withdraw it when you are 60, you pay not a dime of tax. The $96,000 "earned" through investing is tax free. This is the great thing about Roth IRAs.
One loophole, if you will, is the ability to withdraw $10,000, penalty free, from an IRA for a first home purchase after having an IRA for 5 years. Actually, a first home means a home bought for the first time in 2 years.
Therefore, you can contribute to an IRA for 5 years, grow the money, and take out $10,000, no penalty, no tax, toward a home. Again, a little known loophole.

http://www.fool.com/money/allaboutiras/allaboutiras12.htm

 

[Slim]

AZ Typed mentioned life insurance and the "preferred" rates from ALPA:angryfire and AOPA . I agree!

If you need term life insurance, try First Penn Pacific. I have a 250K, 20 year policy with them. The annual premium is $400. I pay quarterly, so it's $472 per year.

They are pilot friendly. My neighbor, who sells life insurance and is also retired National Guard, found this to replace my SGLI.

 

[CTS]

This all sounds good, but be careful

The above insurance reference is correct I purchased 1.4mil of life insurance for the same price as ALPA's 500K policy and it is much better that what the company offered. Also I locked in the rate for 20yrs as to the 10yrs offered by ALPA or the aged based with the company. However I have no bad health history and do not do any GA flying.

Retirement savings,

Some hear may be good at picking stocks, however I encourage you to be cautious. You want to diversify your risk and its takes a minimum amount of money to do this. There are different types of risk. Overall market risk (rising interest rates, and oil prices), company risk (Enron, Global Crossings) and sector risk (the horse buggy sector has not done very well this year). And I should add for international stocks, Political risk. In the beginning a mutual fund can help you diversify your risk, although I am not a big fan of mutual funds. I prefer ETF's(www.ishares.com) or (www.vanguard.com), much like mutual funds, but no fund manager to screw things up. ETF's are computer models that track indexes and cot 1/10th the price of a MF.

While it is nice to hear what our fellow pilots are doing, I would sit down with a CFP (certified financial planner) in your area and develop a "flight plan for your retirement savings). This blue print, as long as you stick to it, will be your key to financial independence. Let a professional tell you if a 401K or ROTH is better for your specific situation. They can tell you exactly how much to save each month and where to put it to reach your goal.

Don't go to a broker; go to a Fee Based Financial Advisor. This way, you pay for his/her independent advice rather than a person who works on commission trying to sell you something. (I.E. a mutual fund)


CTS
www.wiserinvestor.com

 

[Mike man]

go to a financial palnner!

 

[DetoXJ]

I just hit my $14,000 Max out on my 401K. The fact that I didn't pay tax on any of that $14K really means that it only cost me about 10K since thats all I would have gotten had it been "taxable income" In addition to that the company will match 75% of 9% of my salary. Assuming I will make $100K this year, the company will put in almost $7000. What this boils down to is I have $14000+$7000 going into my 401K as opposed to $10K if I didn't do the 401K. Thats over a 100% return just for playing.

 

[Singlecoil]

I just hit my $14,000 Max out on my 401K. The fact that I didn't pay tax on any of that $14K really means that it only cost me about 10K since thats all I would have gotten had it been "taxable income" In addition to that the company will match 75% of 9% of my salary. Assuming I will make $100K this year, the company will put in almost $7000. What this boils down to is I have $14000+$7000 going into my 401K as opposed to $10K if I didn't do the 401K. Thats over a 100% return just for playing.

That's where the real gains are, the immediate 25-30% return because the government isn't getting the money they would have. Some have said the Roths are better because you will be in the "50%" tax bracket when you are taking the money out. Not true. When you are taking the money out, you will be retired! Your house will be paid for (hopefully) and your income will be low because it will only consist of social security, pension income, and whatever money you take out of your 401K, IRA, and/or Roth accounts. Also, maybe by then the rules will be changed by congress to lower taxes on 401K disbursements. You never know.

 

[AZ Typed]

AZ Typed mentioned life insurance and the "preferred" rates from ALPA:angryfire and AOPA . I agree!

If you need term life insurance, try First Penn Pacific. I have a 250K, 20 year policy with them. The annual premium is $400. I pay quarterly, so it's $472 per year.

They are pilot friendly. My neighbor, who sells life insurance and is also retired National Guard, found this to replace my SGLI.

The key is to be sure you're covered under 121 or 135 if that's your line of work. In that case - you'll likely be eligable for preferred rates. It's the GA & 91 flying that raises rates. I have 1M with AIG (the biggest in the nation) for 20 years at $500 a year (montly payments of $42) as a 135 pilot. If I start flying a 172 around for fun - the game changes. So - be sure you disclose the type of flying you're doing and the type of flying you expect to do. When / if I go back to flying around the patch for fun - I'll be revising the policy. Otherwise if I spiral the 172 into the dirt under 91, my beneficiaries get nothing. And if I stack up the jet under 135 - my beneficiaries will get the full $1M. You can't "unscrew-up" the application - so be sure it's accurate before it's sent off to the company. Also - NEVER do this through the mail. Sit down with a licensed advisor or planner. Otherwise you're just tossing a dart at the map and hoping you are correctly insured. That's what most people do...and that's why most people are not correctly insured and are paying WAY to much for what they do have.

Here's a question: Do you all have some references for disability insurance for PILOTS? In other words, insurance that covers us with a lump sum (for example) in the event we lose our medical? I know ALPA offers this...but that's not available to the mom & pop operators out there. Any suggestions would be appreciated!

AZT

 

[de Pez]

I just hit my $14,000 Max out on my 401K. The fact that I didn't pay tax on any of that $14K really means that it only cost me about 10K since thats all I would have gotten had it been "taxable income" In addition to that the company will match 75% of 9% of my salary. Assuming I will make $100K this year, the company will put in almost $7000. What this boils down to is I have $14000+$7000 going into my 401K as opposed to $10K if I didn't do the 401K. Thats over a 100% return just for playing.

In addition, since your 401k is "pre-tax", you've just reduced your taxable income from $100,000 to $86,000.

AND, since a Roth IRA is the other topic of conversation here, your ability to invest the full $4,000 (for 2005) in the Roth begins to be reduced at an income level starting at $95,000. Since you've just lowered your taxable income to $86,000, you can contribute the full amount to your IRA as well.

 

[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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