Monthly Archives: October 2012

How to Retire Rich: 3 Smart Steps at Ages 40-55

Good Day,

As we continue on this topic of the various investment strategies we undertake to ensure a comfortable retirement, you can be sure that there is no single retirement strategy that you’ll be able to replicate over the years. As we grow older, we take on different responsibilities and our view on life gains more meaning, for example, retirement planning means everything to a person above 50 years, but would be among the least important items on the list for a person below 30 years. Thus, the way you implement your retirement plan will depend on your age bracket, and the circumstances that you may be facing at that particular point in time. As Sandy Block and Jane Bennett Clark continue with their discussion on the different strategies, it’s always advisable to ensure that they apply to you as there is no perfect plan for everybody.

By now, you’ve probably amassed a decent sum in your retirement accounts and another hefty sum in the college fund. You haven’t? Join the club. A survey conducted in 2009 by Edward Jones, the financial services firm, showed that 20% of respondents ages 45 to 54 had saved nothing at all for either retirement or college. A recent survey showed that 62% of respondents had never heard of a 529 savings plan, much less contributed to one.

Here’s the penalty for procrastinating on both those fronts: If you had started saving for retirement in your twenties, you would have had to carve out 13% of your salary every year to replace your income in retirement, according to an analysis by T. Rowe Price. Now, at 45, you’ll need to sock away 29% of your salary to catch up. (And if you put it off until age 55, you’ll need to save 43%, which won’t leave you much for groceries or gas.) Uncle Sam gives the procrastinators of the world a powerful incentive to save: Once you’re over 50, you can contribute significantly more to your 401(k) plan than your younger colleagues.

Adjust the college plan.

The same time-and-money crunch applies to college savings. Compare the difference between starting a college fund when your child is a toddler and when he or she is 13. Fifteen years out, you would have had to save $345 a month to cover 75% of the cost of a public college education, according to At this stage — say, five years out — you’ll have to save $646 a month, almost twice as much.

Rather than regret the past, recalibrate. If you’re on track for retirement but short of your college goal, for instance, you can always redirect 1% or 2% of your gross income from one pot to the other for a few years, says Greg Dosmann, a principal at Edward Jones. Recognize that you might have to work a year or two longer before retirement or boost the retirement allocation after you’re done paying the college bills. “It’s a trade-off,” he says.

Or consider borrowing — judiciously. Parent PLUS loans, sponsored by the federal government, carry a fixed 7.9% rate. PLUS loans let you borrow up to the cost of attendance, minus any financial aid. Thanks to their fixed rate and consumer protections, such as forgiving the loan if the student dies or becomes disabled, PLUS loans are generally a better bet than private student loans.

Remember, however, that borrowing on behalf of your student can jeopardize your own financial security in retirement. If the gap is a chasm, not a crevice, find a cheaper school. Another way to get cash for college is to borrow against the equity in your home. With a home-equity loan, you pay a fixed rate (recent average: 6.4%) but borrow the entire amount upfront. With a line of credit, you pay a variable rate (recent average: 5.1%) and borrow as needed. With both, you can generally deduct the interest on amounts up to $100,000, no matter how you use the money.

A lower rate and tax-deductible interest may beat student loans. The downside to this strategy is that it pushes off a key goal for many people, which is to enter retirement mortgage-free. “After the kids are finished with college, you are going to have to save like heck to pay off the mortgage or, if you can’t do that, sell the house and downsize when you retire,” says Yrizarry. Downsizing doesn’t have to be a bad thing, but it’s a decision you should make before you borrow, not after.

Talk turkey with your kids.

No matter how you plan to pay for college, let your kids know what you’re prepared to do before you make up a college wish list. Be clear that “if the net price after financial aid doesn’t end up at your number, it has to go off the list,” says Fox. Without that conversation, you’ll be hard-pressed to say no when the acceptance letter from Vassar comes. “College is not just a financial decision,” says Fox. “There’s a whole emotional side. You have to have the guidelines established before you get to that point.”

Invest what’s left.

If you’re among those who have college covered (or don’t have college costs to contend with) and you save the max in your retirement accounts each year, you may be looking for ways to invest excess income. One option is to add tax-free municipal bonds to your fixed-income allocation, says Yrizarry. Despite recent reports, most state and local governments have shown resilience in the face of budget cuts.

Or take advantage of low interest rates and bottoming housing values to invest in real estate, Yrizarry suggests. If your student is heading off to college, you can accomplish multiple goals (and take advantage of a strong rental market) by buying a condo near campus and letting your kid and a few roommates live in it. Later, you can rent the property to other students or to alums during big sports weekends, generating income before and into your retirement.

How to Retire Rich: 3 Smart Steps at Ages 30-45

Good Day,

As we continue with our discussion on the various strategies that a person will implement during the different stages of his or her life, many people have this tendency of ‘forgetting’ about their retirement plans once they are implemented. But that’s not normally the case, because as human beings your needs and wants continue changing on a daily basis, and thus your retirement plan needs to reflect this changes. Sandy Block and Jane Bennett Clark continue with their discussion on the different strategies on how to retire rich.

At last, you’ve gotten your career on course and are ready for your next big moves — perhaps starting a family and buying a home. Before you get too far down that road, map out a long-term plan, says Jim Oliver, a certified financial planner in San Antonio, Tex. “Most people live the lifestyle they want without putting away enough to meet the goals they want later on. It’s like having a budget for a trip and not allocating it. Before the trip is over, they run out of money.”

Prepare for contingencies.

If you haven’t done so already, fuel an emergency fund with enough to cover at least six months’ worth of basic expenses. That cushion can prevent you from raiding your retirement accounts after a layoff or keep you from borrowing your way out of a crisis. “Debt is the number-one problem that sabotages most couples,” says Deborah Fox, of Fox Financial Planning Network, in San Diego.

Before you have children, contribute as much as you can to your 401(k), but don’t neglect the Roth IRA, says Barry Korb, of Lighthouse Financial Planning. “It’s costing you in taxes now, but down the road, that money is tax-free. Do it while you can afford it.” Keep contributing at least 15% of your gross income toward retirement savings, says Nicholas Yrizarry, of Wealth Management Group, in Laguna Beach, Cal. Once the kids arrive, you’ll likely have to pull back if one spouse leaves the workforce or to pay for child-care costs. Either way, “the reality is you can’t do 15% of gross income because it’s not there anymore.”

Siphon off cash for a down payment.

Sacrosanct as retirement accounts may be, some financial planners consider them fair game for a down payment on a first home. To justify this strategy, you need to have enough time before retirement to replenish the accounts. If you’re 45 or older, don’t even consider the idea. Also be strategic about which account you tap. With a 401(k), for instance, you’ll incur taxes and a 10% penalty on early withdrawals. But with an IRA, Uncle Sam waives the 10% penalty on a distribution of up to $10,000 for a first-time home buyer — although you’ll still owe taxes on the withdrawal. If your spouse is also a first-time home buyer, you can each withdraw up to $10,000 penalty-free. You can always withdraw your contributions from a Roth tax- and penalty-free, but if you’re buying your first home, you can take up to $10,000 of earnings tax-free, too, as long as you’ve had the account for at least five years.

You can usually borrow against your 401(k), an option not available with IRAs. You are allowed to borrow as much as half your balance, up to $50,000, for any reason. You generally have to repay a 401(k) loan within five years or it’s considered a taxable distribution. But your employer may allow you as long as 15 years if you’re borrowing to buy a home. “If it gets you into the home you want and need,” says Yrizarry, “it’s an effective use of your money.”

Already own your home? Consider refinancing your mortgage if you haven’t locked in the low rates available now. You can put the money you free up into savings.

Set a goal for college savings.

Talk about a squeeze play. At the same time that you’re funding your own retirement, you’re also expected to stretch to cover college bills. But you could aim for, say, three years at a public school or two years at a private school and figure on paying the rest out of current income, or have your student kick in summer earnings. To run the scenarios, use the college-cost calculator at To meet 50% of the total cost of four years at a public university, based on the current average annual cost ($17,131) and a 6% inflation rate for college costs, you’d need to save $222 a month for 18 years, assuming a 7% annual after-tax return on your college savings fund. If you covered half of only the tuition bill, you’d need to save $107 a month.

As for which account to pump money into, your best bet is usually a state-sponsored 529 savings plan, which lets your savings accumulate tax-free. If you use the withdrawals for qualified educational expenses, such as tuition and fees, the earnings can be withdrawn tax-free as well. About two-thirds of the states also offer a tax benefit for contributing to a 529 plan. A Roth IRA is also a good way to save for college. Earnings can be withdrawn penalty-free (but not tax-free) before 59 1/2 if you use the money for college expenses.

How to Retire Rich: 4 Smart Steps at Ages 21-35

Good Day,

The quest to retire with enough funds in your retirement account has bogged people for years. We all look for the magic bullet that will solve all our problems with just one shot, but as we all know, that’s not going to happen anytime soon. Most times, what it takes is adequate planning and the strategies that you implement on your retirement plan that will determine the end result. Retirement planning being a long-term goal for everyone, usually entails being on top of your game year in year out. Thus, what this means is that as you grow older each year, your priorities will change and this will mean a different strategy for your retirement plan. Sandy Block and Jane Bennett Clark get into detail in the following article, on the different strategies you’ll implement depending on your age on how to retire with a comfortable retirement portfolio. Over the coming days, I’ll share with you articles by the two authors on how to retire rich, depending on your age bracket.

At this stage of your life, your most valuable asset isn’t youthful vigor or a full head of hair. It’s time. Because you’re decades from retirement, contributions to a 401(k) or other retirement plan will have years to compound and grow. Even a modest contribution now will pack a much greater wallop than a significantly larger contribution when you’re in your forties and fifties.

If you start socking away $200 a month in a retirement account from the moment you land your first full-time job at age 22, within ten years you’ll have a stash of more than $37,000, assuming your investments grow 8% a year. In 20 years, you’ll have more than $122,000, and by the time you reach age 67, your nest egg will be worth $1.2 million.

Stuart Ritter, a certified financial planner for T. Rowe Price, recommends investing 15% of your salary toward retirement. That may seem like an unreachable goal for young people with other demands on their paycheck. If you’re pulling in $30,000 a year, for example, that’s $375 a month. But with tax breaks associated with employer-sponsored retirement plans, plus a possible employer match, you can reduce your actual out-of-pocket contribution. Even a smaller contribution will give you a serious head start on saving, so you’ll have a bigger stash that can grow for dec­ades — plus more wiggle room to deal with the competing demands on your paycheck later on.

Enroll in the 401(k).

Most major companies that offer 401(k) plans match a percentage of your contributions. Typically, these matches range from 25% to 100% of your contribution, up to 6% of your salary. Even if the match is at the low-end, that’s an immediate 25% return on your investment, says Ted Sarenski, a certified public accountant in Syracuse, N.Y. “You’re not going to get that kind of return anywhere else.”

In addition, the money that you contribute to your 401(k) is excluded from taxable income. Once you take the tax break into account, a 6% contribution “only feels like 4%,” says Sheryl Garrett, president of Garrett Planning Network.

Fund a Roth IRA if you don’t have a 401(k).

Many small employers don’t have the money or manpower to offer a 401(k) plan at all, let alone one with a company match. That means you have to create and manage your own retirement plan.

For most young workers, the best choice is a Roth IRA, Sarenski says. Contributions aren’t tax-deductible, but you can withdraw them anytime tax-free. And as long as you wait until you’re 59 1/2 to take withdrawals, earnings are tax-free, too. (Funding a Roth is a good idea even if you are contributing to an employer’s 401(k) plan; read on to find out more.)

You can invest up to $5,000 in a Roth in 2012. That doesn’t mean you need $5,000 — or even $1,000 — to get started. Some mutual funds and brokers, including Schwab, will waive minimum investment requirements if you sign up for an automatic investment program.

Pay off student loans — in good time.

Don’t pay off federal student loans more quickly than necessary, Ritter says. The interest rate — between 3.4% and 6.8% for loans issued after 2006 — is fixed and relatively low compared with the rates many borrowers get on private student loans, and up to $2,500 of the interest is tax-deductible.

Resist cashing out a 401(k).

When you leave a job, you have several options for your 401(k) plan. You can leave it with your former employer, roll it into an IRA, roll it into your new employer’s plan (if your employer permits such rollovers) or ask your former employer to cut you a check.

You may be tempted to choose the last option, but in most cases, that’s a bad idea. Your employer will withhold 20% of the amount withdrawn to cover income taxes. And because you’re under 55, you’ll also have to pay a 10% early withdrawal penalty on the entire amount. Plus, you’re jettisoning any growth you’ve earned, which sends you back to square one when you start saving again. Workers who cash out their 401(k) plans reduce their retirement income by up to 67%, according to an analysis by the Employee Benefit Research Institute.

Retirement Planning 2.0: Retrain Your Brain for Financial Success

Good Day,

Whenever we talk about retirement, a lot of people have a problem with getting around the idea of saving for part of your life that is 20 or 30 years away, especially the young. Ok, I’ll admit, even I sometimes get that feeling that retirement is ages away, and there are more pressing issues that need my urgent attention. But, before things get out-of-hand, I remind myself of the kind of lifestyle I’m planning to live in my retirement. My point being, that the mind is quite powerful, and if left without some sort of control, it will lead to a very different path. There is a famous saying that we become what we think about, which I believe 100%. Maybe the first thing we need to do is start thinking positively about retirement, so that it can have a lasting impact in our life, and as Carla Fried explains in the following article, we need to retrian our minds for financial success, so that we can fulfill our retirement plan.

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious — and more entrenched — problem is that our brains are messing with our retirement plans.

“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out.

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger,” says Meyer.

More productive planning

Forever tweaking your asset allocation probably won’t get you near the retirement payoff that tweaking your brain will achieve. Consider these strategies for engaging your brain in more productive retirement planning:

Get Thee to a Calculator, Pronto:

OK, you know you probably should be saving more for retirement. And when life keeps intervening — that Bahamas vacation you and yours really really need, or the realization that the kid’s orthodontia isn’t covered by insurance — you tell yourself that next year, you’ll ramp up your savings rate. You’ve got plenty of time, right?

What you may not realize is how expensive that time is. Research conducted by Craig McKenzie, a psychology professor at the University of California, San Diego, shows that we have a tendency to “massively underestimate the cost of waiting to save. It’s difficult to appreciate the difference between giving yourself 20 years to save and 40 years.”

For example, a 30-year-old who is saving $10,000 a year and earning an annualized 6 percent will have $1.2 million at age 65. Care to guess what someone starting at 45 will have? About $390,000. The younger saver invests $150,000 more than the 45-year-old does, and in return has an ending balance that’s $800,000 larger. Even if you’re already past your 20s and 30s, you might find it eye-opening to see how extending your investment timeline by delaying retirement on the back end of the calculation can help matters. Your company retirement plan probably has an online calculator you can play with; or try this one.

Make it Personal:

How you frame retirement savings decisions can help boost your ability to delay gratification. When individuals were asked if they’d prefer to have $3,400 in one month or $3,800 in two months, 57 percent chose the latter. When the same scenario was framed in terms of one’s personal age — “when you are 2 months older” — 83 percent chose to wait for the bigger payoff.

How does that translate to better retirement planning? Yale School of Management marketing professor Shane Frederick, one of the study’s authors, says a 50-year-old who frames a savings goal as “when I am 65” will likely be more patient to focus on that delayed gratification, than someone who frames it as a more generic “in 15 years.”

Time Travel:

Another unique challenge for retirement planning is that the end goal is so far away that it’s hard to see how actions we take or don’t take today will have a huge impact on our older selves. When researchers showed individuals doctored photos of their future selves, the human guinea pigs said they would save more than twice as much for retirement, compared to a control group that wasn’t given a glimpse of their older self.

Work is afoot to bring this visual exercise to a 401(k) plan near you. In the meantime, Hal Hershfield, who led the research, says he wouldn’t recommending using apps that age your face. “They’re just not accurate enough, and I think seeing a strange-looking version of your future self may actually have the perverse effect of causing you to identify less.”

Hershfield, an assistant professor of marketing at New York University’s Stern School of Business, says new research that has yet to be published shows that simply writing a letter to your future self can help you become more invested in the welfare of that older person. “In a way, this task is a very low-tech version of the age-progression [photo morphing] techniques: Both have the same goal of creating a more vivid image of the future self.” Hershfield says hanging out with older folks — parents, grandparents, volunteering with an organization for the elderly — can also have a beneficial impact on your resolve to save more today.

Channel Ulysses.

Most of us suffer from a bad case of recencybias, the tendency to extrapolate that whatever is happening today will keep happening. That’s why it’s so hard to buy low and sell high. If your recent experience is a falling market and bad returns, it’s not exactly easy to belly up to the bar and buy stocks, or simply stay committed to what you already own.

A Ulysses Contract — a one-page statement that lays out your long-term strategy and the fact that you’re committed to staying the course — can be a line of defense against over-reacting to current events. Like the Greek warrior, you are pre-planning for how you will circumvent alluring emotional sirens that can thwart your retirement plan.

For example, a sample Ulysses contract — created by the Allianz Global Investors Center for Behavioral Finance for financial advisers to use with clients — includes this passage: “Should the portfolio value decline by 25 percent, we commit to avoid the urge to panic and sell the portfolio. Similarly, should the portfolio value increase by 25 percent, we commit to avoid the urge to chase the hottest investments.”

Another useful step is to include a clause in your contract saying that before you ever deviate from your plan, you will write down your rationale. As Nobel Laureate Daniel Kahnemann explained in his book, “Thinking, Fast and Slow,” you don’t want to cede all power to the quick-twitch intuitive part of your brain. Slowing down and simply writing down why you want to change course triggers more deliberate rational thinking. That’s the key to getting ahead and staying ahead.

The 7 Deadly Financial Mistakes

Good Day,

We all make mistakes, although not many people will admit it in the beginning, but in the end, we end up doing more damage before we accept defeat. The problem is when the decision is bound to affect your future standard of living. Take the example of ledger fees that are charged by investment companies, when you consider the percentage charged on an annual basis, the fees are minimal that you often ignore them, but considering that you are going to invest in the long-term, this charges can be quite a chunk of money. But this is one of the many financial mistakes many people make, the following article by Jill Schlesinger elaborates seven deadly financial mistakes that people make when investing.

Who among us has not made a costly financial blunder? Come on; admit it — we all make some dumb moves for which we have to pay a pretty penny. Research by the Consumer Federation of America and Primerica found that two out of three Americans say they have made at least one “really bad decision,” and almost half of those questioned (47 percent) acknowledged that they had made more than one financial bad decision. The median cost of these bad decisions was $5,000, but the average cost was $23,000.

That we make financial boo-boos is not surprising, but the report also found that a large majority of those surveyed believe their ability to make financial decisions is “good” or “excellent,” despite having made costly financial mistakes in the past. “Considering their past mistakes and the complexity of the financial services marketplace, we were surprised at how highly most middle class Americans rate their ability to make a variety of financial decisions,” said CFA Executive Director Stephen Brobeck.

Call it the “Lake Wobegon Effect,” named after the fictional town where author Garrison Keillor noted that “the women are strong, all the men are good-looking, and all the children are above average.” The “Lake Wobegon Effect” has come to mean the tendency to overestimate one’s capabilities. In social psychology, it’s called “illusory superiority”.

Of course, if we are all so smart and confident in the world of finance, why are we shelling out thousands of dollars to cover our bad decisions? Even if you are from Lake Wobegon, you may be interested in these mistakes that I saw frequently when I was an investment advisor:

1) Failing to maintain an adequate emergency reserve fund.

Maintaining 6 to 12 months of living expenses allows you to ride out many a financial storm without raiding your retirement assets. For those in retirement, carrying 12 to 24 months of expenses is even better.

2) Creating an overly optimistic financial plan.

From the mid-1990s until the financial crisis, too many plans relied on the expectation that annual investment returns would average 10 percent. Those whose assumptions were more conservative faced far fewer surprises when the negative years rolled in.

3) Paying more fees than necessary.

Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

4) Allowing your emotions to rule your financial choices.

There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed. To prevent the emotional swings, create and stick to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities.

5) Not having adequate insurance/purchasing too much insurance.

Insurance is a necessary component of a financial plan. However, too often people shift from one extreme of not having enough coverage to the other, when they buy more insurance than they need. A good way to quantify your insurance needs is to use a life insurance calculator, like

6) Assuming too big a risk.

If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long-term. Yes, there are people who invest in the next Apple, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

7) Not asking for help.

There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. For example, if an advisor is paid on commission, that means he has an incentive to sell you one product over another, regardless of whether it’s in your best interest. Better to hire a fee-only advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest.

Hey, I’ve heard that even in Lake Wobegon, the average financial mistake can cost you $23,000!

7 Ways to Prepare for Retirement in Your 20s

Good Day,

Lets face it, we’ve all been there, when life was good and you couldn’t care less what was going to happen next week, leave alone your retirement. You had to move with the times, lest you’re left behind and be considered old-fashioned, for example, buying the latest fashion trends, driving the latest car model and of course hanging with your friends in the most upmarket clubs. Fast forward two decades later, and one thing that will be sticking in your mind is all the money you squandered during that period, when in your current life, every dime counts. Don’t kill yourself with these thoughts, you still have time left. But to all those twenty-something out there, I know you may think that time is one your side, ok fine, it is, but please, don’t waste a golden opportunity that is in front of you, as you are busy trying to keep up with the Joneses. Retirement planning may seem like it is light years away, but you’ll be surprised how time travels fast, and as Joe Udo elaborates in the following article, there are seven ways on how to prepare for retirement in you 20s.

The year you get your first full-time job is the best time to start saving for your retirement. The power of compound interest will have much more time to work in your favor if you start investing as soon as you start making some money. However, most people in their 20s are way too busy to think about retirement.

Most of us have experienced the starving student lifestyle, and it was not fun. When your first paycheck rolled in, I’m sure you had a list of things to spend it on. Young people these days also have large student loans to contend with, and it’s difficult to find any extra money to put toward retirement. I’m sure most new college graduates who just started a new job are not ready to even think of retirement. Most young people are focused on working and enjoying that money when they can.

Here are seven things 20-somethings can do to get ahead:

1. Avoid consumer debt.

It’s difficult to avoid debt at any age, but it’s worth the effort to start out right. While young people often live in the moment and enjoy going out and having a good time, it is very important to spend less than you earn so you can avoid credit card debt. The interest will chip away at your income, and it will be much more difficult to save if you take on more debt.

2. Avoid lifestyle inflation.

Most of us are unable to avoid lifestyle inflation after we start making more money. Who wants to drive an old jalopy around when a car dealer is offering a new car with a low interest rate? Spending money is fun and our consumer culture encourages that. However, it’s difficult to reduce monthly expenses once they creep up. It’s best to avoid lifestyle inflation as much as possible.

3. Grow your income.

People in their 20s do not make as much money as older folks, but their compensation has a lot of room to grow. If you work hard, you should be able to get promoted and grow your income quite a bit early on in your career.

4. Sign up for a 401(k) account and start saving.

A 401(k) account is a great retirement savings tool. Everyone should sign up even before their first paycheck rolls in if they can. That way your 401(k) contribution is automatically deducted from your paycheck and you won’t see that amount in your checking account. This will help with lifestyle inflation because if you don’t see the money, you won’t be tempted to spend it. Start contributing right away and then increase this amount a little bit every year until you reach the contribution limit.

5. Open a Roth IRA.

The best time to contribute to a Roth IRA is when you are in a low-income tax bracket. The money invested in a Roth IRA is after tax, but you won’t have to pay tax on any earnings.

6. Open a taxable brokerage account.

It can be difficult to max out a 401(k) and Roth IRA. If you have any money left over after doing these two things, then consider opening a stock brokerage account. Investing in the stock market can be daunting when you are new to it, but you can start by investing in a low fee index fund. Once you learn more about investing, then you can branch out.

7. Buy income producing assets

instead of a new car or other stuff that will break. Think about depreciation before spending money. If you buy a new car, it will be worth much less in a year. If you buy some dividend stocks instead, you will receive dividend income and the stocks might gain in value. Another example of an income producing asset is a house. You can buy a house and rent out some rooms to generate income to help pay the mortgage.

It’s not easy to think about retirement when you are in your 20s, but your older self will be very grateful if you do so.

7 Easy Ways to Mess Up Retirement

Good Day,

One of the things we do to mess our retirement is doing nothing at all, or various other reasons, for example, you believe that the amount you’ll be collecting as Social Security will be enough to cater for your retirement needs, not seeing the need to save, especially in the current financial situation the global economy is facing, or maybe you’re not just interested in your retirement. The reasons could be endless, but whatever it is, I don’t think its worth the kind of misery that you’re setting up yourself for in the future. All these mistakes that we always make in our youth tend to catch when we least expect it, in our retirement. So to avoid any kind of surprises in you retirement lifestyle, you rather be safe than sorry, and as Greg Daugherty explains in the following article, there are seven ways to mess your retirement

Never in all the years I’ve been writing about retirement planning have so many things been so much in flux: the job market, the stock market, the entire world economy. At this point it’s anybody’s guess how Social Security and Medicare might change. Ditto for the U.S. tax code, which plays a role in countless retirement-related decisions. You don’t have to be crazy to wonder, why bother to plan at all?

My answer to that, or at least what I keep telling myself, is that this is one of those situations in life where there are things we can control and others we can’t. And we might as well not mess up the former. In that spirit, here are seven common mistakes most of us can avoid if we choose to.

1. Not having a plan.

Many of us reach middle age with little more than a vague notion of our plans for retirement. Sure, we might be funneling cash into IRAs and 401(k) accounts every year but otherwise we’re just too busy earning a living to really focus on it. At a minimum, all of us ought to have at least a best-guess estimate of (a) how much money we’ll need to retire and (b) how much we’ll have to save and invest each year to get there. Also worth considering: (c) how we plan to use our time and energy in retirement. That’s not strictly a money question, but it seems to trip up a lot of people, including many who have done everything right from a financial perspective.

2. Not having alternative plans.

These days one plan is no longer enough. You might plan to retire early, late, or never, but your employer might have different ideas. So it makes sense to have at least a plan B and possibly a C, D, and E. For example, what would happen if you had to retire before age 65, when Medicare eligibility begins? What if you find yourself supporting an adult child or other relative? What if you plan to sell your house but the real-estate market collapses?

3. Not knowing what you’ve got.

Part of any planning exercise should be a thorough inventory of our investments. Besides retirement accounts, which might represent the bulk of our wealth, many of us have picked up an assortment of other assets over the years: a Krugerrand or two, shares of an ex-employer’s stock, a bit of leftover cash in a child’s 529 college savings plan—you name it. It might take the better part of a weekend to sort it all out, but the result could be a pleasant surprise. “People may not realize all that they have,” notes Michael J. Garry, a certified financial planner in Newtown, Pa.

4. Underfunding accounts.

Each year we don’t put as much money as we can into 401(k)s and similar tax-deferred plans, we’ve missed an opportunity. This year the limits on 401(k) contributions have risen to $22,500 for anybody over 50 and $17,000 for everybody else. Unless your 401(k) plan is administered by incompetents or thieves, it’s worth contributing as much as you can, especially if you’re entitled to an employer match.

5. Wimping out on risk.

Garry says he sees a sudden aversion to risk among many new retirees. “People sometimes look at their retirement date as the end line, when they don’t want to take any more risks with their investments,” he says, “whereas the real end line is death.” With any luck, most of us could be retired for three or four decades, and a portfolio consisting of “safe” investments like CDs and Treasuries is unlikely to keep pace under even modest inflation. With inflation recently running at 3.9 percent and five-year CDs yielding an average of 1.2 percent before taxes, it’s easy to see how overly cautious retirees can lose ground pretty fast.

6. Ignoring fees.

Many of us were outraged recently, and rightly so, when banks started hiking debit-card fees and other charges. But we seem to have resigned ourselves to retirement-plan fees, which can be just as dastardly and far less transparent. In one illustration provided by the U.S. Department of Labor, a 401(k) plan charging 1.5 percent a year left a participant with 28 percent less money after 35 years than a similarly performing one charging 0.5 percent. Unfortunately, 401(k) fees are notoriously murky and rife with potential conflicts of interest, although new disclosure rules are supposed to address some of that this year. And, of course, you also need to be aware of fees on investments outside your retirement accounts.

7. Depending on home equity.

Bottom line, it’s best not to count home equity in your net worth unless you plan to sell your house and are absolutely certain how much profit you’ll walk away with. Garry suggests looking at home equity as a form of insurance in case your other retirement projections don’t work out exactly as planned. And given the world we live in now, that’s a possibility.

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