How old are you today? Have you started investing in a 401k, Roth IRA, or Savings Plan? Have you ever thought about when you will retire, and how to afford your life when you reach retirement age? If you really want to quit work someday and enjoy a high standard of living when you retire, please give the following some thought! What are you waiting for? Some people do not even want to think about retirement or 401k plans today. It is very easy to live in the now, and to ignore the fact that retirement will be here before they know it. Some people would say, ‘I am still young, why should I think about my future or retirement today?’ Well, it is very true that nobody knows what will happen tomorrow. If you have chance to plan your future earlier with a chance of getting a better retirement, why do not you start from now? Which one do you prefer, an enjoyable retirement, free from worry, or would you rather spend your golden years scrutinizing every penny that you have earned?
Start Saving! I emphasize saving for two reasons. One is that it’s essential. No saving, no retirement. It’s that simple. And the sooner you get into the habit of regular saving, the better your chances of being able to retire in comfort. That being said, I agree that some advisers and financial planners can get too strict. They create the impression that unless you’re salting away most of your salary you’re a spendthrift. Sure, contributing to 401(k)s and other retirement accounts is crucial. But you don’t want to go through life feeling guilty every time you treat yourself to dinner at a decent restaurant. I mean, you do have a life to live before retirement. And what’s the point of retiring in comfort if you lived a pinched existence during your career? What’ll you do in your dotage? Reminisce about how much fun it was to forego family vacations so you could boost your 401(k) contribution rate yet another percentage point? Clearly, retirement planning has got to strike a balance. You want to save enough so you’ll be able to enjoy retirement. But not so much that you can’t also live a satisfying life during your career. Just try to live below your means! I think the best way to achieve that balance is to adjust your expectations so that you’re content living a little bit below your means. Let’s say your salary is high enough that you can buy a Mercedes, but doing so would require you to spend every cent you make. Well, maybe you decide to go with a moderately priced Toyota instead so you have some dough left over that you can plow into retirement savings. It’s that sort of reasonable compromise you want to shoot for in retirement planning, whether it’s choosing a car or a home, planning vacations or whatever. Don’t go to extremes with your financial life! Try to avoid going to the extreme end of anything in your financial life. If you try to live like a millionaire while making 30k a year, rest assured that this lifestyle will have consequences in the future. Rather, you want to make choices that will allow you to live comfortably, but not extravagantly during your career, which should also allow you retire without having to ratchet down your standard of living.
Mike Rowan is the co-founder of erollover.com, based in Atlanta.
Please visit our site for more retirement and 401k details: www.erollover.com
Five professional tools to see how the funds in your 401(k) measure up By Jonathan Burton, CBSMarketWatch
How good are the mutual funds in your 401(k)? It would be nice if there were a scorecard. But rating the investments you hope will glitter in your golden years can be confusing. That’s one reason why so many investors have embraced so-called target-date or life-cycle funds, which take care of the guesswork. Those who still want to pick their own 401(k) investment lineup often don’t know how, or where, to start. So they wind up defaulting to funds with the best track records.
That’s not strategy, it’s performance chasing — buying high and selling low — and it leads investors nowhere, says David B. Armstrong, managing director at Monument Wealth Management in Alexandria, Va. “They’re picking mutual funds that have been doing very well and not giving proper consideration to the appropriate allocation,” he says. To tell which stock funds in your retirement account are right for you, look beyond performance. Take a page from the methods investment experts likely used for your own company’s 401(k) plan. Here are five things to keep in mind:
1. Expenses In many cases, 401(k) plans offer one actively managed fund and one indexed alternative. Since indexed management is usually cheaper, make sure you’re getting your money’s worth from an actively run choice. Costs matter. An index fund that charges one-tenth of a percentage point in yearly management fees, for example, has a full percentage point head-start over a fund that takes 1.1%. Accordingly, the manager of the more expensive portfolio has a steep hurdle in order to deliver above-average returns over time. Don’t pay top dollar for mediocre results.
2. Risk-adjusted return You can’t judge a fund by its advertised performance. Understand the risks a manager took to generate those returns. Maybe the fund loaded up on a hot stock or market sector, or the manager traded frequently, playing the market’s momentum. Otherwise, you run a risk too — that you’ll fork over good money to a fund that exposed you to more volatility that you can comfortably handle. “Big stakes in any one sector is good reason to dig deeper,” says Christine Benz, director of personal finance at investment researcher Morningstar Inc. “How does that fit with the manager’s strategy, and how has that played out for the fund?” One key measure of a fund’s risk-adjusted return is a technical term called standard deviation. It shows how much a fund’s performance varies, or deviates, from its expected normal return. You won’t need a slide rule. Web sites such as Morningstar.com do the math for you. Click on “Risk Measures”: The bigger the number, the more risky the fund. So if Fund A gained 11% with a standard deviation of 18, and Fund B rose 10% with a standard deviation of 12, then Fund B achieved almost the same results with two-thirds of the volatility and would have a better risk-adjusted return. “Standard deviation can help you see which fund has had higher volatility and has probably been taking more risks,” 3. Results versus peers You also want to look at a fund’s performance relative to its category. Investors frequently make the mistake of comparing funds to “the market,” which usually means the benchmark Standard & Poor’s 500 Index (SPX: S&P 500 Index But the S&P 500 is a large-company U.S. stock index. The only funds to rate against it are large-cap U.S. stock funds; anything else is simply misplaced. A small-cap stock fund may look great compared to the S&P 500, but it may have underperformed the more fitting Russell 2000 Index benchmark. Similarly, an international small-cap stock fund has no business in the same pool as its U.S. small-cap counterpart. Again, Morningstar.com makes this information readily available. Click on “Total Returns” to see how a fund stacks up in its category. Be sure that all of your fund choices are related, says Armstrong, the Virginia financial adviser. If they’re not, “you really can’t determine if the portfolio manager is doing a good job” or if you should just buy an index fund.
4. Portfolio yield Performance-chasing is bad enough, but investors also reach for yield — the dividend income that can provide a cushion in difficult markets. “I’ve seen clients get stars in their eyes over a high yield,” Armstrong says. They forget there’s a reason for this excess payout — and not always a good one. Beware of a fund with a yield that’s out of synch with its peers. Maybe the high yield comes from a heavy dose of financial-services stocks or lower-quality investments. In that case, not only is the yield shaky — some banks have cut or eliminated their dividends, for example — but even the most generous dividend won’t offset major declines.
5. Manager tenure The big consulting firms that cobble 401(k) plans together grow cautious when a fund switches managers, and you should too. Fund companies will protest to the contrary, but new managers are game-changers. While the fund’s investment style might not be drastically altered — and if it is you have another problem — you can bet the portfolio itself will get a makeover. If a fund manager has been on the job for only a year, then the fund’s three- and five-year performance belong mostly to someone else. You can be more charitable when a new manager is a veteran who has experienced bull and bear market cycles. On the other hand, if a longtime manager is retiring soon, find out when the junior managers joined the fund. Says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh.: “If a manager changes, you’re in effect starting a new fund.”
Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.
Please visit our site for more retirement and 401k details: www.erollover.com
Individual’s approaching retirement generally have one thing that keeps them up at night. They wonder, “Does my 401k or IRA have enough value to retire” or “What happens if I happen to outlive my retirement by living too long”. These are both very valid concerns for an investor to have running through their head. However, there are many different strategies that can help to appease this particular concern. One such product that prevents this from happening is the immediate annuity or single premium annuity.
A Lesson in Immediate Annuities
Single Premium Immediate Annuities (SPIAs) are purchased with a single deposit amount. As the name implies, the annuity usually start making regular monthly payments to you immediately after you turn over the funds to the insurance company. Typically this means 30 days from the date of deposit; but within certain limits you can also to defer the date that payments begin.
The first thing you need to understand is what actually happens when you buy an immediate annuity. In return for a sum of money, the insurance company promises to make regular payments to the owner or annuitant (if different) for a specific period, such as the remainder of the annuitant’s life. The payments can be set up in any of a variety of different ways (see below); however, whatever form you do select at the time of purchase cannot be changed at a later date. In accepting this guaranteed schedule of payments you also give up the right to demand the return of your original deposit, for example in the form of a lump sum less any payments that have already been received. In short, once the payments of an immediate annuity have begun, the contract generally cannot be revised or cashed in.
Why should I consider buying an Immediate Annuity? What are its advantages to me?
These are a many advantages that immediate annuities can provide to the buyer. Here is a list of just a few:
1. Security- the annuity provides stable lifetime income which can never be outlived or which may be guaranteed for a specified period; 2. Simplicity- the annuitant does not have to manage his investments, watch markets, report interest or dividends; 3. High Returns- the interest rates used by insurance companies to calculate immediate annuity income are generally higher than CD or Treasury rates, and since part of the principal is returned with each payment, greater amounts are received than would be provided by interest alone; 4. Preferred Tax Treatment- it lets you postpone paying taxes on some of the earnings you’ve accrued in a “tax-deferred” annuity when rolled into an immediate annuity (only the portion attributable to interest is taxable income, the bulk of the payments are nontaxable return of principal); 5. Safety of Principal- funds are guaranteed by assets of insurer and not subject to the fluctuations of financial markets; and 6. No sales or administrative charges
Forms of Immediate Annuities:
The most basic life annuity is known by several names, including “Single Life,” “Straight Life,” “Life Only,” or “Non-refund” annuity. In its simplest form, it provides guaranteed payments over the lifetime of one person, with payments ceasing upon the annuitant’s death. By offering a way of insuring that you will not outlive your financial resources, a Single Life annuity can be an important tool in planning for retirement. A Single Life annuity also provides the highest payout of any lifetime annuity, because it carries the smallest risk for the insurer.
One of the key factors in pricing a life annuity is the average life expectancy of the person that will be receiving the payments. In a sense, purchasing a life annuity is like making a bet with an insurance company about how long you will live. Since the insurer will stop making payments when you die, it is betting that you won’t live beyond your life expectancy. On the other hand, you come out the winner if you do live longer than the average person, because the insurance company will have to continue making payments beyond the period it had assumed.
The coverage of a life annuity can be increased by including a second person (”Joint and Survivor” annuity), by adding a guaranteed period of time (”Period Certain” annuity), or by guaranteeing that payments will continue at least until the original purchase amount has been paid out (”Installment Refund” annuity). The added risk to the insurer is likely to reduce monthly payments by about 5% to 15%, depending on the age of the annuitants and the length of the guarantee period. Annuities with this kind of added coverage are particularly suitable: (1) when there is a need to guarantee income over the lifetimes of a husband and wife (”Joint and Survivor” annuity); (2) when payments must continue for a specified period (e.g. 5 or 10 years or more) to a designated beneficiary (”Certain and Continuous” annuity); or (3) when the annuitant wants to make sure that, if he should die before his initial investment has been fully distributed in monthly payments, an amount equal to the balance of the deposit continues to a named beneficiary (”Installment Refund” annuity).
Funds That Purchase an Immediate Annuity Source of Funds - Qualified vs. Non-Qualified Qualified Immediate Annuities
The term Qualified (when applied to Immediate Annuities) refers to the tax status of the source of funds used for purchasing the annuity. These are premium dollars which until now have “qualified” for IRS exemption from income taxes. The whole payment received each month from a qualified annuity is taxable as income (since income taxes have not yet been paid on these funds). Qualified annuities may either come from corporate-sponsored retirement plans (such as Defined Benefit or Defined Contribution Plans), Lump Sum distributions from such retirement plans, or from such individual retirement arrangements as IRAs, SEPs, and Section 403(b) tax-sheltered annuities, or Section 1035 annuity or life insurance exchanges. Generally speaking, insurance companies use male/female (sex-distinct) rates to price qualified annuities in situations where the purchaser and/or owner is a corporation. When the annuity is being purchased by an individual, annuity rates are generally unisex. Some states, however, require that unisex rates be used for all qualified annuities. Non-qualified Immediate Annuities
Non-qualified immediate annuities are purchased with monies which have not enjoyed any tax-sheltered status and for which taxes have already been paid. A part of each monthly payment is considered a return of previously taxed principal and therefore excluded from taxation. The amount excluded from taxes is calculated by an Exclusion Ratio, which appears on most annuity quotation sheets. Non-qualified annuities may be purchased by employers for situations such as deferred compensation or supplemental income programs, or by individuals investing their after-tax savings accounts or money market accounts, CD’s, proceeds from the sale of a house, business, mutual funds, other investments, or from an inheritance or proceeds from a life insurance settlement. While most insurance companies apply their male/female (sex-distinct) tables to non-qualified annuities, some states require the use of unisex rates for both males and females.
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Gone are the days when all that we had to do was balance our checkbook once a month to keep track of our money. It seems like our financial affairs have grown more complicated in lock step with the rest of our modern lives. In the world of personal finance, we’ve seen new tools emerge to help us with our money management, while we do away with older habits. For instance, who still writes checks? [Okay, I still do, but not as often as I used to!]
However, your situation may have complicated itself (hopefully in a good way) to the point that some external assistance is necessary to keep things in order. If you haven’t quite reached the point that you can hire someone else to organize and analyze everything for you, then these simple tools will help you do it yourself. They are easy to access, easy to use, and best of all, easy on the budget.
Net Worth
Figuring out what you have is as good a place to start as any. This net worth calculator will not only help you determine your current net value but it can help you determine how it can change over time.
Life Expectancy
Now that you know how your finances will change over time, it might be useful to determine just how much time you’ve got. This calculator will estimate your life expectancy based on aspects of your current health and the lifestyle that you enjoy. Is this a bit morbid? Well, sure it is; but it’s also dead useful. Earning Potential
Now that you know how long you’ll live, try this utility to determine how much money you’ll earn over the course of that lifetime.
Cost of Living Calculator
If you’re considering a career move that might also result in a move across the country, use this calculator to figure out the actual financial benefits. It will help you compare the overall cost of living between various cities so that you can take this important information into account when finalizing your decision.
Home Budget Analysis
This budget analysis tool will ascertain the reality of your spending habits. Once you are able to track how your money is coming in and where it is going, you’ll be able to get your expenses under control.
Human Life Calculator
What is your economic value? Another way of looking at it is to ask: what is your life worth? This calculator uses a variety of criteria to assist you in determining the amount of life insurance that you should be carrying as part of your portfolio.
Retirement Planner This simple calculator will help you keep your overall retirement plan right on track. Social Security Benefits
Here’s a calculator to see how your Roth IRA investment grows with time. It compares your Roth IRA amounts against its taxable investment counterpart during the same time period.
457 Savings Calculator
457 plans are like 401K plans, except for government workers. For those who are eligible, using this calculator will help you determine if investing in a 457 savings plan could result in a more secure and more enjoyable retirement. With generous employment matches all the way to age 65, it looks like a pretty sweet retirement for those who go this route!
Please visit our site for more retirement and 401k details: www.erollover.com
Congratulations! You have taken the plunge and have taken that new job that you have sought over for so long! Then, all of the sudden, you think of your 401k and may wonder, “What on Earth am I supposed to do?”.
There are many options for your existing 401k or retirement plan when you change jobs. For the most part, it opens up many options with regards to moving your plan and customizing it according to your individual retirement goals and needs. However, there are several 401k stipulations with which an investor must be very aware. If not followed exactly, it could possibly result in some major penalties for your 401k or retirement plan.
401k Rollover Options :
1. Rollover your 401k over into a personal retirement account (IRA) 2. Leave your 401k with your current employer 3. Rollover all or a portion of your 401k to your new employer 4. Take a full or partial withdrawal
Roll your 401k over into a personal retirement account (IRA).
Advantages : Gain full control of your retirement plan Gain full control of your investment options Access to fully customizable asset allocation models Easy and inexpensive access to professional investment advice Flexibility in executing your decisions Disadvantages : None Leave your 401k with your current employer: Rules and limitations apply depending on your employers specific retirement savings plan rules.
Advantages : Convenience Disadvantages : Current employer retains control over your investment options. You may not have access to the investment vehicles appropriate for you. Limited access to professional investment advice.
Roll over all or a portion of your 401k to your new employer. Rules and limitations apply depending on your new employers specific retirement savings plan rules. Advantages : None
Disadvantages New employer gains control over your investment options. You may not have access to the investment vehicles appropriate for you. Limited access to professional investment advice. Continues circle of having to roll over accounts as you change jobs. Take a full or partial withdrawal with the check payable to you. Beware of withdrawing money from your retirement savings plan account because you will owe current income taxes on the eligible portion of your withdrawal. In addition, if you take the withdrawal before age 59 1/2, you may also owe an additional 10 percent early withdrawal penalty. Advantages Instant access to a small portion of your funds.
Disadvantages Taxes are payable, either 20 % instantly through withholding or Income taxes. 10 % penalty tax will apply to most withdrawals before age 59 ½ Your financial independence might be in jeopardy.
As you can tell, rolling over your 401k, 403b, or retirement plan, can be either the best or worst thing that you did for your retirement planning. Generally, moving your 401k to an IRA tends to be the most favorable action. However, as previously stated, you must know the 401k guidelines, or you may face severe penalties!
Please visit our site for more retirement and 401k details: www.erollover.com
Before you begin drawing income from your 401k's, IRA's, and retirement accounts, make sure its asset allocation is the right one for your new circumstances. Unfortunately, it's easy have one of many misconceptions about common retirement beliefs.
Here are 4 you'll want to carefully consider:
1. Stocks pose too much risk for retirees. Not necessarily. Chances are, if you were comfortable with a proportion of stocks in your portfolio before you retired, you'll be comfortable with some proportion for a time during retirement. For a retirement period that could easily last 20 to 30 years, you'll still need the growth that only stocks can provide. Over time, you may want to become more conservative. 2. Bonds are the best investment for retirees because they produce income. The interest that bonds generate can indeed be an important source of income. Bonds also provide balance and diversity critical to all portfolios. But retiree portfolios need to be prepared for an amount of inflation-beating growth, too, which stocks have delivered by the widest margin over time. And there's nothing wrong with selling stock holdings for income. 3. For absolute safety, stick with cash investments. These investments, which include money market funds, bank certificates of deposit, and Treasury bills, offer relative stability and safety. So they're a great place to store cash temporarily and to use as an emergency fund. However, since cash investments will barely keep ahead of inflation over time and typically yield far less than bonds, most retirees shouldn't keep a significant portion of their assets in them. 4. Don't forget about the effect of inflation! You'll note that, in countering these investment misconceptions, the subject of inflation in retirement keeps coming up because inflation never retires. Even at a mere 3% annual inflation rate (the national average rate for the relatively low inflation period from 1986 to 2002)*, you'll need income of around $72,000 in 20 years to buy what $40,000 buys today.
Your individual inflation rate in retirement may be even higher than the national average. Retirees tend to use more health care services and pharmaceuticals, and these costs have been rising faster than the overall inflation rate by 5.4% a year over that same time period.**
Of course, inflation is only one factor to consider in evaluating the asset allocation of your investment portfolio. No asset class single handedly makes the best portfolio. For retirees, as for all investors a portfolio that includes all the asset classes can provide the right mix of growth, income, and stability and make the fluctuations in the financial markets tolerable.
Keep your portfolio balanced and diversified Your goal in developing the correct asset allocation for your retirement portfolio should be to make sure it's well-balanced and diversified. Such a portfolio aims to control risk, as opposed to focusing on the highest returns.
Consistently and accurately predicting which investments will produce the highest returns is all but impossible, even for the experts, but you can control the level of risk by assembling and maintaining a well-thought-out asset allocation strategy. Unfortunately, many retirees have a collection of investments acquired over time, not an investment plan. If this is the case for you, it's possible you're exposed to more portfolio risk than you should be at this point in your life.
A balanced portfolio is diversified among asset classes to reduce risk: Subpar performance of one asset class can often be tempered by the performance of another. Wide diversification within an asset class is also a key risk-reduction strategy. This protects your portfolio from the unforeseeable temporary or longer-term problems that might afflict specific stocks, bonds, or other investments. That's why, for example, retirees who hold large amounts of their former employer's stock should probably shed much of it in favor of more diversified holdings.
There's no one correct asset mix because each person's financial situation and risk tolerance differ.
Please visit our site for more retirement details: www.erollover.com
I am often asked, "How can I retire early and take money out of my 401k, 403(b),TSA, 457 plan and/or IRA without paying IRS the extra 10% early withdrawal penalty because I am NOT age 59 ½ yet?
It's very easy to do. I have done it MANY times! IRS has a rule called a 72T, equally substantial distributions. By using IRS's rule 72(t) it ELIMINATES the 10% early withdrawal penalty normally due for withdrawals prior to age 59/12.
Here's how it works. Let's say you are still working but want to retire (let's say in this example) at the age of 55. First you quit working. Then you ROLL your 401k into an IRA. After the rollover is completed you apply for a 72(t) equally substantial distribution. 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).
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.
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. NOTE: The above calculations are based on the NEW IRS 72(t) rules, as established by Congress, effective January 1st, 2003!
A word of CAUTION! Do it right and it works beautifully. Do it wrong by withdrawing too much and you can end up broke! PLUS, the IRS may assess the 10% penalty on all amounts withdrawn, if the IRA account runs out of money before the end of the 72(t) scheduled time-frame. That's the rule. Therefore, it's imperative you work with someone who knows what they are doing! CD's can not be used effectively as an investment vehicle for a 72(t) distribution.
Not all (Financial Advisors, CPA's, Attorney's or otherwise) know about this little known 72(t) IRS rule. Also, NOT ALL companies know how to do a 72(t), or how to set it up properly, or even have the mechanical or electronic means available, to do such distributions!
I have effectively set-up 72's for income withdrawals prior to age 59 1/2 MANY TIMES throughout my years and it works perfectly, if done correctly. It is completely legal and ANYONE (at any age) can use a 72(t)!
Please visit our site for more retirement details: www.erollover.com
People are saving more in their 401(k) plan as a result of the automated enrollment efforts initiated by their employer. Workers under thirty continue missing out on the free money given away by their employers. People are investing solely in their company's stock. Today, these stories make headlines and continue to prove that employees need help.
Studies have shown investors, when asked whether their company's stock or the S&P 500 is more risky, consistently point to the S&P 500. One of the reasons people have a lot of company stock is when you're looking at ten investment options, none of which you recognize, but you work for the company, familiarity makes it feel safer. Lower salaried workers also tend to rely on company stock.
Other staggering results show one-fourth of 401(k) participants closest to retirement (those sixty years old or older) invest more than half of their workplace retirement plan in their company stock. Some of those older workers take even bigger risks: 15 percent of sixty-year-old or older workers invest more than 80 percent of their portfolio in their company stock.
Real savers have budgets and have acquired good spending habits. Saving is a skill that has to be learned. People need to learn these skills and become better informed. Research articles on topics such as finding money to save and how to choose the right mutual fund.
It's obvious that people have issues and they need help with managing and investing money. People that know the value of saving are investing in the wrong products. Remember Enron? You should never invest more than 10 percent in your company stock. Follow these guidelines to help you gain control of your investments:
1. Contribute enough to get your employer's match.
2. If you're not sure of how to invest, consider a target fund that matches investments to your age or planned retirement date.
3. Read the article "What you need to know before you buy mutual funds."
4. Avoid taking hardship withdrawals or loans unless it's a dire emergency, such as bankruptcy.
5. Resist cashing out small accounts when you leave an employer. The money can be rolled into another employer's plan or an individual retirement account.
6. When rolling over accounts, try to get the money transferred from one trustee to another rather than taking a check. If you don't reinvest promptly in an IRA or another 401(k), you'll have to pay taxes on the money and you could pay a penalty as well.
You work hard for your money. Now make your money work hard for you. The companies no longer offer a pension plan and the 401(k) plan is the only option available in Corporate America to save for retirement.
Please visit our site for more retirement details: www.erollover.com
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