Category Archives: Retirement

Starting an Individual 401(k) is Easy!

Written by in Retirement
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This year, I set a goal (not in my actual goals, but maybe I should add it) of making regular monthly or quarterly contributions to my retirement and investment accounts. In the past, I’ve let my money sit in a saving account so that I wouldn’t have to pay taxes on earnings. I love Roth accounts, but I went a little too far and let the money sit in an extremely low interest rate savings account so that I wouldn’t have to pay taxes on my earnings.

Since I have a business (I filed as an LLC a few months ago), I am eligible for an individual 401(k). I looked at a lok options, but ultimately, I went with the individual 401(k) because of the high limits. It allows me to contribute 100% of net adjusted business profits, up to $17,000 in 2012, as a salary deferral contribution, plus an additional 20% of the net adjusted business profits for the company as a profit sharing contribution. The totalI won’t give you specific numbers because that’s not my style, but it gives me the opportunity to contribute more than any other IRA or 401(k) option.

And since I’m young, I opened a Roth Individual 401(k). This lets me contribute after-tax money to the account. The salary deferral portion can be either Roth or Traditional (or a combination), while the profit sharing portion must be made as a traditional (pre-tax) contribution.

Once I knew what I wanted to do, I went onto Vanguard (where I do all my investing), and checked out there paperwork. There was a large packet to fill out, but most of it required basic information about me and my business. I took 30 minutes to fill it out, mailed it off, and a week later I got notification that the account had been set up for me.

I truly thought the process would take a lot longer, there would be more forms to file, and there would be some complications. My only regret is not having done this a year earlier. Instead of a silly $5,000 limit on a Roth IRA, I can contribute way more!

For any of you self-employed individuals, what type of retirement accounts do you have?

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Taking The Investing Leap in 2012

Written by in Investing, Retirement
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Toward the end of 2011, I started planning my investments for 2012. Instead of investing over a long period of time, I let my money sit in my savings account because I didn’t want to pay taxes on my earnings. I was planning too much and not taking enough action.

My plan was to wait until 2012, and then invest the money in a Roth 401(k) (details about that coming in a future post) through my LLC. I was sitting on cash because I hadn’t been willing to invest it, and it was finally time to cash in.

The only problem, was that I wouldn’t exactly be liquidating my savings account, at least not for the long-term. Sure, the balance would drop, but I’m going to be replenishing it in 2012, and soon I’d be sitting on another pile of cash with no real plan.

I wanted to do all my investing in a Roth IRA, but the truth is that with $5,000 limits (and income limits that can prevent you from investing in a Roth IRA), I was going to have to join the rest of America and invest in a taxable account.

So I had to adjust my plan. There’s no day like today to start investing, so now I’m taking the plunge. And since I plan on making money from my day job and my side hustles in 2012, I’ll be using that money for the Roth 401(k). I won’t be able to make one lump deposit, but I will be smarter this year and invest every month (or quarter) so that I don’t end 2012 with cash that could have been making me money the entire year.

I believe that stocks will do really well in the long term and I want my money invested when the market skyrockets. However, that’s impossible if I sit on my cash and wait for the perfect investing conditions. Most of the time, doing something is far better than doing nothing. I finally took the leap, and I promise to be better in the future!

Readers, how dumb am I for waiting until 2012 to invest? Is it hard to part with the money in your bank and invest it?

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The Ideal Amount of Savings at Age 30

Written by in Retirement, Saving
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I love looking really far down the road. I love projecting account balances in the future, and I love the idea of compounding interest.

I also like making money today, I like having the ability to spend money on the things I want, and I have no problem paying a little extra for things if I can afford it. I hate stress, so if a few dollars saves me from worrying, it’s money well spent.

So I thought about, in order to retire comfortably at age 66, I’d need $4 million. Why that much? Because it’s such a huge number, that even with inflation and everything, there’s no way I could ever need more than that. It’s very possible I won’t need that much. But I know that in 40 years, if I have $4 million in savings, there’s no way I won’t have enough money for everything I’ll want.

So working backwards, I realized that at an 8% rate of return, I’d need $250,000 in savings by age 30 to hit that mark. If I earn 8% every year, I’d have $367,000 at age 35, $539,000 at age 40, $1.16 million at age 50, $2.5 million at age 60, and just about $4 million at age 66. The “normal” retirement age will probably increase in the next 40 years, so I’ll still be retiring early at age 66.

$250,000 is not an easy target to hit by 30, but the benefits are enormous.

There would be no need to save a dime the rest of your life. Once retirement is fully funded, there’s no need to save extra. As long as you earn as much as you spend, you can spend that money however you want. No more saving 20% for retirement, you can focus on education, the house, travel, or whatever else you’d like.

Instead of saving for huge goals, savings can go toward family vacations, education, and some of life’s pleasures. $250,000 is my goal for 30, and then that extra 20% (or more ideally, 60%) of income that goes to savings can go toward a house or kids.

Readers, what do you think? Is $250,000 a realistic goal? Are the benefits enormous enough to make it worth it?

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Government Could Lower Social Security Benefits Without Anyone Noticing

Written by in Budget, Insurance, Retirement, Taxes
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I’ve believed all along that Social Security benefits as we know them aren’t going anywhere, but it turns out that there are some sneaky ways that the government can reduce the payouts it will have to make.

One step that would definitely save the government a good amount of money would be changed the way it measures inflation. Currently, Social Security calculates inflation based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Both White House officials and Congressional leaders (Republican and Democrat) are proposing calculating inflation for social security benefits using the Chained Consumer Price Index. The result would likely be that social security inflation would be slower than under the current rules.

It would be pretty hard to get away with saying that people don’t deserve the benefits they were promised and to reduce someone’s paycheck by a hundred dollars a month. There would be an uproar because it would be seen as stealing from needy seniors.

But by changing the calculation that determines just how much of an increase people get each year, this change would be much less noticed and the impact would be felt by only a small very amount each year.

The proposed change would put the rate of inflation at an average annual rate of about 0.3% less than the current calulation. So after 10 years, people would receive a check that’s about 3% smaller than what they would if no change is made.

Still, the proposed change would cost the average retiree about $18,000 over 25 years. I’m sure the government would love to save that much per retiree. It comes out to an estimated $112 billion over 10 years, and since it compounds, the savings for the government would continue to grow.

About 60% of seniors rely on Social Security benefits for at least half their income. And by 2020, Social Security benefit payments are projected to total $1 trillion, so clearly we’re dealing with a large issue. Saving $100 million over 10 years is not going to fix the problem, but it would certainly be a start.

Readers, what do you think of this proposed fix? Would it be helpful or is it just a sneaky way of reducing the benefits of seniors?

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