Not to seem heartless, but this is another example of poor (or no) planning, and bad choices. Not everyone is born a good decision maker, and some are better than others. But by and large, decision making is a skill and it can not only be learned, but it can be improved.

I offer this story to my readers as a means to learn form another’s mistakes, and remind ourselves of the importance of proper planning and not letting our emotions rule our decisions entirely.

Planning is important.

Despite owning a several businesses (a clothing line, perfume maker for example) and earning $65,000 a year in the 70′s she never saved a dime for retirement. Being self employed, she could have saved up to 25% of that per year in a Keogh plan – tax deferred! That’s $16,000 per year in her account, and off the top of her tax bill!

Following your heart and ignoring your head can be costly.

Her free spirited ways led her to leave University of California, Berkeley before graduating to follow and marry her college sweetheart, a “minimalist sculptor and sometimes rock musician.”

I’m not saying you have to be Mr, Spock all your life and let your passions wither on the vine in a desert of logic, but if it was truly meant to be, then it would still be meant to be after she graduated college. Postponing would have at least given her a degree – an important commodity in the decades following her stint at Berkeley in the late 1950′s.

Besides, in all likelihood, she would have realized it wasn’t meant to be and she could have saved herself one of her eventual two divorces. Incidentally, Divorce is also a costly “life event”, especially for Ms. Wilson since she never received any alimony.

There are always possibilities.

Flash forward to today and things look bleak. Ms. Wilson lives on her social security check of $900 a month, and a one day a week job at a local jewelry store for $12.50 an hour.

She’s got a house with a $5,477 mortgage, and about $9,000 in credit card debt. The credit card debt is from living expenses, so her income is clearly not enough to get by.

The good news in all this is her house. She inherited it with no mortgage, but had to take out a mortgage to pay for repairs. That leaves her with more than $150,000 in equity and since she’s over 62, she’s a candidate for a Reverse Mortgage. In fact, she’s probably a poster child for one!

A reverse mortgage would get her a monthly check from the bank. Not to mention, it would eliminate her mortgage bill in the process. Increased income, and decreased expenses – it’s all around winning!

Read Susanna Wilson’s story here.

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70 Year Old Free Spirit Offers Lessons on Retirement Planning. Copyright © Simple Debt-Free Finance

I for one congratulate Kris for his honesty and willingness to examine and learn from his mistakes. After all, if we can’t learn from our mistakes then we are not only doomed to repeat them but no good will possibly come from them either.

It’s a cliche that we need to learn from our mistakes, but I’ve often thought that we should learn from other people’s mistakes as well.

And so I’d like to offer my thanks to Kris for sharing some of his mistakes, so that we may all learn from them.

Know who you are

Kris states that one of his biggest financial mistakes was buying a house:

“The home I purchased in 2008 is probably the worst thing I could have done to hurt my financial future…. At the time, my wife and I thought we were doing things the right way. We put a nearly 45% down payment on the home, took out a 5.35% fixed rate, 15-year mortgage, and made extra payments along the way.”

So far so good, right? I mean many people who bought homes in the last five years in particular are struggling, due to declining values, evaporating equity and job instability. But those don’t seem to be a factor for Kris.

He states how he did everything right, financially speaking – hefty down payment, low interest fixed-rate 15-year mortgage. These are exactly the things you should do to mitigate the effects of the housing crisis. In fact, I’d say Kris was ahead of the game since most people can’t afford to do these things, yet he did.

The real mistake Kris made was in not knowing himself and his spouse:

“we really don’t like the area we chose and have found that home ownership just isn’t for us (I worry about things constantly and am afraid to go on vacation anymore for fear that something will happen to the house)… I’m kicking myself for ever allowing myself to be talked into home ownership (I’ve always been more of an apartment kind of guy)”

So his mistake is really costing him more of his mental health and happiness, which in turn causes financial problems when he can’t recoup his costs when selling his house.

The lesson here is to know whether you’re inclined to be a homeowner before you become one. Home ownership is not something to be taken lightly or dabbled in – it’s a serious commitment of time and money.

Weigh the pros and cons of job hopping

The next mistake Kris shares with his readers is his career change from hotel management to freelance writing.

There are some obvious hits to your financial bottom line here:

• reduced income (at least short term)
• reduced consistency of income
• reduced (or non-existent) benefits like:
  • retirement savings plan
  • health insurance

When you freelance, you are responsible for all the stuff your employer used to take care of. You’re on the hook for paying for heath care and contributing 100% to your retirement plan – all on a lower salary!

Kris may eventually earn more as a freelance writing, but it’s going to be a lot tougher than hotel management.

For the record, Kris made the switch to spend time with his newborn son. It’s a goal I can admire, since my wife made a similar choice 8 years ago and we’ve been living on a single income ever since. But these kinds of career moves take a lot of planning to make them work…

Risk avoidance investing

Perhaps because of his move to freelance work, Kris admits his investing style is much too conservative. This is a good thing, when you need the funds relatively soon. But for a retirement that’s decades away, low risk, low return investing choices are more detrimental.

He says his holdings are primarily in low-risk, income style assets. There are easy ways to get higher returns with little to no effort, and still remain diversified so sticking to fixed income with retirement 30 years away is a needless mistake, in my opinion.

No room for error

Lastly, kris admits to something I think a lot of people can relate to: Things are OK at the moment, but that’s mainly because expenses have been relatively low.

In other words, when prices start to rise and inflation really takes hold then things are going to get really bad. Without steady increases in income and with the cost of living rising daily, your standard of living will decline and at some point saving for retirement at all becomes a dream for another day.

Since we can’t control the global economic landscape, the best thing to mitigate this is to create as many side income streams as possible, cut your expenses as much as you’re comfortable with, and be involved in local and national elections to ensure that fiscal restraint and responsibility once again take hold in government.

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• REVIEW: Stock Investing For Dummies, by Paul Mladjenovic.

Don’t Sabotage Your Retirement (Like Kris)! Copyright © Simple Debt-Free Finance

It’s true that the 401(K) came into prominence during their working lives, but I would hardly consider them “The retirement savings plans that many baby boomers thought would see them through old age.”

The article seems contradictory too. On the one hand, we are told that these Boomers have relied on them for retirement, and then we’re told that one reason the 401(k) has fallen short for these Boomers is that they never really contributed enough with any consistency. Which is it?

Also, the 401(k) came into heavy use in the 1980′s. These Boomers were well into their 30′s by then. Did they wait until then to start saving?

I realize I’m being a bit over the top, but only because the article doesn’t really portray the situation correctly. For example, it doesn’t really go into how this generation was caught at the crossroads between pensions and individual retirement accounts. That’s a circumstance of the times, and doesn’t really mean that the 401(k) plan has failed as a vehicle for retirement savings.

One thing is certain, retiring boomers have tough road ahead.

Personally, I consider my own generation and the current (X and Y) to be the generation of the 401(k) because we know that social security will not be viable for us and we are responsible for our own retirement. I encourage you to read the article because it may just scare you into action on your own retirement planning!

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• Why 401(k) Retirement Plans Really Don’t Work, and How to Fix Them
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• Don’t Sabotage Your Retirement (Like Kris)!

Are Retiring Boomers “The 401(k) generation”? Copyright © Simple Debt-Free Finance

It’s kind of a catchy headline, right? I know anytime I see something about spending 50% of my income, I tend to take notice. But it’s more or less the big ticket items you’d expect. Here’s the list, and what I think about each. Feel free to add your thoughts in a comment.

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What Do People Spend Their Money On? Copyright © Simple Debt-Free Finance

Regular readers know that I’ve been a steady contributor to my 401(k) at every job I’ve had since I started work professionally about 12 years ago.

Consistent contributions (even through employer match cut-backs and the recent Great Recession) an good plans have allowed me to watch my savings cross the 6-figure mark at the end of last year. But I realize now how lucky I have been to have had such good options in my 401(k) plans to date.

I realize this because I’ve hit a problem with my current plan, and I bet I’m not alone.

The problem

The problem is this: The investment options in my current employer 401k plan stink.

The plan is administered through a well known insurance company with a catchy jingle and fees that top the range of what is considered average for the funds.

I’m a big believer in low fees. Research has shown that most portfolios have a greater chance of outperforming their peers and the benchmarks averages when they invest in lower cost mutual funds or ETFs. It’s just common sense that when all other things are equal, the fund that charges less with leave you with more money in the end.

Of course, some funds out perform their peers and have higher fees. That’s OK too, but the key is that you’re getting a demonstrated track record of out performance for that extra cost.

My problem is that few of the funds in my 401(k) out perform their peers, but still have higher fees.

So, I have a few options and if you’re in the same situation, you do too!

Retirement plan options

The 3 basic retirement plans available to me in my career are:

• Traditional IRA
• Roth IRA
• Employer’s (lousy) 401(k) plan

Each one has benefits and drawbacks, but the Traditional IRA and Roth IRA are slightly different beasts given that the Roth contributions are after tax, while the tradition are pre tax.

I don’t want to roll over my 401(k) to a Roth, because I don’t want to pay the taxes on the conversion. I’m considering opening up a Roth in addition to pre-tax retirement plans in the future, but the Roth is not being considered by me at this time.

That leaves the Traditional IRA and the crappy 401(k).

Rolling over my 401(k) to a traditional IRA seemed liked a no brainer – I would be able to invest in a wider range of funds, stocks and bonds – but then I realized this startling discrepancy:

The contribution limit for a traditional IRA is only $5,000!

By contrast, the limit on a company sponsored 401(k) plan is a whopping $16,500!

With all the talk of financial reform in Washington D.C. over the past two years, and all the discussion about ending the 401(k) plan in favor of another social security style plan, I wish Congress would just make the contribution limit of the IRA as large as the 401(k)!

The total solution

Well, this left me with the choice of saving less in my IRA but paying less fees, or paying higher fees and potentially saving more by using my 401(k).

After much pondering, and poking around the Internet (to no avail), my solution is this…

I will rollover my old 401(k) to a new IRA. I will make the maximum contributions per year ($5,000) to that plan and any remainder I will contribute to the least offensive options in my 401(k).

For example, I’m used to contributing about $7,000 a year to retirement. I will be splitting up that amount like so:

• $5,000 to funds in my IRA
• $2,000 to funds in my 401(k)

I call this the “total solution” because it reminds me to consider the total holding in these two accounts as my portfolio – I have 1 unified portfolio instead of 2 portfolios.

The trick is determining which holding to keep in my 401(k) considering that an future increase in contributions will need to go into those funds. I’m tempted to hold my bond allocations in my 401(k). That way I will automatically increase my bond exposure over time as my contributions increase and I get closer to retirement age.

It’s not an ideal solution by far, but it’s the best I could come up with and I couldn’t find a better one. If you have any suggestions, I would gladly welcome them!

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How to Save for Retirement When Your 401(k) Plan Sucks. Copyright © Simple Debt-Free Finance

Apparently, the politicians in Hungary, Poland, Bulgaria, Ireland and France view private savings accounts as their own personal piggy banks. I can’t begin to express how disgusting (and frightening) I think this is.

In Hungry, the government is resulting to extortion to gain access to over $14 billion in individual retirement savings:

“The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). “

In Bulgaria, the government seized $60 million in private accounts. The Polish government wants to transfer a “1/3 of future contributions from individual retirement accounts to thestate-run social security system.” Ireland and France are a bit less dramatic in that they have thusfar only raided the public pension funds to bail out the rest of the government, and not yet confiscated any current savings plans.

Beside the outrage of outright theft of private property (i.e. retirement savings) of the Bulgarian, Hungarian and Polish people, even the Irish and French governments raid on public pension plans must lead its citizenry to wonder if there is even any point in saving or planning for the future.

Once the people lose hope and the ability to plan their own destiny, the system collapses.

Could this happen in the United States?

It probably won’t reach the level of depravity of the Hungarian and Bulgarian governments, but the current administration and the 111th Congress racked up record deficits and created the largest new entitlement (heathcare) in generations.. And some have already hinted at back door methods of the kind of confiscation seen in Bulgarian (see how George Miller, Teresa Ghilarducci and the End of Your 401k. ) . And the Social Security “trust fund” has long since been raided, resulting in the system we have today – people paying into the program are essentially supporting those collecting from it today.

I would argue that this is no different than forcing people to pay into the system even though they are not going to benefit from it when they retire. This is likely true for younger generations of worker, though no public official would dare to state this.

Source

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European Nations Start Confiscating Private Retirement Plans! Copyright © Simple Debt-Free Finance

According to the study, 80% of Generation Y workers (defined by the study as roughly 18-30 year-olds) will fall short of having sufficient funds for retirement by the time they get their last paycheck.

“After factoring in inflation and post retirement medical costs, its researchers project Generation Y workers will need to save 18.7 times their final pay in retirement resources — including Social Security, employer-provided defined benefit and defined contribution plans and employee savings — to maintain their current standard of living in retirement.”

I think there’s a lot of truth at the heart of the study, but not just for Gen Y-ers, but there are also a host of assumptions at play here too – most of which make the picture even more bleak!

For example, does anyone really expect Generation Y members to be able to collect Social Security by the time they retire? If the system isn’t completely bankrupt by that time, it will likely be reduced to something akin to retirement welfare – providing simple subsistence to those below the poverty line who never saved anything for retirement. Like many of Generation X, Generation Y retirees will face saving for their own retirement in their private accounts (401ks, etc..) while funding the retirement of others through the social security tax.

Another point that isn’t made clear in the article is how the unemployed factored into the results. A large portion of the nearly 10% unemployed are in this generation.

The article goes on to point out that 41% of workers with access to 401k plans do not save enough to get the company match (free money people!) I think this highlights another underlying problem – younger workers lack a saving mindset.

It’s not a Gen Y thing, I can remember when I got my first real job out of college and was making what was big money to me at the time, I didn’t think anything about retirement savings. My parents never talked to me about such abstract things, and it seemed a lifetime away at the time. Fortunately, I had a manager who took me aside and told me – in no uncertain term- that I was going to set aside at least 10% of my salary and increase that by 1% every year.

Thanks to her, I had 6 figures in my 401k by the time I was 35.

I didn’t fully understand the Importance of what she did for me until many years, and a few jobs later, but I see the difference it made in my life and I wonder how many in my generation and others never had the same kind of retirement guardian angel I had.

One thing is clear, without sufficient savings rate the standard of living for Gen X and Gen Y retirees will be significantly lower than previous generations.

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• Are Retiring Boomers “The 401(k) generation”?

Generation Y slacking on Savings? Copyright © Simple Debt-Free Finance

Photo by {Guerrilla Futures | Jason Tester}

A BankRate reader recently asked Don Taylor just this question. Here’s the gist of don’s reply.

Don points out that it’s notoriously difficult to “run the numbers” to compare the cost of a 401k loan vs. other debt (ex: will you save money borrowing from your 401k to pay down your car loan) because it’s impossible to know for sure what the 401k loan will really cost you in the end. It’s easy to compare interest rates, and the financing cost of the loan, but you can never truly account for the lost compounding effect from having that money continuously invested (and any dividends re-invested). In short, you can’t know for sure what the cost of having that money side on the sidelines is going to be.

Still, there are some situations where it can be less of an impact, if not an actual benefit to borrow from your 401k.

Here’s a list of when it might be beneficial to borrow from your 401k:

1. If you would need to borrow the money anyway from another source, if not your 401k.
2. If the after-tax interest rate on that other loan would exceed the “reasonable return” you can expect from your 401k over the term of the loan.
3. If you can make your 401k loan payment without reducing current 401k contributions.
4. If you accept the terms that you will need to repay any outstanding portion of the loan within 90 days of leaving your job or pay income tax on that balance along with a 10% penalty.
5. If the borrowed money is going toward repayment of a loan with no tax deduction (i.e. credit card debt).
6. If you get your financial ship in order to avoid the need to borrow so much in the future.

I added those last two points because I feel they’re important. I also don’t think it’s ever really a good idea to borrow from your future like this unless your present way of life is really in danger of ending. In other words, you have exhausted all other avenues and bankruptcy is not a way out.

I’ve had friends who have borrowed from their 401ks and never been able to pay them back because they never got their spending habits under control. This only serves to set them back financially in a big way.

In my own experience, when I’ve had to come up with some extra money to pay off debts, I’ve stopped contributing to my 401k and diverted that money toward the debt as extra payments. It’s painful at the time, but less painful than borrowing from my 401k, which only shifts the debt around and ends up costing much more in the long run.

It’s important to note that Don bases these points off of a paper by members of the Federal Reserve Board titled “New Evidence on 401(k) Borrowing and Household Balance Sheets.” This paper is also referenced by the Wall Street Journal article, “Rethinking Conventional Wisdom About 401(k) Loans.”

UPDATE: Thanks to NerdWallet for featuring this post it its Carnival of Money Stories – Oktoberfest Edition, and Personal Dividends for featuring this post in their Carnival of Wealth #4 – The Family Finances Edition.

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Should I Borrow From My 401K? Copyright © Simple Debt-Free Finance

One of the basic concepts of investing is the idea of active funds and passive funds.

I’ve just come across this post about active vs passive funds by Craig Ford at Christian PF.com that does a good job of breaking down the differences between active vs passive funds and which is better.

As I say, even if your interest and involvement in retirement planning doesn’t go beyond your company 401k plan you should at least know the general idea beyond these funds, so check it out!

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Investing For Beginners – Active Vs Passive Funds. Copyright © Simple Debt-Free Finance

She’s in her early 40′s, newly married with no debt and no retirement savings. She was wondering if I had any advice on the best way for her to start saving TODAY.

Well, it turns out that I do have some advice – so much so that I figured it best to respond in a full post, as comments are too limiting. Besides, maybe this will help others as well.

Look on the bright side.

First off, it’s important to realize things are not as bad as they may at first seem.

Being on the other side of 40 with little or no retirement savings isn’t the end of the world. It’s not too late, but time is running against you. It’s always easier to start saving and investing at an earlier age, because you have time on your side. Time to let your savings accrue interest and grow faster than the rate of your deposits.

Renee is actually ahead of the game in one way – she’s frugal. She’s paid for her wedding completely, and only buys things she can pay for today. As a result, she’s got zero debt and that is an incredibly powerful thing on her side.

Also, many people saw their nest eggs decimated by the 2008 crash. Many of these people had a lot of wealth tied up in the stock market, but it was paper wealth that was gone in a flash. Many of these people had to start over again after the crash but unlike Renee, they also have the burden of debt weighing them down.

Being debt free means that Renee has more of her income available to invest.

Tips for saving for retirement after 40.

First, it’s important to remember 2 things:

1. I am not a professional, and only sharing my own experience and knowledge that I have learned on my own. You should consider speaking with a professional financial planner before taking any serious action.
2. “saving for retirement” is really a misnomer. You cannot afford to retire on traditional savings alone. Your savings account, or CDs will not get you what you need to retire on. You need to invest.

The most important Step.

The single most important thing you should do is to educate yourself. I’m talking about investing terminology, but also in terms of getting an idea of where you are and where you need to be. Without a destination in mind, you will never meet your savings goals.

To be able to retire, you’ll need a plan. It’s that simple.

The question is whether you are creating the plan yourself, or if you will work with a professional planner. Either way, it will benefit you greatly to have an understanding of the basics of investing. I recommend getting a copy of Stock Investing For Dummies from your library (it’s free!) and get an idea of how interested in investing you really are and go from there. That will be a big part in deciding whether to do more yourself, or just turn everything over to a professional.

You should understand the following terms at a minimum:

• IRA, 401(k), Roth IRA

• Tax deferred accounts vs. Taxable accounts

• Mutual funds

• Expense ratio

• Yield (dividends)

• Blue chip vs. small cap

• Asset allocation

Figure out where you are and where you need to be.

In order to get to where you need to go, you’ll need to figure out where that is. Check out the Retirement saving calculator at Bankrate.com.

That should give you a ballpark idea of how much you’ll need. To be conservative, use the following values:

• Inflation: 4%

• Return: 6%

• Time to retire: 20 years

You’ll also want to determine when you think you can stop working full time. You’ll likely be working until early to mid 60′s, so that still gives you about 20 years. Work backwards to see how much you’ll need to invest each year to meet your goal.

Take action.

Make sure you use your 401(k)/403(b) if you get an employer match - it’s free money!

Don’t let fear guide your action.

Don’t avoid stocks – you’ll need the growth, especially with starting later. Just don’t invest in individual stocks.

Share your future.

Renee is newly married, and it’s important to talk things like this over with your spouse (whether you’re a newlywed or have been married for a while). Money problems don’t just go away because you retired, and if you don’t consider your spouses plans before then you could be on the road to a very unhappy retirement.

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How To Start Saving For Retirement At 40. Copyright © Simple Debt-Free Finance

I originally wrote this article back in January for the Saving Advice Blog, but I’ve seen a lot of chatter recently about it again – including this issue of Time magazine – and I feel very strongly about protecting individual retirement savings from the government, so I thought I’d go on the record here and post my thoughts about it on Simple Debt-Free Finance.

With the death of defined pension plans, 401(k) retirement plans have become a staple for many employees, but the recent financial turmoil has put these once infallible savings vehicles under the microscope. There have been numerous news articles detailing the stunning losses of the stock market since October of last year. Such stories usually offer a profile of some victim around 55 years old who was preparing to retire in the next few years, only to have 25% or more of his 401(k)’s value wiped out over night.

This has led to calls for the government to step in and fix the problem. Economist Teresa Ghilarducci has put forth a plan to do just that, and congressmen George Miller and Jim McDermott support it. Under Ghilarducci’s plan, contributions to a worker’s 401(k) plan would no longer be tax deferred. This would effectively tax the contributions twice – once when you earn the income that you then contribute to the plan, and again when you withdrawal the money in retirement. Under such conditions, why would anyone continue contributing to a 401(k)?

Ghilarducci’s plan also proposes implementing a government provided “guaranteed retirement account” to be administered by the Social Security Administration. Under this plan, worker’s would be required to invest 5% of their pay, and would receive a guaranteed return of 3%, adjusted for inflation.

This is the wrong way to fix the problem.

First of all, why would we want to reinvent social security when it’s been documented to be unsustainable? The government has already tapped the money many times over that was supposed to be set aside for the program. Isn’t this just recreating that problem? Secondly, the stock market has returned, on average, roughly 10% per year since WWII. How would worker’s be better off earning 3% per year? Thirdly, it doesn’t address the real reason 401(k) plans have left people short on their retirement funds.

The 401(k) plan did not fail. The stock market did not fail. This person simply had too much invested in the stock market for his age and retirement goal. The problem lies with the individual, and the lack of information and education provided to the individual, not with the 401(k) plan itself.

401(k) participants are investors, whether they know it or not. The problem is that most do not. The real reason 401(k) plans fail to the extent that people perceive them to is because the participant often lacks the education to make appropriate decisions. Many 401(k) participants don’t want to be investors, they just want to do their job and live their life. Another problem with 401(k) plans is that the individual is often entirely in charge of their investments, and have no safety valve in times of extreme panic or greed. Just look at the recent economic turmoil and see how many have pulled everything out of their 401(k) because they don’t trust the market. Once the loss has happened, pulling out is the worst thing they can do, but these people are simply reacting emotionally. They don’t have the background to approach it rationally.

The real way to fix this problem is education. Employers could provide professional assistance by way of making an impartial financial planner available to employees in the plan. Most plans provide life cycle or target date funds where employees choose the fund with their target retirement date, and the plan manager gradually adjusts the allocations between stocks and bonds over time. This is essentially a set it and forget it approach that has been proven to work over time. But so many employees are ignorant to their existence and their use. If that 55 year soon-to-be retiree had a proper asset allocation in his 401(k), he would still be on course to retire, though he might still choose to work a little longer for a better post-retirement lifestyle but the choice wouldn’t be so drastic as losing a quarter of your retirement.

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• Generation Y slacking on Savings?
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• Investing For Beginners – Active Vs Passive Funds.

Why 401(k) Retirement Plans Really Don’t Work, and How to Fix Them Copyright © Simple Debt-Free Finance

It hit close to home because a few weeks ago I received an email from my corporate masters informing me that 401(k) matching contributions were “on hold indefinitely” so as to provide the flexibility required to “navigate these unprecedented economic times.” This was a week after they announced that there would be a wage-freeze and bonuses “across the board” would be eliminated.

I’m not alone, it would seem.

The article provides some depressing figures on just how much less you have at retirement without an employer match. It seems a little like a WAG to me because there are A LOT of assumptions involved like average rate of return, whether the employee will stop contributing to his 401(k) altogether, etc.. but the article does outline 3 actions an employee faced with the elimination of his company’s match can take:

1. Save more.
2. Consider a Roth IRA.
3. Don’t cash out.

What would you do? (Read the details of each action here)

Me? I opted for #1. It wasn’t as hard a choice as I thought it would be, since the market had pretty much bottomed out by the time I had to take action. I like the idea of buying more stocks at what I’m sure will have been historic lows by the time I retire. So I jacked up my contribution rate to what it was with the employer match included. Still, I wish I had that match…

Related Posts:

• Are Retiring Boomers “The 401(k) generation”?
• How to Save for Retirement When Your 401(k) Plan Sucks.
• Generation Y slacking on Savings?
• Should I Borrow From My 401K?
• Investing For Beginners – Active Vs Passive Funds.

Employers cutting 401(k) match contributions. Copyright © Simple Debt-Free Finance

Roth IRA Eligibility Rules.

Eligibility rules are simple – if you earned taxable compensation, you are eligible. If you’re eligible, you next need to see if you qualify. For 2009, if your adjusted gross income (AGI) is less than $105,000 when filing single, or $166,000 when filing jointly then you qualify. NOTE: if you earned more than those amounts, you may still qualify for a Roth IRA, but at reduced levels of contributions.

Speaking of contribution levels, for 2009 the maximum contribution is $5,000. Like 401(k)s, there is a catch up clause, but I won’t go into that here.

Roth IRA benefits.

Any qualified distribution (withdrawal) is tax free. A “qualified” distribution is what that occurs at least five years after you first started to contribute to a Roth IRA and after you’ve reached age 59 1/2.

See http://www.money-zine.com/Financial-Planning/Retirement/Roth-IRA-Rules/ for more.

The problem.

The best selling point for most people is the tax free withdrawals, but this may be in jeopardy. Consider the following…

• Obama’s deficit is projected to be over $10 TRILLION in the next decade.

Now, deficits are not always evil and are sometimes necessary. Personally, I happen to believe that $10 trillion is excessive and dangerous. But regardless of how such deficits make us feel, one fact remains: It will need to be paid back.

The interest payments alone are set to take on a run-away snowball effect right around the time other social programs like Medicaid, Medicare and Social Security are projected to go bust.

In order to pay down this debt, the government will have two basic options: 1) Borrow the money, 2) Increase tax revenues. Borrowing the money is not going to work, not only because it will be difficult to find countries able and willing to lend that kind of cash, but because it would be pushing the deficit around without actually lowering it. This leaves option #2.

The current crop of politicians in Washington will interpret this to mean raising existing taxes and imposing new taxes. Ironically, in doing so they will stifle economic growth further, exacerbating the problem. But that’s another matter…

Higher taxes needed.

Modern Democrats have adopted the “Tax the Rich” mantra as a solution to their runaway spending, but this strategy falls short. First of all, they won’t be “Rich” after they’ve been taxed at the levels required to fund the spending projects. The whole “tax the rich” philosophy is little more than class envy and ignores the fact that most Americans do not remain fixed at any particular income bracket.

Another solution that is often proposed is to apply FICA taxes on all income. Congress has been sliding the maximum up year after year, but for 2009 only the first $106,800 of income is subject to the FICA tax. But even opening up all of a worker’s income to the FICA tax would not produce enough revenue to cover the funding gaps.

Conclusion.

Since there exists no single solution to generating the increase in revenue required to pay for the spending occurring today, and since the Federal Government is unlikely or unwilling to adopt a fiscally responsible policy the likelihood exists that we will not only see increased tax rates, but also an increase of new taxes. Already, politicians have targeted the 401(k) plan. One of their criticism of the plan is the money the Government misses out on while workers funds grow tax deferred. In this light, can we really expect that withdrawals from Roth IRA plans will remain tax free? Never mind that this would, in effect, tax workers twice (once when the earned the money to contribute, and then again when they withdraw their savings).

Well, those are my thoughts on the matter. What are yours?

Related Posts:

• How to Save for Retirement When Your 401(k) Plan Sucks.
• Conversion to Roth IRA Still Possible for 2011.
• Tax Alert: Fate of 401(k) when relocating.
• Tax Time: Last Minute List of Overlooked Deductions.
• Tax Time: Kiplinger’s “Do It Yourself Pay Raise” (Video).

Will The Roth IRA Remain Tax Free? Copyright © Simple Debt-Free Finance

In fact, a reader of this blog, Danny, recently left a comment along these lines. In writing my response to his comment, I realized that I had more to say than would fit in the comment box. I wanted to go into some detail of what I did just the other night to give my poor 401k some TLC.

In my initial response, I broke my action up into 2 basic actions:

1). Evaluate your options (and their performance).

2). Up your contribution rate through work.

I should point out that both Danny and I are many years from retirement, and as such this post is really geared toward the individual who still has a decade or more of employment ahead before their target retirement date.

Evaluate your options.

It may seem comforting to just ignore your portfolio and hope you haven’t lost much, but that won’t change the fact that your portfolio has lost value – and you won’t be able to retire on hope alone. Here’s what I did.

Gather the data.

You’ll need a list of the investment options available in your plan. Often times this is available on the quarterly statement you get in the mail, or on the 401k plan website. Make sure it has the following information: performance, expense ratio (cost), style and category.

Compare performance.

I went category by category and compared all of the options by return over a 1 year period and return compared to the bench mark index.

I had done the same thing when I initially selected the funds in my portfolio, and not surprisingly every fund I had initially chosen had held up better than their peers over the last year. In fact, some even out performed the index. Don’t get me wrong, my portfolio is not more valuable than it was a year ago, but most investments have lost value over the past year. The point is to minimize those losses and make the best use of what’s available to you.

It’s important to make sure you compare similar categories and styles. For instance, my small cap fund was down roughly 40% over that past year, while my bond fund was up 1%. You may be tempted to cash out the small cap and let it all ride on the bond fund, after all a 1% gain beats a 40% loss, right? Well, yes, but this is a very narrow slice of time. Over the long term (i.e.: your working life) the chances are much higher that the small cap stock fund will vastly outperform the bond fund. It’s similar with large cap value vs. large cap growth. Both funds will have companies of similar size, but different styles and so perform better at different times.

Performance of the options available in my 401k plan differed wildly in some cases. Some small cap funds were down more than 50%. That over a 10% difference between the best performing and worst performing for my plan!

Compare expense ratios.

Expense ratios are the cost of the fund, and usually fall between .25% and 4%. In my opinion, anything over 2% is too expensive. Most of my funds are in the .75 – 1.5% range. Again, it is important to compare similar categories since small cap stock funds tend to be more costly than large cap value funds for instance.

All other things being equal, you want the fund with the lower expense ratio. But what about when things aren’t equal? Well, there are a few funds in my plan that are have expense ratios quite a bit lower than the ones I chose. One example is a small cap fund that has half the expense ratio of the one I currently hold in my portfolio. The problem is that the lower expense fund also lost 5% more than my fund. Since the difference in expense ratio is less than 1%, this 5% trade off is clearly not worth it.

Increase your contribution rate.

Stocks right now are cheaper than they have been in a very long time. The recent plunge in stock prices is disastrous for recent or soon to be retirees who held too much of their retirement savings in stocks, but for those with many years of work ahead of them it is a once in a lifetime buying opportunity.

As I said to Danny, if you can spare the cash, bump up your contributions. I personally think the stock market is not likely to experience significant, long term growth for quite a while but eventually the stock market as a whole will rebound and grow. It make take 4 months or 4 years but the more you buy when prices are cheap, the faster your portfolio will rise when the market rises.

In the meantime, taking action on the things you can control will give you a greater peace of mind.

Related Posts:

• Are Retiring Boomers “The 401(k) generation”?
• How to Save for Retirement When Your 401(k) Plan Sucks.
• Generation Y slacking on Savings?
• Should I Borrow From My 401K?
• Investing For Beginners – Active Vs Passive Funds.

What to do with My 401k in the Current Market or How I gave my 401k Some TLC! Copyright © Simple Debt-Free Finance

Don’t believe me?

Consider this recent article on CNN/Money, titled It’s time to fix the 401(k), by Penelope Wang,.

Ms. Wang details some of the things she views as the shortcomings of the 401k plan as it pertains to saving for retirement.

“Lots of people start saving too late, save too little or make missteps with their portfolio. And all of us are vulnerable to risks that we can’t control. … Or you may hit a market storm at precisely the wrong moment: the year you stop working.”

She also references the 10% penalty on early withdrawals. The problem here is not the 401k, it’s the investor! There will always be some who either cannot or choose not to learn proper money management. If these people were investing in an IRA or a general stock market (i.e. non- tax deferred) account, they’d have the same problems.

She goes on to say:

“Over the past 12 months, a 64-year-old investor in an age-tailored “target date” mutual fund has lost 26%. Savers with high balances can recover from that. But many lost more, and the typical near-retiree with a 401(k) has less than $50,000 stashed away in it. “

Again, this is not specific to the 401k, it’s the stock market in general. Many stock portfolios have dropped 26+% over the past 12 months, whether they were held in a 401k, IRA, Roth IRA or standard brokerage account.

So, she’s not happy with the 401k plan. What’s her proposed solution to this “problem”?

“Our current retirement system hasn’t broken – it was never really a working system to begin with. No law-makers designed the 401(k) to displace the traditional pension, although that’s what ultimately happened.”

I have a serious problem with the premise of this: namely that law-makers (i.e. bureaucrats in Washington) are knowledgeable enough to create a plan that solves the problems outlined above. Where is the evidence of this? The bankrupt Social Security system? The current bailout/tarp/spending fiasco taking place (and driving the market down) on a daily basis ? I don’t think so.

In fact, much of the article seems geared toward pushing the Ghilarducci plan that I wrote about here. In that plan, workers would forfeit the opportunity to earn higher returns on their retirement savings for a “guaranteed” return of 3% per year, inflation adjusted.

3% per year in the positive may sound great when you’re looking at your 401k balance down 30% over the past year, but when your balance is growing at a double digit clip (as it will again someday) it’s not looking so good.

The real problem isn’t the 401k, or the free markets – it’s education.

No retiree 5-10 years out from retirement should have 90% of his savings in stocks. That’s an insane amount of risk (unless he doesn’t need the money for 1st 20 years of retirement!). Ms. Wang does outline some actual problems with many 401k plans. For instance:

” Your employer might not offer a plan or might choose one with second-rate investments. “

Other potential problems might be high fees, and no employer match. I’m all for standardizing and expanding investment options in 401ks – just keep the Government out of my retirement thanks.

Related Posts:

• Are You on Track to Retire Comfortably?
• Spring Cleaning My Finances and Looking Ahead.
• 70 Year Old Free Spirit Offers Lessons on Retirement Planning.
• Are Retiring Boomers “The 401(k) generation”?
• How to Save for Retirement When Your 401(k) Plan Sucks.

Fixing what isn’t broken. (Fixing the 401k). Copyright © Simple Debt-Free Finance

The article highlights 4 proposals from Washington as a ” response to the retirement savings crisis”:

Relaxed hardship-withdrawal rules

“President-elect Barack Obama has proposed temporarily dropping the 10% penalty for hardship withdrawals from an IRA or a 401(k) for amounts up to 15% of your plan or $10,000.”

Gee, sounds great. Now you can borrow from your 401k savings penalty free. Only one question – how does this increase the amount of money Americans have saved for retirement? It doesn’t. In fact, it actually worsens the problem!

Easing up on required distributions

“For those age 70½ or older, Obama has proposed temporarily suspending required minimum withdrawals from traditional IRAs and 401(k)s.”

OK, this at least removes the mandatory drawing down of retirement savings, thus eliminating unnecessary withdrawals. But it’s only for 2009. Most retirees of age 70 1/2 or older in 2008 have already had to withdraw money from their 401k accounts after they’ve lost 30% or more for the year! This is akin to putting a Band-Aid on a wound, and claiming to have fixed the problem, only to have the patient suffer from extreme blood loss! Or if you prefer the farm cliche’: the barn door is being closed but the horse has already bolted.

An automatic IRA

“Under this plan, designed by a nonpartisan group and endorsed by Obama, small businesses without 401(k)s would have to enroll workers in a payroll-deduction savings plan (you could opt out), but no matching contribution would be required.”

This appears to be the only one of these proposed “solutions” that actually addresses the problem! Since the worker has the option to opt out, I don’t have a problem with this solution.

A new national savings plan

“Proponents of a government-backed retirement savings account that would guarantee an inflation-adjusted return of 3% initially got little support. But recently one of its biggest backers was asked to testify on Capitol Hill – a sign that the plan is getting serious attention.”

This plan is not a plan to fix the 401(k). It is a plan to effectively end the 401(k) as a means of saving for retirement and transfer control of your retirement over to government agencies who have already proven incapable of handling such responsibility. It would provide the worker with a 3% return on his money, instead of the market return of a 401(k) plan. You can read more on why this plan should never see the light of day here.

Related Posts:

• Are Retiring Boomers “The 401(k) generation”?
• Investing For Beginners – Active Vs Passive Funds.
• Are You on Track to Retire Comfortably?
• Don’t Sabotage Your Retirement (Like Kris)!
• How to Save for Retirement When Your 401(k) Plan Sucks.

How NOT to fix the 401(k). Copyright © Simple Debt-Free Finance

It looks like a scam, but it’s probably not. Having said that, I don’t think it’s what they make it out to be either. Just like the radio ad, the T.V. commercial makes it seem like gold is the only safe investment and that if you own gold, you’ll never have to worry about your retirement.

This is absurd. First, there is no single investment that never loses value. Second, there is no single action a person can take, no single item to buy that will make your life worry free. Sorry, but that isn’t reality. Life is a sequence of ups and downs; a myriad of risks and rewards. Some investments are safer than others, but nothing is without risk.

Rosland Capital is Accredited by the BBB and has no complaints, so they’re not a fly-by-night bunch of charlatans. But that doesn’t mean that the Rosland Gold IRA is a good deal.

For starters, I’m not sure their IRA product holds actual gold. It may just hold paper obligations to gold. This would essentially be the same as buying shares of the iShares Gold Index ETF (IAU) or some similar index.

The price of gold 1991 - 2007. Photo courtesy of Wikinvest

Aside from what you’re actually holding in your IRA, buying gold has its place, but I’m not sold that now is its time for a place in your IRA. I’m no financial planner to be sure, but as I’ve pointed out on my Blanchard and Co post, the price of gold was flat for much of the 90′s, and has really taken off over the past 5 years or so. That’s not to say it won’t continue to rise, but it seems more likely that it will level off and eventually drop in price. Remember oil in mid-2008? We were headed for $200 per barrel oil and $10 per gallon gasoline. Then the housing bubble burst and oil is now around $40 per barrel. I’d wait to buy when the price dips.

Gold does well in uncertain times, and these are uncertain times. However, I personally think that it’s done about as well as it’s going to for this run and we’ve bottomed out on uncertainty. People eventually reach their limit of panic and become numb to further fear and uncertainty. Investors are people too.

I do think gold, precious metals and commodities in general make sense in a retirement portfolio. They tend to zig when stocks and bonds zag, and if you don’t need the money for 10, 20 or 30 years, you’ll make out fine. But remember to diversify! More than 10% in any sector (commodities are a sector play) is more risk than reward over the long term.

Related Posts:

• How (and Why) I Added Gold to my IRA.
• Conversion to Roth IRA Still Possible for 2011.
• Are You on Track to Retire Comfortably?
• Lear Capital Commercial Pushes Mysterious Asset, but is it the One Asset to Rule Them All?
• How to Survive (and Possibly Thrive during) Stagflation.

Rosland Capital – U. S. Gold Eagle Coins in Your IRA. Copyright © Simple Debt-Free Finance

Teresa Ghilarducci’s retirement plan.

According to Workforce Management:

Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.

The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.

Teresa Ghilarducci

This idea has really gotten legs since the stock market has essentially set the way back machine for 2003, thus erasing the retirement hopes of millions of Americans, if not postponing those hopes indefinitely. But the fundamental problem here is not the 401(k) plan as a retirement vehicle or the tax breaks it bestows. The fundamental problem is that private accounts like 401(k)s and IRAs have replaced traditional pension plans and there is an entire generation of workers (i.e. the baby boomers) who have received little to no education on how to properly use them.

In her testimony to Congress, Ms. Ghilarducci stated:

Short-term I propose . . . that the Congress allow workers to swap out their 401(k) assets, perhaps at August levels, for a guaranteed retirement account–just a one-time swap. . . .
How would this work? You go back to your districts and meet up with a 55-year-old who had $50,000 in his account last month and now has $40,000 in the account. He can swap out that $50,000, valued in August, for that guarantee of what would become, if he retires at 62, a $500 a month addition to Social Security

A recent article in the WSJ on the Ghilarducci plan and her testimony makes the point that a 55-year-old who lost 20% of his portfolio because of the market decline since August had too much invested in stock for his risk tolerance and stage in life. But this makes my point: too few people understand even the basics needed to manage their retirement plan.

The root of the problem Ghilarducci has with the effectiveness of the 401(k) plan as a retirement vehicle is the lack of education and financial literacy.

But I don’t think that’s the full story.

Ms. Ghilarducci is clearly of the opinion that the government will do a better job of management worker’s retirement funds than the workers – despite the failure to do so with the Social Security system, which was originally intended to solve this problem. History has shown that government is NOT better at this.

George Miller, Jim McDermott and your tax break.

George Miller, D-Calif.

Enter George Miller, D-Calif., House Education and Labor Committee Chairman and Rep. Jim McDermott, D-Wash., chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support. These guys think you shouldn’t get a tax deduction for your 401(k) contributions. They would like to see Ghilarducci’s plan implemented and the tax breaks for 401(k) and IRA plans eliminated.

From Investment News :

She [Ghilarducci] has been in contact with Mr. Miller and Mr. McDermott about her plan, and they are interested in pursuing it, she said.

“This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for Mr. McDermott.

“That is part of the discussion,” he said.

While Mr. Miller stopped short of calling for Ms. Ghilarducci’s plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.

The end result of this would be you, the worker, get 2 choices to make regarding your retirement planning:

1). Forfeit your private retirement account (401(k) and IRA) and the chance to make, on average, 10% return on your money per year and receive a government managed plan in which you receive only 3% return, adjusted for inflation.

or

2). Keep your 401(k) and IRA plans, be effectively taxed twice (once on your contributions, and again on your withdrawals) and still be forced to contribute 5% of your income a year to the government managed account.

The result of implementing this plan could also lead to even more money being taken out of market en mass – decapitalization of the market – resulting in more businesses going out of business and more economic woe. But won’t you feel safe and secure when you get 3% return on your money.

Related Posts:

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• This Woman is Crazy!
• Tax Time: Last Minute List of Overlooked Deductions.
• Tax Time: Kiplinger’s “Do It Yourself Pay Raise” (Video).
• Are You Prepared to Pay $3,598 More in Income Tax for 2012?

George Miller, Teresa Ghilarducci and the End of Your 401k. Copyright © Simple Debt-Free Finance

I recently received a sample issue of the Bottom Line Personal magazine. The tag line states: “Bottom Line makes you Healthier, Wealthier, Wiser… Happier too.”

With headlines touting such things as the “Millionaire’s secret to retiring richer faster”, my scam alarm was ringing loudly.

Secret # 1. How to Make More Money Than 90% of Investors – Even if You’re Lousy at Picking Stocks.

They give some silly example of an investor who lost 80% of his nest egg in the tech bubble bust of 2000. He then turned his remaining $33,000 into $7 million over the next 15 months.

Wow! Sounds great. How’d he do it?

By eliminating his loses, of course. We’d all be millionaires if we never lost money in the stock market, right?

Their example goes on to state that:

If you invest $5,000, and lose 20%, you’re down to $4,000 ($1,000 is 20% of $5,000).

Fair enough.

But for you to recover that loss you need to earn a 25$ return ($1,000 is 25% of $4,000).

OK, I’m with them so far.

The more you lose, the harder it is to get back. Recovery from a 50% loss requires a 100% gain, and recovery from a 75% loss requires a 300% gain.

Then how the hell did the investor profiled in the tech bubble example get back his 80% loss just from avoiding further losses?

The answer is he didn’t, it’s a load of bunk.

But the underlying methodology is sound: limit your losses in the stock market by using stop-loss orders.

Secret # 2. Make Your Grandchild a TAX-FREE Millionaire!

The claim:

“If your teenage child or grandchild is gainfully employed, he can contribute up to $4,000 a year to a Roth IRA. If the child puts $4,000 a year away between the ages of 16 and 21 and the Roth IRA earns 10% per year, the child will have $2,045,042 at the age of 65.”

Sounds great on the surface. But what’s the catch?

Inflation.

After those 49 years piling up in the Roth IRA, that $2,045,042 would be worth only $1,391,185 in today’s dollars, assuming a relatively benign 3% inflation rate. That and it took 49 years to get there, so while the headline makes it seem like it’s getting rich quick, it’s anything but.

Does this make it a scam, or mean it’s not worth doing? No, of course not. It’s the point of an IRA or 401(k) in the first place. It’s also the basis of David Bach’s Automatic Millionaire. Just don’t confuse automatic with instant.

Secret # 3. How to Pay Off Your 30-Year Mortgage in Just 23 Years.

No secret here – it’s called a Biweekly mortgage payment.  The only catch is to make sure your lender doesn’t charge a fee for the program or any pre-payment penalties.

Secret #4. Lower Your Tax Bracket.

The claim:

In one easy step, lower your rate to as low as 15%!

This one is so vague I can’t be sure what the “secret” is they’re selling. It could be creating your own business as some form of tax shelter. Maybe it’s legal, maybe it’s not. There are legal ways of doing this. For example, you could invest in tax-free municipal bonds or max out your pre-tax retirement accounts to lower your taxable income.

Secret #5. How to Boost Your Tax Refund.

The claim:

You can boost your tax refund even if you take the standard deduction!

Yeah, I can over-pay the government every pay period by claiming 0 dependants. Whoopdy-do! No thanks, I’d rather owe the government $10 at the end of the year. Then I know I’m keeping most of my money.

So are these really scams?

I think scam is probably too harsh a word. I haven’t actually seen a full issue, but this “free copy” mailer certainly makes it seem like they are trying to make a buck (or take a few of yours) selling information that’s relatively easy to find on the Internet or through other sources. In short, there’s nothing secret about any of it.

Still, it just looks “scammy.” It feels like something targeting gullible retirees. In fact, looking at reader testimonial page shows 6 people – all over the age of 60.

Bottom line on the Bottom Line Magazine: Read some personal finance magazines or blogs and save your money.

Related Posts:

• Beware ezsver rw and the proflowers scam!
• 6 Tips for Spotting an Investment Scam.
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• Want to Build Wealth, and be Secure? Focus on Learning Instead of Earning!
• Robert Kiyosaki Plays Loose With His Math in Financial I.Q.

Bottom Line Secrets Magazine, a Scam? Copyright © Simple Debt-Free Finance

“I am curious about my tax-deferred 401(k) plans when I move. If I move from New York to North Carolina or South Carolina, will New York come after the taxes that were deferred while I am working here now? I can’t seem to find the answer to this question anywhere.”

This was something I never thought about. I think most people probably think that their retirement account is their own. At least until they start making withdrawals and the income may be taxed, as it is in a 401(k) account. But Mr. Saenz’s answer does make a kind of sense:

“If you’ve lived and worked in New York or any other state that imposes an income tax for that matter, your retirement accounts have been in part subsidized by the state.

The subsidy is the state tax savings you realized when you excluded the retirement contributions from taxable income. If you move prior to collecting your retirement pay, you’ve eroded that state’s tax base. If you move to another state that imposes an income tax on retirement accounts, you’re enriching that state’s coffers at the expense of the other state in which you worked.”

Looks like this is yet another caveat to the tax deferred retirement accounts that we need to be aware of.

Related Posts:

• Tax Time: Kiplinger’s “Do It Yourself Pay Raise” (Video).
• Don’t Sabotage Your Retirement (Like Kris)!
• Are Retiring Boomers “The 401(k) generation”?
• How to Save for Retirement When Your 401(k) Plan Sucks.
• How to Get Free Help With Taxes!

Tax Alert: Fate of 401(k) when relocating. Copyright © Simple Debt-Free Finance