I can set forth the information for you. You need to project where you at and where you will be. When there is an employer match no if ands or buts, take it.
Roth
A roth is all post tax contributions. Meaning your money will be taxed in the year you earned it and then invested. Now the tax benefit is that when you withdraw the money in retirement at least 59 1/2. If you make over $110,000 you cannot contribute the full $5,000 amount for a single filer and $173,000 for joint filers.
When should you contribute to a Roth IRA? We can make this pretty simple. If your younger and expect to move up tax brackets it makes sense to pay the tax now and take advantage of the tax fee withdrawals. Now I should warn you. The government can change what they want when they want. There would obviously be a big uproar for changing this though. What I personally love about a Roth is that it eliminates double taxation. Double taxation is the fact that the corporation pays tax on the income and the shareholder pays tax on dividends received. Meaning that all dividends received are tax liability to the corporation and the shareholder. Taxing the same money twice. Everyone agrees that this is an issue, but nobody can make a fair point to not tax one over the other. Keep in mind the government would have to find income another way also.
If you're 20-30 and plan to move up the corporate latter you should definitely be thinking about contributing as much as you can to your Roth. 30-40 age group I think it's important to stay diverse and take advantage of tax advantages. You should put in partially of what you can contribute. Age group 40-45 this probably needs to be an afterthought but I would contribute some to it if you can. I wouldn't max out my 401k and then go to my roth yet in this age group.
401k or 403b
Lets just use the term 401k in joint with 403b becasue they are basically the same thing. The real difference is for the employer. 401ks are more common. You can contribute up to $17,500 currently and withdraw with no penalties at 59 1/2.
401k is basically the opposite of a Roth. It is a tax deferred account. Meaning you don't pay tax till you withdraw. Where is the benefit? When your retired and you're only money is coming from your retirement plan and maybe you're making minimum wage sitting on a golf cart hopefully. Your income should be significant less then just before you retire. Meaning you are moving the money from being taxed at a higher tax bracket to a lower tax bracket. It will also delay your tax liability. If I'm in a 25% tax bracket and put in $4,000 that is $1,000 that I didn't have to pay this year.
401k is a tax sheltered aimed to move your money to a lower tax bracket when your retired. It makes the most sense to contribute most you can when your in your highest tax bracket probably later in your career. 50-60 age group you should consider trying to max out your 401k first then moving to your roth. Then basically the opposite as above against the Roth.
You should be contributing what you can to your Roth and/or 401k. Later in your career about to retire flood to your 401k and then your roth if you can. Early in your career try max out your roth, but always meet your employers maximum match first.
Saturday, February 23, 2013
Saturday, February 16, 2013
Free Money Keep Up or Lose Out
I want to talk about investing and employer sponsored plans.
For those of you who are self employed I can not say this enough. Yes, you need capital. The second that you need to start investing to an IRA immediately when you have any kind of steady flow of income.
For those of you that are employed I can't stress enough that you need to immediately enter your employer sponsor retirement plan at least up to the minimum they'll match. I don't care if your employer doesn't match for a year. I hear it over and over that people wait to opt into their employer sponsored retirement plan. For the sake of this post I'm going to refer to the employer sponsor retirement plan as a 401k which for most of you is. Do really stress this I tell people that is free money, take it. Now personally I don't think it's free money. When I calculate cost as an employer I consider that part of the cost when hiring someone.
Quite honestly it's a bonehead mood not to meet the minimum to get the match. It's part of your pay in my opinion. Why not take all your pay? I once had a friend tell me it's not necessarily free because the markets are volatile and you could lose it. I understand his thinking, but he's oh so wrong. First of all if I buy 5 shares at $10 a share. It goes down to $5/share, yes, the most important thing value has gone down. I haven't lost my 5 shares though. Now I'll touch on this a little bit more later why that really makes a difference. I've also heard that I can't afford. Now there might be some people that can't afford it. If you have a job you can and if you absolutely need to get to the money you can. Don't unless it's a necessity and I hear people tapping into their 401k for a down payment on a house which is a huge mistake. Just lost out on that tax advantage, growth, and the power of annuity. 4-5% isn't a killer. Over 17.8% of my income goes straight to my retirement. Trust me I don't make much money, but I love my job.
If your employer sponsors 50% up to like 4% of your contribution after a year of employment. Put in at minimum that 4%. Don't leave that 2% on the table. Whether you don't plan to even vest. First of don't take that chance of leaving it on the table and I'll tell you why you need to invest and invest early.
The power of annuity is your best friend. Annuity is why investing early makes the difference it does. There's an old saying that if you put away just 1¢ just one penny and it doubles everyday you will have $10,737,418.24 in 30 days. Now that is making 100% on your money put it puts a big principal point to mind. The money we're talking about making is 6-10%. Yes, there might be years you make 18% and you might lose 15%. In the end you should average around that 8%. Back to that 10 million number. Once that principal gets large and you gain 8% it's higher when the principal amount is higher. It's really hard to drive that home.
What about those losses though? Back to why that question about if you lose it it's not really free money. There is one concept that is hard to understand. I'm an example person.We all hear buy low sell high. When our investment goes down and especially ones we are constantly contributing to like your 401k you're more with the same amount of money. Lets get to the numbers.
Lets deposit $50 per deposit and here is the change per deposit comparison for a steady growth between something that steadily grows and something that goes down and starts at what it began at.
Up and Down Steady growth
Shares Cost/share Shares Cost/share
10 $5 10 5
13 $3.846 9.5 5.263
15 $3.333 9 5.555
17 $2.941 8.5 5.882
20 $2.5 8 6.25
20 $2.5 7.5 6.666
17 $2.941 7 7.142
15 $3.33 6.5 7.692
13 $3.846 6 8.333
10 $5 5.5 9.09
The value of up and down is at $750 and the value at steady is $704.54. On a graph the up and down would be like smile the start and the end would be the same point with a dip. Now the steady growth is just a straight diagonal.
Still not convinced? Real live exact numbers. Lets say hypothetically we make 8% every year. Person A invests at the age of 20 for 10 years and stops. B doesn't start to invests till 30. Each investor invests $5,000 a year. Difference being investor A invests from 20-29 putting in a total of $50,000 and then not contributing anything anymore and B won't start till 30.
Age A B
| 20 | 5,000.00 | |||
| 21 | 10,800.00 | |||
| 22 | 17,064.00 | |||
| 23 | 23,829.12 | |||
| 24 | 31,135.45 | |||
| 25 | 39,026.29 | |||
| 26 | 47,548.39 | |||
| 27 | 56,752.26 | |||
| 28 | 66,692.44 | |||
| 29 | 77,427.84 | |||
| 30 | 83,622.06 | 5,000.00 | ||
| 31 | 90,311.83 | 10,800.00 | ||
| 32 | 97,536.77 | 17,064.00 | ||
| 33 | 105,339.72 | 23,829.12 | ||
| 34 | 113,766.89 | 31,135.45 | ||
| 35 | 122,868.24 | 39,026.29 | ||
| 36 | 132,697.70 | 47,548.39 | ||
| 37 | 143,313.52 | 56,752.26 | ||
| 38 | 154,778.60 | 66,692.44 | ||
| 39 | 167,160.89 | 77,427.84 | ||
| 40 | 180,533.76 | 89,022.06 | ||
| 41 | 194,976.46 | 101,543.83 | ||
| 42 | 210,574.58 | 115,067.33 | ||
| 43 | 227,420.54 | 129,672.72 | ||
| 44 | 245,614.19 | 145,446.54 | ||
| 45 | 265,263.32 | 162,482.26 | ||
| 46 | 286,484.39 | 180,880.84 | ||
| 47 | 309,403.14 | 200,751.31 | ||
| 48 | 334,155.39 | 222,211.41 | ||
| 49 | 360,887.82 | 245,388.33 | ||
| 50 | 389,758.85 | 270,419.39 | ||
| 51 | 420,939.56 | 297,452.94 | ||
| 52 | 454,614.72 | 326,649.18 | ||
| 53 | 490,983.90 | 358,181.11 | ||
| 54 | 530,262.61 | 392,235.60 | ||
| 55 | 572,683.62 | 429,014.45 | ||
| 56 | 618,498.31 | 468,735.61 | ||
| 57 | 667,978.17 | 511,634.46 | ||
| 58 | 721,416.43 | 557,965.21 | ||
| 59 | 779,129.74 | 608,002.43 | ||
| 60 | 841,460.12 | 662,042.62 | ||
| 61 | 908,776.93 | 720,406.03 | ||
| 62 | 981,479.09 | 783,438.52 | ||
| 63 | 1,059,997.41 | 851,513.60 | ||
| 64 | 1,144,797.21 | 925,034.69 | ||
| 65 | 1,236,380.98 | 1,004,437.46 |
So what? A put in $50,000 and is still has $231,943.52 more then B. B has put in $180,000. Really think about it, it's a $361,943.52 difference. So when will B catch A? Honestly never with these variables. This is why investing early and keeping it in there is important. It doesn't even matter if you understand the power of annuity. Just put your money away. A dollar today doesn't buy the same thing tomorrow. Your money decreases in value 3% on average every year. If you don't make 3% you lost money. Look at gas. I've heard back in the day how it was 10¢ a gallon. I think here today ethanol is like $3.55/gallon. Everyone can see pop and candy prices go up. I remember getting a soda out of the vending machine for 75¢. I remember the change to $1 and now it's at least $1.25 they might be up to $1.75 in some places I believe. I remember when candy was only a 50¢. Might get something for $1.
The one last thing that I wanted to touch on again is dividends which is another power of annuity. When dividends are paid out and then reinvested you just gained a larger part of the pot. It adds to that principal amount. The larger the principal grows when there is growth and you'll also receive a higher percentage of dividends next time. It increases like the principal amount.The power of annuity.
About Financial Foes
To me times I hear so many mistakes and misunderstandings. Everyone's finances are different. I can be generic and very few times that is advice for almost everyone. To really help people out you need specifics. Please email me questions you have. I plan to cover finance mistakes I hear about and answer your questions.
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