Personal Finance Blog by Debit versus Credit

Retirement Planning: What You Can Do To Retire In Good Financial Shape

October 17, 2008 | Filed in: Personal Finance | 1 comment

If you like this post then please consider subscribing to my RSS feed. You can also Subscribe to Debit versus Credit by Email and have new posts sent directly to your inbox.

Today I’m featuring a guest post about retirement planning.  Stay tuned next week for some great updates including a new Friday Book Club and the continuation of my Investing for Beginners series.

Where do you want to be when you retire? Will you be on an island in the Bahamas? Working in a different field? Or simply enjoying your spouse? Ninety-five percent of Americans have fears about retirement and 42% feel they will run out of money entirely, according to a 2005 study by NAVA. Just as you wouldn’t go on vacation without an itinerary or a budget, you shouldn’t run toward your retirement blind. With the right plan, retirement planning can be a breeze.

When you’re first getting started, you’ll want to envision how you want your retirement to be. While you’ll be saving money on gas and eating on-the-run, remember that there will be additional expenses — notably healthcare — as you age. Check with the Social Security Administration to find out what your benefits will be. Go over your employer’s retirement and 401k plan. After realistic considerations, you may want to consult a retirement planning calculator.

Some feel most comfortable using retirement planning software. Forbes Magazine recommends Quicken Retirement Planner ($59), Morningstar ($125) and ESPlanner Plus ($199). This option allows you the time and a no-pressure approach to examining your options independently. If you like having things explained in person, you can ask your banker, life insurance agent, investment broker, accountant or attorney for advice. To avoid the hassle, retirement planning services are another avenue, although most places charge around $200 per consultation.

Don’t rely on social security! Social security only provides for approximately one-third of the average American’s retirement plan. Instead, focus on your 401k as the bulk of your retirement savings and invest as much as possible. Consider annuities as a great supplemental retirement plan. Remember, tax-efficient options are increasingly crucial in saving up that nest egg.

Contribute the maximum on your 401k! Putnam Funds did a study in 2005 that found if you earned $40,000 in 1990 saving 2% of your salary, you’d have $40,000 by 2005. However, if had you saved 6% of your salary, your return would have tripled!

Beware of inflation! Ronald Reagan once warned, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Many people forget to factor inflation into their retirement planning. Consider that a $60,000/year lifestyle will cost you $80,635 in ten years and double that in thirty years! Your investment returns should be high enough to cover this pitfall. Most pensions and social security account for inflation and adjust accordingly; however, if you plan to dip into savings accounts or investments, your money will decrease in value over time.

While it may seem overwhelming at first, all the tools are available to make your retirement planning less tedious. Whether it’s a retirement planning service and personal consultant or retirement planning software, you’ll find answers. You can leave the investments up to a trustee who will take the guesswork out or you may choose to take a more active role in your investments. Your best bet is to start now and make a variety of investments to ensure your golden years are truly the best.

Tags: Guest Post, Retirement Planning

Keep Investing In Your 401k Plan

October 8, 2008 | Filed in: Investing | 5 comments

Here’s a question for you: If you put $5,000 dollars into your 401k plan this year and your employer also puts $5,000 into your 401k plan and over the course of a year your investments lose 40% of their value… assuming all of this, how much would you have lost?

The answer may surprise you.  You’ve actually not lost anything - you’re at a gain on your 401k plan at this point.  Remember that 401k plans are usually matched by your employer, and quite often dollar for dollar up to a certain percentage.  Assuming that the $5,000 you contributed was the maximum that your employer would match you immediately net a 100% return on your money.  After all, you put in $5,000 and so did they.  Now if that entire amount ($10,000 at this point) lost 40% of its value you’re down to a 401k plan value of $6,000 dollars.  All from an initial investment (out of your paycheck) of $5,000.

Guess what that means?  Your 401k plan portfolio has still gained 20%.  That’s a fantastic return on your money by any standard.  Things might be dramatic out there in the world of money, but you have to remember that you are in it for the long run, and with the exception of those who plan on retiring sometime in the next 5 years you ought to maintain your 401k plan investments.

Don’t let the news frighten you, don’t check your investments daily and most of all don’t go looking for bad news without thinking about what good can (and ultimately will) come from the difficulties we are now facing.  But most of all don’t sell out of your 401k plan and PLEASE OH PLEASE continue to invest in it.  You’re practically guaranteed a positive return, even with negative stock returns in the 30-40% range.  After all your employer is likely giving you FREE money, just for taking advantage of their 401k retirement plan.

Tags: 401(k), 401k plan, Investing, Retirement Planning

Time For A Financial Checkup

July 8, 2008 | Filed in: Personal Finance | No comment

It’s midway through the year.  How have you done with the financial goals you set for yourself in January?  If you never set any that’s ok.  It’s never too late to start.  It’s a good time to check your finances and make any necessary adjustments to keep yourself on the right track to financial independence.  For a great starting point check out the following list.

Emergency Funds: Here’s a pop quiz for you.  How many months worth of expenses have I managed to save up so far in my emergency fund?  If you answered “3 months” then pat yourself on the back.  You deserve a cookie.  Enough with the cliches.  A well prepared personal finance portfolio should have AT LEAST three months worth of expenses.  Most financial advisers recommend six months worth, as do I.

Net Worth: A net worth that’s holding steady or rising is a good sign and you’re doing well.  To calculate your net worth add up your assets and subtract your debts.  Pretty simple right?  You should calculate this number on at least a semi-annual basis to make sure that your Net Worth is increasing.  If it’s not you need to change your financial habits.

Insurance Policies: In this day and age insurance is as much a necessity to a healthy financial policy as is a 401(k) or emergency savings.  You don’t want to pay for more coverage than you need, but even more so you don’t want to be underinsured in case of a catastrophe.  Another thing you want to review is your deductibles.  If you have a substantial amount of cash on hand to cover a high deductible you might consider increasing your deductibles in order to lower your annual insurance premiums.  Assuming nothing goes wrong this should pay for itself within a few years (or less).

Retirement Planning: Are you ignoring free money?  Does your employer offer a 401(k) or similar retirement plan?  If the answer is yes then are you contributing to it?  If you answered no, then start now.  Most employers that offer a 401(k) retirement plan also offer matching contributions up to certain amount.  These can range anywhere from 1-10% of your contributions.  If you’re lucky enough to get a matching contribution on the upper range then it’s even more reason why you need to be contributing to such a plan.  For more information check out a previous post of mine: Are You Ignoring Free Money?

Investment Portfolio: It’s always a good idea to review your investment portfolio on at least a quarterly basis.  If you are not comfortable with self-managing your portfolio then call your financial advisor to review it for you.  If a large portion of your investments are in bonds or other fixed-income investments you might consider putting more into stocks, especially considering they are down sharply this year.  This should lead to a higher return over the long run.  On a side note, if you are in your twenties or even thirties and you have more than 5-10% of your investment portfolio in bonds then get them out.  Bonds - as my friend Ramit from iwillteachyoutoberich says - are not for young people.

Tags: Emergency Fund, Financial Checkup, Insurance, Investing, Net Worth, Personal Finance, Retirement Planning