MiB Smarter Money » Portfolio

What Do I Do During a Bear Market? What Do I Invest In?

hank — Wed, 30 Jan 2008 08:19:09 +0000

Photo by: artct45If you’re between 20-40 years old, don’t do anything. Stay where you’re at, markets fluxuate. That is their nature and that should have been something you learned before you got it. If this is your first time hearing about it, don’t worry and more importantly, don’t run. Let the traders panic. That is their job. They’re pounding down 15 cups a coffee per day and enjoy the stress. Let them deal with it. You’re paying a person that the traders are relaying information to in your mutual funds. You’re 3rd tier on that – sit back and enjoy the cheap stocks you’re getting into.If you haven’t sold, you haven’t lost. Stick to your guns and don’t get scared out of the market, recessions happen. But they always come back. As long as you still have a job, you shouldn’t be worrying. If you HAVE lost your job, you should probably not be reading this blog, try this one.

Buy technology stocks and fund. They’ve done really well this year, and think about it. We’re in the technology era; people WANT technology and are willing to pay for it still. As long as you’ve got a good time horizon for investing (10+ years left till retirement) I think you’ve got a good shot to get in at the bottom floor during the recession.

There are special recession ETFs geared towards recession. Look at medical, people always need to go to the doctor. Look at Claymore Securities.

Ultimately, my recommendation is to keep your money headed towards your investments as long as you’ve got a job. Keep your portfolio on track, this is the time when many people are getting out of the game, and as long as you’ve got time on your side, a perfect time for you to capitalize on the low prices being tossed around.

Do you have any secrets you’d like to share? Anything you’ve done in the past? Advice for the future?

Keep Your Investments Separate For Different Goals

hank — Wed, 16 Jan 2008 15:30:14 +0000

How many of you use your 401k for your everything bucket? I’ve overheard friends and family talk about their 401k like their “all for one long term savings account” saying things like, “I’m going to use my 401k for my kids education” or “my 401k is used for both me and my wifes retirements” or the worst to date, “I really need to get a car, I’ll probably borrow against my 401k”. The last one is clearly the worst because a car is a depreciating investment. You’ll never get that one back.

I can see the other 2 MAYBE working; but when you start to dabble the same investment for other pieces you often times lose site of what it is there for. A 401k is there for YOUR retirement; a ROTH IRA is for YOUR retirement. Unless you’re dumping TWICE as much in your 401k, it shouldn’t be set for yourself and your wife. Keep it for you and start something ELSE up for her.

Using it for your kids college education isn’t a HORRIBLE idea either, but take into account that you’re going to likely retire AFTER they go to college. So if you’re double-timing your 401k to education AND retirement, it’s going to look awfully small after the kids take it to school. By that time, it might be too late to know where you want to get with it. I offer the same advice for the person wanting to use the 401k for both he and his wife, make sure you’re dumping a lot into it then.

Just the visual aspect of seeing my kids 529 plans, my 401k, and my ROTH IRA are enough to keep me in line. I know what the investments are for, and what money is going where, and more importantly, why. Simplifying the process can often times remove that “investing blur” that you may have when it comes to saving for your future.

If that isn’t enough to convince you to keep them separate, think of how life is always changing; you have another kid, you have an accident at work forcing you to retire early, big medical bills come up. If you plan on your ROTH covering you in retirement (after 59 1/2) and you have to retire early, is there anything set up for that aspect? Might not be a bad idea to have that emergency fund fired up in that case.

Over time, your investments will change, your mindset will change, your timeframes will change. For those reasons you shouldn’t keep all your (investment) eggs in one basket. Spread them around to different baskets for different goals. If nothing else, it trains you on another aspect of investing when you jump to another ship and increases your financial education significantly.

Photo by: Daquella manera

Why Is It So Taboo To Talk About Salary And Compensation?

hank — Tue, 15 Jan 2008 09:13:54 +0000

Photo by: takashy

How is it that when we can readily see public sector and professional athletes salaries on the web and not bat an eye at it. I’m sure they discuss these things over caviar all the time and it isn’t that big of a deal; but why does middle class America think it is so taboo to discuss it? I admit it, I never ask friends and family what they make. If they make it readily available for me, I’ll certainly listen, but I have never asked about it. Is it a status thing?

It seems even more ridiculous when you can find and know the price of everything with the advent of the internet. I can find out prices of cars, prices of houses, prices of groceries, tax information, and daycare prices if I really want to online. We have a pretty good idea of how much someone is worth by these things, but still feel it is some top secret information to readily discuss the last piece of that puzzle.

Do I disclose my salary on this site? No. But could you find it out if you wanted to? Totally. Look at my balance sheet, my net worth, and see how much goes in and out. Feel free, it’s out there to find, but I still find myself reluctant, even through anonymity to release that piece of information.

I think it may fall in the way we were raised and the environment we grew up in. I think a big reason may be that some of us are always trying to “keep up with the Joneses” and don’t want to give in that those said Joneses really are kicking our butts in the income category.

Photo by: takashy

I think another big piece of it MAY be the fact that the athletes, public officials, and some celebrities salaries are posted (including the fact that Paris Hilton gets paid MILLIONS to attend parties). We realize that we’re up against some pretty big $$$ and that our measly salaries are nothing compared to those apples…

But why the mindset in the first place? I never knew what my parents made growing up. Eating hotdogs and macaroni and cheese 4 times a week though gave me a pretty good indication; but they never actually let on anything. I’d suspect that my dad (mom stayed home to take care of us) brought in no more than 20k through the 80′s and left in the 90s and I’d bet when my mom went back to work she was barely pulling in 10-12k in her first few years, nearly to 25k now, but I never knew.

Does the lower class discuss salaries openly? In tight knit families I bet they do. If you’re all working to pay for the roof over your head, I’m sure it is readily available information at the dinner table. Heck, it would have to be.

Photo by: takashy

I’m not rich, nor am I poor, but I can’t tell you the salary of any of my family members, nor do I feel I should ask. Yes, I am certainly interested; but not enough to pry and ask. I would actually probably feel pretty uncomfortable about it. I remember growing up when you’re in your teens, people older than you always asked me though, assuming that I made minimum wage, I’d be happy to pipe up that I was making WELL above the minimum wage of $4.75 and that I was paid very well at $5.15.

So how about worldwide though – Is it just an American thing? Like I said earlier, I’m even confining it to American middle-class right now – prove me wrong if you can, I’m happy to listen. Half Sigma started a post last year about it and what he makes and it has generated a pretty good list so far. These people seem willing to share, anonymously, but still willing.

Is there ever a GOOD time to ask what someone makes? Maybe a rephrase, is there ever an appropriate time to ask what someone makes? I ran across a post my MyOpenWallet and they said:

“The question isn’t one that people are used to asking, I think. It seems rude, and your motivation for asking could be questionable. In many cases, maybe people would rather not know. But more often, I’m sure people are dying to know, although they would never dream of just coming out and saying it: “How much money do you make?”

And I agree – it DOES seem rude, but is that a thing that is a mindset? Would you care as much if you knew EVERYONES salary? if you knew the salary your boss, his boss, your co-workers, your family, your friends – would it numb the subject any? I’d think it would certainly change things up, but in different facets. The newly found rich people would be hit up by charities more, the poorer people wouldn’t have to try to live up the Joneses mentality, and likely would be richer by NOT having to live up to something they weren’t.

Ultimately it sounds like the issue isn’t going anywhere anytime soon. I’m sure I’m not going to be passing on any new developments on that front because to me, it is rude, at least at this point in my life… Convince me differently?

Goodbye To My Universal Life Insurance From Hartford Mutual

hank — Thu, 27 Dec 2007 13:00:51 +0000

Photo by: dave mcmtSo I’ve done it – after debating for about 2 months and trying to convince myself that I DIDN’T make a bad investment in getting in on this, I’ve come to my senses. I admit it, I made a bad mistake 5 years ago to purchase my Hartford Life Universal Life Insurance policy. Over that 5 year period I was putting in $205.00 per month to be “invested” in ITHAX; not completely invested in it; honestly, I don’t know how invested I was in it. I straight out asked my agent “Is my investment based exactly on the ticker symbol ITHAX?” She responded back with,

“Well, not exactly. It is difficult to explain, but yes, some of your assets are in ITHAX, but we can’t tell exactly how many shares you own at any given time. Just wait for your monthly statement.”

Are you kidding me? First of all, I want to see my investment when I want to see my investment. We’re not in the 1980s anymore. I’m a GenX’er that has grown up with the internet. If I can’t see something online, that’s another hard strike against them.

Photo by: dave mcmt

Furthermore, how is that an “investment” then? Two terms to consider in insurance: SELLING and INVESTING. They are NOT the same word, and shouldn’t even be used in the same sentence generally. You are SOLD an insurance policy. You are not INVESTED in an insurance policy. They should be completely separate entities and treated as such in your net worth and balance sheets. You are SOLD car, home, and LIFE insurance. You INVEST in stocks, bonds, and mutual funds. Don’t get them confused.

Needless to say, she wasn’t completely happy with my choice to opt out of paying her salary each month. But they’ll be like that, they want you to stay in because you’re making them money. Take this number in. My $205/per month I was “investing” with her over the 5 year span made me about -$3,000. Yep, that’s right, that is a NEGATIVE number. I had put in $12,300 over 5 years, and my “investment” is worth $9,292 as of December 1, 2007. If that’s not a bad investment, I’m not sure what is.

I never took the Suze Orman view of Term Life insurance very seriously as for whatever reason I was under the spell of my insurance agent. My agent is a very nice lady; nothing against her (aside from taking my $) but she is just trying to make a living also – I have nothing wrong with that. But I’m out from under that umbrella now and am totally onboard with Suze and Dave Ramsey in the insurance piece.

Photo by: dave mcmt

CubeFarmer has pretty much written the exact same thing about their whole life policy. It’s crap, and Universal is similar. I can’t begin to explain how much I relate to the article. Almost to the “T”. I got in shortly after college because of relatives advice also, and here we are years later. One BIGGER caveat though is that the surrender charge is RIDICULOUS. My 9k investment, if cashed out now to find a new investment/insurance is going to take almost 4k in surrender charges!!! That’s almost HALF of my “investment” in there!

I’ve got an email in with her now inquiring about my options going forward and how to mitigate the surrender charge, but I’m pretty sure it’s similar to the Edward Jones ROTH IRA ladder structure, but stretched out over a longer period, which I believe is 15 years; one thing is for sure though, she’s not getting that $205 payment as soon as I find a decent term policy…

How Do I Plan To Reach My Investing Goals For Retirement?

hank — Sun, 23 Dec 2007 13:00:50 +0000

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

I’m Ditching My Edward Jones Deferred-Loaded, “B” Shares ROTH IRA

hank — Wed, 12 Dec 2007 15:52:56 +0000

So after writing about how my Edward Jones ROTH IRA was invested in “B shares” of NFPBX and no response back from my Edward Jones rep questioning him if I could get out without paying the 5% deferred load or reallocate the funds elsewhere, I figured it was time to do something about it, and I have. As of yesterday at 9am, I turned off the faucet to funding that account. We’ll see if he calls me back now.

Either way I wasn’t very happy with the service he was giving me. He’s a nice guy, but it just seems to me like he is selling me a product instead of investing my money, very similar to my Universal Life Insurance policy I was sold on 5 years ago (of which I have also turned off the faucet, more on that later). But an advisor should be someone that is there to ADVISE you of where your money should go to help for YOUR retirement, not theirs. I am confident enough now to select my own funds and choose my own investing path, but it is nice to have someone to ping questions off if I DO have questions and for second opinions.

The personal finance blog network is one resource, but I like to have the option to ask a question to a certified financial planner if I can as well. It’s advantageous to have as many resources in your investing bullpen to help along the way with any decisions. So I will keep the Edward Jones account open for nothing more than to utilize the resource he’s given me; I won’t close the account because he’s not the one holding the bag for the 5% deferred “ladder approach” to investing, it is the actual fund, NFPBX. The ladder approach the Edward Jones rep refers to is that the 5% deferred load on the fund will decrease each year I stay in it, up until the 5th year, at which time my account will be converted into “A” shares and the load will be gone.

His explanation of the reasoning behind this is that “it will keep me honest in my investing, and force me to invest for my future”. Well, duh, I know I need to stay in for the long haul, but I don’t need to be investing in HIS future, nor the futures of the fund managers. I think they’ll do just fine without me. I also don’t mind keeping the cash in with NFPBX because it IS a decent fund; repeat, DECENT fund. I hate the deferred load, and the expense ratio of 1.48% isn’t in my sub 1.0% range, but it HAS returned 16% this year, and I can’t balk at that. But I think I can find better ways to manage the $.

In comes Charles Schwab – Honestly, it is the infancy stage, and I’m sure there may be bumps along the way. But they’ve been nothing but cordial in my journey thus far. Yea, I know, they want me for my money. If I find they’re not doing me a service, I have no qualms leaving them either; after all, I can open as many ROTH IRAs as I’d like if I really feel like it. But I am very happy so far. The one sticker so far I’m dealing with then is the fact that I’m NOT transferring my current ROTH or cashing it out (for $400 via the 5% deferred load is what I’d have to pay to get out now) so I don’t have any capital or $ to be sending to a ROTH right now, so I’m starting with the payments I PREVIOUSLY had going to Edward Jones of $100.

The payments will now be headed towards my new ROTH with Charles Schwab under one of their funds, SWEGX. SWEGX has been doing alright this year and it’s basically a mutual fund of mutual funds because it’s holdings are smaller funds, also held by Schwab. Morningstar gives it a 5 star rating. It has a 0.80% expense ratio that I like, and is a no-load fund. Finally it’s got a 12.4% rate of return so far this year, which isn’t too bad either. We’ll see how it does over the next few months, but as a starter fund and only have 100$ to start investing with, it is going to do the trick nicely I think.

Welcome to the family SWEGX!

Should I Use My 401k To Pay Off My Mortgage?

hank — Thu, 29 Nov 2007 17:23:55 +0000

I got an email from a reader yesterday that asked:

“Hello Hank, I’ve been with my company for almost 20 years and I have over $1,000,000 in my 401k. I am 45 years old and I have a house mortgage still of $295,000 for another 13 years paying about $2000 per month. Would it make sense to get out of my mortgage and have that extra $2000 per month to put towards better investments? I plan on working for 10-15 more years before retiring. What do you think? Is that a good idea?” - Neville from Mississippi

Welp, where to start. First of all Neville, GOOD JOB on putting away $1,000,000 in your 401k by 45! That’s tough to do and the first million is always the hardest! Which leads to point #1 (again, take it how you like, I’m not a professional, but this is what I’d do in this situation):
1. The first million is the hardest to get! It’s taken you 25 years to get there! Do you have another 25 to wait? Yes, I know you’ll only be taking out $295,000, but that off of $1,000,000 still knocks you down to $705,000, which isn’t bad at all, but to get back to the power of that $1,000,000 it’s going to take 6 years to get back there, and on top of that, the 705k in15 years investing 15k per year (3% inflation) is going to be a tidy $2,286,545 (click the image to enlarge)

Now that’s not too bad at all, and I’m not knocking it – I hope to be somewhere around there soon too, but think if you leave that $1,000,000 in there for the next 15 years and add 15k per year at 3% inflation you’re looking at $3,077,503 (click the image to enlarge)

Doesn’t that look better? By keeping that money there, you’re banking $790,958 MORE than by taking out the $295,000 that you “thought” you were taking out – but that’s only the beginning -

2. The 401k is set up as a RETIREMENT account – you shouldn’t be dipping into that bucket, that’s what you set it up for, RETIREMENT, not “HOUSE PAYING OFF” – You clearly make enough money to be able to put money away, so why cut the compounding interest short by hacking it into quarters? It’s for retirement, I’d leave it that way!

3. Taxes, taxes, taxes – You’re going to get raked over the coals taking out 401k $ now to pay for your house – not only are you going to have to claim the 401k money as income for the year, that’ll toss you into the highest possible IRS tax bracket at 35%!

Schedule Y-1 — Married Filing Jointly or Qualifying Widow(er)

If taxable income is over–	But not over–	The tax is:	$0	$15,650	10% of the amount over $0
$15,650	$63,700	$1,565.00 plus 15% of the amount over 15,650
$63,700	$128,500	$8,772.50 plus 25% of the amount over 63,700
$128,500	$195,850	$24,972.50 plus 28% of the amount over 128,500
$195,850	$349,700	$43,830.50 plus 33% of the amount over 195,850
$349,700	no limit	$94,601.00 plus 35% of the amount over 349,700

That’s a pretty penny to pay out, especially if you’re used to the 25% bracket you’ve been in. An additional tax on an early distribution is 10% of the taxable amount. The taxable amount is also included in your taxable income. This 10% tax is in addition to regular income taxes. So you’re giving 45% away right there to ol’ Uncle Sam.

4. Your mortgage interest is a tax write off. I don’t know how your mortgage is structured, but I DO know that when your mortgage is paid off, you won’t have that write off.

5. Even if you DID have an extra $2000 to put somewhere each month instead of paying your mortgage, your nest egg is now at $705,000 and even if you put $2k more each month or 24k more per year on top of your 15k, for a total of 39k per year, you’re going to be sucking tailpipe to your $1,000,000 you would have had making regular distributions(click the image):
vs.

By putting $39,000 per year into an investment making 10% with 3% inflation, you’re going to bank only $2,920,604, which is $156,899 less than if you would have kept that $1,000,000 in there and made standard 401k donations. If you never wanted to see that 157k extra, I guess it’s no big deal though.

So ultimately I’m saying it’s probably not a great decision. A few things you COULD do though:
1. Ask your plan administrator if you can borrow against your 401k plan; take out a loan to pay off your mortgage, the money would still be working for you, but you’d have to pay it back, but that’d be better than just taking it out -
2. Do you have a ROTH? The tax benefits might be better (I strongly suggest NOT doing this) but you can take out the PRINCIPAL that you have put in to it at no tax consequence, but suggest against it – see response #1 at the top of this page and check out this post on it here.
3. Just contribute $100-$200 more per month to your mortgage – it’s amazing what a few extra dollars per month will do to melt away the balance. Ask Money&Happiness, BuildingEquity, LivingAlmostLarge, or MyMoneyBlog.

If anyone else has any info, feel free to share, but from my perspective, I think you’d be making a bad decision to take 401k money and use it towards your mortgage, but like I said, I’m no professional financial guru.

My Edward Jones ROTH IRA Account Is Invested Nn B Shares – Is That Good?

hank — Wed, 28 Nov 2007 23:41:08 +0000

So I met with my Edward Jones rep 2 weeks ago and he informed me that my ROTH IRA is being invested 100% in NPFBX. Keep in mind, 9 months ago, my goal was to just get a ROTH IRA started again. Now that I’m a bit futher along in my journey, I figured I’d dig in on exactly what I’m was putting cash in to; starting with my 401k, and now on to my ROTH.

So obviously the first step was to assess the fund NPFBX; it looks like a good fund, over the last 5 years it has gone up 15+ points, has a decent expense ratio (1.48%) and is a 3-star on Morningstar. With my 401k I have been trying to keep the expense ratios low, and the Morningstar ratings at 4 or 5 star, so that is was initially got on my bad side. Investingating further I figured ask my rep why he’s got me in the “B” shares as opposed to the “A” shares. It essentially comes down to him telling me that he wants me to “stay in the market” for 5-10 years. I agree, I want to stay in for the long haul for sure.

So I figure we’re on the same page. So I ask him about the 5.00% back-end load the fund charges with the “B” shares. He tells me that I don’t have to worry about it if I plan on staying in the for the long haul, because I WILL be in the market for 5+ years. The “B” shares have a step down structure to keep me in the fund for at least 5 years. After this year, the back-end load will drop to about 4.25%, the next year to 3.25%, then 2.25% and 1.25% in the final year, and in the 6th year, my shares will be converted to “A” shares. That doesn’t sound too bad, does it?

Well, actually it does sound bad. Right now (Nove 28, 2007 @ 2:50pmPST) the “A” shares of American Funds New Perspective (ANWPX) are selling at 36.32 vs 35.51 for the “B” shares (NPFBX). They are invested in exactly the same setup of a LargeCap Blend, but with a few key differences:
1. The expense ratio on the “A” shares is 0.71% vs the “B” share of 1.48%.
2. The Overall Morningstar rating of “A” shares is 4star, vs. the 3star of “B” shares.
3. The “A” share has a frontload of 5.75%, which isn’t cool, and the “B” share has the deffered ladder dropping from 5.00%, which also isn’t cool.

I’m starting to not like the fund more and more. But I figure I’ll give it the benefit of the doubt and research a little deeper to see what I can find. What is the real difference between the “A” shares and “B” shares. Isn’t it difficult enough to find what mutual funds in general to invest in? And now on top of it I have to decided, after I choose a fund, what type of shares I want? How does that work? So I did some more digging…

From the International Herald Tribune, they say the rule of thumb for shares is as follows:

A, or front-load, shares are the least costly way to own a fund, provided the investor is long-term;

B, or back-load, shares are more likely to fit a five- to seven-year time frame;

C, or level-load, shares are for short-term investors who like to trade in and out of funds.

Makes sense, but why deal with it?

Other investors take their business to fee-only advisers, who recommend portfolios of no-load funds, often with other financial-planning advice. These advisers are paid not by a fund company, but by the client. Typically, the fee is equivalent to a percentage of the client’s assets.

Not surprisingly, the array of options has left many investors at a loss as to whom they should pay, how they should pay, and for what.

I did some more digging on the differences between “A”, “B”, and “C” shares and actually found an article directly FROM an Edward Jones associate where he says:

In the US “a” share funds have a maximum 5% initial commission and a annual expense fee. “B” shares have a zero initial commission, typically a 7 year holding period and a higher annual expense fee than “a” shares. “C” shares have no initial commission, one year or less holding period and a higher annual expense fee than “a” shares.

Our [Edward Jones] feeling is that our customer at Edward Jones, the serious long term investor, is better off buying “a” share funds, paying the one time commission and getting the lower annual expense fee. Our average client holds a mutual fund 18 years. It makes good economic sense for them to hold the A shares.

In Canada because “a” share front load commissions are fully negotiable, there really isn’t the equivalent of the US “c” share.

Also, most fund groups in Canada charge the same annual expenses for their “a” or “b” shares. ie; xyz fund company Canadian growth fund A and B shares have the same annual expense charge.

The savings the fund company has on the A shares vs B shares, because they don’t have to fund the salespersons commission on A shares, like they do on B shares, they pay out in the form of a higher trailing commission to the salesperson on the A shares.

The key piece I see there is the last paragraph where he says that the FUND COMPANY (American Funds) doesn’t have to pay the seller of the share (Edward Jones rep) when they buy the “A” share. When the customer buys the “B” share, they’re paying the Edward Jones rep as well when you buy that.

AH HA! So I’m buying into the “B” shares from my reps perspective to “stay in the market for the long haul”, but in actuality, I’m buying into “B” shares to hook him up with a few extra $ off me that he’s getting instead of applying it to my best interests. A handy way of hiding it I guess.

So the next step I decided to do was to cut off the $ being sent to him and get out of that fund ASAP. But, as I’ve already invested almost $2,000 this year and it is the first year I am in it, I am going to be charged the 5% back-end load to get OUT of the fund now. Well crap, right? Not necessarily, I can just stop funding this ROTH IRA account, keep the $2,000 in there, and wait for 5 years to go by before they’re turned into “A” shares (at which time the 5.75% front load doesn’t matter, because I’ve already been in the fund before and road the step ladder from “B” share-land.

Is it worth it though to stay in for those 5 years with the 1.48% (NPFBX) expense ratio, and miss out on the 0.71% (ANWPX) expense ratio from being out of the “A” share box? Well, let’s run the numbers:
1. 1.48% of $2,000 over 5 years raking a modest 10% return would mean 8.52% real return putting it at about $3,007 over 5 years (not adding any more).
2. 0.71% of $2000 over 5 years raking a modest 10% return would mean 9.29% real return putting it at about $3,120 over 5 years (not addign any more).

No HUGE deal, $113.00 saving over the 5 years to be in the “A” share bucket, but still, that’s $113 I could put to work elsewhere. So it is probably no HUGE skin off my back to keep it in there, but I need to realize that if I were to leave that in there until retirement in 40 years for me, that $113 without adding anything more would relate to $70,119 in the “A” shares, and $52, 266 for “B” shares over that timeframe meaning $17,853 whittled away on fees for being in the “B” bucket. Furthermore, if I take out the $2000 I have in there now, I’m going to be giving the fund another 5% getting out now and giving them another $100 to pull it out and go elsewhere, ugh. I figure the best way around it is to keep the $ in there, keep the financial advisor assistance (whatever he DOES give) on board and wait 5 years to let that $ simmer. If nothing else, I keep the rep honest and onboard at the same time if I have other questions.

Right now that $2000 wasjust a bad decision overall, but a good decision to get back into the ROTH IRA realm. I should have looked elsewhere before jumping, but I jumped and ultimately this is water under the bridge, and can be tacked on to my “bad decisions I’ve made investing“. I’ll not let it happen again. I’m going to stop payments to that Edward Jones account and open up my own ROTH IRA elsewhere, and contribute, at least the rest of my ROTH amount for this year in that bucket, and heading forward doing the same. I am going to let the Edward Jones pot boil over the next 5 years, and open another ROTH likely with Charles Schwab. More on that later…

The Difference Between ROTH And Traditional IRA

hank — Thu, 15 Nov 2007 00:27:14 +0000

Why should I choose a ROTH IRA? Why should I choose a Traditional IRA? What’s the difference? I’ve been hit with both questions – The main advantage of a traditional IRA versus a Roth IRA is the tax benefits immediately realized. To receive the maximum tax benefits of a traditional IRA the taxpayer must have either of the following qualifications:

The taxpayer can be a member of a company retirement program (401k) but must have an adjusted gross income (AGI) of less than $52,000 (single) or $83,000 (married). If the traditional IRA account holder is not a member of a company sponsored retirement program there are no AGI limits.

If qualified, the yearly contributions to a traditional IRA are fully tax-deductible. A maximum contribution ($4000) would result in a tax savings of $1000 if paying taxes in the 25% bracket (AGI of $30,651 to $74,200). The maximum contribution will rise to $5000 in 2008.

The Roth IRA had an advantage when it comes time for disbursement of the account. With a Roth IRA, disbursements are tax free but these disbursements must be qualified. Contribution funds can be withdrawn at any time, penalty free, but don’t use that to fund anything else! A ROTH should be for retirement! Don’t use it for anything else!

Earnings can be withdrawn if the account has been in existence for five years and the account holder has reached the age of 59½, or has died, or has become disabled, or to pay for the construction of a first home.

Since Roth IRA disbursements are tax free a traditional IRA will only have a higher return than a Roth IRA if the tax savings are reinvested because traditional IRA disbursements are treated as regular income. There are guidelines to qualifying for a Roth IRA:

The holder must have earned income income under $99,000 for full contributions ($4000 under 50, $5000 over 50) income under $114,000 for a partial contribution. These numbers have “phase out” stages though, but can be off-set and drop your M.A.G.I. by investing more in your 401k contributions (but only investigate this if you’re making combined 150k-160k).

Benefits of owning an IRA account are undeniable. Which type or IRA to own can be a difficult choice, unless you make over $114,000 a year then there is only one option. Traditional IRAs do benefit the taxpayer in the short term, but are penalized when it comes time to withdraw. IRAs can be converted from traditional to Roth but not vice-versa. You can own both types of IRA accounts also, but the contribution limits are less (currently $4000).

The #1 Secret To Investing…

hank — Fri, 09 Nov 2007 08:49:41 +0000

Where should I put my money now so that I can live comfortably in retirement? I’ve been asked and asked myself this question many times over the years, as I’m sure everyone has. Everyone wants a magic formula that will tell them where to put money. Some people think there is a magic box that will allow them to get to retirement and wealth with little or no effort, but I’ve got bad news, there isn’t a magic box. Well, I take that back; maybe the lottery is a magic box, but that magic box is being bid on each day by 14 MILLION people, so the odds are fairly low on that one, or so says Wikipedia here.

The one constant that has been used in the market for making a profit is time. That’s it folks, there’s your answer, TIME! The problem is not that people don’t realize this, it is that they never take it into consideration when they’re young. Most people don’t start planning for retirement before that “magic” age is gone. If you’re reading this blog and others like it, you’re on the right path though – if you’re between 18-25, you’re WELL on the right path!

So let’s look at some numbers:
People, me included, when you’re 18-23 you’re in college mode and either don’t have an extra $20-$40 a week or month even to be putting it away, but if you DID put away even $20 per week instead of buying a case of beer, and ONLY put it away during your 4 years of college, you would have saved:
$20*4(weeks)=$80/month.
$80*12(months in a year)=$960 per year.
$960*4(years in college)=$3840.
Set that to simmer for 50 years, NEVER putting anymore in, assuming 10% rate of return, retire at 68 and you’re looking at $450,781 being built up in that account! (click the image to see the time that’d be on your side):

So further dreaming… What if you would have been doing this at 12 when you started your paper route and stopped when you were 18 and went to college?
$20*4(weeks)=$80/month.
$80*12(months in a year)=$960 per year.
$960*6(years in till 18)=$5760.
Figure retiring at 68 again, so 54 years:

Yes, that is some serious dreaming, and determination that almost nobody has (myself included!) , but is just staggering the amount you can get with compounding interest. Seeing as though most people don’t get into this mindset until their mid 30′s on average, what would a 35 year old have to stick away to be able to have that kind of money at 68 (click the image below):

You’d need to stick away $333.33 per month or $83.34/week UNTIL you turned 68 to match what you could have done by socking away $20 a week from your paper route in middle school! Sad but true, and rarely do people catch on. But that brings up another debate all-together which might be for another post, at another time, but should you really be having Junior stick his hard earned paper money away for retirement, or just let him be a kid and spend the $ on gum and baseball cards?