Retirment Calculator

http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp

This is a great tool that will let you know what you will need to save. More importantly, when filling it out, you will be able to critique your current savings plan and really see what you are saving and if it is enough. (It probably isn't)

What NOT to do when saving for retirement.

Warning: this will be a long post, I have a lot on my mind when it comes to retirement.

I think that it is safe to say that retirement is the No. 1 goal of investors. Yet, looking at the numbers, it's clear that many investors are killing themselves and their savings with unfortunate actions. Here are some mistakes to avoid if you want your retirement dreams to actually come true.

1. Killing your nest egg before retirement. I have seen a couple studies which said that somewhere around 50% of workers cash in their 401(k)s when they switch jobs. In other words, they take the money and put it into their checking or savings (and pay income taxes and a 10% penalty if they're not yet 59 1/2 years old) rather than leave it in a retirement account. That's no way to build the retirement of your dreams. Not only are you paying penalties on hard-earned income but you are relinquishing the advantage of having the money grow tax-deferred, which is really important for the long term. When you change jobs, you can transfer the money in your employer-sponsored retirement plan to an IRA, which will allow the money to continue growing tax-deferred. You might also be able to leave the money in your old plan or transfer it to the plan at your new job, depending on the plans' rules. But your best bet is the IRA. You'll have many, many more investment choices, usually at far lower costs. Nowadays, people switch jobs like crazy, so if you do change your job, don't you dare make the above mistake.
2. Spending the money you have saved too early. Cashing in your 401(k) at a young age isn't the only way for your retirement to meet an early demise. Not saving enough in the first place will guarantee that your retirement will be on life support, for lack of a better term. Of course, no one wants to be told to "save" b/c it's so boring, and so ungratifying. blah blah blah. But this is what low-savers (and non-savers) are really doing: they're spending their retirement now, which may mean they won't be able to retire at all. Buying some stupid and expensive watch that they can't afford or changing their car lease every two years. Basically, don't live outside or above your means. It takes sacrifices to make large gains in the long term but it is not as hard as you may think once you create good habits. Building a nest egg isn't a decision of whether to consume, but when to consume. Do it now, and you won't be able to do it later without having to work for a paycheck. Think about what you buy now that you can go without and you will be amazed at hom much money you could save.
3. Not knowing how much to save. I bet a very small percentage of workers have calculated how much they need to retire. But you can't get to where you want to go if you don't know how to get there. You need a plan. Just google 'retirement calculator' and you can input some numbers and get an idea of what you will need and what it will take to get there. Just don't come crying to me when it says you will need 3-5 million but based on your current savings and what not you will only have 500k. Go do this and figure out your number and achieve it!
   
4. Spending too much too fast. This is for those that are in retirement. If you've made it to retirement with enough money, you should be congratulated! You've amassed enough money to create your own portfolio and generate a paycheck for yourself for the rest of your life.....hopefully. But you can't take it too easy, because you'll receive a severe pay cut if you deplete your portfolio too fast. How much can you take out each year and be almost certain that you won't outlive your savings? 3%? 5%? 7%? Well, the rule of thumb is about 4%. That's supposedly the withdrawal rate that can sustain a mix of stocks and bonds over most 30-year historical periods, which in all likelihood is the amount of years you will live after your career. It all depends on the market return of your portfolio so if you retire on the eve of the next bull market, you can take out more. However, if you quit working right before the next bear market, then taking out more than 4% a year could have your portfolio beating you to the grave. This is why it is important to over-save just to make sure you are covered.
   
5. Disregarding asset allocation. speaking of mixing stocks and bonds, nothing can mess up a retirement like bad investment decisions, whether it's owning too much of one stock, letting emotions take over, chasing the latest fad, or letting short-term events affect your long-term strategy. The way I see it, you basically have two choices: You can be a master stock-picker like Warren Buffett and try to find a dimaond in the rough like the next Wal-Mart OR you can broadly diversify your assets. This way, you can have exposure to giants as well as to small-sized growth firms. Either way, until you've established your skill at finding great investments, keep the bulk of your assets in a broadly diversified, regularly rebalanced portfolio aka a mutual fund portfolio. That way it is low maintenance and you can leave it up to the 'pros', the portfolio managers.
   
6. Allowing the government to eat your retirement. There are many types of investments and investment accounts, and they all have their differences when it comes to taxes. Not knowing all the rules can lead to too much taxation and less money for retirement.
   For example, profits from stocks that are held for at least a year will be taxed as long-term capital gains, a rate no higher than 15%. Interest from corporate bonds, on the other hand, is taxed as ordinary income which is a rate as high as 35%, or your tax bracket. Yet many investors keep their stock investments in their tax-advantaged accounts and their bonds in regular, taxable accounts. That just doesn't make sense. Asset location can be just as important as asset allocation. Read that again b/c it's really really important. Asset location can be just as important as asset allocation..
   
7. Paying too much for help/advice. There's nothing wrong with getting financial advice. If financial advisors/consultants didn't think that investors could use ideas, feedback, and answers, and pay for them, then they wouldn't be in business. But on the same note it is important that that help should be objective and affordable. Paying too much for advice, especially if it's bad, does a lot for a broker's retirement, not yours. Of course, if the advice you received had your portfolio performing better than what you could do on your own, then the price might be worth it. Remember: it's a lot better, in my opinion, to pay 1-2% and get a 10% annualized return than do it yourself and get a 3-6% return. Just be smart about what you pay and who you get advice from. There is no harm in getting multiple opinions, but the most important thing is that you do your own due diligence and ultimately know what is best for your own financial well-being.
8. Retiring too early. If you're in your early 60s, you should plan on living at least another two decades. Can you stand full-time leisure for 20 years? Do you have enough money to live on and live how you want to? Sure, it may sound good now, but many retirees find they get pretty bored after a while. But by then, they have already severed many of their professional ties. Before you decide to retire fully and permanently, discuss a phased or gradual retirement with your employer and business partners. A lot of the successful and wealthy people that I have talked to continue to work part-time as a consultant or other position in the industry that they spent their career in. My point is only that you should explore your options before you no longer have them.

Ok, that is enough of that. I probably left a lot of topics out but that should be some food for thought.

Save, Save, Save!

Great article.

A must read. Talks about why the average investor either loses or underperforms the market.

Also, it makes a case for having a financial advisor, someone whose job it is to strictly watch over your financial well-being. Comments welcomed.

http://www.thedigeratilife.com/blog/index.php/2008/01/03/why-most-investors-dont-make-money-in-the-stock-market/

Newly added: Quotes Section

Check out the new quotes section on the right hand side of the blog. I think it is a good addition. If you have a quote that relates to finance, let me know, by adding a comment and I'll put it on the page.

Quotes section

One of the comments I received included a great quote and so I thought it would be beneficial to have a quote section. Thus, you can find this newly situated on the right hand side column of the blog. Enjoy

Most Important Investments

For the majority of people, investing in stocks and bonds is foreign, especially in a basic brokerage account. The only exposure to investments many people receive is that of a work retirement account, usually a 401(k). It's amazing, and a little bit sad, how many people that I have talked to, who do not know about IRAs and their eligibility for other retirement options.

If you are the typical employee that has a company sponsored retirement plan, you have a couple ways to invest for your future.
1-Contribute to your work 401(k).
2-Open and contribute to an outside retirement account, i.e. an IRA.
3-Open a brokerage account with a broker-dealer like E-trade, Fidelity, Morgan Stanley, Merrill Lynch etc...
4-Buy oil. (meant to be a joke but right about now that looks like a great investment)

In any fashion, I want to express how important it is to save for retirement and more importantly let you know how to go about doing so.

First off, the most important way to save, by far, is your company 401(k), if you have one. The reason for this is that, most of the time, the company matches a portion of your investment. This company match is FREE MONEY. Yes, free money. ALWAYS contribute enough to get the full company match. Always. Why would you not take advantage of free money? There is no excuse or reason. (Most of the time the company that you work for will match up to $x and then 1/2 of the next $x. Always contribute enough to get every penny from them.) The reason it is so important to take money out of each check and contribute to your retirement funds is obvious: so that you have money working for you to become financially independent later in life. Another reason is that having some money withheld and invested every paycheck allows you to continually invest and dollar-cost average (see previous post of dollar-cost averaging for benefits).

Secondly, you want to open an IRA. If you make below 100k/year and don't see yourself making above that for much of your work life, open a Roth IRA. If you make, or will soon make, above 100k, open a Traditional IRA. (I won't get into the details as to why in this post)

Now, there are many reasons for opening an IRA, but the most important is that you will be able to contribute an extra $5k/year if you are under 50, and $6k/year if you are over 50 to your retirement. This money will grow tax deferred, which means that there will not be any tax consequences when you purchase or sell securities, for a profit or loss. This is a huge advantage over a normal brokerage account in which you have tax consequences after each transaction.

Lastly, if you have extra money left after taking care of necessary expenses and fulfilling the above investments, I would suggest opening a basic brokerage account and depositing that extra money so that you have the freedom to invest it in stocks or other investments.

In summary, take advantage of the free money your employer is offering. Once you've done that, do all you can to save and invest for your retirement. Even if you only have an extra $50-100/month, save it. It will go a long way for your future.

Always remember: "A penny saved, is a penny earned." This is a priceless tidbit of information that pays off in the longterm.