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)
Thursday, May 15, 2008
Wednesday, May 14, 2008
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.
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.
- 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.
- 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.
- 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!
- 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.
- 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.
- 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.. - 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.
- 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!
Monday, May 12, 2008
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/
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
Sunday, May 11, 2008
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.
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.
Thursday, May 8, 2008
Example of how a dividend can grow your holdings
I re-read my previous post and wanted to add an example of how a dividend can help grow your holdings in a stock. I thought that a real world example would make it clearer as to why dividends are beneficial. See below:
Let's keep the math simple....
You buy 100 shares of Washington Mutual when it is at $10. Your original investment is $1,000. Let's assume that the yield of WM is 10%, this means that WM pays dividends that add up to 10% annually. (Usually, dividends are paid quarterly, but they are measured in yield per annum.) Let's also assume that WM stays at $10/share for 5 years with absolutely no appreciation in stock price. This is not really realistic but helps keep my example clear. Even with the share price of WM staying flat over 5 years, you would have increased your holdings because of the compunded dividend growth, assuming you reinvested those dividends. Let me show you.
Year 1: Own 100 shares at $10.
Year 2: (after 10% annual dividend reinvested) Own 110 shares at $10.
Year 3: (after 10% annual dividend reinvested) Own 121 shares at $10.
Year 4: (after 10% annual dividend reinvested) Own 133.10 shares at $10.
Year 5: (after 10% annual dividend reinvested) Own 146.41 shares at $10.
Isn't this crazy? Even with 0% growth in the actual price of a stock, your value of investment went up from $1000 in year 1 to $1464.10 in year 5. A 46% return over 5 years with no growth in the stock OR the dividend. The best part about this is that we all know most stocks will go up over the long term as the business grows and becomes more profitable AND when the businesses become more profitable they in turn usually raise the dividend to share that profit with shareholders. That means that the original investment that you make will grow even more than my example. This just goes to show how powerful dividends are.
Once again, this example was a little extreme, but just goes to show the added value of dividends, if reinvested. I highly recommend that you take some time and research dividend paying companies. Just google dividends and stocks and there will be myriad links to sites listing some good names.
Any questions or comments that you may have are always welcomed, drop a line below.
Let's keep the math simple....
You buy 100 shares of Washington Mutual when it is at $10. Your original investment is $1,000. Let's assume that the yield of WM is 10%, this means that WM pays dividends that add up to 10% annually. (Usually, dividends are paid quarterly, but they are measured in yield per annum.) Let's also assume that WM stays at $10/share for 5 years with absolutely no appreciation in stock price. This is not really realistic but helps keep my example clear. Even with the share price of WM staying flat over 5 years, you would have increased your holdings because of the compunded dividend growth, assuming you reinvested those dividends. Let me show you.
Year 1: Own 100 shares at $10.
Year 2: (after 10% annual dividend reinvested) Own 110 shares at $10.
Year 3: (after 10% annual dividend reinvested) Own 121 shares at $10.
Year 4: (after 10% annual dividend reinvested) Own 133.10 shares at $10.
Year 5: (after 10% annual dividend reinvested) Own 146.41 shares at $10.
Isn't this crazy? Even with 0% growth in the actual price of a stock, your value of investment went up from $1000 in year 1 to $1464.10 in year 5. A 46% return over 5 years with no growth in the stock OR the dividend. The best part about this is that we all know most stocks will go up over the long term as the business grows and becomes more profitable AND when the businesses become more profitable they in turn usually raise the dividend to share that profit with shareholders. That means that the original investment that you make will grow even more than my example. This just goes to show how powerful dividends are.
Once again, this example was a little extreme, but just goes to show the added value of dividends, if reinvested. I highly recommend that you take some time and research dividend paying companies. Just google dividends and stocks and there will be myriad links to sites listing some good names.
Any questions or comments that you may have are always welcomed, drop a line below.
Wednesday, May 7, 2008
Dividends. They are a great way to slowly accumulate wealth.
So, dividends are very important. What are they? Here is the simplest definition I can come up with: a dividend is the distribution of additional company shares to its shareholders.
A little overview: Many companies and financial organizations offer shares to generate funds for the company. The investors invest in the company through these stock purchases. The investment decisions also depend on the reputation of the company. Getting some good returns in the form of a dividend is the motive behind these investments.
The shares bought by the investors provide them the status of an owner of the company. When the company makes a profit, a certain percentage of the profit is distributed among the shareholders according to the amount of shares of the company they own. These dividends are provided in cash or in the form of additional shares. These additional shares are known as a stock dividend.
There are several reasons for providing a stock dividend to the share holders. The company may have a shortage of cash. Because of this it becomes impossible for the company to provide cash to every shareholder. On the other hand, it is also possible that the company wants to invest more money from the earned profit into the company to raise the production level, thus they issue stock instead of cash.
There are several benefits of a stock dividend. Most importantly, no tax is charged on such dividends. If a shareholder receives some kind of stock dividend he or she is not entitled to pay any kind of tax on that until the additional shares are sold. On the other hand, this type of dividend provides the shareholder with additional ownership in the company which can provide more profit in the future. These are big pluses and the main reason why investors are attracted to the long term growth prospects of high-dividend yield stocks.
Another form of dividend that is provided to the shareholders is known as cash dividend. This dividend is paid in hard cash form or by check. The rules of this type of dividend is more or less same as the stock dividend. Here also the shareholder receives a certain part of the company's profit, which is decided according to the number of shares the shareholder holds. The investor can then decide whether or not to reinvest the cash into the company, by purchasing more shares, or simplay take the cash as a deposit into the brokerage account. Most of the time, people reinvest the money as to grow their investment, especially if the company's future looks bright.
Here are some dividend paying stocks that are popular buys.
-Pfizer (PFE)
-Duke Realty (DRE)
-Bank of America (BAC)
-Sempra Energy (SRE)
-Johnson and Johnson (JNJ)
-General Electric (GE)
-Pepsi (PEP)
Obviously, there are thousands of stocks that yield dividends. I would suggest doing a google search for dividend paying stocks and go from there.
Good luck!
A little overview: Many companies and financial organizations offer shares to generate funds for the company. The investors invest in the company through these stock purchases. The investment decisions also depend on the reputation of the company. Getting some good returns in the form of a dividend is the motive behind these investments.
The shares bought by the investors provide them the status of an owner of the company. When the company makes a profit, a certain percentage of the profit is distributed among the shareholders according to the amount of shares of the company they own. These dividends are provided in cash or in the form of additional shares. These additional shares are known as a stock dividend.
There are several reasons for providing a stock dividend to the share holders. The company may have a shortage of cash. Because of this it becomes impossible for the company to provide cash to every shareholder. On the other hand, it is also possible that the company wants to invest more money from the earned profit into the company to raise the production level, thus they issue stock instead of cash.
There are several benefits of a stock dividend. Most importantly, no tax is charged on such dividends. If a shareholder receives some kind of stock dividend he or she is not entitled to pay any kind of tax on that until the additional shares are sold. On the other hand, this type of dividend provides the shareholder with additional ownership in the company which can provide more profit in the future. These are big pluses and the main reason why investors are attracted to the long term growth prospects of high-dividend yield stocks.
Another form of dividend that is provided to the shareholders is known as cash dividend. This dividend is paid in hard cash form or by check. The rules of this type of dividend is more or less same as the stock dividend. Here also the shareholder receives a certain part of the company's profit, which is decided according to the number of shares the shareholder holds. The investor can then decide whether or not to reinvest the cash into the company, by purchasing more shares, or simplay take the cash as a deposit into the brokerage account. Most of the time, people reinvest the money as to grow their investment, especially if the company's future looks bright.
Here are some dividend paying stocks that are popular buys.
-Pfizer (PFE)
-Duke Realty (DRE)
-Bank of America (BAC)
-Sempra Energy (SRE)
-Johnson and Johnson (JNJ)
-General Electric (GE)
-Pepsi (PEP)
Obviously, there are thousands of stocks that yield dividends. I would suggest doing a google search for dividend paying stocks and go from there.
Good luck!
Sunday, May 4, 2008
highly recommended article
Instead of me just writing endlessly about retirement, which I could do, TRUST ME, I am simply going to give you a link to a great article about understanding your retirement. It is short and sweet and to the point, so check it out. There are also many other fantastic articles about all aspects of money and finance that are quite helpful as well.
http://www.fool.com/retirement/retirement01.htm?source=ifltnvsnv0000001
This article is on the Motley Fool website. This site is great. There is a section called 'Caps' that I frequent. It allows you to make stock picks and track your portfolio of picks. I check this site at least once a day and everytime I am interested in a stock for purchase or out of curiosity. Many people use this and present great insight into companies that you may not have been privy to on your own.
I'd recommend taking an hour or so, if you have the time, to navigate the site and see what parts could be useful to you.
Happy Reading,
The Guru
http://www.fool.com/retirement/retirement01.htm?source=ifltnvsnv0000001
This article is on the Motley Fool website. This site is great. There is a section called 'Caps' that I frequent. It allows you to make stock picks and track your portfolio of picks. I check this site at least once a day and everytime I am interested in a stock for purchase or out of curiosity. Many people use this and present great insight into companies that you may not have been privy to on your own.
I'd recommend taking an hour or so, if you have the time, to navigate the site and see what parts could be useful to you.
Happy Reading,
The Guru
Friday, May 2, 2008
Dollar Cost Averaging..... a very very important concept for continued growth/profit from your investments!
In short, dollar cost averaging is an investment technique used to reduce market risk through the regular purchase of securities at predetermined intervals and set amounts. Many successful investors already practice this without realizing it. Many others could save themselves a lot of time, effort, and money by beginning a plan.
Dollar Cost Averaging: What is It?
Instead of investing assets all together in a lump sum, the investor works their way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.
Here are the numbers. Let's say the mutual fund share price is $50/share to start.
Purchase 1 - $100, 2 shares at $50 each
Purchase 2 - $100, 1.96 shares at $51 each (can only buy 1.96 shares b/c price has appreciated)
Purchase 3 - $100, 1.92 shares at $52 each
Purchase 4 - $100, 1.88 shares at $53 each
In this case, you would now have $400 invested in this mutual fund and you would own just under 8 shares (7.76 shares to be exact). The average price paid would be $51.50. Therefore if the mutual fund goes below that you are at a loss but if it is above that then you have gains.
Dollar cost averaging works even better when a fund decreases in value after you buy it. For instance, you buy 1000 shares of a stock at $50. It goes down to $25 and you buy another 1000 shares. At that point, you would own 2000 shares at $37.50. This helps b/c then the stock doesn't have to make it all the way back to $50 for you to break even, it only has to get to $37.50. Obviously it is useful if you believe in the prospects of a stock. If you bought a stock that has been downgraded or isn't attractive anymore, then you may just want to cut your loses.
Godspeed.
Dollar Cost Averaging: What is It?
Instead of investing assets all together in a lump sum, the investor works their way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.
So how do you set up your own dollar cost averaging plan?
In order to begin a dollar cost averaging plan, you must do a couple things:
- Decide exactly how much money you can invest each month or period.
- Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.
- Select an investment that you want to hold for the long term, preferably five to ten years or longer.
- At regular intervals (weekly, monthly or quarterly works best), invest that money into the investment you’ve chosen. If your broker offers it, set up an automatic withdrawal plan so the process becomes automated.
Here are the numbers. Let's say the mutual fund share price is $50/share to start.
Purchase 1 - $100, 2 shares at $50 each
Purchase 2 - $100, 1.96 shares at $51 each (can only buy 1.96 shares b/c price has appreciated)
Purchase 3 - $100, 1.92 shares at $52 each
Purchase 4 - $100, 1.88 shares at $53 each
In this case, you would now have $400 invested in this mutual fund and you would own just under 8 shares (7.76 shares to be exact). The average price paid would be $51.50. Therefore if the mutual fund goes below that you are at a loss but if it is above that then you have gains.
Dollar cost averaging works even better when a fund decreases in value after you buy it. For instance, you buy 1000 shares of a stock at $50. It goes down to $25 and you buy another 1000 shares. At that point, you would own 2000 shares at $37.50. This helps b/c then the stock doesn't have to make it all the way back to $50 for you to break even, it only has to get to $37.50. Obviously it is useful if you believe in the prospects of a stock. If you bought a stock that has been downgraded or isn't attractive anymore, then you may just want to cut your loses.
Godspeed.
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