Wednesday April 23, 2014
It never fails. In February, March, and early April my phone rings off the hook and emails come pouring in. As people gather information to file their taxes, all kinds of other money questions come up. †This fresh look at your finances can continue right into spring.
Think of it as spring cleaning for your financial house. It's time to get organized, find hidden assets, tidy up your portfolio, and get a clear picture of your future. Want to know how? Here are my financial spring cleaning tips: 7 Ways to Get Your Financial House in Order.
Wednesday April 16, 2014
Did you pull money out of the markets in 2008/2009 and then sit on the sidelines for far too long? If so, you're not alone. On average, investors have woeful timing.
Dalbar, a research company, studies average investor behavior to quantify just how woeful the timing is. Their 2013 data is out.
Take a guess... for the last 20 years did the average equity investor under-perform the S&P 500 Index by 2%, 3%, 4%, or more?
You can find the answer in Why Average Investors Earn Below Average Returns.
Monday April 14, 2014
In every field of study there is something called "the curse of knowledge".† When you get deep into a topic for a prolonged period of time it can be easy to take your knowledge for granted, and assume that something that you consider basic, is, in fact, basic. Most of the time it is not.
401k rules provide a perfect example. I recently received this question, "If a company closes and still has their 401k, who pays the penalty?"
It's a great question and illustrates the fact that many people who have 401ks do not realize that the funds are portable - meaning when they no longer work for that company they can transfer the funds to their own IRA (Individual Retirement Account) or possibly to a 401k plan with their new employer, if that plan allows incoming transfers. These types of moves do not trigger taxes and penalties.
So in the case of the question above, this reader should be able to roll their 401k money to an IRA, and no taxes or penalty will be owed.
Many people believe if they move money out of their 401k plan at all they will owe taxes and penalties - even if they move the funds to an IRA. This may be one reason why so many people leave money in an old 401k.
The confusion is understandable. The words distribution and withdrawal do not have clear meanings in the 401k world. A rollover is a form of a distribution, but not a taxable one. †A withdrawal usually means a taxable distribution.
I took a stab at clearing up some of the confusion in Understanding 401k Terms - Distributions, Withdrawals, Transfers, and Rollovers.
Learn more ~ or join the conversation!
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Monday April 7, 2014
There are several ways to figure out what you might spend in retirement. The easiest is to start with your current take home pay. If you can live on that, then you might assume that if you had that amount of after-tax income in retirement, then you should be able to continue your lifestyle.
Overall, I find this method of estimating needed cash-flow works, but not for everyone. You might have health care premiums that your employer currently covers that you will have to cover in retirement. If so you'll need to add this new expense to your current take home pay to accurately project the amount of retirement paycheck that you will need.
And what about auto or home repairs? You might cover those out of your current take home pay.... unless you get bonuses that you use for those expenses. Lots of people use their current company bonuses to pay for extra items like vacations or home remodels. You'll still have home repairs in retirement. Have you accounted for this periodic expense in your planning?
Overall, I find most people accidentally leave expenses out of their retirement budget. Dental work is a great example - I've yet to see a line item on anyone's budget for "dentist" yet I know crowns, bridges, and other expensive dental work occur more and more frequently as you age.
To help you avoid the most common mistakes, a colleague and I have gathered together the most common items we see missing in retirement budgets in 7 Disastrous Retirement Budget Mistakes.