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Archive for the ‘Retirement’ Category

Is it any wonder today’s investors are confused?  These two headlines ran on MSN/Yahoo within 12 hours of each other:

Dow off 237 as financial stocks crumble
Stocks head for higher open

Okay, I can understand that. Financial stocks are weakening, but there was some optimism as the market opened this morning. Optimism is good – our country literally runs on optimism.

Later today, these two Yahoo news pieces ran 5 minutes apart:
Dow, S&P turn negative on oil, financials
Stocks higher despite worries about financials

Can you see the short term investors pulling their hair out? What is it – higher or lower?  Red ink or black?

I just wanted to point out the insanity of today’s marketplace. If we try to overanalyse the situation, we might just catch ourselves selling valuable stocks on a bad tip or media lead.

At the age of 23, this is my portfolio’s first true bear market. It’s scary, and I don’t like it.  I’ve lost more than $1,000 in the past six months – about 15 percent of my retirement portfolio.  My financial adviser’s advice?  Sit tight. It hurts, but there are no bulls without bears.

Until that bull comes charging back into our stock market, I just tell myself that I’m buying lots of stocks on sale. I like sales, right?  I’ll stick to my large-mid-small cap indexes, and hopefully ride out this mess with a profit in the end.

In the meantime, I think I’ll just stop reading the daily stock updates. How much value can they hold for a long-term investor?  Not much.

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Back when I was 16, my father helped me open a Roth IRA. “She’s so young!” our adviser exclaimed. “Think of how much tax money she will save!”

Retirement plans come in both traditional and Roth forms. Roth 401(k)s and IRAs do not offer a tax deduction, but money can be withdrawn tax-free during retirement.

A traditional account lets you take a tax deduction for retirement contributions. If you contribute $1,000 to an IRA or 401(k) in 2008, you can deduct $1,000 from your income for tax purposes. Any money earned through the investment is then taxed when you withdraw the money during retirement.

 My trusty Roth worked well the first few years.  I didn’t earn much income, and my taxes were always low. My employer took out the government’s 10% and that was that.

Move forward a few years. I am now self-employed, and with my husband earn substantially more than we did in high school and college.  Suddenly, we’re being hit with self-employment taxes, a higher tax bracket, etc.

My trusty Roth is continuing to plug along, but is it still the best retirement plan for our situation? We’re in the position right now where we could really use the tax breaks a traditional retirement plan can offer.

I must admit that I don’t trust the government, either. Will they be able to resist taxing Roths in the next 40 years?  Will they be encouraged or forced to tax these otherwise “tax free upon withdrawal” accounts, to make up for the financial mess our country is headed towards?

In my opinion, it can’t hurt to diversify your retirement funds. If we have both a traditional and Roth IRA, we should be able to choose “when” we are taxed in retirement. I’m aiming for an equal mix of Roth, traditional and non-retirement funds to pull from at our discretion.

Note that I mentioned non-retirement funds, such as long-term stock market investments. While there are no tax benefits to saving money outside of IRAs and 401(k)s, etc., you pay taxes on capital gains, not the entire invested amount. Of course, who knows what capital gains will be taxed at in 20 or 40 years?

What I’m really attracted to, in the case of non-retirement funds, is the ability to pull my money before age 59 1/2. We’re hoping to retire young, perhaps between 45 and 50. While the government does allow us to take “substantially equal periodic payments” before age 59 1/2, a 72(t) withdrawal, I’d rather have complete control over how much (or how little) we withdraw in early retirement.

How are you planning for retirement?  Do you have a mix of tax-advantaged accounts?

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Updated goals

A lot has happened since I first posted our goals in April!  The Husband and I finally sat down and discussed our long-term goals, including retirement and early retirement. 

The Husband wants to retire at 45.  I’m not sure if we can do it, but it’s certainly an admirable goal!  We’re both fully dedicated to this goal now.

Because we only make so much money, we cannot continue to aggressively pay down our mortgage and student loans while still saving for an early retirement. Thus, our goals have somewhat changed.

Old goals
Goal 1: Build our retirement fund
Goal 2: Pay down the 30 year mortgage in 15-20 years
Goal 3: Pay down student loans

New goals
Goal 1: Build our retirement funds

We still plan to set aside $50 or more each month into a Roth IRA.

Goal 2: Invest for early retirement
We’re now setting aside $100 each month to invest in an S&P 500 index. We don’t want to touch our Roth until age 60 or older, so we need investments outside of our retirement accounts.

Goal 3: Pay down the 30 year mortgage in 22 years.
This coincides with our 45th birthdays, around the time we would like to slow down.

Goal 4: Pay off student loans… eventually.
My loans are now at 4.25%, down from 5.25%.  We will pay the minimum each month.

I sometimes feel like we are micromanaging our finances and goals.  Am I the only one?

Have you examined your goals lately?  Have they changed in any way?

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It seems fitting to discuss taxes and money on April 15.  We’re long done with our taxes, but I just “discovered” a tax credit that we are eligible for. It’s called the “saver’s credit.” What better place to discuss a tax credit for savings than in a personal finance blog?

Like many young adults, my husband and I have Roth IRAs.  We’ll be able to pull our retirement money out tax free, but in the meantime, we don’t get a tax savings for contributing.  It’s a tough decision: Save tax money now, or later.

Now we don’t have to make that choice. We can deduct part of our contributions, up to $2,000, using the saver’s credit. (Find last year’s form here.)  If you make less than $52,000 and are not a full-time student, you may also be eligible for the Saver’s Credit. Check it out!

The saver’s credit seems to work for traditional and Roth IRAs, 401(k)s, 403(b)s, and SEP and SIMPLE retirement plans.

Going the traditional route, i.e. the non-Roth IRA, will save you more tax money each year.  But the saver’s credit is a nice bonus for those who choose to utilize a Roth retirment plan.  It isn’t much (we’ll save about $60), but every little bit counts!

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