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Retirement Planning


Bruce B
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With it looking like more and more that there will be no social security benefits by the time we are ready to retire I was wondering what you guys have in place for a retirement plan. Where I work we have a 401k plan towards which I put $100 a week in and the company matches with 25%. We also have profit sharing where at the end of the year monies go in to my account. When we set up this plan I had a choice of how aggressive to be as far as where to invest and I chose a very aggressive plan where the highs can be real high and the lows can really be low. My question is do you just let your money go in there every week, or are you actually active in how your money is being invested and do you play the market. I am kind of clueless when it comes to investing so I just "let it ride". I'm also interested in what other companies are offering as far as retirement benefits as a comparison.

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I havent invested a lot of money yet as im still young and recklass :-). Only a grand in stocks, but towards the end of the year i plan on start putting a lot more money in. Im lucky that i work with a guy who has been in the stock market since he was my age. He has made out very good by being cautious. Not taking stupid chances. We talk about it all the time. What i have done to start up is pick stocks that are solid, yet they give you a dividend. For example RJ Reynolds, Altira (Philip Morros) and Citigroup all give pretty good divedends. So each year you get money back from those companies which you can then reinvest if you want. For example

 

Say you buy 10 shares of RJR at the current price of 59.79 i believe it is. Every year on those 10 shares you get $38 from them just for owning the stock. A lot more then you get from bank intrest. Of course the more you invest the more you get back. Also sometimes the divedend will rise.

 

Many people pick stocks to try and make a quick buck. Dont do that. Get in for the long haul. Buy solid stocks when they are at a reasonable price, which you arent taking a huge gamble with your money. A company that has been around a while, where you know your money wont all of a sudden drop. The market has its ups and downs. But it always recovers. Wait till the end of these recoveries and buy up stuff that is low. Ill give you a example of what i did

 

When the current market hit its low. I picked up some RJR reynolds. In the span of 8 months the stock has gone up $25 each share above what i bought it at. Of course it will drop a few times, may go up, but its gonna take a lot for the stock to now drop, plus im collecting the divedend.

 

 

The point is to invest smart. If you want to take small gambles on some IPO's and such put some money into it. Not all of it, and get out when you have made a good enough profit off of it. Make sure you keep a nice chunk of change in solid stuff where you are making money so when you do retire you will be well taken care of.

 

 

If anyone is looking to get into stocks. There is a site called Sharebuilder.com . You can set it up so each month you can put money into a certain stock or stocks. Do research of stuff and so on. Its excellent for beginners. I used it when i was just learning about them. Its a great way to start investing for the future. Many people setup accounts for there kids so when it comes college time the kid has money for it.

 

Also i recommend Scottrade.com. They are a regular trading firm. They have the lowest trade fee on the net. More in depth with charts and so forth. I use them now and dont have any problems.

 

capt

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Originally posted by Whooter@Mar 9 2004, 09:14 AM

Actually, I'm having to start all over again, since I was forced to plunder my 401k from my previous job after being out of work for almost a year. I have some Pepsi stock that has done quite well for me...

Same here whooter, was outta work just about all of last year, Had to take out my 401k too, the job search was tough, nothing was working out so I though I would need it to pay bills. I took the withdrawal, got the check and a week later I got a job, I was both :D and :( , because one more week, and I coulda kept it in there and avoided the penalties of the early withdrawal, although it did help with the bills.

 

If you worried about risk see if the plan you are in offers Rebalancing. The investment house will on occassion, either quarterly, semi-yearly, or yearly will reorganize your investment mix so it matches the years to retirement, financial goals and your tolerance for risk, it should lessen the losses a tad, and help those who don't have the knowledge or wear with all to keep track of their assets.

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I've been lucky enough to have my 401k continue to grow, and started a Roth IRA with my wife about 5 years ago.

 

Now, I just need to keep working on building the two of them up.

 

Building a new house this year will definately make saving for the future a challenge.

 

Glen

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All good advise, but the one thing missing is what I believe to be the most important: DIVERSIFY!

 

I own both preferred, dividend-bearing stocks as well as some standard equities that have some movement. I also have an IRA, 401k, *and* cash savings accounts.

 

The key is to make sure you keep some savings relatively liquid so you don't get nailed by early withdrawal penalties or having to wait weeks to liquidate cash you need tomorrow. Also, by diversifying, you can be both secure in your bulk while enjoying the ride a bit (both up and down) on the smaller things.

 

Ed brings up a good point, though - structure your savings to reflect your personality. I'm pretty scattered, as you can tell by my structure. That matches my lifestyle. It allows me to both spend large chunks of cash when necessary without penalty as well as not have access to the shiny, pretty money when I'm jonesing for an irresponsible purchase.

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Guest Bryan

We started two Roth IRA accounts several years ago and we contribute to them monthly. We also participate in our company sponsored 401k accounts. Our main goal right now is to pay down our mortgage. We feel that investing in the house is a wise way to go and we pay a substantial amount over and above the mortgage cost each month. As the property value grows, more and more of the eventual selling price will be profit.

 

Our mantra is to eliminate as much debt as possible and be liquid. We are not interested in paying interest.

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WarEagle: Many companies don't match, but at least you're getting the tax benefits of the 401k. Depending on your age, and assuming you're young, you may want to defer some of that money to securities for some more short-term growth. Don't drop the 401k, but diversity a bit.

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Originally posted by Bryan@Mar 9 2004, 01:35 PM

Our main goal right now is to pay down our mortgage. We feel that investing in the house is a wise way to go and we pay a substantial amount over and above the mortgage cost each month. As the property value grows, more and more of the eventual selling price will be profit.

 

Our mantra is to eliminate as much debt as possible and be liquid. We are not interested in paying interest.

I'm the same way, I hate debt. :bang: But a financial adviser would tell you that you're doing it all wrong.

The way it works is...your mortgage is good debt because it's a tax deduction, the higher your mortgage the the bigger the tax deduction. Now it's counterintuitive, but as you pay down your mortgage your taxes are going up, and at the same time you're investing in virtually nothing. As the value of your home is appreciating you are reaping the benefits, even if you're not paying much down on the principal. For example, if you paid $200k for your house and in 2 years your house is worth $250k, you're net worth went up $50k no matter how much you paid on the principal. If during the same time frame you paid $50k on your principal, you'd have a net worth of $100k, right? Now if you took that extra $50k and put it in even a bond fund earning a mere 4% annually it be worth 52k, so you'd have more money, and again your taxes for the year would be lower.

 

I'm not a financial advisor, but this makes sense to me. If you're paying pmi that's a whole different ball game.

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Just as a point of reference.

 

We get 50% match up to 6 percent for the first 5 years at the company, it goes to 75% between years 6 and 10, and 100% after 10.

 

Also, we have a pension plan that we are vested in after 5 years. I figure I can't start looking for another job until that 5 year mark is here.... which is September of this year.

 

Glen

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For example, if you paid $200k for your house and in 2 years your house is worth $250k, you're net worth went up $50k no matter how much you paid on the principal. If during the same time frame you paid $50k on your principal, you'd have a net worth of $100k, right? Now if you took that extra $50k and put it in even a bond fund earning a mere 4% annually it be worth 52k, so you'd have more money, and again your taxes for the year would be lower.

 

I see what youre saying but your missing the back side of the transaction which is that he's reducing the amount of years that he has to pay the mortgage also.

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Originally posted by Bruce B@Mar 9 2004, 03:23 PM

For example, if you paid $200k for your house and in 2 years your house is worth $250k, you're net worth went up $50k no matter how much you paid on the principal. If during the same time frame you paid $50k on your principal, you'd have a net worth of $100k, right? Now if you took that extra $50k and put it in even a bond fund earning a mere 4% annually it be worth 52k, so you'd have more money, and again your taxes for the year would be lower.

 

I see what youre saying but your missing the back side of the transaction which is that he's reducing the amount of years that he has to pay the mortgage also.

But he'd have more money on the back side with some more diversified investments on the front side, see?

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Originally posted by Bruce B@Mar 9 2004, 04:23 PM

For example, if you paid $200k for your house and in 2 years your house is worth $250k, you're net worth went up $50k no matter how much you paid on the principal. If during the same time frame you paid $50k on your principal, you'd have a net worth of $100k, right? Now if you took that extra $50k and put it in even a bond fund earning a mere 4% annually it be worth 52k, so you'd have more money, and again your taxes for the year would be lower.

 

I see what youre saying but your missing the back side of the transaction which is that he's reducing the amount of years that he has to pay the mortgage also.

The first thing they teach you in any business class is that cash now is worth more than cash tomorrow, Its called the time value of money. what Baiter said should be followed. Your getting the interest on the morgage back. Its not bad interest. If you are looking into paying things off early I would suggest car loans and such. That's the worst investment someone can make is a car, immediate and brutal depreciation. Then again, most people can qualify for 0% interest on those right now.

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Originally posted by Bruce B@Mar 9 2004, 04:23 PM

I see what youre saying but your missing the back side of the transaction which is that he's reducing the amount of years that he has to pay the mortgage also.

Let me put it another way.

Your mortgage is 200k, and you're paying 5% interest.

This means you're paying roughly $10k/yr in tax deductible interest. If your tax bracket is 30%, you only end up paying $7k/yr in interest, or 3.5%.

 

If you find an investment that yields more then 3.5% then you've made a better investment then putting more money toward your mortgage.

I'm not the best with words, so I apologize if you're still not following me. :roll:

 

Sorry I used simple interest, I'm not bored enough to use compound interest. :oops:

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I'm not the best with words, so I apologize if you're still not following me.

 

I smell what youre cookin'! ;)

 

I also put money towards my principal for another reason which is I just dont like being in debt and like the satisfaction of knowing that if something were to happen to my job etc, that there would be less debt to worry about. Thats also my reasoning behind paying off my credit card every month. What your saying makes more financial sense, the way I go about it makes me feel better from a mental sense.

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Bruce,

 

I've been around the block with retirement (funny, since I'm only 31) and figured out that what you're doing now is fine Bruce. The very best way to invest is to diversify (which is done automatically with most any mutual fund), set it up as an automatic payment (direct deposit weekly), protect it from taxes and have corp. matching if possible (401k), and lastly don't touch it unless you absolutely have to. That last part is the trick, its best just to forget you even have the investment and just let it roll along. My 401k was battered down to around $25k two years ago and I was tempted to switch out of aggressive long term stocks. But I left it alone (actually moved it to be a little more aggressive), and it's swung back to ~$52k today. Obviously not enough to retire, but my planned retirement is still 30 years away ;) I had started investing 15% of salary when I started working out of college, recently pared back to 5% diverting money to kids' college funds.

 

If you want to do more than that $400 a month (which is a healthy retirement amount), then you can always have a ROTH IRA on top of the 401k. The ROTH uses after tax funds that grow tax free and basically can be pulled out anytime with no penalties (for the initial principal.) After you are 59.5 you can then pull out all the interest tax free as well. The ROTH allows I think $3500 a yr. to be placed in there (moving up to $5k in next few years - thank you GWB.) I have a ROTH IRA in addition to the 401k that I use for extra savings sometimes, maybe a couple hundred a year in there.

 

There are other retirement investments that are worthwhile, but the 401k and the ROTH are the two big boys on the block and good for 90% of the folks saving today.

 

Best!

 

EDIT: Also, the ROTH has no expiration limit where you must take distributions, so you can leave it there until you are 105 and let it grow tax free. No absolutely sure, but I think you can also will it to a family member if you die and it escapes estate tax. Not 100% on that claim though...

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If you find an investment that yields more then 3.5% then you've made a better investment then putting more money toward your mortgage.

I'm not the best with words, so I apologize if you're still not following me.

 

There is one exception that I think defies what you're saying here. IWhen one compares the return of paying down a mortgage versus paying up a stock investment, one must consider the time it will take to eliminate the mortgage. If you can eliminate the mortgage altogether, then you'll have more money to invest on a monthly basis, earning those high percentages on a larger scale.

 

I admit that this isn't an option for most people, but I wanted to voice this perspective as it seems absent.

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