The government announced this morning that social security recipients, who number approximately 55 million Americans, will get a 3.6% cost of living adjustment, or COLA, starting in January 2012. 8 million Americans who receive Supplemental Security Income (SSI) will receive a 3.6% increase as well.

This will be the first COLA since 2009, when the increase was a rather large 5.8%.  There were no increases in the COLA for 2009 and 2010, since the measured inflation rate during the weakened economy was too low to bring it above the rate measured in 2008 which was used for the 2009 increase.  These were the 1^st two years without an increase since automatic increases based on inflation were adopted in 1975.

Many people, particularly the elderly living on fixed incomes, have complained and struggled over the last two years, that while food, medical, and other costs have risen, their social security payments have not.  In addition, it is expected that medicare premiums will increase next year, wiping out some of the SS increase for many.

Monthly social security payments average just under $1100 per month, so a 3.6% increase would mean the average payment would increase about $39 per month, or appx. $468 per year.

For the maximum monthly payment, currently $2366 per month, the increase would amount to approximately $85 per month, or $1020 per year.

On a related  and interesting note, the amount of salary or wages subject to the social security tax will rise by the same percentage next year, from the current $106,800 to $110,100, according to the social security administration.  For those subject to the increased threshold, this would mean an increase of appx. $225 according to my quick calculations.

Since the social security payroll tax cut for 2011 has yet to be extended for 2012, the increase in the amount subject to the ss tax as well as the potential for paying the 2% that was cut in 2011 could mean decent increase for some.

President Obama originally included an extension of the 2% SS payroll tax cut  through 2012 in his jobs bill proposal which was DOA a few weeks back, however;  he plans to continue pushing individual parts, including the payroll tax cut extension in 2012 as individual pieces.  I’ll be sure to discuss if anything is announced in the near future, so stay tuned.

2012 Social Security Benefits Increase to be 3.6% is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• Bush Tax Cuts to Be Extended Through 2012, Social Security Payroll Tax Reduced
• I Bond Rate for May 2011 through October 2011- 4.60 %
• I Bonds to Earn 0.0% From May to October, 2009
• I Bond Rates for May 2010 through October 2010- 1.74% Total, Fixed Rate 0.20%
• November 2009 to May 2010 I Bond Rates- 3.36% Total, Fixed Rate 0.30%

It’s pretty standard advice that everyone should put enough money into their 401k (or similar retirement plan, such as a 403b) to get the 401k match from their employer, if it is offered and if there is any possible way you can do so.

In fact, it’s probably a good idea to do this above just about anything else, many people say, including paying off debt.

If your employer matches $0.50 on the dollar or even dollar for dollar up to a certain percentage, that is a very good guaranteed return, and everyone should take advantage of it.

Just getting the employer match for retirement investing isn’t going to get you where you want to be with your future retirement goals, however.
You are going to need to invest more.

Paying off high interest debt like credit cards, personal loans or similar debt should probably take priority, but if you have crossed that bridge and eliminated your debts, and are able to invest more for retirement, you most certainly should, and as soon as possible.

Where do I invest my money next?
Where you invest next is sometimes a tricky question though.
3 of the most common options are:

• Keep investing in your 401k
• Open a traditional or Roth IRA
• Invest through some other vehicle (probably not recommended until all tax advantaged retirement options are exhausted)

What Should You Do- Keep investing in a 401k or open a Roth IRA or Traditional IRA?

First, Consider what’s available in your 401k plan

Not all 401k or other retirement plans are created equal. While some plans offer an adequate amount of decent funds over a balanced range of asset classes, others offer a weak group of mutual funds and charge fees which are way too high.

You also may not be able to invest in your choice of asset classes in your 401k, or the choices or choices may be limited to poorly performing ones. This may interfere with your planned asset allocation percentages as well.

For example, your 401k may offer one bond fund or international fund that has a poor history against a known benchmark. If you don’t have any other choices within your 401k plan, you may not want to invest in that particular fund inside your 401k. Then you might have to put that money somewhere
with a higher or lower risk, which is probably not what you wanted to do with that  percentage of your retirement investment.

If your 401k doesn’t have a broad enough number or type of funds for you to set up your overall retirement asset allocation model that you have decided to follow for yourself, it may be a good idea to invest outside of your 401k plan.

As an added bonus, investing outside of your 401k will give you total control of your traditional or Roth IRA- which will give you a lot more  investment choices, allow you choose to when to put money in, etc. To me, this is a compelling reason to go with an IRA after getting the 401k match. You may also want to consider the tax treatment of your retirement investments.

Traditional IRA or 401k vs. Roth IRA

With your 401k or a traditional IRA, you invest with pre-tax dollars, but pay taxes when you eventually withdraw the money. In a Roth IRA, investments are made with after-tax contributions, but your future interest and withdrawals can be made tax free.

Some tax diversification is probably a good thing in general,  and  if you think you will be in a higher tax bracket in the future at retirement or when you start withdrawing, it may be a good time to diversify some by investing in a Roth IRA. This case could also occur if you are just starting in the work force and are on the low end of your career salary range.

For those looking for an additional tax deduction, the traditional IRA may make more sense.

Either way, be in control of your own retirement investments can be a good thing- after all, who cares more about your money than you? (Note: I may be a little jaded here- I find my employer’s 401k options to be fairly poor, in my opinion.)

After you’ve hit the limits for a traditional or Roth IRA, you can and probably should put any additional money you might have available for retirement investing into your 401k, until hopefully you max it out.

If you reach that point, you’re really doing great. (I wish I was there!)

If not, and there is nothing to be ashamed of if you can’t save that much for retirement right now-it can be very hard-  but why not make it a goal for the near future?

I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next? is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• The Two Simplest Ways for Graduates to Achieve Retirement Success
• Things to Consider if Your Company Cuts the 401k Match
• The Roth IRA: A Closer Look at a Powerful Wealth Building Tool
• What’s The Real Value of a Dollar? It Depends on Whether You’re Paying Debt or Building Wealth
• 2011 401k and Traditional and Roth IRA Limits

Yahoo Finance had a story yesterday about 107 year old Leonard McCracken, a 107 year old man who retired at age 69 and has been retired for almost 40 years!

According to the article, he has managed to live a comfortable retirement through thrift, real estate investments, managing debt, working hard, investing conservatively, and staying healthy.

Here are some of the experts from the article as well as my thoughts:

Thrift- He has only owned 2 new cars his entire life, and still shops at thrift stores. Those both sound like good ideas to me!

Real Estate Investments- McCracken was busy in the real estate field, “buying and selling more than 35 houses, including five he built himself”, according to the article. That seems like a lot, even for someone 107 years old! But since he obviously had an interest in real estate and building houses, it made sense for him to use this to build wealth.

Use Debt Well- McCracken borrowed when he had to, but paid it back as quickly as possible. He learned working at a bank that borrowing money can cause financial disaster. Paying off debt is always a good idea, especially paying it off quick.

Work Even When Jobs are Hard To Find- After he lost one of his jobs, he worked driving a truck for $5 a day. Working hard is definitely a way to get ahead in life, stay out of debt, and get wealthy. Your ability to earn income is one of your greatest assets.

Save and Invest Conservatively-McCracken has avoided the stock market, and invests in bonds and CD’s. While this may seem conservative to many, it’s always a good idea to invest in what makes you comfortable, according to your investment risk tolerance.

Stay Healthy- Obviously, McCracken must have lived a healthy life to reach the ripe old age of 107. But it also helped him avoid paying a lot of medical bills and avoid medical debt as well.

This is a pretty inspiring article, and I found it especially interesting in a few ways.It doesn’t really say he was wealthy, but it sounds like he had everything he needed and lived comfortably.

He lived frugally, but also felt comfortable in the real estate market, buying, building, and selling a lot of houses. He was not comfortable with the stock market, so he invested conservatively. It shows that there is no one way to live comfortably or reach your retirement goals- it all depends on what you are comfortable with regarding risks and investments.

How long do you think you’ll be retired for? Do you plan on being retired for 30 to 40 years? If so, start planning now!

Personal Finance and Retirement Lessons from a 107 Year Old Retiree is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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• Book Review: A Million Bucks by 30 by Alan Corey

Preparing and saving money for retirement has become a solo activity. Gone are the days when working for a company for 25 years or so would get you a gold watch and a nice retirement pension. If you want to have income in your retirement age, you are going to have to save it yourself.

Survey after survey tells us that people are not saving enough for retirement.

There are all kinds of reasons (read: excuses) people give for not saving for retirement. And yes, these excuses are capital “L” Lame….but so many of us use them or have used them in the past. I’ve used several myself.

A lot of these excuses end up putting the retirement burden on your “future self” instead of dealing with it in the present. This is a bad habit to get into for lots of things, particularly when it comes to saving for retirement.

If you catch yourself doing any of these, think about what they mean in reality- that you are potentially delaying or jeopardizing your retirement. And you may not have time to make it up in the future.

I’ll do it later or start in a few years- The older you get, the faster time goes by- skipping for 1 year becomes 3, then 5 then 10. The next thing you know its 20 years later, your in your mid forties or fifties, and have next to nothing saved for retirement.

Social Security will be there for me- It may be there is some form, but it may not be much, either. Do you want to take that chance?

I’ll retire later/work longer- You may well want to work into to your mid to late 60′s, or even into your 70′s particularly if you like what you do. But what if you can’t, or you get laid off, or your health won’t allow it? What then?

I can’t afford it- If you can’t afford to save for retirement now, you will probably never think you can afford it in the future, either. Expenses always come up- college, major purchases like a car or house, your daughter’s wedding, etc. You can’t afford NOT to save for retirement now,  in reality.

I’ll start when I make more money- Don’t count your chickens before they hatch- you don’t know what your future may hold, and the power of compounding interest can be a powerful tool towards your retirement over time. Start now.

I’ll start (or save more) when the kids are grown and out of college- it may be too late then, to start building a retirement nest egg. You can always start, but the best time, besides yesterday, is today!

No one else my age is saving for retirement right now- Do you really want to be like everyone else? Really? This is one of those times when you want to be different.

I want to enjoy my life now- You still can, and save for retirement at the same time. You just have to prioritize and make sometimes difficult decisions as to what you spending priorities are. It’s tough sometimes, but necessary.

8 Terrible but Common Excuses for Not Saving for Retirement is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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• The Two Simplest Ways for Graduates to Achieve Retirement Success
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• 10 Great Ways For College Graduates to Start Off on the Right Track with Their Finances
• Why Some College Students Manage Their Finances Better than Middle-Aged Adults

Several weeks ago, the IRS released pension plan limits for 2011, which sets the limits one can contribute to a 401(k), 403(b), and other retirement savings plans, as well as individual retirement account (IRA) limitations for traditional and Roth IRAs.

2011 401k limits

The maximum contribution limit for a 401k, 403(b), 457(b), or Government Thrift Savings Plan is remaining the same in 2011 at $16,500. If you are 50 years old or older, you can contribute an additional $5,500 in 2011.

Traditional and Roth IRA s

With a traditional IRA contributions are tax deductible and the withdrawals made from a traditional IRA during retirement are taxable. For a Roth IRA contributions are made with after tax money, and the proceeds can be withdrawn tax free after reaching age 59 1/2. Due to the ever present talk of tax rates increasing in the future, many people find the Roth IRA more attractive, particularly if they are already contributing to a tax-deferred plan such as a 401k or a 403b.

Income Phase outs based on Adjusted Gross Income (AGI) for 2011 Traditional and Roth IRAs

• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are active participants in  an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $56,000 and $66,000, unchanged from 2010. For married couples filing jointly, in which the spouse who makes the IRA contribution is an active participant in an employer-sponsored retirement plan, the income phase-out range is $90,000 to $110,000, up from $89,000 to $109,000. For an IRA contributor who is not an active participant in an employer-sponsored retirement plan and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $169,000 and $179,000, up from $167,000 and $177,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $169,000 to 179,000 for married couples filing jointly, up from $167,000 to $177,000 in 2010. For singles and heads of household, the income phase-out range is $107,000 to $122,000, up from $105,000 to $120,000. For a married individual filing a separate return who is an active participant in an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.

2011 Traditional and Roth IRA limits

The maximum contribution limit for a Traditional IRA or a Roth IRA is not changing for 2011 either, so the max. contribution will remain $5,000. The  IRA contribution limits are supposed to be increased in increments of $500 based on inflation, and should go up regularly, but apparently inflation did not rise enough according to the government’s estimate, to reach the $500 increment. If you are 50 years old or older, you can contribute an additional $1,000 in 2011, for a total of $6,000. Note that you can contribute to both a Traditional IRA or a Roth IRA in the same year, but the total for both cannot exceed the $5,000 maximum contribution limit ($6,000 for 50 yrs old and older).

2011 401k and Traditional and Roth IRA Limits is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• Just in Case You’re Still Investing for Retirement- 2009 401k and Roth IRA Contribution Limits
• The Roth IRA: A Closer Look at a Powerful Wealth Building Tool
• The Two Simplest Ways for Graduates to Achieve Retirement Success
• Things to Consider if Your Company Cuts the 401k Match
• I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?

Most people dream of a comfortable retirement. But not every one’s idea of retirement is sitting in a recliner watching “The Price is Right” every morning before your mid-day nap. (Just kidding!)

You may not even actually stop working, if you are passionate about what you do.  But it is likely that you want to reach that “financial cross-over point” where you can either:

1.) Live off investment or retirement income and stop working completely

2.) No longer need to work as hard, or as many hours, or keep doing something you don’t really like just for the money-i.e., become free to pursue other interests, whether they make you enough money to live off or not.

If you never plan to fully retire, the size of your nest egg, and therefore how much you need to save up during the years leading up to your retirement, may need to be less than if you plan to live off of your investments completely.

What this really means though, is that you may be able to reach your definition of retirement, or take care of your retirement needs, faster than you originally thought-i.e., early retirement-according to your own definition.

Currently, I really enjoy what I do for a living at my day job. I also enjoy some of my other hobbies and interests that occasionally earn me a little money as well. I have come to the realization that I could see myself doing what I do for a living in some fashion- either starting my own business or company, freelancing, or maybe even just working part time- for quite a while, likely into my 70′s or beyond.
It’s not that I want to stop doing what I am doing now for a living, but I certainly wouldn’t mind a little more freedom. Freedom to work when I want, and how much I want.  As of right now, that is what retirement, or early retirement would probably be for me. I would like to travel some, spend time with family and friends, spend some time helping others, and work some.

A couple of years ago, I probably would have said I would want to stop working completely when I retire. Not because I hated my job, but because I thought that was what retirement meant. Nowadays, I don’t feel that way. But who knows? Five or ten years from now, a traditional retirement may appeal to me, and I will have to change course somewhat- either work a little longer, or try to save more to be able to live off my retirement savings.

In preparing for battle I have always found that plans are useless, but planning is indispensable. -Dwight D. Eisenhower.

I think this applies to reaching your ideal retirement goal as well. It is the planning part that is important, not the actual plans. Your plans may change, but if you don’t engage in “planning” for them, whatever they end up being, it will be that much harder to reach them. In fact, you may not even realize it when you get there.

Have you thought about your retirement needs, and what retirement will mean for you lately? Is it different than a few years ago?

What Does Retirement Mean to You and What Will Your Retirement Needs Be? is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• Why Some College Students Manage Their Finances Better than Middle-Aged Adults
• Personal Finance and Retirement Lessons from a 107 Year Old Retiree
• The Two Simplest Ways for Graduates to Achieve Retirement Success
• Obama Announces Initiative to Increase Retirement Savings Rate
• Mastering Frugality- The Art and Science of Saving Money

It’s not something you want to hear, but it has been happening all too often lately. Many companies are stopping (or suspending, as some may like to sugar coat it) the employer match of their employees’ 401k contributions.

I have been lucky, but I have several friends and relatives who have had this happen to them. The big question, aside from wondering when and if your employer will start the match back up, is what to do- and how to keep saving for retirement when what was likely your primary vehicle for doing so has now lost some of its luster in the form of a matching contribution.

The free money in the form of the match made the decision to invest in a 401k easy. Now, you might begin to wonder what your options are and what is the best thing to do.

Some of your options include the following:

Do nothing and keep contributing to your 401k – Continuing to make contributions into your 401k plan is probably a good idea. You may not be getting a match anymore, but by continuing to save through your retirement plan at work through automatic, tax-free (OK, really tax-deferred) contributions from your paycheck on a regular basis.

Consider diversifying your tax treatment and contribute to a Roth IRA- Another thing to consider is taking some or all of the money you currently contribute to your 401k and either opening a Roth IRA or increasing your contributions if you are able and not at the yearly maximum, which is $5000 for 2009. Especially if you don’t have a Roth IRA yet, you are diversifying the tax treatment of your future retirement income. Your 401k investments will be taxed in the future, when you take withdrawals, while with a Roth IRA, you will pay taxes now, but your withdrawals, including interest, will be tax-free.

Pay off debt- I’ve touched on this before and discussed whether I should stop 401k contributions to pay off debt. A main argument many made against it was that you are leaving money on the table if you bypass your employer’s 401k match. But what if there isn’t one anymore? I think it is something to consider, but each person needs to assess their situation personally. If you have credit card debt at 20% interest, it sounds like a pretty good idea, because that is a guaranteed 20% return. (Especially considering the stock market’s abysmal performance over the last year or so) A student loan at 3% doesn’t seem like a great idea. The important thing is to make sure you are funneling all of that money to the debt you are trying to pay off, and start your retirement contributions back up right away after you have it paid off.

The best thing to do is to probably stick with the status quo, and continue investing in your 401k.  Because it is automatic and you have been making regular contributions, it may be a good way to make sure you keep saving for retirement. We are creatures of habit, after all.

Investing in a Roth IRA, especially if you don’t have one, can be a good idea to obtain some tax-diversification, but set that up for automatic withdrawals from your bank account so you don’t have to remember to make regular contributions.

Paying off debt could be an option and result in guaranteed returns, but you need to be careful to make sure the money is going in the right place, and to start saving for retirement again as soon as possible.

Things to Consider if Your Company Cuts the 401k Match is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• The Two Simplest Ways for Graduates to Achieve Retirement Success
• I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?
• The Roth IRA: A Closer Look at a Powerful Wealth Building Tool
• Should I Stop Contributing to My 401k to Pay Off Debt?
• Do Government Bailouts and Payouts Mean Higher Taxes in the Future?

Did you know the economic stimulus plan included the addition of computer technology and equipment, including internet access,  as a “qualified higher education expense” for 2009 and 2010. Now this may only help you if:

• Either you are in college, or have a child in college
• You have a 529 plan for yourself or your child
• and you have enough money in the 529 plan to pay for all of the other qualified education expenses (tuition, books, etc.) as well as a new computer.

What this would allow you to do is pay for a new computer, internet access, software, and other peripherals with money that has grown tax free from a 529 plan. With the state of the economy as it is, I am not sure if it will help too many people, but I am sure some will be able to take advantage of it.

I am sure there are other ways you could put this to use, but it all depends on your personal situation. For example, perhaps you could pay for a computer, internet, and other items with a 529 and then take a tax deduction for educational expenses, either the $4000 tax credit, the Hope Scholarship or Lifetime Learning tax credits.

From the text of the stimulus bill:

SEC. 1005. COMPUTER TECHNOLOGY AND EQUIPMENT
ALLOWED AS A QUALIFIED HIGHER EDUCATION
EXPENSE FOR SECTION 529 ACCOUNTS IN
2009 AND 2010.

(a) IN GENERAL.—Section 529(e)(3)(A) is amended by striking ‘‘and’’ at the end of clause (i), by striking the period at the end of clause (ii), and by adding at the end the following:
‘‘(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.
Clause (iii) shall not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature.’’
(b) EFFECTIVE DATE.—The amendments made by this section shall apply to expenses paid or incurred after
December 31, 2008.

Note-you can’t buy software that is considered a game!

And from the text of the tax code mentioned above-for definitions of what qualifies

(F) Definitions
For the purposes of this paragraph—
(i)Computer technology or equipment The term “computer technology or equipment” means computer software (as defined by section 197 (e)(3)(B)), computer or peripheral equipment (as defined by section 168 (i)(2)(B)), and fiber optic cable related to computer use.

(B) Computer software defined
For purposes of subparagraph (A), the term “computer software” means any program designed to cause a computer to perform a desired function. Such term shall not include any data base or similar item unless the data base or item is in the public domain and is incidental to the operation of otherwise qualifying computer software.

(B) Computer or peripheral equipment defined
For purposes of this paragraph—
(i) In general The term “computer or peripheral equipment” means—
(I) any computer, and
(II) any related peripheral equipment.
(ii) Computer -The term “computer” means a programmable electronically activated device which—
(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and
(II) consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities.
(iii) Related peripheral equipment The term “related peripheral equipment” means any auxiliary machine (whether on-line or off-line) which is designed to be placed under the control of the central processing unit of a computer.
(iv) Exceptions The term “computer or peripheral equipment” shall not include—
(I) any equipment which is an integral part of other property which is not a computer,
(II) typewriters, calculators, adding and accounting machines, copiers, duplicating equipment, and similar equipment, and
(III) equipment of a kind used primarily for amusement or entertainment of the user.

I would take this to mean printers, scanners, and the like. It is important that if you are able to take advantage of this, you read all of the associated documentation, and consult with a 529 and/or tax expert to make sure you are following the rules.

From the Economic Stimulus Plan- 529 Funds Can be Used for Computers, Software, and Peripherals is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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• Defining and Investing for Short, Medium, and Long Term Personal Finance Goals

The title of this post is meant to be sarcastic, but I do think their are many people who have lost confidence in the idea that investing in a 401k or a Roth IRA is a fool-proof way to reach your retirement goals. While it may not be fool proof or guarantee you the retirement lifestyle of your dreams, I really think that a 401k and/or Roth IRA are essential tools for reaching your retirement goals, whatever they may be.

While a Roth IRA or a 401k by itself may not get you to your retirement goal in the time frame you want, I think that not having one (or both) would make it much, much harder to reach your magic number.

Here are the Roth IRA and 401k contribution limits for 2009:

2009 401k limits

The maximum contribution limit for a 401k is going up in 2009, to $16,500, up $1000 from the 2008 limit (which was the limit for 2007 as well) of $15,500. If you are 50 years old or older, you can contribute an additional $5,500 in 2009.

2009 Roth IRA limits

The maximum contribution limit for a Roth IRA is not changing in 2009, the max. contribution will remain $5,000. The Roth IRA is supposed to be increased in increments of $500 based on inflation, so it is likely it will go regularly, but apparently it did not go up enough to reach the $500 increment. If you are 50 years old or older, you can contribute an additional $1,000 in 2009, for a total of $6,000.

Just in Case You’re Still Investing for Retirement- 2009 401k and Roth IRA Contribution Limits is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• 2011 401k and Traditional and Roth IRA Limits
• The Roth IRA: A Closer Look at a Powerful Wealth Building Tool
• I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?
• Things to Consider if Your Company Cuts the 401k Match
• The Two Simplest Ways for Graduates to Achieve Retirement Success

It has been several months since the last time I looked at my 401k plan. In fact, I believe the last time I checked my 401k was when Single Guy over at Single Guy Money asked his readers how much they had lost in their investment accounts. That was back on July 17th. I think my 401k accounts were down about 12-15% then, I know they are down a lot more since then, although I could not tell you exactly what that number is.

Why haven’t I looked at my 401k account since then?

Well, after the bottom fell out in September and October, I really wasn’t that interested in how much money I LOST in my retirement accounts. I was not going to pull it out of stocks and into bonds or a money market account, as my asset allocation is heavy on stocks due to the length of time I have before retirement; that did not seem like a good thing to do. Since I did not want to participate in “panic selling”, I just have not had the urge to see what the damage really was. Is this foolish? I don’t think so, and in fact, if I had more money to invest, I would probably increase my 401k contributions.

Am I afraid to look? Not really. Most of my 401k is in funds that track the major indices, like the S&P 500, or even the total stock market-although they are not actually index funds. So I have a pretty good idea of what my losses probably are.

My plan is to take a look in January, although I may do it before then, when my company match from this year goes in, and re-balance my 401k by placing my new contributions and the company match in the fund or fund type that needs to be increased.

Have you been obsessing over your 401k balance? Have you been checking it regularly over these last few months? Or have you stopped worrying about it? Should I be checking it more closely? What do you think?

How’s My 401k in the Current Market?- I’m Not Really Sure! is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

• I’m Saving Enough To Get the 401k Match From My Employer, Where Do I Invest My Money Next?
• Should I Stop Contributing to My 401k to Pay Off Debt?
• Things to Consider if Your Company Cuts the 401k Match
• The Two Simplest Ways for Graduates to Achieve Retirement Success
• The Emergency Fund- Where Should I Keep It and Why?

One of the unfortunate byproducts of the current stock market meltdown, is the fact that many people are going to have to delay their retirement by a few years, if not more. When times are good, and the stock market is increasing at 8% to 12% per year, it is very difficult for people to pull money out of the stock market and put it in safer investments.

Even though I am in my mid-thirties, I have experienced two periods of time in my working life where I have had co-workers or acquaintances tell me they were going to have to defer retirement for a few years due to heavy losses sustained in their retirement accounts, both after the tech crash and subsequent effects of 9/11, and the current stock market crash.

An equally unfortunate part of the equation is that many people getting close to retirement age these days are now pulling ALL of their retirement investments out of the stock market, and may never be able to make up the difference.

So how do you avoid this scenario?

The answer is asset allocation.

Asset allocation is how you have your investments proportioned in each investment category. For example, you could invest in stocks, bonds, real estate, and commodities (gold, oil, etc.), leave your money in cash, or even invest in foreign currency. Most of the categories can be broken down further, such as large cap stocks, small cap stocks, etc. Also, you can invest in some categories, such as commodities or even real estate by either buying certain companies that are part of that industry (i.e., stocks), or exchange traded funds that invest in a particular commodity (such as gold or oil), or even a real estate investment trust (REIT) for real estate. For the sake of simplicity, and because it is frequently the only investment outside of a home, let’s just look at retirement accounts an focus on stocks vs. bonds vs. cash-keeping in mind that some stocks could be a gold ETF or a REIT for real estate. The goal of asset allocation is to reduce volatility and limit the potential downside of loses to one class of asset. By the same token, however, the upside (or potential for gains) can be reduced if one asset class sees large gains.

There are two components of asset allocation that you need to examine:
1.) Your asset allocation vs. age, or when you want to retire.
2.) How often you rebalance your portfolio, or changing your asset allocation.

Asset allocation vs. age

There is an old rule of thumb, that the amount of investments you keep in stocks (vs. bonds or cash) should be 100 minus your age. For example, if you were 40 years old, the amount of money you keep in stocks would be 100-40 = 60%. While this may have seemed conservative a year or two ago, there are many, many people who would have loved to have this type of allocation over the last year. I would surmise that this could be adjusted somewhat based on your own personal risk tolerance, as well. But even if you were 20 years old, it would still mean that you would have 20% of your retirement funds in bonds or cash, such as a money market fund. Benjamin Graham (Warren Buffett’s mentor) recommended at least 25% in each category, and suggested that a 50/50 split might be appropriate.

Rebalancing Your Portfolio- Re-allocation of Assets

At some interval, whether it is every 6 months or every year, you should rebalance your portfolio back to the asset allocation you determined was right for you. You should also take into account your age, or how soon you want to retire. The closer you get to retirement, the “less risky” your overall portfolio should be.

Why?
Because this is how you lock in stock market gains, and limit losses. Going back to Warren Buffet’s mentor, he recommends a simpler way-

A good case can be made for a consistent 50-50 (stocks vs. bonds) division here, with adjustments for changes in the market level. This means the investor would switch some of his stocks into bonds on significant rises of the market level, and vice-versa when the market declines.

I do not see this as market timing-it is not based on what the stock market or your investments are going to do, but what they have already done-there is a key difference there.

By properly allocating your retirement assets to your age or retirement, as well as your risk tolerance, and rebalancing on a regular basis, you can limit the volatility in your retirement accounts and approach retirement age without worrying about a massive drop in the stock market putting your retirement plans on hold.

Are your retirement accounts allocated across different investment types? Do you rebalance on a regular basis?

Asset Allocation and Your Age- Finding the Proper Allocation that Makes You Comfortable and Reduces Risk With Your Retirement Investments is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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Nobody likes to hear or deal with the kind of financial news and stock market woes (although Monday’s gains made people feel a little better, I’m sure) that are going on right now, but besides the presidential election, it is about all that is on the news and is the most popular topic of conversation these days. But ups and downs in the stock market, even wild swings similar to what we are seeing lately, do happen, and they often make us feel a little stressed out or uneasy about our financial future. Taking steps to identify and alleviate worries about our finances can go a long way to making this roller coaster ride a little more bearable.

Examine your goals- If you have a very long time horizon, which could be as short as 10 years, or longer, you really should not panic. You will not need the money for a long time, which should give the stock market a long time to RECOVER. Looking at a long-term goal over a short period of time is not the way to do it. Not to mention, if much of the damage has already been done, there is really nothing you can do about that.

Learn from this experience- Remember how this makes you feel. If you are having trouble sleeping because of a large drop in your 401k, but still have 30 years to retirement, you investment allocation may not match your risk tolerance. Going forward, you may want to put new investments in a lower risk category to match your asset allocation to your risk threshold.

Boost your cash savings- One thing the economic downturn brings to light is the fact that cash really is king. If you feel uncomfortable with the size of your emergency fund or what your cash reserves are, find ways to increase your available cash to make you feel a little more secure.

Make smart money moves- Now may be a good time to buy a CD, open a high interest savings account like ING Direct or HSBC, or pay down debt, if it makes you feel more comfortable than investing.

Remember the fundamentals of investing- I haven’t heard too many people saying “Buy Low and Sell High” lately. Although some people are certainly taking advantage of the reduction in price of the overall stock market, you might think more people would actually be excited at the buying opportunity that seems to here right now. If you have extra cash, you might want to consider it. (Although I am not recommending it for anyone in particular, as every one’s situation is different)

Focus on the present- Don’t worry too much about what is happening to money you are not planning on using for 30 years. Make sure you are taking care of things today, first. Focus on the present and make sure you have everything covered.

Plan for the future- Keep you savings and investments in perspective. By the same token, however, if you don’t feel you are saving enough for the type of retirement you want, take steps to correct the situation.

Are you feeling stressed out or uneasy due to the volatility in the stock market and problems with the financial sector? How are you dealing with all of the “bad news” we have been getting lately?

Ways to Deal With Financially Stressful Times is a post from: Think Your Way to Wealth a Personal Finance Blog Copyright 2008-2010

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