Monday, April 28, 2008

Retirement Planning and Your Personal Finance Skills, Part Three

Personal Financial Literacy Quiz:

(Answers and explanations by me are at the bottom of the page)

21. Matt has a good job on the production line of a factory in his home town. During the past year or two, the state in which Matt lives has been raising taxes on its businesses to the point where they are much higher than in neighboring states. What effect is this likely to have on Matt's job?

    a.) Higher business taxes will cause more businesses to move into Matt's state, raising wages.

    b.) Higher business taxes can't have any effect on Matt's job.

    c.) Matt's company may consider moving to a lower-tax state, threatening Matt's job.

    d.) He is likely to get a large raise to offset the effect of higher taxes.

22. If you have caused an accident, which type of automobile insurance would cover damage to your own car?

    a.) Comprehensive.

    b.) Liability.

    c.) Term.

    d.) Collision.

23. Scott and Eric are young men. Each has a good credit history. They work at the same company and make approximately the same salary. Scott has borrowed $6,000 to take a foreign vacation. Eric has borrowed $6,000 to buy a car. Who is likely to pay the lowest finance charge?

    a.) Eric will pay less because the car is collateral for the loan.

    b.) They will both pay the same because the rate is set by law.

    c.) Scott will pay less because people who travel overseas are better risks.

    d.) They will both pay the same because they have almost identical financial backgrounds.

24. If you went to college and earned a four-year degree, how much more money could you expect to earn than if you only had a high school diploma?

    a.) About 10 times as much.

    b.) No more; I would make about the same either way.

    c.) A little more; about 20% more.

    d.) A lot more; about 70% more.

25. Many savings programs are protected by the Federal government against loss. Which of the following is not?

    a.) A U.S. Savings Bond.

    b.) A certificate of deposit at the bank.

    c.) A bond issued by one of the 50 States.

    d.) A U. S. Treasury Bond.

26. If each of the following persons had the same amount of take home pay, who would need the greatest amount of life insurance?

    a.) An elderly retired man, with a wife who is also retired.

    b.) A young married man without children.

    c.) A young single woman with two young children.

    d.) A young single woman without children.

27. Which of the following instruments is NOT typically associated with spending?

    a.) Debit card.

    b.) Certificate of deposit.

    c.) Cash.

    d.) Credit card.

28. Which of the following credit card users is likely to pay the GREATEST dollar amount in finance charges per year, if they all charge the same amount per year on their cards?

    a.) Jessica, who pays at least the minimum amount each month and more, when she has the money.

    b.) Vera, who generally pays off her credit card in full but, occasionally, will pay the minimum when she is short of cash

    c.) Megan, who always pays off her credit card bill in full shortly after she receives it

    d.) Erin, who only pays the minimum amount each month.

29. Which of the following statements is true?

    a.) Banks and other lenders share the credit history of their borrowers with each other and are likely to know of any loan payments that you have missed.

    b.) People have so many loans it is very unlikely that one bank will know your history with another bank

    c.) Your bad loan payment record with one bank will not be considered if you apply to another bank for a loan.

    d.) If you missed a payment more than 2 years ago, it cannot be considered in a loan decision.

30. Dan must borrow $12,000 to complete his college education. Which of the following would NOT be likely to reduce the finance charge rate?

    a.) If he went to a state college rather than a private college.

    b.) If his parents cosigned the loan.

    c.) If his parents took out an additional mortgage on their house for the loan.

    d.) If the loan was insured by the Federal Government.

31. If you had a savings account at a bank, which of the following would be correct concerning the interest that you would earn on this account?

    a.) Earnings from savings account interest may not be taxed.

    b.) Income tax may be charged on the interest if your income is high enough.

    c.) Sales tax may be charged on the interest that you earn.

    d.) You cannot earn interest until you pass your 18th birthday.

ANSWERS: 21) c; 22) d; 23)a; 24)d; 25)c 26) c; 27) b; 28) d; 29) a; 30) a; 31) b

Part One

Part Two

Thursday, April 17, 2008

Retirement Planning and Your Personal Finance Skills, Part Two

Beginning a retirement plan is right at any age. The younger you start, the better off you are. But it is often the small financial mistakes we make every day that inflict the most damage, often years down the road. If you are close to retirement, offer this to your children. If you are years away, these questions should hold even more importance.

In her incredibly interesting fiction "Special Topics in Calamity Physics", Marisha Pessl suggested the following observation about imminent futures: "A person's life is nothing more that a series of tip-offs of what's to come. If we had the brains to notice these clues, we might be able to change our future." The quote was credited to Dr. Fellini Loggia, but I'm not sure he exists - it is fiction.

The Fed's Personal Financial Literacy Quiz:

(Answers with explanations - from me- at bottom of page, part three comes later this week.)

11. Sara and Joshua just had a baby. They received money as baby gifts and want to put it away for the baby's education. Which of the following tends to have the highest growth over periods of time as long as 18 years?

a.) A checking account.
b.) Stocks.
c.) A U.S. Govt. savings bond.
d.) A savings account.

12. Barbara has just applied for a credit card. She is an 18-year-old high school graduate with few valuable possessions and no credit history. If Barbara is granted a credit card, which of the following is the most likely way that the credit card company will reduce ITS risk?

a.) It will make Barbara's parents pledge their home to repay Karen's credit card debt.
b.) It will require Barbara to have both parents co-sign for the card.
c.) It will charge Barbara twice the finance charge rate it charges older cardholders.
d.) It will start Barbara out with a small line of credit to see how she handles the account.

13. Chelsea worked her way through college earning $15,000 per year. After graduation, her first job pays $30,000. The total dollar amount Chelsea will have to pay in Federal Income taxes in her new job will:

a.) Double, at least, from when she was in college.
b.) Go up a little from when she was in college.
c.) Stay the same as when she was in college.
d.) Be lower than when she was in college.

14. Which of the following best describes the primary sources of income for most people age 20-35?

a.) Dividends and interest.
b.) Salaries, wages, tips.
c.) Profits from business.
d.) Rents.

15. If you are behind on your debt payments and go to a responsible credit counseling service such as the Consumer Credit Counseling Services, what help can they give you?

a.) They can cancel and cut up all of your credit cards without your permission.
b.) They can get the federal government to apply your income taxes to pay off your debts.
c.) They can work with those who loaned you money to set up a payment schedule that you can meet.
d.) They can force those who loaned you money to forgive all your debts.

16. Rob and Mary are the same age. At age 25 Mary began saving $2,000 a year while Rob saved nothing. At age 50, Rob realized that he needed money for retirement and started saving $4,000 per year while Mary kept saving her $2,000. Now they are both 75 years old. Who has the most money in his or her retirement account?

a.) They would each have the same amount because they put away exactly the same
b.) Rob, because he saved more each year
c.) Mary, because she has put away more money
d.) Mary, because her money has grown for a longer time at compound interest.

17. Many young people receive health insurance benefits through their parents. Which of the following statements is true about health insurance coverage?

a.) You are covered by your parents' insurance until you marry, regardless of your age.
b.) If your parents become unemployed, your insurance coverage may stop, regardless of your age.
c.) Young people don't need health insurance because they are so healthy.
d.) You continue to be covered by your parents' insurance as long as you live at home, regardless of your age.

18. Don and Bill work together in the finance department of the same company and earn the same pay. Bill spends his free time taking work-related classes to improve his computer skills; while Don spends his free time socializing with friends and working out at a fitness center. After five years, what is likely to be true?

a.) Don will make more because he is more social.
b.) Don will make more because Bill is likely to be laid off.
c.) Bill will make more money because he is more valuable to his company.
d.) Don and Bill will continue to make the same money.

19. If your credit card is stolen and the thief runs up a total debt of $1,000, but you notify the issuer of the card as soon as you discover it is missing, what is the maximum amount that you can be forced to pay according to Federal law?

a.) $500
b.) $1000
c.) Nothing.
d.) $50

20. Which of the following statements is NOT correct about most ATM (Automated Teller Machine.) cards?

a.) You can generally get cash 24 hours-a-day.
b.) You can generally obtain information concerning your bank balance at an ATM machine.
c.) You can get cash anywhere in the world with no fee.
d.) You must have a bank account to have an ATM Card.

ANSWERS: 11) b; 12) d; 13) a; 14) b; 15) c; 16) d; 17) b; 18) c; 19) d; 20) c

Part One of the Fed's Personal Finance Quiz can be found here as well.

Tuesday, April 15, 2008

Retirement Planning and Your Personal Finance Skills

Retirement planning is all for naught if you don't bring some basic knowledge to the process. Below is the first of a three part quiz published by the Federal Reserve to help tally your personal finance, economic, and investing skills. There is no reward for right answers. In fact, I have taken the answers below and added explanations to help you understand why.

Part two and three come later this week.

Federal Reserve Quiz

Part One

Personal Financial Literacy Quiz:
(Answers with explanations - from me - at bottom of page)

1. Inflation can cause difficulty in many ways. Which group would have the greatest problem during periods of high inflation that last several years?

a.) Older, working couples saving for retirement.
b.) Older people living on fixed retirement income.
c.) Young couples with no children who both work.
d.) Young working couples with children.

2. Which of the following is true about sales taxes?

a.) The national sales tax percentage rate is 6%.
b.) The federal government will deduct it from your paycheck.
c.) You don't have to pay the tax if your income is very low.
d.) It makes things more expensive for you to buy.

3. Rebecca has saved $12,000 for her college expenses by working part-time. Her plan is to start college next year and she needs all of the money she saved. Which of the following is the safest place for her college money?

a.) Locked in her closet at home.
b.) Stocks.
c.) Corporate bonds.
d.) A bank savings account.

4. Which of the following types of investment would best protect the purchasing power of a family's savings in the event of a sudden increase in inflation?

a.) A 10-year bond issued by a corporation.
b.) A certificate of deposit at a bank.
c.) A twenty-five year corporate bond.
d.) A house financed with a fixed-rate mortgage.

5. Under which of the following circumstances would it be financially beneficial to you to borrow money to buy something now and repay it with future income?

a.) When you need to buy a car to get a much better paying job.
b.) When you really need a week vacation.
c.) When some clothes you like go on sale.
d.) When the interest on the loan is greater than the interest you get on your savings.

6. Which of the following statements best describes your right to check your credit history for accuracy?

a.) Your credit record can be checked once a year for free.
b.) You cannot see your credit record.
c.) All credit records are the property of the U.S. Government and access is only available to the FBI and Lenders.
d.) You can only check your record for free if you are turned down for credit based on a credit report.

7. Your take home pay from your job is less than the total amount you earn. Which of the following best describes what is taken out of your total pay?

a.) Social security and Medicare contributions.
b.) Federal income tax, property tax, and Medicare and social security contributions.
c.) Federal income tax, social security and Medicare contributions.
d.) Federal income tax, sales tax, and social security contribution.

8. Retirement income paid by a company is called:

a.) 401 (k).
b.) Pension.
c.) Rents and profits.
d.) Social Security.

9. Many people put aside money to take care of unexpected expenses. If Juan and Elva have money put aside for emergencies, in which of the following forms would it be of LEAST benefit to them if they needed it right away?

a.) Invested in a down payment on the house.
b.) Checking account.
c.) Stocks.
d.) Savings account.

10. David just found a job with a take-home pay of $2,000 per month. He must pay $900 for rent and $150 for groceries each month. He also spends $250 per month on transportation. If he budgets $100 each month for clothing, $200 for restaurants and $250 for everything else, how long will it take him to accumulate savings of $600.

a.) 3 months.
b.) 4 months.
c.) 1 month.
d.) 2 months.

ANSWERS: 1) b; 2) d; 3) d; 4) d; 5) a; 6) a; 7) c; 8) b; 9) a; 10) b

Sunday, April 13, 2008

Retirement Planning and Universal Health Care: A Medical Army

The Medical Army of Massachusetts

Mention the word conscription and shudders can be felt throughout the populace. Parents concerned about kids, kids being concerned about an accustomed life interrupted by forced service from some authority they know little and care less about to civil researchers who point to the unfairness of drafting someone, who they have determined will be from a largely underprivileged class, all mire the inherit value of citizenship and service.

But this isn’t about the drafting of soldiers into military duty and in the truest sense of the word, it might not even be conscription. What universal health care needs is way to ensure that it works. In country where capitalism is also a political force that cannot be denied, even if it leads us into recessionary times, it would be difficult to rebuff those kinds of headwinds.

One of the main roadblocks facing the success of the Massachusetts attempt at providing universal health care is the key link in any health plan: prevention. With so many people coming into the system, many of whom have not had adequate access to care, the current system is overwhelmed. These people come with problems and ailments that have not been treated, many of which have grown into full fledged maladies, preventable in many cases had they had access to care.

That is problem number one. Problem number two should not have come as a surprise to the authors of this legislation. There were not enough doctors at the general practice level to accommodate the throngs of new patients. The New York Times recently reported the “The situation may worsen as large numbers of general practitioners retire over the next decade. The incoming pool of doctors is predominantly female, and many are balancing child-rearing with part-time work. The supply is further stretched by the emergence of hospitalists — primary care physicians who practice solely in hospitals, where they can earn more and work regular hours.”

Politicians are leaning towards some sort of tuition relief for doctors. This group, many of who claim that they did not enter into the medical profession for the monetary reward, has borrowed over six figures to complete the required training. Eager to recoup those costs, medical school graduates gravitate toward specialty practices that pay better than general practice, often three times better.

But we are thinking about relieving the tuition costs of the wrong group. If physician assistants, nurses and social workers could be given a free ride through college and, if their field of studies requires, beyond, couldn’t we conscript them to provide into four years of service for the plans in their state? Wouldn’t it be a small price to pay for the promise of a debt free career after their term of service was complete?

Social workers could visit patients before they become patients, providing them with the initial visit and the help them navigate the system. They could determine the level of care they might need, which for the home bound might be as little as a phone call reminder once or twice a day from a nurse to take their medicines.

Nurses would be given regions of the state, lording over their districts in much the same way the school nurse might. This second wave of care would provide the comfort many illnesses need and because of their position in the system, they would assess whether a doctor would be needed or a physician assistant could make the diagnosis. Care would be given in small regional clinics, perhaps set-up as a storefront in a small town.

Regular wages would be paid to each of groups. Dropping out of the program would always be an option but your deferred tuition would be yours once again.

But what about doctors and their better-paid counterparts, the specialists, the folks who are in such short supply, who would rather work in a hospital setting? How would we get the most critical part of the system to help?

They would be given volunteer status in the program. How do you give them similar benefits without making them sign a contract for long-term service? You give them tax incentives. Each year a doctor serves as a general practitioner allows them to work tax-free. No income tax on the federal or state level. Nothing.

Once a patient has been assessed by a social worker, visited a nurse, been diagnosed by a physician assistant, the once a week visit to the clinic to see the patients who required a doctor’s care or the reference needed to see a specialist, would be almost negligible. He could charge them as he would any other patient under the plan but the income he generated from these visits would not come with a tax penalty.

The same could be offered to nurses, social workers, and physician assistants who chose to stay on after their four-year conscription was finished.

Of course there are just as many cons to this kind of health care solution. How do you weed out the bad ones who simply want a free ride to college? Make GPA’s earned in college the determining factor for admittance to the program.

How do rate the care given once these professionals begin their post-collegiate service? Exit polls of patients would be the simplest answer. The system would spawn a more motivated and engaged workforce, a sort of homespun medical Peace Corp, out in the field, doing work where work needs to be done.

Wouldn’t more populace states would be overrun with help while smaller, more rural states would be left wanting? There is always that but it has always been my impression that those rural states view their relative isolation as a way of life and not so much an obstacle. States could further sweeten the pot by providing free housing and transportation and do so with the hope that the medical worker might stay long-term.

Massachusetts could be the perfect place to test just such a program. They show great economic and often geographic diversity, often within a few miles of a major metropolitan area. No one said the plan would come off with some tweaking but the creativeness of how it should be done is often left in the hands of people too close to the original plan.

Friday, April 11, 2008

Retirement Planning and the Disgruntled Worker

You will be able to pick them out much easier in the coming months. You will see them with disappointed looks on their faces, trudging through their day wondering if they will ever be able to retire. Not just because they haven’t saved enough. Some of these folks have and were fully prepared to quit their day job in favor of a new life after work. Instead the angst they wear on their shirt sleeves is because they underestimated the volatility of the equity markets and over estimated the value of their homes.

The latest release form the Employee Benefit Research Institute portrayed an American worker who has lost confidence in their ability to save enough to retire. According to the report, “The percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008, the biggest one-year drop in the 18-year history of the survey. Retiree confidence in having a financially secure retirement also decreased, from 41 percent to 29 percent, a drop of 12 percentage points. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.”

Those that had already retired, also part of the survey were just as concerned as though who seem to be putting off their plans until the markets recover. Among those 54 percent told the surveyors that they left the workforce because of health problems or disability. What incomes they received from pensions and savings was largely eaten up by expenses, with 44% of those who responded telling that they spent “more than expected on health care expenses”.

Once retired, the primary concern is not outlasting your savings. It is what we focus on, mostly in the abstract while we are working. But once we leave the workforce, those concerns become very real. The EBRI found that “More than half of retirees (54%) say they are now more concerned about their financial future than they were right after they retired, a 14 percentage- point increase from a year ago (40 percent in 2007)”.

While health concerns both while working and retired have deeply impacted this confidence indicator, the real day-to-day expenses have begun to erode the average workers ability to save for retirement.

Cost of living wage increases have all but ceased, with number showing that over the last seven years, the average worker has lost one percent in the category of take home pay. Premiums for health insurance, while workers were still employed have grown by an average of 6% and those number look to increase. Couple that with wage stagnation and you can see why some workers feel as though they were moving in reverse.

The housing crisis has shaken many people to the core, even if they are confident that they are well positioned with their mortgages. Even if your debt level is manageable, the economy will make its downtrodden presence known to even you. Fuel costs will make an ever-increasing impact. Inflation will erode not only your current dollar but future ones as well. And if the economy seems bad now, wait until the job market begins to deteriorate as the credit markets continue to tremble with fear. That fear is very real. Creditors wonder, almost out loud, will they get paid back?

One bright spot: those fears seem to lessen with income. The fewer dollars you gross, the report seems to indicate, the lesser the chances are you are worried about retirement. Perhaps that is because you may never know what retirement is.

Sunday, April 6, 2008

Retirement Planning and Risky Portfolios

They must be pretty smart down in Corpus Christi. I’ve never been there. Judging by the personal finance column that appears in the Caller-Times, H. Swint Friday a professor of finance at Texas A&M University-Corpus Christi with a doctorate in finance and a master's in economics and is a certified financial planner thinks they are. From what I gather, the folks who live there, even the beginners down in Texas take risks.

Corpus Christi Harbor

Mr. Friday, whose column titled Personal Finance 101 suggests some restructuring for your portfolio based on research offered by Harry Markowitz, a mathematical economist. Professor Markowitz, also no slouch in the credit department is also mentioned as the founder of the Modern Portfolio Theory and was involved in optimal portfolio performance research.

We all know what optimal portfolio performance is. Right? No? Without a lot of the mathematical twists and turns, it is the perfect balance of risk. Providing of course you know what kind of risk tolerance you have, which many of us don’t, you can create what Mr. Friday and Markowitz call an M portfolio.

This, at least according to Mr. Friday, is beginner’s stuff. All you have to do is understand that “Higher standard deviation portfolios are more volatile” which I'm sure all of you know.

In all fairness, before he dangles the hope of the perfect portfolio in front of those readers, he does offer some disclaimers. You should be well aware of composition, a nice word that offers up a blend of not only tolerance and wealth but also the intent. The desire for returns, as Mr. Friday writes is not even on the list when investors in Corpus Christi consider building this type of investment.

You would hope that your financial adviser has the sense to pick up on all of these nuances, subtract liabilities and then, calculate what you are worth as an earner. The higher the net pay, the greater the score your financial adviser might give you for your ability to live up to your potential human capital.

“Human capital” is what pensions are all about. Companies were able to exploit your human capital when you were younger and as you aged, offered payment for years of loyalty with a pension for your after-work years. In retirement planning outside of a pension, this carries extra importance. It is why it so critical to get going as early as possible in your working career on building a retirement account to allow compounding to do most of the heavy lifting.

When Mr. Friday discusses human capital, he is looking at the potential for losing everything against the how long your income recovery time is.

Mr. Markowitz’s portfolio research suggests that his M portfolio, after buying risk free T-bills as a hedge against the risk, what the investor should “own to some degree is a mix of all the assets in the world at their respective values in the world portfolio of assets. That is, each asset including oil, timber, gold, silver, beef, art, real estate and so on is included in this portfolio and they are included at their current representative value in the world portfolio. So, for example, if the total value of the world's portfolio is $100 and the total value of the world's oil is $1 then oil would have a 1 percent representation in the M portfolio.”

All you beginners out there get that? Did it offer any of you experts out there something that you might find plausible?

Mr. Friday’s lesson in how to build a portfolio has merit but not for anyone who considers themselves at more than the halfway point of their working career. Such a portfolio would probably do spectacularly considering the rising prices of commodities of late. With demand looking to increase for the world’s limited supply of what looks like a long list of raw materials, even a few that might qualify as hedges against inflation, the average investor would be better off avoiding such risk the way the M portfolio outlines.

But if it seemed like something you just have to try, consider doing it as part of a mutual fund/ETF. One, operated by the noteworthy Jim Rogers comes to mind. According to RCG Alternative Investments site, “The Rogers International Commodity Index (RICI) represents the value of a compendium (or "basket") of commodities employed in the global economy, ranging from agricultural products (such as wheat, corn and cotton) and energy products (including crude oil, gasoline and natural gas) to metals and minerals (including gold, silver, aluminum and lead). As of July 31, 1998, there were thirty-five different contracts represented in the Index.”

This would mean your portfolio, if constructed as suggested, would be based on only two investments: The commodity index (The RICI TRAKRS Index is a total return index designed by Merrill Lynch, Pierce, Fenner & Smith Incorporated and is traded as a Dow Jones Index) and T-bills. I would be wary of that kind of limited diversification no matter how much you made, how risky you felt, or what you estimated your human capital to be worth.

Adding some additional investments and bringing each of those investments down from 50% each to only 10% would give you just enough risk for any portfolio. Both investments are hedges against inflation and although that might seem like a logical place to put your money today, allocating too much of it in both would not give you the long-range options that a balanced risk portfolio would.

Thursday, April 3, 2008

Retirement Planning and the Hope of Outliving Your Money

What makes us, as investors, so optimistic when we shouldn’t be and so pessimistic when we still have control over our retirement destiny? Consider these thoughts from a recently published online survey of 2100 adults ranging in age from 55 to 70.

Chances are, if you are retired, you often find yourself feeling hopeful about your future (48 percent) than your cohorts who are still working. Only a third of those who are still in the workforce see themselves as well positioned for the future despite the fact that many of the respondents still have ten years to complete their retirement plan.

The numbers get worse from there with much of the late aged workforce exhibiting far less confidence about where they are and where they hope to be that their retired counterparts. In fact, if you are still working, half of those questioned are worried. The respondents it should be noted had “household assets of $75,000 or more, excluding the value of real estate holdings”.

It is generally believed and certainly well touted among those who write about personal finance – myself included – that the stock market is the single greatest opportunity to get from point A (which seems to be the point of greatest concern) to point B (reaping the benefits of adding to accounts that grow over time, compounding and providing wealth that any other means simply cannot give).

But these folks are mostly frightened about their abilities (43% of those still employed, 28% of those that are not) and are unwilling to let trust the equities markets to live up to their billing. Almost half feel this way.

What is most problematic is the inability to make good estimation about how long we will live beyond the day we first begin drawing those accounts down. Many retired people are pulling a full 10% from those savings annually. This is far beyond the recommended 3-4%, which would get them well into two decades of after work income. Forty percent of those retired felt confident that they would have enough money. Yet they also found themselves very concerned about where their health was headed.

Wednesday, April 2, 2008

Retirement Planning and Your House as Part of the Plan

I shudder when I read phrases like this: “counted on proceeds from the house sale to boost their retirement income” or “slumping real-estate market in Sarasota, Fla., has damped the longtime retirement dreams”. Both of these comments appeared in an article in yesterday’s Wall Street Journal. It is easy to envision whatever equity you have built up in your home as part of your retirement plan but at the same time, it is foolhardy to think that the roof over head has any economic impact, other than the pressure it puts on your retirement income.

How we view our balance sheet

In the book that this blog is based on, I discuss this phenomenon at length (chapter six, page 55). Few people realize that the equity built up in their home is not what it appears to be.

They think of it as profit. It is not. It doesn’t even qualify as a dividend. Once you purchase a home, you provide numerous years of upkeep, pay the taxes that increase exponentially as the years drift by and you remodel and improve the property. You do this in the hopes of creating a better selling price. But does it return what you assumed it would have had you invested the money elsewhere?

Yes and no. Yes because if the markets cooperate and the prices soar well beyond what, deep in your heart, you know is unreasonable, much like the market provided for us just last year, you perceive the net worth to be high. But the downside of that thinking is harsh. Your house is worth more because the market is up. But so to is everyone’s property. To replace your out-priced home, you will buy another out-priced home and when the markets settle down and prices adjust, you are left with a feeling of loss.

And no. Had you taken all of that cash you invested in making your home more live-able and hopefully more sale-able, and invested it, you would not be worrying today about whether you could retire early or, as some articles of late have wonder, if at all. Granted, this requires you to live as low as possible, put all of your excess cash into another market – securities – also fraught with ups and downs and which is now being referred to as the “lost investment decade”.

So where does that leave us. Focus on your home as a self-sustaining unit. Can you afford to live in the home you are currently in while maintaining it and paying for the taxes and insurance? If the answer is yes, move on to what you have as retirement income beyond those numbers. If the answer is no, consider finding some shelter that qualifies, a place that allows you to live economically. This will not necessarily be where you dream it might be.

If you are still working, look to creating a better nest, a place that is both comfortable and able to accommodate you in your retirement years. This will allow you to stop wondering about whether you can afford retirement allowing you to instead, focus on generating income for those years ahead. Once you remove the “profit” from selling your home and calculated the cost of staying right where you are, you can make a better estimation of what it will take to live in retirement.

If you are close to retirement as the linked article above suggests and your home’s value is revising your dreams, this is the market you hoped would never happen. But it has and coping is what we do best.

Your current home has a cost that is part of your liabilities. To turn it into an asset does not erase it from the liability side of the balance sheet. It simply shifts it to another location with new costs.

Focus on the things you can control. Investing in the stock market is not one of them unfortunately. But not investing is equally dangerous. The total value of your portfolio may be down but that will not be a forever event. The upside of working just a little longer than you had planned: the equities you are buying now are undervalued. This means buying more (shares in your mutual funds) for less and when the market finishes this correction, and it will, you will be far better off than you had imagined.

Tuesday, April 1, 2008

Retirement Planning and Future Calculations

The internet is littered with a wide variety of calculators, many of which are designed to help you focus on a certain goal. Many are just flat out depressing.

As we have found out, retirement planning is more than just saving money. It is a strategic position, a plan for all of the possible things that could go wrong from health issues not only for you and your family but job interruptions, career changes and forces that exert a certain pressure of which we have little or no control.

Inflation and taxes play a huge role in how we plan but they are almost completely unpredictable. Nonetheless, the calculators still try to paint a picture that will best, and in most cases, sell an idea, product or company that can help you attain that dream. Charles Schwab is no different.

The company is hoping that more companies will begin offering a Roth inside of a company’s 401(k) or defined contribution plan. But is a Roth good for everyone?

Not necessarily. The differences in the two types of retirement plans are based on the way taxes are handled. If you assume that you will be in a lower tax bracket when you retire, sticking with the traditional form of 401(k) will still be the best choice. It provides you with the same contribution opportunities as a Roth 401(k) would but may, especially in the lower income brackets – below $100,000 income, provide you with a better funded paycheck.

Once you get above the $100k limit, a Roth might serve you better.

The calculator that Schwab offers can give you some indication of the differences although it does not calculate the net result of inflation on those contributions nor does it discuss investment options or the fees associated with those investments.

If you use the tool, be sure to check the box at the lower right hand corner. It might give you a more accurate read on where you might be going and whether it is worth changing. If you can take home 9% more now and use that money to control your debt and even increase your emergency savings, a Roth may not be the best option.