JR Ewing
MuscleHead
- Nov 9, 2012
- 1,329
- 420
Yeah, the SEP is a great tool for those of us who are self-employed.
One important thing to be mindful of for one's longterm retirement plan is to start as early as possible.
Besides being diversified and investing in quality investments, one should also generally view the younger years as the time to be most aggressive with your investments - when you're decades away from retirement, hopefully you can make double digit returns most years, or at least 7-8% a year on average. The power of compounding works wonders over time.
Too many people put off even thinking about retirement until they get well into their 40's or even later. Too many people live far too high, spend way too much, borrow too much, and don't have priorities in order. If it comes down to your last $1k a month of your monthly budget being divided up between your automobile of choice and your retirement investing, don't buy a car that costs $1k a month. Buy a car that will cost you $500 a month or less, and put at least $500 a month into retirement.
An old guy I know retired in his 50's after 35 years of working as an hourly blue collar worker, making an average of $80k a year. He lived like he made $50k a year, and put the rest into retirement. He was worth over $3 million when he retired. Another old guy I know started an industrial cleaning business right out of high school, worked hard, paid himself a modest salary, and sold his business 30 years later for an after tax profit of $30 million before he was 50 years old.
As you get closer to retirement, it's probably a good idea to be somewhat more conservative, particularly if you don't have a huge amount of money by the time you reach that last decade or so prior to retirement.
Hopefully by the time you retire, you have all debt paid off, all kids out of the house (or at least pulling their weight if still at home), and all of their educations taken care of (529 plans, etc). Some people downsize when they retire - they no longer need a 5 bedroom million dollar home after the 3 kids are gone, so they downsize into a smaller home and invest the rest of the money from the sale of the big house.
If you retire with $10 million or more and no debt, you can probably play around with some of your money and keep a little in riskier investments. If you retire with $1-2 mil or less, you will most likely need to make every dollar count, and will probably want to be pretty much entirely in things like investment grade bonds and large cap high-dividend blue chip stocks in retirement.
Some very conservative retired folks may keep the vast majority of their $ in bonds, while some more aggressive retired folks with plenty of money to play with may continue to keep most of their money in various stocks. Investing is a highly individual thing, and more money gives one more flexibility - particularly if they are more or less debt-free and don't have huge living expenses.
A general rule of thumb is that you should have at least $100k saved up for every $5k of annual income you'll need. If you're taking out more than 5% a year, you're probably going to be eating into your principal or investing your retirement nestegg too aggressively. If you're not earning at least 4-5% a year in interest, dividends, etc, you're going to have a hard time outpacing inflation.
A good thing about contributing a fixed amount to your retirement accounts each payday is that you are dollar cost averaging - buying more shares of your investments when the investments are down, fewer shares when they are up. This also helps when we go through periods like Q4 '07 through Q1 '09.
One important thing to be mindful of for one's longterm retirement plan is to start as early as possible.
Besides being diversified and investing in quality investments, one should also generally view the younger years as the time to be most aggressive with your investments - when you're decades away from retirement, hopefully you can make double digit returns most years, or at least 7-8% a year on average. The power of compounding works wonders over time.
Too many people put off even thinking about retirement until they get well into their 40's or even later. Too many people live far too high, spend way too much, borrow too much, and don't have priorities in order. If it comes down to your last $1k a month of your monthly budget being divided up between your automobile of choice and your retirement investing, don't buy a car that costs $1k a month. Buy a car that will cost you $500 a month or less, and put at least $500 a month into retirement.
An old guy I know retired in his 50's after 35 years of working as an hourly blue collar worker, making an average of $80k a year. He lived like he made $50k a year, and put the rest into retirement. He was worth over $3 million when he retired. Another old guy I know started an industrial cleaning business right out of high school, worked hard, paid himself a modest salary, and sold his business 30 years later for an after tax profit of $30 million before he was 50 years old.
As you get closer to retirement, it's probably a good idea to be somewhat more conservative, particularly if you don't have a huge amount of money by the time you reach that last decade or so prior to retirement.
Hopefully by the time you retire, you have all debt paid off, all kids out of the house (or at least pulling their weight if still at home), and all of their educations taken care of (529 plans, etc). Some people downsize when they retire - they no longer need a 5 bedroom million dollar home after the 3 kids are gone, so they downsize into a smaller home and invest the rest of the money from the sale of the big house.
If you retire with $10 million or more and no debt, you can probably play around with some of your money and keep a little in riskier investments. If you retire with $1-2 mil or less, you will most likely need to make every dollar count, and will probably want to be pretty much entirely in things like investment grade bonds and large cap high-dividend blue chip stocks in retirement.
Some very conservative retired folks may keep the vast majority of their $ in bonds, while some more aggressive retired folks with plenty of money to play with may continue to keep most of their money in various stocks. Investing is a highly individual thing, and more money gives one more flexibility - particularly if they are more or less debt-free and don't have huge living expenses.
A general rule of thumb is that you should have at least $100k saved up for every $5k of annual income you'll need. If you're taking out more than 5% a year, you're probably going to be eating into your principal or investing your retirement nestegg too aggressively. If you're not earning at least 4-5% a year in interest, dividends, etc, you're going to have a hard time outpacing inflation.
A good thing about contributing a fixed amount to your retirement accounts each payday is that you are dollar cost averaging - buying more shares of your investments when the investments are down, fewer shares when they are up. This also helps when we go through periods like Q4 '07 through Q1 '09.
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woodswise
TID Board Of Directors
- Apr 29, 2012
- 4,334
- 1,340
I have a simple IRA, a traditional IRA and a Roth IRA. The traditional and Roth share a cap of $5,500 if you're under 50 and $6,500 if you are over 50, so you can put that amount away between the two. My simple IRA is through my employer and has a 3% match (my employer will match my contributions up to 3% of my salary in a given year). I can contribute up to the limit on the Simple IRA in addition to the $6,500 for my Roth/Traditional IRA's. Currently I am putting away nearly $20,000 per year, which leaves me cash poor, but with high hopes for a comfortable retirement!
woodswise
TID Board Of Directors
- Apr 29, 2012
- 4,334
- 1,340
The real issue you raise is whether to invest aggressively or more conservatively. By spreading your investments around (i.e. stocks, bonds, mutual funds of differing types and strategies) you can insulate yourself somewhat from the ups and downs in the stock market. For younger folks, they might want to invest more aggressively because over time they will recover from a large crash, whereas older folks should be investing more conservatively so they don't face a large crash near retirement.
woodswise
TID Board Of Directors
- Apr 29, 2012
- 4,334
- 1,340
The question whether to invest in a 401K or with after tax dollars is easy. Given the choice between investing pre-tax dollars and paying tax only when you take money out, versus paying the tax up front and only having to pay capital gains, clearly you will do better with pre-tax dollars. However, if you need a cash reserve for getting through hard times, or for purchasing real estate, it is best to keep that money as after tax dollars so you aren't paying taxes and penalties for cashing it out.
401K, Traditional IRA, Simple IRA and many other vehicles allow you to invest pre-tax dollars, and only require you to pay taxes when you cash them out (which all require minimum distributions starting at age 70.5). In contrast, Roth IRA and normal investments involve after tax dollars, so when you cash them out, you only owe capital gains which are taxed at a lower rate than ordinary income.
woodswise
TID Board Of Directors
- Apr 29, 2012
- 4,334
- 1,340
Interesting that you call it "snatched" when what is actually happening is a person without long term care insurance (or with inadequate insurance) is being forced to pay for their nursing home care. That isn't exactly snatching someone's money, it is making them pay for their own care.
I help people with some (though not all) Medicaid Planning, and where I live we can protect the house and contiguous lands, and if the spouse remains in the house, around $110,000 of non-exempt assets (investments, retirement accounts, liquid assets, etc.). If the spouse does not go to the nursing home whatever is left goes to the family. If both spouses go to the nursing home, everything other than the house and the parcel on which it sits, must be liquidated to pay for the nursing home. So there are real limits to what you can protect. If the spouse remains in the home, the rest (i.e. non-exempt funds) has to be spent on the nursing home care of the other spouse. When those funds run out, the state takes over. In some nearby states, you can't protect the home.
Rider
TID Board Of Directors
- Aug 27, 2010
- 1,672
- 1,063
Yes same here. This is great advice all around. My job offers a Traditional 401K or a Roth 401K. I chose the traditional because of the pre-tax dollar benefits when it comes to investing as opposed to after tax (Roth). Figured having more money would generate better returns as the market continues it's upward trajectory. Hopefully!
woodswise
TID Board Of Directors
- Apr 29, 2012
- 4,334
- 1,340
You're welcome bud. The bottom line is start saving as early as you can, and put away as much as you can afford, and get it invested so you have the benefit of compound interest. If you do those things, your life when you retire will be a lot better than if you don't do them.
Another concept is to start as early as possible. Compound interest has a much larger effect when your investment window is extended a decade or two. If you start in your 20's, you can make as much progress saving $100 per month as if you start saving $500 per month in your 40's (i'm not sure the exact numbers but the concept is sound).
UncleAl
MuscleHead
- Jun 20, 2012
- 1,376
- 600
Some great advice here. The only thing I would add about simple IRAs is keep in mind that when you withdraw money from those funds (mandatory after age 70 1/2) that sum is added to your gross income. Not only do you have to pay tax on those funds, but they may drive you into a tax bracket that increases the amount of taxable social security income. This bit me in the ass last year.
shortz
Beard of Knowledge VIP
- May 6, 2013
- 3,107
- 897
I was going to switch one of my small IRAs out because our broker was doing a horrible job managing it; long term investments, conservative and low risk, so they just put it in to a mutual fund, which barely stays ahead of the market, good for a very large portfolio, terrible for a smaller one. When I looked in to it, they were going to tax me something like 40% to pull it out. So, instead, I switched it out of the Mutual fund and put it in to something better and just manage it from there.
I then decided to open up a non-IRA brokerage account. Threw a few thousand dollars in it and it's doing well. Three days before oil crashed too. Lawd... It's ok, learned a lot, made the money back, and I am sitting a grand higher than I started. It's nice knowing I can draw this at any time if we ever need money without paying penalties
mugzy
TID Board Of Directors
- Aug 11, 2010
- 4,876
- 1,800
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