Retirement Column


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 Retirement 
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How to Borrow from Your 401(k) Loan

401k loanSometimes, when you really need the money, raiding that retirement account starts to look really good. Especially if you have no other viable options. A 401k loan can seem like an attractive alternative to a payday loan or some other high interest loan because the interest rate is usually lower, and because you are paying that interest to yourself.

However, even if you are in what you consider a true emergency situation, it’s important that you take a step back and consider your options, and understand what a 401k loan is really all about.

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 Retirement, Taxes 
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IRA, 401(k), HSA Contribution Limits for 2012

401KSetting aside money in a tax-advantaged retirement account is one way that you can build your wealth for the future. You receive favorable tax treatment, either deferring taxes until a later date, or paying taxes now and watching your money grow tax free.

However, you can’t use these accounts as complete tax shelters. Indeed, there are limits on how much money you can contribute each year. On top of that, if you contribute to a Roth IRA, your contribution eligibility phases out according to your income. Every year, the IRS reviews economic conditions, and considers inflation, and makes a decision about whether or not to increase the contribution limits. For a couple of years, no changes have been made, but the IRS announced a few changes for 2012.

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 Retirement 
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When It Makes Sense to Opt Out of Your 401(k)

401KIt’s considered a no-brainer by many: Participate in your employer’s 401(k) plan. In fact, due to recent legislation, many employers automatically enroll their workers in 401(k) plans. This enrollment, though, doesn’t guarantee that workers won’t opt out. And, in some cases, it make actually make sense to opt out.

Just because your company has a 401(k) doesn’t mean that it’s the right choice for you. Before you just blindly participate in your company’s 401(k), make sure that it makes sense. You don’t want to end up with a retirement account that doesn’t help you maximize your money. Here are some indications that your company 401(k) may not be the best choice for you:
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 Retirement 
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Rule of 33

Here’s a rule I’d never heard of until I read this retirement article on NPR – “I use something that I call the Rule of 33,” he says. “You need 33 times what you want to spend in your first year of retirement.” He, in that article, is Dallas Salisbury, president of the Employee Benefit Research Institute; and I can’t find any other reference to that rule.

As it turns out, it’s similar to another rule I’d read about regarding retirement savings – the 4% rule. The 4% rule says that you should expect to spend 4% of your nest egg each year if you want it to last. Between Social Security and fixed income investments, 4% of your nest egg should last you for your entire retirement under normal circumstances. As is the case with all rules of thumb, your mileage will vary.

The Rule of 33 isn’t much different since it’s a slightly more conservative version of the 4% rule. Having 33 times what you need to spend in your first year means you’re only spending 3% of your nest egg each year. One divided by 33 is about 3%.

Sadly, whether it’s 3% or 4%, all the statistics seem to show that we aren’t saving enough!

 Retirement 
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Can You Save Too Much For Retirement?

Nest EggLife is often about balance. It’s about balancing the instant gratification of today against future rewards. It’s about enjoying life now versus saving enough for later so that your life can be just as enjoyable after you retire. It’s very difficult to know where that line is because it’s difficult to predict the future. Will taxes go up? How much will inflation be? How much do I need in retirement to continue my lifestyle? With so many questions, spread out across so many years, it’s hard to know if you’re saving too much or too little unless you do a little planning.

Most retirement investment planning, at least when you’re in your early twenties, focuses on two accounts – a 401(k) and an IRA, typically a Roth IRA. The contribution limits are $16,500 for the 401(k) and $4,000 for the IRA, higher if you are permitted a catch-up contribution due to your age. If you were to max out your contribution to both, that’s a hefty $20,500 a year towards your retirement. That’s a lot of money for anyone to be contributing and I’d argue that contributing $20,500 each year until you retire is too much. Unless you make a lot of money, contributing that amount will put a significant strain on your current lifestyle and that’s a tradeoff that you may not want to make.

Here’s how I approach my retirement planning.

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 Retirement 
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Do You Need to Adjust Your Retirement Account?

Nest egg savingsOne of the most important things you can do for your future is to save for retirement. At some point, you will no longer be working the same job you are in, and your income might drop. When that day comes, it helps to be prepared with a substantial nest egg that can help you live comfortably.

In order to live comfortably in retirement, though, you need to make efforts now. You might already have a retirement account set up, but are you contributing in an effective manner? It is important to consider your retirement account, and make necessary changes. Don’t get complacent about the state of your retirement portfolio; make sure to review your situation regularly.

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 Retirement 
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Social Security IRA

As experts debate potential changes to Social Security to improve is deteriorating financial situation, one of the ideas that’s been offered is that of a Social Security IRA. I first read about it when it was mentioned by the founder of the Association of Mature American Citizens in the wake of the news that the AARP was in favor of changes to Social Security. AMAC said that in order for them to support increasing the full benefit age from 66 to 69, they would require the mandatory offering of a Social Security IRA.

What exactly is this Social Security IRA? It sounds a lot like the privatization of Social Security (which was a red hot political term for many election cycles), by putting it into an IRA and letting the wage earner direct the investments. Their proposal is to make it tax deductible, payroll deducted, and owned by the wage earner (rather than sitting in a “lockbox”). You couldn’t withdraw any funds until retirement (62-65) and 50%+ of the funds would have to be put into “guaranteed interest accounts.”

What’s the downside in all this? As is the case with any investments, people usually don’t make the best decisions since they’ll be governed by their emotions. How would your average wage earner have reacted to the gyrations of the market the last two or three years? We all know that market timing doesn’t work, people were overall terrible at it through this last crisis, so do we really want to offer up that much control over Social Security?

I think people should be able to manage their own money, even if they’re terrible at it. You have to educate people, not shelter them from difficult decisions. I think Social Security is an imperfect system but I also know that giving people that much control, despite my belief that people should have that much control, can be dangerous.

That said, I like that this is being discussed because something has to change about how our entitlement programs operate.

 Family, Retirement 
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Kids and Money: Early Retirement Savings with an IRA

Child IRAWe all want to teach our children about good financial habits. Helping your child understand good financial practices, such as saving for the future, budgeting, and wise spending, can help your child start out ahead of the money curb. But what about retirement? While it seems a little strange for many to think that a 15-year-old might begin saving for retirement, it can provide an enormous benefit for your child later.

Anyone with earned income can open an Individual Retirement Account (IRA) and start investing. With children, the IRA will be custodial, meaning you are in charge of it until your child reaches the age of majority (check your state law to see when this is). The assets in the brokerage account, though, are your child’s, not yours, so keep this in mind.

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