Saver’s Credit: Retirement Savings Contribution Tax Credit

Hand Painted Piggy BankReader TTFK sent me an email this morning about the “Credit for Qualified Retirement Savings Contributions,” also known as the Saver’s Credit, claimed on Form 8880, a tax credit I haven’t covered recently. The Retirement Savings Contribution tax credit is a tax credit, up to $1,000 ($2,000 for joint filers), for contributions you make into qualified retirement accounts. It’s a great incentive for you to save towards your retirement if you’re able to and those who earn less than $26,500 ($53,000 married filing jointly) qualify for some of the tax credit. Unfortunately, if you earn more than that, you don’t qualify.

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Interview with Jim O’Donnell, The Shortest Investment Book Ever

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellLast weekend, I reviewed The Shortest Investment Book Ever by Jim O’Donnell and today I have the opportunity to interview him. I thought that Jim’s extensive financial experience and his love to educate was something I should take advantage of and he willing subjected himself to my hard hitting investigative journalism. 🙂

Good morning Professor O’Donnell, I thought The Shortest Investment Book Ever lived up to its billing, being both short and informative in a way that is not intimidating in the least. Often times investing related books assault the reader with a mountain of data, but not so with your book. What led you to write The Shortest Investment Book Ever?

There is no shortage of investment and budgeting books out there already. But they don’t address the 401(k) and the 403(b), which is the chief retirement savings tool for about 62 million Americans. My book targets those many, many “savers” who are often overwhelmed by investment choices at work and may, therefore, do nothing or do the wrong thing.

I also don’t want people paying additional money (they may not have) to get “help” which often times is, even from honest brokers, a sales pitch. But my book is also intended for those who don’t have a 401(k) or a 403(b). It will help lots of people better understand Medicare, Social Security, and IRAs, which are also important aspects of retirement savings.

Were there any chapters that were cut from the book that you would have liked included?

Actually, no. In putting the I book together, my editors and I had some tussles over content. But I wanted LESS, while they wanted MORE, and kept suggesting more chapters that I might develop as briefly as I did the ones we have. Some of the chapters in the book, on, for instance, socially-responsible investing, were not my idea. I think they are good topics. But I didn’t think they belonged in the SHORTEST investment book ever.

What led you to leave Wall Street and begin teaching? In your book, I get the feeling that it’s a mentor speaking to a mentee; it works quite well in welcoming the novice to the world of retirement and investing.

I was a school teacher for seven years after college. In many ways, I loved it. All my life, I have wanted to have a life-long, and I hope positive, impact on others. I left teaching junior and senior high school, discouraged after our upstate New York community voted down the budget a couple of years in a row. I also seemed to think that my students were more capable of excellence than my administrators thought. I was then – and still am today – a demanding teacher. I’m not in the classroom to serve time and accrue retirement credit. That led to tension and some soul searching with my administrators.

So I went off to Columbia U. in New York City and got an MBA in finance and accounting with the hope of helping people in a new way. I continued to try to do that with clients and staff as I rose in the mutual fund world for a couple of decades. Then, a powerful, reorienting, religious experience in the mid-80s caused me, in time, to leave the business world and invest in the education of the next generation. In a sense, I went back to the classroom, sort of like “back to the future.”

With all the talk of a recession, what do you think most people should do to prepare for it and, should we be so lucky, what should we do to benefit from when we exit the recession?

To prepare for the recession that is upon us: We need to examine our own houses. We need to spend less, save more – sometimes LOTS LESS. We need to discipline our sometimes crazy natures to understand the difference between WANTS and NEEDS. I’m convinced that contented people – which should be our goal – don’t necessarily get what they want but they learn to live with and maybe like what they get.

For those near retirement, the recent market drubbing is, of course, more challenging. We may need to defer some dreams, keep working a bit longer, and rework our budgets and plans. We may need to learn to live on less and reinvigorate such easily overlooked joys as time with family and friends, being or becoming involved in community or church work, even enjoying simple, cheap pleasures, like a movie at home with friends or family.

We’ve got to challenge the cockamamy notion that, if I don’t spend a lot of money, we can’t enjoy life or that we’re not a “success”. Nonsense! For those of us – even if we’re near retirement – and still saving for retirement, check your asset allocations. Get them back in line. Don’t let the numbness of the disaster knock us silly or punchy.

Don’t chase the “hot” asset of today – cash or Treasuries – as if that will save you. (It won’t.) What you can save in your retirement plan today is being accumulated at bargain basement prices. This is especially helpful the farther we may be from retirement, but it can help “oldsters”, too. Young people are going to be great beneficiaries of this meltdown, if only they have the courage and discipline to save and accumulate quality, low-priced funds at these once-in-a-lifetime prices.

To benefit when we exit this recession: (And we will!) Read the above comments on preparing fro the recession.

I read a brief biography about you and saw that you had an extensive history of working with wealthy investors during your time at investment powerhouses such as Fidelity. What sorts of things have the wealthy done “right” with their investments that everyone can incorporate into their strategy?

The wealthy also can spend foolishly. But the smart ones are not extravagant. They know that capital is hard to make and still harder to accumulate. Many live very modestly, dressing and driving, for instance, NOT to stand out. Many have strong families and good marriages. A family breakup is a powerful stimulus to poverty, whatever we had before the blowup.

So, stability is something that the wealthy seem oftentimes to have. Many wealthy people I worked with are far less risk-oriented than one might expect. They almost sense that they have been lucky and don’t want to test fate. Much of their risk taking may be confined to a business, say, not to their investments. They – the smart ones – don’t put too many eggs in one basket, even if the baskets can be very large.

What do they do wrong that we should try to avoid?

Hard to generalize there. But it wasn’t investment stuff that marked “what they did wrong.” After all, they were paying me for advice. What the most foolish of the wealthy I met or worked with did was to let their pride or arrogance or the certainty that money can fix or buy anything go to their heads. Some feel that money is the standard by which all – including everyone around them – is to be measured. While most wealthy people I worked with were good folks, some were certifiable jerks – just like some of us who have no money. I worked with lottery winners, sports, movie, and TV stars that were princes and princesses and with others in the same fields who seemed to think everyone was a bellhop or a porter, fortunate to be in their presence and to take their abuse.

One question I’ve often asked myself is, knowing what I know about life in general, what advice would I give to myself ten years ago. Given your experiences and knowledge, what advice would you have liked to give yourself many years ago? (financial, or otherwise!)

What an interesting question, Jim.

First, I’d say that the important stuff is the relational stuff, not the money stuff. The money stuff is just a “funding vehicle” to enhance the relational. In the end, PEOPLE matter, not stuff or things. On the other hand, we have to be good stewards of much of the stuff and things we have been given. I’m a person of faith, so I put my trust in unseen things. I know others of great faith who seem to despise “stuff and things” and seem to value only what is eternal and invisible.

Here, I beg to differ with them. While we are in this world, we must not treasure our “stuff,” but neither should we neglect or misuse important, helpful things -even money – we have. They can helpfully serve us and others and, when cared for, can last, making us able to spend more on others or other NEEDED things. I’m uncomfortable with both those who think money is the measure of all things AND, too, with those who think it is the measure of nothing, that it is meaningless. The latter folks practice irresponsibility and think it is faithfulness or praiseworthy selflessness.

Lastly, I would say we all need to do the best we can with the gifts and talents we have been given. I think I used to believe that life would get easier as I grew older. It has not. It’s hard. There’s trial. There’s suffering. There’s reversal. There’s loss. (See my first book at But there’s lots of joy and lots of beauty. too. We have to manage through it all, not just through the good or the easy. We have to avoid fantasizing, too — a real, real problem in a world of endless pop culture and celebrities.

We need – all of us, young and old – to finally grow up into mature people who can make this broken world a better place for us and others.


The Shortest Investment Book Ever by James O’Donnell

The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O'DonnellI really liked The Shortest Investment Book Ever: Wall Street Secrets for Making Every Dollar Count by James O’Donnell because it was concise and to the point, not overly wordy. The book isn’t a thick tome designed to overwhelm you into thinking you are getting your money’s worth, it’s about a hundred and fifty five pages broken up into eighteen chapters, each of which probably take about 10 minutes to read. You would think it’s impossible to cover everything in investing in 155 pages and you’re right, he covers all the basics 99% of investors will need. He writes about various account types like 401(k)s and IRAs, he writes about diversification, he writes about the importance of time, he writes about life cycle funds, he writes about investing with a conscience, he writes about re-balancing, he writes about annuities, etc. He doesn’t discuss more advanced topics like investing in commodities or buying options and futures, but for 99% of individuals that stuff won’t matter.

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 Devil's Advocate 

401(k)’s and IRA’s Are For Suckers

Devils Advocate Logo
This is a Devil's Advocate post.

This Devil’s Advocate comes straight at you and assails the one last bastion of hope for a prosperous retirement – 401(k)s and IRAs. While it probably doesn’t feel that way with the volatility in the market, conventional wisdom says that the best way to save for retirement is tax-advantaged accounts like 401(k)’s and IRAs. The power of having that money grow tax free trumps all other options.

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Where To Invest Outside the Stock Market

Stock MarketI quit investing in the stock market.

OK, just kidding, I didn’t really quit. I haven’t changed my retirement contributions in anyway (though I feel foolish every time I see a contribution go through, followed by the stock market falling even further). I left my retirement contributions alone because my time horizon gives me the the benefit of time, the one certain cure for this economic malaise.

However, we have stopped contributing to our taxable brokerage accounts simply because of how violent the market has become. Check out the CBOE volatility indices:

  • VIX – S&P 500 Volatility Index
  • VXN – Nasdaq 100 Volatility Index
  • VXD – DJIA Volatility Index

The volatility indices show the market’s expectation for volatility over the next thirty days and as you can see on their charts, they’re at all time highs. That’s why we’re not putting in any more money, we are going to wait until things calm down before we add back in. (That account was for savings on items we need beyond the next five years)

So, without the stock market, the next question is where should we go with our savings?

Bolster The Emergency Fund

This is never a bad decision. With the economy the way it is, we should use any abundance we have left to start saving for potentially leaner months (or years) to come. If you listen to any experts, you might notice more and more are bolstering up their cash positions. As regular people, emergency funds (and CDs/High Yield Savings) are our cash positions and it’s never a bad idea to squirrel away a few nuts for the winter.

Pay Down Debt

If you have any debt, whether it’s a 6% mortgage or a 20% credit card, paying it down is a smart move. Some would say that you should invest your money and take advantage of the leverage, but I think that’s a little too risky given the volatility of the market. The rewards you will reap by getting rid of your debt will far outweigh the potential gains you’ll earn in our current market. I’m not saying that the money you put into the market will be lost, maybe we have hit the bottom and its on its way up, but by paying down debt you free yourself in a way a few extra dollars in stock gains simply won’t. Also, when you pay down a debt, that rate of return is guaranteed.

CDs & High Yield Savings Accounts

There’s nothing wrong with taking the 3-5% APY of a certificate of deposit (the best cd rates are hitting 5% APY) or a high yield savings account (the best high yield savings account rates are near 4% APY). I think there is a stigma against taking these “safe” gains because we have it in our heads that the stock market can yield returns of 10%. The reality is that the 10% metric is one that’s been overplayed and so ingrained that people are looking at the volatility in the market today and wondering how that figure could possible be correct. It’s not. The market may have yielded gains of 10% since the beginning of time but as all mutual funds state – “past returns are not indicative of future performance.”

One thing is certain though – a certificate of deposit or high yield savings account will get you that yield. The worst case is that you get your money back (bank failure). Unlike money market accounts, CDs and savings accounts are FDIC insured and you’re protected from loss.

Take the safe bet, it’s OK!

Invest In Yourself

Now is the perfect time to invest in yourself by taking some classes, buying some books, and otherwise augmenting your skills to make yourself a more attractive employee or prospective employee. Investing in yourself is one of the best things you can do with your money as knowledge is something that can stay with you for a very long time and there’s always something you can learn.

You don’t have to go as far as taking a class but if you’re in an industry where certifications, and the knowledge those certifications confirm, are important, go out and test for them. In certification heavy fields, many requisitions are filled by those certificates.

Invest In Money-Savers

It’s often said that replacing a ten year old refrigerator can yield significant cost savings (some figures claim $100-$200 of savings [1] [2]). If you have a ten year old refrigerator, consider taking your investment money and replacing it. Let’s say you buy a $2000 fridge and it saves you $100 a year in energy costs – that’s a 5% return on your investment. Since that 5% isn’t taxed, that’s the same as a 6.67% return in the stock market if you’re in the 25% marginal tax bracket. 6.67% return, a new fridge, and being nicer to the environment isn’t too shabby, is it?

There are plenty of other money-savers you can find both in and outside of your home.

Do you have any suggestions on where people can invest nowadays?

 Personal Finance 

How To Draft A Basic Financial Savings Plan

When it comes to long term financial planning, my wife and I don’t really have one. We have some long term goals but we don’t have any dates pegged for those goals (which include starting a family, going back to school, buying a new home, etc.), which is about as useful as having no goals at all. That being said, it was about time we sat down and put pen to paper so we would stop committing the fourth deadly sin of personal finance – failing to plan.

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How I Prepared To Be A Freelancer Problogger

Mac LaptopSix months ago, I became a professional blogger (or problogger, as the lingo goes) but the process of going professional was easily six months in the making (three years if you ask my wife).

I don’t know if it’s come through in my writing, or if you’ve read long enough to tease this out, but I’m a predominately conservative person with regard to risk (not political leanings). However, given the right opportunities, I’m willing to make aggressive moves that some would consider extremely risky. Resigning my full time position to pursue what is essentially a freelance writing gig ranks as extremely risky in my pantheon of risk. While you’re never 100% safe in your job, it’s certainly more stable than working for yourself. Being self-employed has its benefits, stability certainly isn’t one of them. This article will detail how I mitigated those risks, as best I could, and how I prepared to become a professional blogger.

This article is pretty long and might not be all that useful to many people, but several other bloggers and my friends have asked about how I prepared to become a freelancer/problogger so I thought I’d put it all together.

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The Smartest 401(k) Book You’ll Ever Read by Daniel Solin

The Smartest 401(k) Book You'll Ever Read by Daniel SolinThe main point of Daniel Solin’s The Smartest 401(k) Book You’ll Ever Read is that your 401(k), or 403(b) or 457(b), and it’s employer match may not be a no-brainer investment because it could be filled with funds that fat on fees and poor on investment selections. His answer? It’s to model the Thrift Savings Plan, the retirement plan available to government employees that consists entirely of low-cost index funds (the expense ratio is around 0.03%), and use low cost index funds for your retirement options. Look inside your mutual fund options to find the ones that most closely model index funds and go with them.

I think The Smartest 401(k) Book You’ll Ever Read by Daniel Solin does a very good job of opening your eyes to the fee-ladened landscape of retirement investing. He takes specific aim at 401(k) because those “captive audience” type programs are more deceitful than you can imagine. Many companies use plan administrators that offer 401(k) plans for free because they know they can make a killing on the back end with expensive fund choices. If they really had the employee’s interests in mind, then they’d simply offer cheap index funds. In fact, some companies actually pay kickbacks to company HR departments to use them. The plan administrators pay companies for the opportunity to offer their fee fattened funds! It’s pretty ridiculous.

Unfortunately, this means that if you mainly invest in low cost index funds, you won’t get much value out of the first few sections of the book (it could spur you to rollover your 401(k) when the time comes!). The book continues to talk about other retirement investments such as IRAs, both Traditional and Roth, and annuities.

One characteristic I like about the book is that the chapters are short. Many are under three or four pages long, which is exactly how long it should take to explain many of the fundamentals about investing. For example, Chapter 14 is called Simple Investing Is Smart Investing is about three pages long and explains why a simple allocation of basic mutual and index funds will be sufficient for most. Chapter 22 is called “Why Fifteen Is Your Magic Number” and uses three pages to explain why you need to save 15% of your income if you want to expect to have a successful retirement. That, coupled with a applicable quote (usually from some important successful investor such as John Bogle), makes this book an easy read. There aren’t large chapters to digest, there aren’t huge concepts to wrap your head around, this book makes everything nice and simple.

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