When a good deal is not a good deal…

Retirement Investing

Retirement-for many it seems so far away, why should I worry about that now!  Others may be in panic mode, realizing they are getting older and haven’t set aside enough to keep them in their current lifestyle when they reach retirement age.

For both of those groups, I wanted to add to my basics of retirement investing posts.

Saving for retirement

Enjoying Retirement? (by boliston)

For many readers investing for retirement seems to be the most difficult thing about personal finance.

• It is easy to understand (not necessarily to do) that getting out of debt is a good thing.
• It is easy to understand (not necessarily to do) that spending less than you earn is a good thing.
• It is easy to understand (not necessarily to do) that putting away money for our elder years,  is a good thing!

But INVESTING for retirement just sounds intimidating to many!

Make Investing Simple

So let’s make it simple:

First investing-what does  it mean? Investing means putting aside money in hopes to receive a return or increase in value of that money.

Most people learned about simple interest in school.  If your $100 grows 5%- in one year you have $105, in two years it is $110.25……

So investing is using money in such a way as to grow the value of the money.  So theoretically you can invest in anything from real estate, to artwork.  From windmills to wine.  The idea, of course, is to pick something that will increase in value. Increase faster than the value of the dollar decreases… But inflation is another story!

The stock market is nothing more than a central place of convenience to put your money to work-investing in companies- in hopes that in the future companies stock you invest in,  will grow in value.

Investing risk comes from the possibility that where you put your money to work, may go DOWN rather than INCREASE in value.

Retirement Accounts Have Advantages

There is nothing magic about retirement accounts-they were set up by the government to encourage people to save, by providing a tax break for that money.  Money put into certain qualified retirement plans is tax deductible.  Of course, the devil is in the details regarding which account is tax-deductible for whom.

The other advantage in addition of tax deductions, is the growth of the money is tax deferred.

If you save 500 bucks in a regular savings, the growth of that money in value is taxed.  If you put that same money in an IRA or 403b, the growth is tax free!  That is a cool thing….

IRA’s

IRA’s have inc0me limits.  Anyone can invest in the traditional IRA and get tax deferral on any taxes on the growth of the money, but the money deposited is not tax deductible if your income is over a certain amount (check with your tax adviser or the IRA account manager.)

The short story on Roth vs Traditional IRA’s is that Roth IRA deposits are not pre-tax or tax deductible, and they have income limits-couples over $150,000 in annual income aren’t eligible.  Anyone can open a traditional IRA, but the tax deductibility of the deposits varies by income-as discussed above.

What can be bought in an IRA?

Most IRA’s can be invested in stocks, mutual funds, ETFs, and real estate can also be held.  There are also many other possibilities such as gold, silver, and many esoteric investments, but most mutual fund companies that manage IRA’s don’t allow them, even if the IRS does, because of the extra paperwork involved.

You also can’t use margin (invest borrowed money)  in your IRA!

401k and 403b’s

The Difference between 401k and 403b.

There is very little difference between these accounts.  The 401k, is usually found in traditional for-profit corporations, and 403b’s are usually found in not-for-profits-so these are common in community hospital settings.

The main negative with 401k/403b type plans is the investment options provided by the plan your employer uses is sometimes limited, and some employers don’t match your investments.

If that is the case, (your employer doesn’t match) many experts recommend focusing your initial investments in your IRA, then using the 403b if you want to save more than the IRA limitations allow.

Case Study

Lets Do a case study to help you understand these investments and what they can do for you.

Nurse SusyQ: When she graduated, she bought a new car, and traded it in every 3 years-”I got a great deal and my payments were the same” was her mantra…. Her employer had a 403b, which she ignored completely.

Her great uncle left her a couple of thousand bucks when he died, and she thought a vacation to the islands was an appropriate way to remember him by.  These decisions were representative of her choices in life-full speed ahead!

Fast forward 35 years later, and she is living on whatever Social Security provides and her kids getting a reverse mortgage on her home to help keep her in groceries and medicine.

Nurse Bobbie, however took my course, the 5 A’s to Financial Health fresh out of nursing school.  She paid off student loans,  bought used cars, and put the match into the 403b at work, and invested the rest of her savings in Roth IRA’s.  She and her spouse bought a small home when they could afford the down payment.

She continued paying herself first, building up substantial savings.  After about 15 years, she and her husband started buying rental properties when she built up enough cash.

When she finished her nursing career,they had built up a high 6 figure retirement account, and had three paid for rental properties.  The income from these investments allowed them to travel the world .They also  enjoyed starting college accounts for all the grandchildren.

Financial Choices

There are choices you have to make!  If you make them by ignoring them, you will still be making a choice.

Make your choice the grown-up one, to put aside wasteful spending for the gadget of today.  Make your later years rewarding, rather than being a  parasite on your kids and grand kids!