Posts Tagged ‘retirement planning’

Retirement Investing Made Simple

Monday, November 29th, 2010

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.

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!

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Posted in Retirement savings | 5 Comments »

Nurse Over 50: Needs Personal Finance Transplant!

Thursday, August 12th, 2010

Nurses Financial Summary:

Let me introduce Nurse Shawna.  She has been an RN for 15 years. Before nursing school, she worked in a manufacturing plant.  Once the plant closed and the jobs went overseas-she went back to school- being the first in her family to go to college.

She is making the national average nursing salary of $53,000 per year as a nurse manager.    She has enjoyed the comfort a good job has brought to her family, and combined with her husband’s salary-they are doing quite well.

However, she just had her 55th birthday. She had an epiphany on  her birthday-she didn’t want to work forever.   She and her husband recalled that commercial, where the couple is on the phone talking about how their friends had to sell their home in retirement-as they didn’t have the money to keep it.

For the first time in years-Shawna began to think about their long-term financial future.

Her employer,  a large city hospital, matches up to 3% of her salary in a 403b.  But Shawna is only contributing 1%.  Her last child had just graduated from college, and was finally off the payroll.   He has gotten a job, even in this environment-hallelujah!

Prior to his graduation, Shawna and her husband had been doing what a lot of people do, sacrificing their future for their kids’ college.

They had opened IRA’s on the advice of a friend years ago, but hadn’t put anything in them for several years.

Financial Fast Facts for Shawna:

  • Home mortgage- 20 years left on a 30 year mortgage at 6%
  • 403b-Hers-3% match-she is only having 1% taken out of her check-Account balance $75,000
  • 401k-Her husband-he is matching 2%-balance $125,000
  • IRA’s-traditional combined balance of $1500
  • With the youngest out of college and getting a rein on their spending-they are going to have free cash flow of at least $1,000/month.

Nurse Shawna and her personal finances:

What can Shawna and her husband do, to “catch-up” on their retirement savings?

I will write a follow-up post next week, on the catch-up scenario, but welcome reader suggestions or questions in the meantime.

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Posted in Retirement savings | 5 Comments »

401-K:The Quality of Your Retirement May Depend On It!!!

Tuesday, January 26th, 2010

It amazes me, when I ask the nurses at the hospital how they have invested their 401-K money.  What kind of funds do you have?   I usually get the shrugs, the “I don’t know-I just did what they told me to do.”

Now there has been a big debate over the last few years on how to get people to pay more attention to retirement.

We all know that the odds of social security being there for us in our old age is between slim and none.  And if it is there, then the amount of money we will receive is unlikely to be enough to live a quality retirement.

I can hear it now-”Where do you want to eat out Friday, Harold?”  “Well, we can splurge honey,  cause I just sold some plasma, and found a bunch of cans this week!” “Dairy Queen, here we come-we may even be able to share the mini-sundae to go with our burger!!!!”

Maybe it’s because I am closer to retirement age than I am 20, but time passes in a hurry, and the better plans you make now, the smoother and more freedom you will have in retirement.

So today, as promised last week, I want to define a few terms to help with making decisions on where to put your 401-K money.

Now, when you are hired, or once a year, a benefits administrator will meet with you to explain what your 401-k options are, and to make changes in your choices if you have any.  Before you go the next time, I want you to be more informed, so will continue this series over then next few months.

So today, I want to talk about Index Funds.  As I mentioned last week, index funds hold stocks that make up an Index.  Common indexes are the S&P 500, the Russell 2,000, 3,000 and the Wilshire 5,000.  Is this a Stock Car race???

No the numbers are how many stocks make up the index.  The S&P 500 index holds 500 stocks, the Russell 2,000 contains 2,000 stocks….

Now, if the index holds 5,000 stocks, then it is holding all of the stocks of any consequence traded on a major stock exchange-like the NASDAQ or the New York Stock Exchange.  Now to make it even more complicated, the amount of each company stock, such as Coca Cola, is dependent on the “market capitalization” of each stock-that is the number of shares of that company that trade on the exchange, multiplied by the price of the stock.

So if a company has a market cap of 500million, and another has a market cap of 250 million, then the first company will have twice as many shares in the index.

Now to add another wrinkle, the mutual fund companies, can decide that they want to limit some companies from being in their “index fund”.  So their index fund may not be a true index fund-holding all the stocks-they may just hold stocks from that index that meet certain earnings criteria.  They do this to keep from buying what they consider “dogs” or poorly run companies.

Now, this is enough info on index funds for today.  In another post, I will explain in a little more depth, how to choose which index fund for your retirement account.

This stuff has to be dealt out in small doses, or it can become overwhelming in a hurry.  But like any of your classes in nursing school, you have to start somewhere.  And the more you read and study, the more sense this will make to you.

Now, if you need to know more in a hurry, this article on index funds is a good overview, but again, until you begin to understand the special language of investing, it may be difficult to comprehend on the first go-round….

So let the learning begin!!!!

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401-K 101: The Basics of Retirement Investing for Millionaire Nurses

Tuesday, January 12th, 2010

401k Investing For Beginners

A recent survey of nurses revealed personal finance or “money worries” were their chief concern. Shouldn’t be a big surprise, considering we are in a near depression.

So over the next few months I will try to post at least one article a week on basics of personal finance.  This might include planned spending, retirement accounts, banking, credit cards and saving in addition to commentary,and punditry.

These basic articles may be boring to some, but fast forward to the years immediately before retirement, and you are thinking-”What am I going to live on, and how will I get by?”-then you will be glad you plowed through, and even more importantly, learned and executed on these recommendations…..  So let’s get started!

401-K’s got a vote of confidence, in a couple of surveys discussed in this article in the “Wall Street Journal”.  They report that the majority of 401-k holders kept their money invested, even during the severe market drop in March of 09.  Why is this important?  Because since that drop, the market has been up more than 30 %.  So the money you had invested during the drop has come back in value substantially-you are still not even on that money, but getting close.

(Now for those of you who may have another version of 401-k such as 403-b accounts-all we say here applies.  If you have no retirement account provided through your job, we need to talk!!!!)

More importantly, however, is that the new money that has been taken out of your check (pre-tax) has grown significantly since March 09-you bought at the bottom!!!!!  Good Job!

Of course, who knew when the stock market would hit bottom-nobody!  There for a while, it seemed as if the earth would stop spinning, the financial world was such a disaster.

Another article, discusses the argument about buying index mutual funds vs actively manged funds in your accounts. This article discusses a few advantages and disadvantages of the two type funds-but keep in mind, when stocks or mutual funds are in a retirement account forget about the fourth tip in the article-funds in retirement accounts are not taxed- on long or short-term capital gains.  One of the main advantages of investing in a 401-k or IRA-you get tax free growth.

First a few definitions about fund types:

Index funds:  These funds buy all the stocks in whatever index they are trying to mimic.  So a S&P 500 index fund holds all the stocks that make up that index.  So that mutual fund will go up or down the percentage rise and fall  of that index.   The stock holdings in that fund don’t change much, as changes in the stocks that make up an index don’t change often.   There are many other “index funds”-Russell 2000, Russell 1,000, S&P 500, and 100.

Therefore, the fees that occur when holdings are changed within a mutual fund are much less than average.  There are many different types of index funds, Dow index, Russell 1,000, and Russell 2,000 are a few popular ones, in addition to the S&P 500.  Vanguard is a mutual fund company, whose founder, John Bogle, made these funds famous.  But all investment houses, from Schwab, to Fidelity have their versions.

Actively Managed Funds: These funds have a manager or investment committee that makes decisions about which stocks to buy in their fund.  They may trade frequently or infrequently.  The difference between those that trade a lot, is that fee’s are higher.  One of the problems with these funds is that if they have done well under a manager, and the manager leaves, what will happen?  Who knows, but it might not be good-definitely worth watching.

So, what is a Millionaire Nurse to do?

Well the Millionaire Nurse at a minimum finds out what funds are in their  401-k.  Write the name of the fund down, and go to Morningstar and look the fund up.

You may find that everything is Greek-hey, if financial folks read a medical file-they would think that was Greek (more like Latin).  Find out how well your fund is doing compared to similar funds.

I think there is a place for both type funds, but if you don’t want to learn about them, then the index funds are the way to go.  Find one with low fees if it is offered in your plan.  Many plans only have one of each type to choose-that makes it easy.

Get the retirement plan managers to answer your questions about the type of fund, and how it is doing compared to its peers.  When your benefit administrators are at your hospital or other place of employment-don’t be afraid to ask questions-they may not give you investment recommendations-but they should be able to explain your options.

I will do another post later on the different types of managed and index funds, because I don’t want to overwhelm you with information, today.  You didn’t become a nurse in a day-and you will not be a financial expert in a day-but you have to start learning-and learn you will.

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