The Grand (Money) Illusion

OK, admit it. You've done it too. With the recent rise in the stock market, you've seen your 401(k) balance rise also. You've started to think "Its going up, so everything is fine. It was down for a while, but now its coming back."

Does that sound like you? When you open your 401(k) or IRA statement, do you just look at the total balance and try to figure out if it's up or down? 

Money Magazine has their 2011 Retirement Guide out now. Senior Editor, and Retirement Expert Penelope Wang urges you to think of your retirement differently. Don't just look at the total lump sum. Look at what the future income will be, which the lump sum will generate. This is the Grand Illusion (not the Styx song) when it comes to your 401(k), she says. Remember that your future purchasing power also will be eroded by inflation.

Recently, I had a client ask me if $1,000,000 was enough to retire on. My answer was that we don't know until we look at your income needs, and cash flow. What are your monthly and yearly expenses? 

Let's assume that you have $1,000,000 (I know, I know.....just play along, OK). Let's assume also that you will be drawing 4% per year from the $1,000,000 nest egg. In order to do that, your money needs to be invested so that you are getting at least a 4% real return (after taxes and inflation). That way you can take money out without shrinking your nest egg.

So, using the $1,000,000 figure we can multiply that by .04 and get $40,000. We will take $40,000 per year for income. Will $40,000 meet your expenses? Do you have other debt? How about other sources of income?  

You MUST look at your 401(k) or IRA this way! It is a source of future income for you. The bigger the nest egg, the more income it will generate. But now you know WHY you need a bigger nest egg! "People understand how much money they need each month, so it makes the saving process more relevant," says UCLA behaviorial finance professor Shlomo Benartzi.

By the way, Ms. Wang also shows an illustration in her article on how long we think our money will last. Although most experts asvise retirees to limit their withdrawals to a maximum of 4%/year, there is a myth that you can take out more. According to the Met Life Retirement Income IQ Test (2008), about 26% of those surveyed thought that withdrawing 7%/year from a nest egg was safe. A whopping 43% (nearly HALF) of the respondants believed that it would be OK to withdraw 10% or more per year!!

Picture a small boat with a leak.

At first, you may not notice the leak. As water rushes into the boat, you start to panic. The water pours in

faster and faster, until the boat begins to sink. That's what happens to IRAs when you take out too much money. Eventually you reach a point where you can't keep up.

Let's keep your boat floating!

Help! My 401(k) Has Fallen – And Must Get Up! is my new book. It has several ideas and strategies which will help you in your retirement savings journey. Get your ‘Fallen’ 401(k) back on its feet. Contact me to reserve your copy today. You can also get a FREE report at my website –

The 5 Biggest Problems With 401(k) Plans & How To Fix Them.

You may also listen to my weekly radio program – Improving Your Financial Health on WHME-FM in South Bend. Archives can be heard on my website as well. If you live in the South Bend, IN area, I specialize in 401(k) rollovers or IRA reviews. You can also follow me on Twitter, Linked In, or Facebook .

New Years Resolutions

"Now is the accepted time to make your regular annual good resolutions. Next week you can begin paving hell with them as usual." Mark Twain

Here we are - a New Year. Some also say a New Decade.

What 'Financial' Resolutions have you made? Can't think of any? Here are a few tips.

1. Review and Rebalance your Investments and 401(k)
If you have been putting it off for a while to "wait & see", your account is probably seriously out of balance. Sit down with an advisor to review your goals and make your your fund mix matches what your needs are.

2. Increase Contributions to Your 401(k)
Are you putting between 10% and 15% into your 401(k) at work? If not, then at least raise the amount you are putting in. Gradually work yourself up to that level. You will need the nest egg for income later.

3. Pay Off Credit Cards and Other Debt
If you are having trouble with #2, get these paid off and free up some money for yourself.

4. Set Up a Budget and Stick To It
There are a number of places you can find good basic worksheets for setting up a budget. It should be simple. Just make sure all of your money has a place to go - either savings or expenses. Here is a site with some downloadable sheets. http://www.betterbudgeting.com/

5. Contribute to a Roth IRA and Convert Pre-Tax Retirement Savings
You can put up to $5000 into a Roth ($6000 if you are 50 and older). You can still make 2009 contributions up until April 15. The Roth IRA of course grows tax free and allows you to make withdrawals at retirement which are also tax free.

There are no income restrictions for the Roth this year and if you choose to convert any money from your Traditional Pre-Tax IRA to the Roth, you may spread the taxes out over the next 2 years.

You can contact me through my website, http://www.helpmy401k.us/. You may also follow me on Twitter at http://www.twitter.com/deanvoelker. I also host a weekly internet radio program at http://www.blogtalkradio.com/401kcoach.

Retirement Calculators

There are some great tools and calculators you can use for free to help plan for retirement. Some of the best ones are those which you may not even know about.

First, not to toot my own horn, but my website, www.helpmy401k.us has a great tab called Investment Tools .

There are calculators there for almost everything. The most commonly used one is the 401(k) Calculator. You could also use the 457(b) calculator if you are a government employee, but the concept is the same.

Simply go to the 401(k) calculator and plug in your own numbers. For example, lets say you are 29 years old with $1000 in a retirement savings account. Lets also say that you earn $50,000 per year and that you follow Dave Ramsey's advice and put in 10% of your pay into your 401(k) or $5000. If you earn an average return on this 401(k) account of 8% and keep doing this until age 66, you will have saved $1,076,087 for retirement. And that does not include an employer match or a raise in pay - EVER. Personal Finance expert Eric Tyson has an idea which may help provide an incentive to save more in 401(k) or IRAs - instead of calling them those names, we should try calling these "tax-reduction accounts".

What if we did figure those in? Easy - just enter those numbers.

Well, lets say your employer matches your contribution by 50% of whatever you put in up to 4%. If you put in at least 4% or more (and we are doing 10%, remember?), that means you are getting another 2% ($1000) from the employer. Also, lets assume they will raise your pay by

2% per year as a cost of living increase. Keeping the other earlier numbers the same, you will now have saved $1,598,680 for retirement.

Here is another one which my be helpful if you are planning to pay off credit card debt. And you should absolutely do that! It will have you save more in your "tax-reduction accounts."

Let's say you have a balance of $2000 in a credit card account. Your current monthly payment is $125/month and your interest rate on the card is 17.5%. (Ugh!) If you do as Dave Ramsey says and do some "plastic surgery" on your card (cut it up and dont use it anymore!), did you know that you can pay the card off in 12 months by just raising your payment to $183/month? It's true and very easy to figure out using the "Credit Card Payoff" calculator on the site. This can be very helpful to see yourself making progress towards your goal, if you can't pay the entire amount, but know you should pay less than the minimum.

In upcoming blog articles, we will look at a few more of the calculators.

You can see these calculators and many other helpful ideas on my website, www.helpmy401k.us. You can also follow me on Twitter at www.twitter.com/deanvoelker . I also host a weekly internet radio program "Improving Your Financial Health" at http://www.blogtalkradio.com/401kcoach .

Cut The Fat in your 401(k)

Last week, we asked “Where’s the Beef?” Today, we ask “Where’s the Fat?”
Its very important to trim the ‘fat’ in your 401(k) plan – or fund expenses. Today on my Blog Talk Radio program, I had a listener ask about fund expenses. These can really affect your long term return on your retirement savings.

Expenses come from managing the mutual fund. The fund family charges a percentage of the assets invested to manage the fund – deciding what to buy, what to sell, and how much to buy or sell and when to do it. Less trading = lower expenses. Also the advisor on the plan may be paid from these expenses.

Knowing this, it would make sense to look for funds in your plan which have a lower expense rate. If its about 1%, that isn’t too bad, much more than that can negatively affect your returns over time.

To give you an example, I did some figuring on my financial calculator . Let’s look at a 22 year old college graduate, starting their 401(k) plan. Of course you would expect them to bump up their contributions over time, but lets say they put in $300/month with an 8% average return until age 66. They would have saved $1,340,048 in 44 years.

What if they were using a fund with expenses that were 1% more? In other words, the fund may have averaged 8%, but the real return was 7% due to higher expenses. With all the other factors being the same, we now have a total savings of $993,985, which is a difference of $346,063. OUCH! If you figure on taking 4%/year of the nest egg at retirement for income, that means we would need to live on less income -$13842 per year less. See where 1% can make a big difference?

So look carefully at your statement. Don’t just look at ‘performance’ but also fund expenses, which do affect long term performance. Have an advisor help you with this and also help you determine how much to save, so you can have the type of retirement you want.

You may contact me through my website at http://www.helpmy401k.us. You can also follow me on Twitter at http://www.twitter.com/deanvoelker. I also host a Weekly Internet Radio Broadcast “Improving Your Financial Health on Blog Talk Radio http://www.blogtalkradio.com/401kcoach

If You Knew You'd Get a "B"

Soon, all the kids will be back in school. My daughter can’t wait to see her friends and show off her new outfits. Back-To-School time usually also means plenty of sales which should get the cash registers ringing in your local retail shops.

Since we are just getting started, it’s too early to think about report cards and grades yet….or is it?

What if you knew at the beginning of the year, that your grade at the end of the year would be at least a “B” and no worse – no matter what? Better still, what if you got an “A” in one quarter, and a “C” in the other quarters – and at the end of the year, you got to keep the “A” as your grade for the year?

If that were true, how would you feel about going to school? Would you be more relaxed? Would you want to learn more? Would school be more fun?

Well, GUESS WHAT!! I can’t do much about Johnny’s math grade, or Susie’s US History Course, but I can provide solutions which may improve your confidence in investing.
How can you do that, you ask? Variable Annuities can provide Safe Growth and Safe Income.

Recently, Leslie Scism of the Wall Street Journal wrote “Because of such guarantees, many holders of variable annuities actually saw their accounts increase 6% or more in value last year, when the Standard & Poor’s 500-stock index dropped nearly 39%.” in her article “Long Derided, This Investment Now Looks Wise”. http://online.wsj.com/article/SB10001424052970204900904574302270919454880.html

Currently, you can earn as much as 7% or more on your principal base when you aren’t using it for income. That means if you start with $100,000, by the end of the year, you would have $107,000 to draw income from later – no matter what happens in the market. (As long as you leave it there.) And it can grow tax-deferred until you begin to take it out.

What if your account does better than 7%? Also, what if it only does better than 7% for one quarter? Wouldn’t it be great to keep the best quarter and lock it in for the year? Well….you CAN!

What if you could do this every year while you are building your Nest Egg? What if you went into the school year knowing you would at least get a “B”….and might get an “A”?

Then when you begin to take income from your savings, you can take 5% from the nest egg you’ve built for the rest of your life. The check would go up or stay the same, but never go down. (As long as you aren’t taking more than 5%.) Would that be OK?

There are some drawbacks to a Variable Annuity, which Ms. Scism also points out in her article http://online.wsj.com/article/SB10001424052970204900904574302270919454880.html the most obvious being the cost of the extra protection. George Lambert also points this out in his article, “The Cost of Variable Annuities” http://www.investopedia.com/articles/pf/06/variableannuity.asp in which he looks at the different types of protection – Growth Protection, Income Protection, and Death Benefit.

Another drawback is that when you consider investing into a Variable Annuity, you need to take a Long Term approach – like any other investment. Speak with a reliable advisor about whether or not it may be appropriate for you based on your time horizon and income needs at retirement. Early withdrawals may result in steep surrender charges, although many plans allow you to withdraw as much as 10% with no surrender charge.

The main advantage of course is taking the uncertainty over today’s economy out of the picture. And if you knew you’d get at least a “B”, wouldn’t you sleep better at night?

For more information on annuities, or other investment ideas, you may contact me at http://www.helpmy401k.us/. You may also follow me on Twitter at www.twitter.com/deanvoelker. I am also hosting a weekly internet radio podcast at http://www.blogtalkradio.com/401kcoach.

Credit Myths

There is an old saying that if you tell a lie loud enough and long enough, then over time, the lie will become accepted as truth.

Like many of you, I had bought into the credit card myth. I believed that having a credit card was aprt of life and that you "needed" one to rent a hotel room or make other purchases.

Recently, I've discovered that one of the best ways to Improve Your Financial Health is to perform some "Plastic Surgery". There is an overwhelming feeling of freedom and relief when you take a pair of scissors to that piece of plastic in your purse or wallet.

Dave Ramsey discusses this in further detail in his Financial Peace University course.
www.daveramsey.com

Imagine how much simpler your life would be without credit card payments or other loan payments. Imagine being totally debt free, or at lest debt free except for your home.
How much money could you save if that were your situation?

If you had $10,000 or more in a savings account, to be used only for emergencies, would you be able to worry less about the possibility of something happening?

One of the best definitions I have heard of "Financial Security" is this:
Financial Security means being able to afford almost anything you want - AND wanting very little.

When you tell a lie or spread a myth long enough, it will eventually be accepted as truth.

Here are a few "myths" about credit which have been told to us over & over again through marketing and the media.

Myth: You need a credit card to build credit.
Truth: A credit card does not "build" credit. In mnay cases, it can even destroy credit.

There is NO positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! Most families don't pay on time. The average family today carries $8,000 in credit card debt according to the American Bankers' Association.

When you pay cash for a purchase, you can "feel pain" of the money leaving your hand. This is not true with credit cards. Flipping a credit card up on a counter registers nothing emotionally. If you use credit cards instead of cash you will spend 12-18% more. This is money you could have saved.

Myth: What about my credit score or FICO score? Don't I need a good score for getting a job,
getting loans.
Truth: The FICO score (Fair Issac Corporation) was created in 1958 as a way of determining the likelyhood that a person will pay their debts. http://en.wikipedia.org/wiki/Credit_score_(United_States)

In other words, it is a debt score. It measures what debts you have and how likely you are to pay them. People with no debt over a period of several years actually have a ZERO score. Wouldn't it be better to have ZERO debt as a measurement of managing your money, than a 'score'?

Myth: Wouldn't it help to get a debt consolidation loan? That is a good way to get out of debt.
Truth: When you do a debt consolidation, you just move the debt from one place to another. 88 percent of the time people do debt consolidation, they don’t change their behavior and go right back into debt. You can't borrow your way out.

The best way to eliminate debt is by putting together a budget, and putting your debts on a sheet and knocking them out one by one, starting with the smallest balance.

Myth: 90 Days Same as Cash or 0% Financing is a good deal.
Truth: This is an advertising gimmick. Businesses are in business to make a profit.

When companies use this method, they simply build the extra right into the price. Then when you don't pay it off in 90 days, they can charge you interest on top of it at rates from 24-35%. Worse, they will backcharge the rate all the way back to the date of purchase. And they know that most of the time, people won't pay it off on time. Again, the reason for doing this is to make a profit - once when they sell the item, and again when they can charge you interest.

Please contact me for more information. You may reach me through my web site. www.helpmy401k.us. You may also follow me on Twitter. www.twitter.com/deanvoelker

How Do I Keep My IRA From Being Eroded By Taxes When I Die?

Recently, I have been reading “The Retirement Savings Time Bomb…and How To Diffuse It” by Ed Slott. Ed is a highly renowned CPA and tax advisor. He has written for the Wall Street Journal, the New York Times, and USA Today. His book focuses on strategies to keep money in your savings, and away from the IRS.

One strategy of his, which I also recommend to my high net worth clients is the use of Life Insurance for estate planning. Because Life Insurance proceeds are not taxable, it’s a great way to pass money to your beneficiaries without creating a tax burden for them.

Ed uses a great story to make his point on why insurance is important. With his permission, I have included an excerpt from his book. Ed Slott’s website is www.irahelp.com.
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If you’re not a baseball fan, then the name Bill Buckner probably doesn’t ring a bell. But if you follow the game, you’ll recognize it as one of the most ignominious names in the history of baseball.

Bill Buckner was the first baseman for the Boston Red Sox in the 1986 World Series when the Sox were matched against the New York Mets. It was Game 6. The Red Sox were an out away from winning a World Series for the first time in 68 years. The ball was pitched, the Mets batter swung and connected with a thunderous c-r-a-c-c-k-k, sending the ball straight to first base and the outstretched arms of Bill Buckner, who flubbed the catch before the stunned but elated crowd in New York’s Shea Stadium, letting the ball roll between his legs!

Thanks to this colossal error, the Mets were able to pull their fanny from the fire, win the game that night, and go on to win Game 7 and the World Series title. The city of Boston has never forgiven Bill Buckner. Last I heard, he’d moved to Idaho, which apparently still wasn’t far enough for Boston fans. To Boston Red Sox fans in particular, and to baseball fans in general, Bill Buckner remains but one thing: The Man Who Dropped the Ball.

Now, what if I told you the Bill Buckner was also one of the best players ever to play the game of baseball? Would you be shocked? Disbelieving? I know I was when I heard that exact statement mad in a recent show about Buckner called “Beyond the Glory” on the Fox Sports Network. Being an accountant by trade, I decided to do my own audit of Buckner’s statistics to see if the show was right.

But how would I find those statistics? Easy. I went to a local baseball card store and asked the owner if he had any Bill Buckner cards for sale. He looked at me like I’d sprouted two heads.
“Why would you want a Bill Buckner card?” he asked. “Nobody wants them. That’s why I don’t carry any. We’d never sell them.” But I persisted, and he said he’d check around the baseball card grapevine to see if he could come up with one.

I went back in a few weeks and, lo and behold, he’d managed to dig up a few old Bill Buckner cards for me. “How much?” I asked.

He said, “They’re worthless. You can have ’em for free.”

I thanked him, took the cards home, and quickly checked Bill Buckner’s statistics. Fox was right. The numbers were astounding!

Bill Buckner played 22 seasons. Only 25 players in the history of baseball have pleyed more games then he did. He’d gotten more hits than 70% of the players currently in the Baseball Hall of Fame, including such superstar names as Mickey Mantle, Ernie Banks, Reggie Jackson, Johnny Bench, and even Ted Williams. He had 500 more hit’s the Joe Di Maggio!

When Buckner played for the Chicago Cubs, he won a National League batting title. He was also an exceptional fielder. He genuinely was one of the greatest players the game of baseball has ever had. And yet he will be forever locked in the Baseball Hall of Shame for that one slip-up at the end of his career that cost the Red Sox the World Series.

As I pondered the ill-fated career of Bill Buckner, I found myself thinking, “He’s a lot like an IRA. He had such a brilliant career, accumulated so much, but in the end lost it all due to one error, and now his name is mud.”

Is that how you want your family to remember you? As the guy (or gal) who dropped the ball?
Most people don’t think about it much, but the combination of estate and income taxes can easily consume an IRA of any size. Combined, estate taxes, along with federal and state income taxes could easily exceed 90%.…..

When it comes to retirement accounts, its not enough to earn great investment returns. Yes, that is important in building the account, but even if you earn 30% per year, every year for 30 years, what good is it if, at the end of the line, up to 90% of the account’s value is lost - which can happen if the funds aren’t there to pay the combined estate and income taxes on an inherited IRA, and so the IRA itself must be used to pay those taxes.

If an IRA must be tapped to pay tax when the IRA owner dies, the result is a cycle of taxation that doesn’t stop until the beneficiaries are so punch drunk that they don’t know what’s happened to them, let alone to their IRA…..

Do something now while you are still alive and options to protect that money for your heirs still exist. Life Insurance is your retirement account’s best defense to offset the tax burden which beneficiaries may face.
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For more information, please contact me at http://helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker

This Time Its Different

Last year (2008), the Dow Jones Industrial Average fell about 34% (www.djindexes.com), then dropped ANOTHER 20% in the first 2 months of 2009.

It is estimated that investors accounts have declined in value by about $10 TRILLION DOLLARS TOTAL. http://www.businessweek.com/mediacenter/podcasts/cover_stories/covercast_03_05_09.htm

Severe recessions such as this one can test the resolve of even the most experienced investors.
It is easy to say "This time its different." Many people are still feeling that way.

However, it is important to keep in mind a few points.

* Financial decisions (any financial decisions) should not be based on emotion.
* Historically, after every past recession, the market has gone on to hit new highs.
* Declines in the market & economy, even our most severe ones, have been temporary.
* Since 1926, the Dow Jones has had TWICE AS MANY positive returns as negative ones.
Despite more than 12 recessions dating back to 1926, $1.00 invested in the Dow in 1926
would have been worth $2045.00 at the end of 2008.

The late Sir John Templeton, founder of Franklin Templeton Investments liked to say, "The Four most expensive words in the English Language are 'This time it's Different.' "

The National Bureau of Economic Research www.nber.com http://www.nber.org/cycles/
states that the United States has weathered a recession EVERY decade since the 1920's. https://financialprofessional.hartfordinvestor.com/planco/om/P7135.pdf - Page 4.

As painful as the recessions are, when we are experiencing one, they have always been short lived, about 11 months on average. It can be difficult to predict when one will end, and announcing the "end" may take a while. According to NBER, they have waited an average of 15 months before declaring an "end". This way they avoid confusion. If there is further economic turmoil, it can be linked to a new recession, rather than the old one.

While we are "waiting to see what will happen" rebounds are often quick and robust. Stocks tend to recover about 6 months before the economy does. According to Morningstar www.morningstar.com, stocks are referred to as a leading indicator. On average, stocks have returned about 25% from market lows to the "end of the recession".

Did you know that the Dow Jones has increased by nearly 30% since its low point on
March 9, 2009? Have you been "in" the whole time, or did you go to something "safe"?

3/9/2009 - 6547
7/1/2009 - 8504

"The most expensive words in the English Language are 'This time it's different'."
Sir John Templeton

If you went to cash, thinking you were being "smart", think again. Cash can actually slow your recovery, and make it much harder to get your savings back.

In a recent study, Hartford shows data from the recession of 1973-1974, which had been our most severe until the present one. The study (please contact me at www.helpmy401k.us for more information) shows 4 seperate scenarios, each starting with $100,000 invested in equities on Dec. 31, 1972.
(Equities are represented by the S & P 500 Index. Cash is represented by the 30 Day Treasury Bill Index.)

In the study, they wanted to see how long it would take to recover the original $100,000 for the Low Point in the Market (Sept. 30, 1974)

Investor A (stayed in Equities) - back to $100,000 in July 1976 (1.75 years)
Investor B (moved to cash for 6 months, starting 9/30/1974) (5.3 years, or Jan. 1980)
Investor C (moved to cash for 12 months, starting 9/30/1974) (also 5.3 years)
Investor D (moved to cash for 18 months, starting 9/30/1974) (6.2 years, or Nov. 1980)

Yogi Berra sometimes said, "Its deja vu all over again."

In a challenging economy such as this one, isn't this precisely when you need a financial professional working side by side with you?

For more information, please contact me at http://www.helpmy401k.us. You may also follow me on Twitter at www.twitter.com/deanvoelker.

Fixing Your 401(k) - Part 6

Problem #5 - Investments (Company Stock)

Do you own stock in your own company? Companies have always encouraged employees to think like an owner. By owning stock, you are a part owner of your own company. There is nothing wrong with that idea, and if you work for a large company which issues stock, that may be an option available to you in your 401(k) plan.

But how much should you own? Not more than 5-10% of the company in your 401(k). There are just too many "Murphys" out there. http://www.murphys-laws.com/murphy/murphy-true.html

Mutual funds are much more recommended as a way to spread your money out so it can grow.
“Money, you should pardon the expression, is a little bit like manure. It doesn’t do any
good unless it’s spread around, encouraging young things to grow.” Barbra Streisand

One of the worst examples of company stock going sour in a 401(k) is Enron. Enron has been a running joke since 2002 for their collapse due to fraudulent business & accounting practices.
Many of their workers lost their life savings when Enron filed bankruptcy and their stock was rendered worthless. http://www.albionmonitor.com/0202a/enrontimeline.html

Enron's 401(k) plan was enormous - over $1 Billion in total assets, of which $600 Million was in Enron stock - That is 60%! Enron offered a matching plan of up to 6% of an employee's base pay - but paid the match in STOCK, not cash. When the stock plummeted from over $90 per share to less than a $1.00 in 16 months, their employees lost their life savings and any chance at retiring the way they had planned.
http://encarta.msn.com/media_701610605___1___6/the_fall_of_enron_stock.html

Please meet with your advisor if you have more than 10% of your 401(k) or portfolio in company stock. For more information, or to contact me, please visit http://www.helpmy401k.us. You can also follow me on Twitter at http://www.twitter.com/DeanVoelker

Fixing Your 401(k) - Part 4

Problem #3 - Loans

"Brother, Can You Spare A Dime?" (Bing Crosby 1932)
http://www.youtube.com/watch?v=eih67rlGNhU

There has been a popular myth lately that it is OK to borrow against your 401(k) plan. The most common thing I hear from those I talk with is "I'm paying myself interest!"

If you believe that, I've got some GM stock for you that you should buy!

All kidding aside, this could be the worst idea ever with regards to retirement savings plans. Dave Ramsey, nationally syndicated financial expert, has some thoughts on this as well.
"Never, ever borrow on your retirement." Dave says in response to this question. http://www.daveramsey.com/etc/askdave/index.cfm?event=dspAskDave&intContentItemId=7802

Yet, almost 1 in 5 401(k) plans (18%) have a loan against it. This is according to Transamaerica for Retirement Studies in their annual survey. www.transamerica.org
http://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&content_id=3838

Reality is NOT "paying yourself interest", but rather paying credit card interest to borrow your own money. OUCH!

What are the Tax Consequences on a 401(k) Loan?

When you borrow, you have 2 options -
1. Pay it back.
2. Don't pay it back.

Of these, the best of course is to pay it back. However, did you know that when you do, you face DOUBLE TAXATION? You are paying interest with after-tax dollars that will be taxed AGAIN
at withdrawal.

What about not paying it back? Well, obviously your investment takes a hit & you could be taxed up to 35%, and face the early withdrawal penalty of 10% if you are younger than 59 1/2. If you leave the company, the loan is automatically listed as a withdrawal, so it is "repaid".
Again, you are paying interest, not to yourself, but to a lender on your own money.

What does this mean to your investment? It lowers the balance, certainly. How much depends on how many times the loan is taken, what amount, investments, payback and several other factors.

Please don't "Spare a Dime" from your 401(k). You will need this money later!!
For more information, please contact me, Dean Voelker, at www.helpmy401k.us

Fixing Your 401(k) - Part 3

Problem #2 - Portability

OK, after taking a few days off for the Memorial Day weekend, I am back. There are still a few more problems to tackle with 401(k) plans as a retirement tool. Today's topic is Portability.

Question: When you left your last job, what happened to your 401(k)?

Follow Up Questions: How many times does the average worker change jobs during their
working years? And what percentage of people cash out their 401(k)s?

In Gregory Crawford's memo to President Bush in 2005 "The Looming Retirement Disaster",
the average worker will change jobs 5-8 times during their working years. And Jobradio.fm says that 1 out of 5 will likely change in 2009. http://jobradio.fm/2009/01/07/changing-jobs-1-in-5-say-they-will-in-2009/

The era of the "gold watch" after a long, loyal career is pretty much OVER. People may change for any numbe of reasons, but whatever the reason is, it may have a dramatic effect on retirement savings. There can be waiting periods to participate in a 401(k), the new employer
may or may not offer a plan, and there are interruptions in employer matching contributions.

And on average, this happens 5-8 times for the typical worker over their working life.

How many people simply cash out all or part of their 401(k)? According to Gregory Crawford,
an astonishing 55%. If you are younger than 59 1/2, you are subject to taxes plus a 10% penalty by the government. Without education, or belief that the market will come back, many people convinced that this is the right thing to do "before they lose any more."

How exactly does this affect our savings?

In the last post, I showed how a worker earning $75,000/year for 20 years, putting in $6075 per year (8.1%) and getting a 4% match and an 8% average return would have saved
$431,901 in 20 years.

Using the same scenario, lets have this worker change jobs 3 times, with the last 10 years at the same job. We have just cut our savings down to $136,724. (Source Jackson Life - Rollover Rx). And if we take 5% income from that, we now have an income of $6836/year.

For more information, please contact me at www.helpmy401k.us

How Should I Invest?

Everyone has beeen asking lately - "How should I be investing my money?" or "What's Good Right Now"?

The answers to those questions should provoke several other questions from your advisor.
I could say "Depends", which doesn't mean to invest in adult diapers, but you should give your advisor more information.

How you should invest your money really does depend on you.

* What are your goals?

Is it to be 'debt free'? Is it to own a 60 foot yacht? Golf everyday? Spend time with grandkids?
What does having money mean to YOU? Once you figure that out and communicate that with an advisor, he or she can help to give you the right place to put your money.

* What are your financial circumstances?

Someone with $100,000 in savings and no debt is in a different place in their life than someone who has $500 to "play with", but no other savings. As an advisor, I do not want to "gamble" with anyone's money. I look to provide appropriate long term solutions to help you reach your goals.
My job is to give you the "Map" you need to get from where you are now, to where you want to be - and make sure you are happily involved every step of the way.

* What is your tolerance for Risk?

OK I said it - the "R" word. To which you may say "I don't want any risk."
It's important to understand that ALL investments have risk. Even your savings account which
is FDIC insured has risk.

"How is that?" you ask.
Savings & CDs have "inflation risk", which means they are not good long term vehicles to keep up with the rising cost of living - inflation.

The best way to minimize risk is to use a mix of different investments that have different purposes - like different clothes in your closet - or "Diversification". There are also questions which your advisor may ask you to help you understand what risk means.

It all boils down to one question - Money means different things to different people.
What is important about money to you?

For more information, or to contact me directly, please visit www.deanvoelker.com

How Diversified Are You?

Diversification - Now there's a word you hear a LOT in the investing world. For those of you who may not have a Series 7 license - WHAT DOES IT MEAN in layman's terms? WHY is "diversification" important to me & my money?

Good question - Here's what diversification is NOT -
* Having Money at different banks.
* Dealing with different financial advisors.
* Owning CDs due at different times.

The simplest way I know of to define "Diversification" that most of us can relate to is this.

Think of your closet at home, where you keep your clothes. We all may prefer a different style or taste in clothing, but clothing generally falls into these main groups.

* Winter or cold weather wear
* Summer wear
* Spring wear
* Dress up or formal wear
* Casual wear
* Sleepwear
* Working clothes (Painting or yard work)
* Shoes
* Rain gear

In other words, different clothing for different occasions. No matter what's happening in your life or with the weather, you have clothes to wear that fit the situation. And we need to have the right amounts.

If you don't like the weather in Indiana, don't worry. It will change soon. It would be silly to own all t-shirts & shorts. Wouldn't it also be silly to live in Arizona, and own too much winter wear?

The same is true for investing. You need a full "closet" of clothing so that you are ready for whatever the economy is doing. That's how you minimize all the types of risk.

Talk with your advisor today to make sure your "closet" is full of the right financial "clothes".
(Is it time to get rid of the Nehru Jacket & Leisure Suit yet?)

For more information, you can contact me at http://www.deanvoelker.com/