Adding more to the retirement account

In an earlier post, I talked about my salary increase. I realized two weeks later that I had not increased my 401(k) contribution. This was not a terrible thing, but with an increased paycheck comes the potential for increased taxes. Plus investing more in my retirement will likely benefit me in the future. Therefore, I increased my 401(k) contribution by 1% and saw a modest decrease in my take-home pay. With some changes to my automatic savings, I was able to cover the difference and build my retirement investment more quickly. Since this money comes out pretax, it does affect my final tax burden so I should see a modest reduction now as well as investing for the future.

Have you increased your retirement contributions?

Retirement investing: A cautionary tale

I have discussed rolling over your IRA, for example, when you have left a place of employment. In fact, I have rolled over my 403(b) into a traditional IRA. Hindsight being what it is, I wish I would have done things differently.

When I was looking to rollover my 403(b), I had to wait over six years for the amount of money I put in and the value of the account to equalize. This was made more difficult by the fact I make my contributions from 1999-2001 and then left for a new employer. The tech stock crash of 2000-2001 left me with almost 50% of the value of my pretax contributions gone. It was not a pretty sight and I ignored the account for the better part of five years.

However, I received a call from a new financial advisor in late 2006 to ask me to come in and evaluate my accounts. I had not talked with anyone for a while since my previous advisor had left the credit union of which I am a member. So I came in with my statements and we discussed my options. He recommended rolling over my 403(b) into an IRA account. Since the value was near my contribution values, I was interested in doing something different. The financial advisor suggested a growth investment portfolio with TransAmerica, and said he was invested with them as well. I thought that was a good recommendation.

He explained that the account was a front-load fee and was actively managed with shares of stocks and other mutual funds changing as the managers saw more opportunities for growth. My advisor told me that even though a 5% fee would take money from my initial investment, I would likely make it up the money in a year or two.

What does this all mean? Well, a front-load fund basically means that the mutual fund firm takes my money, removes 5% from the money and then invests the remainder for me as I specified. In the case of the fund I invested in, no fees would be charged to take out the money when I would want it in the future. I basically paid a fee up front for the company to take my money and invest it. I made this decision based on two flawed ideas:
1. My financial advisor liked the fund enough to invest in it himself so it has to be good.
2. As long as my money continued to grow, I did not think much about the 5% front-load fee.

Why are these ideas flawed? I never asked if the financial advisor received any benefit from me investing with the company. The second, why give up more of my precious money than I had to? I started out with a small amount of money, $5,400, to invest. Removing 5% then putting it in a market starting in 2007 was not an ideal move. I lost money to start with and my last statement had me with a value of just over $3,100. And that was after nearly gaining back my 5% fee off the top. If I was going to lose over 40% of my portfolio, I would rather have lost less of my money to fees.

If I had to do this over again, I would invest only in no-load funds (those with no fees), most likely index funds like those of Vanguard, Fidelity and T. Rowe Price. Yes, the value would still be down but I would still have more than if I invested in loaded funds. Now I know to check not only what fees are charged for investing, but the maintenance and management fees which can easily add up to 2% or more of the value of the fund. For the future, I plan on keeping more of my money for my investments and both asking more questions and reading the fine print more closely.

To educate yourself about investing, visit the following resources:
CNN Money 101
Balance Track overview
Fidelity basics

Brief overview of Roth IRAs

As you can tell, I am a big advocate of investing in the Roth IRA retirement vehicle. Recently, I was talking with a friend of mine and she mentioned that she should finally invest in one. However, until we were talking for a few minutes about Roth IRAs and when contributions could be made and how to invest, I did not realize she thought that all retirement vehicles meant that the money was tied up until at least 59.5 years of age. When she realized there were ways to withdraw money from the Roth IRA prior to retirement, she became greatly interested in what a Roth IRA could do for her.

Accounts like 401(k)s, 403(b)s and traditional IRA (individual retirement accounts) are tax-deferred. That means money iscontributed to the account before taxes are paid. That is why your end of the year tax statement, your W2, can show less money than your gross income because the money was put directly into the tax-deferred retirement account before taxes were calculated. Using tax-deferred accounts is one way to reduce your AIG, adjusted gross income, on which your federal and state taxes are based.

Roth IRAs are different; they are tax-exempt. While the money put into the account has already been taxed and does not decrease your taxable income, when withdrawn after retirement, no taxes are paid on the earnings. Furthermore, if you are not retirement age, you can withdraw your contributions without penalty. I believe the five-tax-year rule applies to contribution withdrawals, but this is one way to help fund schooling or a buying a first home. Leaving all your money in the Roth IRA account earns more dividends; however, this account type is flexible enough to give you options for pulling out the money if needed sooner than 59.5 years of age.

Roth IRAs are subject to contributions limits ($5,000 for 2009), income limits for single and married taxpayers, and do have penalties when contributions and earnings are taken out without following the allowed withdrawals terms. However, you can put in money for 2008 and 2009 years right now until April 15 to get one year closer to the five-tax-year "magic" number without waiting five calendar years. For more information on Roth IRAs, visit the Motley Fool. I have given a brief overview and the Web site has more details and examples to explain the various points.

Roth IRAs can be invested in anything from mutual funds to money market accounts and certificates of deposit. My Roth IRA is through T. Rowe Price and is composed of two index funds. My investment strategy is risky but I am hoping for greater rewards when I need the money. In the end, I contribute to both tax-deferred and tax-exempt retirement accounts. I put more than enough to get my employer's match for the 401(k)--I love free money!--and have made it a priority to fully fund my Roth IRA even if it takes me 14 months instead of the 12 calendar months. Consider the best strategy for you and weigh how each of these account types (tax-exempt and tax-deferred) will work for your retirement.

Analyzing my net worth for October 2008

I do not mean to depress you, but I have done my financial analysis for the month of October and now have enough data to compare year to year. Since I started calculating my net worth October 22, 2007, this is the lowest my net worth has been. So much for my goal to reach a net worth of $100,000 by the end of 2008.
October 2008 net worth -9.5%
11/1/07 to 11/1/08 net worth -7%

Extreme stock market volatility
I purchased some stock in February 2008 when the Dow dipped into the 11,300 range and thought I did well for myself. Well, October saw lows in 8,000s from highs of about 10,000. While October ended with the markets up, I will not be holding my breath that my stock values will return from their nearly 40% plunge. My 401(k), rollover IRA and Roth IRA all had a nice downward trajectory that ended up pushing my net worth down 9.5%.

Savings and cash
I keep saving money, but not enough to fill the hole from the stock market. In all cash categories (except the cash kept on hand), the amount of money is up. With gas prices easing at the pump, I can put more money back in savings and build a small cushion of gas cash for extra travel or sudden price jumps before I need to change my spending plan.

I have no predictions about the end of the year and what my account will look like. While my cash position could have been even stronger, I am in stockpiling mode so I did not have the same cash cushion in my spending plan as last month. With my focus on what I need to get done around my house, I did not seek a second job and am unlikely to find one between now and the end of November. I expect a small bonus with my next check, but I also plan a shopping trip for myself this month. We will see how this affects my totals when the month ends.

Analyzing my net worth for September 2008

Well, no surprise--my net worth took a hit. Like all of you that have invested in the stock market especially mutual funds, I have lost value in my 401(k) and Roth IRA. In fact, I lost nearly 4% of my net worth compared to August 2008 and nearly all the decrease was due to stock market fluctuations.

Not to belabor the point, but here is the breakdown:

Stock market volatility
The whole stock market is too reactionary to be anything but wild. September had the biggest one day drop in points, 777 points from the Dow, and only had a few days left in the month to make it up. With the overall market behavior, my mutual fund portfolio reflected the downward trend of the stock market. I have nearly 30 years to gain back these losses and I will likely need all the time I can get. Investing in mutual funds is a gamble and September reminded me that yes, it can not only go down, but can do it in a dramatic fashion.

Savings and cash
I gained some here, but not enough to counter the retirement fund losses. I bolstered my Emigrant Direct high yield savings account with another $400 and moved $1,500 I was saving for the replacement car into a 12-month CD at ING Direct, giving me a 4% APY. Any interest gains I can make, I will take! Future plans include boosting CD funds when they mature and adding a new CD to the mix so I have one maturing each month. These are not a true ladder, but three 3-month CDs staggered to give me higher interest than my savings account, but make them a bit more accessible. In addition, I saved almost $37 from my spending plan to add to my savings accounts and hope to add more in the next few months.

My losses are probably greater than I know now. My rollover IRA probably took a hit in September as well, but will not get the statement until October. I want to focus on my level of savings and bolster my cash position as much as possible. While I am far from panic mode over the Wall Street/bailout controversy, I feel it prudent to be more conservative in my spending. A possible second job is being considered and hoping I can save more money toward future dreams as well as present considerations.

Analyzing my net worth for July 2008

It's that time of the month again, to look back at the just-completed month and see how my finances held up. As I am sure you have hear around the web, the stock market has been a bit rough on finances. My rollover IRA is down 11%, my 401(k) down 11.7% and my Roth IRA has lost 4%. Since these stock-driven vehicles are a good share of my net worth, it is no surprise I lost another 1% of my net worth over the last month.

Will I change my investments? No, I am holding tight, letting my monthly or biweekly investments move forward and letting time (and my money) work for me. A down market is good for dollar-cost averaging. Stocks (and mutual funds) are on sale, meaning the more shares I buy now, the greater my gain in the future when the stock market moves upward again.

Notables in my net worth analysis:

Mortgage
I received a midyear statement and learned my mortgage calculator (in a spreadsheet) was off by two cents. Those extra decimal places really add up. Still, the amount owed on my mortgage is getting smaller and I plan on continuing this trend. On the other hand, paying off my mortgage is not eminent, but certainly manageable on the 30-year basis my mortgage repayment is based on.

Retirement funds
While my 401(k) is down (even as it is the largest pool of my retirement money), my Roth IRA gained. Granted, it only gained the amount of my contribution for July, but at least its total value is holding for the moment. Since the Roth IRA is made up of two index funds and my 401(k) of six managed funds, I find this month's snapshot interesting, but ultimately an atypical blip as the two investment vehicles usually have the same reflection, not opposite ones.

Larger expenses
I bought a chest freezer, had a large bill for the veterinarian and my electric usage is climbing for the summertime. I could be better at saving than I am, but both large and small expenses are bleeding off some of the money I could stash away.

I am feeling less controlled in my life, which stems from many things. Automated savings will get me part of the way there, but I need to take a more active role in managing my income. August is an extra paycheck month so I should have more in my savings account at the end of August, boosting my net worth. I will have to see the results in 30 days to find out if this extra savings is enough to bring me back to positive territory.

Analyzing my net worth for June 2008

Last month, I was excited by the increase in my net worth and projecting only good things for the future: meeting my $100,000 net worth goal for the end of 2008, even exceeding it. I bragged about how I achieved my net worth increase of 2.61% in this market. Well, it has come to bite me in the rear end. Yes, in June, my net worth is down -2.61%. Ironic, no? So what caused this karmic drop in my monetary value?

It's the market, stupid.
Yes, both my 401(k) and Roth IRA decreased in value from the month before even with continuous contributions every month. I had not realized the stock market had dropped that much in value, but the numbers do not lie. In looking at my 401(k) value, it is down 8.9% for the year to date. I know it was only -4% last month so June really knocked down my stock portfolio.

My car isn't getting any younger.
This was the third of my quarterly adjustments in my car value. As this is a depreciating item, I decreased the number listed for my car's value. Lowering the value of my car is expected, but merely compounded the lower asset total for the month.

Otherwise, my cash position is better than last month, my two savings bonds gained a bit of interest and a CD that I had at 5.25% rolled over to a 3.30% APY. I wonder if I might see 5% or greater returns any time soon. I need to focus on being more frugal, resisting the temptation to buy things just because I can afford it and keep on saving. I made some changes to my auto insurance and that will give me additional savings for my future car purchase (and further increase my cash position in July). Hopefully, this month will break even or increase in value over June.

How to rollover (or move) your IRA

The ease of rolling over your money from a 401(k), 403(b) or other pretax retirement benefit from an previous job depends on the company holding your money. Let me use my experience as an example.

My first job after graduate school was working in a laboratory at the same university from which I graduated. This new job doubled my income from my graduate stipend and offered me the opportunity to invest in retirement funds via a 403(b), which is a pretax retirement plan for nonprofits or universities. I started investing in 1999 and then 2000-2001 came along, blithely wiping out the value of my account. When I left the university position in late 2001, the retirement account value was ~50% of my contributions.

The company I am with now hired me seven months after I left my university position. While I was fairly pleased with the 401(k) plan my new employer offered, in January 2007, I consulted with a financial advisor about my 403(b) from the university job. I had let the money (and the plan choices I made) sit for six years. In that time, with no new contributions, I had finally gained all the value I had lost in the 2001 stock drop. I was ready to move on and wondered what to do with this money.

My financial advisor recommended Transamerica, which invests in several mutual funds, buying and selling funds to maximize returns. He was invested in the plan, explained it was a front-load fund and I thought the philosophy meshed well with my future goals. Now I realize funds that charge a load really are stealing my money, but I did not really think about it so I paid to join the mutual fund. Actually, I almost broke even for the first year in the fund so that was a plus.

However, it was not easy to retrieve the retirement money from my current 403(b) custodian to rollover into the IRA mutual fund I wanted. First, I had to sign lots of paperwork stating "Yes, I would like all the money invested in Wells Fargo Funds to be liquidated and transfer custody to Transamerica, where it will be invested in new mutual funds." The paperwork did not take long to fill out, but required I identify myself, list the custodian of my current funds including its address and phone number, my account numbers and indicate that all the money would be rolled over. Since I was conducting this rollover with the assistance of a financial advisor, I needed a witness as I signed my papers and noted the amount being transferred. The paperwork was then sent to the current account custodian for processing and transfer to Transamerica.

Despite a phone call from my financial advisor to Wells Fargo, it took two or three more phone calls and second round of paperwork to finally get my money transfered to Transamerica. Depending on the customer service agent my advisor spoke with, the paperwork was either adequate, inadequate or unable to be found. However, by April 2007, my 403(b) money was moved to its new custodian, Transamerica and earning back the 5% front-load fee for me.

There are a few options for rolling over money from retirement accounts into IRAs.

Visit a financial advisor.
As my story above illustrates, a financial advisor can help you chose an appropriate mutual fund family for your goals and assist you in taking your money from a retirement benefit plan and placing it into a rollover IRA.

Rollover the money into the new employer's retirement plan.
Many 401(k) plans including my own through Fidelity allow you to take money from a previous job and add it into the new retirement plan. This is not necessary. Money can be left in the previous account until you decide you want to move it, but being able to add it to the new 401(k) or other retirement benefit plan minimizes the accounts you need to keep track of as well as reducing the number of plan statements to review.

Rollover the money yourself.
Many companies like Fidelity, T. Rowe Price and Vanguard would be happy to receive your business (and your money) with a rollover IRA. You can call them via phone or sign up online to open an account. As long as you meet the minimum investment amounts for each fund and fill out the appropriate paperwork for the rollover, you can set up the new IRA yourself. These companies have no-load funds, allowing you to keep more of the money you saved and invested.

Regardless of how you choose to rollover your money, be aware that some custodial companies are more reluctant to release your money than others. Wells Fargo seemed quite tight fisted and required several follow up calls and a second round of paperwork to get my money. Oppenheimer, my Roth IRA custodian, just needed the paperwork I filled out to move my money to T. Rowe Price. If you tackle this job yourself, you may need to spend time coaching the money through the system. However, once the money is in your new IRA account, you can watch it grow (hopefully) and be happy with its new investment home.

Financial goals for the next five years

I have been considering how I want to push some of my financial goals. I have mentioned what my goals are for this year. However, I would like to add more challenges to get me closer to a lifestyle I will enjoy. Suburban living is really not for me and I want to get back to the country. This move necessitates many things including additional savings I do not have. What can I do to get myself closer to my dream living situation?

Save 40% of my gross income.
Right now, I save just over 30% of my gross income. My retirement accounts, my targeted savings (e.g., to purchase a new auto), and my regular savings accounts bring me to this point. However, I would like to increase that by 2-3% a year to reach 40% in 5 years. This is quite ambitious as I am not sure what I need to cut in order to get to this point. Likely my spending plan cuts would include entertainment, eating out, personal care and utilities. The latter is tough, but I could be more miserly when it comes to using energy. A 2% savings increase would require me to save over $100 a month. I have a lot of work ahead of me to make this goal a reality.

Generate additional income to save more.
This is a great if cliched statement. If frugal living is not enough to get the desired result, find a way to get more money. Potentially, I have a raise coming up, but I will not count on such a factor. So that means a source other than my biweekly paycheck. Currently, I am selling unwanted items, but this is hit or miss. Someone might be interested or may not be. I lose some potential money to haggling, but that is part of business. But in the end, there is a finite amount of stuff I am willing to sell. That means I need to find other methods to generate income.

I have considered the possibility of having a roommate. Despite my loud protests over the loss of privacy and the concerns about sharing my space, this idea has not disappeared. It ends up in my head at least once a day so my revisiting of this idea may not be too far in the future.

I could also leverage skills I have to generate income. I can sew and quilt items to sell or ask for commission. I think the former is what I will do first if I intend to pursue this path. Basically, I am not excited about this because I have not sewed things I need or wait until the last minute to make. Would I really sew for someone else even if it is for money? I could also use my work skills for possible income, but my thoughts are limited as to how to do this.

Use my money to generate more money.
I have much of my savings in high-yield interest-bearing accounts. The rates are nothing to write home about (my highest is 3.6%), but this is more than my credit union pays. The more money I have in savings and Certificates of Deposit, the more passive income I earn. The numbers are not spectacular, but it is more money than I had when I first deposited it. Since the money in these savings accounts are for emergency use, I do not feel comfortable investing in stocks. However, this is a path I will explore further as my savings becomes more robust. Past my $15,000 threshold, I might investigate a bond or a stock mutual fund. These potentially have greater return but also greater risk. I will need to do a gut check to make sure this is okay before deciding to pursue this path.

I have no plans to buy additional real estate as an investment property to rent. I am comfortable with my mortgage and do not feel the need to take on a second. Contemplating a roommate is difficult enough. A full-blown landlord situation--that is scary.

These are the various idea that drive my financial goals which basically comes down to saving more money to give me the freedom to do what I want. I have learned so much more now than I knew even before I bought my house. While I would not trade the personal gain in having my own home for the apartment I was living in, it does mean I have committed a good portion of my income to fixed expenses associated with homeownership. I would like to find a place to live for the rest of my life, but it is hard to predict where life may take me. I will save money and keep an open mind and see where I end up.

Reevaluating my 401k

My company decided to take their current 401k plan to the next level--bring in a financial firm to help them choose great funds and design portfolios to get the best return for various investment strategies. The firm recommended funds currently in the company's core group be removed and added some better performers to the core funds. There were several meetings to explain these changes and why they were being made. In addition, employees could also meet with one of the financial associates fora 30 minute individual session so I signed up.

I have six funds in my portfolio: a large cap, a mid cap, a small cap, international, government bond and a lifecycle. Some of funds I really did not want to give up to match the aggressive growth portfolio designed by the financial firm--Fidelity Contrafund and Fidelity Overseas fund. Both had been performing well for me and I liked them. The person I consulted with basically recommended I get rid of the bond fund and lifecycle fund. Since my retirement horizon is 30 years, she said a bond fund was not really necessary as its yield is generally less than stocks and only there to tame volatility. Since I want to maximize growth, more stocks, the better. Here is the portfolio I walked into the meeting with:

Selected Fund	Contribution
Fidelity Contrafund (large cap growth)	20%
Fidelity Overseas (international)	20%
Fidelity Low Price Stock (mid cap blend)	20%
Wells Fargo Small Cap Value CL Z	20%
Fidelity Freedom 2040	15%
Fidelity Institutional Short-Intermediate Government	5%

As of 11/28/2007, the YTD return was 12.2%.

The woman I spoke with did say I did a good job of covering all the bases. Still, getting better returns and doubling my money sooner is nothing to dismiss. Therefore, I walked out with this more aggressive portfolio:

Selected Fund	Contribution
Fidelity Contrafund (large cap growth)	20%
Allianz NFJ Dividend Value Inst CL (large cap value)	10%
Fidelity Overseas (international)	24%
Fidelity Low Price Stock (mid cap blend)	20%
Wells Fargo Small Cap Value CL Z	16%
Columbia Mid Cap Value Fund Class Z	10%

Hopefully, I will get a better return for this new portfolio. I really want to maximize growth of the dollars I put into the 401k. Right now, I contribute 10% of my income to this pretax shelter and my company matches 50 cents on the dollar up to 6%. I have never left this money on the table and never will as long as I work there. I am also contributing to a Roth IRA in an index fund and slowly growing that. Between my 401k and my Roth IRA, I am contributing 16% of my gross income to retirement funds (19% if I include the company match). My goal is 20% into retirement funds in the next five years along with maxing out the Roth IRA contribution.

I want to ensure my comfortable retirement and financial independence. I will take advice I believe is sound to help me on this path and hopefully, end up in a good situation for the future.