A new finance tool, the Five Minute Retirement Plan, does what the name implies. In only a couple of minutes, the site will create a free, customized retirement plan based on your age, current assets, and ability to invest in the future.

I gave the site a test run to see how my current retirement investing compares, and the results were interesting.

I agree with some of the results, but I believe that having 25% of a portfolio in emerging markets is a bit much. If I had built a plan myself, I would have put more weight into Mid Cap and Small Cap funds and less into Emerging Markets, but overall it is a pretty good guide.

According to the site’s creators, this is the methodology used to select asset classes for your customized portfolio:

A major goal of Five Minute Retirement Plan is to use empirical data to make investing decisions. To that end the system uses historical market data to determine a representative set of asset classes across the risk/return spectrum.

The United States, being the world’s largest economy, is allocated the majority of equity holdings in the portfolios with up to 55% of assets spread among large (30%), medium (10%) and small (15%) capitalization stocks.

In the past twenty five years, globalization has been a major economic trend, with the emerging market showing impressive gains. Since this trend is expected to continue, stocks of companies in the emerging markets (China, Brazil, South Korea, Taiwan & India, etc.) are given a weight of up to 25%.

The Asia-Pacific and European developed regions are represented by companies with large capitalizations and are given a weight of up to 10% and 5% respectively.

The US Treasury Inflation Protected Bonds and REITs are used to combat the risk of inflation and are given a weight of up to 20% and 5% respectively.

Long Term US Treasury bonds are used to combat deflation, and are given a weight of up to 20% (although in practice this asset class’s allocation will be much smaller).

Total Bond Market and Short Term US Government Bonds are allocated up to 20% and 100% respectively and are included to get low risk returns over medium and short time frames.

I recommend that anyone uses this free tool to compare their current retirement allocation. I would certainly not follow it to the dollar, but it is a good guide to help you get started with an ETF based approach to your retirement account. Be sure to use your own brain and research as well.

If you are interested, you can also read a more technical review of the site at Seeking Alpha.

The Five Minute Retirement Plan is a post from: Narrow Bridge

No related posts.

If you are in your 20s and your parents are near retirement, do you think you should have different investment strategies?

Of course you should!

The Early Years

Through your twenties and well into your thirties, you are a long way from needing your retirement income. When you have a 30-40 year horizon until you retire, you can invest in risky investments that have a potential for longer term growth.

At this point in your life, I would invest heavily in equities (stocks). It is a good idea to diversify; you should consider mutual funds and index funds rather than picking individual stocks. A mix of US large cap, US small cap, international, and emerging market equities should make up virtually your entire portfolio.

Mid-Career

From your 40s into your 50s, you should transition away from risky investments, such as small cap stocks and emerging markets should be a smaller focus. At this point, the large ‘blue chip’ stocks, index funds, and fixed income investment (bonds) should be your focus.

Why the change in strategy? Large cap stocks and fixed income investments are less volatile than small cap and international stocks. Because you are now 10-20 years from retirement, you can’t afford the time to bring everything back if there is a major drop in your portfolio. You can still take some risk, but it should be more calculated.

You should be mixed between equity and fixed income at this point, with a slight favorability toward the large cap stocks and index funds.

Nearing Retirement

As your late 50s and 60s come up, you should be retreating to even more stable investment options. Of course, treasury bonds will not grow as much as a stock might grow, but you can’t afford big losses in your portfolio as you near retirement.

At this point, solid blue chip stocks and index funds should make up a small portion of your portfolio while fixed income and government bonds make up the bulk of your holdings. Keeping some cash on hand is also a good idea for security.

The Golden Years

You are done with work. Mazel tov! As you enjoy a new life filled with golf and grandkids, you can’t afford to see your net worth take a hit regardless of what is happening in the markets. You can’t deal with volatility.

Move away from stocks completely, or make them a very, very small part of your portfolio. Government bonds should be the bulk of your investment holdings. You should also keep a healthy cash cushion with zero risk.

Balance Risk and Return Goals

I have always been somewhat risk averse, but that does not mean I do not take risk. I am willing to buy into foreign stocks and emerging markets due to the potential for growth, but I don’t want to see a big loss so that is a smaller holding for me.

What I think my Dad should do and what I think I should do are very different. You have to decide for yourself exactly what the right mix should be, but know that higher risk can lead to higher returns, but it is called risk for a reason.

What is your investment strategy for your retirement fund? Please share in the comments.

Image by jurvetson.

Carnivals and Such

Thanks to Barbara Friedberg for including Narrow Bridge in Carnival of Personal Finance #334: Weather’s Impact on Your Money Edition and Joe from Retire by 40 in Carnival of Personal Finance #335: Get A Prenup Edition.

Also, be sure to check out my guest post on using p2p lending for retirement income at the Social Lending Network blog.

Investment Strategy by Age is a post from: Narrow Bridge

Related posts:

1. What Investment Risk Means
2. Easy, Low Risk Investment Option: CDs
3. Investment Options: Stocks, Bonds, and Funds. Oh my!

Welcome to the 321st edition of the Carnival of Personal finance. I had a lot of fun reading everyone’s submissions and added a few new folks to my reading list. I am excited to host this carnival for my first time. If you are new to Narrow Bridge Finance, be sure to check out some of my best posts and read about why you should listen to me.

This month I dealt with the single most bizarre experience of my life. I became friends with someone, started a company with him, and found out he was not who he claimed to be. It made me think about the millions of people who have been in similar situations. From Bernie Madoff to  Frank Abagnale, this week we are going to highlight some people who used finance for a very different purpose than the bloggers of today.

Image from Dreamworks film Catch Me if You Can

To begin, the con artist that makes fraud sound sexy. Frank Abangale Jr. was the subject of the popular film ‘Catch Me If You Can.” Based on the life of Abangle, Leonardo DiCaprio makes fraud look fun as he travels the world as an airline pilot, saves lives as a doctor, and eludes an FBI agent hot on his trail as he cashes fake checks and finds beautiful women.

Editor’s Picks:

Sustainable PF examines ways to make money online over four decades. Starting in the 1980s, SPF used innovative methods to create income streams. Some of them have died off and others are still applicable today.

The Financial Blogger thinks that debt is a good thing. How timely can an article be? As Fannie and Freddie are posting losses, the US Government is struggling with its own debt, and I am looking at buying a home, TFB takes a look at things from the other angle.

Mike, aka Oblivious Investor, reminds us that owning a bunch of mutual funds is not the same as diverse investing. Many mutual funds own the same stocks and some even own other mutual funds. Mike helps you dissect your portfolio to balance your investments.

Lindy at Minting Nickels made a few mistakes when she had her first baby. She shares her non-frugal moments in her post How We Didn’t Save Money with Our Babies.

Squirrelers has five easy steps to increase your savings. Sometimes it is good to get back to basics with personal finance.

Budgeting:

My blogging buddy Well Heeled has seven tips for buying an engagement ring at Costco. These are great tips when you are making such a big and important purchase.

Career:

Adam at Rabbit Funds continues a series on starting a home business. This post focuses on important accounting and marketing tasks that most bloggers and entrepreneurs can learn from.

Clint at Accumulating Money put together a list of different types of jobs for finance professionals. As a finance guy myself, I can attest to how important having a direction can be to your finance career.

Mike at Green Panda Tree House wants to help you make a plan to quit your job.

Control Your Cash reminds you that your time is worth something and you should give it a value. Do not give it away for free.

Bret at Hope to Prosper has the secret to success for working stiffs.

Your Life Their Life looks at George Costanza as a case study for how you can succeed at work.

Image via Wikipedia

Don’t forget the infamous Charles Ponzi. Yes, he is the guy Ponzi schemes are named after. Charles pioneered the genius pyramid marketing scheme that has cost so many people so much money. The Italian immigrant swindled people and governments by engaging in mail fraud and investment fraud.

Credit:

Jake at NerdWallet examines the different benefits of American Express cards. From Clear to Centurion, AmEx has a lot to offer, if you are willing to pay the fee.

Jeff from Good Financial Cents reminds you to avoid store credit cards. It is not worth it.

Janet at Credit, Eh thinks you should use income diversity as a insurance for your credit card payments.

Glen at Free From Broke found the best credit cards for college students.

Philip shares ten tips to stay out of credit card debt at Deliver Away Debt.

Debt:

Jeff at Sustainable Life Blog takes a look at what happened so far this year in his finances.

Cathy at Money Health Central has ideas for what to do after your debts are paid off.

Image from US Department of Justice

Bernie Madoff is a new edition to the list of fraudsters. Madoff admitted to operating the largest Ponzi Scheme in history. It is estimated that he cost investors $18 billion when his Manhattan investment firm went bust. He is currently serving a 150 year prison sentence. Sadly, many non-profits were dramatically impacted when Madoff’s house of cards collapsed.

Economy:

My University Money explains the implications of the rising Loonie compared to the US dollar and gives a brief FOREX lesson discussing why exchange rates vary.

Darwin from Darwin’s Money shares what the media did not regarding the debt ceiling vote.

Money Thinker has his own ideas for fixing the national debt.

Finance:

Money Beagle thinks having health insurance can be hazardous to your health. If you are considering a new addition to your family, this post has great insights.

Crystal shares her retirement checklist at Stupid Cents.

Image from US Department of Justice

Kenneth Lay is responsible for the largest corporate collapse from fraud in history. Lay lied to investors and cooked the books at Enron while being paid over $42 million per year to manage the company. The company with a $60 billion market cap with $100 billion annual revenue was exposed in October 2001 and now does not exist.

Frugality:

Kim at Blogging for Change noticed that her child’s school supplies were far more expensive than they needed to be, but most people just pay for convenience.

Free Money Finance takes a look at extreme couponing and wants to know your take.

Britney at TotallyMoney wonders if cost and expectation go hand in hand.

Hunter at Financially Consumed writes about caffeine addiction and how it impacts you, and your finances.

Glen at Parenting Family Money has 9 inexpensive ways to keep your kids entertained over summer vacation.

Jacob from My Personal Finance Journey has five great ways to reduce your car insurance.

Investing:

The Dividend Growth Investor looks at master limited partnerships and the implications of owning these investments.

The Div-Net takes a deep dive analysis into the high dividend yield of Kinder Morgan.

Intelligent Speculator things that Google might have a chance at social media after all. It is not going to happen automatically, but Google is taking steps in the right direction.

The Dividend Growth Stocks blog is on the never ending quest for the perfect dividend stock.

Matt the Dividend Monk will help you build a $150,000 portfolio by the time you are 30.

John at Stock Market Basics helps you discern the many gold ETFs you can purchase.

Ricky at Qwoter can help you decide on the best company for an IRA depending on your needs.

Growing Money has comments on CNBC’s recent list of 20 stocks about to pop.

Jim at the Retire Happy Blog has found the science of building a diversified investment plan.

John from Wallet Blog discusses the difference between money market funds and money market accounts.

Outlaw Finance gives tips on where to invest your money.

Image from ABC's Lost via Wikipedia

Okay, so this one was not a real guy, but I could not make a list of con artists without including James Ford, more commonly known as Sawyer. Sawyer taught the world about the “long con” on ABC’s series Lost. Sawyer also lived under the alias Jim LaFleur. Of course, Sawyer would not have been such a great con man if he had not learned from the man who stole his parent’s life savings.

Money Management:

Ricky at Qwoter discusses financial priorities. Learn about ideas ranging from the popular emergency fund to less known tips for building your own value.

Jen at Master the Art of Saving is taking an extreme couponing reality check. It is important to remember that behind the trendy “glamour” of feeding your family for twenty cents for four weeks that there are big costs. She also notes that guys (such as myself) may not appreciate your fifty boxes of tampons in the garage.

Anabelle at The Year of Shopping Detox wonders why so many financial experts and mean and yell-y. My personal opinion of Suze Orman is not so good, by the way.

Eric (good name!) at DollarVersity reminds us that bank account bonus offers are not always as good as advertised.

RJ at Gen Y Wealth thinks you do have enough willpower to make a difference in spending decisions. He also has strategies to make it easier on you.

MD at Studeneconomics explains why online banking is more popular than ever.

Canadian Finance Blog thinks it is time to start thinking like a wealthy person.

Jason from One Money Design asks the readers if they can live well on less than $40,000 per year.

Elizabeth reminds us to remain calm despite our volatile economic situation at Modern Gal.

Real Estate:

Nicole at Grumpy Rumblings shares her August mortgage update and the broken window hypothesis.

Sarah helps you find out how much your home is really worth at Money Under 30.

Saving:

Chris at Stumble Forward helps you set up a savings account for your child. This is an important step in your child’s financial education and future, so be sure to get them started young.

Mike at Cards Canada examines loyalty programs worth joining.

Ben at Money Smart Life has the best rental car deals for road trips.

Phil at PT Money, our great organizer for the upcoming financial bloggers conference, tells us how to save like a madman.

Other:

Boomer from Boomer & Echo is learning about caring for elderly parents and shares stories from difficult moments.

Junior at Consumer Boomer helps you decide whether funeral insurance is right for you.

Briana at Personal Dividends never travels without travel insurance. She lists of the major benefits of having your trip insured.

No Debt MBA helps you decide if admissions consulting is worth the cost.

Asking About Money interviewed No Debt MBA and had some interesting answers.

Next Week:

Next week the Carnival of Personal Finance will be hosted by Financial Uproar. You can submit your posts by visiting the Carnival of Personal Finance homepage.

Carnival of Personal Finance #321 – The Fraud Edition is a post from: Narrow Bridge

Related posts:

1. Carnival of Personal Finance – Oktoberfest Edition
2. Carnival of Personal Finance #270
3. This Week’s Carnival of Personal Finance

From the age of 18, I have always been fascinated with the idea of starting and growing new businesses. Through my undergraduate college days, I started and successfully operated 1) an eBay selling business and 2) a pet waste removal service. I also attempted several network marketing gigs, but failed miserably in all of them. I most likely won’t be trying those again anytime soon!

At the same time that I was starting these different ventures, I also began reading any personal finance book that I could get my hands on. Several of the books that inspired me in my early days to learn more were David Bach’s “Automatic Millionaire” and Jeremy Siegel’s “Stocks for the Long Run.” I used the knowledge I gained from these books to begin investing my own money that I received from internships throughout college. By the time I finished school, I had been fully funding my Roth IRA for 2 years.

On a cold January day in 2010, I was reading a book about different businesses that could be started with little or no capital investment. Among the listing of businesses was the idea of starting your own blog. I knew the second that I read this page that writing a personal finance blog would be a perfect fit for me . Not only could I tie together two of my passions in life (personal finance and starting businesses), but it would also be contained in an omnipresent, searchable internet location that could make the information accessible to anyone in the world. Shortly after that day in January, I had my first several posts generated, and My Personal Finance Journey was born.

The biggest myth that I’ve encountered since I started blogging is that people think/are told that active management (individual stock selection by “experts”) in the investing world will produce superior long-term returns. I consistently hear of investors throwing money at individual stocks touted by stock newsletters, bought through “hot” actively managed mutual funds, or simply by the financial advisor at their local Merrill Lynch or Edward Jones office. However, the truth is that these “experts” are often little more than salespeople trying to make money. The majority of investing books and research studies I have read have found that 70-80% of actively managed money (so money invested in individual stocks) fails to beat the return of the overall market.

Because of all of this misinformation, I attempt to unravel this myth by researching and posting about the benefits of low-cost, passively managed index mutual funds. Examples of the posts I’ve written can be found at the link below.

Why I Sold Out of My Actively Managed Mutual Fund

Vanguard vs. Fidelity – Which Funds Are Better?

Index ETFs vs. Index Mutual Funds – Which Are Better?

This one is easy! The one tip I wish I knew was to open a Roth IRA investing account at an early age. You can open a Roth IRA as soon as you have earned income, even if it is for side-jobs you have during the summer.

By opening up a Roth IRA at age 18 with $2000 and assuming you earn the long term market return of 10% until retirement at age 65, the $2000 alone would be worth ~$176,000 at retirement. It’s brilliant how powerful compounding interest is!

The biggest personal finance lesson that I learned the hard way was to be cautious about how I issue payments to parties I do business with on the Internet. While this may seem obvious, it sure cost me some money!

Several years ago (prior to my blogging days), I was very involved with running an eBay wholesale selling business. One day back in 2005-2006, I received an unsolicited email from a seemingly nice man representing a supplier that sold Canon CCD cameras to people with wholesale licenses (state sales tax IDs). His back-story, company description, and website all seemed to check out as being legit, so I began working through the details of a potential deal for him to sell me several CCD cameras that I would resell on eBay.

My contact was very responsive to any and all questions I had during the negotiations of price, delivery, etc, and we finally decided on the price of $1500 per camera. The only suspicion that I had during the negotiation was that he insisted on payment being made through Western Union, instead of using PayPal or a credit card like I would have preferred. He mentioned some technicality about how their company receives payment that I believed at the time (but looking back on it, I obviously shouldn’t have gone for it). Anyhow, I agreed to send him the money for one camera via Western Union in advance of receiving the product. I went to the grocery store that afternoon to make the transfer, and it went through with no problems. I then rushed home to tell my contact to confirm receipt of the money.

Well, he received it all right! So much so that he felt that he never had to talk to me again! He disconnected the phone number I was using to reach him, didn’t answer any emails, and I never heard from him again. Now, granted that I was a little less Internet savvy back then than I am now, but I really didn’t do much to try to track him down. I remember thinking that I didn’t believe there was anything I could do. I looked around at Western Union’s website, and couldn’t see any refund policies like the ones that credit cards or PayPal has. And, ultimately, I never saw that money (or the camera) again.

Outside of blogging, there have been two changes I have made to my financial life that I believe had the most significant impact on my net worth and ability to manage money.

The first change is that whenever I move to  a new location, I track my spending for one month to determine how my expenses have changed compared to where I lived previously. Doing this allows me to 1) put together a budget for the various categories of spending (entertainment, transportation, housing, etc) and more importantly, 2) know how much money should be left over at the end of the month that I can set aside for cash reserves or retirement account savings.

The second change that I’ve made is that I now track my net worth and asset allocation percentages once per month. This tracking exercise forces me to be objective in maintaining my asset allocation percentage targets (within a +/- 5% band) through rebalancing, regardless of what movements the markets has made. For example, if the world equity markets have gone up significantly, rebalancing forces me to sell some of my holdings and buy fixed income shares to maintain alignment with my targets.

Interview: Jacob at My Personal Finance Journey is a post from: Narrow Bridge

Related posts:

1. Finance Blogger Interview – Evan at My Journey to Millions
2. Carnival of Personal Finance #321 – The Fraud Edition
3. Interview: Jason at Live Real Now

This guest post was written by Jason, the proprietor of Live Real, Now, a blog focused on spending–and saving–in the real world. It was written for a blog swap run by the Yakezie personal finance blog network to answer the question “What motivates you to be financially responsible?” You can read my post over at his blog: Living The High Life.

This may not be the most original motivation, but I am financially motivated by my family.  Before I had kids, I didn’t care much about money or stuff.   My goal was to sell everything I owned and backpack Europe.   Yeah, it’s a bit cliché, but that’s the way it is.  I  was also considering trying to live out of saddlebags while touring the country 1000 cc’s at a time.

Now, I’ve got so many other considerations.  Four, to be exact.   A wife and three kids certainly change your perspective.   If it doesn’t, you’ve got flaws I can’t help you with.

When my family started, it was a huge wake-up call.   Suddenly, I had responsibilities (cue scary music).  Overnight, I had things to care about that didn’t involve a party, or instant gratification, or, well, me.   Merlin the Stork floated down, waved a wand and Poof! I was a grown-up.   This may not sound like much of a shock, but my wife and I had baby #1 when we were 20.   Adulthood was still pretty new to us, and suddenly we’re parents?

As a grown-up, with three precious little monsters dependent on me for absolutely everything, I had to start worrying about their security.  This was more than just keeping them physically safe.   I’ve had to manage their emotional health, their physical needs, and their entertainment.   They rely on me (and my wife!) for everything.    How could I live with myself if I couldn’t put food on the table and a roof over their heads?  Winter boots?  Clothes without holes?   Visits to the doctor?   Have you ever noticed how much kids cost, even without considering the Japanese fad games and Barbie dreamhouses?  Having a kid is like cutting a hole in your wallet and holding it over a blender nestled comfortably in a roaring fire fueled by napalm.

Then, after I’ve got them clothed, fed, sheltered, and entertained, I have to teach them how to be real people.   I’m of the opinion that children in their natural state are little more than wild animals.  Generally cuter, but that’s about it.  It’s a parent’s job to train that ravenous little beast into an acceptable, successful person.  Part of that consists of teaching the little brats how to start paying for their own clothes, food, shelter, and entertainment, and how to manage that without becoming a drain on society.   Productivity and success can be defined a thousand different ways, but none of them include letting other people pay your way or borrowing money you have no intention or means of repaying.  Ultimately, being an adult–being a successful part of society–involves recognizing your responsibilities and living up to them.

Caring for, providing for, and teaching my children the things I know provides me with an irreplaceable opportunity to watch them grow and learn, while giving me a chance to steer that growth.   It is, without a doubt, the best, most satisfying, and most difficult thing I have ever done.  The pleasure I get from raising my kids reinforces my desire to become the best person I can be.

Really, I just want to be the guy my kids think I am.

Please take a moment to visit Jason’s site, Live Real, Now.

Monsters is a post from: Narrow Bridge

No related posts.

photo © 2009 Helga Weber | more info
Now that I have settled into my new job, I have to deal with the financial side of leaving a job.  It is something that many people put off, but when you get a new job it is important to make sure your retirement accounts are in order.

In my old job, I was putting money into several investment and retirement sources.  I put 3% of my paycheck, matched 100% by my employer, into a traditional 401(k) retirement plan.  I put another 3% into a Roth designated 401(k).  I put another 3% into company stock at a 15% discount.  My company also contributed to a pension plan on my behalf.  Needless to say, there was a lot to deal with.  Fortunately, if you know what you are doing it is easy and painless.

401(k) Rollover

A 401(k) is a tax deferred retirement plan.  That means you do not pay taxes on any contributions.  Instead, you can put the money into your account, almost always matched by an employer, pre-tax.  However, your withdrawals are taxed.

Because of the special tax status, it is best to do a “rollover” rather than take a disbursement on your funds.  Most employer sponsored 401(k) plans charge a management fee in addition to mutual fund investment fees.  My fees were high, so I decided to do a 401(k) rollover right away.

To start, I opened a new Rollover IRA account at my brokerage firm.  It was a quick and easy online process.  In about five minutes, I had a new account.  When choosing a Rollover provider, look into any possible fees and investment options.  My IRA has no fees and allows me to invest in any stock, bond, fund, or investment vehicle I could reach with a Schwab investment account.  The only cost is $8.95 per trade.

I got on the phone with a Schwab retirement account customer service representative and he took care of all of the dirty work for me.  My old 401(k) provider, ING, is mailing me a check with my new Schwab account number on it.  I can drop it off at any Schwab office or mail it in to have my balance transferred to my new account.

Roth Designated Funds

A Roth IRA is a relatively new investment option.  If you have more than seven or eight years to retirement, this is an incredible opportunity for investing for retirement.  A Roth account requires after tax investments, but all withdrawals during retirement or for certain qualified events are 100% tax free.

I went through the same process as the 401(k) rollover for my Roth.  I set up the new account online, the same Schwab employee had the ING account closure and check mailing arranged.  When the check shows up this week, I just have to drop it off.  No fees other than trades.

I opened up my Roth account so I can contribute to it any time in the future.  I plan to have a direct deposit of 3% of my pay go into that account going forward.

Pension

I had the rare benefit of a pension fund at my old employer.  Pension funds, or “defined benefit” retirement plans, are 100% employer paid retirement accounts.  These are quickly disappearing, and unless you work for a giant, old company, chances are you will never see a pension.

Based on my balance and age, I was required to take a distribution.  I had the option to take the cash, paying both income taxes and a 10% penalty or roll the balance into an IRA.  I picked the IRA.  I had to fill out a few forms and mail them in.  I will receive a check from the Qwest Pension Service Center designated to be deposited into my IRA account at Schwab.

Company Stock

At one point, I had accumulated over 1,000 shares of Qwest stock.  With a 15% discount and a positive outlook, there was no reason to skip out on the plan.  When my investment account became so heavily weighted to one company, I knew it was time to re-allocate.

I have been slowly selling down my stake in roughly $1,000 increments and investing the proceeds in other stocks and ETFs.  I made a dollar cost average of 125% profit on my Qwest shares, so I have no hard feelings about being so heavily weighted into one company.  However, diversification is important in a portfolio and it was time to move things around.

Summary: Don’t Forget Anything, Don’t Pay Extra Taxes

Moving retirement funds around is not hard, but it is important to read the fine print and make sure you don’t pay extra taxes or fees.  Make sure your dispersed funds are designated for a retirement account to avoid IRS penalties.  Also, don’t forget anything.  Make sure you take 100% of your funds with you.  Losing hard earned money would be a bummer.

In the future, I plan to invest my retirement funds in a diversified portfolio primarily consisting of destination, or target date, mutual funds.

If you think I missed anything important, please share in the comments.

Sharing the whole story would take more words than I can fit into this post, so I have been sharing my experience in a series on career transitions.  To make sure you don’t miss these posts, which are sure to help you navigate the path to a new career and navigate the process of leaving a job gracefully, be sure to sign up for RSS or e-mail updates.

Rolling Over Your 401(k) is a post from: Narrow Bridge

Related posts:

1. Rolling Over Your Old 401(k)
2. Starting Your 401(k) at a New Job
3. The Easiest Way to Invest for Retirement

photo © 2007 Eric | more info (via: Wylio) A reader sent in this question from the contact form:

I was wondering what your take is on borrowing from a 401K to pay off credit cards.  Everything I’ve read says not to but 1) I have an interest rate on one card that is 27%; 2) I’d be paying myself back an annual rate higher than anything I’m getting now.  So why not?

What is a 401(k) Loan

Most anyone with a 401(k) account has the ability to “borrow” funds from their retirement.  The IRS allows you to withdraw money from a tax deferred 401(k) to use as you wish with the stipulation that you pay it all back within a certain time period to avoid tax penalties.

In general, it is a horrible idea to take money out of a 401(k) until you are retired.  This is mostly a psychology issue, not a financial issue.  I am in the mindset that my 401(k) funds do not exist.  I don’t have access to them until I retire.  Period.

For many 401(k) borrowers, it is easier to skip paying it back and take the tax hit, which is often a lower dollar amount than paying the fund back.  If you are borrowing because you are short on money and you have creditors after you, are your habits really going to change enough that you honestly think you are going to pay it back?

The Finances of the Situation

Mechanically, it is probably a better decision to take out the money to pay off the 27% credit card.  If you would really pay yourself back at the rate your were paying the credit card companies, taking the money out is a slam dunk.  However, there are other alternatives than a 401(k) loan that you might consider.

Alternatives

The first thing I would do is call the bank and ask for a lower rate.  It is often that simple.

If I could not get a lower rate, I would look around for balance transfer opportunities.  Do you have other credit cards that would let you do a balance transfer?  If you will save more than the transfer fee by moving to the lower rate, go for it.

If you are a homeowner, you can take out a “second mortgage,” which would be secured to your home and offer a much, much lower interest rate.  However, if you don’t pay that loan your home is at risk.

If you have never looked into social lending (also called Peer to Peer Lending), you might be surprised with a good deal from sites like Lending Club or Prosper.  Depending on your credit score, you might be able to get a great rate compared to the credit card.

Conclusion

While it might seem like a good idea to borrow from your future, it should be considered a last resort.  Consider your other options first.

I am sure other readers have good ideas too, so please chime in and leave your opinion in the comments.

Take a Loan on your 401(k)? is a post from: Narrow Bridge

Related posts:

1. How to Shop for a Car Loan
2. Starting Your 401(k) at a New Job
3. Rolling Over Your Old 401(k)

I have a file cabinet at home with bank statements dating back to when I opened my first checking account when I was sixteen years old.  Nine years later, I wondered if I still need those bank statements.  I also have every tax return I have filed, ever.  Do I need those?  I did some digging, and I found a great resource.  Here is the synopsis:

Tax Returns – You need to keep all documentation around your taxes for at minimum seven years.  The statute of limitations for the Internal Revenue Service (IRS) to come after you for back taxes is three years, so that is where the minimum comes from.  However, if you have failed to report income, the statute of limitations is six years.  To cover yourself, it is best to have a seven year record of taxes.  Just to be safe, it is probably a good idea to keep your form 1040 and record of payment to the government for life, but you do not need the backup documents for more than seven years.

Bank Statements – Did you give a charitable contribution or make a business expense payment on your credit card or bank account statement?  If you ever have to show proof of a deduction to the IRS, you need that statement.  Like tax returns, keep them for about seven years.

Brokerage – The best advice I can find here is to keep your year end statements and trade confirmations indefinitely, but you don’t need to keep your monthly statements more than two or three months in case you find any errors.  When you sell a security, you have to be able to prove the original cost for capital gains taxes.  That is why you need your year end statements so long.

Retirement – To make sure you are safe if you ever have to withdraw principle (not interest earned) from a Roth or other retirement account, you have to able to prove what you put in and when you put it there.  That means you need to keep retirement statements until you are at a point when you can withdraw tax free.  For many of us, that means 40 years or so of records.

Utility Bills – If you have a long record of cell phone, power, or other utility bills lying around, you can free up that space today.  You don’t need more than two or three months of history that can demonstrate that your payment was send and received.  Once your account is correct, toss it in the shredder.

Insurance – If you have any records of claims and policy details, keep them as long as you have the policy.  If you do not have proof and you ever have to challenge your insurance company, you need to have records or it never happened.  For health insurance, make sure you have evidence of coverageso you are never hit by a pre-existing condition clause (while that is still legal).

Paper or Electronic Records?

I have a hybrid system.  For my bank accounts, I have paper records because I never took the initiative to change to paperless and scan in my old files.  For accounts that I have opened in the last five years, I have just started with electronic statements and keep them saved on my computer hard drive and an external hard drive.  I also plan to buy an encrypted USB to have a third backup for only financial documents.

It is important to make sure electronic copies are safe from hackers and hard drive crashes.  I would suggest that you do not keep financial data in online storage, because there is a chance that it could be hacked.

I am planning to scan in all of my old paper files and shred them someday, but that takes a lot of effort and I am much to lazy to break the status quo.

So, what do you use for record keeping?  What are you policies and strategies?  Please share with all of us in the comments!

Just a note: This is my own personal advice based on what I found through my own research.  I am not liable if you throw something away that you need and the IRS shows up at your door.

How Long to Keep Your Taxes and Bank Statements is a post from: Narrow Bridge

Related posts:

1. Hard Copy or Paper Financial Statements – Benefits and Risks
2. GMAC Bank Rebrands as Ally Bank
3. Tax Time Strikes Again – Preparing for Your 2011 Taxes

This is a re-visit to my old Intro To Investing post from October, 2008.  If you like this post, be sure to read the old one that inspired it.

Imagine the life of Mr. Buffet.  He lives like money is not really a concern, which it isn’t.  He is frugal.  He relaxes.  He is happy.

Who am I describing?  Who is the proverbial Mr. Buffet?  It is two Mr. Buffets actually.  Those are Warren and Jimmy.

Warren Buffet is the closest thing I have to a modern day hero.  Buffet is smart and calculated and made a lot of money over the years.  He is the world’s best investor.  Warren Buffet took his “value investing” education to turn an investment in an old textile company called Berkshire Hathaway into one of the most famous holding companies in the world.  With an insurance powerhouse and investment arm under its control, Berkshire Hathaway has produced consistent investor return for half a century.

When you picture paradise, you probably imagine clean beaches, tropical weather, and cold drinks.  Chances are, Jimmy Buffet is there waiting for you.  I imagine Jimmy’s life as the ultimate in relaxation.  While sipping away in Margaritaville and enjoying the Cheeseburger in Paradise (hold the cheese on mine), Jimmy Buffet is the American symbol for relaxing.  His ‘parrotheads’ often travel south, as inspired by his song “Changes in Lattitudes, Changes in Attitudes.”

So, while these icons appear to share little more than a last name, they represent something more to me.  I have to remember to be serious and dedicated in my professional life, but I have to remember to head south every once in a while, or just relax regularly.  Finding the balance between the Buffet’s is the key to my dream.

I hope to be able to combine those lifestyles more as time goes on.  I want to remove the tether of my office and be able to work wherever I want and whenever I want.  I hope to have the financial security to tell any boss how I really feel at any given time and not worry about the consequences.  (I like my boss today, in case you were wondering)

I dream of a freedom from financial worry and a freedom to pickup and go.  I want to enjoy paradise, and the ride to get there.  That is my dream.

My Dream Job and Lifestyle is a post from: Narrow Bridge

Related posts:

1. Starting Your 401(k) at a New Job
2. I Got a New Job! [Career Transition]
3. BRK2011: Berkshire Hathaway Future Leadership

If you have any financial accounts anywhere, you have probably read about rolling over you old 401(k) retirement account to a new company that will “charge less” and help you “earn more.”  While I am a big fan of moving an old retirement account when you leave an employer, it is important to take your time and make an educated decision.

First off, you have to look at where you account is today.  How much do you have there?  Is there a fee for the fund you have your money sitting in?  Is there a maintenance fee?  What is the total cost per year and cost as a percentage per year?  At my employer, I pay less than 1% to keep my investment in a 2050 target date fund and an additional $5.75 per quarter in fees.  I don’t mind the 1%, but the extra five bucks could go to better use.

If you are like me and don’t love the fees at your employer, remember to move things right away when you leave.  It is worth keeping everything with the employer’s endorsed provider as long as you get a match on your contribution.  If you have already left an employer and keep watching fees chipping away at your retirement, it is time to move on.

Reasons to stay with old employer:

• Low fees/no fees (rare)
• No extra work (lazy person’s excuse)

Reasons to move on:

• High fees (likely)
• Little control
• No more contact with HR department where you used to work

Most often, the reasons to move outweigh the reasons to stay.  If you are going to move, don’t just take the cash out and pay the tax penalty!!!!  If you contributed to a retirement account, you got a big tax saving.  Taking money out of a retirement fund early comes with hefty IRS penalties in the US, and I am sure similar penalties in Canada and other countries around the world (readers, please verify in the comments if you know).  When you take out the funds, they have to go directly into a comparable retirement fund somewhere else or you have to pay up.

So, you are ready to move?  Now it is time to research possible storage for your 401(k) in the future.  Note that you can always move your 401(k) or IRA to another bank/broker, you are not limited to when you leave a job.

Googling 401(k) roll over gives you about 495,000 results and countless sponsored options.  You see ads from places like TD Ameritrade, Charles Schwab, T. Rowe Price, Vanguard, Edward Jones, Sharebuilder/ING, E-Trade, and many more.  You can use virtually any bank (not recommended) or brokerage (recommended).  Here is a short list of my favorites:

1. Your Broker – You are probably there for a reason.  If you are happy, explore retirement account options.  You should be able to talk to an expert a sales person that can help you easily move your old account.  Just be sure to ask about fees and investment options before you agree to anything.

2. Charles Schwab- Schwab is my broker, so it is a natural fit for me.  I can invest for free in a whole slew of new index funds and there are no maintenance fees, so I have no reason to go elsewhere based on anything I have read.

3. Vanguard – One of the most popular firms with “low fee fund” options.  Many other brokers offer access to invest in Vanguard funds as well.

4. Sharebuilder- If you are an investor bent on controlling the details and doing your own research, Sharebuilder offers low cost trades, so you can manage the account with fewer trading fees than other brokers.  It is also easily funded through ING Direct (affiliate link).

Remember that these are just a few of the many options you have for investing your hard earned retirement funds.  Just be sure to do your research on fees and investment options before you sign up.  I would love to hear what you use in the comments.

Rolling Over Your Old 401(k) is a post from: Narrow Bridge

Related posts:

1. Rolling Over Your 401(k)
2. Starting Your 401(k) at a New Job
3. Take a Loan on your 401(k)?