Wednesday, February 29, 2012
4 Basic Facts To Know About IRAs
The Limits - The IRS allows you to deposit up to $5,000 per year if you're under the age of 50 and $6,000 per year if you're over 50. These maximums will stay in place for the 2012 tax year but may change in future years. You must also have earned income to contribute to an IRA, but that could include a spouse if you're married.
Two Types - What can quickly turn people off to the IRA is the fact that there are two different types of IRAs. The traditional IRA doesn't require that you pay taxes on your gains until you start taking distributions. (Distribution is the term used to describe the withdrawals you make once you reach retirement age.) The traditional IRA keeps more money in your account over time and that allows the money to compound at a faster rate.
The Roth IRA requires that you pay taxes now, at your current rate, because the money you're contributing was already taxed before you received your check. This allows your earnings to grow tax fee, and if you anticipate being in a higher tax bracket in the future, the Roth is probably your best choice.
Eligibility - With both IRAs there are eligibility requirements. With the traditional IRA, you can only deduct your contributions if your family earnings fall below certain maximums and if you're covered under an employee sponsored plan like a 401(k). According to the Vanguard Group, if your traditional IRA isn't deductible, a Roth IRA is the better choice. With the Roth, your contributions are never deductible and there are income limits. If you're single and make more than $125,000 in 2012, you aren't eligible to open a Roth.
The Costs - In order to open an IRA, you'll need a bank or investment broker. Some of the discount brokers offer no-fee IRAs other than the commissions charged to buy and sell within the account. Other brokers will charge a yearly management fee even if they aren't managing the account for you. Look for a no fee IRA. If you're charged a 1% management fee, that could equate to a 30% lower balance over a 30 year period. So keeping fees to a minimum is key.
Whether it's a Roth or traditional IRA, get started. The money that is sitting in your savings account earning little to no interest could work harder for you in an IRA with safe investment choices. Don't know how to invest the money? Ask a fee only advisor for some help. Many are happy to charge you a one-time fee and a fee for an annual consultation.
Read more: http://www.investopedia.com/financial-edge/0212/4-Basic-Facts-To-Know-About-IRAs.aspx#ixzz1nnKmOTzG
How To Teach Your Child About Investing
Investing Should Be a Family Activity - Some parents are guilty of not discussing personal finance with their children, and almost all parents are guilty of not discussing investing with their children. Investing should be a family activity. Children mature at different rates, so it may take some time before your child is ready to tackle concepts like portfolio creation and asset allocation; however, the basics of investing can be taught quite young.
Risk and Reward - Before you have your kids spending Saturdays at the library using the internet to check company profiles, you will have to explain risk and reward. Risk is the possibility that an investment will lose some or all of its value. Reward is the percentage of gain that your investment experiences over time - the return on investment (ROI).
Easy Ideas to Tell Your Kids About: Stocks - Stocks are variable risk, variable return investments. On the whole, they are categorized as high risk and high return. You have to make it clear that all the risks involved in the stock markets can't be predicted.
Enron and other companies have proved that accounting sheets can be tampered with and CEOs can lie. But even with the unknown risks, the stock market is a strong investment because, over time, it has seen a general rise.
Easy Ideas to Tell Your Kids About: Debt Securities - A bond is a low-risk, low-return investment. Typically, bonds pay only a small amount over the prime interest rate because they are backed by stable institutions (usually banks or governments). You can buy bonds from unstable regions of the world that offer better returns, but these countries often have unstable governments, so you can't necessarily count on getting that return down the road.
Therefore, it may be best start your child with stocks and explain that bonds become more important as you age and need guaranteed investments. Your child will probably not have enough money to make bonds worthwhile, and may actually lose money to inflation.
Getting Your Child's Attention - When you are checking your stocks, show your child the companies of which you own a small part. If you own any exciting companies that might be of interest to your children - plane manufacturers like Boeing, sports equipment specialists like Bauer, technology and video game companies like Sony - make sure that you request the company's current investor relations package, or print it off the internet, so that you can show your child more about those companies, including how much they earned, what they make and how many people work for them.
Then you can ask your child what company he or she would like to buy. Children have favorites even if they are not aware of them. For example, Nike, Nintendo, Sony and Disney are popular with most children. Once again, you can go on the internet or write a letter to these companies to get a copy of the investor's package. This will give your child something interesting to flip through, even though he or she may not understand all the papers inside. Disney, for example, has an investor relations newsletter that features a rotating cast of characters parading through their announcements.
Buying and Tracking - Once you have introduced your child to some basic concepts, you can sit down together allow him or her to select a company. If you have the money, you can buy the stock and track it with your child. You should give the statements to him or her to keep in a financial binder (you can add his or her banking information here also and separate the two different sections with a divider). If you don't have the money, make an artificial portfolio and track the stock for fun.
You and your child can follow your stocks with daily, weekly and monthly summaries on Yahoo! of Google Finance.
When your child is older, you can provide a more in-depth explanation of stocks and other investments. Eventually, you want to let your children buy their own stocks. Your child may have enough cash diligently saved up in a savings account by the time he or she is interested in investing. Don't put it all into a bond or the stock market, but invest a third in each and keep a third in savings. This will allow your child to compare the performance of a savings bond, stocks of his or her choosing and the interest from a bank account.
If your child doesn't have any money, you have two options. You can use $100 of your own money to open a discount brokerage account for your child to make investments through, or you can continue to use an artificial portfolio of stocks that your child wants to buy some day. In the latter case, you will need to find ways to maintain your child's motivation.
Conclusion - If you are able to pick stocks together and track them when your children are young, they will get a sense of the up-and-down cycles that stocks go through. This understanding will prepare them for riding out market fluctuations and making informed decisions when others panic.
During all this, you want to allow your child to make real decisions and take real risks. Yes, your child may lose money, but the purpose of this exercise is to familiarize your child with investing. Part of this exercise is learning that any investment has advantages and disadvantages. Your child may not make a fortune, but the experience of gaining and losing money is almost as valuable.
Read more: http://www.investopedia.com/articles/pf/07/childinvestor.asp#ixzz1nnJ4oaqF
Monday, February 27, 2012
Some ways to get the most out of your IRA
By Robert Powell, MarketWatch
BOSTON (MarketWatch) — When it comes to individual retirement accounts, better known as IRAs, you might think you’ve got it all figured out. After all, these accounts have been around since 1974 and, with few exceptions, haven’t changed all that much. But that doesn’t mean you should neglect your IRA.
There are plenty of little-known and well-known-but-worth-repeating ways to get the most out of your IRA — strategies that you should revisit at least once per year. And tax season, when you’re trying hard to reduce your income tax bill, would be that time.
It's absolutely critical that you look at all the different ways that you can utilize your IRA instead of just using it as a parking ramp for qualified assets. If you use it right you really can maximize your accumulation and you can maximize your drawdown over time.
Here are some strategies to consider.
1. Consolidate accounts
If you have several IRA accounts, it’s time to consider consolidating.
Doing so will accomplish a few goals. One, it could save you money, especially if you have lots of IRAs with small balances scattered among various custodians. IRA custodians often charge an account-maintenance fee on IRAs with small balances so consolidating all those little IRAs could lower your maintenance expenses.
Two, consolidating simplifies your life. Instead of keeping track of 10 funds with 10 custodians, put all your funds with one custodian. Doing this will make life less complicated and it will make rebalancing your retirement assets easier.
And three, it may help you reach your goals. If you have a more convenient setup for your finances, you're more likely to actually be on track, to know what you have, and to figure out what you want to do.
2. Asset allocation and asset location
Odds are high that if you have lots of IRA accounts and one or two 401(k) plans, you’ve got some duplication of asset classes.
What’s more, it’s quite possible that your overall asset allocation might not be what you think it is, given all the funds in all your various accounts.
Look at IRA accounts in one of three phases. First is the accumulation phase.
When you are accumulating there are a couple key questions that people should consider. One, are you putting your assets in the right place at the right time in your IRA and two, are you making sure that you are coordinating that with your other accounts?
The advice: Evaluate all of your funds in all your accounts, both tax-deferred and taxable, with the aim of eliminating duplication and locating your assets in the right accounts.
For instance, if, after creating a personal investment policy statement, you want 80% in fixed income and 20% in equities, make sure that’s what you have. Not just your IRA or just your 401(k). It’s quite possible that you unwittingly have two funds with the same investment objective in your 401(k) and your IRA.
Also, consider putting fixed-income securities, those that generate ordinary income, in your tax-deferred accounts and those subject to capital gains and qualified dividend tax rates in your taxable accounts to the degree possible. The experts refer to this tactic as “asset location” and say it can help you boost your overall return.
Look at your IRA as part of a larger portfolio instead of as a discrete entity.
In addition to diversifying your assets and locating assets in the right types of accounts, consider what some experts refer to as “tax diversification” by having both a traditional and a Roth IRA. Doing so gives you the ability to withdraw money from the account that leaves you with the most after-tax income. That’s because distributions from a Roth IRA are tax-free, while distributions from a traditional IRA are taxed at ordinary income tax rates.
You might not think you need to have a Roth and a traditional IRA, but if nothing else you should examine the difference between them to determine what might be appropriate for you in your situation.
Another advantage to having a Roth IRA: The contribution can be withdrawn at any time without a tax penalty. The flexibility of being able to take out the contribution from the Roth takes away the hesitation that folks may have about not wanting to tie their money up for such a long time.
3. Fund both an IRA and 401(k)
Many folks saving for retirement often overlook the fact that they can, depending on their adjusted gross income, fully fund their 401(k) and contribute to an IRA too, Grant said.
For instance, if you are covered by a retirement plan at work and your tax filing status is married filing jointly, you get a full deduction for your IRA up to the amount of your contribution limit if your modified adjusted gross income, or MAGI, is $92,000 or less.
If your MAGI is more than $92,000 and less than $112,000, you get a partial deduction. If your MAGI is $112,000 or more, and you’re under age 70-1/2, consider making a nondeductible contribution to a traditional IRA.
People think if they have a 401(k), they can’t have an IRA. But there really is a lot more flexibility.
4. Don’t forget to catch up
The maximum contribution you can make to a traditional or Roth IRA is the smaller of $5,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $5,000.
But if you are age 50 or older before the end of 2012, the maximum contribution to a traditional or Roth IRA is the smaller of $6,000 or the amount of your taxable compensation for 2012. This limit can be split between a traditional and a Roth IRA but the combined limit is $6,000.
There are still many Americans who are either unaware of the so called catch-up provision for taxpayers age 50 and older, or who don’t know all the facts about it.
5. Fund the non-working spouse’s account
You might be able to set aside some money for retirement by using a spousal IRA.
According to the IRS, for 2011 if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts: $5,000 ($6,000 if you are age 50 or older), or the total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts:
- Your spouse's IRA contribution for the year to a traditional IRA, and
- Any contributions for the year to a Roth IRA on behalf of your spouse.
This means, according to the IRS’s website, that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $10,000 ($11,000 if only one of you is 50 or older or $12,000 if both of you are 50 or older).
6. Draw down from the right accounts
You can make the most of your IRA by withdrawing your assets from the right accounts during the distribution phase.
It’s important to understand which buckets of assets you should draw your money down from first.
For those over age 70½, consider taking your required minimum distribution, but then — to the extent you can — withdraw money from taxable buckets and let the money in the tax-exempt or tax-deferred accounts grow.
The order in which you take money or you draw money down is important and can have an impact on how long your money lasts.
7. Leaving a legacy
Many people are unaware that you can leave your tax-qualified assets to a charitable organization. Doing so provides some tax benefits to the charitable organization.
Plus, it is a nice way to give if you are thinking about your estate planning.
8. Inheriting an IRA
Last but not least, knowing the ins-and-outs of an inherited IRA could help save a bundle.
People need to understand that there are number of options for them and certainly they may want to look at maintaining an inherited even for a non-spouse beneficiary.
Keeping that IRA as an inherited IRA or a beneficiary IRA, they can stretch the distributions out over their lifetime and minimize the tax impact. And that could be another source of income in retirement for that beneficiary.
Friday, February 24, 2012
5 Reasons We'll See $4-a-Gallon Gas by Memorial Day
No one will throw a ticker-tape parade about fuel prices as long as gas is above $3, but drivers probably did at least a little less complaining at the pump in the latter half of 2011. That's because fuel prices actually were dropping at a pretty good clip -- around 20%, down to about $3.25 -- since they spiked to around $4 last spring.
Hope you enjoyed it while it lasted.
Fuel prices have been back on the rise ever since Baby New Year shook his 2012 rattle, and are already back up around the $3.50 mark, with plenty of room to go higher. Tom Kloza of the Oil Price Information Service told USA TODAY he expects the average price at the pump to hurdle the $4 mark by May, and a slew of factors could prove him right.
Here are five reasons why we'll see $4 gas by Memorial Day:
1. Improved U.S. economy: Unemployment is down to 8.3%, and the U.S. economy is showing a little spring in its step. No full-blown recovery, but when things are looking up, people start to spend -- including on travel. Several surveys show 2012 is primed for increased traveling, and when more planes, trains and automobiles get running, you get higher demand for gas.
2. Global Demand: Of course, while we're piddling around at home, parts of the rest of the world are really growing. China's overall fuel imports for 2011 were up "only" 6% from 2010 after the previous year's 17.5% growth. Goldman Sachs expects China to overtake the U.S. as the No. 1 oil importer by 2013, and India, already among the world's top five oil importers, is only getting bigger.
3. Seasonality: Think summer's the worst for gas prices? Wrong -- at least sometimes. While summer traditionally sees the highest gas prices, fuel also has spiked around late April/early May, including during the past two years. Some of the price run-up comes from annual refinery maintenance. According to AAA spokeswoman Jessica Brady, refineries across the country begin shutting down in February and March to switch production from a winter fuel blend to the pricier summer fuel blend, which also puts upward pressure on gas prices.
4. Tensions with Iran: It's still a big "if," but the standoff between Iran and the U.S. and Europe over Iran's attempts to produce nuclear weapons could become one of the single-greatest upward forces on gas prices. Iran has responded to sanctions against its oil exports by threatening to close the Strait of Hormuz - a narrow waterway through which 20% of all globally traded oil is transported. Iran recently conducted military exercises near the strait, and Britain has said it could send extra military forces to the area to deter a blockage.
But should the strait be closed for business, you'll know about it within an hour, according to Duquesne University professor Kent Moors. Moors said crude oil prices would jump $10 to $15 per barrel -- and gas prices jump between 30 cents and 40 cents per gallon -- "almost immediately."
5. Oil Takes More Work: There's a reason the word "fracking" has quickly entered the vernacular. Oil players of various sizes -- from Exxon Mobil to Kodiak Oil & Gas -- are tapping into North Dakota's Bakken Shale through the costly process of hydraulic fracturing, and while fracking costs are on the downswing, it's still a more expensive process than traditional drilling.
Oil companies also are accelerating their efforts in tar sands and deepwater drilling -- also pricey endeavors. And until these methods become more economical, energy companies need high oil prices to help finance production. Add it all up, and the chances for sub-$4 gasoline after Memorial Day seem mighty slim.
3 Reasons Oil Prices Are Headed Higher
Americans have grown used to oil at $100 a barrel and paying more than $3 per gallon for gas at the pump. But don't get too comfy -- the price of filling up is probably going up in 2012.
Uncertainty in the Middle East, growing global demand, and a lack of easy oil will be the drivers behind the price spike, and as we've seen recently, any change in the status quo will send the black gold higher.
1. Countries with Crazy Leaders Produce a Lot of Oil - In case you've missed the latest in Iran's continuing nuclear drama, the country is threatening to blockade the Strait of Hormuz if the U.S. follows through on sanctions over its nuclear program.
The Obama administration and many analysts are brushing aside that threat because it would hurt China, a strategic ally of Iran, more than the U.S. But many people think that if Iran is serious, the situation could end in military action. Even this threat of action has supported oil prices in recent days, and it highlights how fragile the Persian Gulf -- and oil price stability -- is right now.
With the U.S. pulling out of Iraq and Libyan oil beginning to flow again, there are relatively few supply disruptions right now. But Iran could change that in just a matter of days.
2. Global Demand is Only Growing - In the U.S., demand for oil may not be growing much, if at all. But emerging markets like China, India and Brazil are certainly picking up the slack and increasing their demand.
In November, China imported 32.3% more oil from Saudi Arabia and 76% more from Russia than it did in the previous year. With millions of new vehicles hitting the road in China every year, that trend will continue.
The situation is similar in India, where imports play a huge role. In 2010, India imported about 70% of the oil it consumed, most of which came from the Middle East.
Unless the global economy heads for a recession in 2012, global oil demand will continue to increase and prices will likely rise as a result.
3. Oil is Getting Harder to Find - One of the biggest reasons U.S. net petroleum imports have fallen from 60.3% of consumption in 2005 to 45.4% so far in 2011 is that sources of oil have become more unconventional.
Unlike the good old days of Standard Oil, when you could drill a hole and oil would come spurting out, hydraulic fracturing in shale is much more complicated and has only relatively recently become economical.
Kodiak Oil & Gas, Continental Resources, and Whiting Petroleum are three of the oil companies using this technology to unlock oil in the Bakken shale play in North Dakota and Montana. But it isn't cheap, and these producers need oil prices to remain high to continue their production.
The same goes for ultra-deepwater drilling around the world. Cobalt International, Statoil, and Total are all eagerly anticipating drilling in deep water off the coast of Angola. But the ocean there can be more than a mile deep, and the wells themselves will be drilled more than a mile farther underground -- not a cheap endeavor even if the reserves they find are as large as expected.
The Final Conundrum - Beyond the gas station, the price of oil in 2012 will have a far-reaching impact on the economy. As prices go up, consumer confidence goes down, and we cut back on spending to prepare for bad times. But if prices fall, it could mean we're headed into a recession -- something no one wants right now.
The only silver lining is that the higher prices will also push explorers to expand production domestically and create more jobs. But that's small consolation when you're filling up at the pump.
Money moves to make in light of Obama’s budget
Here are some of the key pieces of Obama’s budget proposal and what moves you might consider.
Higher tax rates — for some
Obama proposed to extend the Bush-era tax cuts for all but the top two brackets.
“The only change would be to have the 33% and 35% rates go back to their pre-2001 levels of 36% and 39.6%,” said Robert Keebler, CPA, of Keebler & Associates.
“Taxpayers in the top two marginal brackets would still benefit from reduced rates on the portion of their income taxed in the lower brackets,” he said.
So, what might you do if you are a high-income taxpayer? “Between now and the end of the year, people should look at whether they can do a Roth IRA conversion,” said Keebler. “How do you bring ordinary income into 2012?”
You might also consider selling your fixed-income securities in 2012 and then buying those bonds back in 2013. This would also qualify as a way of bringing interest income into 2012. And, consider buying cash-value life insurance, Keebler suggested.
Capital gains
Proposed: Raise the long-term capital-gains rate to 20% for some taxpayers: single taxpayers making more than $200,000 per year, $250,000 for married taxpayers filing jointly and $125,000 for married taxpayers filing separately.
Keebler suggests harvesting capital gains, not losses, in 2012. In other words, sell your winners. If the long-term capital-gains rate is raised in 2013, you’d want to have those capital gains taxed at the lower 2012 rate. “That will be really, really powerful,” he said.
Bruce Steiner, a lawyer with Kleinberg, Kaplan, Wolff & Cohen, agreed with this strategy, but also issued a caution. “If the top tax rate on long-term capital gains is increased from 15% to 20% beginning in 2013, some taxpayers may wish to consider accelerating sales to 2012 to take advantage of the 15% capital-gains tax rate,” Steiner wrote in a recent issue of the LISI Income Tax Planning Newsletter.
“This may provide a benefit in the case of sales that would have occurred soon thereafter. However, in the case of appreciated property that the taxpayer was not planning to sell in the near future, the benefit of the 15% tax rate may be outweighed by the cost of accelerating the tax and giving up the potential for a basis step-up by holding the asset until death.”
Qualified dividends
Proposed: Let the tax rate on qualified dividends revert to ordinary income tax rates (up to 39.6%) for the same taxpayers. For everyone else, the rate would stay at 15% (or 0%).
If you are among those taxpayers who have been depending on this tax break to fund your living expenses, it might be time look for ways to reduce your standard of living.
“Those people have to figure out what to do,” Keebler said. “Many are living high on the hog with this qualified dividend at current rates, for 10 years. And now it's gone, like a hurricane took it away.”
“Consider, no matter whether you are wealthy or poor, if you get a tax break you spend it. Some will save it. But a lot of people have built this into their standard of living,” he said.
Losing this tax break could come as a shock to your budget.
Steiner also offered this guidance: “If dividends are taxable as ordinary income for upper-income taxpayers, these taxpayers should review their asset location.”
“At a 15% tax rate on qualified dividends, IRA owners often owned dividend-paying stocks in their taxable accounts, and taxable bonds in their IRAs,” Steiner wrote. “If dividends are taxable as ordinary income, they may want to consider owning dividend-paying stocks in their IRAs and tax-exempt bonds in their taxable accounts.”
Deductions for charitable contributions
Proposed: Reduce the value of itemized deductions for taxpayers in the 33% and 35% brackets to 28% (in 2012, the 33% bracket starts at $178,650 for single taxpayers and $217,450 for married filing jointly).
If you are inclined to make charitable gifts, 2012 would be the year to do it, Keebler said.
“A lot of very large charitable gifts should probably be made this year because [if and when the proposal goes into effect] they would be limited to only 28%,” Keebler said.
Higher-income taxpayers may want to delay their giving decisions until later this year, when more may be known about this tax-law change.
In addition, losing the value of itemized deductions will put a dent in your standard of living, he said.
Personal exemptions
Proposed: Reinstate the personal-exemption phase-out for upper-income taxpayers.
According to Keebler, this means that you might consider reducing your income, if possible. Learn more about phase-outs at this Tax Policy Center website.
Payroll taxes
Proposed: Extend reduction of Social Security tax on self-employed from 14.2% to 12.2% for the rest of 2012.
In the short-term, this extension gives you more spending money or perhaps more money to save for retirement in your own account. But it might not help Social Security in the long run, Keebler said.
College tuition tax breaks
Proposed: Make the expanded Hope tax credit, also known as the American Opportunity tax credit, permanent.
The credit is worth up to $2,500 per year for qualified education expenses.
“With regard to the Hope credit, which technically doesn’t exist in 2012, you would max out the credit by paying the first $2,000 out of pocket — this would cause a $2,000 American Opportunity credit,” said Stephen J. Bigge, CPA, of Keebler & Associates LLP.
“The next $2,000 paid out of pocket would only produce a $500 American Opportunity credit.” Learn more about the Hope credit at this IRS page.
Retirement-plan distributions
Proposed: Exempt retirement-plan participants and IRA owners from having to take distributions if the aggregate value of their qualified plan and IRA benefits does not exceed $75,000.
“Exempting participants and IRA owners with benefits under $75,000 from having to take required distributions will provide these individuals with one of the major benefits of the Roth conversion without having to convert to a Roth IRA,” Steiner wrote.
IRA rollovers for beneficiaries
Proposed: Allow nonspouse beneficiaries of IRAs or other qualified-plan assets to do rollovers.
Right now, a participant, IRA owner or spouse can take distributions of qualified plan or IRA benefits and roll them over into another qualified plan or IRA within 60 days. However, a beneficiary other than a spouse cannot do so other than by direct trustee-to-trustee transfer, Steiner wrote.
According to Steiner’s report: “Limiting 60-day rollovers to participants, IRA owners and spouses is a trap for the unwary,” he said. “Nonspouse beneficiaries sometimes collect retirement benefits payable to them, either thinking they have 60 days to roll them over into an inherited IRA, or not realizing that they can set up inherited IRAs. Allowing nonspouse beneficiaries 60 days to roll over qualified plan or IRA distributions will eliminate this trap.”
Proposals are just that
There’s no guarantee that any of these proposals will become a reality. “But you absolutely have to face them,” Keebler said.
“Most people believe that nothing is going to happen until after the election,” he said. “There’s almost no scenario where people come together and make all this happen. But maybe there is.”
Others agree. The Obama administration’s revenue proposals are not law, nor even a bill.
“However, these revenue proposals are worth watching,” Steiner wrote. “Some of them may be enacted soon. Some of them may be enacted eventually. Some of them may never be enacted.”
Bottom line for now: Talk to your estate-planning lawyer and accountant sooner rather than later. You’ll need as much time as possible to re-jigger your financial plan should any of Obama’s proposals become a reality.
“You have to start now,” Keebler said. “There’s going to be a lot of work toward the end of this year, no doubt.”
Sudden Wealth Syndrome: The Great Destroyer of Prosperity
Wealth Creation in 2012: Where Are all the Millionaires? - The transition of Facebook into a public company confirms social media as the latest purveyor of wealth creation, while also establishing a new generation of cash rich millionaires. Given that social gaming giant Zynga and Groupon Inc. have both made their own public market debuts during the last financial quarter, it is little wonder that terms like sudden wealth syndrome are now re-entering the commercial domain. With new social media resources like Pinterest also growing at a rapid rate of progression, it is likely to become even more widely used during the next 12 months and beyond.
It should be remembered however that public companies are not the only creators of instant wealth, and the U.S. lottery has distributed millions of dollars in prizes across 42 individual states. In fact, the statistics suggest that even the poorest U.S. citizens are only too keen to chase their dreams of wealth and fortune through gaming. Studies reveal that households with an annual income of less than $13,000 spend an estimated 9% of this total on lottery tickets each year. Households that earn more than $300,000 spend a mere 0.3% of this sum on the lottery in comparison, so it is fair to suggest that individuals on low income are themselves becoming increasingly impatient in the pursuit of financial wealth.
The Most Notable Instances of Sudden Wealth Syndrome - Lotteries across the globe have created numerous cases of SWS, and across a range of social demographics. The most famous of these concerned West Virginia building contractor Andrew Jackson "Jack" Whittaker Junior, who is estimated to have lost a staggering $114 million in just 4 years after winning the Powerball multi-state lottery in December 2002. At the time of winning his $315 million prize, he was a successful businessman with a well-rounded and closely knit family. After investing his money in a series of eclectic and poorly considered purchases, however, his life spiraled downwards in a cycle of death and addiction until he was left with no fortune or family to speak of.
It stands to reason that SWS should be an even greater issue for younger beneficiaries, and this brings into focus the relatively early age at which individuals across the globe can gamble on lottery games. In the U.K., citizens can play lottery games if they are aged 16 or over, and this ruling allowed 16 year old Callie Rogers to claim a jackpot prize of £1.9 million in 2003. Unequipped either emotionally or educationally to handle her windfall, she has only recently recovered from a cocaine addiction and repeated suicide attempts having wasted all but £100,000 of her fortune. (For additional reading, see Winning The Jackpot: Dream Or Financial Nightmare?)
Does Education Hold the Key to Coping with Sudden Wealth Syndrome? - As these two stories demonstrate, SWS can afflict people regardless of their age, circumstances or geographic location. While there appears to be no core demographic that is at risk, there are two major factors that trigger SWS once beneficiaries have received a vast sum of money. The first is emotion, and more specifically how the creation of sudden wealth evokes intense feelings and a series of emotive reactions. Whether this wealth is the result of an inheritance, lottery success or innovative commercial practice, these high levels of emotion can cloud each beneficiary's thought and decision making processes.
This does not explain the continual downward spiral experienced through SWS however, which in the case of Andrew Jackson "Jack" Whittaker Junior, alone, continued for nearly four years. A prolonged inability to manage wealth suggests that there are more fundamental educational issues that need to be addressed, especially with regards to basic economics and the ability to budget any sum of cash effectively. Studies conducted by research group TNS in 2010 supported this notion, as it was revealed that just 13% of Canadian citizens were able to answer three basic risk literacy questions and understand the core principals of financial risk.
The Bottom Line - Although there are an increasing number of professional organizations that offer guidance to those at risk of sudden wealth syndrome in the U.S., it would appear that a fundamental lack of financial education will be a more difficult issue to resolve. With specific financial subjects such as economics and budgeting absent from the high school curriculums, young adults have been thrust into an increasingly impatient society with an inability to manage their resources or identify significant aspects of financial risk. This meeting of impulsive desire and inadequate education is a recipe for disaster, and ensures that sudden risk syndrome is very much alive and well in 2012.
Read more: http://financialedge.investopedia.com/financial-edge/0212/Sudden-Wealth-Syndrome-The-Great-Destroyer-of-Prosperity.aspx#ixzz1nJCW1Pi3
The 4 Worst Ways To Borrow Money
Payday Loans - These are short-term loans based on a percentage of your next paycheck. You must bring in a paystub to prove that you are gainfully employed and the lender may perform a credit check. The danger of these loans is that it is easy to get into a borrowing cycle that is difficult to get out of. Paying off the loan with your paycheck may chew up most of it, necessitating a new payday loan against your next check. There is little regulation in this industry and the fees can be steep as there is no security backing the loan.
Title Loans - If you own your car free and clear, you may be eligible for a title loan if the car still has value. The lender holds the title to the car until the loan is repaid in full. While this is a fairly easy way to get small amounts of cash (usually up to $5,000 maximum), the loan comes with high fees along with a high interest rate. The minimum monthly payments required often don't include any principal paydown, so it is easy to maintain a high balance and pay more in interest. Because this type of loan is secured by the title to your vehicle, you may lose it if you default on the loan.
Pawn - Pawn shops are a source of fast money for those in dire straits. You leave something valuable as security for the loan and the pawnbroker can sell it if you do not repay the loan. The benefit for those with poor credit is that the pawnbroker won't run a credit check because the loan is fully secured. The downside is that the fee and interest rate charged make these loans one of the most expensive methods of borrowing available.
Reverse Mortgages - These misnamed loans (after all, they are simply mortgages) are advertised heavily to seniors who have equity in their homes but not the income to qualify for a conventional mortgage. Often, these are even touted as a way to pay conventional mortgage payments still existing on the house. The loan amounts accumulate until the borrower dies or sells the house and then full payout is required. The fees and accrued interest often drain the equity out of a house and leave the heirs with a difficult financial situation. This is even truer today when many properties have mortgages larger than the value of the home.
The Bottom Line - There may be times in life when borrowing from an alternative source makes sense. However, reviewing the terms and conditions of the loan and knowing all of the associated fees and interest can help you avoid the dangers of consumer loans. While there are less risky places from which to borrow, there are also predatory lenders who can make your financial situation worse than it was to begin with.
Read more: http://financialedge.investopedia.com/financial-edge/0212/The-4-Worst-Ways-To-Borrow-Money.aspx#ixzz1nJBuBO00
Wednesday, February 22, 2012
Taxable Events You Didn't Know You Were Creating
Cashing out an Old 401(k) - If you have money sitting in a 401(k) plan from an old employer, you may be tempted to cash it out so you don't have to deal with it any longer. In fact, if the amount is less than $5,000 and you have provided no other instruction to the employer, they may cash it out for you. However, once funds leave the protection of a traditional 401(k), they become taxable and you may also owe a penalty on early withdrawal if you are less than 59.5 years old. To avoid this, have old 401(k) plans rolled directly into your new employer's plan or into an individual retirement account (IRA). There are no tax consequences of a direct rollover. If you have already cashed it out, you can avoid both tax and penalties if you re-deposit it to a new plan within 60 days. Of the withdrawal, 20% will be withheld for the IRS, so you will have to find those funds elsewhere to deposit the whole amount to the new plan.
Selling Your House - If you have a significant capital gain on the sale of your main residence, you may be on the hook for taxes. The IRS allows you to exclude the first $250,000 ($500,000 for couples who own the house together and file jointly) of the gain from your taxable income, but in most cases, anything over that is taxable. If you have been depreciating part of your house for business or rental purposes, you may also owe back tax on the depreciated amount. To minimize the tax implications, work through the calculation of the gain with a tax professional to make sure that you are including all of your capital improvements and additions over the years, which forms part of your cost base.
Rebalancing Your Investment Portfolio - Many new investors are unaware of the tax implications of buying and selling in their portfolios. In non-retirement portfolios, you are required to calculate capital gains and losses on the sale of any securities, even if you reinvest the proceeds within the portfolio. Starting in 2011, brokers are required to report capital gains to the IRS to ensure that they are reported fully and accurately. The timing of gains and losses can impact the overall tax liability for the year, so ensure that you plan your sales strategically.
Selling Your Collectibles - Most household items you buy for personal use decrease in value quickly, so that, when you sell them at a yard sale, for example, you have a loss. This loss is not claimable for tax purposes. However, some items, such as collectibles and artwork, appreciate in value over time. You are required to report the gain of the sale of these types of items, wherever you sell them. For example, if you have collected baseball cards since you were young and sell the entire collection for $5,000, you have a capital gain of $5,000 minus what you paid for the cards originally and any expenses you have incurred in managing, appraising or selling the collection.
The Bottom Line - There are many life events that can trigger tax consequences, and proper tax planning can save you a substantial amount of money. A tax accountant or lawyer can help manage the tax effects of major transactions.
Read more: http://financialedge.investopedia.com/financial-edge/0212/Taxable-Events-You-Didnt-Know-You-Were-Creating.aspx#ixzz1n8ioKBEi
7 tips to savings bliss
The most successful savings plans are those with a goal. Stashing a couple tens or hundred-dollar bills away for a vacation, an unplanned emergency or a kid’s college education are better drivers than the catch-all “save for the future” plan.
No matter what your income level is, saving money is a necessity. Here are a number of ways to go about it, starting with the America Saves Week platform of set a goal, make a plan, save automatically.
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Set a goal. Studies show that goals, both short-term and long-term, are far easier to stick to than a generic savings plan. Save for a down payment on a home or a college education as well as that emergency fund for when the furnace goes out or the car breaks down. Don’t forget vacations and other goods you may covet.
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Make a plan. Take a look at your finances and figure out how to pay off debt and sock away money. You will want to pay off all high-cost debt first — think credit cards with double-digit interest rates — and work your way down. You can’t save and accumulate debt at the same time.
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Save automatically. If you have a savings plan with your company, make sure you’re a part of it. Many will match your savings dollar-for-dollar, which is a better interest rate than you’d find at any bank these days. Also, get into that 401(k) or other work-related retirement program. Outside of work, have a piece of your paycheck automatically deposited into a savings account, a mutual fund or a U.S. Savings Bond. What you don’t see you won’t miss, at least not as much.
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Keep track of your spending and saving. Use your credit card or other records to see where those dollars and cents go and ask yourself whether everything you bought was necessary. Then take a look at the total of your savings and imagine what it would look like if you hadn’t bought that extra sweater or paid too much for that bottle of wine.
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Don’t purchase expensive items on impulse. That certainly prevents buyer’s remorse but also, by imposing a 24-hour wait period, you save yourself from deeper financial woes.
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Consider this little trick for breaking yourself of reckless spending on indulgences: For every pricey cup of coffee, slice of cake, glass of wine or pack of cigarettes you buy, put an amount matching that cost into a cookie jar or under your mattress. If you can’t afford to save the matching amount, maybe you can’t afford that indulgence.
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Save your loose change. Really, it’s a good idea. Fifty cents a day will net you $182.50 at the end of the year, and $1 a day gives you $365 you would not have otherwise.
These Are The 10 Most Common Mistakes Investors Make
In sports, championships often boil down to this fact: your team may have had success after success, but it’s their mistakes which determine whether they win or lose.
I believe that’s true with investing, too. If you’re disciplined enough to avoid making mistakes, you’ll win most of the time. Here’s what I believe are the top ten investor mistakes:
- Believing that one guarantee covers everything. When somebody says that your principle is guaranteed, does that mean your original investment amount is guaranteed, or your returns are? Learn the specifics.
- Doing nothing. I recently met a couple who heard my advice to get out of the market in November 2007—and they're still out. They've been out for four years now, not making any money. Not a good idea.
- Buying investments for tax benefits. Don’t buy something just because you’ll get a tax break. Invest because you’ll get a financial benefit. Tax breaks are gravy, not the maincourse.
- Making a purchase or sale based on a previous price. Don't make decisions based on the price you invested at. You may have bought something at $10.00 a share, but don’t fall in love with that number. You've got to look at the future and make your decision based on the investments’ prospects.
- Buying based on a hot tip. Once you’ve heard a hot tip, it’s already cold. Last year is gone, and it's not coming back.
- Owning too many of the same thing. I meet people who have 28 different mutual funds and all invested in the exact same thing. Diversify.
- Owning too many accounts. Some people have 17 IRAs and 12 brokerage accounts and on and on. You can’t manage that many accounts well.
- Taking advice from the media. Money Magazine is great, but it shouldn’t be your financial advisor. What’s printed is already old news. You don't want to buy yesterday's picks.
- Replaying the past. If you lost money in the past, and you keep employing the same strategy (or lack thereof), you're going to lose money again.
- Not having a sell strategy. It’s possible to avoid losing money in the next bear market Plan for the inevitable. Create an exit strategy.
These mistakes can be avoided. You can be a successful investor, just by steering away from the small mistakes that can cost you the prize.
Tuesday, February 21, 2012
5 Ways To Start Saving Today
It's not rocket science – we all know that having a savings account ensures you are set for these unforeseen circumstances. It is true that times are tough, and interest rates on savings accounts are at an all-time low, but you can still make saving pay.
Anything you can put aside will make you more secure in the coming months and year – keep in mind that saving just $10 a week is $520 by the end of a year.
And always remember the value of compounding. At the moment, interest rates are unusually low – which means that savers aren't getting much of a return on their money. But that will certainly change in time, and when it does your savings will suddenly benefit from the wonder of compounding. Put $1,000 in an account paying 2% for five years and you'll have $1,104.08 in the end. But if the interest rises up to 5%, you'll have $1,276.28. After 10 years you'll have $1,629 if the 5% interest remains.
So how can you make a start as a saver today? Here are our top ways to start that saving account, that are easy to implement and won't be too painful to your lifestyle.
Compare - The first thing to do is open the best savings account you can. Bestcashcow.com offers a comparison of the best rates on savings accounts. You can also compare accounts in your state. Check this out to ensure that whatever savings you do have are making you the best possible return.
Budget - The problem with saving is that you can 'miss' your money – but you can't miss what you haven't had, right? Complete a budget of what you absolutely need to live off of – bills, food expenses, etc. Then, as soon as your paycheck arrives, sweep the rest off into a savings account. If this money is never in your account, you won't feel you're losing out. Of course, this step requires accurate budgeting to work out what you need on a month-to-month basis. So, go through your previous bank statements so you'll have an accurate picture.
Pocket Change - At the end of each day, or each week, empty your change into a jar. Go through your pockets and bag - because those quarters really will add up, and even if you just accumulate $2 a day, that's $730 by the end of a year. If you pay this change into the bank each month, then you'll have the interest to add on top of this. Keep remembering that every dollar counts and you won't go wrong.
Curb Spending - If you're prone to impulse buys and money tends to burn a hole in your pocket, it might be helpful for you to work out what your post-tax wage is per hour. Once you know this figure, you should look at everything you intend to buy with this in mind. If you're considering a $50 pair of shoes and this is five hours of your pay, you might start to think they're not quite worth it after all. This is a great technique to stop spending – and what can you do with this money you save? Invest it in savings of course!
Look for Deals - Now, nobody is suggesting that you stop spending money altogether, but perhaps it is time to look at becoming more frugal. Do you need to pay full price for everything? Probably not. You can use coupons at the grocery store, and use restaurant vouchers to enjoy a treat for half the price. There are excellent bargains to be found on eBay.com, and don't dismiss getting items for free from freecycle at freecycle.org. It really is true that one man's trash is another man's treasure, so shun your preconceptions and consider thinking outside of the box when you need new items for your home and family. By being more frugal in your spending, you are freeing up dollars that can be directed into that savings account.
The Bottom Line - We know we should save, but it often seems like an impossible feat - difficult to start because the end point seems such a long way away. With these steps you can see that small changes can make a huge difference when you look at the growth over a year.
By starting small and watching your savings grow, you'll ensure you're ready should an unexpected expense come your way.
Read more: http://financialedge.investopedia.com/financial-edge/0212/5-Ways-To-Start-Saving-Today.aspx#ixzz1n2IJcrHN
Monday, February 20, 2012
What to Look For in an Advisor
Anthony Williams, who educates financial advisors, explains the top qualities that an investor should look for when meeting a potential financial planner.
Anthony, you educate investment advisors who are working toward a professional designation. What exactly are you finding are the main qualities that an advisor needs these days?
The obvious thing to start off with is technical knowledge. Clearly, this is a very technical industry—you’re dealing with people’s finances, and you’re dealing with people’s livelihoods. It’s a position of trust…so there are a number of components.
But certainly a sound technical base, which really can be achieved, from the public’s point of view, to determine what an advisor has achieved. That is, really, what designations, what professional financial designations do they hold?
Now you know as important as that may be, it’s also important to keep in mind that that, in and of itself, is really not enough. There are multiple—it’s a relationship, and based on being a relationship, it’s not just hardcore facts and figures that you got to throw at the client. And strategies, clearly there’s a connection.
There’s an emotional involvement. There’s got to be this long-lasting…you’ve got to create a feeling of comfort, and you’ve got to be able to lower the guard down for the client and make them feel comfortable enough to invest with you and deal with you and accept what you’re saying.
So it’s really very much like a doctor with a good bedside manner. We’ve all run into a situation where we maybe been in front of a doctor who may be brilliant to be in that position, but may not have the best people skills. Clearly, if they’re going to be performing some sort of surgery on you, you want to be able to translate that information to the patient in a way that makes the patient feel comfortable and to trust the doctor.
It’s really no different if you tie that analogy back to a relationship with a planner and a client. The client needs to feel comfortable enough to say "Yes, I accept what you’re saying, you sound like you’re professional, you sound like you’re knowledgeable, but you also have that human aspect, that emotional connection, so it means that you can relate to my wishes. You can relate to my fears, you know if I am fearful of certain types of investments."
I mean, there’s no better time to really talk about that than right now. We’re in a very turbulent situation, so there’s got to be a lot of hand-holding. You’ve got to be patient as well.
You know the vast majority of people, they don’t have that technical knowledge that you as a planner would have. You’re going to have to be able to take a very complex strategy, or a tax situation,. or whatever the case may be, and be able to in layman’s terms break that down in an understandable way and a comfortable way for the client.
What should the client look for when he or she is seeking an advisor?
Again, a lot of different qualities, but certainly designations would be one—although it’s not the be-all and end-all. But it’s an indication that the person has met certain standards, certain accepted standards.
The human aspect: can you relate to this person? Just looking at them…are they a good listener? That’s a very key, important component as well. Because at the end of the day, the only way they can make meaningful recommendations to you is if they’ve assimilated all the information that you’ve given them.
So they have to be very effective listeners. And empathy. I think empathy is a very important quality as well in a planner.
Wednesday, February 15, 2012
5 Investing Statements That Make You Sound Stupid
Statement No. 1: "My investment in Company X is a sure thing."
Misconception: If a company is hot, you'll definitely see great returns by investing in it.
Explanation: No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies - Enron, WorldCom, Adelphia and Global Crossing, to name a few - have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it's hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.
What an experienced investor would say: "I'm willing to bet that my investment in Company X will do great, but to be on the safe side I've only put 5% of my savings in it."
Statement No. 2: "I would never buy stocks now because the market is doing terribly."
Misconception: It's not a good idea to invest in something that is currently declining in price.
Explanation: If the stocks you're purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you're interested in as if they're on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock's price has been driven down. Make sure it's just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn't mean you should, too.
What an experienced investor would say: "I'm getting great deals on stocks right now since the market is tanking. I'm going to love myself for this in a few years when things have turned around and stock prices have rebounded."
Statement No. 3: "I just hired a great new broker, and I'm sure to beat the market."
Misconception: Actively managed investments do better than passively managed investments.
Explanation: Actively managed portfolios tend to underperform the market for several reasons. Here are three important ones:
- Whenever you make a trade, you must pay a commission. Even most online discount brokerage companies charge a fee of at least $5 per trade, and that's with you doing the work yourself. If you've hired an actual broker to do the work for you, your fees will be significantly higher and may also include advisory fees. These fees add up over time, eating into your returns.
- There is the risk that your broker might mismanage your portfolio. Brokers can pad their own pockets by engaging in excessive trading to increase commissions or choosing investments that aren't appropriate for your goals just to receive a company incentive or bonus. While this behavior is not ethical, it still happens.
- The odds are slim that you can find a broker who can actually beat the market consistently if you don't have a few hundred thousand dollars to manage.
What an experienced investor would say: "Now that I've hired a fee-only financial planner, my net worth will increase since I'll have an unbiased professional helping me make sound investment decisions."
Statement No. 4: "My investments are well-diversified because I own a mutual fund that tracks the S&P 500."
Misconception: Investing in a lot of stocks makes you well-diversified.
Explanation: This isn't a bad start - owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you'll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds (ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio.
What an experienced investor would say: "I've diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that's just one component of my portfolio."
Statement No. 5: "I made $1,000 in the stock market today."
Misconception: You make money when your investments go up in value and you lose money when they go down.
Explanation: If your gain is only on paper, you haven't gained any money. Nothing is set in stone until you actually sell. That's yet another reason why you don't need to worry too much about cyclical declines in the stock market - if you hang onto your investments, there's a very good chance that they'll go up in value. And if you're a long-term investor, you'll have plenty of good opportunities over the years to sell at a profit. Better yet, if current tax law remains unchanged, you'll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly but gains and losses are not realized until you act upon the fluctuations.
What an experienced investor would say: "The value of my portfolio went up $1,000 today - I guess it was a good day in the market, but it doesn't really affect me since I'm not selling anytime soon."
Conclusion - These misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. They may even tell you you're wrong if you try to correct them. Of course, in the end, the most important thing when it comes to your investments isn't looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you'll be on the right path to higher returns.
Read more: http://www.investopedia.com/articles/basics/08/investment-verbal-blunders.asp#ixzz1mTWJm389
6 Misconceptions About Investing Young
"I don't have enough money." - While it is true that young adults are usually inundated with debt - from student loans, car payments and mortgages - many can find at least a small amount of money to invest on a monthly or yearly basis. Contributing to employer-sponsored plans, such as 401(k)s, can allow a small investment to grow over time, particularly when matched by the employer. The power of compounding creates a golden opportunity for young investors, even those on a tight budget. It is important to keep in mind that investing does not have to involve huge positions; it is possible to invest in a very small number of stock shares.
"I don't know anything about investing." - Ignorance is not an excuse to avoid investing. Young investors have many years to study, research and develop proficiency in investing techniques and strategies. A wealth of information is available to tech-savvy young adults, from financial and education websites, to social media pages, webinars and the many advanced trading platforms that are available for free or for a limited monthly fee.
"Investing is too risky." - Many young adults are keenly aware of the economic crisis and turmoil it ensued. While investing can be risky, it can be managed in a way that keeps it from being too risky, however that is defined for each individual. Young investors with a lowrisk tolerance can select more conservative portfolios, like blue chip stocks and bonds. Investors with a higher tolerance for risk can enter more aggressive positions with higher reward potential.
"Investing can wait till I'm older." - Young investors have to contribute less to make more money over time than older investors. This is due to the power of compounding. A person who starts at age 20 and invests $100 per month until age 65 (a total contribution of $54,000) will have more than $200,000 when he or she reaches age 65, assuming a 5% return. If the person delays investing until age 40, he or she will have to contribute $334 each month (a total contribution of $100,200) to arrive at the same $200,000 by age 65.
"Investing is for old people and Wall Street types." - While the media do portray many investors either as wizened old men or young, power-hungry Wall Street types, most investors are ordinary people, both young and old, wealthy and not. Even though we often hear "You are never too old to start investing (or saving for retirement)," the opposite is true as well: people are never too young to start investing.
"My 401(k) should be all I need." - Depending on social securityand 401(k)s can be risky. It is difficult to predict where social security will be in future years, and many investors learned the hard way in the last decade that employee-sponsored retirement plans don't always work out. Starting young and diversifying through a variety of investment vehicles is the best way to secure one's financial future.
The Bottom Line - Young adults often have so many distractions that it is difficult to set aside the time to think about investing. In addition to being busy with friends, work and hobbies, this age group is often burdened by a significant amount of debt, making investing seem like something that will have to wait. Despite these common misconceptions about investing young, those who do start studying, researching and investing young, have many advantages over those who wait, including the power of compounding and the ability to weather a certain degree of risk.
Read more: http://financialedge.investopedia.com/financial-edge/0212/6-Misconceptions-About-Investing-Young.aspx#ixzz1mTUDnrHQ
How Retirement Attitudes Of Baby-Boomers And Gen-Xers Differ
In order to make a reasonable comparison, it is sometimes necessary to divide the baby-boomer cohorts into two groups, which has been done when available data allows. Early Boomers are 1946-1955 and Later Boomers are 1956-1964.
Retirement Savings Attitude and Results - In its 2011 Retirement Confidence Survey (RCS), the Employee Benefits Research Institute (EBRI) compared the attitudes towards retirement savings and amounts actually saved by age.
The fact that early boomers have the largest percentage of individuals with more than $250,000 saved is no surprise, as older individuals are more likely to have larger amounts saved because they have worked longer and have had more time to accumulate those savings. Notwithstanding, it begs the question of whether this is enough to meet their retirement income needs.
Boomers Have Lower Retirement-Readiness Confidence - While a large percentage of respondents say they have saved for retirement, the level of confidence that this savings is sufficient to meet their retirement income needs is low and is critically so for boomers. According to a report from the Insured Retirement Institute (IRI), 63% of baby boomers lack full confidence that they will have enough money to cover their retirement needs, whereas only 33% of generation-Xers fall into that category.
This concern is not unfounded considering that individuals age 55 may need up to $550,000 for men and $654,000 for women to cover health insurance premiums and out-of-pocket expenses in retirement when they reach age 65 in 2018.
Generation X More Willing to Take Investment Risk - Compared to baby boomers, generation-Xers are more likely to take above-average risk when investing their retirement savings. Baby boomers are more likely to choose average risk in return for average gain with a large percentage unwilling to take any risk at all. Since the amount of return on investments is often determined by the amount of risk the investor takes with his or her assets, this approach will ultimately affect how much the members of each group invest based on such levels of risk tolerance.
Boomers Withdraw More and Add Less - According to the IRI, the economy significantly affects people's retirement-saving plans. With widespread layoffs and dim job prospects, about 15% of generation-Xers have had to dip into their retirement savings to cover everyday living expenses and 23% have stopped contributing to retirement accounts. Along the same vein, 20% of baby boomers have made early withdrawals from their retirement accounts and 32% have stopped contributing.
The Bottom Line - It is expected that individuals who are closer to retirement will have a more realistic view of retirement readiness. As such, it should not be surprising to find that more baby boomers are concerned about financial security during retirement than generation-Xers. Nonetheless, one's retirement readiness is often determined by one's attitude towards retirement and the actions that one takes towards saving for retirement.
Regardless of age, individuals can get themselves out of this statistical rut by improving their attitudes and taking more positive actions towards saving and planning for retirement when possible.
Read more: http://financialedge.investopedia.com/financial-edge/0212/How-Retirement-Attitudes-Of-Baby-Boomers-And-Gen-Xers-Differ.aspx#ixzz1mTQvpI37
7 Ways The U.S. Government Wastes Money
With a federal debt north of $15 trillion and projected annual deficits exceeding $1 trillion as far as the eye can see, it's clear that the federal government has difficulty controlling costs or living within a budget. If it can't cut the low-hanging fruit listed in this article, how can anyone expect the politicians to make tough reductions in spending?
These are seven ways that the U.S. government wasted tax dollars in 2011.
$175,587 - Study on Cocaine and the Risky Sex Habits of Quail - Why quail? The reason is because they easily reproduce in a laboratory and provide an alternative to standard laboratory pigeons and rats. Apparently, the government felt the need to prove what numerous studies have already determined - that cocaine use may increase high-risk sexual behavior in humans. Worse yet, the study is slated to continue through 2015.
It only sounds more ridiculous when you learn that the first installment of $181,406 was received in 2010 from the National Institute of Health to see how cocaine boosted the sex drive of Japanese quail.
$550,000 - A Movie on How Rock 'n' Roll Helped Defeat Communism - This documentary, directed by Jim Brown, is scheduled for release in May 2012. The 90-minute film will focus on the arrival of the Nitty Gritty Dirt Band in the Soviet Union during the late 1970s.
This was shortly after the release of their album Will the Circle be Unbroken, and the reception they received was reminiscent of the Beatles. Rock the Kremlin emphasizes the benefits of soft power and cultural diplomacy, and intends to show how music imported from the West contributed to ending the cold war.
$592,527 - Proving That Feces-Throwing Is a Communication Skill for Chimps - The purpose of this study was to determine why chimpanzees often throw feces and food at passersby and what that has to do with the neurological origins of communications among the species. In the wild, chimps learn to throw objects to manipulate the control of other chimps and primates. At a cost of over half a million dollars, it was discovered that the chimps that excelled at throwing feces also had the best communication skills.
$742,907 - Study on Sheep Grazing to Control Weeds - The Department of Agriculture gave money to Montana State University to conduct the study and develop two courses that cover and explain the findings. While most of us already knew that sheep will munch on weeds, apparently three quarters of a million dollars were needed to authenticate the obvious.
Since it doesn't require chemicals, organic farmers can use sheep to clear their fields instead of tilling, which can subject the topsoil to blowing or washing away. They also discovered that sheep manure will act as a natural fertilizer. The American Sheep Industry Association sells a $25 handbook that contains the same information.
$765,828 - Pancakes for Yuppies - Your tax dollars were used to partially fund a new International House of Pancakes in the popular Washington, DC neighborhood of Columbia Heights. While the money was intended for an underserved community, it made its way to this shopping hotspot that also features other prominent retailers such as Best Buy and Target. The irony is that the funding came from the Department of Health and Human Services, which is currently fighting a war against obesity. The IHOP serves two items from Men's Health magazine's Top 20 Most Unhealthy Menu Items list.
$17,800,000 - Gifts to China - Over $1 trillion of the U.S. national debt is owed to China. So why are the Department of State and Agency for International Development giving millions of dollars to that country when it could be used to pay down the debt? About $4.4 million was used to improve China's environment and $2.5 million went to various social services. These are noble goals, but China can afford to pay its own way. While the U.S. debt now exceeds GDP, China's debt is only 26% of GDP.
$120,000,000 - Government Benefits for Dead People - The Government has been paying the dead for a while, costing tax-payers more than $600 million over the past five years. Most of the money consists of retirement and disability payments to deceased federal employees. In one egregious example, a son cashed his dead father's checks for 37 years, totaling more than $500,000. This scam was only discovered when the son died and he was no longer around to cash the checks. None of the money was ever recovered.
The Bottom Line - The programs covered here are hardly national priorities and only scratch the surface of Washington's wasteful and frivolous spending habits. Despite claims from all political corners that earmarks and pork-barrel spending will no longer be tolerated, the reality is that the waste continues unabated.
As the debt continues to climb exponentially and the value of the dollar is further jeopardized, the need to eliminate waste is more compelling than ever. If that can't be done, there's little hope for achieving a balanced budget.
Read more: http://financialedge.investopedia.com/financial-edge/0212/7-Ways-The-U.S.-Government-Wastes-Money.aspx?partner=ntu12#ixzz1mTOle4Ct
Tuesday, February 14, 2012
The Hidden Truth Behind U.S. Economic Recovery
You may have heard media reports recently about how the economy is slowly improving. The stock market has been pointing upward, consumer confidence is growing and profits for most companies have exceeded expectations. Is the "recovery" real, or is the government creating the illusion of prosperity at the expense of future generations?
There's enough evidence to suggest that the economy is being artificially propped up by monetary and fiscal policies that aren't sustainable. These policies have skewed the economic performance data published regularly by the government, such as unemployment and GDP.
Unemployment
The unemployment statistics may not portray an accurate snapshot of the true job picture in the U.S. The unemployment rate is calculated by dividing the number of unemployed workers by the total labor force.
The unemployed are defined as those who are jobless, looking for jobs and available for work. Those who have stopped searching for a job or are otherwise unavailable to work are not counted, which results in an inaccurate assessment of the joblessness rate in the country, and could very well be understating the true percentage.
Another reason the rate runs into a shortfall is because jobs are being paid for with deficit spending. The deficit for FY2011 was $1.3 trillion and nothing has been done by the federal government to reduce spending to control future deficits. That money is flowing into the economy and paying for jobs that wouldn't exist if the budget was balanced.
For example, suppose the number of jobs paid for by the FY2011 deficit can be estimated by dividing the total deficit by the average cost per worker. The annual worker cost of $160,000 includes salary, benefits, office space, materials and supplies.
Divide the deficit of $1.3 trillion by $160,000 and the result is that deficit spending is paying for about 8 million jobs. If all those jobs were added to the unemployment rolls, the rate increases another 5%.
In summary, the current unemployment rate of 8.3% is understated by at least 13.5% (8.3% + 5% from above). The estimated total rate of 21% is higher than the 18% average experienced during the decade of the Great Depression.
Gross Domestic Product
GDP is the measure of economic output and includes government spending. The GDP for FY2011 was about $15 trillion. Government expenditures comprised $1.3 trillion of that amount, so the "true" GDP was actually $13.7 trillion. That's a reduction of 9% from the published value, a drop that some would classify as depression-level. Thus, subtracting government expenditures creates a different portrait of the health of the economy.
Three-quarters of GDP is now a function of consumer spending that has been fueled by epic levels of personal debt. Consumer demand has pulled back because of unemployment and credit tightening, even though interest rates are at historic lows. If rates are hiked because of inflation, then demand will take another significant hit, further depressing GDP.
There are other reasons to be concerned about GDP. Over the past several decades, the U.S. has transitioned from a production-based industrial economy to a consumer-driven service economy. This has not resulted in a GDP decline because of the way "production" is calculated. For example, if you take care of your child at home, that's not counted as GDP, but paying for your child to attend day-care is counted. The result is that all these service industries inflate GDP because we now pay for many services that we previously did ourselves.
The current GDP calculation is masking decreases in real production over the past several decades. As factories and other manufacturing facilities have closed, they've been replaced by more services that don't create real wealth. This is one reason why millions of manufacturing jobs have moved overseas with no apparent reduction in GDP.
The Bottom Line
The U.S. economy is growing increasingly dependent on escalating levels of debt, with 10% of tax revenues going to debt service this year. The remaining revenues are only adequate to pay for national defense, Social Security and healthcare. Every penny beyond that is either borrowed or printed. The strain on entitlement programs continues to grow as averages of 10,000 baby boomers retire every day.
Unfortunately, the government will continue to borrow and print money to create the illusion that the economy is recovering. It's analogous to giving a compulsive gambler who is short on change more money in the hope that he will use it to pay his bills and debts, rather than spend it on gambling. It won't seem like he's broke now, but when he gambles away that money too, who will give him more?
Read more: http://financialedge.investopedia.com/financial-edge/0212/The-Hidden-Truth-Behind-U.S.-Economic-Recovery.aspx#ixzz1mO04y3F9