Rule 1: Lower Your Investment Costs
Rather than wasting time worrying about things beyond your control - like the direction of the stock market, interest rates, or inflation - focus on things you can control in order to improve your odds of investment success. A simple thing to control is the cost of your investments.
You can reduce your investment costs by choosing “no load” mutual funds over funds that pay sales commissions. After all, how does paying a 5.75% upfront commission improve the odds that a fund will make you money? Another easy way to control your costs is to select mutual funds with lower than average expense ratios. (You can read more about mutual fund expenses and fees in a previous post here).
Rule 2: Know What You're Paying for Advice
Another thing you can control in the investment world is how much you're paying for financial advice. Make sure your advisor discloses all sources and amounts of income so you know exactly what you're paying. You might be surprised at how much the "free advice" you receive from your broker is costing you! (FYI - The hidden costs (i.e. sales commissions) of annuities and life insurance can be especially high.)
You can avoid hidden costs by working with a "fee-only" advisor. Unlike advisors that use the term "fee-based", "fee-only" advisors are paid directly by their clients, never receive sales commissions, and have an incentive to recommend low cost investments and insurance. (See if your advisor would be willing to sign a Fiduciary Statement like the one I use here.)
Rule 3: Ignore Your Emotions
All of us are familiar with the saying “buy low, sell high”, but following your emotions when you invest usually leads to doing the opposite. Think twice before going along with the crowd during manias like the dot-com boom and avoid panicking during market declines. Make sure you follow a clearly defined investment strategy so you can take emotions off of the table when making investment decisions.
Rule 4: Don’t Forget About Taxes
Whether or not you realize it, you have an investment partner involved in every decision you make: Uncle Sam. In addition to taxable investment accounts, make sure you're using tax-favored accounts like 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs whenever possible.
For most investors it makes sense to have a combination of "tax-deferred" accounts (e.g. 401(k), 403(b), Traditional IRA) and "tax-free" investment vehicles (e.g. Roth IRA, Roth 401(k)) in order to balance current and future tax savings. Keep in mind that Uncle Sam won't forget about you later in life!
Rule 5: Understand Risk
All investments involve risk. If you invest in stocks, you face the risk that stock prices could tumble. If you hold more stable investments like bonds and CDs, you face the risk that the return you receive won’t keep up with inflation over time.
That’s why most investors diversify into a mix of different types of investments. Make sure you understand and are comfortable with the risk you’re taking with each individual investment as well as with your portfolio as a whole.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
Monday, February 21, 2011
Tuesday, February 15, 2011
Sizing Up Your Retirement Nest Egg Need
One of the biggest mistakes I see people making in their retirement planning is underestimating how much a secure retirement costs. In fact, most people don’t have any idea how much they'll need to have saved to be able to retire comfortably.
How much income will you need in retirement?
The first step to determining how much you need to save is to estimate your annual income need in retirement. A simple way to do this is to start by figuring out how much you spend each year to support your current lifestyle.
Once you get this figure, subtract expenses you won’t have when retired (like retirement savings and expenses for your children) and then add expenses you might incur (like money for additional travel or increased health care costs).
That should give you a rough idea of what you’ll need to retire in today’s dollars.
How large does your nest egg need to be?
Withdrawals from your nest egg will be needed to cover any shortfall between your retirement spending and any steady income you’ll have from things like Social Security, pensions, fixed annuities, and part-time work. For example, assume you’ll need $50,000 in retirement income and will receive $18,000 per year from Social Security. This leaves an income gap of $32,000 per year.
To get a rough idea of how large your nest egg needs to be, simply multiply this gap by 25. This will calculate how much you need to have saved to cover the income gap at a 4% withdrawal rate.
In this case you’d need around $800,000 to produce the extra income you need assuming you withdraw 4% of this amount per year.
What about inflation?
These calculations estimate how much retirement income and how large of a nest egg you'd need in today's dollars. However, since the cost of everything we buy increases over time, these numbers will have to be increased by at least 3 to 4% each year to keep up with inflation.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
How much income will you need in retirement?
The first step to determining how much you need to save is to estimate your annual income need in retirement. A simple way to do this is to start by figuring out how much you spend each year to support your current lifestyle.
Once you get this figure, subtract expenses you won’t have when retired (like retirement savings and expenses for your children) and then add expenses you might incur (like money for additional travel or increased health care costs).
That should give you a rough idea of what you’ll need to retire in today’s dollars.
How large does your nest egg need to be?
Withdrawals from your nest egg will be needed to cover any shortfall between your retirement spending and any steady income you’ll have from things like Social Security, pensions, fixed annuities, and part-time work. For example, assume you’ll need $50,000 in retirement income and will receive $18,000 per year from Social Security. This leaves an income gap of $32,000 per year.
$50,000 Income Need – $18,000 Social Security = $32,000 Income Gap
To get a rough idea of how large your nest egg needs to be, simply multiply this gap by 25. This will calculate how much you need to have saved to cover the income gap at a 4% withdrawal rate.
$32,000 Income Gap x 25 = $800,000
In this case you’d need around $800,000 to produce the extra income you need assuming you withdraw 4% of this amount per year.
What about inflation?
These calculations estimate how much retirement income and how large of a nest egg you'd need in today's dollars. However, since the cost of everything we buy increases over time, these numbers will have to be increased by at least 3 to 4% each year to keep up with inflation.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
Friday, February 11, 2011
Post Year-End Tax Tips
Here are a few tips that might help you reduce your 2010 tax bill.
Tip 1: Contribute to a Traditional IRA
One of the easiest last minute deductions is a Traditional IRA contribution. To claim an IRA deduction for 2010, you need to make the deposit by April 15th and state that it's a contribution for 2010 when making the deposit.
The maximum contribution for 2010 is 100% of earned income or $5,000, whichever is less. If you're over 50 you can contribute an additional $1,000 for a total contribution of $6,000. Also, a nonworking spouse can make an IRA contribution as long as you file a joint return and the working spouse has enough earned income to cover the contribution.
Keep in mind that the ability to deduct the contribution will ultimately depend on your filing status, whether you have a retirement plan at work, and your income level.
Tip 2: Contribute to a Health Savings Account
If you have a high deductible health insurance plan you might be eligible to contribute to a health savings account (HSA). Contributions to HSAs are tax-deductible, money inside HSAs isn't taxed, and withdrawals for qualified medical expenses are tax-free. Another nice benefit of HSAs is that you can roll over your account balances to future years.
Individuals can contribute up to $3,050 and families can contribute up to $6,150 for 2010 as long as the plan’s deductible is at least this amount. Just like contributions for IRAs, contributions to HSAs for the 2010 tax year must be made by April 15th.
Tip 3: Contribute to a SEP IRA
If you’re a business owner, there's still time to set up and fund a Simplified Employee Pension (SEP) IRA. The maximum contribution for 2010 is 25% of your wages up to a maximum contribution of $49,000, so this has the potential to be a huge deduction.
If you have employees you will have to contribute the same percentage to their SEP IRA accounts as you contribute to yours, so keep this in mind when deciding how much to contribute. Contributions to SEPs can be made by your tax-filing deadline including extensions.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
Tip 1: Contribute to a Traditional IRA
One of the easiest last minute deductions is a Traditional IRA contribution. To claim an IRA deduction for 2010, you need to make the deposit by April 15th and state that it's a contribution for 2010 when making the deposit.
The maximum contribution for 2010 is 100% of earned income or $5,000, whichever is less. If you're over 50 you can contribute an additional $1,000 for a total contribution of $6,000. Also, a nonworking spouse can make an IRA contribution as long as you file a joint return and the working spouse has enough earned income to cover the contribution.
Keep in mind that the ability to deduct the contribution will ultimately depend on your filing status, whether you have a retirement plan at work, and your income level.
Tip 2: Contribute to a Health Savings Account
If you have a high deductible health insurance plan you might be eligible to contribute to a health savings account (HSA). Contributions to HSAs are tax-deductible, money inside HSAs isn't taxed, and withdrawals for qualified medical expenses are tax-free. Another nice benefit of HSAs is that you can roll over your account balances to future years.
Individuals can contribute up to $3,050 and families can contribute up to $6,150 for 2010 as long as the plan’s deductible is at least this amount. Just like contributions for IRAs, contributions to HSAs for the 2010 tax year must be made by April 15th.
Tip 3: Contribute to a SEP IRA
If you’re a business owner, there's still time to set up and fund a Simplified Employee Pension (SEP) IRA. The maximum contribution for 2010 is 25% of your wages up to a maximum contribution of $49,000, so this has the potential to be a huge deduction.
If you have employees you will have to contribute the same percentage to their SEP IRA accounts as you contribute to yours, so keep this in mind when deciding how much to contribute. Contributions to SEPs can be made by your tax-filing deadline including extensions.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com
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