Tuesday, December 13, 2011

Inherited IRA—Don’t Blow It!

If you are a named beneficiary of an IRA, you inherit a designated portion of the IRA assets when the IRA owner dies. A common mistake, especially by non-spousal beneficiaries, is to withdraw all IRA assets from the IRA account after the IRA owner’s death; there is a much better way to handle it. Generally, you can have a new inherited IRA account created, and have your share of the deceased owner’s IRA proceeds transferred directly into it. It is important that this is done correctly, and if done so, the benefits can be enormous.

Tuesday, December 6, 2011

Retirement Investing Priorities

You’re ready to start investing for retirement, but should you invest using your employer sponsored retirement plan (401(k), 403(b), etc.), an IRA, or something else? In general, these are the retirement investing priorities I would follow:

  1. 401(k) or 403(b) to get the maximum employer match
  2. Pay down high-interest debt
  3. IRA (traditional or Roth) up to annual limit
  4. 401(k) or 403(b) up to annual limit
  5. Taxable account

Following is a discussion of the rationale for these priorities.

Monday, September 19, 2011

Portfolio Rebalancing

Let’s say that late last April (2011) you decided that an appropriate asset allocation for you, based on your risk tolerance, was 50% stocks and 50% bonds, and that you preferred a very simple portfolio using only 2 asset classes: US Stocks and US Bonds. So, on May 2, you invested $20,000 by buying $10,000 of Vanguard Total Stock Market Index fund and $10,000 of Vanguard Total Bond Market Index fund. About three months later, on August 8, the stock fund had declined in value to about $8,150, the bond fund had increased in value to about $10,380 (assuming reinvested dividends), and your total portfolio was worth about $18,530 (data from morningstar.com). At that point your portfolio was 44% stocks and 56% bonds; i.e., each asset class was about 6 percentage points away from it’s target allocation of 50%.

Assuming no changes in your risk tolerance or other factors affecting your desired asset allocation, you would have been wise to consider rebalancing your portfolio back to its target asset allocation of 50% stocks and 50% bonds. This could have been done by exchanging an appropriate amount from the bond fund to the stock fund (exchanging is a way to simultaneously sell shares of one fund and buy the same dollar amount of shares of another fund). With a portfolio value of $18,530, you would have wanted $9,265 in each fund, so you would have exchanged $1,115 from the bond fund to the stock fund.

Friday, June 17, 2011

Vanguard Target Retirement Funds Minimum Investment Now $1,000

Vanguard recently lowered the minimum investment for its Target Retirement Funds from $3,000 to $1,000. I discussed these funds in my blog post A Single Fund Solution. The lower minimum investment makes these funds an even better way to get started investing. Now instead of having to save $3,000 to start investing in a single, well-diversified, low-cost index fund, you can get started with only $1,000.

Friday, June 10, 2011

I Bonds: Part 2

I received a couple of questions about Series I Savings Bonds (I Bonds) since my last post. One of the questions was about interest rates, and the other was whether or not I Bonds were only a good deal if bought in May 2011. I’ll address these questions in this post, and also will cover a few additional I Bond topics; e.g., I Bond registration (forms of ownership), more on annual purchase limits, and purchasing I Bonds for a minor child or living trust. As always, if you have questions, please post a comment or email me at KevinOnInvesting@gmail.com.

Saturday, May 14, 2011

I Bonds

There’s been quite a buzz lately in investing blogs and forums about I Bonds. The reason? The annualized interest rate for I Bonds purchased from May through October 2011 is 4.6% for the first six months. I’ll explain the details below, but this means that you will get a minimum return of about 2.5% if you buy an I Bond in late May of 2011 and sell it on May 1, 2012. This is a guaranteed, risk-free return that is much higher than any short-term, safe investment or savings vehicle, except perhaps for a reward checking account, and the interest is free of state taxes. The return could be even higher, depending on inflation during the second six months.

Wednesday, April 20, 2011

Your Retirement Goal: An Update

In my May 2010 blog post, Your Retirement Goal, I provided some suggestions for determining how much you need to save and invest to enjoy a comfortable retirement. One of the conclusions of that post may have been more pessimistic than necessary, because I assumed that the amount saved each year was constant. An alternate assumption is that you will be able to save more each year (as your income increases), hopefully at least enough to match inflation. This assumption reduces the initial savings rate. In this post I show an initial savings rate based on the assumption of increasing savings over the years. I also provide a link to a Google Docs spreadsheet you can copy and use to do your own analysis.

Thursday, April 7, 2011

More IRA Tips

After publishing my last blog post about it not being too late to make a 2010 IRA contribution (you have until April 18, 2011), I realized that there is more information that could be useful in making the decision about whether or not to do so. Even if not relevant now, this information may be useful to you in the future.

Saturday, April 2, 2011

2010 IRA Contribution: It’s Not Too Late

You have until April 18 to make your IRA contribution for 2010. If you don’t have an IRA yet, now would be a great time to start one. If you can afford at least $1,000, you can open an IRA account at Vanguard and use their STAR fund, which invests in both stocks and bonds. With $3,000, you can choose from most other Vanguard funds. It only takes about 10 minutes to open an IRA account online at Vanguard, and you can have the money electronically transferred from your checking or savings account into your new IRA account. If you can’t afford $1,000, then you can open an IRA at Schwab with as little as $100, and you should be able to do so in a few minutes online; Schwab offers a few good low-cost index mutual funds and ETFs. Don’t hesitate to pick up the phone and call the Vanguard or Schwab representative if you need help.

Wednesday, March 9, 2011

Two-Year Anniversary of Market Bottom

Today marks the 2-year anniversary of the bear market bottom on March 9, 2009, when the S&P 500 closed at 676.53. Today, March 9, 2011, the S&P 500 closed at 1320.02—an increase of about 95% from the bottom (it’s almost doubled), not including reinvested dividends.

Although the S&P 500 still is about 16% below the closing high of 1565.15 on October 9, 2007, those of us who continued to invest in stock index funds during the darkest days of the bear market have more than recovered our losses. Those who panicked and sold at low levels, and who remained fearful and did not buy back in before the tremendous gains in 2009, have suffered severe losses. Of course things could have turned out differently, and there certainly are more bear markets in our future, but at least for now, those of us who braved the storms can pause and reflect on our good fortune (at least with respect to the stock market over the last 2-3 years).

Tuesday, March 1, 2011

What Do You Think About Investing in ___________ (fill in the blank)?

I sometimes get asked what I think about investing in a particular type of investment; here are examples:

  • Emerging Market Stocks
  • REITs (Real Estate Investment Trusts)
  • Gold
  • Futures or Options
  • Trust Deeds
  • Annuities

The simple answer is that you should have an investment plan and stick to it, and not jump into a particular type of investment just because you’ve heard something about it from a friend, salesperson, or news article. For most people, a rational investment plan involves investing in low-cost stock and bond index funds, and using FDIC/NCUA insured deposit accounts, such as CDs and high-yield savings and checking accounts, for short-term reserves.

Sunday, February 6, 2011

Pick Your Poison (You Can’t Avoid Risk)

No matter how you choose to save and invest, you are taking some type of risk. This is obvious if you are investing in stocks (including stock mutual funds), but it may be less obvious if you are simply keeping all of your money in a savings account. Stocks are clearly risky, since values can fluctuate dramatically. What you may need to think a bit more about is that if you keep all of your money in a savings account, you are taking the very real risk that after taxes and inflation, your savings will lose purchasing power over the years. One of the most important steps in developing an investment plan is to think clearly about risk, and decide what types of risks and how much of each type of risk it is appropriate for you to take.