Investing

Investing

Investing money comes with risk and reward.  The minimum goal is to beat inflation.  If you are saving any money for a long term goal, greater then 3  – 5 years, you should consider investing it so that you money can grow from 5% – 7%. If you can find a way to earn 10% or more, please let me know! If your goal is within 5 years,  just stick with cash savings in a savings account.

Stocks & Bonds

bondsA Stock is simply a share of a company.  You are buying a very small piece which may increase or decrease in value.  It can be expensive to buy individual stocks. Mutual Funds are the easiest way to invest in stocks and be diversified.

  A Bond is simply an IOU.  You are giving your money in return for a receipt and earning interest on the loan. You can buy shares of a Mutual Bond Fund or you can buy bonds directly such as U.S. Savings Bonds, or Municipal Savings Bonds.

Mutual Funds

Mutual Funds and Exchange Traded Funds are large groups of stocks and bonds. The fund is a way for you to buy many stocks and bonds for a small amount of money.  You are purchasing a share of the fund which may increase or decrease in value.  These funds make money from expenses which you can measure by their expense ratio. Buy Index Funds with Expense Rations less than .50 %. Research suggests index funds beat actively managed funds 80% of the time.

Mutual Funds and Exchange Traded Funds (ETF) – A blend of stocks, bonds, and fixed income

Index Mutual Funds – A mutual fund with a mix of stocks and bonds that simply tries to match the market’s movement.  It does not rely on highly paid managers that are trying to beat the market.  They have very low expense ratios (.10 – .40%).

Actively Managed Mutual Funds – A mix of Stocks and Bonds managed by people who think they can beat the market. Sound good ? Well they have good returns in some cases but also have higher expense ratios (.75 – 1.5 %).

Fixed Income or Bond Funds –A mix of bonds. Each fund might hold different types of bonds.

Cash Reserves – Each fund also has a portion of its assets in cash.

Retirement

Retirement can be a daunting savings goal because it is so far away and difficult to grasp.  Also, we are constantly reminded how life is fragile and short. We want to live well and enjoy life while we are here.  It is really up to you how much you want to plan.  group-of-happy-older-peopleThe definition of retirement is constantly changing.  In short, expect that you can’t work forever or you may not want to.  Its up to you to determine what you need to plan for.  Maybe you want to stop working at age 65 and will need money to support you until you pass.  We don’t know how long we are going to live for.  Maybe you plan to work full time until you die but you want to vacation whenever you can. Don’t ignore that growing old is part of life for most people.

401k, 403b

A 401k or 403b is an account where you can invest for retirement.  Your deposits are tax deductible, which saves you money.  These intimidating names simply come from the tax code that defines them.  In this account, your money could be invested in a number of asset types including mutual funds, ETFs, stock, and bonds.  Your account is useless if you do not actively manage it and plan accordingly.  Aim for a 15% contribution rate and be sure to pick the investment that is best for your age and comfort with risk.  You may have a 401k if you work in the private sector or a 403b if you work in the public sector or for a non-profit.  Got it? Cool. Business Graph with arrow and coins showing profits and gains

Pensions, Annuities

Pensions are retirement funds offered by only a few employers these days.  They are also referred to as annuities.  You can also buy an annuity by paying a huge amount of money and asking for a fixed check for the rest of your life.  They both guarantee a monthly check until you die.  Each fund is different with all sorts of complex rules.  In general

  • With pensions, your monthly check is calculated based on your years of service and top earning years.
  • You can decide on a full monthly payment or a reduced payment so that your spouse continues to get a reduced check after you die.
  • You can also decide on a lump some payment instead. There are lots of details to consider in that case.
  • You may also have an option to get a partial lump sum in addition to a reduced monthly payment.
  • You might not be allowed to contribute to Social Security and you’ll lose out on that benefit.

recurring-payment-e1449611064496Warning: People hear the word Pension and assume a golden ticket through retirement.  Run the numbers. Know what you are going to get and plan to see if it is enough. Don’t assume your future because of a word.  You have zero control over the investments. Annuities seem to be coming more available these days.  They are known to have lots of expenses associated with them.  And who do you think will make the money with a private Annuity? You or the company that designs and sells them?

Retirement Planning

There are some decent calculators referenced on the tools page.  But just know that planning for retirement is very complex.  There are some popular estimates you can use.  For example: You’ll probably need about 80% of your income at retirement.  You can probably live off of 4% withdrawals from your nest egg.  However, I have yet to see a calculator that takes into account all of these factors.

  • Retirement start date
  • Social Security Income
  • Pension or annuity income
  • 401k or 403b savings
  • Do you plan on working full time at a reduced salary?
  • Do you plan on working part-time at a reduced salary?
  • Finally, Expenses.
    • Living expenses
    • Caring for a loved one
    • Health Insurance
    • Hired Help
    • Mortgage paid off?

The best calculators I’ve seen are only investment sites like Fidelity.com