Investing

Based on the analysis by Towers Watson, the median savings accumulated by workers ages 51 through 60 is $49,000 and those by workers age 30 to 40 is $30,000. The median worker’s retirement fund has only $79,300. If you haven’t saved enough, it’s time to get serious about saving for retirement. Daily Finance lists and explains some guaranteed ways to retire rich. Here’s 6 ways you can apply in your retirement planning:

1. Spend less than you earn
2. Start saving early
3. Don’t leave free money on the table
4. Take a little risk
5. Minimize your taxes
6. Maximize your income potential

(dailyfinance.com)

Doctors and dentists are highly intelligent professionals with high incomes. But when it comes to investing, high IQ and overconfidence work against them. Why would they be such bad investors? Daniel Solin at Daily Finance pointed out that “doctors and dentists are busy people who don’t have the time to focus on their investments. In addition, many of them believe that, since they are high achievers in their professions, they have the ability to select brokers and advisors who will leverage their savings and provide for their retirement.” We can learn from that pitfall by avoiding the marketing ploy from active investment community that try to capture our assets. Regardless of occupations, smart investing is the same for anyone. Everyday investors should focus on asset allocation and make use of low cost index funds in their globally diversified portfolio. Both health and wealth are the most important assets. We can take care both of them by avoiding tricky mistakes. (dailyfinance.com)

“You could be cheating yourself out of some retirement money without even knowing it,” said Katie Lobosco at CNN Money. Target Date Funds are great option to choose within your 401(k) as they offer a mix of stocks and bonds that automatically adjust as retirement approaches. But a majority of investors are not using it correctly by not putting all of their 401(k) assets in Target Date Funds. As investors add more funds alongside Target Date Funds, they leave their asset allocation skewed since Target Date Fund is designed to hold all of one’s assets. Savers who didn’t put everything in their Target Date Funds had annual returns that were 2 percent lower on average than those who did. To maximize returns, you should treat all of your investments as a single portfolio. (cnn.com)

For investors that are anxious about the market volatility, investing legend and Vanguard founder Jack Bogle has a very good advice: “Just stay the course. Don’t do something, just stand there.” By speculating and responding to the current market turmoil, investors can hurt the return of their portfolio in the long run. Miranda Marquit on personal finance site Money Ning points out that loss aversion and overconfidence lead to investing mistakes. “Take the recent market volatility for example. I know a few guys who were scared of the downturn and moved some money into cash in February, only to see the market zoom back up a good 10% in the last four weeks. The worst part is that these people don’t really track their performances, so they will likely do this over and over again. There’s a reason why we urge everybody to stay the course. Doing nothing is actually not easy, but it’s often the most profitable non-action you can ever take.” Stick with your investment policy statement and stay the course. (moneyning.com)

As reported earlier, unscrupulous financial advisers often prey on the elderly and poorly educated. According to a research by the University of Chicago, about 7 percent of advisers have been disciplined for misconduct, such as selling unsuitable investments to clients or making trades without their input. Investors should wisely investigate their adviser’s background. Even when those advisers got fired, nearly half found work with a different firm in less than a year. Advisers disciplined once were also “very likely to act up again,” with nearly 40 percent becoming repeat offenders. Investors can use the U.S. Commodity Futures Trading Commission (CFTC) search tool called SmartCheck to do a background check on their advisers. (washingtonpost.com)

According to a 2013 study by the Investment Company Institute, about 40 percent of U.S. households own an IRA, holding more than $5.7 trillion in these accounts. Normally investors have a 16-month window between January and the following year’s April to make an IRA contribution for a given tax year. Many IRA investors wait until the last minute to make contributions. Vanguard completed an anlysis and found that over 30 years period you could earn an extra $15,500 by contributing early in January instead of procrastinating until April of the following year to contribute. The extra $15,500 assumes each investor contributes $5,500 for 30 years and earns 4% annually after inflation. Procrastination has a cost by missing out on a year’s worth of tax-advantaged compounding. To reduce procrastination, investors should set up automatic investments to make it easy to contribute regularly. (vanguard.com)

Roth IRA is a great, tax-efficient way to save for your retirement. Your contributions can grow tax-free and you can generally make withdrawals tax-free and penalty-free after you reach age 59½. If your income is too high, you can still do a planned backdoor Roth IRA. In certain situation when you contribute to Roth IRA but later find out that your income is too high. Harry Sit at The Finance Buff has a guide on what to do if you did an unplanned backdoor Roth. First, you have to recharacterize your ineligible contribution and gain to traditional IRA and then convert it. Next, you split your tax reporting since you contribute for one year and convert in a different year. Harry Sit recommends: “If there is any chance that your income may be too high again, resolve that you will become proactive and do a planned backdoor Roth from this year forward. When in doubt, do the planned backdoor. Don’t wait after the year-end.”

There is universal truth such as 1 + 1 = 2. Using basic arithmetic, Nobel Prize winner William Sharpe shows us another eternal truth to answer the question: Do active investors in aggregate earn a higher expected return than passive investors? The answer is that “the average actively managed dollar must underperform the average passively managed dollar, net of costs.” Consider the portfolio of U.S. common stocks weighted according to the total market value of their outstanding shares. Passive investors earn the return on the market minus their fees and expenses. Active investors in aggregate also earn the market return minus their fees and expenses. The fees and expenses of active investors are higher than those of passive investors so active investors in aggregate must lose to passive investors. The basic arithmetic is very obvious to any personal finance readers. Whenever there’s any argument about active investing vs passive investing, please include this link to settle the matter. The eternal truth is that active investors in aggregate lose to passive investors now and forever. Don’t play a negative sum game and avoid active investing in your retirement accounts. (stanford.edu)

Roth IRA is better than a taxable account since the you don’t pay taxes on interest, dividends and capital gains. If your income is too high, $116,000 for single and $183,000 for married filing jointly, you aren’t allowed to contribute to a Roth IRA. However, there’s a way to do a backdoor Roth IRA that suits high-income individuals. The maximum contribution is $5,500 for individual and $6,500 for those 50 or over. Here’s how to easily do a backdoor Roth IRA to minimize taxes in retirement:

1. Rollover pre-tax IRA account into employer if possible
2. Make a non-deductible contribution to traditional IRA
3. Convert traditional IRA to Roth IRA
4. Report on the tax return

You don’t have to make a million dollars to save a million. One way to reach that go is to save early and consistently in your 401(k). Keep in mind that the process is slow, similar to a long distance race instead of a sprint. Fidelity analyzed that data of of more than 1,000 people who have more than $1 million in their 401(k)s and earned less than $150,000. The average 401(k) millionaires are 59 years old with over 30 years working at their company. From the data we can learn five habits of 401(k) millionaires that we can utilize in our lives and to improve our 401(k) balances.

1. Start saving early
2. Contribute a minimum of 10% to 15%
3. Meet your employer match
4. Consider mutual funds that invest in stocks
5. Don’t cash out when changing jobs

(fidelity.com)