A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.
Monday, February 28, 2005
The Guide to the AllThingsFinancial Links
Ageless Marketing - An interesting marketing blog that covers practically everything about marketing.
Another Personal Finance Website - Just as the name implies. I don't have a better description than that.
Asset Allocator - This is a blog by my new friend Chuck (AKA the AssetMan!). This blog takes the place of the now defunct Investing Bits & Pieces. Chuck is a CFA and puts out some interesting stuff. Oh, and PLEASE, for the love of God subscribe to his site!
Blogging About Blogs - This is one of my favorites. It is published by a guy named Ken Leebow. His mission is to search out the best offering on the web and then write about them. He updates several times a day. Fortunately, he uses RSS so you can track him with your Bloglines account.
Bloggin' Wall Street - A blog about Wall Street and investing. Updated several times a day. This guy has a nack for good writing. I wish I could articulate as well as he does.
Blueprint for Financial Prosperity - A blog I just recently found. He posts some pretty interesting stuff. I like his post about mutual funds.
The Budgeting Babe - Interesting blog written by a woman named Nicole. She too, has a talent for writing. She updates her site two or three times a week.
Canadian Capitalist - Here's the description he gives on his blog: "A record of my personal financial experience in Saving, debt management and investing (with emphasis on Canadian content)."
Capital Ideas - This is a nice blog authored by a "23 year-old cubicle dweller." I'm jealous of his writing ability.
Consumerism Commentary - Written by a guy named Flexo (I'm sure that's an alias). Who is Flexo? "Flexo is the evil Bender. Aside from that, he's single and almost 30. That's all you need to know for now." - According to Flexo, himself.
Frugal for Life - A blog dedicated to all things frugal.
G's Investing - An investing blog that is updated once a week or so.
In Praise of Thrift - Written by a guy named Henry Bemis. It is about his personal finance voyage from being deep in debt to his goal of $1,000,000. I like this site and check in on Henry frequently.
It's Your Money - Money Musings - A cool blog. Here's what his description is: "Thoughts on my personal finances, goals, experiences, motivations, and accomplishments (or lack thereof)." Bookmark (or add it to your Bloglines account) this site and check back frequently.
The Kirk Report - An excellent and very popular investing blog. This site was even mentioned in Barron's as a great blog. He does syndicate his site (http://www.thekirkreport.com/index.rdf) so you can add him to your Bloglines (or whatever feed site you use) account. Thanks to Mike at TraderMike for helping me out with that one.
The Learning Curve by Muck Dog - Muck Dog? What a name (I wonder if it's an alias?). This site has a little bit of everything.
Man on a Mission - This is my other blog about mission statements. It is my goal to have mission statements from all types of companies, charities, and individuals as well as helpful hints on creating your own mission statement. Life without a mission just isn't worth living.
My Money Blog - Well, it's not MY money blog. It is Jonathan's actually. It is a blog about goal-setting and achieving. Here's Jonathan's description: "Stumbling along the path to financial freedom. Goals: $100,000 by mid-2007, $1,500,000 by age 55."
Neville's Financial Blog - Neville is a college student, graduating this Spring. This blog tracks his financial journey.
New Age in Personal Finance - A pretty new blog. His blog is about "Our financial journey toward early retirement and lessons learned along the way." He posts some pretty interesting stuff. He also has it RSS ready so you can add him to your Bloglines account.
PFBlog - This guy has put together a pretty nice personal finance site. He just did a re-design (which I think looks very nice). He takes the time to address important personal finance issues.
Phat Investor - This is actually a blog search engine. You can actually search blogs by ticker symbols. This is a great site to bookmark and refer back to daily.
Random Roger's Big Picture - I just found this site last night. Here's what Roger says his blog is about: "This is a stock market blog about portfolio management, navigating the current market environment, how to analyze and choose foreign stocks, exchange traded funds, options and the occasional musing about my wildland firefighting experiences. The point here is to share my process of analyzing markets and stocks. Hopefully you can learn a little from my approach even if you disagree with me on everything. I have nothing to sell, I just enjoy the writing."
The Real Returns - I'm glad I found this blog. This guy always has something interesting to say. I just wish I could make tables the way he does.
Savvy Saver - I like this blog (of course I do, I wouldn't post a link to it if I didn't!). She says: "No one ever says "when I grow up I want to live paycheck-to-paycheck", yet so many people do. I believe the fundamental building block to personal prosperity is learning to live below your means. It's not how much you make, but how much you keep." Makes a lot of sense to me.
Seeking Alpha - This is actually one of six blogs by this guy. Once you see this site, you will see what a mammoth undertaking it was to create it. This site is huge. He has an excellect Exchange-traded funds resource page.
Dan Sherman - The man with ideas. Check it out, you'll see what I mean.
Show Me the Money - This site is mostly about investing. He has some pretty cool ideas. But, PLEASE read his disclaimer first!
Simplify My Life - An online financial journal. Interesting stuff.
Stocks or Bonds - A blog with lots of indepth articles about various financial topics.
Taylor Tree - This is a trading blog. I'm not an advocate of day trading but I do realize that some technical training can come in handy. This is a cool blog.
Trader Mike - All about stock trading.
Well Spent (a Business Week blog) - A blog written by Amey Stone, a Senior Writer for Business Week Online. I just wish I could get my blog listed on their "Recommended Blogs" section. Maybe, just maybe my readers will help me out!? Full text!
Passed the 3,000 Hit Mark
Update - Monday, February 28th, 2004
So, I probably won't be able to post until later today.
Meanwhile, check out this interesting post by Murray over at the Capital Ideas Blog. I thought he did a really nice job talking about mutual funds and taxes.
Also, like all bloggers, I'm trying to build readership. If you are new to this site and like what you see, please tell your friends about it. Also, don't forget that you can subscribe (also known as Syndication) to this site using an RSS reader like Bloglines.
Gotta run. Have a great day. Full text!
Friday, February 25, 2005
Trusts & IRAs
You have read and studied up on IRAs and you are aware that you can pass on your Roth IRA to your kids and your kids can then stretch out their inherited IRAs over their lifetimes, allowing them to build the IRA into a sizeable nestegg over their lifetimes. But, you have concerns that they will simply cash out the IRA upon inheritance and blow it on a Ford Thunderbird. Is there anything you can do about it?
Yep, there sure is! It is called a trust. You can set up a trust, with the help of an astute estate planning or trust attorney, that will give you some control as to how much and when your kids can spend their inheritance. This is a great way to send the message "I'll always be around!" Your kids may not like it, but it is for their own good.
But, before you go off signing some expensive trust document, you better arm yourself with some important information first. If you mess it up, you could ruin your kids' opportunity to stretch their IRAs, defeating the whole purpose of the trust in the first place.
The very first thing you should do is read Ed Slott's Parlay Your IRA Into a Family Fortune. Read it from cover to cover. Then and only then will you be prepared to meet with an attorney. In fact, the book may give you information that your attorney may not even know yet! I'm serious about that. The concept of the stretch IRA is still pretty new and a lot of attorneys and CPAs have not yet grasped the significance of this concept. So, be prepared to educate them!
That's it for now. In my next few posts, I'll share with you what I know about trusts and what to be aware of. Keep in mind, I AM NOT AN ATTORNEY. I'm simply sharing helpful tips. Full text!
Is There Such a Thing as Good Debt?
From a clearly economic viewpoint, I would have to say that yes, there really is good debt. What is good debt? Well, a mortgage is good debt (as long as you don't take on more than you can handle). In fact, I am of the opinion that if the interest rate is low enough, a person should not hurry to pay off the loan. It doesn't make sense to me for a person pay off a low interest loan with money that could be invested at a higher rate of return. (I posted about this back in October)
Anyway, that's my two cents worth. Full text!
Thursday, February 24, 2005
Why it is Important to Start Saving When You're Young
If a 16 year-old could save and invest $1,000 per year for 3 years and then just let it grow until age 65, the account would be worth over $320,000 at age 65. And, that's assuming that they never added another dime to it.
Let's take it a bit further. Say they save for 3 years and skip saving while they are in college and then they start saving once they are out of college and starting a career. We'll assume that they can save the maximum allowed to be put in an IRA, which will be $5,000 starting in 2008.
For all you number lovers, here's what they look like:
Age Balance Additions Total ROR Balance
16 $1,000 $1,000 10% $1,100
17 $1,100 $1,000 $2,100 10% $2,310
18 $2,310 $1,000 $3,310 10% $3,641
19 $3,641 College $3,641 10% $4,005
20 $4,005 College $4,005 10% $4,406
21 $4,406 College $4,406 10% $4,846
22 $4,846 College $4,846 10% $5,331
23 $5,331 $5,000 $10,331 10% $11,364
24 $11,364 $5,000 $16,364 10% $18,000
25 $18,000 $5,000 $23,000 10% $25,300
26 $25,300 $5,000 $30,300 10% $33,330
27 $33,330 $5,000 $38,330 10% $42,163
28 $42,163 $5,000 $47,163 10% $51,880
29 $51,880 $5,000 $56,880 10% $62,568
30 $62,568 $5,000 $67,568 10% $74,324
31 $74,324 $5,000 $79,324 10% $87,257
32 $87,257 $5,000 $92,257 10% $101,483
33 $101,483 $5,000 $106,483 10% $117,131
34 $117,131 $5,000 $122,131 10% $134,344
35 $134,344 $5,000 $139,344 10% $153,278
36 $153,278 $5,000 $158,278 10% $174,106
37 $174,106 $5,000 $179,106 10% $197,017
38 $197,017 $5,000 $202,017 10% $222,218
39 $222,218 $5,000 $227,218 10% $249,940
40 $249,940 $5,000 $254,940 10% $280,434
41 $280,434 $5,000 $285,434 10% $313,978
42 $313,978 $5,000 $318,978 10% $350,875
43 $350,875 $5,000 $355,875 10% $391,463
44 $391,463 $5,000 $396,463 10% $436,109
45 $436,109 $5,000 $441,109 10% $485,220
46 $485,220 $5,000 $490,220 10% $539,242
47 $539,242 $5,000 $544,242 10% $598,666
48 $598,666 $5,000 $603,666 10% $664,033
49 $664,033 $5,000 $669,033 10% $735,936
50 $735,936 $5,000 $740,936 10% $815,030
51 $815,030 $5,000 $820,030 10% $902,033
52 $902,033 $5,000 $907,033 10% $997,736
53 $997,736 $5,000 $1,002,736 10% $1,103,010
54 $1,103,010 $5,000 $1,108,010 10% $1,218,811
55 $1,218,811 $5,000 $1,223,811 10% $1,346,192
56 $1,346,192 $5,000 $1,351,192 10% $1,486,311
57 $1,486,311 $5,000 $1,491,311 10% $1,640,442
58 $1,640,442 $5,000 $1,645,442 10% $1,809,986
59 $1,809,986 $5,000 $1,814,986 10% $1,996,485
60 $1,996,485 $5,000 $2,001,485 10% $2,201,634
61 $2,201,634 $5,000 $2,206,634 10% $2,427,297
62 $2,427,297 $5,000 $2,432,297 10% $2,675,527
63 $2,675,527 $5,000 $2,680,527 10% $2,948,579
64 $2,948,579 $5,000 $2,953,579 10% $3,248,937
65 $3,248,937 $5,000 $3,253,937 10% $3,579,331
Even at age 55, they could have over $1.3 million.
The point of all this is that if possible, it pays to start saving at a young age. So, to all you parents out there: teach your children well. Full text!
Wednesday, February 23, 2005
Make Sure Your IRA Can be Stretched
If you want to stretch your IRA, it is important that you do three things, according to Slott. Those three things are:
1. Name a beneficiary - make sure you read his book about who or what makes the best beneficiary.
2. Make sure your IRA custodial agreements allow for the stretch. Although most firms allow for the stretch there are some that do not. There are also firms that do not even know what a stretch is.
3. Roll company plan funds like 401(k)s into an IRA as soon as you can so that you don't miss out on the opportunity to stretch your IRA.
Those are a few things to think about. I urge everyone to read Ed Slott's book to learn all about stretching IRAs. Your family will appreciate it. Full text!
Kiplinger's Mutual Fund Guide
Here's a summary of what the best performing (based on average annual total return) mutual funds were over the last 20 years: Some of the funds may have front-end sales loads.
DISCLAIMER: These are NOT recommendations. Invest at your own risk.
Fidelity Contrafund (FCNTX) 16.2%
Meridian Growth (MERDX) 14.7%
Columbia Acorn Z (ACRNX) 16.6% - closed to new investors but other classes available
Dodge & Cox Balanced (DODBX) 13.9% - closed to new investors
Vanguard Wellington Inv. (VWELX) 12.4%
Dodge & Cox Stock (DODGX) 16.1% - closed to new investors
Davis New York Venture A (NYVTX) 15.6%
CGM Capital Development (LOMCX) 15.2% - closed to new investors
Mutual Beacon Z (Franklin) (BEGRX) 14.5% - closed to new investors but other classes available
FPA Capital (FPPTX) 17.9% - closed to new investors
Heartland Value (HRTVX) 15.9% - closed to new investors
Tamarack Enterprise S (TETSX) 14.5%
International small companies
International stocks - diversified
American EuroPacific Growth A (AEPGX) 13.8%
Long-term corporate bonds
AllianceBernstein Corporate Bond A (CBFAX) 9.9%
Short-term corporate bonds
FPA New Income (FPNIX) 9.2%
High-yield corporate bonds
Fidelity Capital & Income (FAGIX) 10.3%
Long-term municipal bonds
Smith Barney Managed Munis A (SHMMX) 8.3% Full text!
Want to Make the Big Bucks? Become an Economist!
Why are they getting paid so much? Scarcity! There just aren't a lot of economists out there. I remember when the college I went to actually quit giving economics degrees. Anyway, to all my aspiring readers out there, if you are looking for a career, consider economics.
Economists Gain Star Power (subscription required) Full text!
Tuesday, February 22, 2005
Thanks to Blogging About Incredible Blogs
Monday, February 21, 2005
How an Aging Population is Changing the Mind of the Market
The picture he uses is very similar to the one in Stephen Covey's The 7 Habits of Highly Effective People. Full text!
Stretch a Small Roth IRA
1. Only take out the Required Minimum Distribution (this link will show you how to compute the RMD) each year. The less money you take out, the longer the remaining money will be able to compound.
2. Invest the bulk of the IRA in equities. Over a lifetime, this will make a HUGE difference. Just take a look at the table below of an example of a 10 year-old inheriting a $10,000 Roth IRA.
So, you don't have to be "rich" to be able to leave a legacy. This is a much better way to leave an inheritance than just leaving money. Full text!
Facts About the Roth IRA
1. A Roth IRA does not give an upfront tax deduction like a Traditional IRA does. Instead, you put in after tax dollars today and in return you get tax free income in the future.
2. Unlike a Traditional IRA, there are NO mandatory distributions. This makes the Roth IRA a wonderful estate planning tool.
3. When a spouse inherits a Roth IRA, there are still NO mandatory distributions.
4. The inheriting spouse can name a new beneficiary. If structured properly, the new beneficiary will then be able to stretch the required minimum distributions from the IRA over their life expectancy. Best of all, there's NO income tax on these distributions.
5. The IRA owner can even name a grandchild or great grandchild as beneficiary, stretching the IRA even further.
Those are a few facts for now. In my next post, I'll show how even a small amount of money passed to a grandchild can have a real impact. Full text!
Happy President's Day!
If you can, try to enjoy the holiday. Full text!
Sunday, February 20, 2005
Spring is Almost Here!
Off Topic: Testing the Trackbacking Feature
Testing 1, 2, 3...
UPDATE: It worked! You can see for yourself here: Can We Talk About Trackback?
Blogger doesn't support trackback so I have to use Haloscan. It is a lot of work but I think it could turn out to be a pretty cool tool. Full text!
A Book Everyone Should Read
I'm hoping to make book reviews a habit. For one, it will help inspire me to read all the books I buy constantly. And, I might be able to help my readers find out about books they may not normally be interested in.
You are shopping for a lamp. You go to a store and you find the lamp you want for $100. You know there is a store down the street that has the same lamp for $60, or $40 less. Question: Do you go to the other store to save $40? Okay, now you're shopping for a dining room suite. You find it at a store for $4,600. Again, you know that you can get the same suite at a store down the street for $4,560. Now, do you go to the other store to save $40 on the dining room suite?
You'll have to read the book to find out what the authors thought about this. Despite the fact that this is a behavioral finance (just the sound of that can nearly put a person to sleep) book, don't let that scare you. It is a very interesting read.
Should You Leave Your 401(k) With Your Company?
1. Leave it where it's at, provided your ex-company will allow that.
2. Roll it over to your new company's plan. You might consider this in case you need to borrow funds from it (which I don't recommend).
3. Roll it over to an IRA.
Number 3 is CLEARLY the best option. Why? Flexibility! With an IRA, you can pretty much invest it how you want. Once it is rolled to an IRA, you can then convert it to a Roth IRA (yes, you will have to pay taxes on the rollover).
With a Roth IRA, you can take money out tax free when you need it. There are no mandatory distributions to worry about. Once you reach 59 1/2, you can withdraw how much you want when you want with NO TAXES. And, if you have read my stretch IRA posts (link 1, link 2), you already know about the powerful estate planning abilities of the Roth IRA.
So, in my opinion, if you leave a job and have money in your 401(k), roll it over into an IRA and then convert it to a Roth IRA as soon as you can. To learn more about IRAs and other retirement plans, read Ed Slott's two books.
DISCLAIMER: Consult your CPA or tax attorney before you make a decision. The purpose of this post is to give you ideas, not advice. Make the switch at your own risk. Full text!
Saturday, February 19, 2005
Smart Money Picks Update - Feb 13, 2005
These are the eight mutual funds on the cover of February's Smart Money:
Mutual Funds Mag Beg. Cur. %
Large-Cap Growth Symbol Date NAV NAV Ret.
Marsico Growth MGRIX 2/05 17.29 17.13 -0.93%
T Rowe Price
Growth Stock PRGFX 2/05 26.02 26.13 0.42%
Mosaic Investors MINVX 2/05 20.48 20.3 -0.88%
Mairs & Power
Growth MPGFX 2/05 68.11 67.55 -0.82%
Int. Equity BJBIX 2/05 30.98 30.72 -0.84%
EuroPacific Fund AEPGX 2/05 35.08 34.91 -0.48%
American Funds has a maximum front-end sales charge of 5.75% that has not been reflected in these numbers. Full text!
The Beauty of the Stretch IRA - An Example
Okay, here we go. First, we have to make some assumptions:
Amount of the Roth IRA at the owner's death: $100,000
Child's age upon receiving the IRA: 10
Child's life expectancy upon inheriting the IRA: 72.8 (see chart in the link above)
Expected rate of return on the Roth IRA during the stretch: 10%
Here's what the numbers might look like:
Account Life 10% Ending
Age Value Exp. MRD Growth Balance
10 $100,000 72.8 -$1,374 $9,863 $108,489
11 $108,489 71.8 -$1,511 $10,698 $117,676
12 $117,676 70.8 -$1,662 $11,601 $127,615
13 $127,615 69.8 -$1,828 $12,579 $138,365
14 $138,365 68.8 -$2,011 $13,635 $149,990
15 $149,990 67.8 -$2,212 $14,778 $162,555
16 $162,555 66.8 -$2,433 $16,012 $176,134
17 $176,134 65.8 -$2,677 $17,346 $190,803
18 $190,803 64.8 -$2,944 $18,786 $206,644
19 $206,644 63.8 -$3,239 $20,341 $223,746
20 $223,746 62.8 -$3,563 $22,018 $242,201
21 $242,201 61.8 -$3,919 $23,828 $262,111
22 $262,111 60.8 -$4,311 $25,780 $283,579
23 $283,579 59.8 -$4,742 $27,884 $306,721
24 $306,721 58.8 -$5,216 $30,150 $331,655
25 $331,655 57.8 -$5,738 $32,592 $358,509
26 $358,509 56.8 -$6,312 $35,220 $387,417
27 $387,417 55.8 -$6,943 $38,047 $418,521
28 $418,521 54.8 -$7,637 $41,088 $451,972
29 $451,972 53.8 -$8,401 $44,357 $487,929
30 $487,929 52.8 -$9,241 $47,869 $526,556
31 $526,556 51.8 -$10,165 $51,639 $568,030
32 $568,030 50.8 -$11,182 $55,685 $612,533
33 $612,533 49.8 -$12,300 $60,023 $660,257
34 $660,257 48.8 -$13,530 $64,673 $711,400
35 $711,400 47.8 -$14,883 $69,652 $766,168
36 $766,168 46.8 -$16,371 $74,980 $824,777
37 $824,777 45.8 -$18,008 $80,677 $887,446
38 $887,446 44.8 -$19,809 $86,764 $954,400
39 $954,400 43.8 -$21,790 $93,261 $1,025,871
40 $1,025,871 42.8 -$23,969 $100,190 $1,102,093
41 $1,102,093 41.8 -$26,366 $107,573 $1,183,300
42 $1,183,300 40.8 -$29,002 $115,430 $1,269,727
43 $1,269,727 39.8 -$31,903 $123,782 $1,361,607
44 $1,361,607 38.8 -$35,093 $132,651 $1,459,165
45 $1,459,165 37.8 -$38,602 $142,056 $1,562,619
46 $1,562,619 36.8 -$42,462 $152,016 $1,672,172
47 $1,672,172 35.8 -$46,709 $162,546 $1,788,010
48 $1,788,010 34.8 -$51,380 $173,663 $1,910,293
49 $1,910,293 33.8 -$56,518 $185,378 $2,039,153
50 $2,039,153 32.8 -$62,169 $197,698 $2,174,682
51 $2,174,682 31.8 -$68,386 $210,630 $2,316,926
52 $2,316,926 30.8 -$75,225 $224,170 $2,465,871
53 $2,465,871 29.8 -$82,747 $238,312 $2,621,436
54 $2,621,436 28.8 -$91,022 $253,041 $2,783,455
55 $2,783,455 27.8 -$100,124 $268,333 $2,951,664
56 $2,951,664 26.8 -$110,137 $284,153 $3,125,680
57 $3,125,680 25.8 -$121,150 $300,453 $3,304,983
58 $3,304,983 24.8 -$133,265 $317,172 $3,488,889
59 $3,488,889 23.8 -$146,592 $334,230 $3,676,527
60 $3,676,527 22.8 -$161,251 $351,528 $3,866,803
61 $3,866,803 21.8 -$177,376 $368,943 $4,058,369
62 $4,058,369 20.8 -$195,114 $386,326 $4,249,581
63 $4,249,581 19.8 -$214,625 $403,496 $4,438,451
64 $4,438,451 18.8 -$236,088 $420,236 $4,622,600
65 $4,622,600 17.8 -$259,697 $436,290 $4,799,194
66 $4,799,194 16.8 -$285,666 $451,353 $4,964,880
67 $4,964,880 15.8 -$314,233 $465,065 $5,115,712
68 $5,115,712 14.8 -$345,656 $477,006 $5,247,061
69 $5,247,061 13.8 -$380,222 $486,684 $5,353,523
70 $5,353,523 12.8 -$418,244 $493,528 $5,428,807
71 $5,428,807 11.8 -$460,068 $496,874 $5,465,613
72 $5,465,613 10.8 -$506,075 $495,954 $5,455,491
73 $5,455,491 9.8 -$556,683 $489,881 $5,388,689
74 $5,388,689 8.8 -$612,351 $477,634 $5,253,972
75 $5,253,972 7.8 -$673,586 $458,039 $5,038,424
76 $5,038,424 6.8 -$740,945 $429,748 $4,727,228
77 $4,727,228 5.8 -$815,039 $391,219 $4,303,407
78 $4,303,407 4.8 -$896,543 $340,686 $3,747,550
79 $3,747,550 3.8 -$986,197 $276,135 $3,037,488
80 $3,037,488 2.8 -$1,084,817 $195,267 $2,147,938
81 $2,147,938 1.8 -$1,193,299 $95,464 $1,050,103
82 $1,050,103 0.8 -$1,050,103 $0 $0
So, based on these numbers, if the grandchild only took the minimum required distibutions each year and left the rest of the IRA to grow, she could potentially take a total income of over $14 million off a $100,000 IRA!
That is some pretty fascinating stuff if you ask me. Full text!
Friday, February 18, 2005
Retirement Withdrawal Strategy
Here's the case:
A guy retires with $2,500,000 in capital. He desires a $100,000 in income the first year. He has his portfolio invested 65% equities and 35% fixed income. We'll assume a 10% rate of return on the equities and a 3% rate of return on the fixed income. To figure out the expected return on the entire portfolio, you simply multiply the allocation percentages by their expected returns and add the numbers together. Like this:
.65 X .10 = .065
.35 X .03 = .0105
Total = .0755 or 7.55%
So, we will assume a portfolio rate of retun of 7.55%. We'll also assume that his income need will increase at the same rate as inflation, which is 3%.
My strategy is to put three years' worth of income needs in a cash account. Then each year, simply withdraw one more year's worth of income from the investment account and put it into the cash account. If he has a really bad year in the market, he could forgo withdrawing money that particular year, giving him flexibility.
Here is my method for looking at the numbers:
The first thing is to figure out his three years of income needs. Here's a look at how his income needs might grow assuming a 3% inflation rate:
A quick summation tells us that he needs to withdraw $309,090 at the beginning of year one to fund his cash account. This is what his annual numbers would look like:
YR Investments Cash Needs Balance ROR Balance
1 2,500,000 $309,090 2,190,910 7.55% $2,356,324
2 $2,356,324 $103,000 2,253,324 7.55% $2,423,450
3 $2,423,450 $106,090 2,317,360 7.55% $2,492,320
4 $2,492,320 $109,273 2,383,048 7.55% $2,562,968
5 $2,562,968 $112,551 2,450,417 7.55% $2,635,423
6 $2,635,423 $115,927 2,519,496 7.55% $2,709,718
7 $2,709,718 $119,405 2,590,313 7.55% $2,785,881
8 $2,785,881 $122,987 2,662,894 7.55% $2,863,942
9 $2,863,942 $126,677 2,737,265 7.55% $2,943,929
10 $2,943,929 $130,477 2,813,451 7.55% $3,025,867
11 $3,025,867 $134,392 2,891,475 7.55% $3,109,782
12 $3,109,782 $138,423 2,971,358 7.55% $3,195,696
13 $3,195,696 $142,576 3,053,120 7.55% $3,283,630
14 $3,283,630 $146,853 3,136,777 7.55% $3,373,604
15 $3,373,604 $151,259 3,222,345 7.55% $3,465,632
16 $3,465,632 $155,797 3,309,835 7.55% $3,559,728
17 $3,559,728 $160,471 3,399,257 7.55% $3,655,901
18 $3,655,901 $165,285 3,490,616 7.55% $3,754,158
19 $3,754,158 $170,243 3,583,914 7.55% $3,854,500
20 $3,854,500 $175,351 3,679,149 7.55% $3,956,925
21 $3,956,925 $180,611 3,776,314 7.55% $4,061,426
So, as you can see, assuming the assumptions hold true, this guy's portfolio should continue to grow and give him a sizeable amount of income.
Now, it's time for the lovely DISCLAIMER: This is meant to be an example or model ONLY. Invest at your own risk. Full text!
Thursday, February 17, 2005
I was catching up on my reading tonight and I read an article in the WSJ regarding CEO pay. The article was talking about measures that are currently being taken to make companies divulge more information about their executive pay packages.
I am all for 100% transparency! If a company is publicly traded, I think the public has EVERY RIGHT to know how much their executives are being paid. Don't get me wrong, I am an American capitalist all the way. But, I'm fed up with CEOs who take the helm of a company, run it into the ground, and waltz off with tens of millions of dollars.
Well, that's my rant for the day. Full text!
1. Keep costs low
2. Watch portfolio turnover. The lower the better
3. Pick a fund that doesn't advertise.
4. Pick a fund family that regularly closes funds that have grown to big or become too popular.
5. Pick a privately owned family of funds.
6. Pick a fund family that has limited offerings.
7. Don't just look at past performance.
8. Consider a team-managed fund
9. Stay away from funds with lots of volatility.
That's it. If you want to know more, check out his column. Full text!
Tuesday, February 15, 2005
Stretching an IRA
In the second book, Slott talks about stretching an IRA. I gotta tell you, this is HUGE! Stretching an IRA means that a person can name a beneficiary to their IRA. When the owner of the IRA dies, the beneficiary becomes the new owner of the IRA. Mandatory distributions must begin, but they are based on the beneficiary's age (see table below).
Life Life LifeHere's an example of how this works: A father has $250,000 in his Roth IRA when he dies. He has named his 35 year-old daughter as his beneficiary. For easy math, we'll say that the father's estate is valued below the exemption (more on this in a later post).
Expectancy Expectancy Expectancy
Age Factor Age Factor Age Factor
0 82.4 38 45.6 76 12.7
1 81.6 39 44.6 77 12.1
2 80.6 40 43.6 78 11.4
3 79.7 41 42.7 79 10.8
4 78.7 42 41.7 80 10.2
5 77.7 43 40.7 81 9.7
6 76.7 44 39.8 82 9.1
7 75.8 45 38.8 83 8.6
8 74.8 46 37.9 84 8.1
9 73.8 47 37 85 7.6
10 72.8 48 36 86 7.1
11 71.8 49 35.1 87 6.7
12 70.8 50 34.2 88 6.3
13 69.9 51 33.3 89 5.9
14 68.9 52 32.3 90 5.5
15 67.9 53 31.4 91 5.2
16 66.9 54 30.5 92 4.9
17 66 55 29.6 93 4.6
18 65 56 28.7 94 4.3
19 64 57 27.9 95 4.1
20 63 58 27 96 3.8
21 62.1 59 26.1 97 3.6
22 61.1 60 25.2 98 3.4
23 60.1 61 24.4 99 3.1
24 59.1 62 23.5 100 2.9
25 58.2 63 22.7 101 2.7
26 57.2 64 21.8 102 2.5
27 56.2 65 21 103 2.3
28 55.3 66 20.2 104 2.1
29 54.3 67 19.4 105 1.9
30 53.3 68 18.6 106 1.7
31 52.4 69 17.8 107 1.5
32 51.4 70 17 108 1.4
33 50.4 71 16.3 109 1.2
34 49.4 72 15.5 110 1.1
35 48.5 73 14.8 111+ 1
36 47.5 74 14.1
37 46.5 75 13.4
The 35 year-old daughter becomes the owner of the $250,000 IRA. She must take a mandatory distribution every year. The first year's distribution would be $5,155 (to compute this, divide the account value by the life expectancy number for the appropriate age [$250,000/48.5 = $5,155]. The rest of the IRA continues to grow until the next year. Also, since this is a Roth IRA, the withdrawals are tax-free!
To compute the second year's distribution you simply divide the IRA balance by the life expectancy minus one year (48.5 - 1 = 47.5). For year 3, 46.5. This is not rocket science.
It doesn't take a genius to see that this can be an excellent estate planning tool.
To learn more about the stretch IRA, check out Slott's books.
NOTE: Remember to consult your CPA or tax attorney BEFORE you do anything. Full text!
States Mull Charging Drivers by the Mile Full text!
Monday, February 14, 2005
I'll post some of my thoughts about the book in a later post. I'm trying to hurry through it first because I have his follow-up book coming from Books A Million. It will probably get here today. Full text!
Sunday, February 13, 2005
The Cost of College
I found a review written by John O. McGinnis (Wednesday, November 17, 2004) of the book Going Broke by Degree - by Richard Vedder. So, this post will be a review of a review.
The review mentioned the following theories as to why the cost of going to a university is increasing so quickly:
1. Universities face only limited market discipline because they (and their professor workers) lack a clear metric of performance, such as profits.
I agree with this theory. Every time I turn around I see another article or news story about how the cost of college is expected to increase, which becomes a self-fulfilling prophecy. In essence, we are giving colleges and universities the opportunity to raise prices because it is expected of them.
2. Government, with its subsidies and loans, has confused the real costs of college, making it harder for parents to judge which college is the best bargain. And government has raised college costs by imposing a host of regulations concerning everything from admissions to animal research.
3. The premium for intelligence is rising in the business world. The research departments at universities must compete with the Microsofts, Intels and other companies in the business world for tallented researchers. So, they must pay more, which leads to higher administrative costs. Guess what that leads to? That's right, higher tuition.
4. Much of the benefit fo going to a university is the social network it generates. This leads universities to spend lavishly on fancy dorm rooms and big swimming pools.
My next post will discuss a couple of ways to reduce college costs. Full text!
Shopping for Kid's Clothes
The hardest part about buying clothes now for next year is guessing how big your kids are going to be then. It is really hard with babies. By this fall, who knows how big she'll be. The older boys are somewhat easier to buy for. You can pretty much estimate that they'll be in the next biggest size.
The impact of 75% off sales is huge. I think last year we bought $800 worth of clothes for around $200. You can't beat that. Full text!
Friday, February 11, 2005
Here's the link to the story:
Up to 70% interest - credit card aimed at the poor Full text!
Question of the Day: Why Does the Cost of College Increase so Quickly?
The Cost of College
Please keep in mind, these are just estimates!
She will be ready for college Fall 2023, which is 18 years away.
Inflation Year Year Year Year Total for
Rate 1 2 3 4 For Years
5% $38,381 $40,300 $42,315 $44,431 $165,426
6% $45,521 $48,252 $51,147 $54,216 $199,137
7% $53,903 $57,676 $61,714 $66,034 $239,327
8% $63,729 $68,827 $74,333 $80,280 $287,168
As you can see, it's not a pretty picture. Maybe she can get a scholarship!
The purpose of this post was to give you something to think about. My next post will address ways to save for college. Full text!
Thursday, February 10, 2005
Beware of the Advisor who "Writes" His Own Book
Here's what this advertisement promises to do:
"Include your introductory chapter - which you will write with our editorial guidance and support - more quickly and easily than you may think."
"Make you the expert - after all, you "wrote the book"!"
Isn't this the same as lying?
Blogging About Incredible Blogs
Click on the link and then save it to your favorites. Or, better yet, set up a Bloglines.com account and add Blogging About Incredible Blogs to your list of blogs that you follow. Trust me, you won't regret it. This guy, Ken Leebow, has dedicated himself to finding the best and most interesting blogs out there and he writes about them.
However, SOMEHOW AllThingsFinancial has escaped his radar! Imagine that! I am hoping it is because he is busy and not because he thinks I have a bad site.
Anyway, do as I say, you won't regret it.
Also, if you follow this blog at all, you can see that I have been adding a lot of links lately. Eventually I would like to have a page dedicated to links with a description of each link. Sometime when I have some time I'll work on that.
I'm going to finish up my taxes today. We should be getting a sizeable refund. We had a baby last year and she impacted our taxes in a positive way (however, I'm sure we still spent more in diapers!). All I can say is God bless tax software. I wouldn't even want to attempt my taxes the "old" paper way.
Have a great day!
Wednesday, February 09, 2005
Tuesday, February 08, 2005
I wish I would have seen this BEFORE I bought my tax software. Oh well, such is life.
12 Ways to Build a Nest Egg for Retirement
1. Save early and save often, starting NOW.
2. Don't forsake the stock market. Stocks are likely to offer your best chance for long-term growth. Use a diversified portfolio to balance risk and reward.
3. "Buy low and sell high." Rebalance your portfolio annually as a good way to build your walth for the future and to keep from getting burned now.
4. Get your employer to save for you. Contributel at least enough to your 401(k) to get the full employer match.
5. Follow the money. Get a handle on what you spend each month, plug leaks in your budget and divert savings to your retirement fund.
6. Take advantage of tax-free savings. Over two decades, you'll pile up almost $200,000 (assuming 10% annual returns). In a Roth, it's all tax-free in retirement.
7. Catch up to your savings. If you're at least 50 years old, take advantage of "catch up" rules that let you stash even more in 401(k)s and IRA tax shelters.
8. Back to the future. You're likely to spend 25% of your life in retirement. Dedicate a quarter of raises and bonuses to your retirement fund.
9. Don't let benefits slip through your fingers. Check your annual social security benefit statement for accuracy and know how much you can count on from Uncle Same. Check out Social Security Administration.
10. Protect your money. Empy nester? Consider trading excess life insurance for a long-term-care policy to protect your next egg from nursing home bills.
11. Rehearse for retirement. One year to go? Rehearse by drawing up a retirement budget and living within it.
12. Profit from your profits. Use tax-free profit from the sale of your home to feather your nest egg.
There you have it. I thought these were worth sharing.
Monday, February 07, 2005
Mutual Fund Fees
A better way to calculate what the average investor is paying in fees is to use the dollar-weighted average fee. According to Lipper, calculated this way, the average fee is .936%. That's quite difference! Why is there so much difference? It is because most of the investors and most of the money is invested in the bigger mutual funds which typically have lower costs.
So, the next time you are sitting with your broker and he or she tells you "this mutual fund has a below average expense of 1.25%..." you can correct them.
Link: How to Look at Mutual-Fund Fees
Sunday, February 06, 2005
Now Is a Great Time to Buy a Bike
Granted, the "new" Mongoose bikes are NOT the same as the old Mongoose bikes since Mongoose was bought out a few years ago. Now, they are mass produced and priced to sell. But, $34.98 for any bike is a good deal.
Friday, February 04, 2005
Anyhow, it will be interesting to see how this plays out. The first step is to get the plan approved. I think it is a long shot. Full text!
Thursday, February 03, 2005
Eagles Fans Go All Out to Make Super Bowl Trip
Are Dividend-Paying Stocks a Good Deal?
Wednesday, February 02, 2005
First off, the day started off on a bad note. I took my wife's Honda in for an oil change and mentioned to the service attendant that the "check engine" light came on. They did a diganostic test ($80) and told me that I have a cracked manifold and a leaky seal. I about fell out of my chair when he told me that it would cost over $1,750 to fix! Needless-to-say, I'm going to shop around.
While I was there waiting for 2.5 hours, I read today's Wall Street Journal. If you don't subscribe to the WSJ, you should. It is well worth the $200 per year subscription price. If you don't want to pay that much for print, you can do the electronic version for something like $90 per year (which also includes Barrons).
Anyway, here are the interesting things I saw in today's WSJ:
Andy Kessler thinks SBC's purchase of AT&T will prop up SBC for a while. I take it to mean he isn't too fond of SBC. Time will tell.
American Express is planning to spin off it's advisory unit. They have found that trying to be a financial "supermarket" isn't the way to go. In fact, the brokerage (or advisory) unit has been dragging down American Express. It is probably due to the fact that their mutual funds are subpar and had $5 billion yanked out them by investors last year (2004).
It seems the wealthy (those who have investable assets of $500,000 or more) are losing their trust in their advisors. That is according to a survey that was done recently. The article claims that many people are switching firms due to hidden fees and poor investment results.
Finally, worried employers are starting to put their employees into automatic 401(k) plans. Employees can opt out of them if they choose. This is a pretty interesting idea. Hopefully more companies will follow suit. Full text!
Tuesday, February 01, 2005
ETFConnect Full text!
The title says it all: "... Dot-Com Investors." Maybe the author of the article should go back and read Benjamin Graham's The Intelligent Investor. If they had read Graham's book, they would have changed the title to "...Dot-Com Speculators."
Sure, I feel for the people who bought stocks based on hyped-up analyst reports. I think that the big brokerage firms should pay for their evils. However, I also feel that personal greed played a huge role in the dot-com bubble. My dad told me about how one of his friends retired from a long career and put EVERYTHING into WorldCom stock! Everything! Now this guy is selling shoes!
The point of all this is: Have a diversified portfolio with an asset allocation plan and STICK WITH IT through thick and thin. If you have some extra money that you want to play around with, go for it. But, realize that you are gambling and you shouldn't expect any return on your gamble.
That's my rant for the day...