Why is this?  It’s because they have the presence of mind to step back and look at the big picture.  Remember the chart in the last article (below) about saving money in an IRA for 50 years?

Look at the early years in that graph.

That was a test.

What are the early years?  The first one, two, three?  There’s hardly any difference between that and the start.  “You mean I’ve been investing for three years with you now and I’ve hardly made anything?  I’ll never get anywhere!”

If only I didn’t hear that, like, all the time!  But that’s not the end of the “early years”.  I’m not talking about 3 years, or 5 years, or 10 or 15 years.  I’m talking about 20 years before you really see the difference in that case, after which the growth really starts to become noticeable and just accelerates from there.  This is why you should start as early as possible, build a trusting relationship with a competent advisor, and then be almost impossibly patient.  I’m not suggesting that you buy-and-forget.  On the contrary, you should be working with an advisor who is not afraid to take time with you and educate you.  What I’m suggesting is that you realize that it will take time, but if you do it, time will be on your side.

Now, what if you want your money to grow faster that what we see in the chart?  Can you do that without saving anything more?  It’s possible, but it involves more risk than you might be comfortable with.  A much better approach is to continually add to that savings, every paycheck.  If you budget properly, you’ll make that a key part of your planning and you’ll pay yourself first!

Let me say that again.  Pay yourself first.  I doubt that there are three more important words that anyone will ever say to you, unless they are “I love you”.  You don’t need a new car as much as you need to have the choice to retire someday, preferably when you want to.

Want to know more?  Let’s talk, and create a plan that’s right for you and your family.

This is the kind of question that depends completely on you.  By that I mean it depends on your goals and your needs.  Let me explain a little more about what your options are.  If you might need access to that money in the next few years, then you might not want to put it in an IRA or a company 401(k) where there’s a penalty to take it out before you’re age 59 ½.  In that case, you’ll pick a regular taxable brokerage account for the money.

Or, maybe you know you’re okay with having it locked away until retirement (because you actually have a budget and you actually follow it), so the money is going into some sort of retirement savings plan, but which?  The three most basic choices are a company 401(k) plan, a traditional IRA, and a Roth IRA and the decisions revolve around company matching funds, vesting schedules, investment choices and tax considerations.

In the case of a company 401(k), employees typically can save 15% of their gross income, up to $16,500 (in 2009).  That money will be deducted from the gross income used to calculate how much tax you owe, and accordingly, a lower amount of tax will be withheld from your paycheck.  You will eventually have to pay taxes on the money, but you can defer them until much later.  The following chart shows just how wonderful that is.

In this example, we assume that you got $10,000 at age 20 and put it in a tax-deferred account, then never invested anything else after that.  We also assume that you earn 10% on average for the next 50 years, which is do-able, and that you’re in the 25% tax bracket.

The orange line shows what your account would be worth if you paid the taxes due on your earnings from the account every year.  The green line shows what would happen instead if you deferred the tax bill to the end, and the sharp drop in the green line is what would happen if you took all that money out at once at age 70 and therefore had to pay all the tax at once, which I wouldn’t recommend.

In addition, companies often match a portion of your contribution as an incentive to work there.  It’s common for a company to put 50 cents in your account for every $1.00 you put in, up to a pre-defined (by the company) limit.   One company I used to work at matched at that rate up to 6%, meaning that when I put 6%, they’d put in 3%.  If I put in 5%, they’d put in 2.5%.  But 6% was the limit, so if I put in 6.5% or more, they were still maxed at 3%.

That’s a pretty good deal.  If you work at a company which matches, put in at least that amount necessary to get the maximum match.  If you don’t, you’re leaving free money on the table, subject to the vesting schedule.  In some companies, you are 100% vested from day one.  That means that, should you leave the company, you’re entitled to 100% of their matching contributions in addition to your own money.  Often, however, companies will choose to have a 4- or 5-year vesting schedule.  This means that, after one year of employment, you’re entitled to 1/4^th or 1/5^th of their matching contributions if you leave, and only after 4 or 5 years are you entitled to the full amount of the match.  So, if you’re thinking that you won’t be there that long, the match is much less important.

Now, what about the other 9% (in my example)?  What to do with that?  Now it gets a little more complicated.

You could put that extra money in the 401(k) and get more of a tax benefit, but keep in mind that there are literally thousands of investment choices out there, and you only have access to a dozen or so through your plan at work, not all of which are likely to be good ones.  A tax benefit is nice, but if the investment choices underperform, it may not be everything you hoped.

You might instead choose to have a traditional IRA with a brokerage firm, because up to certain income limits, you may still be able to deduct your contributions, and you’re getting a bigger world of investment choices with the help of a professional advisor.

If you’re getting a big tax refund already, you might not need further deductions and could instead choose to put the money in a Roth IRA, which doesn’t give you any tax-deduction NOW, but instead it allows all of the earnings to grow completely tax-free, provided you adhere to a few fairly easy rules.

In the case of either type of IRA, your savings limit for 2009 is $5,000 per person, or $10,000 for a married couple, and it doesn’t matter if both spouses are employed.  If you’re 50 years of age or older, you’re entitled to a “catch-up” contribution of an extra $1,000.

If that’s not enough or you just want to save more, there’s another level of options not commonly known which we can implement which might be the right thing for you.

The keys are to do it – the earlier the better.  If you have questions or would like me to help, contact me now and let’s get started.

Lots of people are asking this question lately.  I thought it would be a good time to clarify what I said a few weeks ago about not looking at your primary residence as an investment.  Some people thought I meant they should just continue to rent their living space instead of buying it.  That couldn’t be further from the truth, so let me explain in more detail.

When you buy a house, you are admittedly taking on a huge responsibility, but one which can pay off handsomely down the road.  My parents bought a house in 1964 and took out a 30-year fixed mortgage.  The monthly cost of that mortgage was pretty tough for them to swallow in 1964, but in 1984, when they were still paying $296.00 per month, it was a pretty sweet deal!

The logical conclusion from that is to buy as much house as possible, but don’t overbuy.  Doing that is part of what got us into the huge mess we’re seeing right now, with record foreclosures.  Don’t be afraid of that happening, but also don’t forget that “huge responsibility” part.  Buy what you can afford – you can always trade up later when the time is right.

Now, what was I saying about that not being an investment?  Just remember, even though it is likely to go up in value over time, that money is tied up unless and until you sell the house, but if you do that, you have to buy something else or rent, because you still need a place to live.  The other important consideration is that if you live there for five, ten or more years, you will probably have to replace carpet, paint, perhaps some appliances, maybe even the roof!  That’s not money being paid TO you, which is what an investment is supposed to do.

Contrast that with a rental house, where, for example, you might pay $1000 per month for the mortgage, taxes and insurance, and rent it out for $1200.  That’s $200 per month INTO your pocket, which is what a good investment is all about.

So, bottom line, buy a house if you can, because the alternative is to pay rent, which is exactly the same thing as paying someone else’s mortgage for them.  Just don’t buy more than you can afford and put the rest into real investments, both in the stock and bond markets as well as in real estate.

Contact me if you’d like a professional to help you with doing that!

“Oh, my gosh!  Did you see what happened in the stock market today?  It was down almost 120 points!”

Ever heard that before?  If you haven’t, you will.  The question is: should you listen?  The answer is: only if you like being really depressed one day and really excited the next day, because that’s typically what happens?  Sometimes we get really good days back-to-back and sometimes really bad days a few times in a row, but that’s still not stepping back far enough.

Let’s say you’re 40 years old, and you started putting money into the stock market 20 years ago.  The S&P 500 was trading at approximately 340 points, compared to nearly 10,000 today.  Or maybe you’re 50 and your start was 30 years ago.  The S&P 500 then was trading for about 100 points.  So between 1979 and 1989, the market tripled.  Between 1989 and 2009, the market grew by 33 times!

Isn’t that a better concept to stick in your mind than what most of the media is alarming you with lately?  Like a market down about 33% in the past two years?

The only reason – at all – to be concerned about the short term in the market is if you plan to retire in the next few years.  If you’re younger than that or if you like your job, you should be taking advantage of the magic of compounding returns to get you in a position where you have choices!  Having the choice to work or not work is a whole lot better than needing to work to make ends meet.  That’s when you might have no choice but to be really aggressive, which can hurt a lot if things don’t go the way you hoped.

And don’t listen to people who say you can’t be too conservative, because you can be!   Remember my article (below) about the Rule of 72.  If you put all your money into CDs right now, your money will grow at a rate lower than inflation.  I don’t know about you, but I’d like my money to double sooner than three to four (or more) decades!

Still confused about the right thing to do?  Let’s talk, and create a plan that’s right for you and your family.