When you were young and looking for the proper babysitter for your child, no stones were left unturned. Character, accountability and track records were all important. The same—and more—criteria should be applied to the person and/or institution that guides you in growing your assets. Your approach does not have to be complicated. Indeed, the better you understand the suggested plan of action, the more likely you are to monitor the progress. I believe input from you is the foundation on which your roadway to retirement should be built. There was an article in the January/February 2010 Money magazine entitled “Investing Made Simple” that offered some guidance. First, it was suggested that you don’t obsess over the best investments. Instead of searching for the hottest new investments, consider assembling a group of tried and true assets that give you a diversified portfolio. Don’t think of investing as a sprint rather than a marathon. Focusing on the short term could result in a portfolio holding more volatile investments that seek big short term gains versus a steadier, less bumpy approach using a longer term perspective. Be aware of the costs associated with your portfolio. Finally, keep your own emotions in check. When the market is “hot”, resist the temptation to plow money into risky assets. Maintain your composure and stick with your plan. It should work for you in the long run.
Taxes can also affect your retirement income. It is pretty obvious that taxes are going up for everyone, regardless of campaign promises. Proper use of 401(k) and IRA’s may provide relief in several areas. The March 10, 2010 Wall Street Journal Online offered guidance in an article “Five Reasons Tax Shelters Are More Important Than Ever”. In this article, the term “tax shelters” refers to 401(k) plans and IRA’s, not exotic off shore ventures. In many states, assets in IRA’s are shielded from creditors. The earlier money is placed in IRA’s, the greater the potential for account preservation. When deciding on what assets to put in the IRA, or what class of assets to use in a sheltered account, you may want to consider using fixed income investments as part of your IRA portfolio.
When you have a portfolio whose return is basically from interest bearing securities, it is taxed at the higher ordinary income rates. When tax rates go up the shelter of the IRA becomes more valuable. For those of you who are accumulating assets for a college education, the money in an IRA/401(k) does not count against you in the federal formula when applying for financial aid. For these and many other reasons, perhaps you should dedicate more of your savings to the shelter of a qualified retirement plan. As always, I have to remind you that investing involves risk, including possible loss of principal. No investment strategy, including diversification, can guarantee a profit or protect against loss in periods of declining values. Past performance is not a guarantee of future results.
If you are past the accumulation phase of retirement and in the spending phase, here are some ideas from a February 22, 2010 Morningstar online article. Remember that these are general recommendations and before taking any action, you should consult with your personal tax advisor. If you are over 70 ½, your first distributions should come from your IRA’s that have required minimum distributions. After the RMD is satisfied, if you still need cash, draw from your taxable assets, starting with your assets with the highest cost basis. Next, move to accounts funded with nondeductible contributions. If you are still short, return to the traditional IRA funded with pretax dollars. Your last source will be the Roth IRA, if you have one. To help you with this schedule and to discuss the “buckets of assets” you will need during retirement, schedule an appointment with your financial advisor. This appointment is important because individual situations can vary and any information in this article should be relied on only when coordinated with your individual professional advisor. Sorry, but my compliance department requires this verbiage.
Since we have been stuck on retirement in this discussion, let me share some words from Eugene Peterson in his book “Living the Message”. He talks about the difference between a job and a profession, saying that “a job is what we do to complete an assignment; that we give satisfaction to whomever makes the assignment. We learn what is expected and we do it. There is nothing wrong with doing jobs. But professions and crafts are different. In these we have an obligation beyond pleasing somebody; we are pursuing or shaping the very nature of reality, convinced that when we carry out our commitments, we actually benefit people at a far deeper level than if we simply did what was asked of us. With professions, the integrity has to do with the invisibles; for physicians, it is health; with lawyers, it is justice; with professors, learning and with pastors, it is God”. From 1 Timothy, “Teach believers with your life; by work, by demeanor, by faith, by integrity”.
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