Does “buying low/selling high” apply to retirement?

Did you know I LOVE LOVE LOVE getting emails from PDITF readers!? It’s nice to break up the spammy sponsored blog post proposals that typically flood my inbox. “Dear Ninja, I would like contribute relevant financial information to blog readers of your fine website”. 

Emails like that make me want to stab my eyeballs out with a jalapeno.

jalapeno eye

That’s why I was pleasantly surprised to get this email from a reader….

Ninja,

I have a question about buying low and selling high. Does this apply to retirement accounts as well?

I have nearly 40k in my 401k, nearly all a ROTH. I put in 12% of my income in and my employer matches 4%. Given that the markets are what I would consider “high,” does it not make sense to sell now and move my accounts to cash?

I tried doing this through my Fidelity account, but did not have a cash option, everything was in funds or bonds of some sort. When I contacted a representative on how to do this I was asked why am I doing this, that this is not the point of a 401k, and that it would benefit me to stay in the market, for the long term.

Thanks!

Ahhh, pretty simple question “Should I buy low and sell high?” 

The answer is even more simple…. YES!!!!!

Only problem is, no one knows what “high” or “low” means. People were freaking out when the Dow dropped under 10,000. They thought 9,000 was an insane deal and it was time to buy. Little did they know, the markets would shed another 25%.  

I think your Fidelity rep is spot on. Maybe the markets hit 16,000 next month, or maybe they drop to 13,000. Since I have no way of knowing what’s going to happen I just invest consistently every month. That means I bought in when the market was in the 6’s and I’m buying now in the 15’s.

Don’t get me wrong. I know the markets have been extremely bullish the last couple years. A correction will surely come. But is that correction going to be from 20,000 back to 17,000? Or will it be from 15,000 down to 12,000? Will it be six months from now, or six years?

I CAN accurately predict the market will go up and down, but I CAN’T get any more specific than that.

And for that reason, I’ll stick to boring old unemotional dollar cost averaging in my retirement accounts.

Should I accept a free financial consultation?

goldilocksgoldilocks

goldilocks

A few months ago, I signed up for a new money management website called Personal Capital. It’s a competitor to Mint.com and apparently was founded by the former CEO of PayPal. I decided to give the new guys a shot and set up all my accounts shortly after they launched. After a few weeks of use, I decided it wasn’t for me and that I’d just stick with Mint. Haven’t logged in to the site for a couple of months now.

Personal Capital (PC) was out of sight and out of mind… until yesterday, when a financial advisor from the company left me a voicemail. Apparently PC prides itself on its investment portfolio analysis tools, and as a benefit to new members they offer a free consultation with one of their financial advisors.

I find this both intriguing and creepy. I haven’t called the advisor back yet because I’m kind of skeptical of what can really be accomplished in a 30 minute phone call. Me thinks it will be more of a sales call, than a productive advising session.

But then another part of me figures “What the heck, it’s free.” Might as well give it a shot right? Even if the guy is super sleazy and just tries to sell me on more advising sessions or investment products, I’ll at least get to write an epic blog post about the call, right?

I’ve never consulted with a certified financial planner before. I’m definitely open to the idea (especially if that consultation is free), but I don’t want my first experience to be a bad one and I fear this could be exactly that.

If someone from Personal Capital, Mint, or your bank called you and offered a free consultation on your investment portfolio, would you take them up on it? Or should one only consult with a neutral, third-party, financial advisor? Should I return the voicemail? Anything I should ask the advisor if I do?

 

A 5% discrepancy could means millions.

Just about every personal finance guru has an opinion on how much you should contribute to retirement. Their suggestions usually falls between 10% and 20% of your gross income. For as long as I’ve been at this personal finance thing (since 2007), I’ve decided to contribute no less than 15%.

Here’s what my retirement contributions look like for 2013…

401K: 13% of gross income

Roth IRA: $5,000 (which is 6.5% of gross income).

As our income has increased, we’ve been able to send more discretionary income to retirement, nearly 20% of my income. There’s something missing though, I also get a 5% match from employer in the 401k. So that really means about 25% of my pre-tax income is being stashed away for future me.

But when the gurus talk about retirement, what satisfies their stated 15% threshold? Is it simply what the individual contributes, or is the company match factored in to that equation? Or in other words, would Dave Ramsey say I’m investing 20% towards retirement, or 25%? 

It’s an interesting question, one that could literally mean the difference of a $1,000,000+ come retirement.

When I asked this question on twitter, I got a 50/50 split. Half said they count the match towards their goal, while the other half said they pretend like the match doesn’t exist.

I-R-HoorAy, ho, hey, ho.

stupid brain

It’s a good thing I have a cousin-in-law that works for a Wells Fargo retail branch. He always fills me in on things I need to know about the companies personal banking products (Girl Ninja and I are WF clients). Normally I’d be all about a local credit union or community bank, but Wells Fargo has a product line called the Portfolio Management Account (PMA) that is pretty swaggerific.

It has some standard benefits like free checking, free cashiers checks, custom ATM cards; but the thing that really makes it stand out from the competition is the fact that a PMA member can make 100 free trades each year through their Wells Fargo brokerage account. The $30 annual fee for these types of accounts is also waived.

If you have the assets necessary to qualify, the PMA package is pretty much the best thing out there. Or at least that was true 10 days ago.

On March 31st, my cousin-in-law informed me that the 100 free trades benefit was disappearing on April 1st. Wells Fargo now charges a $6.95 per trade fee to any newly opened PMA accounts. That’s not an excessive amount by any means (E*Trade is $8), but that’s a heck of a lot more than the $0 per trade I’ve been paying for the last five years.

The accounts Girl Ninja and I already have are grandfathered in (my Roth, her traditional). But what if I quit my job a year from now. In the event I change careers, I’ll need to roll my 401k assets in to a traditional IRA. Meaning my new traditional IRA would be subject to the $7 fee.

Fortunately, I was able to call at about 8pm on Easter Sunday and get a traditional IRA opened up if/when this becomes a reality.

Problem solved.

Well except for the fact that I have never contributed to a traditional IRA before and made a major boo-boo. I told Wells Fargo to throw $1,000 in to my new traditional IRA for the 2012 tax year. Thinking I was a good boy for putting a little more away for future-me.

Not so fast! Apparently if you max out your Roth IRA, you aren’t suppose to contribute to a traditional IRA (or vice versa).

Basically I’m only allowed to contribute $5,000 total between my traditional AND Roth IRAs. I already maxed out my Roth ($5,000) a few months ago, so my recent $1,000 addition to my traditional puts me over the maximum allowed contribution. If I left things how they are the IRS would come kick my door down, punch me in the face, and penalize me for over-contributing. How lame!

Ugh, I remember the days where I worried if I should have Golden Grahams or Cinnamon Toast Crunch for breakfast, now I’m worrying about getting a visit from Uncle Sam for investing too much. Growing up sucks.

Completely unrelated note: Anyone work in medical/pharmaceutical/tech sales. I want to explore that career field and would like to pick someone’s brain! Not literally. Literally picking your brain would be kind of weird.

 

Keeping up with the Joneses like a boss.

My next paycheck will be a bit larger than the last.  I’ll be getting a slight raise, about $2,500 more per year. While I’m stoked to be getting any raise at all, let’s be real, it’s not a life changing amount. In fact, it only works out to about a $75 net gain each paycheck. Or as I look at it, a free lift ticket each pay period 😉

Since Girl Ninja and I are fortunate to have our income exceed all of our wants, we decided to do the boring/responsible thing and further increase our retirement contributions. Instead of throwing 10% of my gross income in to my 401K each month, we increased that sucker by another 3%, to 13%. My employer matches 5%, so in total 18% of my gross pay will be going in to my 401K plan each paycheck. Is that hot or what?

That's hot

So I get a $2,500 raise, and before I even have a chance to see it in my paycheck, we decide to throw all of it towards retirement. If that’s not keeping up with the Joneses, I don’t know what is!!!!

Since I’m a self-proclaimed PF nerd, I thought I’d run a quick calculation…

If we keep throwing that $2,500 in to our 401K plan for the next 40 years, do you want to know how much extra we’d have come retirement? This example assumes a 6% rate of return.

$416,968

There was really no decision to make. Get $75 extra in each paycheck and blow it on things we don’t need, or have an extra $417,000 waiting for us when we’re old?

Lifestyle inflation is cool and all, but if we are already content with what we have, what else is there to inflate besides our savings account, retirement funds, and our charitable contributions? I’m not going to go run out and buy another TV or laptop just for the heck of it.

Last time you came in to a little extra money, what did you do with it? If you had to inflate your lifestyle in one aspect how would you do it? (We would probably pay for a bi-weekly cleaning service)

Screw my Roth (yeah I just said that)

When I graduated college in 2007 I promised myself I would fully fund my Roth IRA every single year. We are in 2012 now, and so far, I’ve stayed true to my word. BUT NOT FOR LONG. One of my resolutions for 2013 is to STOP contributing to my Roth IRA.

That’s right, I’ll probably never contribute to my Roth IRA again. Like ever.

If you’ve read my blog for a while you’ll have seen many a posts where I confess my undying love for Roth IRA’s, like this one six weeks ago. The more I think about it, however, the less convinced I am that it’s the right place for my money.

Girl Ninja and I are in the 25% tax bracket. Looking at historical averages, we will likely remain in the 25% tax bracket for a very long time, likely our entire working lives. I could nearly double my already decent salary, and we would still be in the 25% tax bracket.

What’s more, I don’t necessarily think the government will attack the middle class anytime soon. Politicians argue about the richest and poorest people in America, not us middle-classers. Republicans want to cut entitlement programs, and Democrats want to tax the wealthy. That’s the way it’s been, and the way it will continue to be. When’s the last time you heard someone run for president say “I want to stick it to the middle class”?

Let’s say the government does get greedy though. My taxes could theoretically go up at some point in the future, but guess what, Roth IRAs could also be taxed at some point in the future. Roth IRA’s were made for the middle class. Literally. (A single person making more than $125K and a married couple earning more than $183k aren’t even allowed to contribute to a Roth because, by the government’s standard, they make too much.)

So if the government would wage war on the middle class by increasing their income tax obligation, why wouldn’t they wage war against the middle class by taxing Roth IRAs? Heck, they’d likely go after the Roth first since that would only piss off a portion of Americans (those who actually have a Roth) as opposed to enraging the entire middle class. (note: I don’t think the Roth will be taxed at any point, FOR THE SAME REASON I don’t think middle-class taxes will increase, it would be political suicide).

If taxes aren’t likely to increase for the middle class, and I have no reason to believe I’ll be in a higher tax bracket come retirement, I see no benefit to a Roth IRA.

Why give the government more than I have to?

Last night, I logged in to my 401k plan and upped my contributions by exactly $6,667 annually (this pretax amount is equivalent to $5,000 after taxes…the amount I would have put in my Roth). This increased my 401k contributions from 8% to 16%. Who knows, if I’m feeling crazy I might even try to max it out to a full $17,000 annual contribution.

I don’t hate my Roth. I’ll continue to let what money is in there grow tax-free, but I’ll probably never contribute to it again.

And regardless of the things I’ve said in the past, you might want to consider kicking your Roth IRA to the curb as well.

To further prove the point here was a blurb from a comment below:

“If you are in the 25% tax bracket and contributed $100 to a Roth IRA and it grew 10% you would be able to withdraw $110 tax free (let’s ignore the 5 year rule etc). For the 401k if you contributed $133.33 (which works out to $100 pretax: $100 / 0.75) and it also grew 10% you would have $146.67, and after paying 25% taxes it would give you $110, which is the exact same as the Roth IRA.”

p.s. If you want to disagree with me, or call this decision stupid, use MATH to back your claims up. If my tax bracket is not higher in retirement, the Roth benefits are significantly diminished.

My friend is the 1%, but not the 1% you’re thinking of.

I’m on a business trip right now with about 50 of my colleagues. Since I typically work out in the field (by myself for the most part), I don’t really know these people. I mean, I talk with them on the phone every once in a while, I see them at occasional meetings, but for the most part I don’t know them. Many, not even their names.

I do, however, have one coworker I’m really close with. We worked together in San Diego, found out we both were involved in Young Life, and he transferred to the Pacific Northwest two weeks after I did (albeit he transferred to Portland… which if you didn’t know is like the Junior Varsity version of Seattle). We’ve been spending most of our free time together, and since he knows I have this personal finance blog, a good chunk of our conversations are about money.

I discovered something very interesting last night. Even though my friend and I make the exact same salary – weird part about working for the fed is you know pretty much how much everyone makes – he happens to be part of the 1%.

No, not the 1% you’re thinking. 

I’ve always given him a hard time about saving for retirement. The government fully matches up to 5% of an employee’s gross salary in the Thrift Savings Plan (our version of a 401k). I learned last night, my buddy is only contributing 4% to his TSP.

FOUR PERCENT!!!!!!!!!

I about ripped my hair out when he said it. I stopped him and was like “What the heck man? Four percent? What is keeping you from upping your contributions one more percent and getting the FULL match?”

He didn’t know what to say. While he was thinking, I started punching numbers in to my calculator watch (yes I really do wear a calculator watch). I interrupted his thought process and told him that increasing his contributions from 4% to 5% would cost him roughly $25 per period.

Now if my friend was scraping by, adding the 1% to receive a full match could be difficult. He’s not, and he knows it. He actually started laughing when he thought about just how silly NOT receiving the full TSP match is. He has LITERALLY been passing up free money for the last four years.

Needless to say, I got him to pinky promise me he would up his contributions to 5% when he got home. What’s that popular saying? Every time someone contributes to their 401k an angel gets their wings?  Yeah…. that sounds right.

I rarely tell people what they should do. If you like car loans, get a car loan. If you want to buy a house that stretches your budget thin because it’s “an investment”, be my guest. I wont stop you.

But hear this: If you aren’t taking advantage of a 401k type match at your work place, you are probably failing at personal finance (this is obviously directed to people whose company offers such a benefit, which I realize your company may not). You literally can not beat a 100% guaranteed return on your investment.

No. Seriously. You can’t.

You think you should pay off your student loan or credit card bills before taking advantage of your companies match, don’t you? You need to think again (seriously click that link… I explain why investing in a 401K is a higher priority over paying down HIGH interest debt). 

Fortunately, last night I was able to nudge my friend in the right direction. But it makes me wonder, how many of you ARE NOT taking full advantage of a company offered match (be honest, no judging here)? What’s keeping you from doing it? Can someone tell me why the majority of people DON’T take part in such programs?