Tag: Investment strategy

7 retirement planning myths debunked

If you ever plan to retire, you have to have a plan.  The days of depending on an employer pension and government benefits are rapidly disappearing and, especially if you are under 50, you are living in a  “yoyo” economy — short for “you’re on your own.”

There are a bunch of myths about retiring that need to be abandoned.

  •  It’s OK to postpone saving for retirement until other needs are taken care of.  Wrong.  There are always “other things” that interfere with saving for retirement and if you let them get in the way, you’ll never start.
  • Medicare will take care of almost all your health care needs.  In reality it will cover about half.
  • You’ll need far less income in retirement to maintain the same standard of living.  Only if you decide to become a hermit.
  • You can claim Social Security early and still get full benefits later.  Wrong.  When you begin taking benefits you are locked in (unless you pay it all back).
  • You should rely heavily on bonds rather than stocks as you get older.  Only if you plant to die soon and expect zero inflation.
  • Any retirement target-date fund will allow you to “set it and forget it.”  Target date funds vary widely in performance and there are no guarantees associated with them.
  • You’ll be able to make up a savings shortfall by retiring later or working part-time in retirement.  That’s a hope, not a plan.  You may not be physically able to work after retirement.   Because of the costs of benefits, many employers are reluctant to hire older workers.

A plan is needed, and needs to be constantly updated to keep you on the path to the kind of retirement that you want.

Open a Roth IRA for Minors

Consider this example: If a child invests $2,000 in a Roth IRA each year from ages 13 to 17, that $10,000 could increase in value to almost $296,000 by age 65, according to research by  T. Rowe Price. That assumes the account earns a 7% annual rate of return. If that panned out, the account could provide tax-free income of $11,800 a year for 30 years.

Tax-free compounding of earnings inside an IRA is a beautiful idea — and a powerful one. The longer you can keep your money invested in a tax-free vehicle, the greater your wealth accumulation. What better way to accumulate a large amount of savings than to start during childhood? When tax-free compounding has more than 50 years to run its course, a relatively modest savings plan can produce substantial wealth.

There’s no minimum (or maximum) age to set up a Roth IRA. And there’s no requirement that the same dollars that were earned be used to fund the IRA. If your child earned money on a summer job and spent it on whatever kids spend money on these days,* there’s nothing wrong with using money provided by parents to establish the IRA. The child has to have earned income, though.

The major impediment to IRAs for children, especially young children, is the earned income requirement. An unmarried person must have earned income of his or her own to contribute to a Roth IRA. The income has to be compensation income, not investment income. And it has to be taxable compensation income.

That doesn’t mean your child has to actually pay tax on the income. If the total amount of income is small enough so your child doesn’t have to pay tax, that’s okay. But your child has to have the kind of income that would call for a tax payment if the amount were large enough.

Tools for getting out of debt

Getting out of debt is easy, stop spending and pay off your bills.  The overweight person gets very similar advice: eat less and exercise.  They are both pieces of good advice, but they rarely work all by themselves because we are creatures of habit, whether it’s spending or eating.  So here are my twin tools for helping you with the debt issue (for the dieting part, you’re on your own.)

First, get a copy of Dave Ramsey’s book    “The Total Money Makeover.”  It’s a virtual 12 step process designed to get you debt free and build wealth.  The book costs about $25.00 and is worth every penny.  Dave Ramsey has built a business around personal finance advice that includes books, a radio program and courses that are being offered throughout the country.  The course is offered by many churches and is both entertaining and filled with outstanding information.

Second, if you have a computer, get a copy of “Quicken.”  It is the number 1 selling personal finance software.  If you are in debt you have to know where your money is going before you can fix your problem.  Quicken allows you track every penny that you spend.  In addition it makes balancing your checkbook a snap and has other features that are useful once you begin to accumulate wealth.  The program costs less than $50.

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