Category Archives: Retirement

Hello 2015! Goodbye 2014. And so on…

It has been one hell of a year. Accounting for all that has happened, no wonder I feel mildly overwhelmed. As life speeds ahead, I’m grateful for this one day a year to stop and reflect on how much changes in the course of 365 days. A lot, to say the least.

I’m trying to become a more mellow person, but that’s a struggle. Whatever seems massively important today, unless it has to do with your loved ones or close friends, isn’t really that important at all in the grand scheme of things. When I care too much about everything, that’s when shit starts to hit the fan. Work is work, love is love, and the two should never be accidentally interchanged. I’m not saying that one shouldn’t work hard and get shit done, but the amount of stress I create for myself on this impossible quest to perfection, and the ultimate downfall of such anxiety, is not worth it and it doesn’t help anyone.

In 2015, I’d like, more than anything, to manage a solid and productive year at my current job. This will not only enable me to reach or at least get near my 2015 financial goal of $400k networth (up from $300k today), but it will also provide me with the confidence I need to be highly employable going forward, with a playbook to use which can be followed in any role I take, at least within my specific type of position and industry. It’s creating the playbook that’s hard, especially when you have to learn from trial and error.

In my last opportunity, I realize now that a lot of the challenges there were not my fault. I didn’t make the right plays, for sure, but sometimes young companies have issues beyond what a marketing or sales person can help. Lesson learned there is to never take a job unless I believe 100% in the product and also know there’s a large pain point it is solving.

That’s not to say anything is going to come easy in 2015. I am in a much better situation, but some of the realities are the same as the last and I want to make sure not to make the same mistakes. While I don’t want every year of my life to be dedicated to my career and working long hours, I think 2015 is the year to do it. I don’t have kids yet (but hopefully will soon) and outside of a stable relationship with my boyfriend of nearly nine years, I don’t have much of a social life to speak of, so I might as well invest my 2015 into, as calmly as possible, kicking ass at my job. (And accepting help from the right people who can actually GSD. I.e. hiring smart and making decisions not based solely on resume but on my gut.)

I’m also accepting that there are some things I’m good at and some things I’m not so good at — and I want to forget about that and try my very best to see what I’m truly capable of — if that isn’t good enough for this role or this type of role then, well, I need to figure something else out. I’m hoping that’s not the case, but we’ll see. The difference this time around is that I want to push myself to do whatever it takes to succeed. It is going to be a struggle every step of the way, but what good taste of victory isn’t?

As a working professional, I’m not allowed to be scared, but I am, but I’m also reminding myself that it isn’t worth being scared over succeeding or failing in a job as long as you believe you’ve actually done your best (and you have enough of an emergency fund in the bank to help you through whatever transition needed should you falter.) I have to wake up every morning and ask myself — what needs to get done today? And I need to get that done. Period. No getting distracting on projects that may help the bigger picture but aren’t contributing to your core objective. To succeed at work, you have to be selfish. You have to learn to say “no” a lot. And you have to get results so people trust that when you say no, it’s for good reason.

Outside of work, I hope 2015 will be an exciting year on the personal front. It should be the year my boyfriend proposes to me, which I’m actually excited about given we’re pretty much married at the moment and there is no other person I’d rather spend the rest of m life with. What I have learned about myself is that – while I thought I’d want to marry someone who is career-minded and well-traveled, for many adventures throughout the next however many years of my life, I’m actually much more of a homebody who prefers stability in my relationship. That’s not to say we don’t take trips on occasion, but we’ve yet to travel abroad with each other (my Southeast Asia trip was with a high school friend, not with him) and that’s ok. I’ve discovered that the value of a relationship is having someone to come home to at night, to share a meal with, to watch a movie or tv series with, to cuddle with and wake up next to in the morning. And, of course, to raise a family with when the time is right. All of the other excitement can be obtained outside of a relationship in the form of individual adventures and sharing time with good friends.

2014 has also been a year of seeing my parents go through their own transitions. My mother turned 60, my father, in his 60s, still has terminal cancer, yet is doing miraculously well, #knockonwood, and they’ve been remodeling all of the bathrooms in their home, considering purchasing a condo in Florida to spend the long winters, and surprisingly enough have not killed each other on a series of road trips across their part of the country. I have to remind myself often that I’m now old, and so are they. I mean, 60 isn’t that old necessarily, but 60 year olds are grandparent age, and neither I or my sister have had a child yet, so they’re occupying themselves with a variety of other engagements. But it is strange, how fast life goes, and remembering your parents when you were young, and knowing your time with them, even without accident, is limited. Living far away, if you see them twice a year, for 30 more years, that’s even just 60 more times to say hello and goodbye to the people who made you, and that’s a terrifying thought, no matter how many times they drive you to want to jump off a bridge on each visit.

I hope that 2015 is filled with success, love, and friendships. My resolutions are to go to the gym every weekday (or walk at least one hour with commute), to NOT pig out, binging on crap food just because it is the only thing that helps combat my terrible anxiety, to focus on the primary success metric on my job and relentlessly show results to my boss and team so they can trust me and I can expand to do the things I enjoy most while still delivering unprecedented results, and to spend reasonable amounts of quality time with my family who are across the country, not just my parents, but my cousins, grandparent, and sister. I also want to get rid of tons of shit and live a simpler life.

Finally, my New Years resolution, which is crazy, is that I don’t want to buy anything (other than perhaps a new suit and coat) between now and June 2015, as my focus is on losing weight and saving money. I want to have my 401k and HSA maxed out by March ($20k), following by investing in a post-tax IRA ($5.5k) and manage to save another ~40k-75k through some serious frugality over the year. I can’t focus on that though, as it distracts me from what gets me there, being successful at my job, and growing into an actual executive who looks nothing like the me prior to 2014. Bring it on 2015, I might not be ready for you, but let’s make it happen.

 

Question for my Readers: Should I do a Roth IRA conversion?

One of my biggest financial mistakes to date was rolling over my 401k – or at least, I think it was. By rolling over my 401k accounts I made a Roth IRA conversion of my post-tax “traditional IRAs” unwise. There is, however, a way go around my mistake in order to convert my post tax IRA accounts to a Roth. I’m just not sure if it makes sense to do this. In lieu of hiring a CFA, I pose this question to my readers: should I convert (by doing the following) or not?

The Data

I currently have $14,803 in a post-tax IRA (i.e., I thought I was ineligible for a Roth for two years, at which time I funded a post-tax IRA. This was probably a mistake to begin with, but nonetheless, I have $14,803 in the post-tax IRA. I’d like to convert it to a Roth.)

Where did this money come from?

2010 – $5000 contribution
2011 – $5000 contribution

Thus, I currently have $4,803 in unrealized gains in this account.

If I were to convert to a Roth I would have to pay taxes on this… which maybe not worth it to begin with. However, even if that would be worth it, I have another IRA account from my Rollover 401k. If I were to convert to a Roth I would not only have to pay tax on the $4803, but I’d also have to pay income taxes on the entirety of my 401k account (or a percentage of it, depending on the total conversion.)

The catch is — it is possible to rollover my prior 401k and current IRA account into my new work 401k. At least it looks like it’s possible to do this. By doing this I would no longer have an additional IRA so I’d be able to rollover my post-tax IRA into a Roth IRA and pay tax on “just” the $4803 in gains (or whatever it is at the time I do the conversion.)

However… the funds I have access to in my work 401k are not nearly as compelling as those I have access to in my Vanguard IRA. At the moment, most of my investments in this IRA have a .10 expense ratio. My employer 401k options seem to be mostly in the 1.10 expense ratio, with one S&P fund at .54 or something like that. So, ultimately, I would need to do the math to figure out if it would make any sense to bother with all this hassle to convert my two years of traditional IRA investing to a Roth. I’m really not even sure if I wasn’t eligible for a Roth at the time, but I’m pretty sure it’s too late to fix this error if it was an error. Hmm.

My thoughts are as follows:

1) Wait until the last minute to rollover my current IRA into my work 401k. The last minute mean whenever in the future I am about to leave my company, or, in the case of being laid off, filing the paperwork on the day I’m laid off.

2) If that works, I’d wait until the rollover cleared, and I no longer had an existing IRA beyond the Sharebuilder 2010/2011 contributed-to account.

3) Then I wait… until a year when my income is low (probably when I have my first child or when/if I go to grad school, though this is all a hypothetical time/year to begin with – and needs to happen before I get married!)… and convert the existing post-tax funds to a Roth, so my tax rate is low.

4) That said, does it really matter? In 35 years the account will be worth $415,916 if it makes 10% in interest per year. So I’d have to pay tax in retirement on $405,916. Or, I figure out how to do the conversion in the near future and pay tax now on $5000, give or take. I’m not sure if the tax comes out of the account or you can pay that separately, assuming you can pay it separately then I’d still have $15k or so to compound over the years for retirement, and just pay $2500 or whatever it is right now in taxes on the conversion – if I can actually rollover my old 401k IRA into my new 401k.

But… then I need to look at how much is lost due to the higher expense ratios in the 401k account on the $91k-ish that is in my current IRA. If I have to pay 1% more per year in expenses then…

According to this calculator, if I left my $91k in the new 401k for 5 years, paying an additional 1.00% in expenses each year, with a 10% YoY rate of return, the total fees would be $7885.21, including operating fees and opportunity costs, versus $731.32 if I left it alone in my Vanguard account w/ the .10% expense ratio. So, basically, for the five years waiting for a year when I don’t make that much money (assuming I don’t actually get married) then I’d lose $7500 or so waiting to convert the existing post-tax IRA to a Roth, plus I’d lose whatever tax I’d pay on the gains on the interest gained in the post-tax account. So I’d end up probably paying $10k now in order to avoid paying tax on my hypothetical $405k in retirement.

That seems like a fair trade, if it actually worked out. I’m sure there’s a catch somewhere, I just don’t know enough about finances to see it. That’s why I’m asking my readers…  should I rollover my $91k IRA to my 401k in order to convert my $15k post-tax IRA to a Roth?

 

 

 

 

How to Estimate Your Tax Rate in Retirement

As I’ve been running calculations on whether or not it makes sense to do a Roth Conversion, I came back to the question — what will my effective tax rate be in retirement?

That’s a question a lot of us considering a Roth Conversion should ask, but it’s not one that is easy to answer. What’s important, though, is that the numbers you plug into your calculations are reasonable. After all, expecting a 40% income tax in retirement each year can greatly skew your calculations if in actuality you’ll see a 20% effective tax rate.

This Forbes article by Erik Carter was really eye-opening: Why Your Taxes in Retirement May Be Less Than You Think

Article Highlights 

  • You are probably overestimating what you will have to pay in taxes at retirement
  • Withdrawls from Roth accounts are tax-free at 59.5
  • Social Security is taxed at ordinary income rates but only part of it is taxable
  • Long-term capital gains are taxed at lower rates than income tax (*at least according to current tax law)
  • Your income will probably be lower and put you in a lower tax bracket (i.e. experts recommend 80% of your pre-retirement income, but you may need less)
  • When you are older than 65, you get different deductions than younger people. For instance, you have a $1550 higher standard deduction than us young folk
  • A lot of 401k contributions withdrawn yearly will be taxed at lower rates, especially if you plan on taking out less than $36k per year (note, that’s no where near 80% of my current salary, but I could live on it in another state if I owned a house free and clear)
  • Tax rates could be higher when you retire but that’s unlikely (*not impossible)
  • Lots of people retire in states that don’t have income tax like Texas, Florida and Nevada. (*check out this handy-dandy state income tax calculator and weep… unless you live in a state with low income tax.)
  • Move where all the old people live and you’ll be fine.

Understanding the Roth IRA Conversion Pro Rata Rule & a Great Trick!

IRAs come in two flavors — traditional and roth. Both have income and contribution limits per year in order to take advantage of their benefits. Roth IRAs require that you pay taxes up front on any income you put into them, but then — this is where the magic happens — your interest grows tax free forever. You can take the total amount out at retirement and not pay any tax on it! You can also pass the total amount onto your heirs without them having to pay taxes. It’s a pretty spectacular deal, especially when you’re in a very low income bracket so you aren’t paying much in the form of taxes up front.

Traditional IRAs, on the other hand, are available for low income earners, often who do not have access to a 401k. With the traditional IRA one would put their money in and not pay taxes on this money up front, but then when they retire and take the money out it’s taxed as income for that year (theoretically your tax bracket would be lower in retirement, but this may not be true.)

Up until recently if you made too much money for an IRA you really couldn’t do anything other than invest in taxable accounts. Traditional IRAs were available but you weren’t able to take the tax deduction up front or when you took the money out in retirement, so the only benefit there was the years of dividends not being taxed and reinvested into your investments. It’s not even that great of a deal because then you’re paying income tax rates on your dividend yields versus dividend rates. Generally traditional IRAs for high income earners are useless.

However for tax benefits, today a higher income earner can do a little trick called a Roth IRA conversion. This occurs when the individual puts up to the year’s limit in a traditional IRA ($5500 currently)  and then immediately converts that to a Roth IRA. Because the individual put in post-tax money and the conversion happened right away, no taxes are owed and basically that higher income individual has gone through a loophole to invest in a Roth. For younger folks in their 20s and 30s the ongoing compound interest and ultimate ability to take out the investments tax free might be better (do your own math to figure out if this makes sense for you.)

The trouble comes when you have multiple IRA accounts. Most often this is from 401k rollovers when you leave a job. A 401k is pre-tax money so if you want to roll that over to a Roth you will have to pay tax on not only the interest earned but also the entire amount of basis. That can be an expensive proposition!

That is where the “pro rata” rule comes in. Understanding how this works is a bit challenging. I’ll try to explain this in simple terms based on my research so it’s accurate and makes sense.

How the Roth IRA Conversion Pro Rata Rule works

At the end of the tax year (not the day you do the conversion) the government will look at all your non-Roth IRA funds to determine how much tax you need to pay. They aren’t nice enough to let you get away without paying taxes on a conversion when there is tax money they could make. Instead they require you to pay pro rata on the amount you convert.

Let’s take an example very near and dear to my heart (so I can finally understand what sort of tax liability I’m looking at here.)

I would like to convert my current IRAs to Roth IRAs before rolling over my high-fee 401k (*or I need to get a new job with a better 401k as I can rollover my 401k to that so I can continue to do Roth conversions year after year.)

Vanguard IRA (from rollover 401k)

$26,987 (all pre-tax)

Sharebuilder IRA

$14,027.47 ($10k is post-tax, $4027.47 is pre-tax)

Due to the pro-rata rule it is not possible for me to rollover just the $10k of post-tax money today.

If I rollover the $10,000 of post-tax money, the pro-rata rule would take my total amount of IRA money $41014.47 to determine how much I actually owe.

To figure this out for yourself, follow the steps listed here.

1. Total up all of your IRAs (non Roth): $41,014.47
2. Total up all of your after-tax dollars in IRAs: $10000
3. Calculate your % of after-tax dollars: 24.38%
4. Determine the taxable amount of your distribution: ($20,000 distributed = $4876 tax free, $15124 taxable(!))
5. Exception for rollovers to a company plan: n/a

In order to take out the full $10,000 of post-tax money, I’d have to convert the entire amount ($41,014.47) and pay taxes on $31,014.47.

Is either scenario worth it? Let’s play this out to the conclusions…

Assumptions:

  • 35 years growth
  • .05% average interest rate
  • 30% federal and 10% state tax in retirement (40% taxes)

1. I do nothing, and leave my $41,014.47 to grow for 35 years until I turn 65 and retire.

  • $226,235 pre-tax
  • Total Value = $135,741 (@40% tax bracket)
  • ((15% tax bracket, in 0% income tax state, low annual withdrawals, would = $192,229))

2. I convert 25% of my IRA plans today

  • Pay tax on $15,124 at today’s tax rates (28% fed, 10% state – $5747.12 in tax)
  • Have $14252.88 remaining to grow tax free forever
  • $78,619 post-tax on conversion
  • + $116068 * 40% tax = $69640
  • Total Value = $148,260

3. Just for kicks, I convert 100% of my IRA today, paying tax on $31,014.47

  • Pay tax on $31,014.47 at 38% rate — $11785.50 in tax paid today
  • $29228.97 remaining to growth tax free forever
  • Total Value = $161,227

4. Additional test thrown in — low income year, 25% tax today

  • Pay tax on $31,014.47 at 25% rate — $7753.61
  • $33260.86 remaining to grow tax free forever
  • Total Value = $183,467

What do these calculations teach us?

  • The value of a Roth Conversion (if you have both deductible and non-deductible IRAs) is determined largely by your current tax rate and your expected tax rate in retirement (oh fun, guessing games.) Apparently people tend to overestimate how much taxes they will pay in retirement (i.e. maybe my 40% estimate is too high. You think?)
  • The conversion for an account that looks like mine MAY make sense if I can hold it for 35 years or longer. But it’s still not a sure bet. (I calculated everything at a 5% return YoY to be conservative.)

When Does the Roth Conversion Not Make Sense?

I haven’t done all of the calculations, but I assume at some age the roth conversions do not make sense UNLESS you have no taxable money to deal with. If you don’t have many years for the interest to compound and make up for what you paid in tax, then you’ve just paid a lot of money to the government to make less in the end. That’s what they want you to do. That’s what a lot of people who aren’t running the numbers are going to do thanks to this new rule.

When Does the Roth Conversion Make a Lot of Sense?

If you have one year of your life where you happen to not be making a lot of money — maybe it’s a year you went to school or took time off to have a kid — you will be able to do the conversion and pay your income tax on that conversion. If you are single and have no income, your first $36,900 of taxable conversion (or mix of conversion amount and income) is taxed at just 15% (the first $9600 at 10%.) This changes the numbers quite a bit! So say you want to convert $20k with $10k of it non taxable and $10k taxable. You pay $1k on the first $9600 and 15% on the $400 ($60) so you’d pay just $1060 to convert your $20k, leaving you with $18940 to grow tax free forever — if you live in a no income tax state, anyway (most states will charge you income tax so factor this into your calculations as well.) That’s still a pretty great deal, but you’re also losing all of the money you could have made that year and put into your investment accounts, so it’s not worth it to do this unless you are already planning to take the time off. (And if you really want to be tricky move to a state with no income tax and don’t work for a year!)

(Note, married couples can stay in the 15% tax bracket up to $73,800 income including the taxable IRA conversion amount.)

The Best Trick I’ve Found (That is legal, at least for now)

If you have a work-sponsored 401k, find out if it allows you to “reverse rollover” pre-tax IRA investments. If you can do this, take all of your pre-tax IRA investments and move them into your 401k. You will have to keep those investments in the 401k until you change jobs again (and at least for a year) so if the 401k offers crappy, high-fee, high-load mutual funds you’re going to want to run all the numbers in your specific situation. That said, if you have a decent 401k and can rollover your funds into it — you can roll them over and then only pay taxes on  your interest on any post-tax IRA contributions for the Roth conversion. This means that you can save a lot of money and do a few years of IRA conversions to grow your roth (esp if you are a high income earner and are already maxing out your 401k.)

Now that I’ve figured out this is do-able, I’ve immediately decided to rollover my existing crap high-fee 401k into my Vanguard low-fee, no-load Admiral funds IRA account. I’ll let those babies grow until I have a nice 401k at a future job (knock on wood) that lets me roll over my IRA for a while, and I’ll convert at least the $14k of traditional IRA investment plus probably another $5.5k for the current plan year. I will have to run the numbers myself at the time but I think this is probably the best idea.

Even if that doesn’t work out, the actual growth on my pre-tax accounts will still be beneficial and perhaps my actual tax rate in retirement won’t be quite as high as I think it will be. It still might be best just to leave these accounts alone and continue putting $5.5k in a Roth every year that I’m eligible, whether I’m in school and working part-time or unemployed and unexpectedly coming in within the income limits to contribute to a Roth.

Have anything else to add? Think I don’t explain this well?

Leave a comment with your tips and ideas for when a Roth IRA conversion makes sense, and when it doesn’t. Did I get something wrong here? Let me know. Thanks!

 

Should I Rollover My 401k? The Cons

Common financial sense says that you should rollover your 401k into an IRA account as soon as you leave a job. Besides keeping all your financial accounts in one place (so you don’t have a bunch of orphan 401k accounts floating around), fees on typical 401k accounts are painfully expensive (remember in our last post we discussed how after 30 years on a $100k investment every .10 increase in percentage points will cost over $50,000 in fees.)

However, there are some lesser known reasons why you should leave your 401k where it is, at least for the short term.

1. Penalty-Free Retirement at 55 vs 59

The government isn’t ok with you withdrawing funds from your IRA before 59 1/2, but for some reason you’re allowed to withdraw from your 401k at 55. This doesn’t make any rational sense but government rules never do (source)

2. Roth Conversions Get Much More Expensive After a Rollover

A few years ago the government made another rule that doesn’t make any sense — you’re not allowed to contribute to a Roth IRA (i.e. after-tax money that you can take out for free in retirement and that you can pass on to heirs tax free) BUT you are allowed to put money in a traditional IRA, post-tax, and immediately convert this to a Roth IRA tax free. (Did I mention the government makes NO FREAKING SENSE?) However, if you have additional IRA funds, especially ones you haven’t paid tax on yet, you have to pay a pro-rata fee for the percentage you want to convert. I’m going to write a separate post about this pro-rata rule because it’s so complicated I don’t even understand it yet, but basically once you have more funds in traditional IRAs you’re liable for tax on part of them as well if you want to do a Roth conversion, and this can be very expensive and eat into your future earnings (source)

3. Better Creditor Protection

In yet another rule that makes no sense (notice a trend here) 401ks are protected more than IRAs in the case of lawsuits and such. How screwed you are in the case of a personal liability lawsuit depends on what state you live in. For example, New Hampshire and New Mexico have no protection against creditors for your IRA, whereas your 401k can’t be touched. (Say it with me now – this doesn’t make any freaking sense!) In some states, such as Texas, Arizona and Washington, your IRA is treated with the same protection of a 401k , so this rule wouldn’t apply to you (source)

4. Fees Can Be Lower (Though This is Unlikely)

Often the 401k offers access to different funds then you would have access to as an average investor. A lot of articles argue that you could be better off staying with a 401k funds… but make sure to look into the fees of these funds. Mutual funds can cost 1.4% per year or .80%, but those are still high fees compared to a basic Vanguard fund at .10% to .25%. Ask yourself if you really think this fund will perform better than an index fund (hint – it probably won’t, or at least not enough to make up for lost earnings due to fees) (source)

Can you think of any other reasons to keep your 401k at your old employer? #2 and #3 seem to be the best arguments. Tomorrow I’ll share a post that further explains Roth conversions – because they confuse the heck out of me so I need to do some better research, and I’ll share my findings with all of you!

Vanguard Admiral Funds: Rebalancing for Lower Fees

One of the things I realized recently that I’ve been spending more than I have to on fees inside of my IRA accounts. While Vanguard funds are low fee to begin with, did you know that Admiral funds (which require $10k minimum investment per fund vs $3k) still have significantly lower fees?

Fees can significantly eat away at your investments, especially over time in your retirement accounts. I know for a fact my old 401k that I haven’t rolled over is wasting money with some of its funds at .90% fees or higher! I’m holding off on rolling that over in the case I will do a Roth IRA conversion if/when I go to grad school on about $100k of other IRA investments, but for all my other accounts I want to be as fee-efficient as possible.

Expense Fees Add Up Fast!

Here’s a little experiment… (try your own out in this expense ratio calculator) say I invest 100,000 today and plan to keep that money invested for 30 years. I earn an average of 10% each of those 30 years (woohoo.)

If my fund has a low .10% expense ratio then I’ll see a 2.96% reduction of my future value due to fees (costing $51,596.) This sounds like a lot, but it really isn’t compared to the cost of most funds.

Say you have a still relatively low-cost fund at .20% expense ratio. You are then spending 5.83% of your future value on fees ($101,716!)

Some funds have high expense ratios too. If you are investing in a fund that has an expense ratio of .80%, 21.51% of your future value is gone thanks to this fee ($373645.77!!) So you see how a little expense ratio can quickly add up.

After reading a bit more about taxes and what funds to hold in Roth IRAs vs traditional IRAs I decided to shift around funds in my Vanguard accounts. I also changed things up over at Sharebuilder because my $10500 basis Roth over there is significantly underperforming, but I’ll cover those changes in another post.

Also, I read that high-dividend funds make sense in your Roth IRA but not in your traditional IRA. Why?  Because dividends have two purposes — to provide you income today at low(ish) capital gains tax rates, or to compound over time in your investments and to be taken out tax free upon retirement (in a Roth.) Going high dividend in a traditional IRA is silly because you have to pay income tax on it when you retire and take it out — i.e. those proceeds would be cheaper today in a taxable account!

Until today, my Vanguard IRA accounts looked like this:

Traditional IRA

VDAIX / .20%
VHDYX / .19%
VGSIX / .24%
VTTSX / .18%
VGTSX / .22%

Roth IRA

VFIFX / .18%
VTSAX / .05%

Updates to my Portfolio

While there was nothing wrong with this breakdown, per se, I had high-dividend REIT and dividend growth funds in my traditional IRA while I had index growth funds in my Roth. I also had certain funds split between my Roth and Traditional IRA where because I had $10k split between two accounts I couldn’t qualify for the lower admiral fund rates.

Luckily at Vanguard it’s free to trade your funds inside your account, so rebalancing is easy (unlike at Sharebuilder where I’m wasting tons of money trading and will eventually give in and just move my “fun money” to Vanguard.)

I made quite a few (free) trades at Vanguard to fix my portfolio. Here is what I have now, which, as you can see is greatly simplified:

Traditional IRA

VIGAX / growth index fund admiral shares .09% expense
VTIAX / admiral version of VGTSX — .14% expense vs .22%

Roth IRA

VDADZ / dividend appreciation index fund — .10% expense ratio
VGSLX / admiral REIT fund — .10% expense to .24% of VGSIX

I also killed off all of my “target retirement date” funds because I’ve read they are too conservative and at my ripe young age of 30 I want to be aggressive but not stupid (working on the not stupid part.)

Why keep my Sharebuilder account open at all?

Good question! Mostly I keep it open so I can trade precious metals in my Roth IRA (i.e. GLD) since they are taxed at a collectible rate (high tax) unless they’re in an IRA, and I can’t buy gold or silver in my Vanguard fund. I also have some specific REITs which I like to watch to learn more about REITs because they are interesting — especially since I do not actually own any tangible real estate. More on that later.

OMG: 36% of Americans Have NO Retirement Savings

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The concept of “retirement” always seemed a bit funny to me — after all, why save up all of your recreational time for the years when your body is expediting its rate of decomposition? Retirement wasn’t always a thing just as engagement rings were not always a thing (read a good recap of how retirement came to be on The New York Times.)

It turns out that when you’re older, keeping your mind and body busy with work can help you live longer (no really, it’s proven that retirement has a detrimental effect on health in old age.) Research from the Institute of Economic Affairs and the Age Endeavor Fellowship found that both mental and physical health can suffer — increasing the likelihood of clinical depression by 40% and having a diagnosed physical condition by 60%. That said, not everyone has the luxury of working until they kick the bucket, even if they wanted to, and even if it would be better for them statistically speaking. Between disabilities caused by your body slowly falling apart and the fact that many employers just don’t like old people, most employees stop work well in advance of the time their soul peaces out.

For “us millennials” we have this opportunity to determine what we want in our retirement or non-retirements, to at the least have a choice that many boomers now don’t have because of the great recession. Continue reading

Roth IRA Eligibility & Non-Fixed Income

In 2014, one is eligible if their AGI is under $114,000 as a single person and $181,000 for a married couple ($5500 per person max.) For a single person, between $114k and $129k your contribution amounts begin to phase out, with no contribution allowed when you earn over $129k. [estimate your AGI here]

Sans contributing a bunch of money to charity, getting your AGI down is a bit of a challenge and mostly impossible. Trust me, when I was in my early 20s and making $50k a year I would have loved to have this problem, but given cost of living is so high where I live (our 825 square foot 1 bedroom is $2250 a month without any utilities included!) monthly income disappears fast. Your AGI includes any income received from employment AND dividends (so us dividend investors have even higher AGIs even if we automatically reinvest any proceeds, which sucks.) Then you get to deduct only your IRA/401k contributions, student loan interest, alimony, moving expenses, 50% of self-employment tax, and a few other things that aren’t relevant to most working people. In other words, outside of the $17.5k maximum for a 401k, you can’t really lower your AGI.

Investing in a Roth IRA is one way to get some tax advantages for a long-term retirement account. I’ve already maxed out my 401k for 2014 ($17.5k) which reduces my AGI but probably not enough to qualify for a Roth. Meanwhile, a traditional IRA benefits phase out at much, much lower income levels, so investing in a traditional IRA as a “high” income earner is almost pointless (even though you can’t take a deduction, if you open a traditional IRA you can still earn tax-free growth until you take you your money later in life, but it really isn’t a great benefit and you are locking your money away for the long term vs just investing it in a taxable account.)  Continue reading

2014 401k Almost Maxed Out!

One of my goals for 2014 was to live on my savings and max out my 401k before obtaining access to any new funds. The good news: as of February 15 I am $550 away from maxing out my 2014 401k! The bad news is that the markets haven’t fared that well in the first few weeks of 2014, thus my $17500 investment has immediately shrunk. Boo. At least I’ve managed to survive on my “life fund” from late 2013. I’m now down to about $3000 so it’s great news that I’ll be seeing some of my salary in my next paycheck!!!

It was important for me to get the 401k out of the way early on because I am concerned I may be laid off from my job soon, and chances are I will find another position at a small company that will not offer access to a 401k. While I’ve never had access to a 401k with a match, I’ve taken full advantage of tax deferred savings when available. I’ve only had access to a 401k in 2010, 2011, 2012, 2013 and 2014. My first full-time job even brought in a 401k specialist to talk to us and then decided it wasn’t worth paying to administer the retirement plan, so we didn’t get one. I know a 401k is a luxury and I take full advantage of it when possible.

As of mid February, my networth is around $259k (including my maxed out 401k.) That kind of sucks because at the end of 2013 my networth was $250k, so I’m only “up” $9k right now (or down $8500 if you count the total amount of money I’ve put into my accounts!) Hopefully the market will rebound and I actually purchased these 401k shares on the cheap. We’ll see. It would be nice to see the $17500 earn 10% this year and conclude being worth at least $19250. Right now my current employer 401k has $59296.43 in it for 3 years of investment, worth about $19765 per year.

The good thing about maxing out my 401k early is that if I do lose my job I won’t have to worry about finding another job for this year to get tax-advantaged investments. I can start worrying about that again in 2015!

May Investing Highlights, Today Stocks Down $3000

I realize it’s bad practice to obsessively monitor your stocks, but it’s the only way I can learn about how the stock market really works. Boy, it hurts to watch a bright red $3236 (-2.5%) show up at the end of the day, capping off a week of losses on my investment accounts.

Investing Trades in May

Sharebuilder Taxable Account “Gold”
$86,776.36 as of June 1

SELL

  • AND Global X FTSE ANDEAN 40 ETF. I needed some liquid capital and this account was in the dumps. It’s probably bad to off my small sum of international investments, but they aren’t performing well. Maybe I’m just investing in the wrong countries or ETFs on that front. In any case, so long South America.
  • CBOU — I got nervous about my investment in Caribou Coffee, which was down significantly. I don’t fully understand P/E but when I bought the stock, the P/E was 10 and it shot up to 20, so I decided to sell half of my ownership, bringing me down to 100 shares instead of 200. I put the money to work in the following purchases…

BUY 

  • AAPL (Apple) — about 3 shares. My goal is to have 100 shares of Apple, I have a little under 97 right now.
  • KO (Coca Cola) — on a Dividend investment kick. I haven’t purchased any KO before, but I like their diversity in products, and have been wanting to get in on PEP or KO for a while. It felt like a Coke day, so I went with the red can. (My investment decisions are so scientific.)
  • VZ (Verizon) — really good dividend stock, probably dumb to hold this in my taxable account. I don’t have enough funds in my tax advantaged accounts to trade individual stocks, however.
  • INTC (Intel) — Seems like a good buy right now. Technology is only getting more and more embedded in our lives, and Intel is the leading maker of chips to make this tech work. Plus P/E seems low, growth is high, and the company is pretty solid. But what do I know?
Sharebuilder IRA “Silver”
$10,998.34 as of June 1

No trades.

Sharebuilder Roth IRA “Platinum”
$4578.89 as of June 1

SELL
EDIV — this international dividend ETF was not performing well. I hate seeing an account with a limited $5000 investment lose money. I sold and changed strategies…

BUY
PEY — Powershares ETF High Yield Dividend… I want to put more dividends to work in my tax advantaged accounts, and this seemed like a good option. There are a lot of dividend ETFs out there, but few actually have high dividend yields compared to individual dividend stocks. This one is pretty high at 4.1% (The PowerShares High Yield Equity Dividend Achiever Portfolio (Fund) is based on the Dividend Achiever 50 Index (Index). The Fund will normally invest at least 90% of its total assets in dividend paying common stocks that comprise the Index. The Index is comprised of 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends.)

Other Accounts

I formally opened my 401k this year, with a goal of maxing it out at $17,000 for the year. Of course I’m behind in contributing for the year, so we’ll see. I’m now contributing 15% of my income, or $1125 per month, to the 401k. That only brings me to $9008 for the year, quite short of the $17k. Still, I’m not ready to bump my contributions to $2125 per month, or about 30% of my monthly pay. Maybe I should, I really ought to max out my 401k, even though I have no “match” on any of it. There’s nothing wrong with saving aggressively for retirement, especially since this is only the second year in my 20s when I’ve had access to a 401k, and therefore have the ability to invest more than a measly $5000 in a tax-advantaged retirement account. What do you think?