Category Archives for Invest & Retire
My Current Asset Allocation and Net Worth Growth – April 2010
From March 6th (when the last portfolio update was published – see link below) to April 7th, the S&P 500 index went up 5.3%.
My Money Blog – March 2010 Portfolio and Net Worth
During that time period, my net worth increased 7.8%. I have now achieved the following financial goals in 2010:
- Achieved my short term target net worth for this year
- Contributed the maximum contribution level of $5000 allowed for my Roth IRA for the year 2010 (and 2009 as well)
Currently, 26% of my net worth is invested in fixed income instruments, and 74% is invested in equity. This is just off of my targets of 25% and 75%, respectively, for these categories. These proportions are the same as they were last month.
While the overall percentages for these categories are looking good, a detailed look (table below) at the allocation breakdown reveals that I still have some room for improvement.
Remember: a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation.
% Cash (money market target 5%) 10%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%) 0%
% International Equity (Target 11%) 13%
% International Emerging Markets (Target 11%) 8%
% Domestic Large Cap (Target 8%) 25%
% Domestic Small Cap (Target 9%) 9%
% Domestic Small Cap Value (Target 13%) 8%
% Domestic Large Cap Value (Target 13%) 7%
% REIT (target 10%) 6%
In the past month, I’ve been continuing my efforts from March to move money to my emerging market mutual fund account. The progress can been seen because I now have 8% of my net worth in that category. This is a good thing!
Additionally, since I maxed out my contributions for 2010 to my Roth IRA account, I have committed a large amount of funds to contribute to my Domestic Small Cap Value mutual fund holdings. This can be seen as that component of my asset allocation is now 8% of my net worth, up from 6% in March.
Also, as mentioned before, I currently have a VERY large percentage of my portfolio in Domestic Large Cap stocks. This is due to the fact that I was contributing 100% of my 401k contributions purchase S&P500 index fund shares for 1.5 years.
Towards the end of March, I began moving money from the S&P500 fund to a domestic small cap fund in my 401k. This progress can be seen by the fact that the domestic small cap funds now make up 9% of my net worth, up from 6% at the beginning of March.
My next moves for the April/May time frame will be to do the following:
- Since I am looking at buying a condo/townhouse in the summer/fall time frame, I will be trying to build up cash reserves in my high yield savings account for the downpayment.
- Purchase an inflation adjusted bond mutual fund (TIPS)
- Begin contributing to the large-cap value funds in my taxable Vanguard mutual fund account.
- Move several additional net worth % points from the S&P500 fund in my 401k account to the domestic small cap fund.
Jacob
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How Do Mortgage Payments Fit in to Account Hierarchy?
Recently, as I was reading through several personal finance/mortgage books, I realized that I hadn’t previously included in the My Money Blog Account Hierarchy an important factor in many people’s account prioritization decision-making process.
What is this component/factor? – It is how home mortgage payments fits in to the overall picture.
In order to keep the entire account hierarchy in one location, you can view the completed account prioritization list at the link shown below.
My Money Blog – Account Hierarchy
Let me know if you have any questions!
Keep on learning!
Jacob
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How To Create Your Own Home Mortgage Amortization Schedule and Calculate Your Monthly Payments
As some of you may know, I am planning on purchasing a condominium or townhouse during the summer/fall timeframe of this year.
In order to prepare for this undertaking, I have been digging out old personal finance/mortgage books from the shelves and from under my bed to make sure I have the appropriate information needed to make an informed decision regarding the mortgage that I take out to buy the property.
Recently, when I was reading one of these titles, I noticed that the author devoted a lot of time to discussing the various costs associated with homeownership and how to determine the price of a house you can comfortably afford.
However, several things that the book did not fully address were 1) how I could personally determine what my monthly payments would be, given a certain loan quantity, and 2) how to put together an amortization (or home mortgage loan payoff) schedule.
These two related topics will be the subject of today’s post.
First, just how are these two topics related? Well, it turns out that by putting together an amortization schedule in a format that is friendly to Excel’s Solver or Goal Seek, functions, we can then use that to solve for what the appropriate monthly payments will be.
So, let’s get started building an amortization schedule! I have put together an example Excel spreadsheet template, which can be found at the link below, that you can use as reference throughout this tutorial. To obtain a copy that you can edit, just click the file menu and select the “download as an Excel file” option.
Goolge Docs – Mortgage Amortization Schedule
Note: this amortization schedule assumes a fixed interest rate and monthly period payments. ARMS (or adjustable rate mortgages) and biweekly mortgage payment plans will be discussed in a future post.
Loan Specifics
First, you will need to input the specifics of the loan in to cells in Excel so that equations can be properly set up to calculate the amortization schedule. The specific pieces of information you need are shown in the purple highlighted cells of the spreadsheet, and are as follows:
• Loan Amount (please note: this is not the property value, just the amount that you borrow for the house. This can be calculated by subtracting your down payment from the price you paid for the property.)
• Interest Rate on Loan Amount
• Term, In Years, of the Loan (the default here is 30 years, but typical loan periods can also be 15 and 20 years).
Setting up the Amortization Schedule
To set up the amortization schedule, you will need a minimum of 5 columns set up in Excel, titled as outlined below:
• Column C = “Period.” – This is the designation of the monthly period in which your payment occurs. Since we are dealing with monthly payments, in this column, you will need Periods from the number “1” through n years x 12 months/year, where n represents the term in years of the loan as specified above.
• Column D = “Monthly Payment.” – This represents the fixed monthly period payment that you owe on the loan. If you already have been given your fixed monthly payment, just enter that in the first row of Column D after the column title. If you desire to calculate what your monthly payment will be, leave the first row blank, and then in each cell from period 2 through period n x loan term in years, input the equation to draw the monthly payment value from the cell directly above it.
• Column E = “Interest Payment Amount.” – This represents the portion of the monthly payment that consists of interest on the loan amount borrowed. It can be calculated by multiplying the fixed annual interest rate times the amount of the principal loan balance remaining in that specific period, and then dividing by 12 to determine the portion of interest owed in that specific month.
• Column F = “Principal Payment Amount.” – This represents the amount of the monthly payment that counts towards paying off the principal amount of money borrowed with the mortgage loan. It can be calculated by subtracting the interest payment amount in Column E from the total monthly payment in Column D.
• Column G = “Principal Amount Remaining After Payment.” – This represents the amount remaining on the principal loan balance after the monthly payment has been made. It is calculated by subtracting the Principal Payment Amount in Column F from the principal amount from the previous period.
• *Extra Column, Column H* = “% of Monthly Payment as Interest.” – While this column is not technically a part of the amortization schedule, it is interesting to see the magnitude that you are paying towards the interest on the home loan, especially in the first few years. This can be calculated by dividing the Interest Payment Amount in Column E by the Monthly payment amount in Column D.
Once you have created these formulas in the first few rows of cells in each of the columns, just copy the formulas down the entire column until you fill up the table as needed for your loan term.
Great job! You have just built the framework for your amortization schedule. The hard part is done!
Calculating Your Monthly Payment
While in many cases, the monthly payment quantity will be calculated for you, it is nice to be able to know how this number is generated. And, once you have created all of the formulas as explained above, Excel does the rest of the work for you! Here’s how.
To calculate your monthly payment, complete the following steps:
1. In the spreadsheet you have created, click on the cell in Column G that represents the final loan payment on your mortgage. This will be either Period 180 or Period 360, depending on if you have a 15 or 30 year home loan term, respectively. In the spreadsheet I created at the link above, this would be cell G361 for a 30 year mortgage.
2. Next, in Excel 2003, on the top menu, click Tools –> Solver
3. What you will now do is use Excel’s iterative calculation Solver function to “solve” (similar to solving a complex algebraic equation) for the appropriate monthly payment amount that will cause the principal loan balance to go to $0 at the end of the mortgage loan term.
- To do this, set the “target cell” discussed in step 1 to a “Value of” “0” by changing the cell that represents the first monthly payment in Column D. In the spreadsheet I created, you would “Set target cell G361 to a value of 0 by changing cell D2.”
- Next, click solve. Excel will automatically change all of the values in Column D to the appropriate monthly payment value that makes your principal loan balance go to 0 after the loan term.
There you go! You have created your own mortgage loan amortization schedule and are now able to calculate your monthly payment accordingly.
Other Uses of This Amortization Schedule
After you have created the schedule and solved for your monthly payment, you should not abandon this extremely useful tool. By entering the purchase price and down payment you paid for the home in the purple cell area in Column A, you can use this tool for the following purposes:
• Keeping track of the total value of home equity (ownership) you have built up in the house. This can be calculated by adding up the down payment in Column A with the sum all of the principal payments you have made to date.
• Keeping track of the percentage of ownership you currently have in the house (this is also called percent equity).
- Why would you want to keep track of this? Easy! If you’re like most of us and didn’t have the cash for a 20% down payment on the house, you were required to purchase Private Mortgage Insurance, or PMI, in order to insure that the lender would be covered if you default on the loan. However, this PMI insurance is no longer required once you have built up greater than 20% equity in your house. So, this is a handy way to keep track of this and will save you money in the long run!
• Also, in Column D, as you pay off your monthly payments, record the monthly payment amounts in this spreadsheet. You’ll be able to play around with the effects and savings you can incur if you decide to overpay each month on your required monthly payments (sometimes called pre-paying the loan – more on this subject later).
Please let me know if you have any questions. And, as always, keep on learning!
Jacob
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Best Investment Options for the Cash Portion of Your Retirement Account
Recently, my dad and I were chatting about finance, and we started talking about how he currently has invested the cash portion of his IRA (Individual Retirement Account) in a money market mutual fund. He then proceeded to tell me that the current yield he is earning on this cash is 0.01%.
In all seriousness, I was shocked when I found out that this interest rate was so low, considering that the current interest rate on my high yield savings account (taxable account) with Dollarsavingsdirect.com is 1.30%. In doing a quick search, I confirmed that not only was the rate indeed this low at the brokerage he uses, but that the money market mutual fund offered by Vanguard.com (Vanguard.com Money Market Mutual Fund Page) was very low as well (0.01%).
So, this begs the question, just what should an investor do with the cash portion of his/her retirement account?
In a previous post, I detailed an investigation in to the different taxable cash savings account options (see post My Money Blog – Savings Account Options).
However, it is clear that the landscape changes significantly when your options are limited to the selections inside your IRA or 401k. And, since the My Money Blog asset allocation rules (can be seen at the following link – My Money Blog – Asset Allocation Targets) dictate that I need to keep 5% of my retirement holdings in liquid cash assets, this is one detail that simply cannot be overlooked.
So, let’s take a look at the choices by looking at each of my two account types:
401k Cash Savings Options
- My 401k is administered via my employer through Fidelity.
- There is only one option for cash savings within this account. It is an institutional Fidelity money market mutual fund with the following attributes:
- 7 day yield of 0.21%
- 1 year return of 0.53%
- YTD return of 0.05%
Roth IRA Cash Savings Options
- As I have mentioned previously, my Roth IRA is managed through Vanguard.com.
- There are several money market options here, but the only one that I am really interested in / that applies to my circumstances is the Vanguard Prime Money Market Mutual Fund (Ticker Symbol VMMXX). It has the following attributes:
- 7 day yield of 0.01%
- 1 year return of 0.28%
As you can clearly see, the returns available at this low interest rate period in the US will not even be able to keep pace with inflation, which averages around 3.2% per year.
Surely, there have to be better options available! I mean, come on capitalism! Right? 🙂
Alternative Options
A quick search on Google.com of investment options for cash in retirement accounts does not reveal any substantial information.
Next, I then thought back on the 1st IRA I ever opened up. It was a fixed interest rate CD with Bank of America. I really opened it on accident with only several hundred Dollars, and closed it a few months later (yes, I incurred the taxes and withdraw penalty of 10% – it was a mistake!).
1) IRA CD
A quick search at Bank of America’s website revealed the following 30 month term CD for IRA accounts. Bank of America – 30 Month Term CD for IRA Accounts, with the following attributes:
- 2.10% annual yield
- $2000 minimum balance to open
- 30 month fixed term (penalty incurred if taken out of CD before 30 months is up)
- FDIC insured
2) IRA Money Market Savings Account
I also found that Bank of America offers a money market savings account designed to fit in IRAs that can be found at the following link Bank of America – Money Market Savings Account for IRA and has the attributes below:
- 0.60% APY, with a variable rate (meaning that rate will increase or decrease as the prime rate changes)
- $100 minimum balance to open account
- FDIC insured
- No fixed term. Money can be moved in and out of money market account as desired (as long as stays in IRA).
Note: In my research, I found that the banks that offer high yield savings accounts, such as the one from Dollarsavingsdirect.com, do not offer their savings account to be housed in IRA account.
So, knowing this information, what does it mean for me?
Well, in my particular case, the 30 month fixed term CD IRA does not suit me because I don’t want to have that much money tied up for the fixed term, even though it does have a higher yield. Furthermore, since the yield on the money market IRA account with Bank of America more or less matches the interest on the money market mutual fund in my 401k, I would proceed to invest my cash in the money market mutual fund in my 401k account with Fidelity. You can compare CD rates online to find the best option for your financial situation.
It is not the best return, but it also saves the hassle of having to open up yet another IRA account and keep track of it. Next, it would just be a game of hoping that the interest rates in the US increase at some point, and take this interest rate to higher levels!
Additionally, and maybe even more important, is the key takeaway that there are other investment options in IRA accounts that could yield higher returns for cash reserves than merely what is available in your pre-existing IRA or 401k account.
Please let me know if you have any questions.
Keep on learning!
Jacob
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Should You Buy Company Stock In Your Retirement Account?
Picture this!
You have been working in a dead-end government job where you are underpaid, over-worked, and under-appreciated for the past 3 years. You then get word of a job opportunity available at a hot new start-up company in Colorado. It is basically the future of the industry in which it operates. The company currently only has 20 employees, and therefore, you have the possibility to get in at the ground level of this huge happening!
You land the job, move to Colorado, and get started in your new position. After two weeks or so, it comes time to get all of your benefits, insurance, and finances in order. This includes deciding how you want to invest your 401k funds. In the 401k exist the normal options of actively managed and index mutual funds. However, since this is a hot new start-up, you also have the opportunity to buy stock in the new company at an 8% discount of the market price.
The question then becomes, “What do you do?”
Even though it is very tempting to buy stock in the hot new company with a very promising future, you absolutely should never buy stock in the company from which your salary comes for your 401k account. Say that again with me, NEVER! This even applies to company stock in larger companies on the S&P500 as well! It is never a good idea.
Why is this exactly? Basically, it all comes back to the issue of diversification and not putting all of your eggs in one basket. The whole reason I prefer purchasing index mutual funds is due to the fact that it gives you broad exposure to hundreds, if not thousands, of companies. Since there are large number of companies, if one company goes bankrupt, you will not lose large amounts of money.
Additionally, let’s take a look at an example. Let’s say that this employee at the hot new company in Colorado currently has the average US net worth of $93,100, and makes an annual salary of $50,000 at the new company. By doing the division, the first year you work for the new company, already 53.7% of your total net worth is going to be dependent on the company. This is ALREADY a very high percentage! You absolutely do not want any more dependence on this one source than you already have.
Therefore, you should try as much as possible to invest in other investment vehicles through your 401k account!
When Would You Purchase Company Stock?
So, you’re probably wondering right now if there ever exists a time when buying company stock is an acceptable behavior.
For me, the only time that I would ever buy stock in the company for which I work is in the following scenarios:
- If I used part of my alloted “play money” to buy the company stock. See post on play money for more information on this topic – My Money Blog – Play Money
- If your supervisor gave your stock options as part of a yearly bonus, and you cannot renegotiate for a cash bonus/raise instead.
- In this case, I would exercise the stock options as soon as they reached the eligible exercise price and cash out my earnings. I would not remain in company stock.
- If I was already wealthy enough to have secured a comfortable retirement for myself.
- It is perfectly fine (and actually preferred) for you to buy stock in the company for which you work if you are rich (for example – if you were a Board of Directors member) and already have made enough money to know you will live comfortably in retirement. The key takeaway with company stock is that you do not want your RETIREMENT dependent upon one company. In fact, directors of companies should own stock in the company for which they work in order to show that they have a vested interest in seeing the company do well!
As always, please let me know if you have any questions.
Keep on learning!
Jacob
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What Do You Do with Your 401k Savings If You Are Leaving Your Current Employer?
In previous posts, I’ve discussed in great detail the following topics related to retirement accounts – IRA’s (Individual Retirement Accounts) and 401k’s:
- Differences between 401k’s and IRA’s
- Different types of IRA’s – Roth vs. Traditional
- Ways to use money out of your IRA or 401k to finance home purchases
- Additional ways to use money from your tax sheltered accounts without withdrawal penalties.
The posts associated with these topics can be found at the links below.
My Money Blog – 401k Posts
My Money Blog – IRA Posts
However, I didn’t discuss the options that are available to you regarding your 401k funds if you are leaving your current job/company, and you have 401k savings that you would like to have access to afterwards.
Note: This post will assume that you have leaving your current company before normal retirement age (you are younger than 59 1/2 years old).
Options for 401k Funds
To begin, let’s look at the general options that are available to you for your 401k funds if you are leaving your current employer. The link below is a great resource/website from Vanguard that explains the process and available options.
Vanguard.com – Options for 401k Funds When Quitting a Job
1. Withdraw Money –
The first, and probably the most apparent option, is to to sell all of your current holdings, convert them to cash, and transfer them to your checking account. However, this route should only be used as a last resort because you will incur a 10% early withdrawal penalty from the IRS, as well as be fully taxed on your earnings as income.
2. Remain in Your Current Employer’s 401k Plan –
Depending on the company, it is possible that you can remain having a 401k account with your present company after you resign/are let go. You will just need to call the HR department/benefits service center that your company has to explain the situation and see if this is a possbility.
Personally, I would steer away from this option for the following reasons:
- Employer sponsored 401k plans generally have higher expenses / fees. An interesting fact that comes to us from Lipper Inc is that the average expense ratio for Vanguard Funds (Vanguard offers IRA accounts as well as taxable accounts) is 0.23%, while the industry average is 1.19% (as of December 31, 2009).
- Employer sponsored plans have far fewer options than Vanguard or Fidelity. For example, my Vanguard Roth IRA has hundreds of mutual fund options, while my current 401k account has less than 10, many of which are not even index funds (I steer away from actively managed funds).
- There are account minimums (usually $5000) that you have to meet once you leave the company.
- Future plan contributions are either restricted or not allowed.
3. Transfer to Another Employer Sponsored Plan –
If you are leaving your company and know that you are heading to another one, this option is available to you as well. However, as with Option 2, I would steer away from it as well.
Overall, IRA’s are a far superior retirement savings instrument compared to 401k’s. The only reasons I use a 401k are to 1) take advantage of company matching (free money) and 2) to have another tax-sheltered account available to which I can add funds after I have maxed out my IRA funding for the year. Since IRA’s are superior, I always want to take opportunities that present themselves to get out of 401k’s and in to IRA’s.
4. 401k Rollover to an IRA –
Lastly (and my favorite option), 401k’s can be converted, or “rolled-over,” to IRA’s. This phenomena is called a Rollover IRA.
What Exactly Is A Rollover IRA?
Rollover IRA’s are fairly easy to understand. Essentially, they are Traditional IRA’s that are funded through a different process, and therefore, have a different name. However, once they are set up, they act the same as Traditional IRA’s in that they have the following characteristics:
- Pre-tax contributions to the account
- Self directed investment operation (you can choose your own mutual funds)
- Tax-deferred growth – earnings are only taxed when withdrawn
What’s the Process for Setting Up a Rollover IRA?
At a high level, the key to successfully converting your 401k with your employer plan to a Rollover IRA is to keep in close communication with both your employer’s HR department and the investment company to which you are rolling over your account. The process can vary depending on the company you work with, but the general flow will be as shown below:
- Notify your company and the investment company where you will set up the Rollover IRA of what you want to do.
- Be prepared to give specific account information (account numbers, routing numbers, etc) to both parties in order to complete the transaction.
- You will then set up an IRA account online with the investment company (I prefer Vanguard) and elect which mutual funds you want to purchase with the 401k holdings.
- Your employer sponsored 401k account holdings will be liquidated, and the cash will be transferred directly to your Rollover IRA.
- And, you’re done! Not too bad right?
What are the Benefits and Drawbacks to a 401k to IRA Rollover?
- You have a lot of flexibility within your IRA account to invest in different mutual fund options
- You can set up the account with a company like Vanguard or Fidelity, which will have lower fees and a more numerous fund selection than your employer’s 401k plan.
- No fees to set up the Rollover IRA with Vanguard. There may be some small fees associated with transferring your 401k to Vanguard.
- No account minimums and no restrictions on future contributions.
- Drawback – For all practical purposes, if you have company stock (which I greatly discourage), you will have to sell it before converting your 401k account to a Rollover IRA. What is the reason for this? Typically, accounts with mutual fund companies like Vanguard and Fidelity work better if you use them for only mutual funds. It is possible to have a brokerage account within your Vanguard account, but the fees are generally pretty high.
Below is the Rollover IRA website from Vanguard.com. It is a great resource to get started converting your 401k funds to an IRA. I would highly recommend using them! Please let me know if you have any questions.
Vanguard.com – Converting a 401k to a Rollover IRA
Keep on learning!
Jacob
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Ways to Use Your IRA or 401k Without Withdrawal Penalties
In a recent post titled, My Money Blog – Innovative Ways to Obtain Cash for a Downpayment, I discussed how it is possible to use funds from your IRA or 401k to assist in a “first-time” home purchase.
In investigating this, I actually found out that there are quite a few other ways that funds from your retirement accounts can be used without incurring the normal 10% withdrawal penalty.
However, before going in to these “innovative” uses for, let’s talk about what the age threshold is that you are able to withdraw funds from your retirement accounts under normal circumstances. This age threshold is 59 1/2 years old.
Aside from performing an IRA or 401k withdrawal at this “normal” age, government rules allow an individual to tap in to retirement (IRA and/or 401k) reserves for the following reasons:
- If the person works for the Army Reserve and is called in to duty after the date, Sept. 11th, 2001.
- To pay for medical insurance premiums if you are unemployed.
- For unreimbursed medical expenses (in other words, not covered by your insurance) greater than 7.5% of an individual’s income.
- If a person retires after age 55.
- If the person’s life expectancy is cut short (example – due to cancer, a person only has 1 year to live), and the distributions are made as part of equal payments over the account holder’s life expectancy.
- To pay for college/higher education. However, only IRA funding can be used for this purpose.
Truthfully, I was not aware of most of these uses that do not incur withdrawal penalties. However, it is very nice to know that rules are set up around retirement account withdrawals that can help individuals through hardships.
The use that sticks out most in my mind is the idea of using the funds to pay for higher education. For example, if I ever plan to take continuing education classes online or go back to school part-time through night classes, I’ll have another option for paying for the cost of tuition if funding in my cash accounts is running low.
Hope this information was helpful to you. Please let me know if you have any questions!
Keep on learning!
Jacob
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What Percentage of My Salary Should I Save for Retirement?
“So, just how much of my paycheck should I place in to my retirement account each month?”
It’s a difficult question/decision that many people face, especially young adults that are just beginning their working career. And, as you might have guessed, the special amount is heavily dependent upon each individual’s financial situation and if you are shooting for early retirement. Additionally, the answer depends on another question — how well do you want to live during retirement?
For example, if you have a lot of high interest credit card and/or student debt, payday loans, no health insurance, or no emergency fund, you will want to make you follow the My Money Blog – Account Hierarchy and dedicate funds to the higher priority areas before beginning to save for retirement.
How Much Do Rich People Save?
To begin, just out of curiosity, let’s take a look at how much “rich” people save. In T. Harv Eker’s book titled, “Secrets of the Millionaire Mind,” he states that rich people save over 30% of their income. Very interesting!
How Much Should I Save For Retirment?
In order to make this post fully customizable to each individual’s needs, what we’re going to do is make a “super Spreadsheet” version of the Excel sheet I explained to everyone in the previous post at the following link, My Money Blog – Retirement Calculators.
I attached an edit-friendly copy of this spreadsheet at the link below. Please do everyone a favor and save the spreadsheet to your desktop as an excel file before making changes to fit your specific situation.
Google Docs – Super Duper Retirement Calculator
Once you open the spreadsheet, you will then adjust the following parameters, shown in the orange higlighted cells on the spreadsheet, to fit your specific situation.
- Current age
- Current amount saved
- Assumed annual return on investment (before retirement)
- Current salary
- Assumed raise each year
- Assumed inflation rate
- Present value of the desired income you want during retirement
- Desired retirement age
- Assumed age of death
- And, assumed % return during retirement
What does all of this financial assumption jibberish mean? Essentially, what this spreadsheet is doing is applying the same formulas as discussed in the previous retirement calculator to grow your salary and current savings up until and through retirement. Additionally, we are adding the subtraction of the amount of income you will live on during retirement. We have to thrown inflation in to the mix because a certain $$ income now will not give you the same standard of living at retirement age. We also add a different assumed return % during retirement that is lower than prior to retirement because you will not be able to take on as much risk.
Please note: this model does not take in to consideration taxes involved on 401K withdrawals.
After entering your specific information (and remember, saving it to your desktop so you don’t screw up the spreadsheet for other people), you will then change the purple Percent of Salary You Need to Save Each Year cell to different values. I would start off low (around 5-10%) and then move up to 30-35%.
As you are varying the value in the purple cell from above (G13), what you are looking for is to see that the Current Amount (in column B) at your assumed age of death if not 0, or negative. This would indicate you have ran out of money, or the living death.
If you run out of money before your assumed age of death, you will need to do one of the following things:
- Lower your standard of living / expected income during retirement
- Increase the % of your salary you save
I hope this tool gets you on your way to financial success!
Keep on learning!
Jacob
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How Do Credit Unions Measure Up?
In the recent “Choosing a Bank” series (shown at the links below), I deliberately excluded the idea of choosing between a privately owned bank and credit unions. Why is this you might ask? This is due to the fact while you almost certainly qualify for some type of credit union, specific credit unions are not accessible to the general population, and therefore, comparisons are more difficult on a media such as a public website than comparing an INGDirect.com account with a Bank of America account.
My Money Blog – Choosing a Bank – Part 1 – Local Banks vs. National Banks
My Money Blog – Choosing a Bank – Part 2 – Savings Options
My Money Blog – Choosing a Bank – Part 3 – Checking Accounts vs. Savings Accounts
For the uninitiated, a credit union is a not-for-profit cooperative that is owned by the account holders/members. Generally, it is managed by a volunteer committee. Because credit unions are non-profits, they do not have to pay state or federal taxes. This is a major advantage!
To qualify for membership (for an account), you must share a common bond with the organization and body of members. For example, many companies, universities, and even cities/counties have their own credit unions.
In short, it is very hard for traditional banks to compete with credit unions, and it is clear that credit unions offer superior products. It has been postulated that credit unions save customers and estimated $8 billion per year in savings on fees compared to traditional banks. MSNMoney.com provides a great comparison of the advantages of credit unions to traditional banks at the link below.
Advantages of Credit Unions – MSNMoney.com
Advantages of Credit Unions
- Higher interest rates on savings instruments
- Lower interest rates on consumer and mortgage loans
- Deposits are insured
- Harder to access your money due to decreased number of branches and ATMs around the country. Although, this is decreasing all of the time due to ATM networks such as the AllPoint network – see the post My Money Blog – Are ATM Fees a Thing of the Past.
- You will most likely want to change to a different bank/credit union if you leave the school, company, or area in which your credit union is located. In doing some research, I was amazed that most credit unions I came across offer clauses along the lines of “once a member, always a member.” Therefore, you will most likely not be kicked out of the credit union if you stop working for the company. However, you will not want to have your account at a Pfizer credit union if you live in Winslow, AR where there are no other Pfizer employees within 30 miles and no Pfizer credit union branches.
In my personal situation, since I seem to move around a lot, I have chosen to have my checking account with Bank of America due to ease of access when I move. However, if I were to buy a house and want a mortgage loan, I would definitely consider the options at my local credit union!
Key Takeaway
It is clear that credit unions offer superior financial products when compared with traditional banks. As such, they should always be considered as one of your financial options. Take a look at the link below and see which credit unions are located near you that you qualify for!
Keep on learning!
Jacob
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Are Non-Bank ATM Fees a Thing of The Past?
Evening fellow readers!
So, it’s happened to everyone…You are out with your friends or on vacation, in need of cash, and forgot to go to your regular bank’s ATM before you left. But, bless your lucky stars, there it is! In the corner of the bar or convenience store, you see an ATM, and get some cash. However, later, you check your bank account online only to find out that you’ve been charged a $3-$5 ATM usage fee.
In a previous post at the link shown below, I described how one of the big benefits of having an account with a national branch bank is that you will not be charged non-bank ATM usage fees when you are traveling since national banks have many branch/ATM locations around the country.
My Money Blog – Choosing a Bank – Local vs. National
However, I am happy to report that this may be a thing of the past, thanks to new ATM alliance networks such as Shazam or AllPoint (see links below to go to their websites)!
All Point ATM Network
Shazam ATM Network
How do these networks work? Pretty easy. Your bank signs a contract and pays to join the network, and as a result, you can use many non-bank ATMs for free, with no usage fee. Sounds good right?
The banks that are most likely to enroll in the use of these ATM networks are banks that do not already have a large system of ATM (examples of unlikely enrollees are Bank of America, Wells Fargo, or Wachovia). However, a local bank like Signature Bank of Arkansas in NW Arkansas, would be an ideal candidate for using this type of system. In doing a quick search, I found the following website on the bank’s home page – Signature Bank of Arkansas Shazam ATM Locations.
Similarly, INGDirect, an online bank, has a contract with the AllPoint ATM network of 35,000 ATMs that allows checking account customers of INGDirect to have access to their accounts anywhere in the USA. See the following link INGDirect.com Electric Orange Checking Account Free AllPoint ATMs.
When you contrast the size of the AllPoint network to Bank Of America’s largest one-bank ATM system in the country of 18,000 Bank of America ATMs, you can begin to realize how extensive this network really is.
The only drawback to the ATM network systems like Shazam and AllPoint is that since the ATMs are mostly located in convenience stores, grocery stores, restaurants, and bars, you will not be able to deposit money in to them like you can at Bank of America ATMs and at your local bank. However, this may not even matter because you are more likely to be spending money than depositing it when you are traveling away from home.
Key Takeaway
The key thing to learn from this post is to be sure to to check your bank’s website for which ATMs are eligible to use for free. Print out a copy of where the eligible ATMs are in the city you will be traveling to and take it with you. It could save you a lot of money when you need it most!
Keep on learning!
Jacob
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