Retirement Losses?

Budgeting, Retirement Investing No Comments »

Before I left my job, a co-worker and friend of mine had a valuable story to tell about retirement, and how to wisely enter into retirement. He had worked for nearly 30 years with the same company, and agreed to an early retirement offer from that firm. He had saved and invested well in the stock market over the course of many years; he did everything right. However, the recession of the early 21st century slashed his retirement accounts. Does this story sound familiar?

In this edition of Personal Finance Resources, I would like to offer some ideas on how to allocate and use your saving while in retirement. Many of the larger financial institutions offer a wealth of resources to save for retirement, but not how to spend your money wisely while you are in retirement. So without further ado, let’s get started:

  1. The golden rule of retirement spending:
    Spend no more than 5% of your savings per year, and you should expect to maintain your principal balance in your account(s). This concept is very simple as most CDs, money market accounts, bond funds, etc. are very low risk, but still offer a return close to 5%. So if you earn 5% on your principal, and spend 5% per year, than you should end up with roughly the same amount of money, therefore you can effectively live forever (at least from a financial standpoint, :) ).
  2. Transfer your high risk investments to low risk investment alternatives:
    This is part of the issue my friend was faced with when the early 21st century recession hit. He was still invested in moderate to high risk funds, and as the market fell, he got hammered. Now, over a long time line, investing in these types of funds tends to yield much better results; however, if you are needing your money now (like in retirement), then you need to be in lower risk securities such as bond funds, money markets and CDs.
  3. Don’t get suckered into ridiculous spending:
    Timeshares, expensive vacations, and other things all sound great, but can really hammer your hard earned savings. Now don’t get me wrong, you need to have some fun in retirement, but don’t let the salesmen talk you into all the extras that spiral the costs up. Get the basic vacation packages, and don’t buy timeshares. Also, don’t buy new cars every year, or participate in car leases. There is a tremendous expense associated with this type of car buying. Get that new car you want, but keep it for a few years.
  4. If you get into trouble and need money, consider a reverse mortgage:
    I’m not going to get into the nitty-gritty details of the Reverse Mortgage HECM, but this strategy can be a life saver for those in retirement that are hurting. The short of it is that you can get money now at a very low interest cost, with a wide variety of withdrawal/payment options.

These are some simplified methods to wisely dispersing your savings while in retirement. Please leave any comments you have at the bottom of this page.


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How I am Making Money on Options Right Now

Options, Retirement Investing 2 Comments »

The last couple of posts have been dealing with trying to give a base line knowledge of options. Today I will get down to how I have been making money on the call side. I will try to continue with some posts on puts and eventually how I have been making money on puts too.
What is the Market Doing?
This is the question that drives investment. However, with options, I can control, not own, more shares for a limited time with less risk. My first recommendation would be to go to any of the major websites that offer financial information and create a portfolio. I use yahoo finance. I have a fairly broad selection of stocks in mine. This gives me a quick snapshot at what the market is doing for that day. I do not have a lot of time usually to continually check the market.

What am I Looking for in Picking a Stock?
In one word, VOLATILITY. If I can find a stock that I think is going to move, I can make money on it. So if I see some big movers in my portfolio, I have learned what their average range is just by watching them for awhile. I will also typically look at the 6 month to a year chart to see where that stock is in its’ natural curve. If it is on the low end of its’ average range, I will click on the options tab to see how much the premium is on usually a month to two months out. This gives the stock time to move to my target range. The reason that I like the one to two month range is that they are cheaper than farther out options because of what I wrote yesterday about time value.
If the stock goes up as I expected, then I will sell the calls that I purchase. This is called selling to close.
So back to our example from 2 days ago (Options are a Viable Option Right Now) where stock XYZ closed at almost $27, I wanted to buy 10 contracts. So why didn’t I?
Remember when I said that options expire on the 3rd Friday of the month? Well, tomorrow is the 16th (or the 3rd Friday) and the November strike prices will all expire. This is the primary reason why I didn’t purchase the $30 December calls. Typically the Monday after an expiration, the prices go down because investors realize that time is starting to run short on the next month’s options. So if stock XYZ hasn’t gone up significantly, I will look at buying the January $30 calls probably on Tuesday. I guess only time will tell if this is a good investment.

We will continue on in the next couple of days, and I will try to explain puts, vertical spreads, and straddles. Again, these are more complex strategies that require extensive knowledge to trade. I would highly recommend using a website like Think or Swim to paper trade. This will give you valuable experience in executing these trades while using fake or paper money. Again, feel free to ask questions. These are complicated issues. When it comes to investing, remember the old saying, “Time is Money.”


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More Option Basics and the Covered Call

Options, Retirement Investing No Comments »

Okay, so yesterday may have been a little much for some readers that are new to the option world. So I will back track just a little. Options are traded in increments of $5 strike prices for stocks over $25. For stocks under $25, they are traded in $2.50 increments. That means that you can usually buy the $20 strike price, the $22.50 strike price, the $25, $30, $35, etc for any given month. The market value of each option is based on 2 things. The first is intrinsic value, or what the difference is between the strike price and the market price. So what is a $30 call worth if the market value is $33. Intrinsically, it is worth $3 because I can call it from someone at $30 and sell it for $33. The second value is time value. So the further away the expiration date, the higher the time value is.
One thing to remember, options for a given month expire on the 3rd Friday of the month.

The Covered Call
This is probably the most basic form of trading options. This type is often times what brokerage firms will allow you to trade with out any options experience. Selling a covered call is generally seen as having very little risk, and it is even allowed in your Roth IRA or Traditional IRA.
The fundamental of this trade is that you own the underlying stock. You are then selling someone else the right to buy that stock from you at a certain price (strike price) on or before a certain date (expiration date). Of course for this privilege, you will charge a premium. The premium can fluctuate as often as the stock price. If the stock price goes above the strike price before the expiration, someone will call the the stock away from you. You get to keep the premium, and you sell the shares of stock at the agreed upon price (strike price). If the stock stays below or at the strike price, the call expires worthless, and you keep the premium and the stock.
Example Time:
Say I own 1,000 shares of ZYX stock, which is currently valued at $27.50. The $30 Dec call option is currently valued at $.55. So to execute the covered call trade, I would sell 10 contracts (each contract equals 100 shares) at $.55 a share. This would equal the premium that someone would give me in exchange for the right to call those 1,000 shares away from me at any point until 21 December (the expiration date). So my total premium would be $.55 x 1000 = $550.
Question: What happens if the stock goes to $31 before December 21st?
Answer: The purchaser of my call option would call the shares from me for $30 a share. So I would get the $30,000 for the sale of the stock plus keep the $550 for a total of $30,550.
Question: What happens if the stock stays below $30 a share until December 21st?
Answer: I would keep the 1,000 shares and the $550. I could then sale the January or February options to continue making a profit.
This option is usually used when you believe that a stock that you currently own is not going to increase in value beyond the strike price before the expiration date.

In my next post, I will continue deeper into our endeavor of potential ways to make money through options in this volatile market. Feel free to continue asking questions and posting comments.


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Retirement Savings vs Paying Down Your Debt

Credit Cards, Paying Off Debt, Retirement Investing, Tax Planning No Comments »

I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

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There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.


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Bond Calculate

Retirement Investing No Comments »

I was going to put together another spreadsheet to help you calculate a bond and its various attributes, but I found a tool online that is better than I can do for you. The issue with a spreadsheet is that it does not have access to current bond rates, and therefore cannot be accurate unless you track current bond rates (Yuck!). So I will just do a quick overview of the tool, and then provide you with a link.

  1. In the “Value as of:” box, enter the month and year (MM/YYYY) that you want to calculate.
  2. Choose the bond series from the dropdown box.
  3. You may enter the bond serial number, but it is optional.
  4. In the “Issue Date:” box, enter the month and year (MM/YYYY) that you want to calculate.
  5. Click the Calculate button.

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Investing in Bond Funds

Retirement Investing No Comments »

Investing in bond funds is not one of my particular favorites, due to the traditionally lower rates of return vs other investments, however, it does serve a purpose. Typically, bond funds have lower risk, and therefore become more attractive as people age, and become more protective of their money. Let’s look at some typical indicators to be aware of when evaluating bond funds:

  • Return
    Of course, return is what we are most interested in. But bond funds, like other funds, usually show an annualized rate of return averaged over a 1 year, 3 year, 5 year, 10 year, and since inception date. I pay most of my attention to the rate of return since inception. I like to know through the good times and the bad, how a particular fund averages out. So when I am evaluating different bond funds, the most important factor is the return since inception.
  • Inception Date
    As previously stated, the return since inception is most important to me, but it carries less weight if a fund has only been around for say, 6 months vs 10 years. I like to see a fund that has at least been around long enough to see a recession, and an expansion in the economy. Generally speaking, if a fund has been around at least 5 years, it probably has seen down and up markets.
  • Domestic or Foreign
    I will look at foreign stock funds, but not foreign bond funds. To me, if I am going to see less return due to investing in bond funds vs investing in stock funds, I am definitely not going to bear the load of increased risk due to foreign governments or foreign companies and their bond funds. I will stick to US bond funds only.

I have to be honest here, this is about all that has any importance to me when investing in bond funds. I don’t really care about the bond yield, because it is just a current snapshot of what a particular bond fund is doing. I want to know that the fund manager is making good decisions over time, and creating a quality average rate of return. Let me know what you think by leaving a comment or question below. Am I not looking closely enough at these funds? What would you do differently?


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Bond Yield Definition

Retirement Investing 1 Comment »

A bond, simply defined, is a type of investment which is very similar to an IOU. It is a loan in the form of a security with two basic components, the face value (principle), and the coupons (interest rate). The bond is a contract between the issuer and the bondholder to pay certain amounts of money in the future. The issuer of the bond promises to pay the bondholder principle and interest according to the terms and conditions listing in the bond. Many cities and countries issue bonds to fund new highways and other such projects.

The definition of bond yield is the rate of return on the bond, which takes into account the sum of the interest payment, the redemption value at the bond’s maturity, and the initial purchase price of the bond. Yield on the bond relates to the return on the capital you invest in the bond. You will hear the term yield a lot as it relates to investing in bonds. There are many types of yields you’ll need to be aware of listed below.

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Definition of Mutual Funds and the Importance of Diversification

Retirement Investing 1 Comment »

A mutual fund, simply defined, is an investment vehicle which allows a group of many different investors to pool their money together with a clear financial objective - to make money. It consists of an extensive collection of stocks and/or bonds, which is managed by a professional or group of professionals called an investment advisor. The mutual fund was created for those investors who feel investing their money by themselves to be too risky or just not savvy enough, but who still want to take benefit of the shared market. And benefit they do.

Mutual Fund Shares

Shares in the plan are purchased for you according to the rules of the plan and many restrictions on investment and redemptions apply. The shares are issued or redeemed by the investment advisor(s) typically in large blocks. These professionals issue and redeem shares throughout the day to keep the mutual fund making money. Mutual fund share prices are determined at the end of each business day by adding up the current value of the securities in the portfolio (after any expenses) and then by dividing the sum by the total number of shares outstanding.

Mutual Fund Diversification

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Contribute to an IRA - A Building Block for Retirement

Retirement Investing No Comments »

Why contribute to an IRA?  Because the government has allowed us to contribute on a tax deferred or tax free basis to our retirement.  Anyone who is risk averse (wants to maximize return without giving up too much risk) should be involved in some type of IRA.  There are two types of IRA s, the Traditional IRA, and the Roth IRA.  In this post, I am going to show you my approach to IRA s, as well as showing you how I shop for funds within my IRA.  The contribution limits for both the Traditional IRA and the Roth IRA are as follows:

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What is a Traditional IRA?

Retirement Investing 1 Comment »

A Traditional IRA (Individual Retirement Arrangement) is one of the most popular methods Americans use to save for retirement since it is an extremely versatile and simple. A Traditional IRA is a personal savings plan that gives you tax advantages for setting aside money for retirement. Taxpayers want to invest in an IRA, but when it comes to understanding which one is best for them and why, they are unsure. The information provided below will help you decide if a traditional IRA is right for you.

Tax Benefits

In the Traditional IRA,  all investments grow tax-deferred until they are removed from your account, meaning you are able to invest more of your money over the life of the IRA since they are paid with before-tax dollars.  Tax deffered means that the earnings in your Traditional IRA are not taxed until funds are withdrawn from your account.  Any IRA 401(k) contributions you  make to a Traditional IRA are typically fully deductible, but at least partially deductible, depending on your situations.  Taxable distributions may be taken without penalty starting at age 59½ and must be started by April 1st once you have reached 70½. 

Contribution Amounts

In previous years, each participant under the age of 50 in a Traditional IRA had contribution limitations of $3,000, but that amount has been increasing over the past few years. This is to help aid participants in being able to invest enough money for retirement with ever increasing costs and inflation. All participants over the age of 50 have higher contribution limitations as a ”catch up” benefit. For more information on your contribution limitations, see the chart below.

Traditional IRA Contribution Limitations
Year Age 49 & Below Age 50+
2002 – 2004 $3,000 $3,500
2005 – 2007 $4,000 $4,500
2008 - ? $5,000 $6,000
 

The key benefit of a Traditional IRA is tax-deferred growth.  Money invested in a Traditional IRA is pre-tax money, and therefore allows you to invest more of your hard earned money to save for retirement. You will want to review your situations before deciding if a Traditional or a Roth IRA is right for you. To compare the benefits of each, see my post on the subject, Invest in a Traditional IRA or a Roth IRA?, or my post describing the Roth IRA called, What is a Roth IRA?


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