Volatile Market Good Time for Retirement Savings

Jane Young, CFP, EA

Jane Young, CFP, EA

This is a great time to maximize your retirement contributions.  Not only will you save money on taxes but you can buy stock mutual funds on sale.  The one year return on the S&P 500 is down about 8% and market volatility is likely to continue throughout the year.

Dollar cost averaging is a great way to invest during a volatile market and it is well suited for contributing to your retirement plans.  With dollar cost averaging you invest a set amount every month or quarter up to your annual contribution limit.  When the stock market is low you buy more shares and when the market is high you buy fewer shares.  You can take advantage of dips in the market and avoid buying too much at, inopportune times when the market is high.

Ideally, the goal is to maximize contributions to your tax advantaged retirement plans however, this isn’t always possible.  Prioritize by contributing to your employer’s 401k plan up to the match, if your employer matches your contributions.   Your next priority is usually to maximize contributions to your Roth and then resume contributions to your 401k, 403b, 457 or self-employment plan.   Contributions to traditional employer plans are made with before tax dollars and taxable at regular income tax rates when withdrawn.  Roth contributions are made with after tax dollars and are tax free when withdrawn in retirement.   Some employers have begun to offer a Roth option with their 401k or 403b plans.

For 2015 and 2016 the maximum you can contribute to an IRA is $5,500 plus a catch-up provision of $1,000, if you were 50 or older by the last day of the year.  You have until the due date of your return, not including extensions, to make a contribution – which is April 18 for 2015. There are income limits on who can contribute to a Roth IRA.  In 2015, eligibility to contribute to a Roth IRA phases out at a Modified Adjusted Income (MAGI) of $116,000 to $131,000 for single filers and $183,000 to $193,000 for joint filers.  In 2016 the phase out is $117,000 to $132,000 for single filers and $184,000 to $194,000 for joint filers.

Your 401k contribution limits for both 2015 and 2016 are $18,000 plus a catch-up provision of $6,000, if you were 50 or over by the end of the year.  If you are employed by a non-profit organization, contact your benefits office for contribution limits on your plan.

If you are self-employed maximize your Simple (Savings Investment Match Plan for Employees) or SEP (Simplified Employee Pension Plan) and if you don’t already have a plan consider starting one to help defer taxes until retirement.

Regardless of your situation take advantage of retirement plans to defer or reduce income taxes on your retirement savings.  Current market volatility may provide some good opportunities to help boost your retirement nest egg.

Stay The Course! Ten Steps to Help You Through Uncertain Financial Times

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Jane M. Young, CFP, EA

1. Don’t react emotionally! This will result in a constant cycle of buying high and selling low. Once you sell, you lock in your losses. Stay the course and focus on what you can control.

2. Make sure you have an emergency fund of three to six months of expenses.

3. Evaluate your asset allocation to be sure it is consistent with the timeframe in which you need to withdraw money. The stock market is a long term investment; you should never have short term money in the stock market. Make adjustments to your allocation based on your long term goals and need for liquidity not on fear.

4. Maintain a well diversified portfolio.

5. Pay-off credit cards and high interest consumer debt. Be wary of variable rate loans, lines of credit and mortgages. The downgrade in the U.S. credit rating could hasten an increase in interest rates.

6. Get your personal finances in order. It’s always a good idea to understand your spending and keep expenses in line with your income and financial goals. This is a good time to tighten your belt to be prepared for unexpected emergencies.

7. Use dollar cost averaging to invest new money into the stock market. Volatility in the stock market creates great buying opportunities.

8. Don’t get caught up in the media hype. They are in the business to sell newspapers, magazines and television commercials. Avoid the new hot asset class they are trying to promote this week. Sound investment advice is boring and doesn’t sell newspapers.

9. Take steps to secure or improve your income stream. Are you performing up to speed at work? Are you getting along with co-workers? Should you take some classes to keep your skills current? Are you underemployed or under paid for your education and experience? Consider a second job to pay down excess debt.

10. Stay calm, be patient and focus on making sure your financial plan meets your long term goals and objectives. Stay the course, this too shall pass.

You Are Invited to our 1st Fireside Chat of 2011 on Thursday, February 10th

Please join us at Pinnacle Financial Concepts, for our first Fireside Chat of 2011. This is a great opportunity to join us in a very relaxed atmosphere to ask questions, and get prepared for filing your tax return. On Thursday, February 10, from 7:30 to 9:00 a.m. our topic will be “There’s No Such Thing as a Stupid Investment Question” with a bonus (apologies to David Letterman) of “The Top 10 Things to Think About During Tax Season”. We’ll have a basic overview of investment definitions and things to know about investments to spur a discussion on the topic.

Please call 260-9800 x2 to reserve your spot at this chat. There is no charge, but we will limit the number of available seats and schedule an overflow date if needed.   Free coffee and donuts will be served and, as always, this is purely educational, no selling!!

10 Investment Principles that Never Go Out of Style

Jane M. Young CFP, EA

Frequently people talk about how everything is different and we should change the way we invest. Yes, we have just experienced a very difficult year with some major changes in our economic situation. However, every time we go through a major market adjustment if feels like “this time is different”. We could take numerous comments made at the end of the last bear market and insert them into today’s headlines without missing a beat. I call this the “recency effect”; bad times always feel more desperate while we are experiencing them. We need to step back and look at the big picture; don’t throw the baby out with the bathwater. Good, sound investment fundamentals are still valid. Some people may reassess their tolerance for risk, start saving more money or cut back on their discretionary spending – but the following investment principals are good, time tested guidelines that everyone should follow in any market.

1. Don’t time the market – The stock market is counter-intuitive. Generally, it may be better to invest when things seem most dire and sell when everything is rosy. It is impossible to predict the movement of the stock market and history shows that those who do frequently miss out on big upswings.

2. Dollar Cost Average – This enables you to invest a set dollar amount every month or every quarter regardless of what the market does. As a result you buy more shares when the price is low and fewer when the market is high. Dollar cost averaging helps you mitigate risk because we don’t know what the stock market is going to do tomorrow.

3. Maintain at least 3 to 6 months of expenses in an emergency fund – This is especially important in difficult financial times when stock market values are low and unemployment is high. Unless you have a very secure job I currently recommend a 6 month emergency fund.

4. Don’t invest in anything you don’t understand – If you just can’t get your head around something after it’s been explained or you have done a reasonable amount of research don’t invest in it. If an investment opportunity is overly complicated something may be rotten in Denmark.

5. Don’t Chase Hot Asset Classes – Today international funds may be skyrocketing and tomorrow it may be small cap domestic stock funds. Don’t forget what happened to the stock market after the dot.com bubble burst.

6. Diversify, Diversify, Diversify – Everyone needs to diversify with a mix of fixed income and equity investments that is consistent with their own unique investment goals and objectives. Although most stocks dropped in unison over the last year, I still think there is value in diversifying between different types of stock mutual funds. I believe we will see some categories of stocks outpace others as the market rebounds. Depending on your risk tolerance, a small allocation in commodities and real estate may be advisable.

7. Don’t Make Emotional Decisions – Many investment decisions are triggered by fear and greed and they are equally damaging. Don’t make rash decisions based on emotion. Remember the stock market is counter-intuitive.

8. Don’t put more than 5% of your assets in one security – Any given company can go bankrupt as we have seen with many financial and automobile firms over the last year. I encourage the use of mutual funds over individual stocks to help mitigate this type of risk. If you do invest in individual stocks don’t put too much faith in any one company. If you are investing in your own company and you have a strong understanding of the firm’s performance you could go up to 10%.

9. Be tax smart – Take advantage of tax advantaged retirement plans such as Roth IRAs and 401k plans. Consider tax consequences when re-balancing your portfolio. Use a bear market to harvest some tax losses and off-load some bad or inappropriate investments.

10. Be aware of fees and surrender charges – When selecting investments be aware of high fees and commissions. Tread cautiously with anything that contains a contingent deferred sales charge. Many clients have come to me with a desire to sell or transfer previously purchased investments, usually annuities, only to find they have a 5-10% surrender charge if they sell within ten years of purchase. A surrender charge can have a big impact on your flexibility. If you really want a variable annuity buy one with low fees and no surrender charges.

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