Investing For Your Future
Monthly IFYF Investment Message
December 2004
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The end of one year and the beginning of another are a great time to review your finances, determine your progress to date, and make a "to do list" of tasks to improve your financial well-being. Below are seven suggested strategies:
- Calculate the actual return on all of your financial accounts (e.g., bank, brokerage firm, mutual funds), not just the amount that was deposited during the past year. A formula to determine the return on either an individual investment or an entire portfolio can be found in the new Cooperative Extension book Money Talk: A Financial Guide For Women. This 192-page publication is available through the publisher's Web site at www.nraes.org. In order to do the calculation, you need to know the January 1 balance, the December 31 balance, and the amount that was deposited into investments throughout the year.
- Consider making a contribution for 2004 and 2005 to a Roth IRA. You give up a tax write-off today (Roth IRAs are funded with after-tax income), at some of the lowest tax rates ever available, in exchange for tax-free earnings upon withdrawal. Another advantage of Roth IRAs is that there is no age requirement when account earnings must be withdrawn and taxed. This provides maximum flexibility for account owners and potential estate planning benefits for heirs.
- Eliminate consumer debt as quickly as possible. Making a payment on an 18% credit card is equivalent to earning 18% risk-free and tax-free. When you pay off a creditor (e.g., Sears), add the money that you had been paying to the amount due to remaining creditors. Start making extra payments first on the debt with the highest interest rate.
- Examine your spending habits. Choices matter. People generally have more control over their expenses than their income. Resolve to track income and expenses for a month to see exactly where your money goes and identify spending "leaks" that can provide money to invest.
- Calculate what you need to save to maintain your desired lifestyle in retirement. A simple calculation is to plan on saving $300,000 for every $1,000 of monthly income (to supplement a pension and/or Social Security). For example, $3,000 of supplemental monthly living expenses would require a $900,000 nest egg. This calculation is based upon the maximum 4% withdrawal rate recommended by many researchers. Four percent of $300,000 is $12,000 per year or $1,000 per month. Studies have found that a portfolio comprised of 50% stock and 50% fixed-income and cash assets will last 35 to 40 years with a 4% withdrawal rate.
- Consider hiring a certified financial planner for a "financial check-up" and future scenario planning. Many financial planners and large investment firms offer Monte Carlo analyses, which are probability calculations of the chance of running out of money during your lifetime. Using the results of a Monte Carlo analysis, investors and their financial advisors can determine a prudent withdrawal rate to extend the life of an investment portfolio.
- Conduct an "automation inventory" of your personal finances. How many current bill payments and investment deposits are made automatically on a regular schedule? Resolve to do more. Invest automatically so you don't have to think about it and to take the emotion out of investing decisions. Most people aren't lazy when it comes to their finances...they're simply very busy. Automated financial practices (e.g., saving and bill-paying) help people manage their money efficiently so they can get back to living their life.
Happy holidays and best wishes for a successful New Year.