End of the Year

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So, did you maximize your Traditional IRA or Roth IRA for 2012 yet? While you COULD wait as long as next April 15th to do so, at that point most of us will still be paying off the ridiculous overspend on "the holidays." Instead, why not maximize your $5,000 or $6,000 contribution now before you run up a similar amount on your cornucopia of credit cards? If you're 50 or older, make it $6,000. If you can't do the $5,000 or $6,000, contribute what you can. If your spouse doesn't work, you can even maximize his or her IRA contribution for 2012.

Not sure about you, but I don't remember who gave me what last year--I can afford all the sweaters, ties, and books my heart desires at this point. On the other hand, watching my IRA accounts grow over time . . . now that is a gift that keeps on giving.

Fixed and Indexed Annuities

A fixed annuity is a product sold by an insurance company that takes an investor's purchase payments and promises a minimum rate of return on the money. Many individuals opt for monthly payouts that last for the rest of their life, no matter how long they end up living. So, if you like the idea of receiving a promised monthly check backed up by a strong insurance company, you might like a fixed annuity. The rate of return is not high, but if you end up living 10 years longer than you ever dreamed, these guaranteed payments will sure come in handy.
Some people want to experience some of the upside of the stock market and, therefore, they buy equity indexed annuities. These products are a little complicated. First, the individual is credited with some of the upside on the S&P 500--if there is a 70% participation rate, he only sees a 7% increase if the S&P 500 moves up 10%. And, there is usually a cap placed on the how much the contract can go up in any given year, period. So, if the S&P 500 goes up 30% one year, the contract would not go up 21% but would , instead, be capped at maybe 10% no matter what happens. The indexed annuity looks better after a bear market for stocks--here's an insurance company promising to give the investor a return on his money and a return of his money. For a safe-money investment that will protect you against outliving your retirement savings, investigate fixed and indexed annuities. LearnHowToInvest

Should I Use a Traditional IRA or Roth IRA?

IRA? Golf clubs?

So, do you want a tax break now or a tax break when you retire? With a Traditional IRA you can often deduct what you put in each year. If your income was going to be $50,000, you could put $5,000 into the Traditional IRA account, and then your taxable income would drop to $45,000. The $5,000 would grow (we hope) over time without being taxed until you withdraw funds in retirement. As your investments earn interest, dividends, and capital gains, you can reinvest that money into more mutual funds, stocks, or bonds to earn compounded returns. On the other hand, if you make around $50,000, you might want to put $5,000 into your Roth IRA. This way, your taxable income is still going to be $50,000 now, but in retirement all the money coming out of your Roth IRA is tax-free. Big difference, right? If you withdraw $60,000 in retirement from your Traditional IRA, you might only keep $45,000 or less of that after taxes are figured in. In the Roth, on the other hand, if you withdraw $60,000, you keep $60,000. Remember, for the Traditional IRA you must begin withdrawals at age 70 1/2, while in the Roth, there is no such rule. Also, no more contributions are allowed into a Traditional IRA after age 70 1/2, while contributions can continue into a Roth IRA indefinitely, as long as you have earned income.Earned income is what it sounds like--you have to earn it by working, not by collecting bond interest, dividends, capital gains, or rental payments on your investment properties. If you want to keep funding your Roth IRA at, say, age 77, you'll probably need a part-time job. If the maximum contribution is $7,000 at that point, you'll need to make $7,000 or more if you want to max out your contribution. Then again, how much tax-deferral do you need at age 77? Remember, you will have to make withdrawals from your Traditional IRA at age 70 1/2. And, even if it is a Roth IRA, that money is there to pay your living expenses in retirement. Caveat: if your income is too high, you can't fund a Roth IRA. If you participate in an employer-sponsored plan, say a 401K, and you start making around $70,000 or more, you won't be able to deduct your contributions to a Traditional IRA. At that point, you'd probably be advised by your CPA to put money into your Roth IRA. But, I just try to teach the basics to help the average investor make sense of all the terminology involved with retirement savings. Always check out tax issues with your CPA. And, if you're a professional, you know that many, many details have been omitted from this overview. Any time we drill down into all the details of these accounts, we end up with hundreds of pages no one wants to read other than CPAs, CFPs, and tax attorneys. Get the E-Book Now

Broker Check

Are you working with a "stock broker"? Maybe he calls himself a "financial advisor" or a "registered representative." Whatever the case, have you checked to see if he has any disciplinary problems or has had to pay out awards to clients who convinced the arbitrators that he mishandled their accounts?

FINRA is the securities industry regulator, and they are quite happy to provide you with such information at www.FINRA.org . . . look for "BrokerCheck" and then type in the name of your broker and/or his particular firm. You'll see his employment history, which exams he has passed, and you'll see if there are any disciplinary events to disclose. If so, read them. If not, chances are you're working with someone who--at least so far--has kept himself out of hot water. Get the E-Book Now

Protect Your Income

Individuals and families face many financial risks. Obviously, our homes and automobiles are insured both in terms of damage to our property and liability for any damage we might cause to property or other people. Many consumers are so caught up in consuming that beyond home and auto insurance, the rest is considered a luxury, but with so many Americans living paycheck to paycheck, the question each of us really has to face is this: how long could I go if I got sick/injured and could no longer work? One month? Three months? A year? For most people, one month would put them on the edge of disaster, and within three months the house would be in foreclosure, with bankruptcy right up ahead. One in four of us will get sick/injured and be unable to work for an extended period, yet almost none of us has insured against this loss of income. Disability insurance--if you don't have it, google it. See what it's about. That crazy duck in the commercials isn't quacking about nothing, people. Frankly, I couldn't sleep (let alone ride a bicycle in traffic) without knowing how much monthly income I would receive should the unthinkable happen to me. I would have to cut back a bit on spending, but I could get by to age 65 on the disability insurance policy. Let's just hope I never have to find out for sure. Insurance is for peace of mind. You gotta have it; you never actually want to use the protection, obviously.
Many Americans are convinced they will never get sick or injured--even though we aren't looking as svelt as we used to as a nation, are we--and even more, apparently, are convinced they won't die earlier than expected. Really--you didn't lose any classmates in high school, college, in your 30's, in the past few months if you're over 50? Let's get real. If most Americans are already living paycheck to paycheck, what happens if the breadwinner dies at age 42? Does he have life insurance? If not . . . how long before the widow loses the house, struggles to find a job, and declares bankruptcy? Life insurance--if you don't have it, google it. Just type in the question, "why do I need life insurance?" or "what types of life insurance policies are available?" Insurance isn't exciting. It isn't anywhere near as fun as watching a stock double in value over time, but you really can't invest your money until you've first protected against a loss of income due to disability or death. Get the E-book Now

IRAs are for Real Investors

Anyone who gets a good job with benefits can fill out some paperwork to join the 401K or 403b plan. It's the people who go out of their way to set up their own IRA who impress me. With a Traditional or Roth IRA, no one is helping you. It's just your decision to set some money aside for your retirement. Should you start a Roth IRA or a Traditional IRA? Ask your accountant--don't just wing it. For now, know that the Traditional IRA gives you a tax break now, while the Roth gives you a tax break only in retirement. Whether you can use one or the other depends on your income level and whether you're already in a retirement plan sponsored by your employer. If you make a healthy six-figure income, forget the Roth contribution--it isn't happening. If you make that kind of money and are also in a retirement plan through your job, you also won't be able to deduct what you put into your Traditional IRA, so you can pretty well forget that option. The IRAs I'm talking about here are really for people who are starting to make a decent salary, but not absolutely killing it. If you are in a plan through your employer, your ability to deduct your contribution to a Traditional IRA will be phased out in the $56,000-$66,000 range for single filers and $90,000 - $110,000 for married couples filing jointly. If that describes you, your accountant will likely tell you to put your contribution into a Roth IRA. If you're not in a plan through work, you can deduct your contribution to the Traditional IRA, so, if your accountant agrees, put your money there. If your income level plus your participation in a company plan means you can only deduct part of your Traditional IRA contribution, you might want to contribute only that much and then put the rest into your Roth IRA. But, once your income rises to the healthy six-figure range, your days of making Roth IRA contributions are over. Max out your employer-sponsored plans and then either consider an annuity or--my favorite--just opening a regular, taxable brokerage account, where there are no limits on anything, really. Doesn't matter what your income is, doesn't matter how much you want to put into the account, and there's never any weird requirement to wait until your 59 1/2 or to start taking out funds at age 70 1/2 (what's with the half?). Just fill out some paperwork, fund your account, and invest in whatever you want through TD Ameritrade, Charles Schwab, etc.

However they do it, people who start their own IRA or taxable brokerage account are called "self-directed investors." Does that sound like you? All it takes is a little bit of knowledge, and a little bit of money that you can afford to set aside. Get the E-book Now

Omaha, Somewhere In Middle America

Well . . . I finally broke down and bought my motel room for next weekend's "Woodstock for Capitalists," also known as the annual shareholder meeting of Berkshire Hathaway in Omaha, Nebraska. Price of admission? At least one share of stock. I happen to have 80 shares, so I'm good to go.  Warren Buffett is now 80 years old and has named a successor, so I figure I'd better go now while I have the chance. What is this company called Berkshire Hathaway, and why on earth would its annual shareholder meeting require a sports stadium plus over-flow seeting to handle all the attendees? Berkshire Hathaway is a holding company, which means it owns pieces and whole parts of many different companies, including Wells Fargo, Coca-Cola, See's Candies, Dairy-Queen, Fruit of the Loom, and Geico. Primarily, they're a big insurance company, so they're able to take the premiums paid by their clients and invest them aggressively into stocks and companies that make anything from bricks and paint to dilly bars and men's boxer-briefs. Last time I attended, in 2009, the premiums they don't need to keep locked up in reserve represented a "float" of $57 billion. So, no, you can't really copy Warren Buffett and Charlie Munger's results by simply buying the same stocks they buy. Why not? You don't have a $57 billion float, nor do you know how to calculate a buying opportunity with nearly the precision of these billionaire octogenarians.
I'll write more from Omaha. For now, see if you can download the annual letter to shareholders. Some of my favorite and most informative reading, period.  http://www.berkshirehathaway.com/letters/letters.html

What is "growth investing"?

Value investors like to buy stocks trading at low multiples. Growth investors buy stocks at high price-to-earnings or price-to-book ratios because the companies are hitting all their marks currently. Starbucks still trades at a growth multiple in the 20's because the company keeps opening stores, keeps increasing revenue, and keeps increasing profits. Then again, if you read Starbucks' 10K reports, you will see under the risks section that expectations for future performance are very high and, therefore, the stock price could plummet even if the company is still making bazillions of dollars. That's the problem with growth stocks--more volatile and priced for perfection. They also pay no or low dividend yields. Starbucks only recently started paying a dividend, and today the yield is right around 1.2%. With US Treasury Notes yielding only around 2%, the Starbucks dividend yield sounds pretty good, actually. And, it offers potential for growth, meaning the share price could go up over time. Or not. Nobody knows the future. If you want safety, buy the 10-year Treasury Note and live with 2% interest. If you can live with less income now but the potential for the share price to increase, and the dividend to increase, too, buy the common stock trading as a "growth stock."

what is value investing?

value investing involves buying properties that the investor feels are underpriced/undervalued in the secondary market. If you invest in real estate, perhaps you are attracted to fixer-uppers. On the surface, they look pretty nasty. However, other buyers seem to be overlooking the big yard, the rentable parking spaces, the attic that can be converted, and the new shopping mall going up down the street. With a little TLC, this property could turn out to be a lot more valuable some day. Similarly, if a public company, e.g. Dell or Krispy Kreme, is suffering a setback, the negative headlines tend to drag down the stock price. If you feel that price is irrationally low, you buy the stock and call yourself a value investor. If you don't want to pick stocks, buy a no-load value fund with reasonable expense ratios and high Morningstar and Lipper ratings.

It's a New Year . . . right?

Remember how confident you were just a few weeks ago when writing out all those so-called "New Year's Resolutions?" How many of those are being attended to now that we're more than one week into the "new year"?
For someone like you, trying to save up for retirement, some really good resolutions/habits for the "new year" would include:

• packing a lunch vs. eating out
• making coffee at home vs. paying $5-10 a day at SBUX
• using coupons for essential purchases--try to use store PLUS manufacturer's coupons on coffee, paper towel, cleaners, toothpaste, etc.
• doing the paperwork to maximize the 401K, 403b, 457, etc. plan
• making your maximum IRA and/or Roth contribution for 2011 (you have a few months)