The following guest post was written by Derek Sall from LifeAndMyFinances.com.
Have you thought about investing for your retirement? I sure hope so. In our world today, there are so many people that are underfunding their retirement because they choose instant gratification instead. While these individuals might look like they’re having the time of their life today, they might be cooped up in a dank, dark, state funded retirement home when they are older instead of residing in their home on the lake like you, the wise investor.
I have a friend that is incredibly cocky when it comes to financial investments. He always talks about the great picks he has made over the years, but for some strange reason I have never heard about him ever losing on a trade, and I am certain that it has happened many times. It is people like this that ultimately lose in the market. Their constant need to trade only racks up their transaction costs, which makes turning a profit nearly impossible. Many times it is best to obtain managed funds rather than trying to trade on your own. Here are just a few of those reasons:
We live in a world that is constantly on the go. If we take a moment to catch our breath, all of those opportunities might pass us by. In order to truly capitalize on the improving market to increase our investment funds, we must trust someone else to do it for us. Rather than spend every waking day tracking the market, we can simply hand over that responsibility to someone else, allowing us to do what we need from day to day. We certainly should check in on our assets once every quarter or so, but that’s way better than spending an hour hunkered over our computer each day.
We Know Less About the Market
The market isn’t at all what it used to be. A hundred years ago, investing was fairly simple. If a company was poised to turn a profit in the quarter and increase their total assets at the same time, the value of the stock would go up. Today, investing is more about politics and expectations. If XYZ company was expected to show an EPS of $0.58 and they only reported $0.50 for the quarter, their stock will tank, even though they actually made money. Beyond this, when there are issues in D.C., the stock market always seems to tumble. As a part-time investor, there is no way for you to keep track of all of this.
They Are Professionals
Managed funds are often a much better option because there are dozens of men and women that are making trades based on real-time knowledge and experience – far more than you could have by investing part-time. With their wisdom, your funds will be well protected.
I just realized that I hadn’t posted an update of our stock portfolio holdings for about a year and a half! Stocks and market stats still seem foreign to me, so Mr. BFS does most of our direct investing. We sold about half of our holdings late last year when we bought our new home. So here are the current stocks we are investing in via Scottrade, their current dividend yield, and what Mr. BFS said about them:
Conoco Phillips (COP) – 3.93% Yield – “They still have a good dividend based on what rate we bought at. And they haven’t had to spend the money on exploration that other companies have, so they put that money back into share repurchases and dividend growth.”
Intel Corp (INTC) – 3.92% Yield – “Good yield and a solid company. They’ve gotten a lot better in the last year or two with competing with their major competition, AMD, with their processors. They are still the #1 installed chip in pre-built computers. As long as they have that market share, we’re in.”
Johnson & Johnson (JNJ) – 3.04% Yield – “Bought it at a steal and has great payouts. We managed to buy when they were going through the Tylenol recall stuff and they’ve bounced back.”
People’s United Financial Inc (PBCT) – 4.55% Yield – “They have a fairly good dividend and regional banks are doing very well – better than national banks. Although this bank hasn’t done as well as I’d have hoped, but their dividend is keeping us in a holding pattern. We may sell since their financials have not done as well as I thought they would.”
PepsiCo Inc (PEP) – 2.83% Yield – “Great price at the time and we’re getting an excellent return.”
So there you go for straight-up stocks. My 401(k) is in the Vanguard 2035 target date mutual fund and was fully vested before I quit in July 2011, so it’s staying put for now and growing at about 11% per year.
One of our Roth IRA’s is in the Fidelity 2040 target date mutual fund that I selected (it’s returning about 12% a year), and Mr. BFS uses our other Roth IRA to invest in more dividend stocks (these dividends are auto-reinvested). Here are those:
Energy Transfer Partners (ETP) – “They are an energy pipeline company that are big players in the Trans-American pipeline. They also have an amazing yield.”
General Mills (GIS) – “I purchased this during the big crisis, so I assumed they wouldn’t suffer as much. It worked. They also had a good yield and they’re a solid company.”
Johnson & Johnson (JNJ) – “Solid company at a solid price when I bought in here too. I saw the huge price drop and said YES, PLEASE!”
Coca-Cola (KO) – “This is the most recent one that I’ve bought. It seems to be getting into the healthy drink options side of soda more than other companies - like Coke Zero is more successful than other diet sodas, and they have Vitamin Water. We also already had Pepsi in Scottrade…J&J was too hard to pass up twice, but I decided to branch out here.”
Microsoft (MSFT) – “When I bought it, the next generation consoles were going to be released. Then they flubbed with the Xbox 1. But they’ve recovered. Windows 8 was also a really big push into the mobile market (yeah, I know it sucks). But they are also on about 80-90% of home computers, so they’re worth keeping.”
Nokia (NOK) – “Nokia had taken a lot of flack and their stock plummeted, so I jumped on it at $6 a share. I bought it as a speculation bet on the idea that is had been oversold. That didn’t quite work. It was delayed a year and I am basically hoping to break even at least. I’ll give it another 3-6 months to see what happens after this new Nokia phone release.”
Walmart (WMT) – “This was another recession play. Even when people are broke, they shop at Walmart. And they had a great yield when I bought in.”
What are you investing in lately?
**This post is not to be used as a suggestion for investments. This is simply what we own. Make up your own mind and don’t whine to me if something tanks, thanks!**
Mr. BFS and I would love to diversify our investments for retirement, and the rental property we have is making us crave more. We’re looking at our buying options and finances right now to see if we really need to wait until next year like we originally planned. Here is how it is looking.
I was browsing foreclosures in our area last week and noticed two in our old neighborhood. That area is perfect for rental property!
- Homes built in 2004 and 2005.
- $110,000 to $130,000 foreclosures with 3-4 bedrooms and 2.5-3 baths.
- The homes need less than $10,000 in repairs and basic renovations before renting.
- Great school district.
- A solid market for tenants at $1300-$1500 per month since the area is nice (safe suburbia close to groceries and entertainment).
- Well built homes (we have had very low maintenance costs on our first house in these last 6 years).
- Affordable property taxes ($2500-$3000 a year).
- No home owner’s association. Score!
- 5 miles away from our new house (10-20 minute drive depending on the time of day). That’s close enough to keep an eye on our properties but far enough away that we won’t be physically visited by our tenants very often.
The only thing holding us back is the cash on hand needed to buy another house.
The Financial Picture
At 4% interest, a 30 year mortgage after putting 20% down for one of the foreclosures available right now would run about $450-$500 a month plus about $300 a month for property taxes and home insurance. That’s $800 a month for a property that can easily rent for $1300 right after it’s fixed up. That looks to be a great investment!
Plus, even in the no-tenant months, we can cover $800 extra without risking our overall financial health. It would bring our monthly nut including taxes to $8000 again like late 2012 instead of the $7200 it is at right now. We have been hitting that income target for 2 years. We also only have one debt – the $205,000 mortgage we have left on our current house. So this would bring our debt up to about $300,000, but our properties would be valued at a combined $500,000.
BUT, buying another house right now would also mean we would need the cash on hand for 20% down, closing costs, and renovations. A realistic estimate on the high side of all of that would be $40,000. We do have a little more than $40,000, but that would pretty much wipe out most of our cash savings. We never would do that since padding is just plain necessary when you are self-employed.
- Wait until next year and see how much cash we can save up by then. The risk here is that there won’t be any foreclosures available in our old neighborhood by next year. We may have to expand outside of our comfort zone or pay $130,000-$150,000 for a non-foreclosure.
- Take out a home equity loan on our paid off rental home to cover that $40,000 needed around closing. But then we’d have two more loans on top of our current mortgage.
- Look into loans that don’t require 20% down. We do have 2 years of self-employed tax returns now, so finding a loan will be easier than it was last year hopefully. But self-employment may simply mean that banks will want 20% down. We’ll visit a couple and see what they suggest.
- Ignore rental properties completely and open up a SEP IRA as soon as possible instead. I just can’t see retirement accounts making the interest that would make them more profitable than $1300-income rental properties that only cost $800 a month. Property values in this area are still pretty low and make for great long-term investments (there aren’t many places where you can get a 2000 square foot home for $110,000).
We’re leaning towards talking to some banks and seeing what our loan options would be. If 20% down is necessary, we’ll probably wait until next year.
What would you be leaning towards in our position? What obvious options have I missed?
For the past year, we really haven’t been able to stick to a specific plan for saving, investing, and putting aside money for fun. From April through October 2012, we were stashing away as much cash as possible just to close on our new house that was being built. From October through December 2012, we were rebuilding cash reserves and making an attack plan to pay off our rent house mortgage. And from January to early April 2013, we were redirecting all extra money towards that mortgage which is now paid off. So, for the first time in a year, we could really use a plan that isn’t all-or-nothing.
The New Plan
Mr. BFS really misses the balance that we had up until this time last year between paying our bills, saving for our future, and budgeting in the fun stuff . He wants to get back on track. I agreed that it was time to step back and breathe a little. So here is our new spending and savings plan…
Step One – Cover the Stuff in Our Budget
Here is our current budget of necessary expenses, chosen luxuries, and the new-to-us car savings goal that we need to be able to cover every month no matter what…
- Income Taxes – $2500
- New-to-Us Car Fund – $500
- Home Mortgage – $990
- Home Insurance/Property Taxes/HOA – $750
- Rent House Home Insurance/Property Taxes – $275
- Health Insurance – $360
- Life Insurance – $30
- Car Insurance – $55
- Electricity – $175
- Water – $60
- Natural Gas – $40
- Gasoline – $150
- Eating Out – $250
- Groceries – $250
- Sprint – $150
- Cable/Internet (DSL) – $120
- Medicines – $20
- Toll Roads – $25
- Housekeeping – $175 (average over the year)
- Lawn – $80 (average over the year)
- Miscellaneous – $200
- Cash – $100
- Total Expenses = $7255
Then comes the fun part. We bring in about $8000 a month from the business and at least $2000 from rent house and reffing income that Mr. BFS brings in. So, in a normal month, it looks like we’ll have about $3000 extra to leverage how we wish. Here is what we came up with.
Here is how we are allocating the monthly extra until our 2013 Roth IRA’s are taken care of:
- Roth IRA’s – 60%
- Emergency Fund – 10%
- Rental Property Maintenance Fund – 10%
- Mortgage Payoff – 10%
- Vacation Account – 5%
- Fun Money Accounts – 5%
Long Term Plans
We aren’t 100% on all of our long-term plans, but we do know we want to be financially independent as soon as possible. That mostly means that we want to work towards complete debt freedom and funneling more into our retirement planning. With that in mind, when the Roth IRA’s are fully funded, we will be opening a SEP IRA and Mr. BFS will start investing in some of our favorite stocks again. In fact, we may end up doing it this way every year – fully fund all of the Roth IRA’s and then move on to putting as much into the SEP IRA and stocks as we realistically can while still having fun with 10-20% of the extra too.
Anyway, thanks for reading along as we figure stuff out. How have you been doing? Anything you want to just let out?
Ever since we started attacking the rent house mortgage with a vengeance, we sort of put our early retirement plans on auto-pilot. We’re nearing the end of that goal (yay!), so now we have to take another look at our retirement planning.
Our Current Retirement Savings Vehicles
Okay, so I just turned 30. When I started this blog 3 years ago, we were aiming to retire at age 52. That is still the goal on paper, but we are honestly trying to reach financial independence as soon as humanly possible since self-employment only has one huge downside in my opinion – not knowing for sure when it’ll be a big month and when it’ll be a lean one. Financial independence would give us the freedom to do our jobs without worrying so much. Here is how we are saving for retirement so far:
- 401k – I still have money growing in my old 401k in a target date mutual fund
- My Roth IRA - We fully fund this every year and use a different target date mutual fund
- Hubby’s Roth IRA – We fully fund this every year too and he selects individual high yield dividend stocks
- Scottrade account – Hubby invests this money in high dividend yield stocks too. He makes sure to diversify the investment niches though.
- Rental property – We rent out our first home and plan to do so into retirement.
As of right this second, this is where our retirement planning has ended. I saw this post about retirement tips through Genworth and it seems that we are on track. Nice to feel validated, lol. They even suggest getting part-time jobs in retirement and we have ideas lined up. Hubby is already a varsity sports official and plans to continue until he physically can’t do it anymore. I would love to blog or do whatever replaces blogging in the future. I also love volunteering for charities, so I will at least have a free hobby.
But, good enough doesn’t help my brain turn off the worry train. So after we do pay off the rent home’s mortgage, we will be looking at other options like a self-employment IRA and/or seeing how much more we can squirrel away for possible other rental properties. Rental income is pretty dang addictive. Overall, the possibilities may be endless, but we’ll choose a path when we know what we have to work with…isn’t that always how it is?
How are you planning for retirement? Any suggestions or questions?
This post was inspired by Genworth, but I just ran with the topic since I needed to update you all anyway. All of this is 100% Crystal.
As I wrote about yesterday, Mr. BFS and I just fully funded our 2012 Roth IRA’s last week with the last $8800 that we needed to contribute. I’d love for it to be that easy, but we also had to figure out what to invest in with that cash. Here’s what we came up with…
Crystal’s 2012 Roth IRA Investments
I’m easy. I like target date mutual funds. Specifically, my 401k is invested in Fidelity Freedom 2035 (FIHFX) and my Roth IRA is fully invested in Fidelity Freedom 2045 (FFFGX). Both returned about 12-13% over the last year and only lost about 25-30% of their value during the crash (not too bad when some people lost 50% or more). My two accounts have completely rebounded and have even grew some since the crash since that was also when I contributed more cash.
So, the $3800 I had left to contribute to my Roth IRA was used to buy more shares of FFFGX. It’s probably not a sexy choice, but I like target date mutual funds since they are like investing in a great portfolio that is automatically adjusted to be less risky as time goes on. I really appreciate smart and easy.
Hubby’s 2012 Roth IRA Investments
Mr. BFS is not as easy as I am. He likes choosing investments. That is why he runs our Scottrade account for stocks. He ended up using his $5000 to invest in two main stocks:
- Walmart (WMT) - He said he chose this one for $3500 since he thinks it will continue to be a sales leader and they are doing a big, patriotic push in advertising that may go over well. Their price has also dropped a little over the last 6 months, so he think it would be a good time to buy. And he likes their dividend and how often they are known to raise their dividend. Finally, he says we don’t have much other stock in this niche, so it’s diversification.
- Microsoft (MSFT) - He put the other $1500 into Microsoft since he thinks it also has dropped enough to be a nice buy. They also have a good divend and history of dividend growth. And we don’t already have a tech company in our portfolio, so he diversified again. Plus, the crappiness of Windows 8 has already been factored into the stock and the new X-Box console should be released in the next 18-24 months.
Overall, I’m just happy that we have two fully funded Roth IRA’s for 2012. Yay! But my competitive nature now wants to see how well my target date mutual fund does against his specific investments in 2013, lol.
Do you have a Roth IRA? What do you invest in?
The following is a guest post from John Border, an IT project manager in a financial institution (largest bank in the world) and a finance blogger. He blogs at The University of Money.
When it comes to investing your hard-earned cash, there area number of avenues that can be taken to build your portfolio. One of the better options in the realm of asset management is investing in a Roth IRA, or Individual Retirement Arrangement. Once you make the decision to become a Roth IRA holder, questions begin to swirl about the actual commitment involved, how to get the most out of your decision, and exactly who is the best Roth IRA provider to handle your money.
What is a Roth IRA?
A Roth Individual Retirement Arrangement, or IRA, is a special retirement plan that taxes the investment in the beginning, or front end, of its savings plan, while allowing the removal of the funds after a specified amount of time without taxation. This means that once your money goes in, and is diversified through your choice — or the choice of your financial adviser, should you be inclined to provide him or her with the objective responsibility– of securities, stocks, bonds, mutual funds, or mutual funds. The Roth IRA is a popular investment strategy as the funds that exist within the arrangement are available for removal tax free after a specified amount of time, or after certain stipulations are met. These requirements will differ for everyone, and can prove quite popular to those who are closing in on retirement, or who are looking for flexibility in their investment opportunities.
Compare the providers – What to look for ?
When you are ready to consider opening a Roth IRA account, there are several things to consider before doing so including your income level, eligibility requirements, comparable fees, and choices in diversity and conversion opportunities. These categories will differ for everyone, so it is imperative to talk with a financial advisor you can trust. When you are lookingfor the best Roth IRA account provider, look no further than the more trusted firms in the industry, as they will provide you with clear instructions and direction on opening your account, and getting the most from its existence. In addition, the following firms provide online support, maintenance and review soyou know exactly how your investment is working for you at all times.
Brokerages to Compare
Charles Schwab: Schwab is a proven leader in the investment industry, and its top ranking extends into the Roth IRA market.
Fidelity: Fidelity provides clear language, and easy eligibility compliance for just about everyone who is interested in a Roth IRA. Their trusted name is only second to Schwab in this category.
Scottrade: Scottrade provides a local touch and personal commitment to managing Roth IRAs, which makes them a favorite among those who enjoy one-on-one financial counseling.
Vanguard: Vanguard provides exceptionally low prices and commissions and best for going for their trusted target date retirement funds and ETF’s.
It is important to understand all of the rules, regulations and commitments necessary to contribute to a Roth IRA before getting started down the road of its particular investment strategy. Research a number of firms prior to choosing one, and be sure to get all of the facts up front, so there are no surprises as you continue to contribute to the fund.
Crystal’s Comments: Our two Roth IRA’s are with Fidelity. I like their target date mutual funds, hubby likes how easy they are to use, and we both like how straight-forward it was to open and maintain our accounts.
Where would you go (or where have you gone) to open your Roth IRA? Or what retirement account type do you prefer?