For 2010 and 2011, the most that an individual can contribute to a traditional IRA or Roth IRA generally is the smaller of: $5,000 ($6,000 if the individual is age 50 or older), or the individual’s taxable compensation for the year. You have until your taxes are due (April 15th, 2011) to add to your IRA for 2010.
This is the most that can be contributed regardless of whether the contributions are to one or more traditional or Roth IRAs or whether all or part of the contributions are nondeductible. However, other factors may limit or eliminate the ability to contribute to an IRA as follows:
- An individual who is age 70½ or older cannot make regular contributions to a traditional IRA (just to make things complicated you can add to a Roth IRA) for the year.
Contributions to a Roth IRA are limited based on income. The limits are based on modified adjusted gross income (which is before deductions are taken). The Roth IRA earnings limits for 2010 are:
- Single filers: Up to $105,000; from $105,000 – $120,000 (a partial contribution is allowed)
- Joint filers: Up to $167,000; from $167,000 – $177,000 (a partial contribution)
For 2011 the earning limits increase to
- Single filers: Up to $105,000; from $107,000 – $122,000 (a partial contribution is allowed)
- Joint filers: Up to $167,000; from $169,000 – $179,000 (a partial contribution)
The income limits do not cap what you can add using a 401(k). So if you were planning on adding to a Roth IRA but cannot due to the income limits you may want to look into increasing your 401(k) contributions.
The biggest investing failing is not saving any money – so failing to invest. But once people actually save the next biggest issue I see is people confusing the investment risk of one investment in isolation from the investment risk of that investment within their portfolio.
It is not less risky to have your entire retirement in treasury bills than to have a portfolio of stocks, bonds, international stocks, treasury bills, REITs… This is because their are not just risk of an investment declining in value. There are inflation risks, taxation risks… In addition, right now markets are extremely distorted due to the years of bailouts to large banks by the central banks (where they are artificially keeping short term rates extremely low passing benefits to investment bankers and penalizing individual investors in treasury bills and other short term debt instruments). There is also safety (for long term investments – 10, 20, 30… years) in achieving higher returns to gain additional assets – increased savings provide additional safety.
Yes, developing markets are volatile and will go up and down a lot. No, it is not risky to put 5% of your retirement account in such investments if you have 0% now. I think it is much riskier to not have any real developing market exposure (granted even just having an S&P 500 index fund you have some – because lots of those companies are going to make a great deal in developing markets over the next 20 years).
I believe treating very long term investments (20, 30, 40… years) as though the month to month or even year to year volatility were of much interest leads people to invest far too conservatively and exacerbates the problem of not saving enough.
Now as the investment horizon shrinks it is increasing import to look at moving some of the portfolio into assets that are very stable (treasury bills, bank savings account…). Having 5 years of spending in such assets makes great sense to me. And the whole portfolio should be shifted to have a higher emphasis on preservation of capital and income (I like dividends stocks that have historically increased dividends yearly and are likely to continue). And the same time, even when you are retired, if you saved properly, a big part of your portfolio should still include assets that will be volatile and have good prospects for long term appreciation.
Related: books on investing – Where to Invest for Yield Today – Lazy Portfolios Seven-year Winning Streak (2009) – Fed Continues Wall Street Welfare (2008), now bankers pay themselves huge bonuses because the Fed transferred investment returns to too-big-to-fail-banks from retirees, and others, investing in t-bills.
Bond yields have dropped even lower over the last 6 months, dramatically so for treasury bonds. 10 year Aaa corporate bonds yields have decreased 61 basis points to 4.68%. 10 year Baa yields have decreased 53 basis points to 5.72%. 10 year USA treasury bonds have decreased an amazing 169 basis points to a incredibly low yield of %2.54. The federal funds rate remains under .25%.
The Fed continues to try and discourage saving and encourage spending by punishing savers with policies to drive interest rates far below what the market alone would set. Partially this is a continuation of their subsidy to the large banks that caused the credit crisis. And partially it is an attempt to find a way to encourage spending to try and build job creation in the economy. The Fed announced they are taking huge steps to purchase $600 billion more bonds in an attempt to lower rates even further (much of the impact has been priced into the market as they have been saying they will take this action – but the size is larger than the consensus expectation). I do not think this is a sensible move.
Savers do not have many good options for safely investing retirement assets for a reasonable income. The best options are probably to hold short term bonds and money markets and hope that the Fed finally stops making things so difficult for them. But that will take awhile. I think investing in medium or long term bonds (over 4 years) is crazy at these rates (especially government bonds – unless you are a large bank that can get essentially free money from the Fed to then loan the government and make a profit). Dividends stocks may be a good alternative for some more yield (but this needs to be done carefully to not take unwise risks). And I think you to look at investing overseas because these fiscal policies are just too damaging to savers to continue to just wait for a decent rate of return in bonds in the USA. But there are not many good options. TIPS, inflation protected bonds, are another option to consider (mainly as a less bad, of bad choices).
It is a great time to take on debt however (as often is the case, there are benefits and costs to economic conditions). If you have a mortgage, and can qualify, or are looking to buy a home, mortgage rates are amazingly low.
Related: Bond Rates Remain Low, Little Change in Last 6 Months (April 2010) – Bond Yields Change Little Over Previous Months (December 2009) – Chart Shows Wild Swings in Bond Yields in Late 2008 – Government Debt as Percentage of GDP 1990-2009 in USA, Japan, Germany, China…
Kraft Foods Inc. and DuPont Co. are among 68 companies in the Standard & Poor’s 500 Index with payouts that top the 3.78 percent average rate in credit markets, based on data since 1995 compiled by Bloomberg and Bank of America Corp. While Johnson & Johnson sold 10-year debt at a record low interest rate of 2.95 percent last month, shares of the world’s largest health products maker pay 3.66 percent.
The combination of record-low interest rates, potential profit growth of 36 percent this year and a slowing economy has forced investors into the relative value reversal. For John Carey of Pioneer Investment Management and Federated Investors Inc.’s Linda Duessel, whose firms oversee $566 billion, it means stocks are cheap after companies raised payouts by 6.8 percent in the second quarter
S&P 500 companies’ cash probably has grown to a record for a seventh straight quarter, according to S&P. For companies that reported so far, balances increased to $824.8 billion in the period ended June 30 from the first three months of the year, based on data from the New York-based firm.
Cash represents 10.2 percent of total assets at S&P 500 companies, excluding banks and financial firms, according to data compiled by Bloomberg. That’s higher than the 9.5 percent at the end of the second quarter last year, 8.4 percent in 2008 and 7.95 percent in 2007.
“The economy is slowing down, but productivity has been so great in this country and companies have been able to make good profits,”
10-year Treasury note yields were as low as 2.42% last month. The combination of continued extraordinarily low interest rates and good earnings increase this odd situation where dividends increase and interest yields fall. Extremely low yields aimed at by the Fed continue to aid banks and those that caused the credit crisis a huge deal and harm investors.
Money markets and bonds are not attractive places to invest now. Putting money in those places is still necessary for diversification (and as a safety net – especially in cases like 401-k plans where options are often very limited). Seeking out solid companies with strong long term prospects that pay reasonable dividends is a very sensible strategy today.
Related: Where to Invest for Yield Today – S&P 500 Dividend Yield Tops Bond Yield: First Time Since 1958 – 10 Stocks for Income Investors – Bond Yields Show Dramatic Increase in Investor Confidence (Aug 2009)
401(k), IRAs and 403(b) retirement accounts are a very smart way to invest in your future. The tax deferral is a huge benefit. And with Roth IRAs and Roth 401(k)s you can even get tax exempt distributions when you retire – which is a huge benefit. Especially if you don’t retire before the bill for all the delayed taxes of the last 20 years starts to be paid. The supposed “tax cuts” that merely shifted taxes from those spending money the last 10 years to those that have to pay for all the stuff the government spent on them has to be paid for. And that will likely happen with higher tax rates courtesy of the last 10 years of not paying the taxes to pay for what the government was spending.
When looking at your 401(k) and 403(b) investment options be sure to pay close attention to expenses for the funds. Some fund families try to get people to investing in high expense funds, that are nearly identical to low expense funds. The investor losses big and the fund companies take big profits. Those people serving on the boards of those funds should be fired. They obviously are not managing with the investors interests at heart (as they are obligated to do – they are suppose to represent the investors in the funds not the friends they have making money off the investors).
Here is an example (that I ran across last week) expense differences for funds that have essentially identical investment objectives and plans in the same retirement plan options: .39% (a respectable rate, though more than it really should be) for [seeks a favorable long-term rate of return from a diversified portfolio selected to track the overall market for common stocks publicly traded in the U.S., as represented by a broad stock market index.], .86% [for “The account seeks a favorable long-term total return, mainly from capital appreciation, by investing primarily in a portfolio of equity securities selected to track the overall U.S. equity markets based on a market index.”]. Do not rely on your fund provider to have your interests at heart (and unfortunately many companies don’t seek the best investment options for their employees either).
The .47% added expense isn’t much to miss for 1 year. However, over the life of your retirement account, this is tens of thousands of dollars you will lose just with this one mistake. Personal financial literacy is an easy way to make yourself large amounts of money over the long term. It isn’t very sexy to get .47% extra every year but it is extremely rewarding.
$200,000 at 6% for 25 years grows to $858,000
$200,000 at 6.47% for 25 years grows to $958,000
So in this case, $100,000 for you, instead of just paying the fund company a bit extra every year to let them add to their McMansions. In reality it will be much more than a $100,000 mistake for you if you save enough for retirement. But if you save far too little (as most people do) one advantage is the mistake will be less costly because your low retirement account value reduces the loss you will take.
Consumer debt decreased at an annual rate of 3.25% in the second quarter. Revolving credit (credit card debt) decreased at an annual rate of 9.5%, and nonrevolving credit (car loans…) was about unchanged.
Revolving consumer debt now stands at $827 billion down $39 billion this year. That is on top of a $92 decline in 2009. Hopefully we can continue this success.
Through June of 2010 total outstanding consumer debt was $2,419 billion, a decline of $30 billion ($21 billion of the decline was in the 2nd quarter). This still leaves over $8,000 in consumer debt for every person in the USA and $20,000 per family.
Consumer debt grew by about $100 billion each year from 2004 through 2007. In 2009 consumer debt declined over $100 billion so far: from $2,561 billion to $2,449 billion.
The huge amount of outstanding consumer and government debt remains a burden for the economy. At least some progress is being made to decrease consumer debt.
Those living in USA have consumed far more than they have produced for decades. That is not sustainable. You don’t fix this problem by encouraging more spending and borrowing: either by the government or by consumers. The long term problem for the USA economy is that people have consuming more than they have been producing.
Thankfully over the last year at least consumer debt has been declining, but it needs to decline more. I disagree with those that want to see short term improvement in the economy powered by consumer debt. It would be nice to see improvement to the current economy. But we can’t afford to achieve that with more debt. Government debt has been exploding so unfortunately that problem has continued to get worse.
Data from the federal reserve.
Google has generated a large amount of cash due to the profitability of their business. It currently has $26.5 billion 3rd only to Microsoft and Intel of short term holdings of technology companies (though Apple likely should be considered as having higher cash holdings). Google’s Latest Launch: Its Own Trading Floor:
After a couple years of cautious cash management at Google, Callinicos says he’s beginning to build a higher-risk, higher-return portfolio. Since last year he has pulled away from U.S. government notes and moved into corporate debt securities ($4.9 billion as of Mar. 31, up from $695 million the year before), agency residential mortgage-backed securities ($3.3 billion, up from $60 million), and foreign government bonds ($332 million, up from zero).
The largest Google holdings are: cash 35%, corporate debt 18%, US agency debt 13%, residential mortgage backed US agency securities 13%, municipal securities 8%, US government notes 8%. For all the debt problems with government, consumers and corporations that followed advice of mortgage bankers to overly leverage themselves there are many companies that have much larger cash holding than every before. Google is one but many other companies have built up large cash positions as well.
I have been a long term investor in Google and think it is a great buy now. I don’t see myself selling it anytime soon (maybe anytime at all). I do worry a bit about Google wasting the cash on buyouts they are tempted into due to huge amounts of cash on hand. Hopefully they will avoid such mistakes. I think they may well be better off paying a dividend but they seem apposed to that idea.
Retiring overseas has been growing in popularity over the recent decades. A lower cost of living and health care systems that work are two of the big draws. Americans Who Seek Out Retirement Homes Overseas
She said a minimum amount for a comfortable retirement in a number of appealing places — Cuenca, Ecuador, and La Barra, Uruguay, being two examples — would be about $1,200 a month.
Mr. Holman said that if you purchased a home in Medellin, you could live quite comfortably on less than $2,000 a month. As time goes on, retirement hot spots change along with countries’ economic and political situations.
Ms. Peddicord said she used to recommend Ireland, Thailand and Costa Rica, but no longer does. She cited the high cost of living in Ireland, the anti-foreign sentiments in Thailand, and the growing crime rates both within and outside of San Jose, the Costa Rican capital.
“In Panama, for example, your rent could be $1,500 a month for a two-bedroom apartment in a nice building in Panama City with a doorman and a pool,” Ms. Peddicord said, “or it could be $200 a month if you choose instead to settle in a little house near the beach in Las Tablas, a beautiful, welcoming region.”
Lee Harrison, an American who retired to Ecuador several years ago and then moved in 2006 to Uruguay, said there were a wide range of financial issues to consider before making the leap to retire abroad.
For example, he recommends that retirees maintain a bank account and credit cards in their country of origin as well as in their new country, to facilitate money transfer. He also said that retirees should investigate their home country’s system of sending pension money to retirees abroad, as well as their new destination’s ability to accept electronic bank transfers.
Retirees also should request help from a tax adviser and make certain their move doesn’t trigger the need for a new will.
Financial considerations aside, advisers say that when making the decision to retire abroad, most retirees find that the journey itself is the reward.
“I know lots of people who retired to one country and then decided to move again somewhere else but never back” to their home, Ms. Peddicord said. “I don’t know of anyone who has decided to move back full-time after having had a taste of living abroad.”
Living overseas is something a significant portion of people in the USA have no interest in at all. But for those that like the idea there are appealing options with some strong benefits. At the same time you need to understand the significant change this bring to your life and plan for it I suggest visiting the location several times over the years – before you retire.
Credit problems create a vicious cycle. Credit card interest rates are increased, fees are onerous and even applying for jobs is negatively affected (many employers look at credit reports as one factor in the hiring process), insurance companies look at them too and can offer higher rates. Employers and insurers have the belief that bad credit is an indication of other risks they don’t want to take on. Once into the cycle there are challenges to deal with. I must admit I think it is silly to look at credit for most jobs. But a significant number of organizations do so that is an issue someone that gets themselves in this trouble has to deal with.
I think the best way to deal with this problem is to build a virtuous cycle of savings instead. We tend to focus on how to cope with a bad situation instead of how to take sensible actions to avoid getting in the bad situation. In general we spend far too much money and take on too much debt – we live beyond our means and fail to save. Then we have a perfectly predictable temporary hit to our financial situation and a vicious cycle begins.
If we just acted more responsibly when times were good we would have plenty of room to absorb a temporary financial hit without the negative cycle starting. The time to best manage this cycle is before you find yourself in it. Avoiding it is far better than trying to get out of it.
Build up an emergency fund. Don’t borrow using credit cards – or any form of consumer debt (borrowing for education, a car or a house, I think, are ok). Save up your money until you can afford what you want to purchase. Don’t buy stuff just to buy stuff.
Welcome to the False Recovery by Eric Janszen
Companies planning for sudden and relatively near-term growth should reshape their strategies to make the best of economic flatness.
He makes a decent point for companies, but the he flips back and forth between the need to save more (because we are buried in debt) and the need to spend more (because we need to grow the economy right now). And while I wouldn’t stake my life on it I wouldn’t be surprised that we have a strong economic rebound (it is also perfectly conceivable we have a next to no growth or even fall into a recession). But it seems to me the return to bubble thinking and spending beyond our means is making a strong comeback.
Another ok, point but we have hardly paying off anything of the previous living beyond our means. It would take decades at this rate.
So the problem is the saving are not actually resulting in increased ability to spend (first point above) – which is bad he says, because it means their won’t be more spending (because people won’t have the ability to spend). Then he says when banks lend the consumers money they will spend and the saving rate will go down (which is bad – though he doesn’t seem to really want more savings (because that means business won’t get increased sales).
The conventional wisdom likes to point out the long term problem of low savings rate but then quickly point out we need more spending or the economy will slow. Yes, when you have an economy that is living beyond its means if you want to address the long term consequences of that it means you have to live within your means. It isn’t tricky. We need to save more. If that means the economy is slower compared to when we lived beyond our means that is what it takes. The alternative is just to live beyond your means for longer and dig yourself deeper into debt.