2008 retirement/savings/debt

[hegemony]

I imagine some of my ideas below will upset some people. Keep in mind these are based on my opinions and experiences. But here are some ideas for you to ponder...

 

Retirement:

ROTH and traditional IRA contribution limits increase to $5000 in 2008. A lot of people receive bonuses around the holidays. A great use for this is to put bonus funds into your IRA rather than spending them.

 

If you have a 401k plan (or similar plan) at work consider contributing more in 2008. The max contribution for most people is $15,500 for 2008. Having more money put in your 401k now can reduce your current income tax and help ensure income during retirement (when most people have a lower income tax burden). Having more withheld does not necessarily greatly reduce your paycheck now. There are plenty of good estimators out there to demonstrate this. Fidelity and Vanguard are good resources.

 

If you have access to addition deferred compensation programs consider increasing your contributions. 403b and 457 plans have annual max contributions, but how much you put in one does not reduce how much you can put in the other.

 

Be sure to rebalance your retirement funds if needed.

 

Taxes:

It is time to make sure you are not having too much income tax withheld from your paycheck. I know many people like the feel-good nature of a "tax refund" but in reality you are letting the government hold your money at zero percent interest rather than being able to use that money each month to save and/or pay down high interest debt. You can play with an estimator at the IRS web site to estimate how to change your W4 for 2008: http://www.irs.gov/individuals/article/0,,id=96196,00.html . It is especially important to revisit your W4 anytime you receive a pay increase. A tax refund is a terrible financial tool.

 

Savings:

A high yield, FDIC insured, savings account is a great place for money you need for an emergency fund and/or short term (less than 5 years) savings goals. There are some online products that pay over 5%. Around 4.5% APY is very easy to find. If you have an account such as this, consider starting (or increasing) your regular contribution. Try to save 5% or more of your take home (not gross) in such a product. The interest earned is taxable so be aware of this. Nevertheless, everyone needs to have some money in at least an EF.

 

Investments:

For post-tax vehicles, index funds from vanguard, fidelity, and TR Price are good options. These companies also offer decent money market rates and more specialized mutual funds. I like Fidelity's Nordic Fund, Canadian Fund, and a few other narrow funds. We also have a couple of vanguard's non-index funds. Both Vanguard and Fidelity offer very good tutorials online and very helpful CSRs. TR Price is also highly rated, although I do not have first have expereince.

 

Insurance:

Shop around for auto and home owners (or renters) insurance annually. Two years ago I was shocked how much we were able to save with Amica over GEICO. GEICO was some much cheaper than our previous insurer (State Farm). Amica is the top rated (CR and JD Powers) national insurer (USAA has limited membership). We were able to obtain more coverage for less money. Take an hour to call around and see if you can save if you move your auto and home owners.

 

If you have assets, look into an umbrella policy for additional liability that can help protect you.

 

Review your life insurance situation. Be sure to not "over buy" life insurance. Avoid any policy that is not fixed term. Do not conflate investing with insurance. Avoid buying life insurance for children. Life insurance should be treated as income replacement, not a retirement/investment vehicle.

 

Debt:

Make sure you know your debt! I use a spreadsheet (such as the free one from openoffice.org) to track debt, payments, etc. I also like to calculate our "weighted average" APR. Our weighted average APR as of today is 5.29%.

 

If you have high interest debt use the traditional snowball technique; i.e., pay highest APR first.

 

Learn how long it will take for you to pay off the debt and how additional principle payments will affect this timeframe. A nice set of easy to use estimators can be found at http://www.ubt.com/tools/calculators.htm . use #12 "What would I save if I make extra payments?"

 

Make peace with your debt. Debt in and of itself is not bad or "evil." Ignore wannabe gurus who claim otherwise.

 

Miscellany:

Consider a trip to the library each month to read smartmoney, kiplinger's personnl finance, and other financial news sources. Consumer reports is also a good source. I subscribe to these three, but you can save $60 a year if you use the library. I am not a fan of mags/newsletters that chase stocks.

 

I also like to read the Financial Times (daily) and the Economist (weekly).

 

Educate yourself; do not rely on your employer's HR people (many are clueless) or on professional who want to charge you a percentage (on the other hand fee-based financial advice can be VERY valuable). Many community colleges and extension programs offer low-cost financial planning courses. Our local credit union also offers such advice (check yours). The best financial move you can make in 2008 is to empower yourself!

Edited December 24, 2007 by hegemony

[Gail]

I imagine some of my ideas below will upset some people. Keep in mind these are based on my opinions and experiences. But here are some ideas for you to ponder...

 

Retirement:

ROTH and traditional IRA contribution limits increase to $5000 in 2008. A lot of people receive bonuses around the holidays. A great use for this is to put bonus funds into your IRA rather than spending them.

 

If you have a 401k plan (or similar plan) at work consider contributing more in 2008. The max contribution for most people is $15,500 for 2008. Having more money put in your 401k now can reduce your current income tax and help ensure income during retirement (when most people have a lower income tax burden). Having more withheld does not necessarily greatly reduce your paycheck now. There are plenty of good estimators out there to demonstrate this. Fidelity and Vanguard are good resources.

 

If you have access to addition deferred compensation programs consider increasing your contributions. 403b and 457 plans have annual max contributions, but how much you put in one does not reduce how much you can put in the other.

 

Be sure to rebalance your retirement funds if needed.

 

Taxes:

It is time to make sure you are not having too much income tax withheld from your paycheck. I know many people like the feel-good nature of a "tax refund" but in reality you are letting the government hold your money at zero percent interest rather than being able to use that money each month to save and/or pay down high interest debt. You can play with an estimator at the IRS web site to estimate how to change your W4 for 2008: http://www.irs.gov/individuals/article/0,,id=96196,00.html . It is especially important to revisit your W4 anytime you receive a pay increase. A tax refund is a terrible financial tool.

 

Savings:

A high yield, FDIC insured, savings account is a great place for money you need for an emergency fund and/or short term (less than 5 years) savings goals. There are some online products that pay over 5%. Around 4.5% APY is very easy to find. If you have an account such as this, consider starting (or increasing) your regular contribution. Try to save 5% or more of your take home (not gross) in such a product. The interest earned is taxable so be aware of this. Nevertheless, everyone needs to have some money in at least an EF.

 

Investments:

For post-tax vehicles, index funds from vanguard, fidelity, and TR Price are good options. These companies also offer decent money market rates and more specialized mutual funds. I like Fidelity's Nordic Fund, Canadian Fund, and a few other narrow funds. We also have a couple of vanguard's non-index funds. Both Vanguard and Fidelity offer very good tutorials online and very helpful CSRs. TR Price is also highly rated, although I do not have first have expereince.

 

Insurance:

Shop around for auto and home owners (or renters) insurance annually. Two years ago I was shocked how much we were able to save with Amica over GEICO. GEICO was some much cheaper than our previous insurer (State Farm). Amica is the top rated (CR and JD Powers) national insurer (USAA has limited membership). We were able to obtain more coverage for less money. Take an hour to call around and see if you can save if you move your auto and home owners.

 

If you have assets, look into an umbrella policy for additional liability that can help protect you.

 

Review your life insurance situation. Be sure to not "over buy" life insurance. Avoid any policy that is not fixed term. Do not conflate investing with insurance. Avoid buying life insurance for children. Life insurance should be treated as income replacement, not a retirement/investment vehicle.

 

Debt:

Make sure you know your debt! I use a spreadsheet (such as the free one from openoffice.org) to track debt, payments, etc. I also like to calculate our "weighted average" APR. Our weighted average APR as of today is 5.29%.

 

If you have high interest debt use the traditional snowball technique; i.e., pay highest APR first.

 

Learn how long it will take for you to pay off the debt and how additional principle payments will affect this timeframe. A nice set of easy to use estimators can be found at http://www.ubt.com/tools/calculators.htm . use #12 "What would I save if I make extra payments?"

 

Make peace with your debt. Debt in and of itself is not bad or "evil." Ignore wannabe gurus who claim otherwise.

 

Miscellany:

Consider a trip to the library each month to read smartmoney, kiplinger's personnl finance, and other financial news sources. Consumer reports is also a good source. I subscribe to these three, but you can save $60 a year if you use the library. I am not a fan of mags/newsletters that chase stocks.

 

I also like to read the Financial Times (daily) and the Economist (weekly).

 

Educate yourself; do not rely on your employer's HR people (many are clueless) or on professional who want to charge you a percentage (on the other hand fee-based financial advice can be VERY valuable). Many community colleges and extension programs offer low-cost financial planning courses. Our local credit union also offers such advice (check yours). The best financial move you can make in 2008 is to empower yourself!

 

 

Good info hege. The only thing I'd add is to remember that the capital gains tax for those in the 10-15% tax bracket will be zero for the years 2008-2010 so if you had any investments you were thinking about selling, keep those years in mind.

 

And for those so inclined, the income cap for rollovers to Roth IRAs is scheduled to be lifted in 2010 and the tax liability for rollovers can be split up over two years. If your young enough and willing to take the tax bite, this could really pay off in the long run.

 

Gail

[hegemony]

Good info hege. The only thing I'd add is to remember that the capital gains tax for those in the 10-15% tax bracket will be zero for the years 2008-2010 so if you had any investments you were thinking about selling, keep those years in mind.

 

And for those so inclined, the income cap for rollovers to Roth IRAs is scheduled to be lifted in 2010 and the tax liability for rollovers can be split up over two years. If your young enough and willing to take the tax bite, this could really pay off in the long run.

 

Gail

those are both good pieces of info. We are hoping to take advantage of the Roth roll-in ~2010.

[Gail]

Good info hege. The only thing I'd add is to remember that the capital gains tax for those in the 10-15% tax bracket will be zero for the years 2008-2010 so if you had any investments you were thinking about selling, keep those years in mind.

 

And for those so inclined, the income cap for rollovers to Roth IRAs is scheduled to be lifted in 2010 and the tax liability for rollovers can be split up over two years. If your young enough and willing to take the tax bite, this could really pay off in the long run.

 

Gail

those are both good pieces of info. We are hoping to take advantage of the Roth roll-in ~2010.

 

 

I'm hoping to also just for the spread over two years on the tax hit. Not sure if my income will be enough to cover the taxes though (college for the kiddo starts in 2010). Depends how well the traditional does over the next few years. It's got a balance of about $76K right now and up about 15% for the year. That's a big hit.

 

Gail

[Daddy]

Damn Hedge,

 

Thanks for the info bud!!! I truly appreciate this.

 

My wife and I may get a refund this year, because we are both teaching, and have never made this much. Plus we just bought a home. We don't know if we are taking out too much or too little right now. I guess we will find out soon.

 

Again, thanks for the info. Most of that stuff, I knew. But it's good to see it all in one place to read!

[54regcab]

Great info !!!

 

Also don't forget the savers tax credit if your income is low enough ($52K married, $26K single) to qualify. The IRS gives a kickback of 10%-50% on the first $2,000 per person you contribute.

 

See page 73

[tman]

Thanks Heg

[hegemony]

Great info !!!

 

Also don't forget the savers tax credit if your income is low enough ($52K married, $26K single) to qualify. The IRS gives a kickback of 10%-50% on the first $2,000 per person you contribute.

 

See page 73

nice!

[Baddies4Breakfast]

Great read, heg! It's good to always have this basic info fresh in our minds.

 

I'm curious, how do you set up your spreadsheet to calculate a weighted APR? A column for balances, a column for each individual APR, then some magic formula in another cell? Thanks in advance.

[hegemony]

Great read, heg! It's good to always have this basic info fresh in our minds.

 

I'm curious, how do you set up your spreadsheet to calculate a weighted APR? A column for balances, a column for each individual APR, then some magic formula in another cell? Thanks in advance.

 

http://creditboards.com/forums/index.php?showtopic=69268

[hegemony]

bumpers.

[Kayak]

Educate yourself; do not rely on your employer's HR people (many are clueless) or on professional who want to charge you a percentage (on the other hand fee-based financial advice can be VERY valuable). Many community colleges and extension programs offer low-cost financial planning courses. Our local credit union also offers such advice (check yours). The best financial move you can make in 2008 is to empower yourself!

 

 

I am considering a 6 week online course in Personal Finance through a state University. What should I look for to know if I'm getting something decent for my $100? I don't want to post the link here...

Edited January 6, 2008 by KayakDawg

[sm863]

Learn how long it will take for you to pay off the debt and how additional principle payments will affect this timeframe. A nice set of easy to use estimators can be found at http://www.ubt.com/tools/calculators.htm . use #12 "What would I save if I make extra payments?"

 

 

 

 

 

 

Hedge, this link is not working, at least not for me.

[hegemony]

Learn how long it will take for you to pay off the debt and how additional principle payments will affect this timeframe. A nice set of easy to use estimators can be found at http://www.ubt.com/tools/calculators.htm . use #12 "What would I save if I make extra payments?"

 

 

 

 

 

 

Hedge, this link is not working, at least not for me.

 

a few days after I posted they changed the URL and the format...in had been unchanges for 5 or so years.

try

 

http://www.ubt.com/tools/library/calculatorlists.htm

[goldtrad]

Being old school I have always believed in saving money. The only fear I have with retirement accounts is that there is no guarantee tax rates will be lower. Additionally SS may be reduced or eliminated altogether if you show too much money in traditional investments.

[hegemony]

Additionally SS may be reduced or eliminated altogether if you show too much money in traditional investments.

I don't pay in to SS and won't get it out.

 

Are you talking about if there is a chance to SS? This far there is no means test right?

[goldtrad]

Additionally SS may be reduced or eliminated altogether if you show too much money in traditional investments.

I don't pay in to SS and won't get it out.

 

Are you talking about if there is a chance to SS? This far there is no means test right?

 

That is how they will balance the SS budget. Government employees like elected officials won't feel the brunt of this. Sorry to be political and negative about this situation. The system cannot exist forever considering the number of people who will be paying into the system. Eventually they will means test government handouts.

[hegemony]

Additionally SS may be reduced or eliminated altogether if you show too much money in traditional investments.

I don't pay in to SS and won't get it out.

 

Are you talking about if there is a chance to SS? This far there is no means test right?

 

That is how they will balance the SS budget. Government employees like elected officials won't feel the brunt of this. Sorry to be political and negative about this situation. The system cannot exist forever considering the number of people who will be paying into the system. Eventually they will means test government handouts.

I am not against a means test in general; Bill Gates does not need SS LOL.

 

I also think people need to plan to not expect SS.

 

I think the execption for certain gov't employees is a scam, but I don't mention it much because I do like the benefit. :self interest:

 

The other thing that irks me is the annual FICA cap. There is no reason someone like my spouse should have to STOP paying FICA in early April.

 

But I better keep this on topic

[goldtrad]

Additionally SS may be reduced or eliminated altogether if you show too much money in traditional investments.

I don't pay in to SS and won't get it out.

 

Are you talking about if there is a chance to SS? This far there is no means test right?

 

That is how they will balance the SS budget. Government employees like elected officials won't feel the brunt of this. Sorry to be political and negative about this situation. The system cannot exist forever considering the number of people who will be paying into the system. Eventually they will means test government handouts.

I am not against a means test in general; Bill Gates does not need SS LOL.

 

I also think people need to plan to not expect SS.

 

I think the execption for certain gov't employees is a scam, but I don't mention it much because I do like the benefit. :self interest:

 

The other thing that irks me is the annual FICA cap. There is no reason someone like my spouse should have to STOP paying FICA in early April.

 

But I better keep this on topic

 

I would say someone who stops paying in after April is blessed.

[AboveAverage]

Hi all. I guess I'm a newbie. I post on the other board and just lurk here.

 

I do want to add that that one other thing you can do is change the number of exemptions to what you normally claim at the end of the year to get your refund on your W-4 for the year from your HR/Payroll office. (e.g. if you claim 0 for the benefit of a refund and claim yourself and other dependents when you file your 1040 [we'll say 4, you, your non-working wife, and two kids]). Yes, you may not see a refund OR see a tiny one, BUT you get more take home pay to do things like fund a IRA, or pay down debt. Plus too, you are giving the government an interest-free loan.

 

Now I know the arguements such as, "I like getting a refund because it's like getting a bonus". I know them because I too subscribed to them. But at the end of the day, things are getting more and more expensive. IMHO it's better to try to get that extra bit of money to help your situation today instead of Februrary of next year. Just my .02...

[hegemony]

^

 

and bad news for me. I thought I had figures out the ROTH 403B option that is coming online for me, but nope I made a mistake. The contribution cap is $15,500 for the ROTH 403B and qualified 403B together not seperatly. Bummer but I guess I did learn something.

[hegemony]

^

[Nummerkins]

I adjusted my W-4 this year after buying a house. I had the secretary run the numbers with a few different options and chose the one that gave me the smallest return while factoring in how much the property taxes offset.

[Jen23514]

^

 

great post!

 

It's not too late for people to adjust their withholding.

 

And some might even be able to adjust their monthly contributions to their 401k.

 

I'd also like to add in addition to Heg's comment about holiday bonus' : CHRISTMAS IS NOT AN EMERGENCY and dipping into your emergency fund or charging more than you can pay off the next month (for MOST people, not all) IS NOT PRUDENT. Start making out a list now, and keep it with you and look for bargains sooner rather than later.

 

If you prepare now, you can use that holiday bonus for investments, rather than paying off gifts that everyone will have forgotten by Valentine's day anyway.

[drew3918]

^

 

great post!

 

It's not too late for people to adjust their withholding.

 

And some might even be able to adjust their monthly contributions to their 401k.

 

I'd also like to add in addition to Heg's comment about holiday bonus' : CHRISTMAS IS NOT AN EMERGENCY and dipping into your emergency fund or charging more than you can pay off the next month (for MOST people, not all) IS NOT PRUDENT. Start making out a list now, and keep it with you and look for bargains sooner rather than later.

 

If you prepare now, you can use that holiday bonus for investments, rather than paying off gifts that everyone will have forgotten by Valentine's day anyway.

Very good advice Jen....