Lazy Man and Money

Market Timing with 401K Contributions

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Last Week, I said now was a great time invest in stocks. Those who listened to me are probably upset as the Dow continued to drop from around 13,250 to 12,700. They may get more upset with me in the coming weeks and months. I’m confident that in years though, they’d come to love me.

I can never understand a couple of things about people’s philosophy and investing. A month ago, people considered it a great time to invest pushing the Dow over 14,000. A month later, some companies that made some risky bets are paying the price and we should sell investments today? Buy more at 14,000 and selll at 12,700? That sounds backwards to me. I think it makes more sense to invest now than it did before.

Putting my money where my mouth was, I upped my 401K contribution rate to buy cheaper stocks. I will continue at that pace however long the market stays down or until the I reach the yearly limit. If the Dow gets back up to 14,000 or 14,500, I may lower my contribution rate a bit and hope for pullback. In this sense, I am trying to time market. This will be different than the traditional definition of trying to time the market. First, I will be invested in the market at all times, good and bad. Second, I’ll continue to invest at regular time intervals, despite what the market might do.

I suppose that I could simply put their 401K on auto-pilot, but since I’ve started this blog finances have been on my mind. It’s easy enough for me to go in and make the changes as necessary.

When Can You Retire?

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Have you asked, “Can I retire at 55?” Or have you ever sat down and figured out when you might be able to successfully retire? If you have, you may have realized that the closer you are retirement the better your retirement projections will be. Since I’m only 31, calculating my retirement is like trying to sink a putt from far, far away. There are just too many variables between me and the goal.

For this reason, I have largely refrained from retirement projections. It seemed futile to me. Everything has changed since a reader passed on a tip. I feel like Tiger Woods with a top of the line putter now. The tip? Check out this great retirement calculator. I’ve seen retirement calculators before, but FireCalc seems to be to take every factor into account.

I put it through the tests and at my current savings rate, it says I should be to retire in 16 years at age 47. If that seems early to you, it should. I ran my calculations assuming that I’d continue to max out my Roth IRA and 401Ks. This may not be possible if new priorities come into my life. For instance, if me and Energy Gal decide to have children and/or buy a bigger home, I might have difficulty carrying through with my plan.

If you have a couple of minutes, give the calculator a run.  Let me know in the comments what you think of the results.

Retire on 80% of Your Income?

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A little while back Flexo from Consumerism Commentary asked “do you need 80% of your current income in retirement?” While that might be accurate for some people, like most “rules” in personal finance there are exceptions. It is these exceptions that make it difficult for me to endorse.

There are numerous factors that weigh into that 80% number. For one example, there’s a lot of military families out there and they’ll be getting pensions (yes, I still believe government pensions will be there, we’ll just pay taxes to make it work), and very well subsidized health care. This would eliminate one of the biggest costs or retirement as well as bring in income that “doesn’t need to be saved” in advance. My fiancée is in the military so this is definite possibility.

For another, there are the people that are living below their means and saving money now. I know it’s rare, but if you are reading this, the odds are higher that you are one of them. If you are are socking away money and living beneath your means now (and you are 35 or younger), you’ll have accomplished two very important things:

1) You’ll have adjusted your lifestyle to the point that living on 80% of your current income is the norm. Jonathan from My Money Blog is living off of 57% of this his after-tax income.
2) You’ll have saved enough money that there’s the a chance that you’ll actually make more than 80% of your current income in retirement.

In the end, you need to look at what’s right for you. Maybe it’s a good guideline for you and maybe it’s not. I guess that’s what a lot of personal finance is about.

Delaying Social Security Benefits – Will Scott get Burned?

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I’m still catching up on some reading – in this case the 2006 winter edition of USAA’s magazine. Scott Burns, a syndicated personal finance writer has an article about why he’s going to delay his social security benefits.

For those unwilling to read the article, I’ll attempt to summarize a couple of quick points as I understand them.

  1. If Mr. Burns decides to defer earnings for a year, he’ll give up $23,940 in benefits.
  2. At the end of that year, he’ll make $139.56 a month or $1,675 a year in social security.
  3. He determines that in order to guarantee that kind of income ($1,675 a year), he’ll have to buy an annuity (with inflation protection) at $36,111.
  4. Thus he’s getting $36,111 of value for the price of $23,940 – a great deal.

It sounds like great reasoning if you are looking for iron clad guarantee of 7%.  That’s a pretty decent return.  However, I think he can do better.  He ends the article by saying that the “odds say that either my wife or I will live to collect life annuity income for 25.9 years.”  If that’s the case, then I would say it’s a little too early to settle for a 7% gain.

Let’s Play “Invest Lazy Man’s Money”

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The deposit for my Tax Year 2006 Roth IRA just went through. So now I have $4000 sitting an account waiting to be invested. I’m looking for an ETF to invest in. I have $8000 in Vanguard Small Cap ETF (VB). I have another $8000 in Vanguard Total Market Index (VTI) and another $4000 in Amex Technology Spiders (XLK).

I’ve been thinking about iShares MSCI EAFE Index Fund (EFA). I feel the economy getting more and more global every day. If people overseas can do the same job as Americans for 1/10th the money, then business will follow. The American economy will either suffer or those countries will have great wage inflation. Perhaps I’m wrong about this, but I can’t see how the wage difference can go on forever. I’m also thinking about Vanguard Health Care (VHT). America has more aging people than ever – and they are living longer. Everyone will need more medications, more health care. That means more dollars going to the companies that provide solutions. Lastly, I wouldn’t be opposed to expanding the small company or total market portions of my portfolio either.

I like to be diversified in ETFs. They generally have low expenses and allow for easy diversification. What would you suggest?