12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!

5 Habits of 401(k) Millionaires

401(k) Millionaire

Today on the show, Brian and Bo are discussing an article from Fidelity on the 5 habits of 401(k) millionaires. It’s an important topic to talk about, as the responsibility of securing a financially stable retirement is largely in the hands of employees these days. Knowing what habits can help you save is crucial.

Many people don’t think it’s possible to become a millionaire, especially when you’re making less than $150,000. Brian and Bo go through each habit and state how it is possible to achieve millionaire status if you follow these 5 guidelines.

The Parameters of Fidelity’s Study

The average age of the millionaire in Fidelity’s sample pool was 59. They had been working for over 30 years, and they had earned less than $150,000. Fidelity looked at their accounts from 2000-2012.

1. Save Early On

We all know the importance of compound interest. It can’t be stated enough. If you contribute to your 401(k) steadily for 30-40 years, you’ll amass a nice nest egg to retire on.

The counterpoint? Most people aren’t staying at the same company for 30 to 40 years. But while it’s unlikely most people will stay with a company that long, as long as you have a steady, lengthy career and always make it a point to contribute, you can get there.

2. Contribute a Minimum of 10-15%

Fidelity found that the average employer contribution was 5%, and that millionaires deferred 14% of their salary on average ($13,300 annually). The employee contribution + the deferred salary = an annual 19% savings rate.

The counterpoint argued a 19% savings rate is completely unrealistic for most people. That may be true if you struggle to identify your financial needs and separate them from luxuries and wants. Saving 20% — or even more — of your salary is necessary if you want to have enough saved up to retire on.

3. Meet Your Employer Match

This is common advice and for good reason. Any time you’re not contributing up to the amount your employer will match, you’re leaving free money on the table.

Fidelity found that of the millionaires they studied, 96% were in a plan that offered an employer contribution, but not all employees opted in. If you want to reach millionaire status, rethink that: 28% of contributions in the average millionaire’s account came from an employer.

And again, the argument against this point: people can’t control if their employer offers a 401(k) match. While true, it’s something you need to take into consideration when figuring out whether or not you want to work for a certain company. Your retirement benefits are part of the total compensation package.

4. Consider Mutual Funds that Invest in Stocks

The average 401(k) millionaire had 75% of their assets invested in company stock and mutual funds. They were able to get a 4.8% annualized return.

The counterpoint said the 4.8% return required these millionaires to have outperformed the stock market by a factor of 3, given there were two market crashes during the 2000-2012 period. Brian and Bo disagree, and offer a sample portfolio that could achieve the same results.

5. Don’t Cash Out When Changing Jobs

Fidelity admits the average employee tenure of their millionaires was 34 years, so they didn’t encounter the issue of people cashing out retirement plans when they experienced a job change. If you do change jobs, it’s important to figure out alternative solutions for your funds.

It’s also common advice to not borrow from your 401(k) at all, to which the counterpoint was — it’s not that easy. Some people need the money.

(And this is why it’s critical to develop an emergency fund during good financial times, so you can rely on that first when things get tough.)

As you can tell, becoming a 401(k) millionaire is easy in theory, but many people aren’t willing to commit to the work it takes to build such wealth. What will your path look like? Will you commit to what is necessary to reach millionaire status?

5 Ways to a Happier Financial Life

Have a Happy Financial Life

This week on The Money-Guy Show, Brian and Bo review a piece from The Wall Street Journal’s Jonathan Clements. Clements shares the 5 keys to living a happier financial life in his recent article from a Sunday edition of WSJ.

Who doesn’t want to learn how to live a happier financial life? Money can be the cause of so much stress, but financial success isn’t as complicated as some think it is. Read on or listen in to find out what you can do to be happier.

Commuting Is a Huge Waste of Time

The first point Clements writes on: commuting destroys our happiness. Many of you can probably relate! Who enjoys being stuck in traffic for hours on end?

Clements cites a Swedish study that concluded longer commutes increase the risk of couples separating by 40%. He concludes the trade-off of dealing with a stressful drive into the city for a larger house in suburbia isn’t worth it.

Have Humility When Investing

Clements highlights that, as investors, we need to have humility. So many get caught up in trying to beat the market — but remember that “before costs, we collectively earn the market’s return.”

There’s also the issue of encountering high internal expenses when actively trading, although Bo and Brian note that fees have been decreasing over the past few years. They’re no longer the end-all-be-all when it comes to choosing what you invest in. Be smart about it.

Focus on Lowering Fixed Expenses

Clements says a third of the money typically spent in a household goes toward housing. By keeping housing and transportation costs down, we’ll have more money to spend on discretionary expenses, and we’ll be able to save more for retirement. Ideally, housing shouldn’t be more than 25% of your gross income.

Spend Money on Experiences

The guys are huge fans of spending on experiences rather than things, and couldn’t agree more with Clements on this point.

Brian touches upon the fact that when loved ones pass, we’re only left with memories. Similarly, when we pass, we can only take our memories with us. Make them count!

Don’t Work Just for a Paycheck

We all need to get paid, but working solely for a paycheck can be draining when you hate your job. Plus, what we enjoy doing early on in life might not make us happy later on.

Going back to the previous point, if we keep fixed expenses low, we can save enough to retire early, or at least take a paycut to transition to a better job in the future. Brian and Bo recommend doing what you love so it never feels like you’re working.

What Are You Doing to Live a Happier Financial Life?

These 5 keys to living a happier financial life aren’t extreme  or hard to live by– they’re common sense. If any of these issues resonate with you, then maybe it’s time to make a change so you can increase your happiness.

Recapping the 2015 Berkshire Hathaway Letter to Shareholders

BUFFETT

It’s our favorite time of year! Well, it’s close for financial fans and money nerds. Here’s what’s going down: Brian and Bo cover the 2015 Berkshire Hathaway Letter to Shareholders in this episode of The Money-Guy Show.

They’re excited to share these takeaways with fellow fans as there’s much that can be applied from this annual letter to our personal lives and portfolios.

In the 2015 edition of the Berkshire Hathaway annual letters, both Warren and Charlie shed light on the past 50 years of their partnership and what they hope the next 50 years will hold. Here are the highlights from each.

Highlights from Warren’s Annual Letter

Brian took tons of notes on Warren’s letter and shares the key takeaways with us:

Knowing the value of investments is priceless.

The $25 million purchase of See’s Candy, which had a $4 million cash flow with only $8 in net tangible assets. It was a great move that allowed the company to generate cash flow, which could then be used elsewhere. Brian likens this to putting your dollars to work for you in your portfolio.

Avoiding the “new paradigm.” This goes back to when the dot com boom occurred, and anything with “dot com” in the business plan was given huge valuations. As investors, we should be wary of this. P/E ratios of 200 are not normal, regardless of what pundits are saying.

A nugget of wisdom learned from Charlie: forget what you know about buying fair businesses for wonderful prices. Instead, buy wonderful businesses for fair prices.

We need to ignore market noise and focus on the basics. Warren also states you should only purchase Berkshire shares if you plan to keep them for at least 5 years. Brian says investors need to have a realistic time horizon when investing in stocks and bonds.

Warren is extremely against leveraged investments. Bo brings up that people are asking if they should mortgage their primary residence in order to invest the proceeds as rates are so low — and the answer is no!

Cash is to a business what oxygen is to a person – and people will panic in response to economic situations, we just don’t know when. Brian reminds us that having cash reserves in the form of an emergency fund is absolutely necessary.

Be aware of investments that require “sudden demands for large sums.” Brian gives the example that so many of their clients are set up for wealth and success, but they often get distracted by riskier investments that seem better. It’s key to stick to the path, because at some point, the music will stop.

Fight against companies that display “arrogancy, bureaucracy, and complacency.” As investors, we need to do the same for ourselves. Brian points out that so many people have a great income, but they’re not turning it into wealth.

Highlights from Charlie’s Berkshire Hathaway Letter

Charlie explains what the core competencies of Berkshire Hathaway are:

  • All employees should be invested in the company.
  • They want win-win results for everyone – employees and investors alike. Everyone should benefit.
  • Berkshire stays away from short-term executives. Those executives that make decisions should be there to face the results at the end.
  • They seek to minimize bad effects that come from large bureaucracies at headquarters.
  • They want to personally spread the wisdom they’ve attained throughout the years. Education is important.

What’s the Take-Home Lesson for You?

Whether you’re advanced in your knowledge of personal finance, stock markets, and smart investing, or just starting out and eager to learn the basics, there are important lessons to be learned from each of these letters. What can you apply to your own business or financial situations?