Al Crenshaw's "Investment Buck Stops at You"
Please consult your tax advisor(s) for details. Good luck. :)
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"Investment Buck Stops at You"
washingtonpost.com
Household Debt-Service Burden:
federalreserve.gov
New Tax Law Impacts Retirement Plans:
irs.gov
PENSION PLAN LIMITATIONS FOR TAX YEAR 2001:
ftp.fedworld.gov
Retirement Compilation:
...#reply-16117704
...#reply-15180810
...#reply-15317188
...#reply-15197844
...Paul Merriman: fundadvice.com
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Added some + rearranged + boldface is mine.
>>> Investment Buck Stops at You
Risks of Saving for Retirement and College Shift to Workers <
By Albert B. Crenshaw
Washington Post Staff Writer
Sunday, September 9, 2001; Page H02
For most of the past decade, the hot economy and even hotter stock market have made the world look pretty rosy for many American families. Retirement and college tuition seemed a lot more manageable when virtually everyone who wanted to work was working and newspapers carried stories about ordinary people with seven-digit retirement accounts.
But now, things aren't looking so hot.
Unemployment is up, and the stock market, particularly the Nasdaq, is down by percentages reminiscent of the Depression.
While economists puzzle over what went wrong in the "new economy" -- if there ever was a new economy -- middle-class families can draw a clear lesson from the current situation:
... The future is not going to take care of itself.
... If that job is to be done, you will have to do it.
Postwar America has, of course, been through other slumps. But if the '00s turn out to be like the 1970s, with a long, grinding decline in stock prices and stagnation in the economy, the consequences could be far harsher.
Today, personal debt is at an all-time high, and the share of disposable income -- more than 14 percent -- that Americans are devoting to payments on that debt is at a level unseen in 15 years.
The 100 largest U.S. banks wrote off $2.8 billion in credit card debt in the second quarter this year, up nearly 27 percent from a year ago, according to the Federal Deposit Insurance Corp. Mortgage delinquencies are also rising.
At the same time, fewer families are covered by traditional "defined-benefit" pension plans.
... Those are pensions with benefits related to wages and years of service with an employer and not dependent on investment performance.
... That's the employer's problem; if the employer screws up badly enough, there's government insurance.
The big growth today is in 401(k) and similar plans in which the worker contributes to an account,
... the employer often matches a portion of the contribution, and
... the worker gets whatever is in it at retirement. In other words, the investment risk is the worker's.
And finally, whatever the resolution of the Social Security debate, it's unlikely that the "security" part will ever be what it once was.
... On one hand, the present arrangement doesn't provide sufficient benefits to live in comfort.
... On the other hand, while creating investment accounts could provide better benefits, such accounts would shift the market risk onto the retiree, just as is being widely done with private pensions.
So what can families do?
The key is to
... control spending,
... create your own little surplus and
... invest it.
The market may be down now, and possibly for years to come, but it has always recovered.
...And buying during the down periods will mean you have more shares if and when the upturn occurs.
There really isn't much choice.
...Perhaps you have an idea for a business, or you have a terrific investment nobody else knows about. If that's the case, fine.
...But most of us aren't lucky enough to have a short, sure path to wealth.
Yes, yes, Powerball is an option, but you could also buy a lot of insurance and wait to get struck by lightning. The odds would be better.
Controlling spending often isn't as hard as it seems.
... It can be as simple as reading library books instead of renting videos,
... brown-bagging your lunch or bringing your latte in a thermos.
Cutting out or reducing a handful of day-to-day expenses can save $10 to $15 a week.
Get that into a money-market account or other interest-bearing vehicle and suddenly your money is earning money.
It'll be small at first, but it will grow.
The first goal is to build up a cash reserve equal to several months' living expenses.
... How many months depends on your assessment of your job situation.
... The more secure you are, the smaller the cash hoard you'll need.
... But err on the side of caution if you're uncertain.
And of course this shouldn't literally be cash stuffed in a sock.
...Start with a savings or money-market account, then move to something that pays a little better.
...Short-term Treasury securities, for example, are easy to get, highly liquid, and exempt from state and local taxes, so they make a good parking place for your reserves.
...Certificates of deposit will work, too, and you can "ladder" them -- buy a series of maturities -- to get liquidity and improve the yield.
Next consider any intermediate-term goals you have.
...For many of these -- buying a boat, for example -- the basic choices are borrow or save.
... And in times like these, you really need to ask yourself whether you want to take on more debt.
For other intermediate-term goals, such as buying a house or sending a kid to college,
... the government is prepared to help you out a bit.
... There are now several vehicles,
........ including state-run Section 529 college savings plans OR
........ prepaid tuition plans, that come with generous tax benefits.
Also, you can make a penalty-free withdrawal from an individual retirement account for first-time home purchases or higher-education expenses.
... So if you're not sure what you intend to do, saving via an IRA offers tax benefits and flexibility.
Finally, examine your retirement saving options.
...If you are offered a 401(k) or similar plan, enroll.
...If your employer offers a matching contribution, you should put in at least enough to maximize that match -- it's free money.
If you also have a defined-benefit plan, count yourself lucky.
...If not, your 401(k) is likely to be your main source of retirement money, so consider contributing more if you can.
The recent tax cut will boost the overall maximum you can put into a 401(k), beginning next year.
... The limit is $10,500,
........ climbs to $11,000 next year and
........ increases $1,000 each year up to $15,000 in 2006.
... And for workers 50 and older, additional "catch-up" contributions will be allowed.
If you don't have a 401(k) plan,
... you can start an IRA.
... Limits for these are also scheduled to rise, moving to from the current $2,000
........ to $3,000 per person next year, and
........ to $5,000 in 2008.
... There is a catch-up provision here, too, boosting the maximum contribution for workers 50 and up
........ to $3,500 next year and
........$6,000 in 2008.
The tax benefits are nice, but in all these cases, most of the money and all of the risks are on you. That's the prevailing outlook in our society -- we'll give you the possibility of getting rich, and the risk of ending up poor.
You pays your money and you takes your chance. That used to be an old saying; now it's public policy.
Good luck.
© 2001 The Washington Post Company <<< |
