The Writers Coin

There are some standard rules and recommendations when it comes to preparing for retirement. Things like:

• Start saving as much as you can as early as you can
• Contribute to your company’s 401(k), at least to the match (it’s free money!)
• Open a Roth IRA for added withdrawal flexibility when you retire
• Calculate the nest egg you’ll need to accumulate for the standard of living you want
• Take out 4% of said nest egg every year and live only off of that

It’s all good advice when the market is doing what the market has historically done. But if you’re near retirement right when something apocalyptic happens (like the mortgage crisis in 2008) and you followed these rules, then you’re probably going to be a little pissed off.

Because there are thousands of people out there that followed the rules and aren’t going to be able to retire the way they’d planned.

This has some financial experts thinking that it might be time to retire the old-school retirement mindset and move on to a new retirement paradigm—one that doesn’t involve saving up a whole bunch of money, investing it, and then living off the proceeds when you’re 65 and no longer want to work.

This Reuters article lays out the case for a focus on “other forms of capital.”

The goal is to focus on other assets that can help bridge the gap during retirement if money is in short supply—assets that aren’t being risked in the market.

“If they don’t have the money, they have human capital like skills and education, and social capital in terms of friends, neighbors or a church. All these things help,” says Larry Cohen, director of Consumer Financial Decisions.

Even if you don’t have the money, investing in things that aren’t stocks and bonds can pay off. If you learn a skill that can save you money, like gardening, then that can help a little bit during retirement.

And being a part of a community can also help with reducing costs—you can buy in bulk or use someone else’s car.

Then there are skills that can actually generate money, like blogging, consulting, or freelance writing. I mean, you have to spend your retirement doing something, right? Another thing you could do is teach. After 60+ years, there have to be a few things you’re really good at or know a lot about. If you had a career in the automotive industry, you could teach a class on how to repair cars or something like that.

I like this idea. It actually does two useful things:

1. It helps make retirement a bit easier financially and
2. It helps answer the eternal question of “what the hell am I going to do when I retire?”

Traveling and playing golf are good answers, but that still leaves you with a ton of time. I like the idea of a 65-year-old Carlos writing an occasional magazine article here and there, teaching a computer class to other grandpas, and then going on a long walk to stay healthy (and keep health-care costs at a minimum).

In theory, that means I don’t have to stress out so much about accumulating a million-dollar-plus nest egg to be able to “do nothing” after I retire.

If retirement experts can somehow factor these types of activities into the classic retirement calculations, couldn’t I put away less money right now as a 30 year old? Which means I could go on skiing trips or fly to Australia to go scuba diving. If I need less money when I’m older, I should (theoretically) be able to cut down on some of my contributions and use the money right now, while I’m still a strapping young man.

Is this a totally irresponsible and knee-jerk reaction to a stock-market plunge or do you think there’s something to this “new retirement?”

Image by Dawvon

A few years ago I opened a Roth IRA account with Vanguard because they are the best place for index fund guys like myself.

I built my portfolio with some basics:

• S&P index fund (VFINX)
• International stuff (VGTSX)
• Mid cap stuff (VIMSX)

Not a bad mix—maybe too much stock (100%, actually)—but I was young and figured I didn’t have to dip into bonds for some time.

So I held tight.

Then I started reading about REITs. Real Estate Investment Trusts are securities (like stocks) that allow you to invest in real estate without becoming a landlord.

What’s so special about them? They typically pay a nice dividend because they have to pay out at least 90% of their income (to fit this designation), and that means the people owning the shares get paid.

Sweet!

But that also means you have to pay taxes on those dividends, which sucks.

Then I discovered a way to not pay taxes on dividends: owning dividend-paying stocks in a tax-sheltered account like a Roth IRA.

One more thing: I also have a Roth IRA account with Scottrade, which is where I keep my recently split B shares of Berkshire Hathaway (I’m a huge fan of Warren Buffett) and where I can buy stocks in my Roth at a cheaper cost than with Vanguard.

And that is where I would buy a specific REIT if I found one I liked. And back in 2006, there were plenty to choose from. Among the big names that caught my eye were AHM and New Century. Why? Because their dividend yields were juicy—I think they got up to around 8% at one point.

AHM’s Stock Chart — I dodged a major bullet

At the time I was really responsible about my investments so I got the prospectuses and annual reports and went through all the details.

It seemed the reason these companies were raking in so much dough was because of something called sub-prime mortgages. I had no idea what those were but quickly realized this was a buzz word. Everywhere I saw it, dollar signs followed.

But something about the whole idea of getting 8% back on my money (without any appreciation of the stock) and laying down some serious cash for an investment that seemed too good to be true held me back.

Thank god.

All hell broke loose and subprime mortgage companies went under—AHM and New Century included.

But this idea of owning dividend-paying stocks in my Roth always stuck with me—it seemed like a no-brainer. REITs were still out there making money and paying out 90% of their income in dividends, just not with obscene 8% yields.

And when the shit hit the fan I remembered the wise words of Warren Buffett:

Be fearful when others are greedy and be greedy when others are fearful.

Time to Get Greedy

When the real estate market tanked and the stock market plummeted, I realized this was the perfect time to go in there and buy some damaged goods.

Anything that had a solid foundation that had taken a hit was bound to bounce back.

Including real estate.

But instead of risking my money on one individual REIT, I went to Vanguard. They had an index fund that diversified in a variety of REITs to spread the risk around.

I could put my REIT in a Roth strategy to work with minimal risk for cheap: their expense ratio was only 0.26%, which is what some mutual funds charge.

So I took a hard look at buying Vanguard’s REIT Index Fund (VGSIX). The downside: I needed $3,000 to get in the door. Ouch.

Not only is that a lot of money, at the time it was around 67% of the annual amount I could contribute to the account.

So that meant I couldn’t load up on all the index funds I currently owned that had dropped in price so much. I wouldn’t be able to buy low.

So I passed on this chance.

Now comes the part where I messed up:

That red circle down there? That’s the closest I was to buying in. Price at the time? $8.

Price today? $15. Without dividends.

The Lesson

Well, clearly the first thing I did well was not pull the trigger on buying AHM or New Century when they were rolling in money. Something told me it was too good to be true and I was right.

As Warren Buffett has taught us (did I mention I’m a fan?), sometimes the best deals are the ones you don’t make.

On the downside, I didn’t have the balls to make the second move, which would’ve netted me an 88% return in just over year with tax-free dividends to boot.

And all I have to show is this long, winding post.

Shoot.

This article was included in the massively useful Tax Carnival over on Don’t Mess with Taxes. Check it out for great tax tips as April approaches!

It’s the end of the year and that means a lot of you will be getting bonuses. If you’re ultra responsible and personal-finance savvy, you will no doubt take a nice chunk of that bonus and drop it into a retirement account like a Roth IRA or a 401(k) (see the difference between the two here).

Which is a great idea: it’s never too soon to start thinking about retirement.

I’m here to tell you that, while worrying about retirement is definitely the responsible thing to do, it can also ruin your life.

Skydiving and Retirement

I’ve always wanted to go skydiving. I still haven’t done it, and the main reason is because it’s so expensive. Over $150 for a few minutes of death-defying action hardly seems like a good deal.

As someone who constantly analyzes the return on investment of the money I spend, this looks like a terrible deal.

So instead of blowing $150 on skydiving, I save it and do the responsible thing like putting it into a Roth IRA.

That means that when I’m 65 I’ll be flush with cash (knock on wood) so I can enjoy the rest of my life without worrying about how to make ends meet.

But I can guarantee one thing: I won’t go skydiving at 65 if I haven’t already.

There are some things in life you need money for and some things you need youth for. Skydiving most is one of those latter things.

If you have a little bit of money while you’re young, that’s the time to pull the trigger on stuff like this. It doesn’t matter how much money you have when you’re old, you can’t buy youth.

It’s not an easy idea to get into your head at age 28 because:

• I’m young and will always be young!
• I want to do the responsible thing
• I’m paranoid and don’t want to be broke as an old man

Don’t let planning for retirement keep you from doing the things you want to do in your life, especially if you have the money. You’ll make more money as you get older, but you won’t get any younger.

What other kinds of things can you think of that we should do while we’re young that are near impossible as we get older?

Image by Dawvon

Roth IRAs are awesome: I’ve been a huge fan ever since I first read about them and their unique benefits. You can contribute after tax money and allow it to compound tax free into the future. Not only that, you don’t have to start taking money out when you’re 70—you can let it compound even further. I’ve been contributing the full amount allowed ever since ($5,000 this year).

But the one catch Roth IRAs always had were that you couldn’t contribute if you made X amount of money. And that X is $176,000 for married filers and $120,000 for single filers. These people could still fund a traditional IRA and delay paying taxes, but the Roth was outside their grasp.

Which sucked.

But starting in January, a new provision is coming into effect that removes the ability for people making over $100,000 (AGI) to convert their IRAs to Roth IRAs. What does that mean?

• These people pay the tax on the IRA now (at the current rate) and move the funds into a Roth IRA
• This Roth IRA account is now free of taxes and functions like any other Roth IRA

Why is This Such a Big Deal?

Everyone thinks taxes are going to go up (we have been spending quite a bit, and there’s more on the way), so these people get to take whatever nest egg they have in their IRA and pay those taxes now at the current (low) rate. Without this change, they would’ve been forced to start withdrawing money at age 70 and paying taxes on it at the presumably higher rate.

Now they can leave that money in the Roth and not be forced to withdraw—they can even leave it to their grandchildren if they outlive the money.

One of the big factors in play here is whether or not the person has enough cash outside of the IRA account to pay for the taxes on the conversion. If you do have the cash, then this is an even better move because you get to put more money into this Roth account, where it will compound tax free. Since there are limits to how much you can deposit into a Roth every year, the bigger the pile you can start with, the better.

The other thing to consider is how long you have until retirement. The more time you have until you’re going to retire, the more time your Roth will have to compound tax free.

I’m not a tax or retirement pro, but this is a pretty big deal because people who didn’t have access to Roth IRA accounts are given the chance to put them into play.

While Roth IRAs are great and all, don’t forget that the best retirement plan is one that gives you flexibility. So having more than one type of retirement account is a good idea. For more on that, check out my post on 401(k) vs. Roth IRA accounts.