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Re: Savings?
Old 05-28-2004, 04:21 AM   #21
 
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Re: Savings?

Not asking your employer about this stuff reminds me of
a rule taught trial lawyers. Never ask a question unless you know the answer. I suspect this could be applied
to other areas besides the law.

John Galt
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Re: Savings?
Old 06-02-2004, 07:08 AM   #22
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Re: Savings?

Thank you very much for all your responses.
I am so dumb when it comes to investing.
I know you have given me lots of advice here already, but would anyone tell me whether I should contribute more than 7% to my 403(b) plan or should I open some other account somewhere else. Note, I want to be able to retire early and with the 403(b) plan I can't touch that money until I am really old. Someone mentiones about rolling it to Roth IRA, but I am not sure if I qualify for that. If so, when would I do that and where can I calculate how much money I will have in about 10 years?
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Re: Savings?
Old 06-02-2004, 09:39 AM   #23
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Re: Savings?

Quote:
Thank you very much for all your responses.
I am so dumb when it comes to investing. *
I know you have given me lots of advice here already, but would anyone tell me whether I should contribute more than 7% to my 403(b) plan or should I open some other account somewhere else. *Note, I want to be able to retire early and with the 403(b) plan I can't touch that money until I am really old. *Someone mentiones about rolling it to Roth IRA, but I am not sure if I qualify for that. *If so, when would I do that and where can I calculate how much money I will have in about 10 years?
Maggie,

Try to learn as much as you can yourself about taxes, investments, and retirement so you have a general idea about those topics and how they relate with one another. But I would also strongly recommend you find yourself a local CPA who understands your interests and is willing to help you with all the details that take months if not years to understand. He or she can help you "crunch the numbers" and start you on the right track to developing a solid plan. Once you understand the plan, you can refine it yourself on a regular basis and use that CPA from time to time when you get stuck.
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Re: Savings?
Old 06-02-2004, 11:19 AM   #24
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Re: Savings?

Maggie, the 403(b) has upper limits and you must understand those before you plunge in. In 2004 the limit is $13,000 unless you will be 50 by 12/31/2004 - in that case it is $16,000. If you qualify for the 15 year rule you can contribute up to $19,000. This rule is more complex, so you'll want to study it. Also be aware that the 15 year rule has an aggregate maximum of $15,000. In other words, you must keep track of all contributions that apply to the 15 year rule and do not exceed $15,000 in your lifetime. $13,000/year is always safe assuming you earn that much. And keep in mind that the amounts increase annually.

Regarding your question about contributing 7% to your 403(b). I maxed my 403(b) and my IRA for about 13 years. My wife did the same with her IRA and SIMPLE plans through her part-time work. We also saved in taxable accounts at the same time, and now we have enough in those accounts to cover our expenses until I'm 62 (I'm 52 now). I would venture a guess that most people who actually achieve ER were very aggressive savers. If you can afford to do so, try to max every tax advantaged account available to you while also saving in taxable accounts at the same time. Watch investment expenses. 403(b)s are notorious for high expenses so be careful when you choose. The employer (and their HR depts.) are usually clueless, so avoid seeking advice there unless you know for sure they know their stuff.

I agree with retire@40 regarding the use of an accountant. They will be able to advise you regarding the advantages of a Roth vs. a 403(b). Most probably won't understand 403(b) rules, however, so make sure they do before you choose one. I was not able to find one in Iowa, so I learned it myself with the help of my mutual fund company. If you are able to use Vanguard as a 403(b) provider, I'd recommend that. Wendy Duetsch at Vanguard knows everything there is to know about 403(b)s and she is willing to share her knowledge. Email her specifically and she'll help you. Good luck.
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Re: Savings?
Old 06-02-2004, 02:38 PM   #25
 
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Re: Savings?

You know, my initial reaction was to discourage the use
of a CPA (to save fees). Then I considered the fact that
even though
I made a living in accounting/financial management
for a long time, I still use a CPA for some stuff.
The tax laws are amazingly complex and you could easily make a decision with unintended consequences
that won't show up for years. I know I have.

John Galt
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Re: Savings?
Old 06-02-2004, 08:31 PM   #26
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Re: Savings?

Quote:
I am so dumb when it comes to investing.
Nobody's born an investing genius. And they don't teach you this stuff in school! You are well on your way to self-education and early retirement, so don't sweat it; give yourself time to learn.
Quote:
I know you have given me lots of advice here already, but would anyone tell me whether I should contribute more than 7% to my 403(b) plan or should I open some other account somewhere else.
That's really the kind of thing only you can figure out. There are two aspects to your question: "How much should I save?" and "How should I save?" As far as how much, there is no pat answer, but I like the advice I've seen echoed here a few times: Live below your means, save till it hurts and then back off a bit. Repeat as needed. You are saving way more than the average bear (who saves almost nothing) so you're ahead already.

For the "how/where to save" question, if I recall the "standard" priority list goes something like this:

1. Save enough to get maximum company match in 401(k) (or 403(b) or similar company-match plans)
2. Maximum yearly contribution to a Roth IRA. (currently $3000 or $3500 I think.)
3. Save to legal limit of 401(k)/403(b)
4. Have an emergency fund of X months in an accessible after-tax account.
5. After-tax savings. (Savings accounts, CDs, bonds, mutual funds, etc. in nonretirement accounts)

Myself, I am going to max my 401(k) before considering contributing to an IRA because it's less work, the taxes are pre-adjusted and I can't goof it up by procrastinating or having the money burn a hole in my pocket as could happen with my saving for an IRA/Roth IRA and then investing later. This is an example of fitting the savings plan for personal situations: I'm lazy and procrastinate a lot.

Occasionally I've seen it argued that there are benefits to investing in after-tax accounts before maxing out retirement accounts. The benefits have to do with the accessibility of the money and the lower captial gains taxes. I haven't seen that discussion lately though. Again, for myself I know from experience that I'll be tempted to use that money if it's not locked away in a penaltied-withdrawal retirement account.

Quote:
Note, I want to be able to retire early and with the 403(b) plan I can't touch that money until I am really old.
I know some of the answers are confusing for now, but rest assured you can get that money penalty-free before age 60 and age 55 if you retire before then, so adding more to your 403(b) doesn't lock the money away until you're "really old".

Quote:
Someone mentiones about rolling it to Roth IRA, but I am not sure if I qualify for that. If so, when would I do that and where can I calculate how much money I will have in about 10 years?
You could roll the 403(b) over when you quit your job or retire. You can roll into a regular IRA or a Roth IRA. You probably also have the option of leaving the 403(b) as is with TIAA-CREF. Don't let this confuse you, though; these are just future options to investigate.

A Roth IRA is a set of rules, just a different set of rules from the 403(b). You would very likely keep your same investments so the returns would be the same. The thing with the Roth IRA is the taxes; if/when you roll over to the Roth you pay income taxes on the amount rolled over. Ideally you avoid drawing from your assets to pay the taxes because that's a penaltied withdrawal.

After quitting my last two jobs I rolled over my 401(k)'s into a regular IRA because 1: I want full control of my money and the 401(k) plan had limited investment options; and 2: because I didn't have the money to pay the taxes for a Roth conversion.

(post interrupted by some phone calls...if this post doesn't make sense I'll come back and fix it later)
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Re: Savings?
Old 06-03-2004, 04:59 AM   #27
 
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Re: Savings?

Hey BigMoneyJim! Excellent response to Maggie's query.

I want to comment about money "burning a hole in your pocket". 11 years after semiretirement and 6 years
after fully retiring, I have to fight this continuously.
I think it's mostly due to all the years when I just earned
and spent without giving any thought really to retirement,
ER or otherwise. After my epiphany in 1992 I did some big time backsliding spending-wise. And, I can't really blame any of it on my first wife as I was even more loose than she was when the money was rolling in.
Today, even though it's easier to resist unnecessary
spending, I still have 2 factors working against me.
One, I am lazy and refuse to track every dime.
Years ago I tried this and found it quite distasteful.
The second issue is my age. I am acutely aware of
the passage of time and activities/adventures
disappearing from my list of "possibles". Thus, I
sometimes just say to myself, "what the hell, I am not
going to live forever" and then I do a little "off budget"
spending. I think this is healthy as long as you don't
overdo. I have said before this stuff gets easier over time.
This is partly due to being near to SS now, but also
the realization that I no longer have as many years
of life to cover. Long story short, I've always been a
"Do it now!" kind of guy. Unfortunately, there are
quite a few things I can no longer do. No matter how
healthy you are (or think you will be) this will happen to
all of you eventually.

I knew someone would come up with a great post for
Maggie. Kudos to BigMoneyJim..................

John Galt
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Re: Savings?
Old 06-08-2004, 12:17 PM   #28
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Re: Savings?

Quote:
I know some of the answers are confusing for now, but rest assured you can get that money penalty-free before age 60 and age 55 if you retire before then, so adding more to your 403(b) doesn't lock the money away until you're "really old".
Can you explain to me how I can get that money before I am "old" I haven't seen anything that sayd that. When I asked TIAA-CREF about that they keep saying I need to be over 60.
I just don't understand

I wanted to buy mutual funds thinking that that would be the best way to save up and be able to take out money at any time. Am I correct?
Where would you invest your money at age 26 after 403(b)?
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Re: Savings?
Old 06-08-2004, 03:15 PM   #29
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Re: Savings?

Quote:
Can you explain to me how I can get that money before I am "old" I haven't seen anything that sayd that. When I asked TIAA-CREF about that they keep saying I need to be over 60.
I just don't understand
OK, I see why you're so confused. I went to the TIAA-CREF web site and it's damn near impossible to find info on how to get your money out of TIAA-CREF's hands short of investing in their annuities. The reason for this is they want to make as much money as possible off of you and annuities are a good way to do it in addition to making sure your accounts stay with them. (Additionally, an annuity purchase is a lump sum transfer of assets you can't do via the IRA's 72(t), so I see why they don't let you know about this option...they don't ever get to sell their annuities if you use an IRA and 72(t) to retire early.)

Anwyay, the next best thing is to show you how easy TIAA-CREF says it is to transfer money from other plans. When reading how easy it is to rollover money from other companies' 401(k)'s, 403(b)'s and 457's to a TIAA-CREF IRA, realize it works the other way, too: You can go to another company and they'll tell you how easy it is to transfer from TIAA-CREF's 403(b) into their IRA. I'm sure if you tried hard enough you could get TIAA-CREF to admit they can roll over their own 403(b) into their own IRA if you so request and wish to stay with them. This link tells you how easy it is to send them your money. This link echoes the first link and lists the types of accounts eligible for rollover.

That should give you an idea that it's possible. You can follow up with others to convince yourself. Now, I think you're still confused as to when you would do this: When you quit your job and/or retire. When that happens, then you can roll over your 403(b) into an IRA, and then when you're ready to start receiving income you use the 72(t) exemption and simlply take Substantially Equal Periodic Payments (details omitted here) as withdrawals each year and pay income tax on them. (You never paid income tax on the 403(b) contributions, so you pay them upon withdrawal.)

Quote:
I wanted to buy mutual funds thinking that that would be the best way to save up and be able to take out money at any time. Am I correct?
Where would you invest your money at age 26 after 403(b)?
Mutual funds are a type of investment; you can buy mutual funds within your 403(b), within an IRA or in an after-tax account. .... The short answer is that the question is ambiguous... I have to run do some work, so I have to cut this short for now.
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Re: Savings?
Old 06-08-2004, 06:23 PM   #30
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Re: Savings?

Okay, I have some free time now.

To be fair, I went to Vanguard's site and tried to find info on converting a Vanguard 401(k), 403(b) or 457 into an IRA and had similar difficulty as on TIAA-CREF's site; Vanguard also gleefully tells you you can transfer all your assets to Vanguard and offers annuities for payouts. The rollover option exists, but clearly it is in the investment company's best interests to guide you eventually towards their annuity offerings and not offer the information that you can transfer away from them or simply withdraw from the plan/IRA under the allowed conditions.

So, to summarize so far: If you retire early you can still use the money in your 403(b) before age 60 (and before age 55) by first rolling it into an IRA (with TIAA-CREF or another company) and then taking the 72(t) payouts. Of course you shouldn't take my word for it, but you can take that sentence and show it around and get confirmation.

Now, the mutual fund question. I was going to carefully differentiate between account types, investment types and mutual fund asset classes, but that's really redundant and unnecessary. Let's try this:

You sound like you have extra money to save and want to save it somewhere. Here are some options and advantages/disadvantages of each:

Option "put it all in the 403(b)".
Advantages:
  • Pre-tax savings with no extra tax paperwork and no withhold-return money cycle
  • Tax-deferred earnings
  • Can retire early by rolling over into an IRA at retirement date and using IRA's 72(t) withdrawals
Disadvantages:
  • Before retirement, money cannot be withdrawn without 10% penalty and even then only under certain circumstances
  • Limited investment options (you probably have 5-10 funds to choose from)
  • Capital gains earnings are taxed at income tax rates at time of withdrawal (or at time of conversion to Roth IRA) instead of capital gains rate (at least somewhat offset by fact that principle was tax-deferred)
  • Assuming early retirement and IRA conversion, 72(t) payout in early retirement requires planning since the yearly payouts are stuck at or near your designated amount for 5 years or until age 59 1/2, whichever is later
Note: I believe you can borrow from your 403(b) and pay yourself back with interest. Depending on who you talk to this could be an advantage (debt consolidation, borrow for house down payment or emergency funds) or disadvantage (opportunity loss while money is out of the market, temptation to spend money, possibility of defaulting and owing income tax + 10% penalty on the remaining balance).

Option "put it in mutual funds in an after-tax investment account":

Advantages:
  • Can withdraw money at any time for any purpose
  • These types of accounts can offer ATM access and/or check writing
  • Virtually unlimited investment options

Disadvantages:
  • Dividend distributions increase your taxable income (possible to limit by investment asset class; e.g. municipal bond funds or tax-managed stock funds)

Option "put it into a Roth IRA"

Advantages:
  • Tax-free earnings!
  • (I think) can withdraw principle after 5 years with no penalty
  • Plenty of investment choices
  • (I think) Have the 72(t) option available for early retirement

Disadvantages:
  • Earnings can't be withdrawn before retirement without 10% penalty
  • In contrast to other tax-deferred options, must pay income tax on contributions
  • 72(t) payout in early retirement requires planning since the yearly payouts are stuck at or near your designated amount for 5 years or until age 59 1/2, whichever is later

Option "put it in a traditional IRA"

Advantages:
  • Tax-deferred earnings
  • Tax-deductible savings
  • Have the 72(t) option available for early retirement
  • Plenty of investment options

Disadvantages:
  • Have to wait until tax filing time to be refunded the withheld income tax for the contributions
  • 72(t) payout in early retirement requires planning since the yearly payouts are stuck at or near your designated amount for 5 years or until age 59 1/2, whichever is later

Note that in all of these options mutual funds are your most common and likely investment option. If you decide to put money in an after-tax account you may want to invest in less volatile assets (bond funds or money market funds) if you think you may use the money before retirement, say for a house or car or 20 foot plasma TV.

(ack! message too long! Continued in next post...)
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Re: Savings?
Old 06-08-2004, 06:24 PM   #31
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Re: Savings?

(posting a second message because it said this was too long for one message! Boy can I type!)

Again, a summary: You could put every saved penny into your 403(b) and still access your money even if you retire before 60. In such case, instead of the annuity pushed by investment companies you would--after rolling into an IRA--simply withdraw yearly from your savings. Whether you do that or put some savings into an after-tax account or a Roth IRA is a question of whether you plan to tap the money before retirement or how beneficial you think a Roth IRA is compared to your 403(b).

I think my best advice to you so far is this:
Quote:
You are well on your way to self-education and early retirement, so don't sweat it; give yourself time to learn.
I think you're really hoping for specific advice, and I think I will offer some: If you've decided how much more you can save, put that into your 403(b) while you learn more about your options. There are fewer sharks on that route than with opening an individual account, and you can always reduce your contributions later if you decide another place is better for your money.

My first book on investing (well, really personal finance) was "Personal Finance for Dummies". I also liked "Get a Financial Life". The other investing stuff I know I've picked up online over a period of 5 years, but I'm sure there are decent investing books. I've seen "Investing for Dummies" and "Mutual Funds for Dummies" at the bookstore but haven't looked through them. (I used to really like Dummies books, so I'm not calling you a dummy).
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Re: Savings?
Old 06-08-2004, 07:51 PM   #32
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Re: Savings?

BigMoneyJim -

Congratulations! I see your time clock is winding down! That's wonderful!

Maggie, I think it's great that you are thinking about this at 26. I wish I'd thought about it at 26. I know that I thought I needed all my money then, and that when I was "old" I wouldn't have all the energy and interest, so I wouldn't "need" the money for all the fun things I wanted to do.

Now that I'm 50, took up ice hockey 2 years ago, putting a daughter through prep school and, one of these days, college, I look at it a little differently.

I think TIAA-CREF has many advantages. They are known as a solid, conservative, low-fee investment house. Not quite the lowest-fee advantages of index funds, but good. If I were 26 and the bulk of my long-term savings was in TIAA-CREF, I would put additional savings elsewhere. In index funds at Vanguard, to be specific. In a Roth, if I were eligible.

I would save as much as I could without turning life into a big sacrifice. However, I'd pay attention to material consumption. Our society teaches us to buy, buy, buy and then we have to hold huge tag sales, or bring vanloads of stuff to the Salvation Army, to make room for the new stuff. Or buy a bigger house with more closets and a bigger garage to make room for the new stuff. Idiotic.

Avoiding the material seduction and saving like crazy gives one incredible options, like DECIDING how long you want to work, and what type of work, and how many hours a week (year) you want to work, later on. So I'd recommend saving as much as possible. Drive that car into the ground. Walk instead of drive. Bicycle instead of gym membership. Etc.

I'd recommend Jane Bryant Quinn's books, for starters, and Bogle or Bernstein on specifics about investing. Quinn will give you the basics on money management, and the B-guys will teach you why nearly everything you read in Money magazine, Kiplingers, the financial papers, most financial websites, etc., is wrong. (Virtually any advice about picking stocks, timing the market, etc., is contradicted by the academic research on market behavior.)

But stay calm. You have some time. Do a little reading. Save a little more. And then a little more than that. There is great advice here, although not everyone will agree. Keep reading; you're obviously smart enough to figure it out in time!

Good luck!

Anne
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Re: Savings?
Old 06-24-2004, 06:06 AM   #33
 
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Re: Savings?

Thank you so much for your responses. They are extremely helpful.
Yesterday, I increased my contribution to 403(b) from 7% to 10%. I don't know why but I am still feeling a little scared that I won't have access to that money until I am 60. When you say that I will be able to take out that money before 60 what does that really mean? At any age before 60 or at like 55 and up?
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Re: Savings?
Old 06-24-2004, 06:23 AM   #34
 
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Re: Savings?

Hi Maggie! I will let someone else answer your question about how and when you can take money out,
or you can check some old posts.

When I was your age, older folks would tell me to
start saving/planning for retirement, and that the time would just fly by. I didn't listen. It seemed like forever,
kind of like summer vacation when you were a little kid.
Well, I'm here to tell you that "they" were right.
Forty years went by in a flash.

John Galt
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Re: Savings?
Old 06-24-2004, 07:00 AM   #35
 
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Re: Savings?

Let me see if I understand this correctly. This might be an extremely silly question, but is this scenario possible?

Let's assume that I decide to retire at age 35. Let's say I have $500,000 saved in my 403(b). Assume I roll it into IRA. Let's assume I am going to live until I am 80. Does that mean that I will have to divide that $500,000 into 45 years, which leaves me with around $1111, which is about $925/month, which is about $231 a week??

Does it work like that or is this a little more complicated?
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Re: Savings?
Old 06-24-2004, 08:15 AM   #36
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Re: Savings?

It is more complicated than that, but the impoirtant point is that if you have enough saved in IRA accounts, you can get at the money via a 72T exception. So don't worry about the mechanics for the moment because it will be many years before you have the kind of scratch saved to retire. I would also try to squeeze just a bit out of your budget (2%) and build some after tax saving as a cushion/flexibility, but its not critical as long as you are saving/investing.
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Re: Savings?
Old 06-24-2004, 09:08 AM   #37
 
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Re: Savings?

Thanks.
I can squeeze out 2% more, I just don't know where to allocate it. I don't know anything about investing
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Re: Savings?
Old 06-24-2004, 10:19 AM   #38
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Re: Savings?

Quote:
Thanks.
I can squeeze out 2% more, I just don't know where to allocate it. *I don't know anything about investing
Maggie,

A good place to start when considering after tax investments is with low cost, broad index mutual funds.

"Low cost" refers to the fees that mutual fund companies charge you to invest your money. Some funds charge 2% or more of your balance each year just to keep your money. Others charge less than 0.2% for the same service. Once your balances get large, the difference in fees becomes very significant.

"Broad index" refers to the fact that these mutual funds invest in a large number of stocks or bonds that are determined by financial indexes. This means that you don't have to pay someone to sit around all day and manage what to invest in and what to sell. The best news is that index funds usually outperform managed funds.

There are many mutual fund companies that offer low cost, broad index mutual funds. Vanguard offers several and tends to be very competitive. But other fund companies like Fidelity offer nearly identical funds too. If you ask, people on the board will be glad to tell you who they use and why.

Next, you need to decide which index funds you might want to invest in. Some of the more popular choices are: Total Stock Market Fund -- this fund invests in 1000's of individual stocks and attempts to represent the total stock market return and risk profile; S&P500 fund -- this fund invests in the 500 companies that make up the S&P500 stock index (that makes it very easy for you to track since most investment publications will include S&P500 performance); Total Bond Index Funds -- this fund invests in bonds according to bond indexes rather than in stocks. There are many more, each focusing on a different segement of the market.

The stock/bond allocation choice for your investments is very much a personal choice issue. Each person needs to develop their own understanding of their desire for return vs their aversion to risk and figure out what they are comfortable with. Unfortunately, this seems to be a lifetime struggle that changes with age and current situation for most. The good news is that you can always change your mind. You might start (at your age) by putting everything into Total Stock Market Index funds, then as you learn more decide to transfer some or all of it to other funds. If you choose one of the large mutual fund companies like Vanguard or Fidelity or several others, they will have plenty of funds to choose from and transfers won't cost you anything. If you're not sure you really want to invest that money for at least the next 6+ years, you might want to consider a bond fund instead of a stock fund.

You can get specific help starting your mutual fund investments at the web sites for any of the mutual fund companies.

Good luck. And keep asking questions.
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Re: Savings?
Old 06-24-2004, 02:16 PM   #39
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Re: Savings?

Quote:
Let me see if I understand this correctly. *This might be an extremely silly question, but is this scenario possible?

Let's assume that I decide to retire at age 35. *Let's say I have $500,000 saved in my 403(b). *Assume I roll it into IRA. *Let's assume I am going to live until I am 80. *Does that mean that I will have to divide that $500,000 into 45 years, which leaves me with around $1111, which is about $925/month, which is about $231 a week??

Does it work like that or is this a little more complicated?
It can be as complicated as you'd like to make it, but it can be really very simple, and one option (not necessarily the best option, you should learn about them all) is almost as simple as you describe. I believe it's called the "life expectancy" method, and it works something like this:

1. You retire at 35 and roll your $500,000 403(b) into a traditional IRA.
2. You go to some IRS table that tells you how much longer they think you're going to live based on your current age. (This is slightly different in that you don't get to guess, the IRS tells you.)
3. You take your current account value and divide it by the number of years the IRS says you have left.
4. You take that amount out.
5. Repeat yearly.

As I said, there are many other options available, but it really can be that simple.

malakito.
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Re: Savings?
Old 06-24-2004, 02:26 PM   #40
 
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Re: Savings?

Well, I suppose it could be that simple, but in the real world there are about a bazillion permutations.
Sorry Maggie I will offer Maggie this however.
You can get a wealth of info at this site, everything from the incredibly complex to the amazingly simple. It's
all here.

John Galt
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