Choices For Your 401(k) When You Leave Your Job

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Gold watch at retirement

A 401(k) plan is an awesome vehicle to save for retirement!  

You get to lower your tax basis (the income you get taxed on).  You might get a great company match… What’s not to like?

But what do you do with your 401(k) if you leave your job? 

Do you take the 401(k) with you?  Where do you put it?  Should you leave it?

You have some choices for your 401(k) which I’ll outline for you below:

Choices For Your 401(k) When You Leave Your Job

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Buy Low. Better Yet, Buy Lower.

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Gas Pumps

Why do people get excited when their favorite retailer holds a sale, but not when Wall Street does?

Let’s start with the obligatory disclaimer – this is not an encouragement nor a discouragement to buy or sell particular securities, stocks carry risk, consult a financial advisor but you don’t have to, etc.  That was for that infinitesimally small segment of the population that is a) literate enough to read this post, yet b) dumb enough to do whatever a disembodied online voice suggests.  There, now you can read the post absolved of any obligation to think.
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Exchange Traded Funds – Pros and Cons

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Stock+Papers

Exchange Traded Funds are created to gain broad market exposure, like mutual funds, that individual investors could not have achieved on their own.  But built upon mutual funds, exchange traded funds actually combine different features of different types of mutual funds to make them available all in one single ETF, namely the valuation feature of open-end mutual funds and the tradability feature of closed-end funds.
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10 Free Investment Credits From ShareBuilder (And $50 Signup Bonus)

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ShareBuilder+Free+Shares

Online investment company ShareBuilder (owned by ING Direct) is offering up 10 free investment credits to new and existing customers who set up an Automatic Investment Plan before January 31st.  This is a great way to start investing for the New Year!  Normally automatic investments are $4 per trade.
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What Is The Dow?

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What Is The Dow Jones Industrial Average?

The New York Stock Exchange

We’ve hear a lot about the Dow in the news. It goes up and folks are happy.  It goes down and folks panic.  But what is this mystical Dow that everyone is talking about?

The Dow actually stand for Dow Jones Industrial Average.  It’s made up of the 30 largest and most widely held public companies.  The average is a scaled average which is price weighted to account for stock splits.  Although it only accounts for 30 companies, the Dow has historically been in line with the larger US market.  For this reason it tends to be the most common indicator of the market in general.

The Dow was first published in 1896 and consisted of 12 companies:

  • American Cotton Oil Company
  • American Sugar Company
  • American Tobacco Company
  • Chicago Gas Company
  • Distilling and Cattle Feeding Company
  • General Electric
  • Laclede Gas Light Company
  • National Lead Company
  • North American Company
  • Tennessee Coal, Iron, and Rail company
  • US Leather Company
  • Unites States Rubber Company

Today’s Dow looks very different:

3M
Alcoa
American Express
AT&T
Bank of America
Boeing
Caterpillar
Chevron Corporation
Citigroup
Coca-Cola
DuPont
ExxonMobil
General Electric
General Motors
Hewlett-Packard
Home Depot
Intel
IBM
Johnson & Johnson
JPMorgan Chase
Kraft Foods
McDonald’s
Merck
Microsoft
Pfizer
Procter & Gamble
United Technologies Corporation
Verizon Communications
Walmart
Walt Disney

Update – On June 8, 2009 GM and Citigroup were replaced by The Travelers Companies and Cisco Systems.

When it started the Dow averaged 40.94.  It’s recent high was 14,164.53 on October 9, 2007.

Why is it so important?

Since the Dow represents 30 of the largest US companies, changes in the stock prices of the Dow can be seen to represent the general health of US companies.  Higher averages mean growth and profits while lower averages represent contraction and losses.

Do you follow Dow prices?  Do you think it’s an accurate economic indicator?


Creative Commons License photo credit: epicharmus

I Re-Allocated And Re-Balanced My 401(k) Portfolio

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On white: Topsy-turvy

I logged into my 401(k) plan.  Ouch! It’s been taking a beating all year.  In fact I mentioned that my 401(k) was hurting back in December when Hank over at MiB Smarter Money gave me a nice analysis of my portfolio.  Now, I understand that I’m in this for the long haul as far as the investments are concerned.  After all this is for my retirement which is still a ways off.  There’s plenty of time for the investments to recover and do well.  I’m not going to pull my money out because the market isn’t great.  The only reason my contributions were lowered is because we’re a one-income family right now (I only lowered my contributions down to the company match).

So I accept that my 401(k) isn’t so hot. Now what?  Well, I’ve been reading The Bogleheads’ Guide to Investing (which I won from The Digerati Life).  I’m not done with the book (which, by the way, is a great how-to investing read) but I have read how important it is to have a good asset allocation and to re-balance your portfolio from time to time.

This made me wonder what my portfolio looked like.  I set up how I wanted my assets allocated when I started contributing and I’ve made a few adjustments from time to time.  But reading the Boglehead book made me re-think what my allocations should be.  Also, I haven’t re-balanced the portfolio in the longest time.  I’ve changed my future contributions but rarely what was already in there.

So today I changed that.  Looking at my portfolio I realized I had funds that I was no longer contributing to but still had large balances.  I also saw that based on suggested portfolios in the book and my age that I should probably have a higher percentage of bonds in my investments.  Other funds that I was contributing a higher % to really took up a very small % in my portfolio since I haven’t been re-balancing.

First, I changed where my future contributions will be going.  This is money that comes out of my check as well as the company match.  Next, I moved investments already in my portfolio to match my new asset allocation.  Both processes were pretty easy on the Fidelity site (the company that manages the 401k).  Remember, changing your future contributions isn’t the same as re-balancing your portfolio.  You have to look at both if you want it truly balanced to the investments of your choice.

Here’s what the allocation is now:

Stocks

Large Cap

  • Fidelity Contrafund 18%
  • Vanguard Institutional Index Fund Institutional Shares 22%

Mid Cap

  • Artisan Mid Cap Inv CL 10%

Small Cap

  • Fidelity Small Cap Stock Fund 10%

International

  • American Funds New Perspective Fund Class R5 5%
  • Fidelity Diversified International Fund 5%

Bond/Managed Income

  • PIMCO Total Return Inst CL 30%

Before I started changing anything I made sure that there would be no fees for changing investments.  Some funds charge a fee if you sell them before a certain time frame.

I also set up my account to send me an email if any of my percentages exceed 5% of what I set.  This gives me a reminder to check if I want to re-balance the funds that changed.

I’m not expecting my portfolio to all of a sudden jump into the black but it will be interesting to look and see where it’s at year-end.  Again, these funds are for the long haul as I won’t use them until I retire.  That said, I still need to adjust my contributions and allocations as time goes on.

Sign up with ING Direct and get a $25 bonus – Free From Broke

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A CD Ladder Plan For Beginning Savers

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a ladderAre you just starting off building up your savings? I’ve mentioned before that a great way to save is by putting money in a high yield savings account such as Capital One 360 Savings.  A way to make a little more interest is to open a Certificate of Deposit, or CD for short.

What is a CD?

Here’s an excerpt from Wikipedia:

A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions.

CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are “money in the bank” (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.

So if you are investing/buying a  CD you want to make sure you don’t need that money for the length of it’s term (otherwise you will have to pay a penalty to cash it in).

Here’s a great way a beginning saver can get started with CD’s:

  • Figure out a monthly amount of money you know you won’t need for 12 months.  Don’t be scared now.  It can be a small amount like $10.
  • Log into your ING account and go to their products page.  Click on CD’s and proceed to open up a $10 CD for a 12-month term.  (If you can afford more by all means do so.  Remember this is money you won’t touch for a year.)
  • Now every month do the same thing for a total of 12 months.
  • At the end of a year you will have 12 CDs worth more than $120 (imagine if you put more in each month?).  If you can, re-invest the CDs as they mature.  See if you can add to the amounts, again even if it’s only a few dollars.

“What have we done?  Anyone can buy CDs!”, you may ask?  Remember this is for a beginner who is starting to build up their savings.  Here is what the beginning saver has accomplished:

  • This builds up a habit of saving.  By putting the money in a CD we’re limiting the ability to take the money out (without a penalty at least).  Once this habit is in place a beginning saver may have the discipline to expand their savings.
  • It creates a great sense of self-esteem for the saver.  You get to see your CDs growing every month.  How great is it to see a year’s worth of savings?  Once a person realizes that saving is an achievable goal they will be more likely to continue!
  • You’re earning interest.  Not only have you saved but you’re savings are growing too!  You’re taking advantage of laddering.

Savings aren’t usually built overnight.  But by saving bit by bit you will see your savings blossom over time!

photo credit: naama

15 Things To Do With Your Economic Stimulus Check

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The government Stimulus checks started going out on April 28th. If you are expecting one you should start looking for it in May (here’s a post listing the dates).

So what are you going to do with the extra money? Here are a list of ideas for using your stimulus check:

  • Pay off credit cards – If you have any credit card debt the stimulus check will be a great way knock some of that out! Paying off the debt gives you an instant return in savings of whatever you would have paid in interest fees. Psychologically, you will help in getting the debt monkey off your back.
  • Contribute to a Roth IRA – You can take your money and put it into your Roth IRA. For 2008 the contribution limit is $5000.
  • Start an emergency fund – If you don’t already have some sort of emergency fund (three to six months expenses seems to be the conventional wisdom) then your stimulus check is a good way to start one. Even if you have one you can use the money to increase your fund. A great place to start one is with ING Direct (you can even get a $25 bonus by opening your account with $250).
  • Contribute to a 529 college savings plan – You can use the money to help save for your kid’s education by putting the money in a 529 plan. Not only do you help save for college but you might get a tax break as well depending on your home state’s plan.
  • Pre-pay your mortgage – Take the money and make additional payments to your mortgage. By making additional payments you will own your home faster and pay less in interest. Just make sure the payments go towards the loan principle and not next month’s payment (also check that your lender will accept pre-payments without fees or penalties).
  • Go on vacation – You may have been planning to do this anyway so here is a good way to fund the vacation. Go and do something that will be a great experience for the family that you will all remember.
  • Improve the house – If there’s something you’ve needed to improve on your home, such as a furnace, you can use your stimulus check to pay for it (or at least help). Other options could be new paint job, carpet, furniture, appliances, etc…
  • Car maintenance – Have you been putting off a car repair? Need new brakes? New tires? Your stimulus money can fund it. If your car is about to go kaput your stimulus check could help pay for a new car (or a good new used car).
  • Learn to invest – Do some research and take the money and start investing. Companies such as Sharebuilder and Zecco offer low-fee investing. You have to do your homework with this option but it might be just enough money to start investing but not so much that you will be crazy worrying if you lose it. If you invest through Sharebuilder you can buy partial shares of Berkshire Hathaway B class shares. I hear that Warren Buffett is pretty good at investing.
  • Pay off student loans – If you have high interest student loans then your stimulus check can be a great way to help pay your student loans off. Just like with credit cards paying off your high interest student loans give you the instant return in savings of what you would have paid in interest.
  • Have a nice evening out – Take your spouse out to a really great meal. Get babysitting and go to that great restaurant you wanted to try. Go see that new show that everyone’s talking about. Make an experience you will always remember.
  • Get physically fit – The stimulus check should be enough to pay for a year’s gym membership (or more than a year). Use the stimulus check as a catalyst to get in shape and make your life healthier. Not sure about a gym? Find a class such as yoga or martial arts to join. Not into that? Buy a new bike and go riding. Or get yourself some good running sneakers and running attire. Join your local running club and enter a few small races. You never know, you may one day run a marathon.
  • Go to school – Use your stimulus check to enroll in a college course or two. This can be toward a degree or just continuing education. Hey, you can take a personal finance course. Maybe learn a second language?
  • Do nothing – This is the easiest of them all. Put the money in your savings account and forget about it. You don’t have to spend it or find any particular purpose for it. It doesn’t have to burn a hole in your pocket. One day you might find a good use for it but for now it adds to your savings.

Personally, we’re closer to the Do Nothing suggestion. Our stimulus check will come via direct deposit right into our ING account. We have no specific plans for the money so it will be added into our savings. Our check may pay parts of many of the suggestions or for none of them. Either way it will earn interest until it finds a home somewhere else.

Do you have any other ideas for using the economic stimulus check?

photo by Argenberg

Best And Worst College 529 Plans From Morningstar

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Morningstar has released their picks for the top five and worst five 529 college-savings plans. To make their choices, Morningstar “focused on diversification, fees, flexibility, and the underlying funds.”Here are the top five:

- Illinois Bright Start College Savings Program
- Maryland College Investment Plan
- Virginia Education Savings Trust
-Virginia CollegeAmerica 529 Savings Plan (broker sold)
- Colorado Scholars Choice Savings Program (broker sold)

The worst five:

- Ohio Putnam CollegeAdvantage (broker sold)
- Mississippi Affordable College Savings Program
- Mississippi Affordable College Savings Advisor Program (broker sold)
- New York 529 College Savings Program
- Nebraska AIM College Savings Plan (broker sold)

I’m a little concerned that New York’s plan is considered one of the worst. Not only do I have two funds under the plan (one for each child) I also said recently that it’s a good plan. The main criticism from Morningstar is that the plan doesn’t have any exposure to international funds so it’s been missing out on international gains and it’s not hedged against US economy downturns. Other wise Morningstar says it’s moderately priced and they like that it’s made up of Vanguard index funds.

Many people, like myself, contribute to their own state’s plans since it’s likely they get a tax break. But depending on the plan and state you may be better off contributing to another state’s plan.

The Wall Street Journal suggests the following when considering a 529 plan:

“• When shopping for a 529 plan, you should consider costs, investment options and asset-allocation strategies.

• Weigh any tax advantages of investing in an in-state plan against the plan’s total costs.

• Look for annual asset-based fees of less than 1% for direct-sold plans and less than about 1.3% for broker-sold plans.

• Compare state plans at www.savingforcollege.com, www.collegesavings.org or www.morningstar.com.”Hopefully Morningstar’s review will prompt the New York 529 plan to consider some international exposure otherwise I may have to look into some of the better plans.

Do you contribute to a 529 college-savings plan?