Stocks vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 6 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Debt

When investing in real estate it is almost always tied to taking on debt, because of the large amounts of money needed to buy a property.   Taking on debt automatically increases the risk level with any investment.   With stock based mutual funds, you can start with $1, and never have any debt to worry about.

6. Return

There is a lot of variables that come into play when comparing returns of real estate investing vs stock based mutual funds.  You can really cherry pick numbers to make either side look much better than the other.  Just comparing actual long term growth in prices of real estate vs prices of stocks, stocks win that competition easily.  But if you include rental income, it can obviously increase your overall real estate investment return. With that though, you have to consider the risk of not being able to rent it out.

If you are looking for a way to get a high return with lower risk and little hassel, my opinion is that your #1 option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock



References

  1. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

The Easiest Way to Become a Millionaire

Becoming a Millionaire used to seem like this totally unrealistic goal that would never happen unless I won the lottery or inherited a bunch of money from some distant relative.   As it turns out becoming a millionaire is not all that unrealistic of a goal. Becoming a millionaire just means that your net worth, or the amount of money and assets you own, is greater than $1 Million.   It is achievable on almost any salary if you do it the right way.  There are over 11 million Millionaire households in America.  That’s almost 10% of all households in the United States.   1.

Is it Possible?

This is my 3 step guide to reach the status of millionaire: 1. Saving/investing at least 10% of your income, 2. investing prudently while taking proper risks, and 3. starting young.

1. Saving at least 10% of Your Income

I will show you an example of how a person making $30,000 a year can be a millionaire by the time they retire.   A 25 year old, let’s say his name is Bayden, just graduated from college and got a job making $30k year.  He decides to put 10% of that into a Roth IRA, which is $250 a month.   As it turns out he stayed at that same job for his entire life and never got a raise, but continued to invest the 10%.   When he retires at age 67, with growth rate of 8%, he will have $1,058,593 in his Roth IRA.  And the best part of that is the money is all tax free!  Obviously with a higher salary and/or frequent raises you could end up with much more than a million if you follow the 10% rule.  For most people that are out of debt and have an emergency fund, I suggest contributing 15% of their income towards retirement.

2. Investing Prudently While Taking Proper Risk

Time, and growth rate are the two most important factors in that equation.  An 8% growth rate is not anything too crazy, but you have to be invested long term, and have a vast majority of your money in stocks.  You cannot panic and take your money out if there is a crash.  You must trust in the market, and understand that stocks are the greatest wealth creation tool in the world.

3. Start Young

millionaire

Total contributions     $12,000                $36,000

* assumes an 8% growth rate    2.

This visual further proves how important time and compounding is to your retirement account.  Starting young is a principle that everyone knows, they just don’t follow it.  The power of compounding interest is amazing, and the younger you start the more powerful it is.  Even if you can’t reach the 10% goal, if you have an income source, you should be contributing to a retirement account.  For those of you who don’t have 40 years till retirement, you will need to save more than 10% to reach a million.

Do you  really need $1 Million Dollars?

Going back to the example of Bayden, when he retires at age 67, he will literally need every cent (and more) that he saved and earned while investing.   Just to live on the equivalent of today’s $30,000 a year ($103k assuming 3% inflation) for 20 years in retirement, he would need $1.1 million.   And that is assuming a 6% growth rate on the money for those 20 years.   If you don’t have a pension at work, and you want to live on more than $30k a year in retirement, then you better get to saving! Most people will need at least $2 or $3 Million to live comfortably in retirement.

If you can apply discipline in your finances and in your investments, you can become a millionaire by the time you retire.    That is my plan.

By Jimmy Hancock

References

1. “Market Insights Report 2018.” Record Numbers of U.S. Households Achieve Millionaire Status in 2016, According to New Spectrem Market Insights Report, 22 Mar. 2018, spectrem.com/Content_Press/Spectrem-Press-Release-3-22-17.aspx.

Matson Money. Who Wants to be a Millionaire Powerpoint. Mason, OH: Matson Money, 16 Jul. 2015. PPT.

New SECURE Act Signed into Law

On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020.  This includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions previously passed by the House in April 2019.  There are quite a few changes that may effect you now or in the near future.  Most, if not all the changes are positive and allow you more flexibility in general.  Many of the changes have already become effective as of January 1st, 2020.   Below is a few of the provisions and a brief explanation of each.

Required Minimum Distributions (RMDs).  The age at which required minimum distributions must begin will be increased to age 72 from age 70 ½.

Explanation- If you were born before July 1st, 1949, this does not effect your RMD at all.  Even if you just turned age 70 1/2 last year you will still be required to take your RMD in 2020.  But for anyone born after July 1st 1949, you can wait until the year in which you turn age 72 before you are required to start taking distributions from your Traditional IRA or 401k.

Birth/adoption excise tax exception.  Penalty-free retirement plan withdrawals for a birth or adoption.

Explanation- Before age 59 1/2, you can take out money from your Retirement Account to pay for a birth or adoption and you won’t be charged the 10% penalty tax.

No maximum age for Traditional IRA contributions.  You can contribute to a Traditional IRA at any age.

Explanation- Previously, you could not contribute to a Traditional IRA even if you were otherwise eligible after the age of 70 1/2, now you can.

 

Changes for business owners setting up company retirement Accounts

Increased Tax Credits. For new 401k’s being set up, there is an increase in tax credits for the startup costs of setting up and running the plan for the first 3 years.

Deadline to Setup New Plan. An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year.  Previously, the deadline was the last day of their business year. 

 

These are some of the major parts of the new SECURE act.   If you have any questions about these new rules or how to best take advantage of them, feel free to contact me.

-Jimmy Hancock

References

  1.  Neal, Richard E. “The SECURE Act of 2019.” Secure Act Section by Section, House Committee on Ways and Means, waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf.

7 Golden Questions to Ask When Investing Your Money

There are seven questions that one must answer before beginning to have peace of mind with your investments. Making investment decisions isn’t easy, especially if you are just entering the game. There are a lot of details that many people don’t think about until it’s too late. So, if you want to avoid the life long pain of poor investment plans, ask yourself these seven questions.

1. “Why?” It’s a simple question, but it’s often the hardest one to answer. Why are you investing, and what do you hope to gain from it? In other words, you must set specific goals. Maybe you want to save for retirement, maybe you want to send your kids to college, or maybe you just want some breathing room from everyday expenses. Whatever the reason, it’s important that you define why you are investing your money and what goals you wish to accomplish in doing so.  This will help you to decide how much money to put away.

2. “What is my time frame?”  This is like asking, how long will it be until I need the money?  This can depend on your age, and of course your answer to question number one.  If you are putting money away for retirement, your time frame should not end at the day you plan to retire, it should end at the day you plan to die.  You will need portions of that money starting at retirement, but you will keep a majority of it invested throughout retirement if you do it right.

3. “What am I going to get out of it?” What can you realistically expect to earn on your investments? Having an unrealistic idea of playing the stock market and striking it rich could leave you simply striking out.  Investing in stocks is not the problem, it is the expectation of beating the market, rather than expecting to get market returns.  Other investments, such as bonds, have fixed returns that are not as susceptible to market changes but have a lower expected return.  You should not expect to see growth every year or even 2 years.   The short term flat or down periods always seem to bore people out of the market, but that would be a huge mistake.

4. “What kind of earnings will you make?” Very few times when investing does a wad of cash appear in your mailbox if you’re successful. Your earnings will be very inconsistent in the short term, so there is no point in fretting over 1, 3, or 5 year returns.  The annual return that you will get is dependent on the type of investment you are in.  You can reasonably expect between 5 and 12% annual growth per year over the long term depending on your portfolio, but of course that is not guaranteed.   Which leads me to my next point.

5. “What’s my risk?” And here comes the basic balance in investing, risk versus reward. The higher the risk, usually the higher the potential reward, but that is not always the case.   Overall there is no guarantee that you will get your money back or receive the earnings promised to you, unless you have your money in a savings account or a U.S. Treasury security, both of which are backed by the federal government and give you extremely small returns. Make sure that the risk you take is worth the reward that you expect to achieve.  If you have a longer time frame, you can invest in riskier investments.

6. “Is my money diversified?” A great way to lower risk without hurting your return is by diversifying your portfolio.   Certain types of investments do better in certain situations, so by diversifying your investments, you are spreading your eggs across many baskets. That way if a certain industry tanks or sector is struggling, you will have plenty of other baskets holding your money safe and sound.  This doesn’t mean having different accounts or different advisors, but having different holdings in thousands of stocks and bonds.

7. “What is the effect of taxes on my investments?”  Every person who receives any earned income can invest in a tax advantaged plan.  Whether that be a 401k or 403B at work, or an IRA/Roth IRA, or all of the above.  Make sure you understand the implications of how your money is taxed with each type of account.  In many cases, a Roth IRA is the best for your tax situation, especially in retirement.  Also, make sure you plan to have enough money saved to pay for taxes in retirement.

By Jimmy Hancock



The Advantage of Rebalancing

balanceToday we are going to discuss the topic of Rebalancing your portfolio and why it is so important.  I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.

“Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”

Rebalancing for Dummies

Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.

For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in bonds. This is the 50/50 portfolio which is pretty safe and best for those closer to retirement.  So you let it go 1 year and lets say it was like 2017 and stocks had a great year.   After 1 year you now have $65,000 in stocks and $51,000 in the fixed portion.  You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on.   Rebalancing is then needed to sell off what is high, which is stocks, and buy into what is low, bonds.  The beautiful thing about it is, there is never a time when rebalancing forces you to buy high, or sell low.

Why doesn’t everyone rebalance?

Rebalancing never seems like the right thing to do at the time.  For example in 2008 when stocks were plummeting, rebalancing would have been to sell safe fixed income to buy stocks.  If you think about it though, you are buying low and selling high.  During these times you need an investment coach to keep you off the ledge.

So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences.  That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high.  This can help over the long term to increase your return as well.

The Proof

Take a look at this chart by Forbes which visually explains all of this.

 

Rebalancing chart forbes

 

You can see from the chart that rebalancing really does its work when the downturns in the market come.  The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.

Make sure that your money is invested with an investment coach that has a scientific and predetermined way for rebalancing your hard earned money.

By Jimmy Hancock

 

References

1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.

2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.

Investing in Stocks Vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 5 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Annual Return

From 1975 through 2015, a 40 year period, the S&P 500 (US Large Stocks) returned growth of 8.1% annually.  During the same exact period, the US Residential Real Estate prices returned growth of 4.8% annually.   You can see the difference that makes long term by looking at this basic chart. 1.

If you are looking for a way to get the biggest financial return for retirement, my opinion is that your best option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock

 



References

  1. Iskyan, Kim. “What Is the Historical Return of Real Estate vs Stock Investing?” TrueWealth Publishing, 31 Aug. 2016. Web. 12 May 2017.
  2. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

 

How to Become a Millionaire on a $30k Salary

Becoming a Millionaire used to seem like this totally unrealistic goal that would never happen unless I won the lottery or inherited a bunch of money from some distant relative.   As it turns out becoming a millionaire is not all that unrealistic of a goal.  It is achievable on almost any salary if you do it the right way.  There are over 8 million Millionaire households in America.  That’s more than 1 in every 20 households.  1. 

Is it Possible?

This is my 3 step guide to reach the status of millionaire: 1. Saving/investing at least 10% of your income, 2. investing prudently while taking proper risks, and 3. starting young.

1. Saving 10% of Your Income

I will show you an example of how a person making $30,000 a year can be a millionaire by the time they retire.   A 25 year old, let’s say his name is Bayden, just graduated from college and got a job making $30k year.  He decides to put 10% of that into a Roth IRA, which is $250 a month.   As it turns out he stayed at that same job for his entire life and never got a raise, but continued to invest the 10%.   When he retires at age 67, with growth rate of 8%, he will have $1,058,593 in his Roth IRA.  And the best part of that is the money is all tax free!  Obviously with a higher salary and/or frequent raises you could end up with much more than a million if you follow the 10% rule.

2. Investing Prudently While Taking Proper Risk

Time, and growth rate are the two most important factors in that equation.  An 8% growth rate is not anything too crazy, but you have to be invested long term, and have a vast majority of your money in stocks.  You cannot panic and take your money out if there is a crash.  You must trust in the market, and understand that stocks are the greatest wealth creation tool in the world. 

3. Start Young

millionaire

Total contributions     $12,000                $36,000

* assumes an 8% growth rate    2. 

This visual further proves how important time and compounding is to your retirement account.  Starting young is a principle that everyone knows, they just don’t follow it.  The power of compounding interest is amazing, and the younger you start the more powerful it is.  Even if you can’t reach the 10% goal, if you have an income source, you should be contributing to a retirement account.  For those of you who don’t have 40 years till retirement, you will need to save more than 10% to reach a million. 

Do you  really need $1 Million Dollars?

Going back to the example of Bayden, when he retires at age 67, he will literally need every cent (and more) that he saved and earned while investing.   Just to live on the equivalent of today’s $30,000 a year ($103k assuming 3% inflation) for 20 years in retirement, he would need $1.1 million.   And that is assuming a 6% growth rate on the money for those 20 years.   If you don’t have a pension at work, and you want to live on more than $30k a year in retirement, then you better get to saving!

If you can apply discipline in your finances and in your investments, you can become a millionaire by the time you retire.    That is my plan.

By Jimmy Hancock

References

1. Boston Consulting Group. “Millionaire.” Wikipedia. Wikimedia Foundation, 17 June 2015. Web. 9 Feb 2017. <https://en.wikipedia.org/wiki/Millionaire>.

Matson Money. Who Wants to be a Millionaire Powerpoint. Mason, OH: Matson Money, 16 Jul. 2015. PPT.



Bonds 101

Bonds can be extremely difficult to understand at a deep level, but today we are going to discuss the basics of bonds and how they can help you achieve success in your retirement portfolio. 

Bond- “A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.” 1

Short term quality Bonds (matures in 10 years or less) should make up a percentage of your total retirement portfolio.  What percentage of bonds you have compared to stocks is up to you and should be planned according to your age and risk preference.

The Benefit of Bonds

Bonds are much less risky than stocks generally speaking, especially short term Triple A quality bonds.  A bond will give you a set rate of return each year.   Putting bonds in your portfolio helps to lower the overall standard deviation, thus helping to smooth out the performance.

Another advantage of having bonds in your portfolio is that they are not correlated with the price of stocks.  Often times bond prices and stock prices move in opposite directions although not always.  This means that bonds can give you big downside protection in case there is a big down turn in stocks.

Because bonds are not highly correlated with stocks, this makes it a huge rebalancing advantage to have both stocks and bonds in your portfolio.  If stocks crash, you can pull some money out of your fixed income portion of your portfolio, and buy stocks at 20 to 50% off.  Thus you are able to buy stocks at a discount without even putting new money into your portfolio, and your portfolio goes back to your original risk preference of stock to bond ratio.

The Risk of Bonds

Default risk is the main risk that comes along with bonds.  If you own a bond that defaults, you lose all of your money including the principle.  To reduce this risk you can diversify by not buying individual bonds, but investing in a bond mutual fund.  Some bonds, like long term (10 to 30 years) junk bonds can be extremely risky and lose their value quickly.  Long term junk bonds can give you a slightly higher rate, but have a much bigger chance of being defaulted and you losing your money.   Investing in long term bonds can also be dangerous especially in a time like now.  The current rate for a 30 year bond is about 2.63%. 2   That is extremely low and most people expect that to increase dramatically in the future.  If you get stuck in a 30 year bond at that rate, and the rate jumps to 5%, then the price value of your bond has dropped by an extreme amount.  You can either sell the bond at a big loss, or suffer the consequence of receiving 2% per year while everyone else is getting 5%.  

Bonds Vs. Stocks

To finish off, I will explain why bonds should not be used as your main source of portfolio growth.  The historical return for Bonds are minimal compared to a diversified group of stocks.  Check out the chart below. 3

  • Hypothetical US Stock Mix
  • S&P 500
  • Long Term Bonds

bond trap
This chart shows 30 year rolling returns of these 3 asset categories from 1927 though 2014.  You can see that long term bonds have never had a better 30 year return than a diversified stock mix.  Bonds have lost to stocks over the long term no matter what period of time you look at.  This is important to know as you decide the percentage of bonds you want in your retirement mix.

Short term quality bonds should be a part of your portfolio, but make sure you work with an investment coach to decide exactly how much.

By Jimmy Hancock

 

References

1. Investopedia. “Bond Definition | Investopedia.” Investopedia. Investopedia, LLC, 23 Nov. 2003. Web. 31 May 2016.

2. Yahoo! “Bonds Center.” – Bond Quotes, News, Screeners and Education Information. Yahoo!, 31 May 2015. Web. 31 May 2015.

3. Matson Money. The Long Bond Trap Presentation. N.p.: n.p., n.d. PPT.



Investment Accounts 101

investing choicesPlanning your investments to build a retirement fund can be a dizzying prospect. The various questions, options, details, accounts, and amounts are enough to make anyone’s head spin. Wouldn’t it be nice if there was a generic recipe for success? A nice neat list of step by step instructions on how to make the best decisions on where, when, and how much when it comes to investing for your retirement? Unfortunately, this list of steps is incredibly dependent upon each individual and their current situation and future plans, so a sure fire success route does not exist.  This is why it is important to work with an investment coach that can understand your specific needs.

But before you stop reading, there are a few things that we feel you should know about that will lead you down the right path.  Here’s the order that is suggested for the majority of people in terms of what retirement accounts to invest in.

1. Fulfill Your Company’s Match Program: Most companies, even small companies, offer some sort of retirement account.  Smaller companies usually have simple IRA’s or SEP IRA’s, while larger companies usually have 401k’s.  There is a high likelihood that your company has a match program as part of their plan.  This means that for each contribution you make into your account, the company will match it up to a certain amount.  So match programs offer an instant 100% return on the money invested.   Before you invest anywhere else, make sure you are investing enough in your work retirement plan to get your full match.

Before we move on, here is word of warning on the company retirement plan.  If you don’t plan on working for the company long term, make sure you check out the vesting schedule.  A lot of company retirement plans don’t give you full access to your money unless you work there for a few years.

2. IRA to the Max: An IRA is an individual retirement account that can be opened by anyone seeking to invest.  Investing in an IRA usually gives you more investment choices and flexibility than is offered in many 401k plans.   Also, you have the Roth option.  There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle in most cases. There are a few different reasons why you should make this move. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows in your retirement.  The total taxes paid with a Roth IRA from opening of account to death and beyond are almost always less than with a Traditional IRA.

Another thing to consider if you are married is opening an IRA for your spouse.  Even if they are not working you can contribute to their IRA and max it out as well.

3. Company Retirement Plan to the Max: After you have reached your company’s matching level and have maxed out your IRA or Roth IRA, turn your funds back to the company retirement plan until they are maxed out as well. Having both your Roth IRA and your  company retirement plan maxed out gives you some variety in your portfolio in terms of how the investments are taxed. This variety gives you something of a safety net in terms of how taxes and other investments change over time and the affect they will have on your funds.

4. Open Taxable (Non-Qualified) Accounts: If you have maxed out your company plan and an IRA for your and your spouse, congratulations, you are doing very well in the retirement planning side of things.  But what if you still want to put more money away?  There are still options.   You can still invest more money in a non-qualified account.  If you are married this would be a joint account, and for the singles it is a personal account. There are a few advantages and disadvantages of this type of account.  This is not a tax sheltered account, so there is no taxable advantage.  But one big advantage is there is no tax penalty or fee for taking the money out at any age for any reason.  For that reason a lot of people use this account as an emergency fund.
This plan is not something to jump into without doing your homework. There is a lot of things to know, and I haven’t even gotten into life insurance and that side of the retirement planning.   Like I mentioned before, there is a reason that no one has created a perfect plan that fits everyone. Depending on your personal income, you might not be eligible for certain accounts, like a Roth IRA.  But, for most people, looking for a general order of priority for their retirement investments, these four steps are a great place to start.

By Jimmy Hancock

Who Wants to be a Millionaire?

The word Millionaire used to seem like this totally unrealistic goal that would never happen unless I won the lottery or inherited a bunch of money from some distant relative.   As it turns out becoming a millionaire is not all that unrealistic of a goal.  It is achievable on almost any salary if you do it the right way.  There are over 6.9 million Millionaire households in America.  That’s more than 1 in every 20 households.  1. 

Is it Possible?

This is my 3 step guide to reach the status of millionaire: 1. Saving/investing at least 10% of your income, 2. investing prudently while taking proper risks, and 3. starting young.

 

1. Saving 10% of Your Income

I will show you an example of a person making $30,000 a year can be a millionaire by the time they retire.   A 25 year old, let’s say her name is Elicia, just graduated from college and got a job making $30k year.  She decides to put 10% of that into a Roth IRA, which is $250 a month.   As it turns out she stayed at that same job her entire life and never got a raise, but continued to invest the 10%.   When she retires at age 67, with growth rate of 8%, she will have $1,058,593 in her Roth IRA.  And the best part of that is the money is all tax free!  Obviously with a higher salary and/or frequent raises you could end up with much more than a million if you follow the 10% rule.

2. Investing Prudently While Taking Proper Risk

Time, and growth rate are the 2 most important factors in that equation.  An 8% growth rate is not anything too crazy, but you have to be invested long term, and have a vast majority of your money in stocks.  You cannot panic and take your money out if there is a crash.  You must trust in the market, and understand that stocks are the greatest wealth creation tool in the world.

 

3. Start Young

millionaire

Total contributions     $12,000                $36,000

* assumes an 8% growth rate    2. 

This visual further proves how important time and compounding is to your retirement account.  Starting young is a principle that everyone knows, they just dont follow it.  The power of compounding interest is amazing, and the younger you start the more powerful it is.  Even if you can’t reach the 10% goal, if you have an income source, you should be contributing to a retirement account.  For those of you who don’t have 40 years till retirement, you will need to save more than 10% to reach a million.

If you can apply discipline in your finances and in your investments, you can become a millionaire by the time you retire.    That is my plan.

 

By Jimmy Hancock

References

1. Boston Consulting Group. “Millionaire.” Wikipedia. Wikimedia Foundation, 17 June 2015. Web. 16 July 2015. <https://en.wikipedia.org/wiki/Millionaire>.

Matson Money. Who Wants to be a Millionaire Powerpoint. Mason, OH: Matson Money, 16 Jul. 2015. PPT.