What to do (and what NOT do to) in today’s turbulent financial markets

Unless you’ve been living in a cave that’s under the ocean AND on another planet, you have likely heard about a bit of trouble going on throughout the US’s financial system.  First, house prices dropped, then stocks prices, now entire banks like WaMu and Lehman Brothers have gone under (taking the markets further down with them.)

While Congress and the United States Treasury Department try to figure out what to do about the mess that Wall Street (and, let’s be fair, Main Street) got us into, most investors are left trying to figure out what actions to take in their personal lives.  Although I certainly don’t pretend to be an expert on the macro economy (and you don’t need to be to make good decisions when that same economy is acting crazy), I will offer some advice.  The first step is absolutely essential; fortunately, it’s pretty straightforward:


This is a pretty standard rule in any scenario of perceived crisis.  If you’re panicked, you can’t think straight.  If you can’t think straight, you can’t make good decisions, SO RELAX!  Take a deep breath, remind yourself of all the things that are going fine in your life (or at least pretend if things aren’t), and try not to think about that tanking retirement fund.

Really though, after you’ve calmed down, stop and reflect on your personal financial situation.  (Stop worrying about the rest of the country for a minute, and do Ayn Rand proud by thinking only of yourself, and your immediate financially dependent family, if applicable.)  If you’ve followed the rules I’ve recommended, you are hopefully already in solid financial shape.  If you’re not, you need to apply the next step.  (Even if you don’t think you need it, read over it anyway, just in case there are some things you’ve missed.)

Get fit financially

No course changes here folks, continue to pay off your high-interest debt, establish a short-term “emergency fund” (you could put it into a Money Market Fund like Vanguard’s VMMXX.  Don’t worry, the government has said it will guarantee Money Market Funds for a while.)  Get yourself the necessary insurance for your health, life (I believe term is best for most people), disability, car and house, and whatever else you need insured.  (Keeping in mind that many of those types of insurance may be provided by your employer at a good price.  Check into the details with your Benefits department at work.)

Note that we haven’t decided to take any different course of action yet due to the fiscal crisis that we’re facing.  “But, surely” you might be saying, “our plan of action has to change when it comes to our investments, right?  The stock market just isn’t safe any more!  Our retirement and kid’s college funds are in there!”  Well, sorry to disappoint, but the next vitally important step in our plan to deal with these troubling times is…


Well, almost nothing at least.  DON’T rush to cash out your stocks and bonds.  DON’T take all the money out of your savings and checking accounts to stuff it under your mattress (the FDIC insures those deposits at up to $100,000 per account.)  DON’T lose faith in the stocks, the number one wealth-creating opportunity available to all Americans.  In fact, the only “change” I might recommend is to strongly consider starting to invest in stocks (and to continue your regular investing if you’ve already started.)  Over long time periods, stocks are by far the best investment you can make with your money.

Unless you plan on needing the money in less than 3-5 years, the majority, if not ALL, of your long-term savings should be in stocks.  That especially includes your retirement, young children’s college funds, etc (assuming, of course, those events are still several years away.)

With the market in turmoil, it can be very difficult to maintain your disciplined investing strategy.  Stick to it!  Keep investing regularly, DON’T try to time the market, and avoid trading in and out of stocks.  The market has been hit hard recently, but as history shows, the biggest upturns in the economy generally follow the biggest downturns.  Don’t miss out on a huge rally by setting your long-term money on the sidelines. 

Remember that volatility (referred to as “risk” by some folks) is your friend.  Steady investments like bonds and CDs generally pay low to middling returns.  When you buy (and more importantly HOLD) those broad index funds (like the total stock market index fund VGTSX from Vanguard), those short-term ups and downs historically translate into huge gains after many years.


So, to summarize, DON’T PANIC, get yourself financially fit enough to weather any financial storm and keep investing regularly in a diversified collection of stocks, like low-fee index funds (that way, if one of them blows up, you’ll have plenty of other quality business to fall back on.)  Your own financial security is in your hands!  This is just a broad overview of how to handle this adversity, if you have specific questions, please leave a comment or email me.

Hang in there!

The two most important books you’ll ever read on becoming (and staying) wealthy

If I had to choose any two books to recommend to people who want to become financially independent, what do you think they would be?  Maybe Warren Buffet’s excellent biography ‘Buffett: The Making of an American Capitalist’by Roger Lowenstein?  Perhaps Buffet’s compilation of Berkshire Hathaway letters to shareholders.

Surely at least ONE of the books would be written by or about a famous investor, or contain at least for key insights into stock-picking, real estate, how to be successful in business or another get rich plan?  Judging from the tone of this article, you can probably guess that the answer is “no” — and you would be right.

The first book that I believe gives the best advice on how to be successful in your financial life (and how to make your children successful as well) was written by two professors who set out to study millionaires.  What they found surprised them.  In ‘The Millionaire Next Door’, the authors discovered that those with over a million in assets were NOT the people driving expensive vehicles, renting high-priced downtown apartments or drinking Dom Peringnon.

Instead, many of the millionaires they studied had the following seven traits, which the authors flesh out further in the book:

1. They live well below their means.

2. They spend their time, energy, and money in ways leading to wealth.

3. They do not worry about social status, preferring financial independence.

4. They did not receive a lot of financial help from their parents.

5. Their own adult children are not financially dependent upon them.

6. They target opportunities that benefit from large amounts of spending.

7. They work in the right jobs, often for themselves.

I believe, as do many others, that the most important of these commonalities is number 1 – living well below your means.  I think the authors might agree with that priority when they write: “Being frugal is the cornerstone of wealth building. … [F]ew could have ever supported a high-consumption lifestyle and become millionaires in the same lifetime.”

After reading “The Millionaire Next Door,” you will have seen the blue print for attaining wealth. However, implementing that plan is the hard part. Living below your means, regularly investing (and rarely taking capital back out), and foregoing some of the perks that TV commercials and rap songs have convinced us we “deserve” takes discipline, faith, and hard work.  This difficulty is why I believe the second most important book to read with respect to wealth building is Elaine St. James’ ‘Simplify your Life’.

St. James’ lays out 100 ways to simplify your life.  The idea is that as Americans in our modern world we’ve become to obsessed with “keeping up with the Jones’s”, buying bigger houses, flashier cars, and working longer hours to pay for it (while starving our retirement funds, I might add.)  Her goal is to show people the way to reduce their consumption while simultaneously increasing their happiness.  She recommends “selling the damn boat” and consolidating your investments to help reduce the time, money and worry in one’s life.

While St. James’ book is not dedicated solely to reducing your expenses and making you wealthy, it gives the proper framework to get the most out of life without rampant consumerism.

Taken together, I believe “The Millionaire Next Door” and “Simplify your Life” will show you the plan to wealth, and then help you execute it.  Start living cheaply right now and check ’em out from your local library for free!

All about the Roth IRA – your key to tax-free retirement!

If you’ve read my primer on retirement, you should have a good idea of the benefits of investing in a Roth IRA. If you haven’t read it, let me give you a quick rundown before we get into the gritty details:

Meet the Roth IRA

Unlike a Traditional IRA (“Individual Retirement Account”), with a Roth IRA you have to pay taxes on the income that you invest. (The money you put into a Roth IRA is called a “contribution.”) However, instead of that money (plus all the growth) being taxed when you take it out at retirement (after age 59 1/2), with a Roth IRA you get to make the withdrawal tax-free (The money that you take out of a Roth is called a “distribution.”)

Also, like a Traditional IRA or 401k, all the growth and reinvested dividends in a Roth IRA grow tax-free while they remain in the Roth account.

That’s the Roth IRA in a nutshell. Now let’s look at some of the details below that might also sway your decision on where to put your retirement money. (And for a complete look at those details, you can check out IRS publication 590. I’ll warn you though, it’s as dry as the name suggests.)

The Roth IRA has “rules and $#%&” too…


In order to contribute money to a Roth IRA, you must have “earned income” that amounts to at least as much you’re going to invest. Thus, if you want to put in $2500 into your Roth IRA in 2010, you must’ve received at least that amount of earned income in the same year. This then begs the question, “what the heck counts as earned income?”

Earned income (or “compensation”) is defined as wages, salaries, tips or professional fees. Essentially, it’s what shows up on your W-2 as “wages, salary, tips” etc. This does NOT include money from investments like interest, dividends, or capital gains. Also NOT included as compensation are payments from social security, disability, pensions, annuities or income from property.

The most you can contribute in one year to a Roth IRA is $5,000 for 2010 (that is, if you ONLY contribute to a Roth IRA for retirement.) This amount will be adjusted in $500 increments, when required, to keep pace with inflation. There is one exception to this maximum IRS limit: if you’re 50 years old or older prior to 2011, you can contribute an additional “catch up” amount of $1,000 to your Roth IRA, for a grand total of $6,000 in 2010.

In 2010, in order to contribute to a Roth IRA, you also must have an Adjusted Gross Income (AGI) of less than $121,000 if you’re filing single ($177,000 for those married filing jointly.)  Also, the amount you can contribute to a Roth IRA is “phased out” for those filing single whose AGI is between $106,000 ($167,000 if filing jointly) and $121,000 ($177,000 filing jointly.)

One nice thing about the contributions to a Roth IRA is that for a given year (say, 2010), you have until the tax deadline in the following year to make contributions. Therefore, for most people, April 15th 2011 would be the last day you could make Roth IRA contributions for 2010.

(Special note on employer-matching contributions for Roth 401ks: Employer-sponsored Roth 401ks are similar in their tax treatment to Roth IRAs (and similar in their contribution limits to ‘regular’ 401ks, which are pre-tax.  One important difference is that employer matching contributions are ALWAYS pre-tax, and will go into regular 401k accounts, even if your own contributions are sent to a Roth 401k.)


If the idea of receiving tax-free income in your golden years isn’t enough, the Roth IRA also has some other benefits when it comes to receiving distributions.  These benefits give you some flexibility and liquidity that is usually reserved for taxable accounts.

Distribution of your regular contributions – You can take out the amount you’ve contributed to a Roth IRA tax- & penalty-free at anytime (I recommend only doing this if you really have to; chant the mantra: “Retirement savings are for retirement!”) For example, let’s say you’ve contributed $5000 per year for 4 years to your Roth IRA. Then, at age 42, you lose your job and need to tap your IRA in this emergency situation. You could take up to $20,000 worth of distributions from your Roth IRA without penalty tax-free, since you made an equal amount of contributions over the years.

Qualified Distributions – With a Traditional IRA, you can generally only take the money out without penalty if you’re over 59 1/2, and then you still have to pay normal income tax on that money. With a Roth IRA, some of the ways in which you can take out money tax and penalty-free are known as “qualified distributions.”

“A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

  1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
  2. The payment or distribution is:
    1. Made on or after the date you reach age 59½,
    2. Made because you are disabled,
    3. Made to a beneficiary or to your estate after your death, or
    4. One that meets the requirements listed under First home under Exceptions in chapter 1 [of IRS publication 590] (up to a $10,000 lifetime limit).”

If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions.

Item D means that if you’re a first-time home-buyer, you can take a distribution of up to $10,000 in earnings (after using all the contributions) for the purchase of this home (as part of a down-payment, for example.) If your spouse has a Roth IRA and is also a first-time home-buyer, she could use $10,000 of her Roth IRA in the home purchase as well (for a total of $20,000 between the two of you.) Note that you can also use your Roth IRA distributions in the same way for a child, grandchild, parent or other ancestor that is a first-time home-buyer.

Additionally, should you kick the bucket early, your beneficiaries can use your Roth IRA distributions tax-free. This makes a nice life insurance bonus out of the Roth IRA (for your sake, a benefit that hopefully won’t be used!)

You can also use Roth IRA distributions penalty-free (but not tax-free) for up to the amount required to pay for your qualified higher-education expenses (as long as you paid for those expenses with savings, loans, wages, a gift or an inheritance, and NOT through a tax-free scholarship or grant.)  Even though your Roth earnings withdrawals are not tax-free for qualified higher education expenses, you may be able to used tuition deductions or education credits to offset the taxes from that income.  (However, there are much better ways to save for eduction.)

“Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.”

This means that if you want to start a retirement fund but think that in several years you might decide to buy a house (for the first time) or go back to school, a Roth IRA may be a good place for your money in any event.  However, I would caution that if your plan is to use a Roth IRA to fund something other than your retirement, you can’t really count that Roth IRA money as part of your future retirement.

As stated in my article on retirement, I believe that funds set aside for retirement should ONLY be used for that purpose. So, make sure you keep your “true” retirement money separated (at least in your mind) from your “maybe-for-school-or-a-house, maybe-for-retirement” money.

Conversion – You can also convert a Traditional IRA or 401k/403b into a Roth IRA. Keep in mind that you’ll have to pay the taxes in the current year at ordinary income rates on the basis amount of Traditional IRA that you’re converting.  So, if you’re in the 25% tax bracket and convert a $100K Traditional IRA to a Roth, you’ll pay $25K in taxes that year.  (For 2010 conversions ONLY, you have the option of spreading the $100K of income equally over 2011 and 2012.)

Avoid the 10% penalty on withdrawals of Roth funds from converted IRAs

One important exception to the general rule of being allowed to take contributions out of Roth IRAs at any time tax & penalty-free is converted IRAs.  If you convert a Traditional IRA/401k to a Roth IRA, you cannot take out any money within the 5 tax-year period starting with the year that the conversion was made unless you want to pay the 10% penalty (bad idea.)  So, if you convert in tax year 2010, you can’t withdraw those rollover contributions until January 1st, 2015.

Ready, set, Roth!

Now you should have a deeper understanding of the Roth IRA, a powerful retirement vehicle that could save you a bundle in taxes after you retire. If you combine the over-59 1/2 tax-free distributions with the additional distribution flexibility of funding your first home purchase or higher-education costs with your Roth, this IRA might be the right investment vehicle for you.

(To find out why the Roth IRA may NOT be the best retirement vehicle for you, read this.)

What You Need to Know About Retirement NOW (Don’t wait until it’s too late!)

How do you wanna retire? This article will cover the basics of retirement with a focus on the tax-advantaged retirement funds available to help YOU start saving for your retirement now.

How do you wanna retire? On a beach in Tahiti sipping a Mai Tai? Pursuing your dream of becoming a world class sky diver? Maybe quitting the rat race early at age 45 and telling the world to go @#^& itself?

However you envision your retirement, if you want to make those dreams come true, you need to start planning and taking action NOW! Otherwise, you might find yourself filling grocery bags at the local Slaveway well into your eighties. I don’t mean to scare you, but you can’t count on anyone else to provide for your dotage besides yourself. Not your kids, not your girlfriend, and certainly not your employer or the government (although the last two will certainly help you help yourself as you’ll see below.)

First things first

Before we get into retirement saving, you gotta settle your financial house. For that, I got rules!

Pay off any double-digit interest rate debt (read: credit cards), make sure you’re properly insured and have a short-term reserve for emergencies.After you’ve done that, keep spending less than you earn so that you can start to sock away retirement money from each paycheck. And remember, that money is for your retirement! For tax-advantaged retirement vehicles (the best kind!) like the 401k or Roth IRA, you generally can’t take that money out before you’re 59 1/2 without paying some serious taxes and penalties (for Roth IRAs there are some exceptions that The Motley Fool can explain to you.)

However, despite having access to those legal exceptions, I want you to repeat after me: “Retirement savings are for my retirement, retirement savings are for my retirement!” Got it? Good. Let’s move on to where you should put your money to get the most out of each retirement dollar you set aside.

Tax-advantaged retirement savings – the ONLY way to go! (At least I think so.)

As I said earlier, you shouldn’t count on Uncle Sam to fund your retirement. (Even if social security is around when you retire, the pittance you receive will likely be much too small to live off, and certainly not enough to live comfortably with.) However, the government has made several investment vehicles available to the common man (or woman) that incentivize you to save for your own retirement by offering large tax savings.

The most common retirement vehicles are the 401k, 403b and IRA (Roth and Traditional.) The 401k and 403b are only available through your employer, but ANYONE with earned income can invest in a Roth or Traditional IRA.

The 401(k) and 403(b)

The 401k is frequently offered to full-time employees by a private employer while the 403b is offered to some state employees (like public school teachers) and certain non-profit employees (like church employees.) Many aspects of the 401k are similar or identical to those of the 403b. I will discuss the 401k below, but you can assume that the rules and benefits are essentially the same for the 403b. A 401k offers several advantages over a “regular”, taxable account.

Firstly, you don’t have to pay taxes on the money that you contribute to your 401k at the time you invest. This means that if you invest $4000 of your yearly income into a 401k during 2008 and you’re in the 25% tax bracket, you just saved yourself $1000 in 2008 taxes. How did I figure that? Because ordinarily you would have to pay 25% of that $4000 you made to the IRS (25% of $4000 = $1000) and would’ve only been left with $3000 to invest. Instead, you invested that $4000 in a 401k and got to keep it all to yourself! You just increased your savings by 33% because you used your 401k to invest for your retirement instead of a taxable account, that’s big money!

Secondly, every dollar you put into a 401k grows tax-free until you take it out when you need it in retirement. (Generally, you must be 59 1/2 to take money out of your 401k without penalty.) Regular, taxable accounts require you to pay taxes on the dividends and capital gains that your funds produce each year. With a 401k, as long as you leave the money in your account, you don’t have to pay any taxes regardless of how much your fund grows in value!

Lastly, many employers offer “matching” of the dollars that you invest in your 401k. A standard offer is that an employer will match 50 cents on each dollar that you put in, up to 6% of your income. This means that if you make $50,000 per year and put at least 6% ($3000 in a year) of your salary in your 401k each pay period, your company will put in another 3% of each paycheck to boot! (50 cents of 1 dollar up to 6% = 3%.) In the above example, this equals $1500 in FREE money! If you have such a 401k matching deal with your employer, max it out! This is the number one place your retirement dollars should go; no where else can you get anywhere close to this instant, guaranteed return on your money! (Unfortunately, I’ve never heard of a 403b employer offering matching to employees, so this benefit seems to be reserved for those of us lucky enough to have 401ks.)

One other thing to note, the maximum that you can personally contribute in one year to a 401k (or Roth 401k or 403b) is $17,500 in 2013. This number is set to increase with inflation in $500 increments when necessary. (And if you’re close to maxing out that number, my hat’s off to you; nice work!)

The one time that you do have to pay taxes on your 401k account is when you withdraw money from your account (after you turn 59 1/2, otherwise you’ll get hit with nasty penalties! Remember, retirement savings are for your retirement.) At this point, you’re taxed on those withdrawls just like you would be taxed for ordinary income.

However, if you believe that you’re going to be in a higher tax bracket when you retire than the bracket you’re currently in, you might wish that you could just pay the (lower) taxes on your income now, invest it, and then withdraw your money (including all the gains on that money) tax-free at retirement when your tax bracket is higher. Fortunately for you, Uncle Sam has created the Roth IRA (and the Roth 401k) for just that purpose.

The Roth IRA and Roth 401k

The Roth IRA (and Roth 401k) works in a kind of “opposite” way to the 401k (or Traditional IRA, which we’ll discuss briefly later.) Instead of investing money tax-free, you pay that taxes on the income that you invest in a Roth IRA now, but when you pull that money out, your original invested dollars PLUS all the gains on that money aren’t taxed a cent! Also, like a 401k or Traditional IRA, the money you invest grows tax free throughout all those years. Unlike a 401k, virtually anyone with some income can invest in an IRA (Roth or Traditional.) This is subject to certain income requirements which you can check HERE.

This savings vehicle could be a better place for your money than a 401k or Traditional IRA for a few reasons:

1) You expect your future tax bracket to be higher than your current one.

Ex: You currently make $30,000 a year, and are in the 15% marginal tax bracket. However, because you’ve read this blog and have become a prodigous saver, you plan on retiring at 60 with enough money so that you can comfortably withdraw $70,000 a year to live off. This amount of yearly income would put you in the 25% tax bracket. Thus, you’d be better off putting a fair amount of retirement savings into a Roth IRA (paying taxes now at 15%) so that your taxable income when you retire is likely to be within the 15% bracket, and not in the 25% bracket.

2) Your employer doesn’t offer a 401k or 403b and you plan to contribute the maximum to your IRA ($5,000 for 2012/$5,500 for 2013, with the amount set to increase in increments of $500 dependant on inflation.)

The reason you might be able to save more with a Roth IRA is a little more complicated than the last one, but there’s an excellent, clear explanation HERE.

3) You’re not sure how your future tax bracket will differ from your current one, but you just really like the idea of not having to worry about taxes when you retire!

While I completely understand this rationale, I would offer a few things to consider if this is your primary motivation for investing in a Roth IRA or Roth 401k instead of a Traditional IRA or a 401k/403b:

1) As the saying goes, “a bird in hand is worth two in the bush.” By that I mean that while your future tax savings (due to Roth IRA withdrawls) is unknown, it is certain that you will save X % on your taxable income if you were to invest in a 401k or Traditional IRA instead. (Of course, if you’re in the 10 or 15% marginal tax bracket currently, it’s hard to imagine that taxes will be lower when you retire, so a Roth IRA may make sense.)

Keep in mind, also, that some part of your income is never taxed (because everyone has access to a ‘standard deduction’ and ‘personal exemption’ that exempt about $8000 of your income from federal taxation in 2008.) So in retirement, some portion of your “taxable” retirement income (like from a 401k or Traditional IRA) will already be exempt from taxes. Thus, during the course of your working life, you probably want to invest some portion of your retirement savings into a 401k or Traditional IRA (preferably when you’re in a high yearly tax bracket, to reap the greatest tax savings.)

2) Make sure you’ve maxed out your 401k employer matching before you even think about another retirement vehicle.

(If you’d like to know more about taxes and tax brackets, click HERE. 2008 tax bracket information is at the bottom of this article for reference. Keep in mind that the incomes listed are NOT gross income ranges. They are AGI, or Adjusted Gross Income.)

The Traditional IRA

A traditional IRA is like a 401k as far as tax benefits go. However, like a Roth IRA, anyone with some income (and who doesn’t make too much money, generally you need an AGI less than ~$100,000 to qualify.) Also, the maximum allowable contribution is the same as it is for a Roth IRA, $5,000 in 2012, $5,500 in 2013.)

Note that for both Roth and Traditional IRAs, if you’re over 50 you can contribute an additional $1000 for a grand total of $6500 per year (2013) so that you can “catch up” on your retirement savings.

Conclusion and rules of thumb

Now you should have an idea of the valuable tax-advantaged retirement vehicles that are open to you, and why they are such great deals compared to regular, taxable accounts. Lastly, let me break down a few rules of thumb that you can use for your retirement investing.

1) The most important factor in retirement planning is to start investing early. Let’s take two people who are both 30 years old and would like to invest for their retirement. We’ll assume that their investment dollars grow at an annual rate of 8%. Jane decides to begin investing immediately and puts in $5000 per year for 10 years, until she’s 40 years old (a total of $50,000.) Joe doesn’t start investing until he’s 40 years old, BUT, to make up for lost time he invests $5000 for 20 years straight, until he turns 60.

When Jane and Joe turn 60 together, who do you think will have more money? Jane, who started at age 30 and invested for 10 years ends up with $365,000 at age 60. Even though Joe invested twice as much money over the years ($100,000 total), he ends up with only $247,000 at age 60.

Jane ends up with nearly 50% more retirement dollars than Joe, but only had to invest half as much! This clearly demonstrates the importance of acting now with regard to your retirement savings. A 401k (especially with matching) is a really painless way to begin this process. Just start by allocating, say, 10% or whatever you can afford of your paycheck to your retirement fund. You’ll hardly notice the difference in take home pay, but that money will really add up over time (that’s the magic of compound interest!) Try to also increase your percentage savings over time.

2) The first place your retirement dollars should go is towards maxing out a 401k employer matching plan (not everyone’s employer offers these, but be sure to check if your employer does!) This rule prevails regardless of what your tax situation is. Free money is just too sweet to pass up!

3) If you’re in a 25% or above tax bracket, and you don’t already have a large retirement nest egg built up, I would lean towards putting all or most of your retirement savings into a “NO taxes now” retirement account, like a 401k or Traditional IRA. Guaranteed savings of that much are hard to pass up. Also, as stated above, some of this money will likely be tax-free or taxed at a low rate in your retirement.

3) As long as retirement is still 5-10 years off for you, I recommend investing all your retirement savings in stocks (like 100% stock index or mutual funds.) Specifically, I recommend socking the bulk away in a large, safe, low-fee (less than 0.5%) index fund composed entirely of stocks, like Vanguard’s S&P 500 index fund (VFINX.) This also gives you instant diversification by investing you in 500 of America’s greatest businesses. One disadvantage of a 401k plan is that you must choose from the investments offered to you. If you’re lucky, a company like Vanguard, Fidelity or T. Rowe Price that offers low-fee index funds will be available to you.

If you would like to learn more on the subjects discussed above, I invite you to check out the Motley Fool’s (www.fool.com) section on Retirement. Also, if you have questions or comments on certain topics (retirement or otherwise), post a comment and I will try to reply as soon as possible.

Happy investing,

Ward Williams

Year 2008 income brackets and tax rates

Marginal Tax Rate Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $8,025 $0 – $16,050 $0 – $8,025 $0 – $11,450
15% $8,026 – $32,550 $16,051 – $65,100 $8,026 – $32,550 $11,451 – $43,650
25% $32,551 – $78,850 $65,101 – $131,450 $32,551 – $65,725 $43,651 – $112,650
28% $78,851 – $164,550 $131,451 – $200,300 $65,726 – $100,150 $112,651 – $182,400
33% $164,551 – $357,700 $200,301 – $357,700 $100,151 – $178,850 $182,401 – $357,700
35% $357,701+ $357,701+ $178,851+ $357,701+