Hoonie Finances (p2)

(This is the second part of two)

Now that you’ve got a bunch of money ready to be tied up in retirement accounts, what the fuck do you do with it? My minimal-effort recommendations follow.

“Target retirement” funds – A lot of mutual fund companies, like Fidelity, have target retirement funds. These are nice because you don’t really have to think about what’s happening. They happily take a cut every year, but manage your money for you – you’ll be primarily in stocks early, and as you get older, they’ll move toward buying up debt instead (basically loan sharking – I’ve always wanted to be like Tony Soprano). Those are called bonds, and you can buy a million different kinds. Basically, these funds start out risky and move toward conservative bets as you get old.

(Think of roulette – at first they’re betting on individual numbers, trying to win the big payouts, but toward the end they’re only betting on easy things like red or black). The good thing is, in this casino, there is no house advantage.

Target retirement funds are nice and easy. Let someone else worry about bringing you in to retirement. But some folks (read: Me) don’t trust someone else with all of my money. After all, can anyone really have more interest in my financial health than me?

Fact: the S&P 500 (a sampling of 500 different big companies – 489 are American), which most folks consider to be a good indicator of our economy’s health, has grown about 10% per year on average since 1975, and about 8% per year since 1950 (Inflation is 3-3.5%). That’s our house advantage.

If your mutual fund isn’t beating the S&P over an average of 3-5 years, you should seriously think about putting your money elsewhere. Here’s the amazing thing: a lot of mutual funds won’t; their expenses kill off your returns. These guys are paid (by you!) to do nothing but beat the market average, and many of them have remarkable track records of failing to do so.

The option I like better than mutual funds is index funds. They require almost no thought, planning, or know-how to get into, and they tap into what the entirety of Wall Street is doing. Basically, you get what, on average, the whole market gets. After a small fee, of course.

An index fund simply trades shares around every day to exactly reflect the distribution of whatever they’re tracking. For example, an index fund of the S&P 500 will buy an exactly proportionate number of shares to the S&P itself. The entire process is automated, and you don’t have to deal with any financial planners or brokers who take a cut. You pay a yearly maintenance fee that is vastly lower than mutual funds (0.2 to 1 pct vs. 2 pct and up for most mutual funds), and you do however well the index does. That’s it. Vanguard is the index fund provider that I like best (their funds have the lowest maintenance fees, but high minimums).

Now for the tricky part – diversifying. Everyone has heard this jargon thrown around. All it means is covering your ass in case something goes wrong.

My suggestion is the Margaritaville Portfolio, a simple recipe, perfect for recent college students. One part domestic stocks, one part international stocks, and one part bonds. Pick your favorites, and if you can’t decide (eat your heart out, Newey), there’s always this option: Total Stock Market Index, the Total International Stock Index, and the Total Bond Fund Index. Once they’re set up, rebalance them once a year (when you put money into them, for example), and spend your time doing stuff that you care about.

More cool lazy portfolio recipes can be found here.

If you’re super-conservative and just can’t handle the thought of possibly losing money, go with a money market fund (MMF) or a CD ladder. A money market fund is basically a high-yield savings account (except you could use it for retirement funds, if you wanted). They range around 4-6 pct APR. This is where my buying-a-house money is sitting currently. You can write checks from most MMFs, and there’s no penalty for moving the money (either withdrawing it or shifting it to some other investment – lots of investors use MMFs to “park” their money temporarily between deals).

A CD ladder is setting up several CDs of similar amounts that all mature at different times so you can get your hands on your cash as needed. A CD is a “Certificate of Deposit,” a pocket of money that matures according to a pre-agreed schedule and rate – they’re usually about the same rate as MMFs, and they’re slightly less risky/volatile (A MMF can fluctuate a bit from one month to the next), but much less flexible (if you withdraw your CD between maturity periods, you lose the interest from that period).

A CD ladder is not really a retirement plan, and to my knowledge, you can’t put a Roth or 401k into CDs. However, if you’re saving money up in case of emergencies or for some event that you know the date of well in advance (a wedding/honeymoon, a house down payment, income tax payment, a family vacation, etc), it could definitely be a smart option.

While this post was devoid of curse words and beer (many apologies), I did throw in a margarita for ya. I’ll try and work up something really crude and inappropriate next time.

Note: I’m finding it a lot easier to write now that I’ve got a few backlogged and I know I’ve only got to write twice a week to keep that buffer. I’m sort of surprised that it actually works.

Hoonie Finances (p1)

(This is the first of a two-part post. As I re-read it, it’s a bit dry. Deal with it. -Ro)

Since my last post dripped with superiority, I might as well continue with the unchecked arrogance. Today I want to give a quick and dirty Hoonie-style guide to financial planning. That’s actually not a joke.

Simple and lazy. That sounds like the best Hoonie strategy for investing that I can think of, that’s for sure. Fortunately, this plan is both.

There are two prongs to this approach that inspire boredom in 20-somethings everywhere: Roth IRA & 401k. Let me put these out there with a simple example. We’ll use beer, because it’s every Hoonie’s favorite thing.

The Roth IRA is like taking a beer out of the 12-pack before you put it in the magical beer fridge (you guys all remember the magical fridge that somehow spawned beer in the back, of course). You put the 12-minus-1 pack in the fridge and let the fridge do its thing. Several hours later, you come back and there are little beers growing in the back: your investment has paid off! You get drunk off the interest.

Roths are like that – you pay taxes on the money, then take the after-tax money and put it into whatever investments you want. When you get old and gray and they don’t even make Nati Light anymore, you don’t have to pay taxes on the money (which has grown, tax-free, for many years). The difference in a Roth IRA & a regular IRA is that with a regular IRA you have to pay taxes on the growth (so if your beer fridge came up with five extra beers at retirement time, you’d have to sit and drink right away – one for you, and one for Uncle Sam, who just happened to be in the neighborhood).

The advantage to a regular IRA is that you can deduct the money on your taxes (basically, it appears to Uncle Sam that you really only earned 10 beers this year instead of 12, so the freeloading fucker only drinks 5, instead of 6). But that’s where the 401k comes in – and makes both IRA types look like a joke.

401k’s are a bit different. You put the whole 12-pack in the fridge, and you hide the beer from Sam. However, while you do this, your employer, Anheuser-Busch, comes along and puts an extra six-pack in, just for helping them out (sort of like the moving bonus we all supply each other). The beer grows in your fridge, and Sam comes to help you drink it all when you retire (and hopefully his portion of the beer has turned skunky).

As you can see, the 401k is the best deal here. If your employer offers a company match, that’s the first place your savings should go. Your money goes farther (because it’s all pre-tax dollars – your 20 dollar check is 25 dollars before Sam’s cut), and your employer will usually match anywhere from two to six percent of your annual salary. It’s a free raise, essentially. Don’t pass it up. You can contribute up to 15,500 this year in a 401k. I recommend getting the maximum company match and then jumping over to the Roth.

The Roth is, in my opinion, the next best thing for folks our age. Get into it early and you really take advantage of the tax-free growth (and later in life you may make too much money to use a Roth – especially if you and your spouse both make mad bank). You can contribute for 2007 until April 15, 2008, so a lot of folks use their tax returns to fund their Roth. I think it’s a pretty smart idea. Set aside 50 bucks a month for your Roth and you’ve got 600 at the end of a year. Put another 500 in when you get your tax return and you’re looking at a pretty good chunk of money. The Roth maxes out at 4000 a year.

If you’ve got the full company match, and maxed out the Roth for a given year, I think you’re doing great, and that will probably be enough for your retirement as long as you have healthcare taken care of. But if you’ve still got more money laying around (this is for you, Kicks), keep putting your paychecks in your 401k. If you max THAT out… tell me immediately. Dude, you’re buying the beer from now on. Who needs a magic beer fridge if you’ve got a friend like that?