Naked Advice

By Scott Lummer
Chief Investment Officer, mPower

In This Story Stable Value Funds I Don't Make a Lot of Money No Magic in the Tax Code 19 Year Old Investor Aggressive Investing

This week I will catch up on some of my mail, giving short answers to several of the questions you've sent in. What does that have to do with the title? Well, in Internet land, columns have to attract "eyeballs" (in other words, readers). Sad to say, a typical article about investing attracts as many eyeballs as a bath of sulfuric acid. What's a columnist to do?

Simple: Find an idea that works, and copy it. I've noticed that the hottest news site these days, the one attracting the most new viewers, is not CNN or even USA Today, but something called nakednews.com. If you haven't heard of it, this site features male and female anchors delivering the news while taking their clothes off. The site has garnered a lot of publicity, and no less an authority than Time magazine called it the best source for global news coverage, although the correspondent might have been kidding because "coverage" seems an inappropriate word.

Technical Terms Asset allocation Fixed-income security Time horizon

Because I write for a family Web site, there is no video to accompany this article. All I could get my editor to agree to were sound effect prompts. So feel free to use your imagination as I provide answers to your questions while slowly stripping down to my shorts. (Actually, I'll have to do that in my imagination, too. I am writing this on a plane and the woman next to me, who has been lo oking over my shoulder as I type, is beginning to get nervous.)

Stable Value Funds

How do stable value funds fit into an asset allocation?

(Sound of buttons popping)

Many 401(k) plans include a stable value fund as one of the investment choices. For investors who do not want to put all of their 401(k) money in stocks, either because they are conservative investors or because they are nearing retirement, stable value funds can be an excellent place to put money. Most stable value funds are invested in relatively short-term (three-year or less) fixed-income contracts. As I've said before, I think investors should invest the majority of their money in short-term instruments, maturing in between one and three years. But of course, it depends on the specific stable value fund. As with any investment, you should read up on the fund before investing in it.

I Don't Make a Lot of Money

Help me with my 401(k). I don't have a lot of money and I don't make a lot of money. I am a widow and probably won't retire for another l0 years. If I put $20 a week away and my boss matches 25 percent of that, will I be OK?

(Sound of unbuckling)

I entered your numbers (with some assumptions) in our "401(k)alculator": $25,000 salary, 4 percent contribution, ($1,000 or $20 per week), 1 percent match (25 percent of the contribution), 10 percent return, 3 percent inflation, current age of 55, and a retirement age of 65.

With those assumptions, in 10 years you would have $25,000, or $18,000 in today's dollars. (In other words, your $25,000 in 10 years will buy you what $18,000 buys you today.)

Can $18,000 last a lifetime? That is very unlikely. My only advice is to save as much as you can (see if you can find a few more dollars to put away each week) and consider working for a longer time.

No Magic in the Tax Code

Is there a formula that could help me determine how much different my take-home pay would be if I maxed out or made a very significant contribution to my 401(k)? In other words, how much would it lower my taxable income? My current gross income is roughly $65,000. Would this put me in a lower tax bracket, thus possibly letting me take home a very similar pay?

(Sound of unzipping)

There aren't any magic breakpoints in the tax code. Assuming you are married, you are at a marginal 28 percent rate. For every dollar you contribute, your take-home pay will be reduced by 72 cents, saving you 28 cents in taxes (ignoring state taxes). Tax brackets are figured for marginal income, not total income. When you hit a lower bracket, it means that additional contributions will save you a lower percentage of taxes. It does not mean that all of your taxes are recalculated using the lower rate.

19 Year Old Investor

I'm 19 and just finished my first year of college. I would like to start investing now to save for my retirement. Being in college, I don't have a lot of money, but I'd like to start putting a little away each month. What sort of mutual fund would you suggest? I'm not big on risk-taking. Thanks for your help.

(Sound of clothes rustling)

You are my heroine — 19 and planning for the future! Even though you are not big on risk-taking, since you are investing for the very long-term, I would suggest putting it all in stocks. If you can only choose one fund because of investment minimums, I would choose an all-capitalization index fund (some companies might call it a Wilshire 5000 index fund or a Russell 3000 index fund). When you have enough money to add a second fund, I suggest that you put about 25 percent of the total into a broad-based international fund.

Aggressive Investing

(If you're retiring at 55, doesn't it make more sense to keep a more aggressive plan (like the 10 years before retirement) for the 30 or more years of life expectancy I might have?

(Sound of metal clanging. Metal? Oops, I didn't mean to wear that today.)

An excellent question. I need to do a better job of explaining why an investor should become more conservative as he or she approaches retirement.

The assumption most people make is that they should become more conservative because their time horizon is shorter. But that's not really the reason. It is because they have less financial flexibility. Speaking personally, right now I am on target to reach my retirement goals. I plan on working for 20 more years. Over that time my intention is to save a lot more, but also spend some on luxury items as well. I made a decision a few years ago to leave a better-paying job and work here because it was what I really wanted to do. If we had a huge, lengthy market decline, and I were no longer on track to meet my goals, I still have the flexibility to spend less money, seek a better-paying job, or plan on retiring later, or sell my Chaka Khan album collection. Fifteen years from now, however, I will have less financial flexibility because the money will have already been spent, the job opportunities will be gone and the decision to retire later will be more painful, and the album collection will have lost its value.

And there you have it — the naked truth about investing for retirement. Uh oh. The woman next to me is ringing her flight attendant call button. Sometimes I really do get too involved in my writing.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Naked Advice

By Scott Lummer
Chief Investment Officer, mPower

In This Story Stable Value Funds I Don't Make a Lot of Money No Magic in the Tax Code 19 Year Old Investor Aggressive Investing

This week I will catch up on some of my mail, giving short answers to several of the questions you've sent in. What does that have to do with the title? Well, in Internet land, columns have to attract "eyeballs" (in other words, readers). Sad to say, a typical article about investing attracts as many eyeballs as a bath of sulfuric acid. What's a columnist to do?

Simple: Find an idea that works, and copy it. I've noticed that the hottest news site these days, the one attracting the most new viewers, is not CNN or even USA Today, but something called nakednews.com. If you haven't heard of it, this site features male and female anchors delivering the news while taking their clothes off. The site has garnered a lot of publicity, and no less an authority than Time magazine called it the best source for global news coverage, although the correspondent might have been kidding because "coverage" seems an inappropriate word.

Technical Terms Asset allocation Fixed-income security Time horizon

Because I write for a family Web site, there is no video to accompany this article. All I could get my editor to agree to were sound effect prompts. So feel free to use your imagination as I provide answers to your questions while slowly stripping down to my shorts. (Actually, I'll have to do that in my imagination, too. I am writing this on a plane and the woman next to me, who has been lo oking over my shoulder as I type, is beginning to get nervous.)

Stable Value Funds

How do stable value funds fit into an asset allocation?

(Sound of buttons popping)

Many 401(k) plans include a stable value fund as one of the investment choices. For investors who do not want to put all of their 401(k) money in stocks, either because they are conservative investors or because they are nearing retirement, stable value funds can be an excellent place to put money. Most stable value funds are invested in relatively short-term (three-year or less) fixed-income contracts. As I've said before, I think investors should invest the majority of their money in short-term instruments, maturing in between one and three years. But of course, it depends on the specific stable value fund. As with any investment, you should read up on the fund before investing in it.

I Don't Make a Lot of Money

Help me with my 401(k). I don't have a lot of money and I don't make a lot of money. I am a widow and probably won't retire for another l0 years. If I put $20 a week away and my boss matches 25 percent of that, will I be OK?

(Sound of unbuckling)

I entered your numbers (with some assumptions) in our "401(k)alculator": $25,000 salary, 4 percent contribution, ($1,000 or $20 per week), 1 percent match (25 percent of the contribution), 10 percent return, 3 percent inflation, current age of 55, and a retirement age of 65.

With those assumptions, in 10 years you would have $25,000, or $18,000 in today's dollars. (In other words, your $25,000 in 10 years will buy you what $18,000 buys you today.)

Can $18,000 last a lifetime? That is very unlikely. My only advice is to save as much as you can (see if you can find a few more dollars to put away each week) and consider working for a longer time.

No Magic in the Tax Code

Is there a formula that could help me determine how much different my take-home pay would be if I maxed out or made a very significant contribution to my 401(k)? In other words, how much would it lower my taxable income? My current gross income is roughly $65,000. Would this put me in a lower tax bracket, thus possibly letting me take home a very similar pay?

(Sound of unzipping)

There aren't any magic breakpoints in the tax code. Assuming you are married, you are at a marginal 28 percent rate. For every dollar you contribute, your take-home pay will be reduced by 72 cents, saving you 28 cents in taxes (ignoring state taxes). Tax brackets are figured for marginal income, not total income. When you hit a lower bracket, it means that additional contributions will save you a lower percentage of taxes. It does not mean that all of your taxes are recalculated using the lower rate.

19 Year Old Investor

I'm 19 and just finished my first year of college. I would like to start investing now to save for my retirement. Being in college, I don't have a lot of money, but I'd like to start putting a little away each month. What sort of mutual fund would you suggest? I'm not big on risk-taking. Thanks for your help.

(Sound of clothes rustling)

You are my heroine — 19 and planning for the future! Even though you are not big on risk-taking, since you are investing for the very long-term, I would suggest putting it all in stocks. If you can only choose one fund because of investment minimums, I would choose an all-capitalization index fund (some companies might call it a Wilshire 5000 index fund or a Russell 3000 index fund). When you have enough money to add a second fund, I suggest that you put about 25 percent of the total into a broad-based international fund.

Aggressive Investing

(If you're retiring at 55, doesn't it make more sense to keep a more aggressive plan (like the 10 years before retirement) for the 30 or more years of life expectancy I might have?

(Sound of metal clanging. Metal? Oops, I didn't mean to wear that today.)

An excellent question. I need to do a better job of explaining why an investor should become more conservative as he or she approaches retirement.

The assumption most people make is that they should become more conservative because their time horizon is shorter. But that's not really the reason. It is because they have less financial flexibility. Speaking personally, right now I am on target to reach my retirement goals. I plan on working for 20 more years. Over that time my intention is to save a lot more, but also spend some on luxury items as well. I made a decision a few years ago to leave a better-paying job and work here because it was what I really wanted to do. If we had a huge, lengthy market decline, and I were no longer on track to meet my goals, I still have the flexibility to spend less money, seek a better-paying job, or plan on retiring later, or sell my Chaka Khan album collection. Fifteen years from now, however, I will have less financial flexibility because the money will have already been spent, the job opportunities will be gone and the decision to retire later will be more painful, and the album collection will have lost its value.

And there you have it — the naked truth about investing for retirement. Uh oh. The woman next to me is ringing her flight attendant call button. Sometimes I really do get too involved in my writing.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.