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Retirement Investing - Savings Bonds and Inflation

November 13th, 2006 by Papabear

Most of us have bought some of US Savings Bonds at one time or another.  They’ve been around in one form or another since 1776.  Many of us still do.  If you work for a major company, it’s a very easy and painless way to sock away a few dollars every payday.

The biggest downside to savings bonds has been that the interest rate has always been very low.  Often it’s not even kept us with inflation.  That’s why the Government introduced the Series I (for inflation) savings bond.

The interest on a Series I bond is divided into 2 parts.  There is a fixed rate that remains the same for the life of the bond.  In addition, there is an inflation-adjusted adder rate that changes every 6 months, based on the Consumer Price Index.

The US Treasury changes the fixed rate periodically, but once you’ve bought your Series I bond, it’s locked in.  Over the last 5 years, the fixed rate component has ranged from a high of 3.6% in 2000 to a low of 1% in 2004.

Series I bonds are worth taking a look at as part of your overall retirement savings plan, but you should also consider other alternatives.  The average rate for an insured 6-month CD is 4.69% when this is written.  You can check the current rate at Bankrate.com.  Since this is the average, some banks are obviously offering more and some less.  Our local bank is currently paying 4.4%.  Online, E-Loan’s bank is currently offering 5.5%. You can check out what they are currently offering here.  E-Loan

Series I bonds have some advantages.  They are exempt from state and local taxes, and you don’t have to pay federal taxes on the earnings until you cash in the bond.  On the other hand, unlike a 6-month CD, you must keep a Series I bond at least a year before you can cash it in.  Also if you cash in a Series I bond before you’ve had it at least 5 years, you won’t get the last 3 months interest.

You may be able to do better on interest at your local bank or online, but those rates aren’t guaranteed to adjust with inflation.  Check it out and compare.  In addition to federal tax deferred interest, there may be other things to consider.  Where you live and whether you must pay state and local income taxes can make a big difference.  So check with you tax advisor to see if adding Series I bonds to your retirement investments makes sense for you.

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    Retirement Investing - Borrowing From Your 401k - Part 1

    October 31st, 2006 by Papabear

    For most people saving for retirement, our retirement savings account, whether it’s in a 401k account or an Individual Retirement Account or IRA, is our biggest or second biggest asset, next to our home. And unlike the equity in our home, the money in our 401k account or IRA is exactly that – our money. Liquid Assets. It’s tangible and does not go up and down with the value of the real estate market.

    Most of us have our 401k account or IRA in a plan that allows us to borrow a portion of the money. This can be a great idea and a ready source of money, but there are positives and negatives to borrowing from your retirement savings account. Here’s a list of 8 things to consider before taking out a loan from your retirement account. Since the list is long, I’ll post it over 4 days. Let’s start with 4 good reasons:

    1. Most plans allow you to borrow up to 50% of the vested balance in your account, up to $50,000.

    2. Interest rates are usually competitive and are often lower than your could get from a bank on a signature loan. Borrowing your own money is not technically a signature loan, because you are pledging the money in the account to back up the loan, but because it’s so quick and simple, it’s more like getting a signature loan on a note at the bank than the longer process of pledging assets for a loan guarantee.

    3. Because your are borrowing your own money, you don’t have to “qualify” for a loan, like you would for a signature or other loan from a bank, so you don’t have to worry about your credit rating.

    4. Since you’re borrowing your own money, the interest you pay on the loan goes back into your own pocket and not the banker’s, since it goes into your account. If your 401k account is primarily invested in your company stock or even in a mutual fund that has a low or falling rate of return at the moment, you might actually earn more money from the interest you pay on your loan, even if it’s only 5 or 6%.

    So – 4 good reasons to consider borrowing from your retirement account when you need some extra money. Tomorrow, we’ll look at 2 reasons you might want to reconsider.

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    Retirement Investing - Rejoice In Today

    October 23rd, 2006 by Papabear

    Here’s a special thought for Sunday or whenever you read this.

    I posted a blog entry a couple of days ago I called Retirement Investing – What Would Jesus Do? After seeing that post, a friend reminded me the Bible also says:

    “This is the day the Lord has made; we will rejoice and be glad in it.” PSALMS 118:24

    We can rejoice over happy memories of the past, or we can rehash old mistakes we made.

    We can rejoice – in effect – about the future because we can imagine goods things happening. We can also worry about the future by imagining bad things happening. And isn’t it interesting how it often seems easier to come up with more negative things to imagine about the future than positive ones.

    You may be asking what does this have to do with retirement investing or saving for retirement? We must remember – the only day we really have control over is today. To take control of the future, we must take control of today.

    Let’s begin by taking control of our attitude. Let’s resolve – just for today – to rejoice.

    Remember – “One Day At A Time”.

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    Retirement Investing - What Would Jesus Do?

    October 20th, 2006 by Papabear

    This blog seems to have taken off in a direction of its own. It wasn’t my original plan to devote so much space only to how-to financial issues. I meant to write a post on the subject of retirement planning and the steps for determining how much you need to save in your retirement savings account to fund the retirement lifestyle you want. When I typed up that little piece of advice, even covering the steps briefly, I realized it had grown into over 1,500 words of advice. Because it got so long, I divided it into 3 parts.

    So before this blog begins to sound like a dry financial planning textbook, let’s talk about some related things. What about retirement planning and planning for the future in general?

    In the Sermon on the Mount in the Kings James version so many of us are familiar with, Jesus says:

    “Take therefore no thought for the morrow: for the morrow shall take thought for the things of itself.” (Matt. 6:25)

    When most of us hear these words, we understand them to mean Jesus was saying you don’t have to plan ahead. I even heard a man once who was bragging that he didn’t have any life insurance, and he justified it based on this Bible verse. That might be fine for him. He wouldn’t be around to suffer the consequences, but what about his survivors?

    I got out my copy of Dale Carnegie’s great book “How to Stop Worrying and Start Living” because I remembered he discussed this. Dale Carnegie says that when the KJV was written 400 years ago, “thought” frequently meant “anxiety”. So the verse is really better translated “have no anxiety for tomorrow” or “don’t worry about tomorrow”.

    The New International Version puts it this way in :

    “Therefore I tell you, do not worry about your life…Can any one of you by worrying add a single hour to your life?” Matt. 6:25-27

    What does this mean for retirement planning? Dale Carnegie says, by all means yes, you should think about tomorrow and do some careful planning and preparation. What Jesus was saying was - don’t spend your time worrying about tomorrow.

    Planning is productive, both retirement planning and other planning for the future. Worrying is not. That was great advice 2,000 years ago. It’s still great advice today.

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