When does getting a check for $4K in the mail suck?

When you get it because your 401K plan has failed the IRS' non-discrimination test and the amount is being refunded from your 401K contribution for 2012 and will increase your taxable income in 2013!!! Boo. Sooooooooooooooooo annoying.

I do everything right to save for retirement and the government penalizes me at every turn -- my IRA contribution (which I max out every year) is not deductible. Now my only tax advantaged account which I am legally allowed to contribute $17,500 to (or whatever the # is) is reduced by several thousand dollars -- more than 20% of my contribution returned!!! I think the government should encourage everyone to save, and if "high income" savers save more they shouldn't be penalized. In reality, the government probably does not do this because they care about encouraging lower income savers, but because they want to get their hands on as much income as possible from high-income earners so they can tax it.  Ugh. Well, I'm just going to have to save more in my taxable account and spend less to make up for the government's constant blocking of my attempts to save in tax-advantaged accounts.

Getting Serious about Saving

This year was about spending. A LOT of $. Some of that I feel okay about because it was in theory an investment (in my apt.) or at least I view it as prepayment of rent for the future.  The rest of  my spending I feel a little less okay about. I had many one  time expenses that I don't foresee having to replicate next year. The furniture and services that came along with the apt. purchase (although I would like to hire an electrician to install a ceiling fan), a $2600 wedding gift to my brother, new toys for my latest hobby/passion.

Next year, I want to get a lot more disciplined about saving and investing. While I track my budget diligently, I  realize I don't have a target for savings. I just hired LearnVest to help me develop a financial plan for saving and investing and I told my adviser I can commit to investing $500 a month. That is balanced with the $500 a month I prepay my mortgage. Ideally I would like to save another $500 a month in just straight savings. On top of my 401K which I max out, that would put me in a good place, regardless of bonus.

I am finally getting around to reading Your Money or Your Life, which I know has changed many people's lives. So I'm excited to see how that affects me. Maybe it will make me amp up my plan even more.

Morningstar X-Ray

Earlier in the summer I spent a lot of time trying to analyze my holdings across all of my accounts (I have 2 401Ks, 3 IRAs and two taxable accounts). I complained that I couldn't find a good tool and a reader recommended the Morningstar tools. Today I signed up for the free trial of the Morningstar X-Ray.

The analysis was a good confirmation that I have balanced portfolio. It also confirmed that I have a higher weighting of mid and small cap value and growth funds than the Wilshire 5000 at least.

For next steps, I'm thinking of buying some GLD and some more bonds -- I only have 9% of my holdings in bonds.

Seriously?

Okay, the more I research retirement savings the more ridiculous it gets. My favorite is this article on Motley Fool. Check out this handy chart the author has prepared to tell us how much we're supposed to be saving:

our Age	Percentage of Income to Save
20s	10%-15%
30s	15%-20%
40s	20%-30%
50s	30%-40%
60s	40%-50%
70s	50%-60%
80s	Lotto!?

Okay, 10-15% I can see. What 40 year old can save 20-30% of their salary? The author doesn't say, but I assume she means gross salary. Still, most people at that age are raising a family. Their expenses are at their peak. If they started early, they have children in college. This chart is a joke.

There's another article from AP today about how those close to retirement are so off track due to the market crash. This one has yet another metric for retirement savings:

The bottom line is that men will need to have 4 to 6.8 times their annual salary in the bank, separate from Social Security. Women should aim to have 4.5 to 7.5 because they tend to live longer, according to the study.

Overall, I fear these articles just serve to discourage most Americans who have very little in savings without giving any realistic advice about how to save for what we all know will most likely be the biggest expense any of us have.

Retirement Savings: u r doin it rong

I started doing some research this week on retirement savings. I've been saving at least 6% of my gross salary since I started working about 12 years ago (minus one year in grad school). So I assumed I'd be fine.

What should I be saving?
When I started playing around with the calculators, it seems I am underfunded by about half. My Pudding Score is 52. The more I researched the more I came to believe, however, that there is no real way to tell how much one needs to save to retire. All of the calculators make you make rediculous guesses about expected investment returns and other factors that if you knew you'd be a millionaire from being able to read the future.

I did find a few more simple, logical guidelines. Dave Ramsey says save 15% for retirement. Apparently T.Rowe price says the same thing.

I feel kind of cheated to be learning this now. I had always heard that I should be contributing 6% of my salary to retirement. I think I would have contributed more if I'd had known I'd be "behind" at this point.

Non-Deductible IRA?
I had been planning to max out my 401K contribution this year which takes me to a little more than 10% of my gross saved. There's not really any other tax-advantaged way for me to save, as I don't qualify for a Roth IRA and if I were to contribute to an IRA, it is not tax-deductible. It seemed at first this was still a good deal, but I like how this CNN article describes the advantage. Basically it will only help me if I convert it next year to a Roth IRA. I think I will end up doing that. So even though my stragtegy was to have as much cash as possible for an apartment down payment, I think I'm going to throw an extra $5K into my IRA to take me to both the contribution limit and 15% of my salary saved. Even one of my fave bloggers thinks 15% is high, but since I am apparently sooo behind in my savings, I think I'll do it this year. I've hit my social security taxable income limit, so I should get about an extra $2K to contribute from that.

My Obsession

Last time I wrote, I had lined up an appointment with a financial adviser to help me sort out an asset allocation for my portfolio -- the taxable and tax-deferred accounts.

Well, the purpose of the taxable account has always been in theory to use as a downpayment for an apartment. However, I've been looking for said apartment since 2003. I flip flop all the time about what I think I want. I've looked at co-ops in Queens for $255,000 and more recently 1 bedrooms in Brooklyn for $540,000 and 2 families for $800,000. And in between pondered buying a place in the country (having looked in the Catskills once and online constantly).

So, combined with my belief that there are no fundamentals underlying this recent market rally, I've started to feel like maybe I should just cash out the taxable account and keep it in cash. Someday hopefully within the next year I might actually decide on buying a place and might need that $ to supplement my cash savings. So I'm starting to think going to see the financial adviser might be pointless since a good chunk of my portfolio could be converted into cash.

I'm sure I'm not the only one who has problems pulling the trigger on the real estate gun. My hemming and hawing has actually served me well. I missed the whole crazy bubble.

For now I have to decide if I have the courage of my convictions and can actually liquidate my whole taxable account.

401K Contributions, 1997-2008

So this week I did not make too much progress on possible portfolio consolidation or asset allocation. However, I feel much better about the fact that my portfolio isn't exactly where I want it to be. One of my favorite PF bloggers, Get Rich Slowly, sounds like he is at the exact same stage that I am! It's a good reminder that personal finance is a process, and there's also something else to learn and do. There's never going to be a moment where I am "done."

Anyway, the other big factor that affects long-term performance besides asset allocation (in addition to time) is savings. I recently took a hard look at exactly how much I have been saving in my 401K over time. I've made a handy chart so I can share what I discovered:



I was a bit shocked that in the middle years the % gross salary contributed was not higher, as I even have a withholding for I filled out requested that 10% of my salary be withheld. The decline that begins around 2003 was due to my idea to buy an apartment; I thought I'd need the money for a downpayment (didn't happen). In 2007 I was in grad school and did not work much, so I didn't make any contributions. However, I did open a SEP-IRA for tax purposes and put in about $1,200.

Well, what's done is done. And, at least I did start contributing to my 401K almost as soon as I began working (only a one year delay). I'm planning to max out my contribution for this year, and I made good progress last year as well.

Onward and (hopefully) upward, both in terms of contributions and returns!

Potentially Good News on Roth IRAs

An article in the Wall Street Journal caught my eye tonight, as I still have my 401ks and IRA on my mind. The article claims that there will be new rules for Roth IRAs and that the income limit, which I currently exceed, will be lifted. Apparently the rules about income for converting (but not funding) will demolish the income limit. The catch? There are taxes involved. This is all new to me because once I saw the income limits I stopped investigating Roth IRAs. When (if) I convert my 401k to a Roth IRA, I will have to pay income tax on the contributions and the earnings.

So how would this influence my decision to transfer my old 401K? The article answers just that question:
“If you’re thinking about doing a Roth conversion, leave your 401(k) alone” rather than rolling it into an IRA beforehand to keep your share of nondeductible contributions higher in the calculation above, says John Carl, president of the Retirement Learning Center LLC in New York

Another factor to consider when I try to decide what to do with the old 401K. Does anyone else spend this much time strategizing around where to keep assets? I don't even have a lot of assets, relatively speaking.