15. Russia $128.1b
14. Depository Institutions (banks and savings & loans) $145.4b
13. Hong Kong $146.2b
12. Brazil $157.1b
11. Insurance Companies $162.2b
10. Caribbean Banking Centers $179.8b
9. Oil Exporters $187.7b
8. United Kingdom $277.5b
7. Pension Funds $490.2b
6. State and Local Governments $528.3b
5. Mutual Funds $694.5b
4. Japan $757.3b
3. China (Mainland)$789.6b
2. Other Investors/Savings Bonds $1.114 Trillion
1. Federal Reserve and Intragovernmental Holdings $5.127 Trillion
Thursday, February 25, 2010
Retirement...the big variable
There are 8 major variables to the final balance of your retirement account before you start drawing from it (preferably while financially free!).
1. The age at which you start saving. Obviously the sooner the better; not just because of compounding but also because of the time and risk trade-off.
2. One's willingness to stay the course. By this I mean automatically investing $X per month/paycheck into your investment strategy. This will smooth out your drawdowns over a long period of time.
3. The date of retirement. The further out you push retirement the more certainty there will be that the assets will last a lifetime. If you work 2 extra years, that's a positive on two fronts: you don't draw out of your retirement account, and you grow the amount of income you will receive during a shorter period of time.
4. Salary. The more one earns the easier it is to save for retirement. Your employer match on a $40,000 salary is only half of an $80,000 401k employer match. This can compound to a substantial amount over 25 years. The match plus growth on the match can be over $200,000; this does not include the amount the employee has contributed.
5. Employee's contribution. A general rule of thumb is that if you defer consumption, you end up richer than the guy who could not wait. Add to the account as much as you can without affecting your lifestyle in a drastic way.
6. Asset mix. Diversification is one of the most ubiquitous terms used when it comes to investing. There is a balancing act between safety and the need to grow assets for retirement; thus, investors diversify across stocks, asset classes, and even time periods.
7. Fees. If you're in a 401k, make sure to check what all the fees are. The mutual fund or pooled investment units (for those in a Group Annuity) can get quite expensive. Not dissimilar to a traditional business model, your expenses eat away at your bottom line, which in this case is your rate of return. You can't write off fees you paid to a mutual fund company through their expense ratio, but you can write-off fees paid to a money manager (Registered Investment Adviser).
8. Withdrawals before age 55. Cashing in is extremely costly and will devastating effects on your long term savings plan. The IRS charges a 10% penalty to those investors who withdraw before age 55, PLUS ordinary income tax on the entire amount cashed in. Ask your adviser about other options before pulling the money out.
1. The age at which you start saving. Obviously the sooner the better; not just because of compounding but also because of the time and risk trade-off.
2. One's willingness to stay the course. By this I mean automatically investing $X per month/paycheck into your investment strategy. This will smooth out your drawdowns over a long period of time.
3. The date of retirement. The further out you push retirement the more certainty there will be that the assets will last a lifetime. If you work 2 extra years, that's a positive on two fronts: you don't draw out of your retirement account, and you grow the amount of income you will receive during a shorter period of time.
4. Salary. The more one earns the easier it is to save for retirement. Your employer match on a $40,000 salary is only half of an $80,000 401k employer match. This can compound to a substantial amount over 25 years. The match plus growth on the match can be over $200,000; this does not include the amount the employee has contributed.
5. Employee's contribution. A general rule of thumb is that if you defer consumption, you end up richer than the guy who could not wait. Add to the account as much as you can without affecting your lifestyle in a drastic way.
6. Asset mix. Diversification is one of the most ubiquitous terms used when it comes to investing. There is a balancing act between safety and the need to grow assets for retirement; thus, investors diversify across stocks, asset classes, and even time periods.
7. Fees. If you're in a 401k, make sure to check what all the fees are. The mutual fund or pooled investment units (for those in a Group Annuity) can get quite expensive. Not dissimilar to a traditional business model, your expenses eat away at your bottom line, which in this case is your rate of return. You can't write off fees you paid to a mutual fund company through their expense ratio, but you can write-off fees paid to a money manager (Registered Investment Adviser).
8. Withdrawals before age 55. Cashing in is extremely costly and will devastating effects on your long term savings plan. The IRS charges a 10% penalty to those investors who withdraw before age 55, PLUS ordinary income tax on the entire amount cashed in. Ask your adviser about other options before pulling the money out.
Wednesday, February 24, 2010
Divorces and Retirement Assets
As the Great Recession rolls creating a wake of destruction, one of the worst outcomes is divorce. When money gets tight a natural derivative of that is an increase in stress, and stress can be harmful to relationships. If you or someone you know is filing for divorce, make sure they ask their attorney about Qualified Domestic Relations Orders. These affect retirement assets (his or her 401k's, IRA's, and other tax-deferred assets). Negotiating assets is one thing, it is an entirely different thing to pay them out according to the outcome of the negotiation. One of the worst things that can happen is giving up more than you budgeted for. Let's see a couple of examples that may affect both spouses.
Example 1: A divorce is finalized and the husband's 401k will be split in half. They both know that at the time the agreement was made, the total value of the account was $100,000, so they agree that she would get $50,000. Now, this agreement happened to have taken place in the summer of 2008; we all know what happened in the 4th quarter that year and the husband is now an owner of $65,000 401k. He still believes the wife is only getting half of that, but the trouble is that they agreed to a hard number: $50,000. He is shocked to find out that after he pays her, he is only left with $15,000 in his account.
Example 2: Once the divorce has been finalized and the wife accepts to get a negotiated portion of the husband's pension, she thinks everything is squared away. While she thinks she is getting half the pension guaranteed amount, in reality there is no asset. Her attorney failed to negotiate the spousal continuation benefit upon her husbands death.
These are devastating and common outcomes due to deep recessions. Make sure a knowledgeable attorney is involved in splitting up esoteric assets, whether retirement or otherwise.
Example 1: A divorce is finalized and the husband's 401k will be split in half. They both know that at the time the agreement was made, the total value of the account was $100,000, so they agree that she would get $50,000. Now, this agreement happened to have taken place in the summer of 2008; we all know what happened in the 4th quarter that year and the husband is now an owner of $65,000 401k. He still believes the wife is only getting half of that, but the trouble is that they agreed to a hard number: $50,000. He is shocked to find out that after he pays her, he is only left with $15,000 in his account.
Example 2: Once the divorce has been finalized and the wife accepts to get a negotiated portion of the husband's pension, she thinks everything is squared away. While she thinks she is getting half the pension guaranteed amount, in reality there is no asset. Her attorney failed to negotiate the spousal continuation benefit upon her husbands death.
These are devastating and common outcomes due to deep recessions. Make sure a knowledgeable attorney is involved in splitting up esoteric assets, whether retirement or otherwise.
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