I’m sure some of you are motivated to do avoid some of the financial mistakes shared yesterday. A good way to start is by funding yourself an tax-advantaged IRA. Fidelity has come out with a pretty decent product for this – their SimpleStart IRA. You just need to commit to contributing $200 a month ($2,400 a year) to the IRA, and you can avoid the $2,500 initial minimum investments of many of their funds. Also, as you are not paying any trade commissions and there are no annual maintenance fees, more of your money is going towards your investments.

Fidelity’s Freedom Funds, which are automatically rebalanced based on your planned retirement timeframe, are a good simple option I would recommend for those without strong opinions otherwise. This is just one option I’m throwing out there. Either way, get started!

Added: I’ve done a more thorough comparison of ‘IRA Options For Those Starting Out‘, including brokers that require a committment of only $50 per month.

Simplified Employee Pensions, or SEP-IRAs, are a retirement account available to both small business employers and employees under certain requirements. Although I’m sure they are covered more thoroughly elsewhere, I wanted to jot some notes down focusing on the self-employed, that is, you are both the only employer and employee all rolled into one. Beware, during my research I found a lot of outdated and thus inaccurate information online.

Who’s Eligible?
Anyone who has any amount of self-employment income, even if you already have a retirement plan with your other job.
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Before I finish my taxes, I’ll have to decide how I want to put some of my self-employment income away for retirement. I didn’t know there were so many options! In addition to the usual Traditional and Roth IRAs, I could also do use any of the following:

• Simplified Employee Pension IRA (SEP-IRA)
• Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)
• Keogh Profit-sharing Plan
• Individual, or Solo 401k’s
• Solo Roth 401k’s

I’m definitely going to explore all these options soon, but due to their deadlines the only one that I can actually use for 2005 income is the SEP-IRA, which allows me to open and fund it as late as the extended deadline for tax returns. Gotta love easy decisions.

Before I started this blog in late 2004, I didn’t know squat about managing my money besides not to spend it all. Although I’m sure I could have done much worse, let’s see where I was 5 years ago:

1) I didn’t max my IRAs out. Even though I was pretty broke and living on less than $20k a year, I should have tried to max them out. I think I only put $500 in my Traditional IRA for the first year, and $1000 the next.

2) Instead, I paid off my student loans. Even though I was still in grad school and therefore was paying no loan interest at all, I put all my excess money towards student loans even at the expense of not maxing out my IRAs. Think of all the tax-free gains I could have earned!
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Almost exactly a year ago, I pondered whether to convert my Traditional IRA into a Roth IRA. I ended up not doing it right away after realizing that I might hit the ceiling that limits conversions to those with a modified adjusted gross income (MAGI) of $100,000 or less. The same ceiling applies for both a single person and a married couple’s combined income! And if you go the married filing separately route, you can’t convert your IRA at all. I never understand these marriage penalties.

Of course, then I quit my job in July so I should have just gone ahead and converted it. But then I thought, maybe we might even end up in the 15% tax bracket for 2006! That would really save on taxes. But it doesn’t look like it (which is a good thing of course.) So we’ll most likely convert this year. Some additional things I want to take into account are:
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Not saving for retirement? Need a good excuse why? Not to worry – here are some 25 ideas for you, all for free!

1. I’m young, I need to enjoy life.
2. I’m too old, it’s too late for me.
3. I’m scared of money. It’s too complicated.
4. It’s all the credit card company’s fault.
5. Interest rates are still pretty low. Borrow now!
6. I don’t have enough time in the day.
7. I have to pay for my kid’s college.
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Right now I’m reading Yes, You Can Still Retirement Comfortably! by Ben Stein and Phil Demuth, at the recommendation of my friend Trip of Musing Money. So far it’s pretty good. I’m not quite done, but as part of the book it gives you a step-by-step procedure to estimate the nest egg that you’ll need when you reach your desired retirement age. It’s all based on historical market returns and life expectancy charts which I’ll leave to those who buy the book, but here are the rough results for my wife and I together:

1) Estimate Post-Retirement Income Needed. A suggested estimate is 80% of your (expected) final salary when you retire. I’m going to estimate this at 80% of $120,000, or $96,000.
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This last week I maxed out the 2006 Roth IRAs for both my wife and I, a $4,000 contribution for each. I kept it simple and bought Vanguard’s Target Retirement 2045 Fund (VTIVX) for both, tilting our retirement portfolio asset allocation more towards 90% equities.

My new goal is to get $50,000 in total assets at Vanguard. I am at about $37,000 right now. The reason is that once I get to that level Vanguard will waive the $10 annual fee for each IRA mutual fund with less than $5,000 in it. I can then buy lots of specific funds separately and fine-tune my desired asset allocation. I may open up a taxable account and/or a SEP IRA with them to achieve this. Does this make me a Boglehead?

Just to be clear, I only trade individual stocks on my Play Money portfolio. All our retirements funds are going to stay in low-cost index funds. Currently everything is in two funds – Vanguard Target Retirement 2035 (VTTHX) and Vanguard Target Retirement 2045 (VTIVX).

According to Vanguard.com, VTTHX has a year-to-date (YTD) return of 6.82%, and VTIVX has a year-to-date return of 7.54%. Not a bad year, their S&P 500 index fund only has a YTD return of 5.93%. The international diversification of this fund of funds has helped this year, with the Vanguard Pacific Stock Index Fund (VPACX) returning 22.28% YTD. I’ve already got my $8,000 ($4,000 x 2) ready to invest in our Roth IRAs in January.

Talking with my parents about their retirement plans has been very enlightening. I found out that my dad fully intends on working until he is at least 70 years old. I guess it’s not a total surprise, he is a bit of a workaholic, likes his job, and I don’t think he would handle retirement very well. He already gets 8 weeks of vacation a year, which is plenty for him. My mom could probably retire today, but she’d be bored out of her mind as well without grandkids or something to keep her busy. They both travel around the globe for almost a month a year so they are content.

This has gotten me to think – instead of all this focus on saving money, maxing out your 401k, workworkwork for 20 years, all so you can “screw it!” at age 50, I should really focus instead of finding a career path that I really enjoy and wouldn’t mind doing even when I’m 70.
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So I gave my mom a call today to ask her some questions about her 401k portfolio. Here’s a summarized transcript:

Me: I looked at your 401k statement.
Mom: Good!
Me: What kind of other retirements assets you and Dad have?
Mom: Umm… I think I have a Rollover IRA too.
Me: Did you roll it over into your IRA or 401k?
Mom: Umm… I don’t know.
Me: I saw a line on your 401k statement that said “Rollover Amount: XXX”
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After my parents learned of my interest in personal finance topics over Thanksgiving, my mom just sent me her last 401k statement and asked me what I thought. She is 55, and works for a small firm and therefore her 401k is serviced by a small company with limited fund choices. I won’t reveal total amounts, but here is the breakdown:

Dodge & Cox Income Fund (DODIX) [Bonds]- 26%
Amer Funds Washington Mutual (RWMEX) [Lg Cap Value]- 18%
American Funds Growth Fund (RGAEX) [Lg Cap Growth] – 18%
Royce Total Return (RYTRX) [Sm Cap Value]- 9%
Columbia Acorn (LACAX) [Sm Cap Growth]- 9%
Amer Funds EuroPacific Growth (REREX) [Lg Cap Int’l]- 13%
AIM Real Estate (IARAX) [Real Estate]- 7%
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