One of my favorite stations on the radio while I’m driving or commuting for work is to listen to Biz Radio AM.  If you haven’t ever had a chance to listen to Phil Grande; you definitely should.  He’s got a great personality and a lot of what he says I agree with 100%.  I really like the guy.

One thing he says that I agree with is that “Mutual Funds are set to fail!”  One reason for that is because you can not  short the mutual funds.  You can short stocks just as long as it’s not in any individual retirement accounts.  Who really makes up all these rules?  I don’t know.

I can understand that shorting stocks may seem to be the Non-American thing to do, because if you’re an American; wouldn’t you want all US equities to go up in value over time, right?  Then again… is it fair or is it a double standard when huge U.S. institutions, banks, and so called sophisticated investors get to short the market and profit from the downside movement while the 52 million+ employees with their mutual funds in their 401k are hit with growing losses because they aren’t allowed to bet on the downside?

This is also significantly more mutual funds than there are stocks in the S&P500, which makes doing your research harder than it really has to be.  A majority of mutual fund managers can’t even get the average return rate of the S&P500 index.  If they are able to beat it, they can’t do it consistently over a long period of let’s say 10 yrs.  You can argue with me here, but I’ll get some solid figures together here one of these days.  I’ve just been a little busy with work recently.

It might seem like I’m going on a tangent here; however the point I’m trying to make is that they should allow you to short mutual funds and also short stocks in your IRA’s.  It’s just ridiculous in my opinion to limit an employees ability to be profitable as an investor when you don’t allow them to bet on the downside of mutual fund or a stock in their IRA.  I really feel sorry for those that bought BP at $60 a share in their 401k’s within the last 3 months and are still holding on.

I’m not saying to completely stop investing in the stock market.  I’m only suggesting that you further your financial education if you are to invest directly in the markets.  Also you should be open to learning about the advantages and disadvantages of all different asset classes.  That way you aren’t stuck with going long on mutual funds and stocks in your 401k or ira’s.

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I always like to laugh when clients ask, “why is there a RMD or required minimum distribution for taking money out of my IRA if I don’t want to?”  I’ll reply, “…because the IRS has to get paid one of these days and they had to wait almost 71 yrs in your case.”

I never understood why there’s so many different taxations.  In addition to all of the state, federal, income, sales taxes, etc., they then throw in tax deductions, tax incentives, tax deferrals.  Wouldn’t it just make more sense to reduce overall taxes, thus getting rid of the need for tax incentives and deductions? No wonder America goes crazy around April 15th.  Let’s get back to what the RMD is all about.

All retirement accounts such as 401k, IRA’s, 403b’s, etc. were originally created to encourage individuals to plan for their own future, in hopes of reducing the financial dependency on our government.  For that reason, the government has allowed retirement accounts to grow tax-deferred up to age 70 1/2.  By that time, if a client has never withdrew monies out of their retirement account, they are required to start doing so.

We all understand that any withdraws or distributions from these accounts are considered taxable income.  This is where Uncle Sam is able to impose income taxes so he can get paid.  By age 70 1/2 there is a chart or table which can be found on the IRS website, that illustrates the percentage factor of what the minimum required distribution is every year thereafter.  The RMD chart will change from time to time, so it’s a good idea to check at the beginning of each year.  See below for the chart.

I then get asked, “What happens if I miss the RMD for the year or decide I don’t want to take a distribution?” Excellent question!  Let’s say you have a required minimum distribution you have to take out and that equals to $5,000.  This is just for illustrative purposes.  If you did not take out the $5,000, then the IRS can impose a tax on 50% of that amount.  This means, you didn’t take anything out, and are required to pay taxable income on the $2,500.   Depending on your tax rate at that age, it could be 10%, 15%, or 20%.   It’s just better in my opinion to take that out the $5,000 and enjoy that vacation you’ve always wanted.  After all… any year after 71 is a good year!

RMD Chart

Required minimum IRA distributions

We’ll go over how to calculate the RMD in the next post.

Need Help With  Calculating Your RMD?

Ask Binh

Binh Nguyen

(832) 273-3392

admin@401krollovers.info

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Great question indeed.  My client Yvonne said to me… Binh “how much do people need to retire nowadays?”  I said it really just depends.  I wish there was a simple answer to that question.  I said, “it really is different for everyone because of so many factors.”  I said well, let’s start off by finding out how much longer you’ll be paying on your mortgage.

The biggest expense for most families is their home.  The fact that many Americans will still have a mortgage after the age of 62 is pretty scary.  Let’s say your mortgage payment not including property taxes is $1000 for a $200,000 home.  This alone would mean you would need a minimum of $12,000 in additional income saved up for each year you still own on your house.  With families constantly refinancing their loans and extending it to another 30 yrs, it’s no surprise that seniors are still in debt up to age 80+.

Let’s do some simple math.  Someone refi’s for a 30 yr loan at age 50.  By the time they are 60, there’s still 20 yrs left and if we only calculate the $1,000 for principle and interest, that’s over $240,000 in extra retirement savings needed.  That’s not even including everyday necessities such as healthcare, food, groceries, utility bills.

My client Yvonne’s estimated living expenses assuming she has no mortgage, would be $2,000 starting at age 60.  She anticipates living to at least 90 because of her excellent health and longevity within the family.  I mentioned to her that she’ll need about $720,000 in current dollars now for her retirement.

Are you on track?  Feel free to leave comments and share how much you anticipate you’ll need to retire and what age you plan on doing so.

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Need Help With Your Retirement Calculator?

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Binh Nguyen

(832) 273-3392

admin@401krollovers.info

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