Contributing to Retirement account

debo_2006March 30, 2009

I have a small business and thus, contribute to a SEP IRA account. I'm a 50 YO female, and like most, lost approximately half of my earnings in my retirement account. Now that tax time is here, I have the option to contribute my maximum based on my 2008 earnings, but I'm hesitant to do so for fear of loosing that as well. Now, I'm aware the markets have been on an upswing the past few weeks. My accountant suggests contributing, but....

Is it wise to contribute now or ride it out and keep the money in my ING savings account? Thanks.

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Hi Deb,

Heck, you're young, yet, girl - I'm much older, and thankful to be enjoying good health.

Do you like to get products that you're buying on sale? Do you feel happy to get a product at not just an artificial "sale" reduction of 40%, but a real, verifiable 40% reduction?

Stocks are on sale, these days, many quality companies being available at 40% off earlier prices (which were, in a number of cases, overpriced).

They may be on fire sale, later - no one knows now whether that may happen, whether the market may drop substantially more before it moves on a mainly upward path again.

Maybe not.

Do you plan to retire within 3 or 4 years, maybe 5?

You're planning to be leaving that retirement account alone, to just sit there and grow, for several more years, aren't you?

I'm pretty sure that in about five years you'll be pleased with the results produced by a number of the equity investments that you make now.

With the huge debts that the U.S. is carrying ... plus the massive current deficits to finance the bottomless pit called "Iraq" ... and not only the bailouts to date ... but almost certainly more later ... the U.S. must depend on foreign financial suppliers.

Did you note the Chairman of China worrying to Hillary a week ago about whether the U.S. is managing their money well?

If the main banker of the U.S., the gov't. of China, doesn't want to lend more money without major inducements ... the U.S. will have to offer higher interest rates, so many are expecting inflation here. Especially since the U.S. is printing money at a great rate.

Do you figure to retire right soon, i.e., within three years or so ... maybe within five? If so, you may want to invest mainly in guaranteed-dollar assets - but even then, I'd say only related to money that you plan to need within the first few years of your retirement.

For money in there that you don't plan to withdraw for five years after retirement, or maybe up till 10, there's a good possibility that they'll grow better over those years in equities rather than in guaranteed-dollar assets.

Guaranteed dollars in the bank, bond, etc. apart from the rent that they produce on the money, not only don't grow ... in an inflationary environment, they lose value every year!

Plus - when interest rates rise ... the sale price of bonds issued earlier goes down.

I've been investing for almost 50 years, and worked as a personal financial advisor for 25 years recently - sold mutual funds initially for about a year, but didn't sell enough to suit my sponsoring broker, so didn't stay. Since then, offered advice only, sold no financial products: no conflict of interest.

Now, at 80, I have some of my assets in equity mutual funds, all bought prior to about 18 years ago: very few of the managers produce better growth rates than the parallel market averages, and they charge a fee for their management "expertise" every year. If they're as smart as they claim ... how come the stuff that they manage doesn't grow faster than the market averages?

I also have bought several individual stocks, periodically, as I had money available ... so that about 80% of my assets are in those equity-based situations.

I've lived in 22 locations, so have never owned a home, which many expect to increase in value, largely due to inflation.

I'm fortunate that, living frugally, I don't burn up all of my income from my three pensions, so don't need to draw on my equities.

They'd lost something about 30% of their value, at the bottom of the market, but that didn't trouble me substantially - not as much as I'd thought that it might.

In fact, I've been buying some more within the past two or three years ... and have seen them go down, as well ...

... but I expect that they'll recover, given time ... and now, they're paying a higher rate of dividend than earlier, when their prices were higher: Canadian banks are paying 5.5% - 8.5% dividend rates, these days ... and at very low tax rate (but interest attracts tax at top rate, outside of tax-deferred retirement accounts).

Some Canadian oil and gas, commercial, real estate, transportation, etc. companies that have agreed to pay out most of their profit in order to avoid tax have been paying 10 - 15 - 20% (with some risk of reduction, as earnings reduce). One rents out water heaters, so has fairly stable cash flow ... and pays 18%. They must all become regular corporations within a couple of years.

Good wishes for taking the long view - yes, you may die tomorrow ... but the possibilities are good that you'll live till 85, at least.

When we buy life insurance ... we bet that we're going to die (early) ... and the life insurance companies bet that we're going to live ... and they're the ones with the actuaries!

In this situation, you have the opportunity to choose an investment that will pay you while you're still alive ... and no longer working ... not wait till you're dead to pay!

ole joyful

    Bookmark   March 31, 2009 at 5:31AM
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Thanks ole joyful....I always enjoy your posts where ever I read them.

Yesterday, I finally decided to move forward and contribute the max to my SEP. Though my head was saying no, my heart was saying it's the right thing to do at 50 years old. So, with that, I'll contribute in low risk for now until things stablize. Then I can move things around.

We're all hoping thing rebound real soon, and stay steady or better, at that. I'm also somewhat of a frugal person, and seeing all that hard-earned money dissipate, is difficult for anyone to take....but I am not nearly alone, and many have lost a heck of a lot more, unfortunately.

Thanks for your post and the heads up via private email.

    Bookmark   April 1, 2009 at 9:12AM
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I mean no offense, but I don't understand this kind of thinking. Your lost half your retirement and are thinking about putting more money where you lost the other. I would put it in the bank, why take a chance of losing more.

    Bookmark   April 2, 2009 at 11:21AM
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"Now, I'm aware the markets have been on an upswing the past few weeks. My accountant suggests contributing, but....

Is it wise to contribute now or ride it out and keep the money in my ING savings account? Thanks. "

Stargazzer makes a very good point. These are not normal times. I would hesitate to invest more until the regulators are reined in and start doing what they supposed to.

A link that might be useful:

Economist: US collapse driven by 'fraud'; Geithner covering up bank insolvency
Stephen C. Webster
April 4, 2009

    Bookmark   April 7, 2009 at 11:12AM
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I think ol' joyful is right in encouraging you to put money into equities - you're not retiring soon, and the money will likely grow over the long term.

There are 2 issues here - one is whether to fund your IRA and what to do with the investment. The answer to the first question is a big YES - if you've got the money to do will lower your tax basis (I believe that a SEP IRA is like a 401K/403B in that you're putting pre-tax dollars into a SEP and paying tax on the your gross income minus the contribution.) In either event - even without that tax advantage, the interest and growth you will have is tqax free or tax deferred.

The second issue is whether to buy equities or put the money in fixed income vehicles (money market, treasuries, etc.) which you surely can do within the SEP IRA investment choices

    Bookmark   April 9, 2009 at 8:17PM
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The 401k account is also one of the prime retirement accounts in the United States. By having the account, one can save funds for retirement.

Here you can learn about 401 k Plan

Here is a link that might be useful: Retirement Panning

    Bookmark   May 21, 2009 at 5:04AM
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Heck ... I've been retired for over 10 years now ... and I'm not about to "pan" retirement! I think that it's great, especially when one's in good health!

(Actually, I think that the previous poster meant "retirement planning" in her/his link ... and I'm just teasing a bit).

When you're retired ... every day is holiday!

If you plan to live for more than 10 years ... better carry some of your assets in equities.

By the way ... she didn't actually lose money when the markets went down ... unless she sold!

When the markets have gone down heavily ... that may well be a time to buy, rather than sell!

There's a good possibility that the markets will recover most of their former "value", given time. They were overpriced before.

They're largely underpriced now (or were so, a few months ago, prior to recent partial recovery).

Many of you guys'd have a heck of a time being a farmer ... you'd be afraid to buy a cow ... for fear that she'd die on you!

Why should the banks make more on the money that you lend them than you do on that money?

Learn to manage it effectively yourself!

I hope that you're enjoying spring ... I should be home, planting garden.

ole joyful

P.S. Question: What's better than putting your money into a bank?

Answer: Buying (a chunk of) (a well-managed, e.g. Canadian ... and many U.S., usually smaller, that haven't got too big for their britches) a bank!

o j

    Bookmark   May 21, 2009 at 2:17PM
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