There are many ways to Forge Financial Success. The most important part is to educate yourself on how to achieve your personal financial goals. Being equipped with the knowledge to tackle various issues in life, not just finances will yield powerful results for your future, and the future of your family.
Facebook, the almighty social network continues to expand.
I woke up this morning with an email from StockTwits, a social network for investors, explaining the continued growth of Facebook.
I’ll get into the details in a second, but I think Facebook’s will continue to grow.
Facebook is live and all in one place. The internet is completely segmented. When you want to find out how a company is doing, you go to their website. However, the problem faced in going to a companies website is they’re not often updated due to the time it takes to do so.
With a company page on Facebook, you can update easily and share any information you would like with an audience that is “following you.”
Not only will it grow in this manner, but I believe the user base will continue to grow.
When we think about internet companies and social networks we often think of something that is fleeting. It may be popular today, but will it be popular 5 years from now?
When Facebook began to steamroll I believed it was a fad. Myspace was once THE social network and now look at it.
But, despite the cyclical nature of social networks, Facebook has stood the test of time and continues to grow. And because of this, I believe they’ve reached the point of no turning back.
There are so many people on Facebook, with so much content on their pages, to leave Facebook would be like abandoning their personal website.
Not only that, but it would be like leaving your social lifeline as well. How could you possibly get through your day without knowing what Becky had for lunch? Or, what would happen if somebody asked you if you’d seen the viral video that’s been spreading on Facebook and you hadn’t seen it because you didn’t have Facebook?
These sound silly, but these interactions are becoming ingrained into the life we live. No longer does Facebook just live on Facebook. It’s spreading!
Increased User Base
So, enough about what I think. Let’s look at the numbers.
This is a graph published by Stocktwits:
The graph shows the Daily Active Users (DAU) of Facebook from Q3 2013 to Q3 2015.
It must also be noted that these numbers are in the millions! And these aren’t just people who have Facebook accounts. These are people with Facebook accounts that log in each and every day.
1/7th of the world logs into Facebook everyday.
No longer is Facebook just something we do in our free time every once in a while.
It’s a part of our lives. When something because ingrained in our lives, its hard to stop.
Facebook has just begun.
– Cooper Mitchell
Springfield, Missouri is a unique place.
It’s large enough to feel like a “big” city at times, yet has a very much hometown feel. I find it somewhat funny that many people work with an advisor employed by a large corporation, when there are locally owned advisory businesses in Springfield, Mo.
I was born and raised in Springfield. I’ve seen it go through many changes and have been happy to operate my business here.
But why Springfield?
I saw a need for genuine advice combined with the use of current technology and training from the perspective of someone born and raised in Springfield, Mo. A town known for its heavy emphasis on family values. I strive to “Forge Financial Success” for clients utilizing all the tools available with a personal touch.
Let me speak on a few things that set me apart from the rest for those in the area looking for help.
First off, I’m younger than the average investment advisor. Which, in reality isn’t saying much because the average financial advisor’s age is around 50 according to MarketWatch. A question I think people should ask themselves is, “will my advisor retire before I no longer need their services?” If the answer is possibly yes, than I would think about who you’re working with. Not only should you question whether they will retire before you, but are they up to date with current investment strategies, tools that technology has brought about, or even how to communicate using more than just a phone?
I don’t want to bash on advisors that are older than I, because I’ve gained a lot of knowledge from them. But, there’s something to be said about an advisor who is up to date and understands not only the times, but also a clients needs. Because the longer you do something, the more stuck in your way’s you become, and one of the biggest things I’ve found is EACH CLIENT IS DIFFERENT.
The second way I strive to stand out in a wave of advisors is to constantly progress. Not only in the area of designations, but also knowledge, the use of technology, and understanding markets. A quote by one of the greatest investors of all time in Charlie Munger goes,
I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.
This quote speaks volumes to me because I find it to be so true. You come in and stack one brick at a time, and eventually you’ll look back and have a house built. This is the way I not only strive to help my clients in their retirement, but also the way I structure my companies growth. Constant progression.
Thirdly, I am pressure free. There’s this idea in the financial services industry that you have to pretend to be a used car salesman to earn someone’s business. In my opinion, I’ve found this to be the complete opposite of the truth. When I make a recommendation, I ask what the potential client feels about the recommendation and let them decide when to move forward. The choice of an advisor should not be taken lightly and I don’t want somebody making rash decisions.
My goal is to have a client for life; and to earn that trust it takes time.
Finally, I’m an independent business owner. Meaning I’m directly ingrained in the success of my company, and I believe so much in my company that it’s my middle name. I put my name as my business because I’m willing to put my reputation on the line and like the captain of a ship, I’m anchored to the ship’s wheel.
Want to learn more? Visit the Work with Cooper page!
– Cooper Mitchell
There was a time during the early 2000’s when investing in technology was at a peak.
Brokers would cold call average investors all over the country, offer the latest, greatest technology stock offering and get more yes’s than ever before. Since that time, things have changed, dramatically. Brokers cold calling has pretty much come to a halt, everybody is skeptical, but we could be facing a bubble similar to the dot-com bubble that occurred from 1999-2001.
In fact there was a popular movie that recently came out based on brokers targeting the everyday investor:
The reason I bring up everyday investors who have very little knowledge investing in companies that are highly complex and difficult to understand, is because something similar is happening today.
Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times. … Buy into a company because you want to own it, not because you want the stock to go up. … People have been successful investors because they’ve stuck with successful companies. Sooner or later the market mirrors the business. – Warren Buffett
The problem that is beginning to become more prevalent today, is people who have no understanding of the workings of silicon valley, and how hit and miss technology, app, and social media companies can be are flooding the market with money. Everyday you hear of a new story of some guy who made his money through an inheritance, becoming an angel investor in some company trying to be the next Facebook.
Let me be the voice of reason in this situation:
If you have no experience in the industry you’re investing in, no personal relationship with the company, and the company has no goal date of profitability, you should not be investing in that company.
What we call the people who fit the description I just described are speculator’s.
And when too many unqualified speculators are propping up the valuation of companies who should have never been started, there begins to be an expansion of a bubble.
Don’t Take My Word For It
I’m not the only one making these claims either. In fact, they’re starting to come up more and more and from people who are deeply ingrained in Silicon Valley.
Here’s a conversation that Tim Ferriss, author of The 4 Hour Workweek and also the host of my personal favorite podcast The Tim Ferriss Show, and Kevin Rose, a technology entrepreneur in the heart of Silicon Valley: (You can find the video here)
Kevin: So you think there’s a bubble going on right now?
Tim: Yeah, I do I think.
Kevin: But it’s not going to hurt anyone when it pops?
Tim: That’s not true, I think it will hurt people who are getting way too much money, with crazy terms, and bad businesses.
In my opinion, having somebody who is very much synonymous with angel investing in technology, making a claim that we’re currently in a tech bubble is a BIG deal.
I’m sure the majority of you have heard of Steve Wozniak, the co-founder of Apple, Inc. During a recent speech he had this to say:
I feel it’s kind of like a bubble because there is a pace at which human beings can change the way they do things. There are tons of companies starting up.
There’s so many people talking about an oncoming tech bubble that people are already writing how-to survive the tech bubble for companies like this one on Entrepreneur. It’s Silicon Valley’s version of doomsday prepping.
One entrepreneur that sees a bubble burst on the horizon is Mark Cuban. Mark’s reason for thinking we are in tumultuous times is because many venture capitalists have no liquidity. There’s not way they can get out. Like the captain of a sinking ship, many VC’s will have no choice to go down with the company their supporting, because there’s nobody else who will take over.
What Do the Numbers Say?
It’s great to look at people in the industry stating they believe a bubble popping is sure to come, but what are they basing these claims on.
In a recent article (which you can find here) Internet-specific companies captured $11.9 Billion in 2014, which just so happens to be the highest level of Internet-specific investments since 2000, the heart of the dot-com bubble. The increase in dollars entering Internet-specific companies from the year before was a whopping 68%! Such a flooding of capital is sure to lead to some sort of fallout.
NVCA also reported that 27 venture-backed IPOs raised $4.4 billion in the last quarter of 2014, the period was the seventh consecutive quarter with 20 or more venture-backed IPOs, another statistic that hasn’t been seen since 2000.
There are simply too high of valuations for too low of revenues. Snapchat, a messaging application has a valuation of soon to be $19 billion, and revenues of who knows what because they have yet to figure out a way to make money.
There’s seemingly 100’s of companies, which much fewer users that are being over inflated without any plan for generating cash flow. Sure, some have done it in the past, but there’s only so many Zuckerbergs out there.
And this is another piece of advice to high-schoolers dropping out of school and moving to Silicon Valley chasing a dream: if you can’t do it where you are, you probably can’t in the valley where there’s 5,000 people seeking the same money, having the same idea as you. Stay in school.
How Can the Average Investor Combat the Bubble?
With all of this hoopla going on about a potential startup bubble, I’d like to clarify that I don’t see the bursting of the bubble affecting the majority of the population. I mainly believe this because the majority of people aren’t investing in startups, but rather index funds. That being said, there’s still some things you can do to protect yourself:
- Diversify: This is as basic an investing concept as buy low, sell high. Spread out your dollars over many industries to avoid unsystematic risks. Sure, a portion of your portfolio may see a dip if the tech bubble pops, but you’ll be invested in other areas to spread that risk.
- Invest in what you know: If you don’t really understand how coding works, or much less how to operate a computer, stick to other industries. Technology is not, and won’t ever be the only industry growing. You surely have an interest in something that is much greater than the general public– use that to your advantage. Invest in things you know.
- Follow the news: Not being aware of something is not an excuse for being affected by it. Be proactive and prepare.
- Look for safe investments: If you have no tolerance for risk, then look for investments that offer very little. You don’t have to ride the waves if you don’t want.
- Hire a professional: I may be biased, but a financial advisor can help you diversify, and prepare for what’s to come. Not only that, but a knowledgeable advisor will be able to answer your questions and help you put a plan in place that can weather the storms.
If you’ve found this helpful, not helpful, or just have something to say feel free to leave a comment or get in touch with me on my contact page.
– Cooper Mitchell
Ahh, variable annuities. An investment touted by some (typically advisors) as the greatest investment ever, and by others as the worst.
Well my friends, there’s a reason the variable annuity is talked on so much, and it isn’t simply because of how great it is. Really, the reason you hear so much about it, is because it’s controversial.
But before I give you an answer on who the variable annuity is designed for, let’s look at a little background on how the variable annuity came about and what exactly a variable annuity is.
Taken from SEC.gov:
A variable annuity is a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. You purchase a variable annuity contract by making either a single purchase payment or a series of purchase payments.
So, what does that mean?
I like to think of a variable annuity as a piece of candy. Yes, candy. When you receive a bite size piece of candy it has a wrapper, and then inside is what you’re really after, the candy.
In this illustration, the wrapper is an insurance contract, while the candy is the investment which is typically a mutual fund type of account.
Here’s a picture for your reference 😉
What is a Variable Annuity?
What insurance companies did was they created an all-in-one (as seen on tv) package that combines the characteristics of a fixed annuity with the benefits of owning mutual funds. To have this all-in-one package, the investor pays a premium to the insurance company who then buys “accumulation units” into the investors account.
Confused yet? Well, there’s more.
There’s actually two basic types of variable annuities, immediate and tax-deferred. An immediate annuity is typically used by retirees who have saved their money in other accounts and rollover to a variable annuity because they want a lifetime income. With a tax-deferred annuity, you invest your money and it can grow tax-deferred until you decide to withdraw, similar to other tax-deferred accounts you may know of.
Who are they designed for?
I’m a firm believer that there really aren’t many truly bad investments, just the right investments for the wrong people.
With that being said, there are investments that are truly only beneficial to a very small subset of people. In my research, the Variable Annuity is an investment with one of the smallest set of people it would benefit.
So, who would the Variable Annuity best suit?
- Doctor’s who are very worried about mal-practice suits. The reason? A majority of states protect assets in variable annuities from creditors, which is different from regular IRA’s which do not have ERISA protection.
- Investors who truly understand the Variable Annuity, and are willing to pay the usually higher fees associated.
- Investors who are in a job that is deemed economically hazardous. Same reason as doctor’s who are worried about mal-practice suits, your variable annuity could be protected from creditors.
- Those who believe they will live much longer than their statistical average. The income stream is based on an average, and if you live longer than that, you could beat the insurance company.
Now, there are some benefits to variable annuities.
Similar to an IRA, your contributions and earnings within the account can grow tax deferred.
Also, there is the option to have income for life once you annuitize your contract. The Insurance company will guarantee the income for you and you sometimes have the option for your spouse as well.
And finally, you have the option to change your investments when you would like. This can be both a benefit and a detriment depending on how you when it comes to risk and so forth.
There you have it, some benefits of the variable annuity. Some “financial experts” such as Suze Orman will only explain the bad of variable annuities, which do outweigh the positives, but it’s important to give both sides of the issue.
Let’s look at some negatives of the Variable Annuity:
- No matter what an advisor tells you, when you purchase a variable annuity, you are not purchasing a mutual fund. I’ve come across investors who were convinced the broker told them they were purchasing mutual funds only to call the company and realize it was indeed a variable annuity.
- FEES, FEES, FEES. Many advisors can be crafty when introducing variable annuities and gloss over the fact that the fees associated with Variable Annuities are quite high when all added up. These fee’s can include:
- Administrative Expenses – This covers the cost of mailings and providing continued service. Typically this ranges from .1% – .3%.
- Mortality Expenses – Because variable annuities are insurance contracts they charge you for a death benefit. This death benefit is typically a guarantee to pay your beneficiaries at least what you put in. The fees for M&E ranges from .5% – 1.5% usually.
- Investment Expense Ratio – The mutual fund like aspect of the variable annuity that typically trips people up has an expense. This expense is for the underlying stock and bond investments, that as explained earlier are call sub-accounts. The management fee’s for this have a wide range all the way from .25% -2% or more of the value in the account each year.
- Surrender Charges – Many variable annuity policies will pay a large upfront commission to the advisor. The surrender charge is in place in case you surrender your policy early, the insurance company can get the commission back that they paid out.
- Additional Rider Costs – Riders are essentially extra benefits that you pay for. They can give you extra guarantees or death benefits. Riders fee’s range as much as the different types available but a good idea on the costs are .25% – 1%.
- Once you annuitize your contract, there is no return. Investopedia.com has a great example of this that you can see here:
Say you put $264,000 into an annuity at age 60 and accept the insurance company’s offer to pay you $1,000 per month for the rest of your life. You will have to live until age 82 to break even on the contract. If you live past age 82 the insurance company must continue to pay you the monthly check, but if you die before you reach age 82 the insurance company keeps the remaining funds. So even if you die as early as age 63, the insurance company keeps the remaining balance of your $264,000. Many investors find this hard to swallow. Nevertheless, prior to selecting payout, they have to decide whether annuitizing will be beneficial – and, ultimately, this depends on how long they think they will live.
- The final downside isn’t exclusive to variable annuities but once you put funds into an annuity contract, those funds can not touch your hands until you reach the glorified 59.5 years old mark, or else you’ll have to pay a 10% penalty. Yikes!
In my opinion there aren’t necessarily bad financial products, just the wrong people for the right investments. Some investments have a more narrow population who could benefit from them, but nonetheless there are people who could use the investment successfully. The variable annuity is a prime example of an investment that many greatly downplay, and for good reason. However, as with anything, DO YOUR RESEARCH. Talk to advisors, get their take and then take their advice and due your own research to figure out what is best for YOU, not somebody else.
– Cooper Mitchell
When our great, great grandchildren exit their flying amphibious cars in the distant future, many will look at Warren Buffett’s returns and believe he was a myth.
Well the man, the myth, the legend known as the Oracle of Omaha is real, and he’s alive right now (as I write this.) Because we are alive at the same time as the greatest investor of all time, we should heed the advice of such a knowledgeable man on the art of making money in stocks.
So, what is Warren Buffett’s top rule for investing?
Well, its actually two rules, but they are pretty much the same.
- Never lose money
- Never forget rule No. 1
Now you may be thinking, “Warren, are you trying to hide your secrets from us?” I think this is truly his main rule, and I’ll tell you why.
First off, lets think about something nobody does like to think about; losing money.
What happens when you lose money?
Well, you no longer have the money to invest in other things that could make you more money. So, by losing money, you’re not just losing your principal, you’re losing the future gains that could have been made if it had not been loss.
This is the principle that makes Warren Buffett such a powerful investor. He does not follow the crowd, in fact he’s somewhat of a contrarian, (check out Berkshire Hathaway’s holding list here, who else buys newspaper companies in 2015 anyway?!)
So, what made Warren Buffett’s top rule to be that you should never lose money? Well, it probably came from the time he lost money on what he thought would be a sure bet with the New England Textile Mills.
But, as seen before, when Warren makes a mistake, he often corrects himself and doesn’t make it again. The textile industry was one that Warren thought would be a boom, but rather became a bust.
So, in closing, if you would like to emulate one of the best investors of ALL TIME, then NEVER LOSE MONEY.
And, don’t forget there’s more to a statement than what often appears.
The U.S could very well be facing a retirement crisis and nobody is addressing it.
Bernie Sanders, a U.S. Senator recently spoke on the ever growing gap between the 1% and the rest of us.
His statement came during a union hall meeting where he said:
Here’s something not talked about, something that can make us all very, very nervous. Half of all Americans have less than $10,000 in their savings account. And you know what that means and you know why people are so stressed out? If you have less than $10,000, that means an automobile accident, a divorce, a serious illness, a crisis of one kind or another can drive you into bankruptcy and financial disaster.
Now it must be said that Mr. Sanders is toying with the idea of running for President in 2016 election as a Democratic candidate.
So, this got me thinking. Is Bernie telling the truth or is he just looking for some free press and the backing of democratic voters?
And if he is telling the truth, What are the implications and what can be done?
Is it true?
To find out the truth I decided to go digging.
The survey that spawned Mr. Sanders argument was from an article in USA Today in April of 2014. You can find that here.
The Organization that compiled the data used is the Employee Benefit Research Institute and Greenwald and Associates. In addition to the claim by Mr. Sanders, there is a chart shown here that the lack of savings and investments is in all actuality less than years prior.
In 2009 the amount of people surveyed that had less than $10,000 in savings was 39%!!!! And that is after The Great Recession that occurred in 2008 and wiped out many peoples savings.
So, if the stock market is at all time highs, and the economy is doing relatively well, then how in the world do people have less in savings now than they did in 2009? In fact according to this chart 52% had less than $10,000 in savings.
One word: PROCRASTINATION
But Cooper, you can’t judge the entire U.S. by one small survey can you?
No, you can’t, and that’s why I have more to show.
Enter the Federal Reserve Bank
The Federal Reserve Bank surveys consumer finances every three years with the latest being in 2013. The median value (median indicates the middle) of savings excluding a pension and primary residence reported by almost 95 percent of families who had savings was $21,200. This is down from $23,000 show in the 2010 Survey.
So, we can assume that since 5% of families reported no savings that the overall median would be closer to $20,000.
But that’s still not enough. I wanted more proof.
Enter the Insured Retirement Institute
The IRI conducts surveys to measure the retirement preparedness of Baby Boomers, the greatest class of retirees most likely of all time.
There’s a lot of good information in their study which you can find here.
But a few key stats that stand out to me are:
- Economic satisfaction among Baby Boomers from 65% feeling satisfied to 48%. This is an even larger drop from 2011 which was at 76%.
- Only 6 in 10 Boomers reported having money saved for retirement. (Yikes!)
- Boomers who work with advisors are more satisfied, and the gap is increasing. 7 in 10 Baby Boomers (68%) who work with an advisor are extremely or very satisfied with how things are going in their lives.
- More than 8 out of 10 Baby Boomers that work with Advisors feel they are better prepared for retirement because they work with a financial professional.
Looking at these statistics is astounding. I work with many Baby Boomers and although I see mixed situations, I had no idea Boomers as a whole were in this much trouble for retirement.
One more statistic that relates
Freakonomics is one of my favorite blogs. They also have some awesome books.
However, in my research I found in 2010 they covered a survey done by TNS Global Survey in 2009 that concluded that 46% of U.S. Citizens would be unable to raise $2,000 in 30 days if they had to. Based upon the other studies this could be an even higher percentage today.
Not $10,000, not $5,000, but a mere $2,000! Not having an emergency fund of at least $2,000 is very scary and we could very well be facing a retirement crisis.
What can be done?
When you look at a group as close to retirement as Baby Boomers it would be easy to say there’s little that can be done. However, I refuse to ever believe our fate is sealed and I’d like to give some practical advice as to what can be done to secure a better financial future.
For Baby Boomers:
First off, you’ve been through alot. Many wars, many crazy times, yet you’ve still inspired those younger than yourselves to live a great life.
My first recommendation would be to START SAVING NOW!
There’s no time like the present and we can wallow in our past as long as we want, but to change your future and your retirement you need to start right now.
Secondly, look for some help.
You’ve seen the stats showing Baby Boomers that used a financial professional were more satisfied than those that did not. I’m not just advising this because I happen to be a financial professional, but it rings true. Those who have help are typically better off. Even if it’s just getting the opinion from a qualified advisor or a financial plan, you’ll be better prepared for the times ahead and more knowledgeable on your situation.
If your employer offers a retirement plan match, take advantage of it.
I am amazed at people who receive a match into their companies employer sponsored plan and don’t use it. You’re leaving money on the table and even if it’s a small percentage it’s better than nothing.
Don’t plan on Social Security saving you
Social Security has never been and will never be (most likely) meant to provide provide a complete retirement. It’ s a supplement. And here’s some more advice on Social Security. Have a financial professional help you decide when to elect social security. This is especially important for married couples who have well over 50 options for choosing how and when to elect social security. By waiting till age 70 to file, you could gain as much as 30% more from social security versus electing at age 62.
Finally, lighten up
You can’t do anything about your lack of forward thinking in the past so stop worrying about it. In the words of the great Theodore Roosevelt:
Do what you can, with what you have, where you are. – Teddy
For the Rest of Us:
One of the greatest slices of wisdom I was ever given was that I didn’t have to make the same mistakes as those beyond my age. That I could use the mistakes they made as lessons, and create my own future avoiding the pitfalls.
So, my first tip–learn from the Baby Boomers
Don’t procrastinate. Granted, I’m sure many Baby Boomers weren’t simply just procrastinating, they were probably facing tough times and had to do what had to be done. That being said, do the hard things now, when they’re easy, so that when times are hard, you’ll be prepared.
Save, save, save
A great idea as far as saving and budgeting is to set aside a certain percentage of each paycheck and like clockwork invest it into something that is well diversified. This leads to my next piece of advice…
Get help now!
Starting at a younger age with the help of a qualified financial professional can do wonders for your future. Why wait till you’re under water to ask for help. Seek it when you don’t have to have it and you will surely be better off. A good advisor can help you develop a plan to meet your goals and objectives, help disseminate financial information, and also manage your investments.
Don’t plan on Social Security even being there
Will Social Security still be there when you retire? Most likely. But don’t bank on that being a major source of income for you. Pretend it’s not there and urgently save for the future.
Have a rainy day fund
I typically recommend to have an emergency fund of at least 2 years worth of expenses set aside in something that is highly liquid (easy to withdraw from; ex: money market fund, savings account, checking account, etc.) You never know when something unexpected could come your way so prepare for it.
Seek multiple sources of income
I highly recommend reading Rich Dad, Poor Dad by Robert Kiyosaki. It’s a book I’ve recommended to many friends and in it he details why having multiple sources of income is so powerful. Put simply, if one door closes, you have another one still open.
Use your employer match
If your employer offers an employer sponsored plan in which you receive a match, look very close into using it. If you’re not sure, then ask! Receiving a match on any funds contributing can be very powerful!
Finally, enjoy your working years
Don’t let your working life fly by with you waking up each morning feeling sick because you have to go to work. If you don’t like your job, find something you do like. But make the most of your situation, prepare for your future, and feel satisfied about your life.
– Cooper Mitchell
This is a question I’m asked nearly everyday. I think it’s great that people are becoming more knowledgeable on their investment options. However, I have no clue where the idea that investing in a Roth IRA became “THE GREATEST INVESTMENT EVER.” It’s a much more complicated question than a simple yes or no, and I see many in the financial arena throwing out a blanket statement that everyone should invest in a Roth. That may be great to draw people to your website, but as far as providing true, personalized advice I think it falls very short. So, in response I’m going to detail the origins of the Roth IRA and who it is and isn’t made for.
Let’s do it!
So, lets start at the base. I’m constantly speaking on building a solid foundation, and the foundation for understanding whether you should do something typically starts with having knowledge on what that thing is, and how it began.
A long, long time ago in 1997 (okay, not that long ago but in the internet age 1997 might as well be a century ago) the Roth IRA was birthed as part of the Taxpayer Relief Act of 1997. The name of the act that introduced the Roth should be nearly enough to tell you what it’s purpose is, to provide tax relief.
The name is in honor of its chief legislative sponsor, William Roth from Delaware. You can see this good looking guy right here:
That’s the face of a guy looking to help taxpayers
Mr. Roth sought to provide relief for those under a certain income threshold ($191,000 for married filing jointly in 2015) by allowing those who save to contribute after-tax income to an IRA and then withdraw the income from the Roth IRA later tax-free.
Basically, this means that any interest earned by the Roth IRA is effectively TAX-FREE.
People love the words tax free!
So, now that you have a general idea of what the Roth IRA is, let’s look at a few of the main advantages and disadvantages of the Roth IRA vs. Traditional IRA.
- Interest Earned by the Roth IRA is effectively tax-free
- Direct contributions to a Roth IRA (principal) may be withdrawn tax and penalty free at any time.
- If you decide purchase a new home, and it is your principal residence, Up to a lifetime maximum $10,000 in earnings withdrawals are considered qualified, also known as those lovely words tax-free.
- Unlike distributions from a regular IRA, qualified Roth distributions do not affect the calculaiton of taxable social security benefits. This calculation is known as the Provisional Income Threshold and determines how much of up to 85% of your social security income will be taxed. In other words, it’s a big advantage for the long term thinker.
- If you make too much, you may not be able to contribute to the Roth IRA due to income limitations. Now, most tax deductible employer sponsored retirement plans have no income limit for contributions.
- You may never actually experience the tax benefits of the Roth IRA. I.e. if you pass away before retirement.
- The Government is constantly changing it’s mind. Therefore, congress could change the rules that allow for tax free withdrawal of Roth IRA contributions. You never really know.
So to get down to brass tacks let’s give examples of who may benefit from the Roth IRA, and who would not.
John and Jane Doe (That’s actually my Wife and I but shhhh…)
Both are 30 years old.
Their combined income is $80,000 and they plan on working till their 60 years old.
They have enough cash reserves to reside on without working for many years.
They’ve maxed out their contribution limits at work and are looking for an investment to put some money away on the side.
They decide on a Roth IRA because…
- They plan on withdrawing the contributions sometime in their 50’s to build a home.
- They are going to wait more than 5 years to withdrawal from the Roth.
- They are under the income contributions.
- They are already maxing out their contribution limits at their workplace.
- They are relatively young and have a long time horizon.
- They don’t want to be forced to withdrawal an RMD at 70 1/2.
In this example based on the facts presented, a Roth IRA may certainly be a great investment.
Now lets look at a couple who may not benefit from a Roth IRA.
Sam and Susan Sassafras
Both are 60 years old
Make a combined income of $500,000
Both plan on working only 1 more year.
They are not contributing to their employer sponsored plans where they receive a hefty match.
Have only a small amount of money in their cash reserves.
Plan on making withdraws starting in 2 years.
They should forgo the Roth IRA because:
- They plan on withdrawing in 2 years, which is before the 5 year seasoning period is complete.
- They aren’t contributing to their employer sponsored plans.
- They plan on retiring soon.
- Finally, they wouldn’t even be allowed to contribute because they are over the income limitations.
So, is the Roth IRA “The Greatest Investment Ever.”
It depends who it’s for, and what the goals are.
These are the reasons Advisors are in place to help you look at the whole picture and making a decision.
Deciding to invest in something simply because some guy on YouTube told you to is not an investment strategy I would suggest.
There are many advantages and some disadvantages to the Roth IRA just like anything else in this world. Seek knowledge on the issue, meet with an expert, and figure out if it’s right for you.