Taxes in Retirement: How All 50 States Tax Retirees

We rated every state, plus Washington, D.C., on how retirees are taxed. We considered taxes on Social Security and other retirement income, tax exemptions for older residents, and the state’s overall income, property and sales taxes.

Source: kiplinger.com

401(a) Vs 403(b) Retirement Saving Plans: What’s the Difference?

401(a) and 403(b) both offer tax benefits for your retirement savings. While they are very similar, a 403(b) is different than a 401(a) plan. We will discuss both plans as well as laying out the key differences between the two. In the meantime, you can always talk to a financial advisor to assess your financial goals and risk tolerance and learn more about the 401(a) vs 403(b) comparison.

401(a) vs 403(b): A quick overview

Here’s a quick overview on the 401(a) vs 403(b) comparison.

Both 403(b)s and 401(a)s are tax-advantaged retirement plans. They have valuable tax benefits for retirement savers. A 401(a) and a 403(b) plan are both offered by government agencies, public schools and nonprofit organizations. Participants are usually government employees, public school teachers, nurses, doctors, librarians, etc.

In these accounts, your money grows free of taxes until you take it out. That means dividend and interest income accumulate on a tax-deferred basis.

401(a)s and 401(b)s resemble 401(k) plans. The main difference between is that 401(a)s and 401(b)s are offered by government, public employers, while 401(k) plans are offered by private corporations.

Understanding the 401(a) vs 403(b) comparison, will help you determine which one better suits your needs and goals.

*Helpful Tip: If you’re looking for a financial advisor to help you decide what type of retirement plan makes more sense to you, check out SmartAsset. Answer a few questions to see a list of three vetted advisors in your area.

403(b) plan: how is it different from 401(a) plan?

A 403(b) plan is a type of retirement account that is available for you at your employment. It offers an excellent opportunity to save money for retirement and to receive some extra money in employer matching.

A 403(b) plan is similar to a 401(k) plan. Just like a 401k plan, a 403b lets employees defer some of their salary into individual accounts.

This retirement plan is offered by:

  • public school, college, or university,
  • church, or
  • charitable entity tax-exempt under Section 501(c)(3) of the Internal revenue Code.

Participate in a 403(b) plan

To be eligible, you must be:

  • An employee of a public school system,
  • Faculty or staff of a college or university,
  • An employee of a hospital,
  • Minister of a church.

In a 403(b) plan, your employer decides the investment options. As an employee, you then can choose among the investments available within the plan. So, each individual 403(b) plan can differ significantly.

403(b) plans have an added plus: employer matching benefits are also available. Those benefits usually match the amount you contribute to the plan, dollar for dollar, or 50 cent to a dollar. In addition to the matching benefit, you have options in a 403(b) plan such as requesting a loan, etc.

There is a maximum contribution limit in a 403(b) plan. Just like a 401(k) plan, in 2021, you can contribute up to $19,500 a year. If you are 50 years old or older, you can contribute an extra $6,500 to a total of $26,000 a year in 2021.

Your employer decides where to invest your contributions. The typical choices include companies’ stocks, mutual funds, long term bond fund, money market fund, etc.

Tax benefits

There are tax benefits in a 403b plan. Your contributions are deducted from your paycheck before taxes are calculated. In other words, you don’t pay taxes on your contributions.

However, you must pay taxes on the withdrawals you make in retirement. Another tax benefit for 403(b) plans is that all dividends, capital gains, interest are accumulated tax free until you withdraw them as income.

401(a) plan: how is it different from 401(b) plan?

A 401(a) plan is also a type of retirement plan that employers can offer to their employees. However, just like a 403(b) plan, you have to work for non-profit organization, educational institution or government agencies. In other words, if you work for a private company, it won’t be available to you.

Your employer determines the plan’s investment choices. However the investment options are usually very safe and conservative. Participation in a 401(a) plan is often mandatory.

However, if you leave your non-profit employer, you can transfer your funds to a 401(k) plan or an individual retirement account (IRA). To be eligible, you have to be 21 years and older and have been working in the job for a minimum of 3 years.

In addition, you may qualify for a tax credit. Just as with most other retirement plans, there is a 10% early withdrawal penalty if you withdraw money before you reach the age of 59 1/2.

The contribution limit for a 401(a) plan is $58,000 in 2021, This represents the total contributions you and your employer can make.

However, if your salary is below that amount, you and your employer can contribute up to that salary. For example, if you make $35,000 a year, that is the amount you and your employer can contribute to your 401(a) account.

401(a) vs 403(b): the key differences

A key difference between a 403(b) and a 401(a) plan is the contribution limit. In a 401(b) plan, the contribution limit is $19,500 a year. If you are 50 years old or older, you can contribute an extra $6,500 to a total of $26,000 a year in 2021. Whereas, in 403(b) account, the contribution limit is actually higher. It is $58,000 a year.

Another key difference regarding the 401(a) vs 403(b) question is that the sponsors of a 401(a) usually makes it mandatory for their employees to participate in the plan. Whereas, sponsors of the 403(b) plan generally make it voluntary.

401(a) vs 403(b): Bottom line

Both 403(b) and 401(a) plans are vehicles used in retirement planning. Both accounts are offered by nonprofit organizations, some churches, hospitals, public schools. Employees who can participate in these accounts are often teachers, administrators, nurses, support staff, etc. However, the key difference between a 401(a) and a 403(b) plan is that the sponsors of a 401(a) usually makes it mandatory for their employees to participate in the plan. Whereas, sponsors of the 403(b) plan generally make it voluntary.

20 Questions to Know If You’re Ready for Retirement

Finding the right financial advisor that fits your needs doesn’t have to be difficult. SmartAsset’s free tool matches you with fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is leally bound to act in your best interests. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

Related Articles

  • Vanguard Roth IRA: Should You Open One?
  • How to Retire at 50: 10 Easy Steps To Consider
  • The 8 Best Vanguard Funds for Long-Term Investments
  • Grow Your Money: Mutual Funds, Index Funds, & CDs

The post 401(a) Vs 403(b) Retirement Saving Plans: What’s the Difference? appeared first on GrowthRapidly.

Source: growthrapidly.com

How to Create Your Own Retirement Plan

One of the good things of working for a company is that they create a retirement plan for you. As an employee, you don’t have to do anything else but to participate in the plan. However, when you’re self-employed or a small business owner, you’re responsible of setting up your own retirement plan.

When it comes to operating your own business, time is of the essence. However, even if you’re crazy busy, saving for retirement should be a priority. Indeed, a retirement account allows you to contribute pre-tax money, which lowers your taxable income.

Luckily, a financial advisor can help you save time and help you choose the right plan that is best for you. Below are four retirement saving options you can create as a self-employer individual.

1. Solo 401k

A solo 401k is for small businesses or sole proprietors who don’t have any employees other than a spouse working for the business. The solo 401k mirrors a typical 401k plan that most companies offer. The main difference is that you can contribute as an employee and employer.

In other words, because you’re both the boss and the worker, you get to contribute in each capacity. That in turn allows you to contribute a higher amount each year. However, your total yearly contributions cannot exceed $58,000 or $64,000 for individuals age 50 or older as of 2021. To set up a solo 401k, you have to get in touch with a financial institution.

2. SEP IRA

If you’re an independent contractor, self-employed, or has a small business with 25 employees or less you can set up a SEP (Simplified Employee Pension). It’s very easy to establish and don’t even require you to incorporate your business to qualify.

In a SEP IRA, the employer alone contributes to the fund, not the employees. You can contribute up to 25% of your annual salary or $58,000 in 2021, whichever is less.

3. Keogh Plan

Keogh plans are available to self-employed people, including sole proprietors who file Schedule C or a partnership whose members file Schedule E. This type of plan is preferable among those who have a high and stable income.

But the main advantage the Keogh has is the high maximum contribution you can make. In 2021, you can contribute up to $58,000. To set up, you will need to work with a financial institution such as Charles Schwab. 

4. Simple IRA

The Simple IRA was created by the Small Business Protection Act to help those who work at small companies to save for retirement. The small business can offer the plan if it has 100 or fewer employees.

Both the employer and the employee can contribute up to $13,000 in 2021, plus an additional catch-up amount of $3,000 if you’re 50 or older. If a company offers a Simple IRA, it must match an employee’s contribution dollar for dollar, up to 3% of each participant’s annual salary or make a nonelective 2% contribution to all employees.

Where to Invest Your Keogh, SEP IRA, Solo 401k, Simple IRA

As a small business owner, there is always an investment program that suits your needs for your IRA, SEP, Keogh and solo 401k. Places such as banks, brokerage firms and mutual funds institutions such as Vanguard, Fidelity, Charles Schwab are great options. But before opening account, make sure you consider how much money you have, your appetite for risks, the annual fee, etc.

The Bottom Line

If you’re a small business owner or self employed, you should take advantage of the tax benefits offered by these plans mentioned above. Creating a retirement plan is important, because not only will you be able to grow your retirement savings faster but also no one is going to do it for you. 

Related:

  • 4 Simple Ways to Accelerate Your Retirement Savings
  • How to Retire at 50:10 Easy Steps to Consider

Tips on Retirement Planning

Retirement planning can be a major challenge, but you don’t have to go in it alone. Speak with a financial advisor who can help you come up with a unique plan based on your circumstances and situations. Use SmartAsset advisor matching tool to get matched with fiduciary financial advisors in just 5 minutes.

 

The post How to Create Your Own Retirement Plan appeared first on GrowthRapidly.

Source: growthrapidly.com

Should I stay or should I go? Wrestling with the decision to quit a career

J.D.’s note: In the olden days at Get Rich Slowly, I shared reader stories every Sunday. I haven’t done that since I re-purchased the site because nobody sends them to me anymore. But earlier this year, Mike did. I love it. I hope you will too.

Earlier this year, I sent my wife a text message: “On a scale of 1 to 10, how freaked out would you be if I quit my job this afternoon?”

My wife and I had only been married a short while, but she’d known since our second date that I didn’t plan to work in my traditional job until normal retirement age. She also knew that I hadn’t been very happy at work in recent months.

We’re very compatible financially — both savers raised in working-class families that didn’t always have a lot. We make a point of having what we like to call “Fun Family Finance Day” from time to time. On Fun Family Finance Day, we do everything from competitively checking our credit scores to discussing questions that get at the root of our money mindsets to help us create our goals.

But this question wasn’t part of the plan. Not then.

And it was never on any of the lists of questions that we’d discussed with each other. It was like a pop quiz, a pothole in the smoothest relationship road I’d ever traveled…and I was the one putting it there.

Dreams Remain Dreams Without Doing

My wife and I rarely argue, but when we do it’s usually about food. It’s the kitchen and the grocery store that are our battleground. Our finances are fine. Thankfully, when you’re confident in the life you’ve created and the person you chose to build it with, it’s a lot easier to be honest about what’s on your mind.

That still doesn’t always mean you get the answer you want. Or the answer you were expecting. She responded: “Wait what. Kinda. What would you do?”

A completely reasonable and fair question. Not to mention one that I’d probably have to get comfortable answering from a lot more people.

I think my immediate reaction was: We talk about this stuff all the time, where is my, “No worries baby, YOLO!”? (I must have watched too many romcoms back before we cut cable from our lives.)

Being a grownup, it turns out, is actually really hard sometimes. I was about to learn that talking about something, and actually doing it, are a world apart.

Life is full of dreamers and doers. Sometimes those two personalities cross over. But there are plenty of people who go through life talking about so many things they’ll never have the courage to try — or the discipline and determination to follow through with.

Which person was I? The dreamer? The doer? Or that fortunate combination of both?

Standing on the Ledge

There’s a quote perched atop my bucket list of long-term goals:

“At some point, you will need to take a long look in the mirror and ask yourself not just if this is something you wanted to do at one point, but if this is something you will want to have done.”

Words are meaningless without action. It was time for me to take that long look in the mirror. I thought back to one of the questions that my wife and I had previously discussed: What does money mean to you? To me, once I grew out of the “stuff accumulation” phase of my early- to mid-20s, my answer had always been freedom. Money meant freedom. To my wife, the answer was security. Money meant security.

You can probably see how freedom can conflict with security. That was the case here. Not only that, but I was asking to change the perfect plan, one that she was comfortable with and excited about.

That’s not one, but two shots against financial security. If I’d thought more about our financial blueprints and how they differ, I might have seen this coming from a mile away!

As I was standing on that ledge, about to quit my job, thoughts started to race through my mind. What did I actually have to lose if made the leap? Lots.

  • A happy relationship and marriage.
  • A secure job with solid income, not to mention a sixteen year investment in my career.
  • Great benefits, including lots of time off, health insurance, 401(k) — even a pension.
  • The ability to afford anything at any time without any real worry. (Our finances were already on autopilot.)
  • My work friends and work prestige.
  • The general day-to-day purpose of a job.
  • The opportunity to create generational wealth. If we worked until 65, the power of compounding would likely make us ridiculously wealthy.

Today at Get Rich Slowly, let’s perform a little exercise. Come stand in my shoes for a minute, won’t you? Join me on the ledge. Do you see the beautiful view? The endless opportunity? The excitement that’s felt only at the beginning of a grand adventure, an adventure where anything is possible?

Or do you get a queasy feeling in your stomach? Do you feel like you’ve lost your balance, like you’re on the edge of some great catastrophe? Do you see a frightening fall from grace? Does it make you want to back away immediately?

Let’s go back to what it felt like to make this decision…

Sitting on the ledge

My Situation

I’m 38 years old. I’ve worked for the same company since I was 22. Corporate insurance is all I know. I’m well paid. I work from home for a solid company with good benefits, plenty of time off, and I really enjoy most of the people I work for and with.

It’s the definition of stability — a solid guardrail protecting me from what lies over the ledge. So what’s the problem?

A year ago, I took a new position that seemed like a great opportunity. Only it wasn’t. The first misstep of my career. A year in, that spot has killed my enthusiasm and engagement. For the first time at work, I’m struggling to get things done.

As an extrovert that derives meaning from helping others, this feels like a prison. My job isn’t hard because it’s stressful. It’s hard because it’s boring me to death! And what are any of us doing thinking about personal finance and early retirement if we aren’t trying to make better use of our limited time on this planet?

There’s a project looming that would require some weekend work once in a while for the foreseeable future, I’ve avoided it in the past, but my luck is running out. My team — and, more importantly, my position — need to take it on. I understand completely. I just don’t want to do it.

At this point in life, my time is way more important to me than money. The weekends and vacations are what I live for. Adventures in the mountains with my friends, quality time with my wife, our dog, and our families – that’s what makes me feel alive.

Insurance? Meh.

No little kid ever said they wanted to work for an insurance company and play with spreadsheets and Powerpoint presentations when they grow up. I wanted to be a baseball player, a sports writer, even a professional forklift driver. (Because what’s more badass than a forklift when you’re a little kid and your dad works at a marina?)

A Glimpse of the Other Side

My wife and I just got back from a delayed honeymoon to Alaska. To say it was incredible would be an understatement. Denali. Kenai. Majestic train rides. Fjords. Glaciers. Bears. Bald eagles. Whales. Hikes.

Life slowed down.

I somehow managed to read five books while doing so many other amazing things. During our more than two weeks off, I got to see what my mind was capable of when it wasn’t drowning in useless information and mundane tasks that consume my braindwidth.

We talked to people who had ended up in this wild place through a history of taking risks. Parents that had hitchhiked cross-country and ended up there back in the 70s. Can you imagine? Where we live, a fair number of people never leave their town or state!

Before the trip, I had tried to apply for a few positions. For whatever reason, it just didn’t work out. I came home from an amazing glimpse into what life could be to a job that seemed like the polar opposite. (Isn’t that every vacation though?) I’ve felt like a square peg trying to fit in a round hole for a while now. Maybe normal life just isn’t for me anymore. Maybe I need something just a little less ordinary.

Should I Stay or Should I Go?

I’ve been practicing the classic tenets of personal finance since I was in my mid- to late-20s. I found an awesome woman in my mid-30s who just happens to be down with this lifestyle as well. We’re probably two to three years short of where we want to be based on our master plan of a fully-paid house and a really comfortable number in invested assets.

We’d likely fall somewhere between Agency and Security on the stages of financial freedom.

I know good jobs don’t grow on trees, especially where we live. The seasons of the economy are always shifting and there’s a chill in the air. Economic winter can’t be too far off. My wife still has a solid job, and we live a pretty simple life — albeit in an expensive part of the country. Our main splurge is travel, but otherwise we live well below our means.

All of this knowledge and preparation comes with a cost. Having options can be a burden too, because then you’re responsible for making hard decisions. And you’re responsible for the outcomes of those choices.

What other options are there?

  • Be a crappy employee/teammate, and still get paid? Plenty of people have played that game. Get a surgery or two, go out on leave, let performance management run its course for however long that takes, and keep cashing checks the whole time. I don’t think I have it in me to put people I respect through that. It’s just not who I am.
  • I work from home, and I still can’t bring myself to abandon my laptop. What if someone needs me?
  • Am I giving up too soon? The finish line seems just around the corner — somehow so close yet so far away.
  • Should I just suck it up and sell a little more of my soul? Slump my shoulders a little bit more as I trade another piece of myself for money I don’t need to buy things I don’t want?

As I go back and forth, sometimes I briefly wish I’d never found the personal-finance community. Like Neo in The Matrix, why’d I have to take the damn red pill? Being a mindless consumer wasn’t so bad. I would have invested 6-10% in my 401(k) with a traditional pension on top of it.

Forty years on autopilot would have produced a comfortable life of work, nice things — and maybe some time in old age to relax and travel.

Facing Freedom

The whole point of everything I’ve done since I started this journey was to be in control of my own life. To not be owned by things or circumstances. To have options. Freedom of choice. F-U money.

I have the corporate battle scars and survivor’s guilt to understand why that’s important.

I’ve sat on the phone while I heard that my old department was closing down. The sadness and tears in the room. Everyone that had taken me in, given me my chance, taught me the job…basically gone, casualties of a business decision.

I’ve seen people get laid off who are petrified because they don’t know how they’ll pay their bills in a couple of weeks. People will be okay eventually though, right?

What about my friend who was struggling last year and left the company? He committed suicide a few months later. Maybe everyone won’t be okay eventually. Depression runs in my family. Am I really built for this? That thought is haunting.

It’s been said that one of the hardest decisions you’ll ever make in life is whether to walk away or try harder. Every bone in my body tells me it’s time to walk away, to bet on myself.

The End?

About six months after the text exchange that blindsided my wife, with her support, I hit send on the scariest, most exciting and important one-line email of my professional career. It would also signify the unofficial end of it: “I will be resigning from my position effective Wednesday, June 26th.”

To combine a few lines from my favorite movie, The Shawshank Redemption, some birds just weren’t meant to be caged. It’s time to get busy living, or get busy dying.

Source: getrichslowly.org

How to Reassess Your Retirement Plans

Retirement planning is not a “set it and forget it” kind of exercise. Life changes quickly, and it’s important to understand that your retirement plans need to change just as fast. The retirement plan you had in your 20s when you were single is not the same retirement plan you’ll want in your 40s and 50s as your kids look to head off to college. Volatility with the stock market or other investments can also impact your retirement plans. As things change, it’s important to periodically reassess your retirement plans.

When you need to reassess your retirement plans

There are a few different times where you’ll want to reassess your retirement plans. The most crucial times will be when you have major changes to your life or family.

  • Marriage or Divorce
  • Birth or adoption of children
  • Change in employment
  • Moving to a different house

These types of major life events can have a major impact on how much money you need to retire, so you’ll want to reassess your plans. But it’s not only during these major life changes that revisiting your retirement planning makes sense. It’s smart to regularly review where you’re at for retirement, just like you should be regularly reviewing your monthly budget.

Understanding volatility in retirement planning

The one time that you DON’T want to make drastic changes to your retirement planning is during a major stock market downturn. When you see those big negative amounts in your 401k or brokerage account statements, it can be easy to panic and try to sell your stocks in order to stop the bleeding. 

The fact of the matter is that the stock market is extremely volatile. The stock market may average 8% or so over the long-term, but that one number masks a number of huge swings to both the positive and negative. Instead of panicking and selling when the stock market goes down, be proactive and prepare for the inevitable downturn. Sometimes the best thing to do is absolutely nothing.

Get comfortable with risk

Along the same lines of understanding volatility in the stock market, it’s important to get comfortable with risk. In general, the higher return that a type of investment will bring, the higher the amount of risk will also be. Deciding how comfortable you are with risk is an important part of assessing your retirement plans.

Risk is something that should not be feared — after all, hiding all of your money underneath your mattress is a relatively low-risk proposition. But it’s also not likely to lead to a successful retirement. Consider your time horizon — how long you have until you’re likely to retire — and adjust your risk accordingly. If you’re younger and further from retirement, you can afford to invest in relatively riskier investments. The closer that you get to retirement, the less risk that you should be taking on.

Review your portfolio allocation

Understanding and being comfortable with risk can help you as you review your portfolio allocation. Since different types of investments come with differing amounts of risk, it’s important to make sure your portfolio is allocated between investment types in a way that makes sense for your specific situation. 

Generally, the younger you are and the further you are away from retirement, the more it makes sense to have most of your investments in the stock market. The stock market has more volatility but historically has provided the highest returns as well. As you get older and closer to retirement, you will generally want to move a higher and higher percentage of your portfolio away from stocks and into an investment like bonds that has lower returns but also lower risk.

Consider talking with a financial advisor

A financial advisor can be a good resource if you’re looking at making sure you’re on the right road to retirement. A trusted financial advisor can look at where you’re at now, where you want to go, and help ask the questions you need to answer to make sure you’re on the right path. If you don’t currently have one, make sure to find a financial advisor that fits with the type of advice you are looking for.

The Bottom Line

It’s important to regularly reassess your retirement plans. You should review your retirement plans on a recurring basis with your spouse, trusted friends and family, or a financial advisor. You should also review your retirement plans whenever you have a major life change, such as a new child, new job, or when you move to a new home. Following these simple steps can help you make sure that you are on the road to a solid financial future.

The post How to Reassess Your Retirement Plans appeared first on MintLife Blog.

Source: mint.intuit.com

VLXVX: Vanguard Target Retirement 2065 Fund – Reviews

VLXVX refers to the Vanguard Target Retirement 2065 Fund. The VLXVX is one of the best Vanguard retirement funds. It is designed for investors who plan to retire or leave the workforce in 2065, which is the target year. Also, the fund invests more aggressively in the beginning. As it approaches the target date, i.e. 2065, it becomes more conservative. That is, it allocates its assets in more bonds and other low risk securities as opposed to stocks. The fund provides investors exposure to low-cost, broadly diversified mutual and index funds.

If you’re planning to retire in or within a few years of 2065, then you should consider the Vanguard Target Retirement 2065 Fund (VLXVX).

VLXVX: an overview

The Vanguard Target Retirement 2065 Fund (VLXVX) is designed for those investors who plan on retiring in the year of 2065. The fund invests in other Vanguard mutual funds (see below) and provides a broad diversification. Its asset allocation is more aggressive in the beginning and becomes more conservative over time. That means as the fund approaches 2065, the percentage of assets allocated to bonds and other less risky securities will increase while the percentage of assets allocated to stocks will decrease.

VLXVX: Asset Allocation

The Vanguard Target Retirement 2065 Fund is composed (as of 4/30/2021) of the following Vanguard funds: the Vanguard Total Stock Market Index Fund Investor shares (54.60%); Vanguard Total International Stock Index Fund Investor Shares (35.70%); Vanguard Total Bond Market II Index Fund Investor Shares (7.10%); the Vanguard Total International Bond Index Fund Investor Shares (2.40%); and the Vanguard Total International Bond II Index Fund (0.20%).

Moreover, the VLXVX invests in domestic stocks (54.19%); foreign stocks (35.84%); and preferred stocks (0.01%). Moreover, the fund invests in domestic bonds (6.60%); convertibles (0.08%); foreign bond (2.98%); cash (0.27%) and others (0.03%).

VLXVX: Sector Composition

The VLXVX invests in technology (18.6%), financial services (15.60%), consumer cyclical (12.18%), healthcare (11.83%), industrials (11.10%), communication services (9.12%), consumer defense (6.73%), basic materials (4.81%), real estate (3.57%), energy (3.34%) and utilities (2.75%).

VLXVX: Fees, Minimums, Price & Performance

The VLXVX has a reasonable expense ratio of 0.15% and an initial minimum investment of $1,000, making it one of the best Vanguard retirement funds. A $10,000 invested in this fund has a $267 fees over 10 years. In addition to that fee, Vanguard charges a $20 annual account service fee if you have a balance of less than $10,000 in the account. As for performance, this fund has returned 51.66% over the past year and 12.02% percent over the past three years. The price for one share is $29.87 as of May 21, 2021.

VLXVX: Risks

This Vanguard retirement fund invests in stocks, bonds and other securities domestically and internationally. Therefore, they are subject to risk that comes with investing in high yield, small cap and other US and foreign securities. So, you should be able to stomach the risks that come from the volatility of the market. However, the risk associated with the Vanguard Target Retirement 2065 Fund is Average comparing to other Vanguard funds. You should consider investing in this Vanguard retirement fund if you’re planning to retire between 2063 to 2067.

In conclusion, the VLXVX is open to new investors. It has a YTD return of 8.5%, a 3-year annualized return of 13.3%. Its net asset is $1.33 billions. The target date is 2065. The expense ratio is 0.15% and the minimum investment is a reasonable $1000, making it one of the best Vanguard retirement funds out there. Moreover, the Vanguard Target Retirement 2065 Fund invests in stocks, bonds, cash, convertible bonds, preferred stocks and other investments. If you are a long term investor, meaning that you don’t plan to retire soon, you should fare well in the VLXVX fund.

Returns

1 Month +3.86% VLXVX
3 Months +8.9% VLXVX
Year to Date +8.58% VLXVX
1 Year +42.97% VLXVX
3 Year +13.27% VLXVX
Returns as of May 21, 2021

Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals. Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

The post VLXVX: Vanguard Target Retirement 2065 Fund – Reviews appeared first on GrowthRapidly.

Source: growthrapidly.com

5 Reasons You Need To Hire A Financial Consultant

If you’re a busy individual and have no time for the day-to-day management of your money, you may need to consult a financial consultant.

Beyond being busy, however, there are major turning points in your life where working with a financial consultant is absolutely necessary.

For instance, if you’re approaching retirement, you’ll have to figure out how much money you need to live during your non-working years.

So what is a financial consultant? And what do financial consultants do? In this article, we’ll run you through situations where financial consulting makes sense.

We’ll show you where you can get a financial consultant that is ethical and who will act in your best interest, etc.

Of note, hiring a financial consultant is not cheap. A fee-only financial advisor can charge you anywhere from $75 to $300 per hour. If your situation is simple, you may not need to hire one.

However, hiring a financial consultant in the situations discussed below is worth the cost.

Related: 5 Mistakes People Make When Hiring A Financial Advisor

What is a financial consultant?

A financial consultant is another name for financial advisor. They can advise you on a variety of money subjects.

They can help you make informed decisions about managing your investments and help you navigate complex money situations.

Moreover, a financial consultant can help you come up with financial goals such as saving for retirement, property investing and help you achieve those goals.

To get you started, here’s how to choose a financial advisor.

5 Reasons You Need To Hire A Financial Consultant:

1. You have a lot of credit card debt.

Having a lot of credit card debt not only can cause you severe emotional distress, it can also negatively impact your ability to get a loan (personal loan or home loan).

For instance, if you see 50 percent of your income is going towards paying your credit card debt, then you need professional help to manage debt. Your best option is to find a financial consultant.

Luckily, the SmartAsset’s matching tool is free and it helps you find a financial consultant in your area in just under 5 minutes. Get started now.

2. You are on the verge of bankruptcy.

If you have way too much debt and can’t seem to pay it off within a reasonable time, another option for you is to file for bankruptcy.

Although bankruptcy will free you from most of your debts, avoid that option if you can.

One reason is because it can have a long, negative impact on your credit file. Once you go bankrupt, the bankruptcy will be on your credit report for a long time.

Working with a financial consultant can help you come up with different strategies. They may advise you to consider debt consolidation, which can significantly lower interest rates.


Speak with the Right Financial Advisor

You can talk to a financial advisor who can review your finances and help you reach your goals. Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.


3. You’re ready to invest in the stock market.

If you’re thinking about investing in the stock market, then the need for a financial consultant is greater. Investing in the stock market has the potential of making you wealthy.

But with great returns come great risks. The stock market is volatile. The price of stock can be $55 today, and drops to $5 the next day.

So, investing in the stock market can be very intimidating. And if you’re a beginner investor and unsure about the process, it is wise to chat with a financial advisor to see if they can benefit you.

A financial consultant can help build an investment portfolio and help manage your investments.

4. You’re starting a family.

If you’re just got married seeking a financial consultant is very important. A financial advisor can help you figure out whether you should combine your finances, file taxes jointly or separately.

You also need to think about life insurance as well, in case of death of one spouse. And if you’re thinking of having kids, you need to think about saving for college to ensure the kids’ future.

Turning the job over to a financial consultant can save you a lot of money in the long wrong and is worth the cost.

Related: Do I Need A Financial Advisor?

5. You’re just irresponsible with money.

If you make emotionally based financial decisions all of the time, you’re buying things without planning for them, you may be irresponsible financially and therefore need professional advice.

If you’re spending money on expensive items when you could be planning and saving for retirement, then you may need a financial consultant.

You may find yourself having trouble saving money. Then it may make sense to speak with a financial advisor.

Speak with the Right Financial Advisor For You

You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.

 

The post 5 Reasons You Need To Hire A Financial Consultant appeared first on GrowthRapidly.

Source: growthrapidly.com

15 Numbers You Need To Know To Make Smart Financial Decisions

The Wall Street Journal lists 15 important numbers that everyone should know to make better financial decisions. Here they are, broken down by category.

The post 15 Numbers You Need To Know To Make Smart Financial Decisions appeared first on Bible Money Matters and was written by Peter Anderson. Copyright © Bible Money Matters – please visit biblemoneymatters.com for more great content.

Source: biblemoneymatters.com

Ergodicity: The Coolest Idea You’ve Never Heard Of

Surely that’s a typo…ergodicity!? No, it’s right! Ergodicity is a powerful concept in economic theory, investing, and personal finance.

Even if the name seems wild to you, the idea is simple—stick with me while I explain it. And then we’ll apply ergodicity to retirement planning and investing ideas.

By the end of this article, you’re going to be seeing ergodic systems and non-ergodic systems all over your life!

Ergodic, Non-Ergodic, and Russian Roulette

Ergodicity compares the time average of a system against the expected value of that system. Let’s explain those two terms: time average and expected value.

The time average asks, “If we did something a million, billion, trillion times…what would we expect the results to look like?” It needs to be a sufficiently long random sample.

The expected value asks, “By simply averaging probabilities, where would we expect the result to be?”

At first blush, you might think, “Those two are the same thing…right?” Right! Or, at least you’d be right if the system in question is ergodic.

I flip a coin a billion times, and I end up with a time average of 50/50 heads and tails. Alternatively, I could just use their known probabilities and surmise the expected value of 50/50.

In this case, the time average and the expected value are the same. Therefore, the system—coin flipping—is ergodic.

But let’s contrast coin flips against Russian Roulette. The expected value of Russian Roulette is optimistic. ~83% success and ~17% failure. But what happens if one “plays” a million times? Ahh! I think you’d agree that the time average of Russian Roulette is 100% failure.

When one fails in Russian Roulette, it is a devastating failure. To only look at the expected value of the system is too simple. The expected value is far different than the time average. Thus, Russian Roulette is non-ergodic.

Ergodicity –> Over and Over, Big & Small

Ergodicity rears its head in two circumstances. First, ergodicity matters when we do things over and over and over. And second, ergodicity matters when certain outcomes are meaningful while other outcomes are insignificant.

To further explain ergodicity, imagine this bet:

I have a 100-sided die.

I’ll roll the die and you pick a number. If it lands on any other number than your number, then you win $1000.

But if it lands on your number, then Mike Tyson punches you in the face and takes your money.

What a deal! You call 99 of your friends and you all come to take this bet. Sure enough, one of your friends loses. But the rest of you win a combined $99,000 and agree to pay for his medical bills (which may or may not be covered by the $99K…which is another crazy blog post waiting to happen).

The “ensemble average” is that you won! One individual loss doesn’t change that.

But would that result be the same if you had played 100 times by yourself? No! In that scenario, there’s a 63% chance that you’d eventually lose the roll, lose your money, and get punched in the face.

The expected value (you and all your friends) is different than the time average (you doing it 100x). This is not an ergodic process.

Revisiting Ergodicity & Coin Flips

We concluded earlier that coin flips are ergodic. The expected value of a single coin flip equals the time average results of many coin flips.

But let’s change the rules a bit. Imagine I promised you a 40% positive return on heads but a 30% loss on tails. You start with $100,000. Would you take this bet?

Again, let’s call up 100 of your friends. You each take the bet.

We can predict that half of you will end up with $140K (40% return) and half end up with $70K (a 30% loss). On average, you each have $105K. As a group, you’ll end up 5% higher than you started.

Sure enough, we can run this simulation a million times and that’s exactly what we see. Both the mean and median results of these simulation show a 5% profit. Taking the bet was smart.

But what if you took the bet 100 times? Same result?

Same for You?

To start, let’s look at two common snippets in the sequence of returns: one win followed by one loss, and one loss followed by one win.

Win then loss

Loss then win

(You mathematicians will see the commutative property at play. The order of this multiplication didn’t matter.)

This result completely shifts our mindset.

When two people share a win/loss, they end up with $140K+$70K = $210K, or $105K each. They gain $5K. But when one person sequentially suffers a win/loss, she ends up with $98K, or a $2K loss.

What happens if you take this bet 100 times in a row? On average, you are going to lose money. Let’s look at a 50/50 heads/tails split.

Group 50/50:

That’s a 5% profit.

You 50/50:

That’s a 64% loss

But you might “spike” a certain run where you get more heads than tails. What happens if the group gets 60 heads and 40 tails? What happens if you get 60 heads and 40 tails?

Group 60/40:

You 60/40:

That’s…a big profit. $37.3 million.

I simulated the “you get 100 flips” case 100,000 times. As expected, the median result is a 64% loss. But the best result of the 100K simulations turns your $100K bet into $950 million dollars (68 heads, 32 tails).

This bet is non-ergodic. The expected value (100 friends scenario) is completely different than the time average (you 100x bets scenario).

But it’s also interesting that the distribution in the expected value case is tight (low risk, low reward) while the distribution in the time average case is extremely wide (high risk, potentially high reward).

EV is a profit, while time average is a loss. EV is low variance, while time average is high variance.

In case you can’t tell, ergodicity economics and subsequent economic theory is a serious field. There are big conversations taking place and serious money to be made (or lost).

But let’s focus a little closer to home: ergodicity and retirement.

Ergodicity and Retirement

In retirement planning, probability of success is often used as a figure of merit. I’ve used it here on the blog.

For example, the famous Trinity Study and 4% Rule cite a “95% chance of success,” where success is equivalent to “not running out of money before you die.”

Die with money? Success! Run out of money? Failure! This is an expected value metric—for 95% of all people, the 4% rule would have worked.

But a few problems in this thinking immediately arise and ergodicity is to blame.

Problem 1: Equal and Opposite?

The 5% of retirement fail cases are painful. Very painful. I would argue that the pain of failure in retirement is greater than the joy of success.

This is reminiscent of loss aversion, or the “tendency to prefer avoiding losses to acquiring equivalent gains.” The keyword in loss aversion is “equivalent.” People would rather avoid a $100 parking ticket than win a $100 lotto ticket. Those are equivalent. And yes, loss aversion is irrational.

But is failing in retirement equivalent-and-opposite to succeeding in retirement? I’d argue no. Failing in retirement is akin to a Russian Roulette loss. Devastating! And succeeding in retirement is a Russian Roulette win. It’s “expected.”

Problem 2: Expected Value & Risk Sharing

Let’s assume we all follow the 4% rule. And true to historical form, let’s assume that 95% of us have successful retirements, but 5% of us “fail” and run out of money.

In the previous examples—100 friends and Mike Tyson, or 100 friends and the 40% win/30% loss coin flip—we assumed that the group would share the risk and share the reward.

This guaranteed that we’d see profits, but eliminated our chance to win $950 million. This guaranteed that even if we did get face-punched by Mike Tyson, our winning friends would still help us out.

But in retirement planning, people do not share risk. The 95% winners have no obligation to bail out the 5% losers. This changes the game. This isn’t traditional ergodicity.

Instead, we’re all in the game by ourselves (like the time average participant), but only have one shot to get it right (lest our retirement plan fail). From the ergodicity point of view, it’s a conundrum. It’s like playing Russian Roulette with a 20-chamber gun (5% failure = 1 chance in 20).

How do potential retirees react to this change in the rules?

For starters, many real retirement plans are couched with so much conservatism that the retiree ends up with more money when they die than when they retired. Put another way—their investment gains outpace their ability to spend.

And we know that money is time. Therefore, we can conclude that many people work for years more than they need to. They’re cursing at spreadsheets when they could be sipping mojitos. Pardon my 2020 vernacular, but this is an abundance of caution.

Is there an ergodic solution to this over-cautious planning?

Does Ergodicity Have a Solution?

What did we learn from Mike Tyson ergodicity example? What did we learn from our coin flipping?

If we share risk, we reduce our potential upside but also eliminate downside.

Imagine that 100 retirees pool a portion of their money together. They all know that 95% of them won’t need to dip into that pool. They also know that their money in the pool is probably going to have worse returns than it would outside of that pool.

However! These 100 retirees also realize that the pool will save 5 of them from failure. And thus, the pool guarantees that their retirement will be successful. Instead of 100% of them worrying about a 5% downside, now none of them need to be concerned.

The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.

William Bernstein

Some of you will know that this “pool” concept already exists. It’s called an annuity.

Annuities?! Jesse, You Son of a B…

Wait, wait, don’t shoot me! Besides, you only have one bullet in those 20 chambers (thank ergodicity)

Real quick: an annuity is a financial product where a customer pays a lump sum upfront in return for a series of payments over the rest of their life. Insurance companies often sell annuities.

Annuities—on average—are losing propositions. Just like my pool above, the average annuitant will suffer via opportunity costs. Their money—on average—is better invested elsewhere.

Insurance protects wealth. It doesn’t build wealth.

Ben Carlson

Never let someone convince you that an insurance product is going to build your wealth. Why? There are only two parties involved—you and the insurance company. If you’re building wealth, then the insurance company is…losing money? No way.

Insurance products are equivalent to average mutual funs with high fees. The high fees drain you like a vampire bat. They make money, and you lose via opportunity costs.

But one thing that annuities get right is that they hedge against downside risk in your retirement planning. The insurance company—i.e. my pool in the example above—collects a loss from most customers in order to provide a vital win to few customers.

This is just like real insurance. Most people pay more in insurance premiums—for their house, their car, their medical life—then they ever see in payouts. But for a vital few, insurance saves them from complete disaster.

Of course, detractors will rightly point out that annuities aren’t always guaranteed. If the insurance company goes belly-up, your state guarantor might only cover a portion of what you’re owed. Yes—that means your risk mitigation technique has risk itself. Riskception.

Annuities aren’t perfect. I don’t plan on buying one. But if the ergodicity of retirement planning has you fretting small chances of failure, annuities are one way to hedge that downside.

Is Robin Hood Ergodic?

Jesse is a boring index fund investor. It’s true.

But not Robin. She day-trades on Robin Hood, often experimenting with exotic trades with high leverage.

We can examine Jesse and Robin using ergodicity.

Jesse is playing the long game. In this simple hypothetical, his yearly returns are +30%, +10%, then -15%. The same three-year cycle keeps repeating. One might look at those three values and think, “Ah. About 8.3% per year, on average.”

Robin thinks daily. She wants money now. In this hypothetical, her daily returns are +60%, +15%, and -50%. The same three-day cycle keeps repeating. Again, one might look at those three values and think, “Ah. About 8.3% per day, on average.”

You might see a problem. We’ve used the arithmetic mean here. The arithmetic mean is useful in finding the expected value, in ergodicity terms. If Person A gains 60%, Person B gains 15%, and Person C loses 50%, their arithmetic average change is an 8% gain.

But sequencing investment returns—e.g. the ergodicity time average—requires that we use a log-average a.k.a. geometric mean. So let’s do that below:

[note: exp = the exponential function, ln = the natural log]

Thanks @pale_blue_dot for catching my original error

Uh oh. Robin’s log-average return is negative. And sure enough, if Robin executed this particular day-trading strategy, she would turn her $10,000 into $500 in less than four months. Meanwhile, Jesse is fine with his 6.7% annual return (trust me…he is).

In financial circles, the log-average of growth rates is known as the CAGR, or compound annual growth rate.

The simple lesson is one that new investors love to scream from the rooftops (and that’s a good thing). Namely, a given portfolio loss requires a larger equivalent gain to return back to even. The arithmetic mean does not capture this fact, while the log-average does.

The larger the loss, the more significant the returning gain needs to be. That’s another ergodicity concept.

E.g. a 1% loss is offset by a 1.01% gain—they’re essentially the same. But a 50% loss—like the one Robin suffers every third day—requires a 100% gain to offset it

Just like we said earlier in the post—big risks matter most, and those large downsides are when we’re likely to see non-ergodic systems.

Everyday Ergodicity

I would argue that a smooth, ergodic personal life is also optimal. Imagine ranking your days on a scale of 1-10. Would you rather have half 10’s and half 4s? Or all dependable 7’s? Or two-thirds 10’s and one-third 1’s?

To each their own. I’d prefer the 7’s. I don’t want half my days to be “bad,” even if the flip side of that coin is that half my days are “perfect.”

Don’t make ‘perfect’ the enemy of good enough.

-Someone at Jesse’ work

Maybe it’s boring. Maybe it’s the same muscle that pushes me towards indexing and away from Gamestop. To each their own. But I’ll take the 7’s.

Ergodicity in Grad School

In grad school, I studied fluid dynamics. See—this is me! Specifically, I worked on reaction-diffusion-advection problems in the University of Rochester Mixing Lab.

Fluid mixing is a terrific example of ergodicity. Take a few seconds to watch the video below. It’s an aesthetic way to view equilibrium statistic physics. Ergodicity applies to many different dynamical systems, stochastic processes, thermodynamic equilibrium problems, etc. It’s a mechanical engineer’s dream.

Ergodic mixing
Credit Eviatar Bach/Wikipedia

If we mix sufficiently, we see that small sub-sections of the fluid are representative of the fluid as a whole. The time average of many mixes is equal to our expected value of a uniform mix. This is ergodicity. This system is ergodic.

If this was butter and sugar—soon to be cookies—we could take any teaspoon of the mixture and draw reasonable assumptions about the mixture as a whole. Mmmmm!

But imagine if we accidentally introduce a dog hair into the mix (not that that’s ever happened in my kitchen). Suddenly, the mix is no longer ergodic.

Why? The expected value of any given cookie is that it will not contain the dog hair. But of course, eat enough of the cookies and you’ll eventually find the hair.

Or put another way, a single teaspoon of the mixture—which will contain either the entire dog hair or no dog hair at all—is no longer representative of the total mixture.

Good Article. Ergo…

Ergo it’s time for the summary.

Ergodicity is a fun concept. Or at least fun for nerds like me. It’s a terrific way to consider risk. It helps us in behavioral economics, personal finance, and real retirement planning.

What do you think? Any cool ergodic or non-ergodic systems in your life?

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog