Thinking About Investing? This One Single Investment Can Give You The Most Return On Your Investment

"Average people would rather be entertained than educated. Rich people would rather be educated than entertained"

- Steve Siebold

Since last year I've been taking investments courses to learn more about how to trade, invest, and retire. The instructor did something clever during one of the retirement courses.  He asked the class (which mainly consisted of middle class folks between the ages of 35-50) if anyone had a retirement plan. About half of the class raised their hand. He then asked questions to every single person who raised their hand about their retirement plan: what type of retirement plan is it? which plan do you have? how much money has it made you? what has been your ROI? As he asked these questions, most people responded with "I don't know." Out of the 20 people he asked, only one person was able to answer all of the instructor's questions.

The instructor then stepped back thought for a second and then gave us the following scenario. 

"Let's say," he said, "I have this plan that will make you money and I want you to be part of my master plan. Who's in?"

The class looked a little confused. One person raised her hand and asked, "Well, what are you going to do with our money?"

The instructor quickly answered, "I don't know."

Another person raised his hand and questioned the instructor, "Well, how much money are we going to make?"

"Don't know," the instructor immediately responded.

After a few of my classmates asked a few more questions and received the same response from the instructor of "I don't know," one person raised her hand and exclaimed, "then, why should we give you our money?"

The instructor then smiled and responded with another question, "Well, why are you giving part of your paycheck to someone when you don't even know where that money is going, how much you're making or who you're investing with?"

We all fall in the same trap. We don't really want to do our homework so we'd rather "trust" and pay someone else to do the homework for us. Some of  us might just think that all this "investment talk" is complicated so we don't want to deal with that. Some of us might just underestimate ourselves and feel as though we will never get to retire, or that we're just not smart enough to make important life decisions. Instead, we get lazy and never do anything about it. Others will just follow along with the herd.

Time to time I have people approach me or call me and ask me what I think they should do with their money. In other words, they want to know where they should invest. Should they put their money in real estate or in the stock market? They heard a buzz about gold or the Euro, should they put their money there? I will then give my so-called expert advice and try to lead them in the right direction. However, there is always one type of investment that people fail to understand that can give them the most return on their investment. If you're thinking about investing in someone, invest on this:

Yourself.

I don't mean, go to college (unless that's what you want to do) or buy a bigger house. I'm recommending that you either invest some money or time in yourself to get educated about money. Retirement, investments, your hard-earned money are very important life decisions and the best thing that I feel you can do is start there. Buy a few books (but read them), or do what I did and get some audio books and listen to them on your commute to and from work. Your skills will improve and you'll be a lot more valuable. Learn from people that do the work you want to do or are interested in doing. Look at youtube videos to get ideas or subscribe to a few blogs or articles to enhance your knowledge. This will help you really understand what you're getting yourself into if you're planning on buying investment property, or if you're planning on putting your money on a start-up company or if you want to buy stocks for a certain company. 

Some people might have the money to invest in themselves but might just not have the time. I have also 'been there, done that.' However, if this is something you really want to do or deem important, then I know you'll find a way. Get educated. Invest in yourself. 

Any thoughts? 

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401K? IRA? What Does It All Mean?

"Retirement is wonderful if you have two essentials: much to live on and much to live for."
- Unknown

At some point in your career (if it hasn't happened already), you'll be glad to hear that your company offers a 401k plan. Afterwards, you jump on that opportunity because you're supposed to have a 401k and because you're supposed to start putting money away for retirement. Then you hear things such as, "you have to start young so that you can retire with a lot of money." Yet, no one will tell you how much money you really need to retire or how it all works (Read How Much Money Do You Really Need to Retire?).

I sometimes feel as though the goal of an investment firm who is trying to have you sign up for their 401k plan is to try to confuse you even more. Think about it. If you're super confused about retirement and what it all means but you know that you 'need' a retirement plan, you'll most likely get frustrated and conclude that you don't want to deal with any of this and you just want someone to do this for you. So, you sign your life away because the sales person, or financial expert, told you that they'll take care of your retirement fund and that you need not to worry. Some of you might already have a retirement plan and some have not even thought about this yet. No matter where you are in your life, it's always good just to get a little bit more information. Therefore, today I wanted to explain very simply what the difference is between a 401k and an IRA.

Both a 401k and an IRA are intended to help you save money for retirement. Both a 401k and an IRA have legal terms, tax advantages (and some disadvantages) and a lot of jargon that confuses people. Other similarities include when you can take out funds and the availability of the funds for medical expenses, a first home purchase and education expenses. In other words, depending on your plan, you can use some of the funds in your account for certain expenses only. There are quite a few differences though:

• A 401k is typically set up by an employer (or a self-proprietor); an IRA is set up by an individual, not by the company
• In a 401k the employer typically sets the terms of the plan and can select to contribute to the employees plan; for an IRA there are no matching contributions available and the terms are selected by the individual
• A 401k plan allows you to take out loans from your account if needbe; an IRA doesn't have this feature
• A 401k makes it difficult to rollover the amount to another plan (which they might typically only allow you a rollover to another 401k plan); for an IRA, it's much easier to rollover the funds to a different account
• A 401k doesn't typically include beneficiaries; an IRA does allow beneficiaries to be included 

Tomorrow, I will go over the differences between the different types of 401ks and IRAs. The question most people ask me is: which one should I choose? My answer: keep doing research until you find the right plan. Some people are so selective when choosing a TV, a house or a car but when it comes to a retirement fund they're quick to sign a piece of paper without knowing what they're signing. Here are some resources to get you started:

IRA vs. 401k - Which Is Better For You? - an article from iravs401kcentral.com, a blog that strives to educate ordinary folks on retirement plans.

Retirement Basics: IRA or 401(k)? - a Q&A-style blog from U.S. News

Comparisons of 401(k) and IRA accounts - A wikipedia table that makes it easier to make a side-by-side comparison of the different types of plans

What are the differences between a 401(k) and an IRA? - an article from investopedia.com, a website for those interested in investing

Happy research!

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What In The World Is A 401k?

"When you retire you switch bosses from the one who hired you to the one who married you."
- Gene Perret

When I first began my career, I was ashamed to admit that I really didn't know what a 401k was. Although I did my undergrad in business, we never discussed retirement, finances, or personal budgeting. No professor ever did a lesson on 401ks, IRAs or investments. However, everyone was telling me that I needed to save for retirement and that I needed start my 401k. So what did I do? I began to do research and eventually took courses to understand what a 401k really is and what was the history behind it.

Later in life, I realized that I wasn't the only one that didn't know what in the world was a 401k. Many people don't really know what a 401k is and how it works, and many of them think that a 401k is the only option when it comes to retirement. My goal today is to give you a quick history of the 401k and detail more or less what it does. In the next few blogs I'll explain the different types of 401ks that exists so that you can make better decisions when choosing a plan and hopefully manage your 401k much better. Let's get started.

The Era of Pensions

The 401k actually has a short history. Before they existed, some companies offered a pension plan to their employees. The Center for Economic Policy Analysis at the New School for Social Research believes that the old-traditional pensions would do much better now than the traditional 401k we have now. However, most workers in the private sector did not have a pension plan and according to the Center of Research on Retirement Income at the Employee Benefit Research Institute, most employees working in the private sector weren't working long enough with a single employer to qualify for a full pension. Now there are few employers that offer pension plans and the proportion of private workers participating in traditional pension plans is less than 20%, according to the Department of Labor. 

The Birth of the 401k

In 1978, after much debate between employers and the IRS, the Revenue Act of 1978 included a new section code which allowed employees to not be taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. This idea was introduced by Ted Benna, a benefits consultant for Johnson and Johnson and over the next few years the law went through different variations. Finally, the regulations were issued in November of 1981 and shortly after, companies like Johnson and Johnson were adapting 401k plans for their employees. This was called the Internal revenue Code (IRS) Sec. 401 (k). Many employers adopted the 401k plans simply because they were inexpensive.

The Evolution of the 401k

Originally, the traditional 401k plan only had two investing options: a conservative fund similar to a money market fund and a stock fund. That was it.  However, over the years the 401k plans seemed to have gotten more complicated. Many traditional 401k plans now offer more than 15 investment options 'depending on your style'. This becomes very confusing for an average employee who has no investment knowledge. In fact, it's confusing even for those that do have investment knowledge.

So, how does a 401k work and what types of 401k plans exist? That will be the topics of my following blogs. If you're interested in learning more about the history of 401k plans, or you just want to do a little bit more research yourself, please feel free to use the following resources:

The Surprising Origins of Your 401(k) - an article from Nasdaq.com

401(k) - Wikipedia

History of 401(k) Plans - an article from the Employee Benefit Research Institute (EBRI)

401k Fallout - a 60 Minutes segment

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How Much Money Do You Really Need To Retire?

"Don't simply retire from something; have something to retire to."
- Harry Emerson Fosdick

The picture are all the same. You and your spouse are older with white hair and a big smile. You are at a beach wearing white walking around with no problems. I'm not quite sure why you would be wearing white. Do people all of a sudden decide to wear white after they retire? Maybe that will be my next research project.

The pictures look really nice. All institutions that sell you 401ks or IRAs have a picture of this sort in the brochure or folder they give you. The crazy thing is that when we think of retirement, that's pretty much the first picture that comes to mind. However, there's a lot to consider when thinking about retirement. Most people automatically get a 401k from their job because they offer it, but there is no set plan or idea about what retirement really means. The most important element about retirement is knowing how much money you actually need to retire comfortably. 

According to US News Week, the federal government estimates that 12% of women and 7% of men over the age of 65 live in poverty. Why would this be? How could this happen? The research didn't necessarily say why, but according to the Transamerica Center for Retirement Studies, only 1 in 10 people have calculated how much money they need in the bank to comfortably retire. I want us to be that 10% so let's start making some calculations. 

Financial advisers recommend that after retirement you should be able to replace 80% of your income. This means during the year that you retire, if you make $65,000 annually, let's say when you're 65, then you will need  $52,000 a year for the rest of your years. This means that you will need some money coming from somewhere that equates to $52,000 a year or $4,333 a month. If you want enough money to last you for 20 years of retirement, then multiply that by 20 and you'll need roughly about $1 million dollars. I haven't even accounted for inflation which is about 3% a year. For those that might get a bit confused with my math, I found a great retirement calculator from CNN money. 

My goal is not to scare you at all. My goal is to have you face reality if you haven't yet made these calculations. My goal is also not to make you believe that it is impossible to retire with $1MM. The way I think about it is simple. I am currently 30 and have 35 years to figure out how to generate enough consistent cash flow to last me through retirement. It all starts now. We need to plan the seed now rather than later. We need to have our money working for us now if we really want to enjoy our later years without any financial worries. Whatever dreams ans aspirations you might have for retirement, I believe you can achieve them. The question is: do you believe you can achieve them?

Although I am definitely thinking and researching about retirement plans and options (which I will discuss in my next blogs), I would personally want to be on the beach with my loved one (with our black hair) living comfortably now. That's why I stress the importance of money management, cash flow, investments, budgeting and discipline. I personally love to work. The question I ask myself is more: what would I like to do for work when I'm 65? My goal is not to have to work for a paycheck, and that can start now. 

This way, my love and I can wear our white clothes now instead of later. Any thoughts? Share. 

Don't forget to share this blog so you can encourage others: family, co-workers, friends. Give them something to get motivated! You never know what they might be going through. A few words of encouragement can go a long way.