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How to throw away a fortune
Smart moves to neglect and stupid ones to make
The Wall Street Journal | By Jonathan Clements
Today's topic: How to throw away a fortune—in seven easy steps. Ready to waste money? Here are some surefire strategies:
1. Delay saving.
Suppose you work for 40 years, save $250 a month, your investments earn a 5% pretax annual return and you lose 25% a year to income taxes.
If you start saving as soon as you enter the workforce, you will have roughly $279,000 at retirement. But if you delay by just 10 years, you'll amass $167,000, or 40% less.
2. Shun retirement accounts.
OK, maybe it's worth saving for 40 years. But is it really worth locking up money in retirement accounts, with a 10% tax penalty to discourage withdrawals before age 59½?
Let's use the assumptions above. But suppose you skip the taxable account and instead fund a Roth individual retirement account, which can deliver tax-free growth. After 40 years, you'd have $383,000, with no taxes owed.
What if, instead, you had opted for a tax-deductible IRA? You might lose 25% to taxes when you cash out your IRA in retirement. But if you'd invested the tax savings from the initial tax deduction, you could sock away $333 every month, rather than $250. Result: After taxes, the tax-deductible IRA should give you $383,000, just like the Roth.
3. Forfeit the employer match.
Roughly 20% of eligible employees don't salt away money in 401(k) plans, including plans with matching employer contributions, according to a survey by Chicago's Plan Sponsor Council of America.
Are you among those who don't contribute—or don't contribute enough to get the full match? You could be missing out on a heap of dough.
Let's assume your employer matches 401(k) contributions at a rate of 50 cents for every $1 you contribute. If you saved $333 a month for 40 years and collected the match, you'd have $575,000 at retirement, even after paying all taxes.
4. Buy active mutual funds.
Read more from YahooFinance >>
How to throw away a fortune
Smart moves to neglect and stupid ones to make
The Wall Street Journal | By Jonathan Clements
Today's topic: How to throw away a fortune—in seven easy steps. Ready to waste money? Here are some surefire strategies:
1. Delay saving.
Suppose you work for 40 years, save $250 a month, your investments earn a 5% pretax annual return and you lose 25% a year to income taxes.
If you start saving as soon as you enter the workforce, you will have roughly $279,000 at retirement. But if you delay by just 10 years, you'll amass $167,000, or 40% less.
2. Shun retirement accounts.
OK, maybe it's worth saving for 40 years. But is it really worth locking up money in retirement accounts, with a 10% tax penalty to discourage withdrawals before age 59½?
Let's use the assumptions above. But suppose you skip the taxable account and instead fund a Roth individual retirement account, which can deliver tax-free growth. After 40 years, you'd have $383,000, with no taxes owed.
What if, instead, you had opted for a tax-deductible IRA? You might lose 25% to taxes when you cash out your IRA in retirement. But if you'd invested the tax savings from the initial tax deduction, you could sock away $333 every month, rather than $250. Result: After taxes, the tax-deductible IRA should give you $383,000, just like the Roth.
3. Forfeit the employer match.
Roughly 20% of eligible employees don't salt away money in 401(k) plans, including plans with matching employer contributions, according to a survey by Chicago's Plan Sponsor Council of America.
Are you among those who don't contribute—or don't contribute enough to get the full match? You could be missing out on a heap of dough.
Let's assume your employer matches 401(k) contributions at a rate of 50 cents for every $1 you contribute. If you saved $333 a month for 40 years and collected the match, you'd have $575,000 at retirement, even after paying all taxes.
4. Buy active mutual funds.
Read more from YahooFinance >>
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