Three Ways
To Make Your Retirement
Savings Sizzle
Three Ways
To Make Your Retirement
Savings Sizzle
by Richard Band, Editor
Richard Band's Profitable Investing
Are
you getting the most out of your retirement accountIRA, self-employed Keogh
plan or 401(k)? These are some of the safest and best tax shelters left
in America today. Yet many of us use them haphazardly, if at all. With the
new year still young, here are three suggestions on how to make your retirement
account(s) work harder for you in 1999, so that you can take it easy when
you decide to hang up your spikes:
(1) Hand In Your Contribution Now
Simple.
Obvious. However, the procrastinator in us says, "Wait till the end
of the year. Even April 15th a year from now is fine for IRAs and Keoghs."
That's true if all you care about is the tax deduction. But we're in this
for growth, right?
Let
me show you what a difference it make over the long haul if you contribute
to your retirement fund early in the year. Rico and Rufus are both 21 years
old. Each makes the maximum $2,000 contribution to his IRA every year until
age 65. But Rico funnels his money in at the beginning of the year, while
Rufus waits until the end. Assuming a 10% compound annual return for both
accounts, Rico's IRA will be worth $143,781 more than Rufus' by age 65.
Timing is that important!
(2) Eliminate Hidden (Or Not So Hidden) Costs And Fees
It
still amazes me how financial institutionsfrom banks and brokers to mutual
fundsthink they can get away with highway robbery when it comes to retirement
accounts. Many banks, for example, take their customers for a ride by crediting
rock-bottom interest rates on IRA deposits. Sure, thee's "no fee"
for opening or maintaining an account. If the bank pays you only 2% though,
you're being stiffed.
It
seldom makes sense to keep retirement money in a bank. If you can't stand
any fluctuation of principal, go with a money market fund that invests in
government paper, such as Scudder U.S. Treasury Money Fund (800/225-2470).
Current yield: 4.2%. Scudder's minimum to open an IRA or Keogh is only 1,000.
No maintenance fee for IRAs.
For
most investors, the smartest tool for managing your retirement money and
cutting costs is an account with a discount broker. Personally, I've shut
down nearly all the retirement accounts I used to have with mutual fund
families and consolidated them at Waterhouse. Through my brokerage account,
I can buy or sell hundreds of funds with no sales load or transaction fee.
(No set-up or annual maintenance charges, either.) Plus, I can trade stocks
over the Internet for a flat fee of $12.
Other
deep discounters are nipping at Waterhouse's heels. Brown & Co.
(800-822-2829), now a subsidiary of Chase Manhattan, charges only $4 per
trade for qualified customersonline or over the phone. (You need at least
$15,000 in the account and five years' trading experience for Brown to take
you as a customer.) Brown doesn't offer mutual funds, but the company's
rock-bottom commissions should give pause to anyone paying $50 or $100 for
a stock trade.
I'm
not telling you to ditch your full-service broker, or never to buy another
"load" mutual fund. If you're going to work with a commissioned
salesperson, though, make sure you're getting advice that helps younot
just the broker.
(3) Put Your Retirement Money Into Taxwise Investments
I've
saved what may be the most crucial point for last. Some investments grow
better inside a tax-favored retirement account than outside. Generally speaking,
income investments benefit the most from tax shelter, because a large chunk
of their return would otherwise be taxed at high "ordinary" rates.
Look for opportunities to stash bonds, utility stocks and REITs in your
personal pension fund.
On
the other hand, a retirement account can also be a good place to trade stocks
and mutual funds for short-term gains. (Gains earned in a year or less are
taxed at the same rate as dividends.) I'm not a big fan of rapid-fire trading.
However, I recognize that today's heightened market volatility does create
openings for the nimble. For example, when OfficeMaxone of our January
stock selectionsran up past our $10.50 buy price to more than $12 recently,
you could have scalped a nifty short-term profit. A couple of days later,
you had a chance to go back into OMX at $10.50 (or less).
Anytime
a stock or fund climbs 15% or more in the space of a week or two, you'll
find traders swooping in to take short-term profits. Play the game, if you
likebut do it inside your retirement account to keep your tax bill down.
Editor's Note: Richard Band is Editor of Profitable Investing,
7811 Montrose Rd., Potomac, MD 20859, 1 year, 12 issues, $295. Visit the
Web site at www.rband.com
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