Author Archives: Chris Costello

The Market Zigs…and it Zags

Most of blooom’s clients will admit that they don’t often look at the value of their 401k. But if you have been watching the stock market lately you would have seen that it has dropped a fair amount just in the past few weeks – which in turn will lead your 401k to zig and zag in value.

This is nothing new – it’s just been a while since you’ve seen this happen.

Over the past 3 years, basically since August of 2011 when the US Debt was down-graded, we haven’t seen much of a pullback (market decline). In fact, we have now gone 3+ years without even so much as a 10% pullback in the market. That is very unusual. Not nearly as unusual as our hometown team the Kansas City Royals making the playoffs for the first time in 29 years, but unusual nonetheless! Market pullbacks are not only normal….they are NECESSARY. If it was always a straight ride upward, then everyone would be a stock market investor and there would only be a fraction of the return premium afforded to investors.

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120% Rate of Return

If your employer offers a pre-tax retirement savings plan like a 401k, 403b, 457, or similar and they offer a matching contribution you may be the lucky benefactor of a 120% rate of return on your contributions.

Let me explain. Lets assume the following:

$50,000 annual salary
Your employer matches 100% of the first 3% of your contribution. So if you contribute 3% of your salary to your 401k, your employer will also contribute 3% of your salary to your 401k.

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The 10% Savings Trick

We hear it quite frequently…”I just can’t afford to put aside 10% of my paycheck towards retirement.” Or sometimes…”We are just barely getting by on the income we have right now.” If you find yourself in this position then I highly encourage you to take a look into Dave Ramsey’s tools and specifically his Core Financial Wellness Program.

But if this article reaches you before you take your first full-time job and before you have car payments, credit card debt, etc. I implore you to implement the 10% Savings Trick. It is incredibly simple in its concept but massively important in its execution. It works like this…The moment you hear what the annual salary offer is (spoken or written) from your first employer – trick your brain into hearing (or seeing) a figure that is 10% less than the actual amount. If you think you hear $60,000 – immediately convert that to $54,000 in your head and base your decision on that adjusted figure of $54,000. Should you decide to accept the offer – in your mind, you will be accepting an offer of $54,000.

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100 Million Problems

According to the 2010 US Census there are now approximately 170 million people in this country between the ages of 25 and 66. By some estimates, only 51 million of these people are participating in an employer sponsored retirement plan (401k, 403b, or similar) and making 401k contributions.

So what the heck are the other 120 million working adults in this country doing to save for retirement!?!

Is it really true that roughly 7 out of 10 of us are not saving for our eventual retirement? Say it ain’t so! I realize that a small segment of these folks will receive a monthly pension upon retirement (teachers, firefighters, police officers, utility workers, etc). My guess is if you had a room full of your friends and you asked them to raise their hand if they are eligible for a monthly pension check upon their retirement, fewer than 10% would raise their hand.

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I Love Dollar Cost Averaging!

Actually I love anything that gives my investment portfolio a legitimate edge. There is beauty in the simple and dollar cost averaging (DCA), or systematically investing into your 401k for example, is elegantly simple.

Actually, if you are contributing to a 401k/403b or similar there is a good chance you are already enjoying the investment benefits of DCA. Let’s examine why this is benefiting you.

At some point in the past, you (hopefully) filled out a form electing to contribute a certain amount of your hard earned paycheck directly into your employer’s retirement account. (For the sake of this article, let’s assume you are contributing to a 401k.) Generally, you elect to contribute a flat dollar amount or a specific percentage of your paycheck to your 401k. Let’s assume that you are paid every two weeks, 26 times per year. Let’s also assume that you elected to contribute $200 per paycheck to your 401k ($5,200 per year). To keep things simple we will also assume that you opted to put your $200 contributions into a S&P 500 Index Mutual Fund, a broad representation of large US companies.

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