Investing

How a Target-Date Fund Works

A “target-date” fund is a mutual fund consisting of typical assets such as stocks, bonds, cash or cash equivalents. The percentage mix of assets is reshuffled automatically by the fund to meet the objective of the investor by a certain future date, such as retirement.

The main advantages to a target-date fund are: low minimum investment which provides for greater diversification of outside investments, the fund is managed by a professional fund manager, and there is low investor maintenance or monitoring once the initial investment has been made.

As the preselected date approaches, a target-date fund will shift assets towards more conservative investments to avoid or attempt to mitigate any downturns in the economy. This re-allocation is done with no direction or input of the investor but by the mechanics of the fund itself.

When selecting a target-date fund, it is important to examine the initial composition of the fund assets. All funds typically have different percentage allocations based in equities or stocks, bonds, and cash. The difference between the funds rests in the make up of the allocations. One fund may be made up strictly of domestic equities and treasury bonds, while another fund may have a portion of the equities and bonds based internationally. There can be other differences among funds, such as what type of equities are in the asset mix, whether they are large, small or mid-cap stocks, or if the equities are from emerging markets, or the type of bonds and cash equivalents that make up a portion of the fund.

A disadvantage of a target-date fund is that they are not independent. The target-date fund is usually a compilation fund made from the offering company’s other funds. This compilation of other funds can lead to higher expense fees depending upon how a fund company computes their charges, the fee for managing the target-date fund may include all or part of the fees charged for the component funds. Hence the investor in the target-date fund is paying a fee for the cost of managing the component fund as well as the target-date fund.

Whether an investor should or should not invest in target-date funds depends upon how much the investor wants to be actively involved in the management of his or her retirement fund. If the investor wants to be an active participant continuously until retirement, then a target-date fund is not the best investment choice. Conversely, if an investor does not want to be involved in the direction or management then a target-date fund offers that convenience, however, the more passive investor will need to investigate, compare, and analyze the target-date fund before committing to invest in the fund in order to assure that the retirement goals will be met.

An investor must perform due diligence with any fund. With a target-date fund the diligence and investigation must be in depth and up front. With a more traditional self-directed fund the investor must continually monitor during the entire investment in the fund.

What is a Pension?

A pension plan is a specific type of retirement plan in which the employer will make a contribution to funds that have been put aside for the employee’s future benefit. This money is then invested on behalf of the employee permitting benefits to be received at retirement. As a general rule, a pension plan is tax exempt, is built up over numerous years, and consists of money that was contributed by both the employer and the employee.

retirement

How Do I Get a Pension Plan?

A pension plan comes with the job. All you have to do is show up to work and work. When you become an employee, you are enrolled in the pension plan with your employer automatically. However, some companies do require that you are employed for a full year before you are officially enrolled in the pension. And just because the pension is yours does not mean that you have any say so in the investment decisions.

When Can I Have Access to My Pension?

You cannot obtain early access to your pension plan. You will be unable to gain access to the funds from your pension until you have retired from the company. As a general rule, retirement age is 65; however, some companies may allow you to begin payments at 55 for early retirement. If you choose to begin receiving early retirement benefits from your pension, you won’t receive as large of a monthly payment as you would if you were at full retirement age.

Upon retirement, you will begin receiving monthly installments of the same amount each month until the funds have been depleted. The payout will generally depend on your length of time with the company as well as your salary.

What to Know About Pension Payouts

When you do begin receiving payments from your pension plan, you will be responsible for paying taxes on the funds received throughout the tax year. Because of this, a pension plan is considered as a form of a retirement plan.

Now, while most individuals opt for the monthly installments, those with a pension plan do have the option to choose a lump sum payment upon retirement. However, by choosing the lump sum option, you are given all the funds at once meaning that taxes must be paid on the entire amount at the end of the tax year. In addition, you could leave yourself with no money in the long-term by spending too much upfront. The wiser option is the monthly installments; however, the choice is ultimately yours to make.

Don’t Rely on a Pension Alone

When it comes to planning your retirement, you should never rely on one individual retirement plan to carry you through your retirement years. This is extremely true with pension plans since a pension is not going to be enough to carry you through.

Investing in Bonds

Have you ever thought of making some extra money with the money that you already have? If it could take no work at all and the interest rate on your money is insane. You really can earn money for simply investing and it will be easy and is a great option for anyone. The most common bought bond and the one you will most likely want to purchase are individual bonds.

Individual bonds are usually sold in $5,000 dollar parts and they are considered OTC bonds. OTC simply means over-the-counter. You don’t have to get anything special to buy these bonds except the initial cash investment. Bonds are not quoted at the $5,000 ratio, most are quoted as if they were sold in $100 increments. They are rated based upon this. According to the ratings if your bond was quoted at 98 it would be $98 per $100. In the $5,000 bond this means you payed $4,900 for your bond or 2% less than it is worth for selling. Now this is a good thing because you can essentially buy bonds for a cheap price and wait a while to sell them for a profit.

Bonds are not a short term money maker, they require quite a bit of long term investment and good choices. You always want to try and buy bonds in an area that you feel knowledgeable and comfortable. This greatly increases your chances of knowing what you are investing in and making some money off of your bond.

Next, there are some bonds that are called bond funds. This is essentially the same as a stock fund in that a professional manages a bond fund for you and gives advice on things such as reinvesting bond interest and where to place your next bond. Bond funds are initially a service provided to you so they do require a management fee. This fee can be either an initials start up fee or a periodical management fee. When investing this fee should come into account as it will lower the overall money you are making from your bonds.

In some cases however this professional advice is worth the amount out of bond profit. Options like the bond funds are great for beginning bond investors who are still assessing the market and aren’t very experienced with investing in bonds for a profit. Thirdly there are market bonds. These are the quick cash bonds that are high risk. They require an initial investment of anywhere from $1,000 to $10,000 on fast moving bonds. The investor can withdraw at any time and these usually offer the highest profit per time period.

Lastly there are Bond unit investment trusts. These are by far the most stable bonds as the investor knows exactly how much they will make because the portfolio of bond profit is a constant rate. These trusts are good for large investments or investors who want security with their bond.

How to Add Value to Your Home

Home improvements are always regarded as the ideal investment to make in a home. They work to greatly add value to your home price. The apparent belief is that home improvements not only make the house more of a pleasurable living experience to endure but they also increase the value of your property.

add value to your house

This is a fair definition of what home improvement should achieve but a lot of the home improvement carried out doesn’t actually get to reach these and other less obvious but just as important goals of home improvement.

So here are some basic characteristics of what would make for good home improvement efforts:

a) They should improve the overall value of the property, in particular regard to two potential audiences: banks and property buyers.

b) They should make the house more practical in terms of being used as a living space. Open space improvements, for example, help reduce on walls which take up space and make navigation cumbersome, even in large houses.

c) They should have an overall impact on reduction of the cost of utilities. Home improvement projects that improve water use, drainage systems, save on electricity bills by improving access to natural light or by providing efficient lighting systems as well as improving central heating systems certainly fall into this category. If by home improvement you are adding a paint type, for example, that enhances lighting in your house, even at that level, you are on the right track.

d) Home improvements that improve the safety of the property are certainly vital as well. These include improving heat and electrical insulation, fire systems as well as general security systems like alarms. If you install nets in areas with houses that can be accessed by insects or storm windows for bad weather-prone areas, you are getting value for your home improvement investment.

e) Home improvement is also probably best done by a professional. It is all very well to try and do things around the house once in a while but installing new garage doors or re-tiling the kitchen really should not be done by you. The less than professional work actually shows, even to an untrained eye.

f) Convenience also really helps home improvement worthwhile. If you upgrade some of the bedrooms, particularly the master bedroom an en-suite bedroom, the value for the property is bumped up considerably due to the added convenience.

Of course you may have some improvements that do not fall directly into this category, that though they may be pleasing to the eye or your own personal tastes, really do nothing for you intrinsically, or for the property in terms of adding value. These include things like interior decor and swimming pools. You may add them of course, but only as a bonus.

In the long run, it helps to get all the other aspects out of the way first.

How Much do I Need to Save for Retirement?

A 45 year old man working a typical 9-5 job might be thinking more intensely about saving for retirement than a 21 year old that just landed his first full time job with benefits. At the age of 21, he might start contributing 4% of his income to his 401k with a more aggressive market approach. His 45 year old neighbor is struggling tirelessly to contribute 10% of his pay with a much more conservative approach. They both share one common interest: saving for retirement.

Retirement

How much should an individual really save for retirement, and what is the ideal contribution to a company match plan? Many people have relied on and researched retirement planning calculators on the internet for years. The majority of these will calculate a percentage of income that one should be saving and deliver a figure that will support his/her lifestyle in 40 years. The calculator doesn’t take into consideration what everyone’s standard of living will amount to then. The sum of money that an individual should save for retirement doesn’t rely on income; it relies on money spent. A man could make $60,000 a year, but his current lifestyle requires an annual spending figure of $80,000. Another might bring home $80,000 a year, and his current lifestyle requires only $40,000. Should they both contribute the same amount to their 401k? Not likely.

Calculating a substantial amount of savings for retirement relies on evaluating an individual’s current spending and determining the standard of living he/she wishes to uphold at retirement. The retirement calculators that are based on income are not completely worthless. They provide a valuable resource for determining a figure of funds that will be saved after a number of years. Before utilizing these calculators, the individual must determine the ideal amount to save. This number will be derived from deciding how much to spend at retirement. Will they live lavishly, or will they live comfortably? Once a decision has been made on how much they want to spend in 40 years, then they can decide what to save. If the current budget does not allow for that level of spending, then they must discover other ways to save.

Here are a few frugal tips on saving money now for the future:

Stay healthy. One of the leading money guzzlers in retirement are health expenses. Prescription medications, knee replacements, high cholesterol, and cancer all come with a hefty bill. Regular physical activity and proactive health precautions may reduce these expenses.

Make friends with the neighbors. Retirees benefit from friends and family. Several people are willing to lend a helping hand to a senior citizen; a solid relationship will open this door.

Weatherproof the home. Energy costs are rising every year, and they might only increase in 20-40 years. Visit a local home improvement shop to find sealant for windows to prevent cold winter drafts. Ask about clearance items during the contrary weather season.

Being frugal will allow the individual to contribute much more to their company match plan for retirement.

What is a 529 College Savings Plan?

A 529 plan is named after the Internal Revenue Code Section 529, and it is a savings plan created to allow individuals and families to set aside funds to be used for college expenses. The plan is operated by the State or an educational institution. The funds can be spent at any approved college regardless of where the fund was established. For example, a student living in State A with an established fund in that state or a state of one’s choosing, can attend college in State B and use the funds to cover the cost.

529 Plans and How They Work

Every state in the United States has a minimum of one 529 College Savings Plan available. It is up to each state to administer the fund and decide the rules and regulations of that fund. The rules and regulations governing the 529 Plan will differ from state to state. It is important to understand the benefits and features of each plan, and if two or more plans are available, to compare the plans to find the one that best fits the student’s and the plan owner’s needs.

The State financing authority has a program manager, usually an investment company or the State Treasurer’s office, to manage the funds. When a plan is opened by an individual, the funds paid in will be invested, much like a retirement account, usually in general obligation bonds, mutual funds and other investment options. The resulting funds are used to pay the specified percentage of tuition and mandatory fees at participating public and private colleges and universities.

The plan owner names a beneficiary, usually a family member, to benefit from the funds in the form of payments to attend a participating college. It is possible for an individual to set up an account for themselves, if they anticipate returning to college for any reason.

What are the Tax Benefits?

Under Federal Law, tax benefits are provided to tax participants who satisfy the basic tax requirements. Contributions are not an allowed Federal tax deduction on the Federal tax return, but the investment result is a deferred tax and payments to the student’s college are federally tax free. The tax-free treatment was made part of the Pension Protection Act of 2006.

Each state may offer their own tax breaks. The fund owner should research the state tax benefits for the plan and if the benefits do not fit the investor needs, the investor can choose from any 529 being offered throughout the country, as long as the application requirements are met.

Who Controls the Funds?

The fund owner always has full command of the funds. The named beneficiary cannot manipulate the funds, except for a few exceptions. The fund owner decides when financial withdrawals are made and for whatever purpose. The majority of 529 plans allow the fund owner to withdraw the funds for any purpose and during any time frame, but unqualified withdrawals will be subject to income taxation and a 10% penalty.

Are the Funds Flexible?

The fund owner has the ability to switch to different 529 plan option every year, if the plan permits such action, or the 529 may be transferred in total to a different program if no other transfer has occurred within the prior twelve months. There is no federal limit to the number of times changes can be made to a 529 plan if the beneficiary is replaced with a different family member, who qualifies, at the same time.

How to Use an Interest Calculator

An Interest Calculator is one that is used by individuals or firms within the financial sector to determine the amount of interest that will be accrued by a person or firm or business to whom they are extending credit in any form.

The Interest Calculator exists in a number of forms. It can be a document with a formula that is embedded within a spreadsheet document like what Microsoft Excel offers; an Interest Calculator can also exist as a web-page, as in the case where financial firms create web-pages that have the interest calculator embedded within them. This assists prospective clients to use these pages to find out what interest they may incur if they decide to use the financial services belonging to that provider.

The Interest Calculator can also be the actual device used to process this interest figure, and in this case, we are talking about a calculator as a mechanical device.

An Interest Calculator can also exist as a written formula, one that is simply worked out mathematically, on paper.

Interest Calculators typically cover two forms of interest: simple interest and compound interest.

In the case of a mechanical device, it can be programmed to work out the different types of interest, that is, simple and compound interest.

In the case of embedded formula based documents like Microsoft Excel spreadsheets or even web-pages with embedded formula, variations can be made for calculating both simple and compound interest as well.

The same variation can occur when it is calculated as a mathematical formula: you can have a mathematical formula for simple interest and a variation of the same for compound interest.

Simple interest involves calculations involving three basic variables: the principal, the time period and the rate of interest for that specific block of time.

Compound interest rates take into account several factors. These include the principle, the rate of interest over a specific period of time, and the time period involved; however, it also includes an important variation: the rate at which the interest amount paid changes over the varying principal over time.

Some compound interest calculations incorporate an allowance for fluctuations like inflation rates as well as bank rates, insurance premiums and things that affect the returns the financial institution gets from the transaction. Compound interest rates can also take into account penalties for early payments or even late payments, as determined by calculations stipulated by the financial institution.

Interest calculators will thus obviously vary in the situations they are used. Simple interest calculations best serve one off payments and are rarely used for the complicated and more long term financial arrangements. Simple interest rates cover calculations or transactions that are usually more informal in nature.

Compound interest rate calculations are more typical of formal business arrangements that are found in insurance firms, banks, credit card companies, mutual fund managers as well as saving scheme firms.

What is a Target Date Fund?

There are a ton of investment vehicles on the market, most mutual fund companies now offer what is called a “Target Dated Fund”. Investors looking for a fund where they can invest for retirement and don’t have to worry about asset allocation will find target dated funds a perfect fit.
Target Date Funds
Target dated funds are mutual funds that are actively managed with a long term goal in mind. For example: The investor has a retirement date in mind, lets say 20 years from now. All they have to do is find a mutual fund with a target date that fits their criteria, make the investment into the fund and that’s it.

When Should You Use These Types Of Funds?

Investing in these types of mutual funds are for people who want to invest and forget. Lets use the example above: An investor has a retirement date which is 20 years from now. The risk profile for a person this far from retirement is still in the high risk category. This means the mutual fund manger will allocate the assets of this fund in investments that focus on higher capital returns, not capital preservation.

So, the fund will be invested more in stocks and less in bonds. The goal, since there is a long time frame for the investment, is to be aggressive, accumulate more capital. Then, as the fund matures the fund manager will make shifts in the asset allocation moving toward a more conservative mix of stocks and bonds.

Ultimately, as the fund closes in on the target date the asset allocation will be mostly in investments focused on capital preservation. So, for the investor who has a long term time frame for retirement and wants a passive investment, this can be the perfect investment vehicle.

Pros

Mutual funds are always diversified, this investment is no different. Target dated funds are generally comprised of a mixture of other funds. So, this means you have diversification within diversification, this lowers the investors downside risk.

The other advantage, which was already touched on, is an investment where the investor is pretty much hands off. The mutual fund manager is navigating the asset allocation in these funds. The investor is only choosing the target date, that’s all.

Cons

The downside of these target dated funds are fees. Since these funds are actively managed the fees can be much higher compared to other mutual funds. The other term that designates fees in a mutual fund is call “expense ratio”.

The last thing that can be a negative factor with these types of funds is the investments themselves. As mentioned, the fund manger chooses the blend of investments in the fund. Some target dated funds only invest within their own fund family. For example: A fidelity targeted fund will only invest in other fidelity mutual funds (this is only an example, fidelity may not do this,) in this case the investor can lose some of the safety factors that come with diversifying among a variety of mutual fund companies.

Overall, target dated funds can be the perfect investment vehicle for someone with a long term investment timeline who doesn’t want to worry about market fluctuations.