The longer I maintain www.moneyhelpforchristians.com, the less money it seems like I’m going to have.

From the very first days of this blog, I was open about the fact that I wanted to learn  what the Bible had to say about money (as opposed to assuming that I already knew).

I used to have a simple and effective retirement strategy … and then I had to go reading the Bible.  The result?  I started rethinking retirement.

Question: What do you think is most people’s greatest fear about retirement savings?

Answer: That they won’t have enough.

Question: What does the New Testament propose should be the greatest concern about retirement savings?

Answer: That you’ll have too much.

Strange, eh?

There’s a Bible story (Luke 12:15-21) about a guy who kept building bigger barns to stockpile his savings. Obviously, a huge part of this man’s failing is that he did so without being rich towards God. Is the point of this passage that we should build bigger and bigger barns while being rich towards God, or is the point that if we are rich towards God we won’t build bigger and bigger barns?

The moral of the story of the Rich Fool is don’t be an idiot. Don’t do dumb things with money. It’s dumb to build up savings here on earth when you could be investing in treasure in heaven. Why put more in the insecure, temporary investment of this earth when you could use it for an eternal investment that will not spoil, perish, or fade?

It’s not a sin. It’s just plain foolish.

I’ve never had any financial advisor, counselor, or guru tell me to carefully analyze how much I’m saving to be sure it’s not too much.

Is there such a thing as saving too much for retirement?

In our society of bigger is better, why would anyone be worried that they might be saving too much?

By the way, I do realize how dangerous this information can be in the hands of the wrong person. I do hereby release myself of any responsibility of a foolish person who foolishly applies this information.

How We Managed to Reduce our Nest Egg

Step #1 – Say Goodbye to Saving 15% for retirement.

My wife and I did this a year or two ago.

I used Dave Ramsey’s very generous retirement formula and figured out that we were on track to have something in excess of a few million dollars in retirement.

What in the world am I ever going to do with that kind of money?

It was insane! It was too much.

Thus, my wife and I decided our fist baby step was going to be reducing our retirement to 10%. Hey, that’s not a huge leap of faith, but we felt like it was a needed change in the right direction.

What if a Big Mac costs $125 when I retire?

I trust that if one sacrifices savings for giving that God will provide some means for them. You see, I’m not talking about reducing retirement savings so you can take an extra cruise in 2012. I’m not suggesting that you stop saving for retirement so you can install a 397,892 inch Plasma TV. That’s foolish.

I’m suggesting some Christians may be in a place in life where they could/should consider reducing the amount they contribute to retirement so they have more to use for giving to the church, the poor, and missions.

Step #2 Say Goodbye to Saving 10% for Retirement

Here’s my biggest gripe with the percentage idea of saving for retirement.

It assumes you actually plan to have a lifestyle in line with your income.

Let’s imagine for a moment that you were to get a raise. If you save a percentage of your income, that means you now save even more for retirement.

Does getting a raise mean you need more money for retirement?

Only if you adjust your lifestyle upward in kind with your income. However, I think we have a higher call: to use our income (especially as it increases) to be a blessing to others – not just ourselves.

The point?

Don’t blindly trust advice when someone says you should be saving X, Y, or Z for retirement. Prayerfully consider the decision.

Be open to the possibility that God might not want you to save as much as you can.

In our case, we got an early start (I was 21 and my wife 20) when we started saving for retirement. While I know most people are going to have the problem of not having enough for retirement, some will have the issue of having too much.

I’ll follow up in about 40 years when I retire and let you know if I regret this post or not.

Do you think this message is valuable for Christians to consider, or do you think it’s dangerous advice that will do more damage than good?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> What Your Financial Advisor Won’t Tell You About How to Successfully Reduce Your Nest Egg

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I haven’t looked at any stats recently, but last I checked, target funds are growing in popularity.

The reason is because they make people feel safer.  They present a simple, little-knowledge-required way to do your investing.

Thus, they target folks who know little about investing, but want to be saving for retirement.  Furthermore, they are ideal for people who don’t want to have anything (hands on) to do with investing as they consider it a waste of time.

I’m all for detaching yourself from investments in some ways and spending your time elsewhere.  However, you need to be sure that you’re making a wise choice before you detach yourself from what is happening with your investments.

I’m a hands on guy.  Typically, I don’t want to pay others to do what I can do for myself.  That’s why I’d rather change my own oil instead of paying a mechanic to do it.  That’s why I’d rather book my own flights than pay a travel agent to do it.  It’s part of my personal desire to control whatever I can.

My wife, on the other hand (in terms of finances), is an outsource and minimize sort of person.  She thinks, why spend hours doing what someone else could do (and even enjoy)?

As such, she’s an ideal candidate for a single target retirement fund or an investment organization like Betterment.

Still, you must remember that there is a trade off when you don’t fully understand what is happening with your investments.  Even if you want to get a single target retirement fund, I think you need a minimal knowledge of investing.  I suggest you review the basics on how to start investing.

What is a Single Target Retirement Fund?

Target retirement funds are easy to identify because they typically have a date in the name.

For example, Vanguard Target Retirement 2015 fund is suggested for people who plan to retire in 2015.  The Fidelity Freedom 2015 would be the Fidelity version of a 2015 targeted retirement fund.

The funds are already allocated according to the risk matrix typical for people retiring in those years.  The funds are automatically rebalanced, so as you get older, the managers add a larger portion of bonds and other conservative investments.

The idea is that you just keep dumping all your money in the fund, and they’ll do the work to be sure it is positioned well for your 2015 retirement.

But the question remains, are single target retirement funds a good idea?

Advantage of a Single Target Retirement Fund

1. Simplicity. Here’s my check. See you next month.
2. Diversification. Within that one target fund, it is possible to own thousands of stocks.
3. Ideal for those with less money. Your $2,500 can be more quickly diversified than trying to individually buy the different holdings.
4. It’s not a bad thing to do. There are a lot dumber things people could do with their money.  While it might not give you the best return for your money, it might be worth the trade off of spending your time doing something else.

Disadvantage of a Single Target Retirement Fund

1. You outsource asset allocation. Rather than making your own decisions about your asset allocation, you allow the company do to that.  We’ve already established that asset allocation is your most important investing decision.  This is true only if you buy based on the target date (i.e. 2020).  However, if you buy based on the asset allocation (you don’t look at dates but the percentage of holdings), you can avoid this risk.
2. There is no uniform method of allocation. Just because something says 2020 doesn’t mean that it’s the same as every other company that has a 2020 in the name.

As an example, Joseph Slife reports (this article is only available to members):

A case in point: some funds with a 2010 target date had about 20% of their holdings in stocks last year; others had more than 50% in stocks. This explains why last year’s performance among 2010 funds ranged from very modest losses of -3.5% all the way to massive losses of -41.3%, according to data [PDF] from Ibbotson Associates, an industry leader in compiling market statistics.

In other words, you cannot simply outsource by matching your retirement year to the name of a targeted retirement fund.

Conclusion:

Personally, I don’t use single target retirement funds.  However, it is possible that they might be right for you.  An alternative would be comparing the cost of Betterment to the fees you’ll pay on a targeted retirement fund.  Both Betterment and single target retirement funds target the same audience.  Betterment relies only on purchasing index funds.

For more help on the topic of single target retirement funds, you can see:

1. Christian PF Forum: Target Retirement Funds
2. Sound Mind Investing (Members Only): Missing the Mark: Many “Target” Funds Fail to Protect Those Nearing Retirement
3. Get Rich Slowly: How to create your own target date mutual fund

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Should You Only Own a Single Target Retirement Fund?

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Recently, I’ve had several email questions about saving in a Roth IRA vs. a Traditional IRA.

The questions came from people who had most of their retirement savings in a Traditional IRA and were wondering if they should (1) start saving in a Roth, or (2) roll over the money in a Traditional IRA.

In my replies to those questions, I’ve said that if most of your retirement saving is in a one then you could just start saving into the other.  In other words, it is a Roth and Traditional IRA not Roth versus issue.  Why?  This would help you to diversify your investment types.  This way if there were ever any changes (like Congress changing the laws) you would have some money in both.

Note: I’m not suggesting saving 50% in one and 50% in the other.  I’m just saying that it wouldn’t hurt to save in a Roth for a few years and then in a Traditional IRA.

The recent passing of the The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 can serve as an important example.

On December 17, 2010, President Obama signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  As part of the bill, the IRA Charitable Rollover allows people who are 70-1/2 or older to transfer up to $100,000 directly from an IRA to a qualified charity.  This allowance is only for the 2010 and 2011 tax years.  In addition, contributions for the 2010 tax year can be made retroactively if made on or before January 31, 2011.  That means that you have until the 31st of January to make a contribution to count as part of your 2010 tax year.

The main point of this post is not to discuss the IRA Charitable Rollover, but to introduce its implications.  If you want to learn more, you can read more about making charitable contributions from an IRA.

If my point isn’t to discuss the Charitable Rollover, what is it?

Government changes and policies can make either the Roth or Traditional IRA even better in an instant. None of us can predict what those changes may or may not be.  As an example, as far as I can tell, the Charitable Rollover offers no benefit (other than typical charitable deductions) to people with a Roth.  They have already paid the taxes, and there is no mandatory withdrawal.

However, if I was thinking about making a large donation, I’d love to be able to do that from my Traditional IRA since I never paid taxes on it in the first place.  Notice that this only applies for 2010-2011 tax years.  However, what if in 50 years they made a similar allowance?  I’d regret the fact that I had no savings in a Traditional (because I’ve already paid taxes otherwise).

Since this opportunity is past you might want to learn about a Roth in-plan Rollover.

If this is new or confusing, you can compare the tax implications between a Roth and a Traditional IRA.

My point is simply this – you can (and possibly should) diversify how you save for retirement – Roth and Traditional IRA. If you have money in one, you might want to spend a few years contributing to the other.  This just gives more options when it comes time to start withdrawing the money.

Right now we save in a Roth because we use my Roth IRA for college savings too.

Thoughts?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Should You Have Money in a Roth IRA and a Traditional IRA?

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Much has been written about the 401k retirement plan. It’s one of the most popular retirement plans available, and chances likely that your company offers this benefit to you.

What isn’t as well-known, but is just as beneficial when saving for retirement, is the 403b retirement plan. Let’s take a brief look at what it is, who’s eligible, and other important details.

What is a 403b plan?

It’s a retirement plan for certain employees of public schools, other tax-exempt organizations, and ministers. It can be thought of as the non-profit equivalent of the 401k plan of for-profit companies.

Who can establish a 403b?

Only employers are able to set up these accounts. Individuals can’t establish one on their own. Specifically, two types of entities can establish one:

1. 501(c)(3) organizations, and
2. public schools or educational organizations.

However, one note of interest is that self-employed ministers are considered both employers and employees. As such, they can contribute to a 403b for their own benefit.

Who can participate?

Employees are eligible if:

1. They work for a tax-exempt organization as defined under IRS Section 501(c)(3).
2. They’re involved in the day-to-day operations of a public or private school system.
3. They are ministers who either:

• Are employed by a 501(c)(3) organization,
• Are self-employed, or
• Are not employed by a 501(c)(3) organization, but function as ministers in their day-to-day responsibilities with their employer.

What type of contributions are allowed?

There are 3 types of permissible contributions to 403b accounts: employee elective deferrals, nonelective contributions, and after-tax contributions.

With elective deferrals, the money is withheld from the employee’s paycheck and contributed to the 403b account. As with the 401k, contributions are not subject to income tax until funds are withdrawn. However, they are subject to payroll tax.

Nonelective contributions are either matching, mandatory, or discretionary contributions by the employer.

After-tax contributions are not deductible.

Investment Options

Funds can only be invested in either annuity contracts or mutual funds.  Here are some reasons to purchase an annuity.

Contribution Limits

The maximum that can be contributed to a 403b in 2010 is $16,500. If you’re age 50 or older, you can make a $5,500 catch-up contribution.

In addition to this, if you have at least 15 years of service with an organization that’s eligible for a 403b plan, then the limit for contributions increases by $3,000. And the nice part about this rule is that the 15 years of service aren’t required to be consecutive.

So for 2010, an employee over age 50 who has 15 years of service could possibly contribute a maximum of $25,000 ($16,500 deferral, plus $5,500 catch up, plus $3,000 from the 15-year rule).

Do you participate in a 403b retirement plan?

Photo by Rex Pe

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Not, much breaking news here, but just an informative update.

The IRS announced (October 28, 2010) cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2011.

2011 Contribution Limits – IRA, 401(k), 403(b)

The contribution limits for 2011 are unchanged from the limits in 2010.

* If you are 50 years or older you are eligible to make extra contributions in order to catch-up.

If you are interested in more contribution limits see Thrift Savings Plan Contribution Limits.

Here are some related articles you might want to read:

Kid’s Roth IRA | Can Teens and Kids Open A Roth?

Roth IRA and Traditional IRA Tax Implications in Plain English

How Much Savings for Retirement is Enough?

7 Retirement Planning Factors You Cannot Predict

How To Start Investing | A Step By Step Investing Guide For New Investors

Roth IRA For Your Kids’ College Savings | A Hybrid Approach

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Contribution Limits 2011 – IRA, 401(k), 403(b)

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1. Should You Have Money in a Roth IRA and a Traditional IRA?
2. Why We Converted Our Traditional IRA To A Roth IRA
3. Kid’s Roth IRA | Can Teens and Kids Open A Roth?

Do you wonder how you’ll manage your money when you retire? If so, your Social Security statement can be a helpful tool in planning your family’s finances. Have a taken a look at it recently?

A Bit Of Background Information And History

Since 1999, statements have been automatically mailed to all workers over age 25 who haven’t yet received benefits.

The statement is mailed to you about three months before your birthday. And, you’ll keep getting it every year until you begin taking benefits.

What’s The Point Of It?

The statement is designed to keep you informed of your earnings history, which are used to calculate your benefits. It also shows how much you’ve paid in social security and medicare taxes.

With this statement, you can ensure the accuracy of the Administration’s records. So if you do find mistakes in your earnings, notify the Administration well before you retire.

What Else It Includes

When most people think about social security, they think about what they’ll get during their retirement. But it’s more than just a retirement program. It also provides benefits if you were to become disabled, and supports your family – both when you retire and after you die.

What It Isn’t

Although social security is the largest income source for elderly Americans, it was never intended to be the only source of income when you retire.

It’s also important to remember that your statement only shows an estimate. The actual amount you receive may differ due to several factors

1. Your future earnings may increase or decrease.
2. Your benefits will be adjusted for cost-of-living increases.
3. Laws governing benefit amounts may change.
4. Your benefits may be affected by pensions earned in which you didn’t pay Social Security tax.

Can We Trust In It?

According to the administration, more benefits will be paid out than collected through taxes starting in 2016. Without changes, funds will be exhausted by 2037. Then retirees will only get 76 cents for each dollar of scheduled benefits.

Certain people think some form of social security will be around when they retire. Others don’t count on it. But whether you think it will or won’t, I think it’s still important to know what benefits are included.

So we can’t be certain of the availability of social security. And it isn’t meant to be our only source of retirement income anyway. This reinforces the need for us to be proactive about saving on our own for retirement, rather than relying on social security alone.

We do this tried-and-true way – by getting out of debt, building up savings, and investing for the future.

Where To Get More Information

If you have more questions, you can set up appointments with local offices through their toll-free number. In addition, you can request a statement at any time by visiting the social security website.  You can also do additional research on how to increase social security benefits.

Even with this estimate, you may still want to know how to calculate social security benefits in retirement. This can give you a better idea of what to expect.

Do you review your annual Social Security statement?

Photo by stevendepolo

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I used to do a lot to plan for retirement.  But then I wised up.

I find that as time passes I’m developing an increasing skepticism about the concept of retirement.  I definitely would say retirement is not the goal of life.  If we live within God’s calling, we should be able to work, play, and learn at all stages.

I think Christians should be appropriately educated about the value of investing for retirement, set aside a reasonable percentage of their income, and then move along to other important activities.

One of my favorite investing books – The Sound Mind Investing Handbook – has nine pages of worksheets to help you calculate how much you’ll need in retirement.

Here are the key questions covered in that section:

• How much annual income will you need during prime time?
• What about the effects of inflation?
• Will you have enough to sustain you through a normal life expectancy?
• How much of your “prime-time wealth” will Social Security provide?
• How much will your current tax-deferred portfolio be worth when you retire?
• How much will your current taxable holding be worth when you retire?
• How much should you save each year to meet your retirement goal?

While I respect this process and the wisdom of those questions, I’m becoming a little calloused towards the whole process of determining how much money you need to save for retirement.

Basically, I think there are too many questions we cannot answer.

In a previous post, I’ve listed 7 retirement variables we cannot predict.

1. Social Security
2. Rate of return
3. Inflation
4. Retirement age
5. Activity during retirement
6. Our future income
7. The end of time

Now listen, you who say, “Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.” Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes. Instead, you ought to say, “If it is the Lord’s will, we will live and do this or that.” (James 4:13-15 NIV)

Trusting God Through the Retirement Planning Process

The question we all want to know is where is the balance between faith and wisdom?  Yes, we can trust God to provide, but don’t we have a role in the process?

What I’m suggesting is not to live a life style beyond your income and trust God to rain down money from heaven.  Instead, I’m suggesting that if we are faithful to God with what we have today, he will be faithful to us tomorrow.

Feelings and Emotions of 2008-2009

Do you remember how you felt when the market dropped in half?  When your retirement savings plummeted?  Perhaps you’re still feeling the same thing now.

I’ll talk about myself, my feelings, and my emotions to avoid unduly judging any of you.

I felt insecure.  I wondered if everything I had saved for and planned for wasn’t in vain.

I was reminded that there is more about my retirement that I CANNOT control than there is that I CAN CONTROL.

So I’ve decided to take a hands off approach with my retirement.  In fact, this year my wife and I intentionally cut the amount we save for retirement by 2.5%.  Why?  Because it can all disappear in a moment.  We’d rather be using that money to do something good today instead of saving it to do something good tomorrow.  I concluded from some personal study that we shouldn’t be saving more than we are giving.  If God can provide our needs today, he can also provide our needs tomorrow.

At the end of this year, I’m going to suggest we cut it another 2.5%.

I do realize that most people have the opposite problem – they are not saving enough for retirement.

My Responsible and Faithful Retirement Savings Plan

Going forward, I’m going to invest my set percentage towards retirement.  I think it honors God when we save for retirement.  However, I want to leave the rest up to him.  The returns, the life span, the cost of living – everything.  Hey, I don’t mind working when I’m 70 years old, but there may also be reasons to retire early.  I’ll probably be working for God anyways; the only difference is if I can be self supporting or not.

So what am I encouraging?  People to stop saving for retirement?  Nope.  I’m simply suggesting that those of us who are responsibly saving for retirement should re-evaluate our position to be sure we are not focusing too much on retirement.

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Rethinking Retirement | Reasons I Spend Less Time (and Money) Saving for Retirement

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In my last post, I talked about what really matters about investment risk. The basic idea was that meeting your retirement planning goals should have a higher priority than staying within your risk tolerance. If you invest in a “safe” portfolio but don’t reach your goals, was it really a safe investment? I don’t think so.

But I also mentioned that there are some options if you don’t want to increase your investment risk in order to meet your goals. Some readers also brought up the fact that they want balance in their investing. They don’t want a portfolio that’s so volatile they can’t sleep at night. This is where you’re going to have to make some choices, and that’s what this article is about.

5 Ways to Retire with Less Investment Risk

If your current retirement plan requires you to take on more risk than you’d like to stomach, then you’ll have to adjust your goals accordingly. I’ve come up with five options that will help you find a way to balance your investment risk with your goals.

1. Save More – If you want to choose a safer portfolio but keep your goals the same, the simplest solution is to save more. This is not the easiest solution by far, and for many people it may be extremely difficult. But if you want to use a retirement portfolio that’ll earn 6% instead of one that can earn 8%, then you’re going to have to save more money to meet your goals.
2. Retire Later – You probably hate this idea, but it can have a huge impact on your ability to retire. Simply moving your retirement date to a couple years later can reduce the amount of money you need to retire. This means you can choose a safer, lower return investment because you’ll be saving longer, giving your money more time to grow, and spending fewer years in retirement.
3. Spend Less – Another option is to lower your required income for retirement. By looking at ways you can spend less, you’ll lower the total amount you need to have saved. In turn, this can decrease the return you need on your investments and allow you to use the safer options. You don’t want to set yourself up to eat cat food during retirement, but you can certainly look at ways to save money. Since you won’t have the commitment of work to deal with, you can spend some time during retirement on frugal activities that lower your costs.
4. Work Part-Time – Maybe there’s something you really love doing that you wouldn’t mind working at in retirement. If you can work part-time, you’ll bring in a little extra income that will reduce the amount you need from your retirement savings. Lower required savings means you won’t need as much risk to meet your goals. Be careful about counting on this option though. As you get older, the chances of disability greatly increase and that could really throw a wrench in your plans.
5. Die Sooner – OK, I’m joking on this one! Sort of. I’m not saying you should go get an appointment with Dr. Kevorkian when you see your assets dwindling down. Suicide, assisted or not, isn’t the answer! But how long you’ll live does affect how much money you need to have saved. (Again, affecting how much of an investment return you need.) So refusing life-sustaining medical care that prolongs your life without enabling you to enjoy it can decrease the amount of risk you need to reach your goals. You could also spend the last few years of your retirement doing the exact opposite of what your doctors tell you – overeat, don’t exercise, smoke, drink heavily, and so on. Not something I’d want to do, but it’s your choice!

The Best Solution Is Balance

What I want you to realize is that you shouldn’t choose just one of these options. There’s a balance for you to find between your investment risk, retirement age, savings, spending, and what you’ll do in retirement. Sure, you could use CDs or rely on a Guaranteed Equity Bond as your sole investment option if you don’t want to retire until you’re 80.

But a better way would probably be to take on a little more investment risk (maybe with a conservative stock/bond portfolio), retire at 70, plan on spending a few thousand less, and figure on working part-time. Such a balance lets you enjoy a longer retirement without too much more risk. Playing around with a retirement calculator can help you see how these changes will affect your plans.

How Are You Finding Balance in Your Retirement Plans?

Let us know in the comments below!

(photo credit: Pedro Ribeiro Simoes)

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> 5 Ways to Retire with Less Investment Risk

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Investment risk is often defined as “the chance that the actual return from an investment may differ from what is expected”. At least that’s how most investing textbooks define it.

Check the dictionary for risk and you’ll see “the possibility of suffering harm or loss”. That’s probably closer to how most of us think about risk.

But the problem is that both definitions really miss the mark on what matters about investment risk for individuals. What we care about most is whether or not we’re going to meet our goals.

Are we going to have enough to retire on the date we planned and for the income we need? Will there be enough money to pay for our kid’s college education? When we get down to it, that’s all that really matters to us about investment risk. Will there be enough money to do what we planned?

The difficulty is that investment world doesn’t define risk this way. In the investment world, something is considered risky if its return varies greatly from the average (it’s volatile). They call it “standard deviation”. High standard deviation means risky. Low standard deviation means not risky (or not as risky). But this is the wrong way to measure risk and here’s why.

The Wrong Way

Let’s say you go to your local stock broker‘s office. You’ll probably be asked to fill out a risk tolerance questionnaire. You answer a few multiple choice questions, the broker punches it in the computer, and out pops the “perfect” portfolio for you based on your risk tolerance. The computer says you ought to invest in a 20% stock/80% bond portfolio because you have a low risk tolerance – you don’t like volatility.

So you start plopping in your $300/month for retirement – everything you can afford at the moment. You go along until you hit 65, which is when you told your financial adviser you’d like to retire.

But there’s a problem when you want to hand in your resignation at work just before your retirement date. You don’t have enough money! Because you used such a “safe” portfolio you never earned enough money on your investments to reach your retirement goals.

I don’t care how “safe” the portfolio is – if you can’t reach your goals by using it, then it’s RISKY! Do you really want to use a safe portfolio if it’s not going to get you to your goal? I didn’t think so.

How to Really Measure Risk

If you want to measure the investment risk of a portfolio in a way that matters, you need to look at how likely it is you’ll meet your goal with that particular portfolio. A good financial planner will help you do this by looking at the historical return and risk of the portfolio along with other information. Then they’ll use Monte Carlo simulations to estimate your chances of success.

This isn’t a perfect method and a perfect method doesn’t exist. Essentially, we’re trying to predict the future and that’s ultimately impossible. However, it’s an improvement over assuming a steady rate of return and it’s better than just a shot in the dark. The key is to revisit this estimation every few years to see if you’re on track and to adjust accordingly.

By assessing investment risk this way, you can make sure you invest in a portfolio that will provide a high enough return to meet your goals. It will help you avoid the scenario I described above because it doesn’t just look at your risk “tolerance”. It also considers your required investment return to achieve your goals.

But this method also has the additional advantage of helping you avoid taking on more risk than necessary for your situation. Look at it this way. If you can meet your goals with a medium risk portfolio allocation, then why use a high risk portfolio? You don’t need that additional risk, so you can choose to avoid it.

Now some people – especially after the most recent stock market turmoil – don’t want to increase their investment risk even if it means they won’t reach their goals. I think that’s missing the forest for the trees, but you do have some options if you don’t want to increase your investment risk. Be sure to check in later this month when I write about what to do if you don’t want that increased risk!

Your Thoughts

How do you think about risk? Are you missing the point? Am I missing the point? Let me know what you think in the comments below!

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> What Really Matters About Investment Risk?

Other Great Articles:

1. Asset Allocation is the Biggest Investment Decision You’ll Ever Make
2. A Low-Cost, Diversified Investment Portfolio with Only Three Funds
3. 5 Ways to Retire with Less Investment Risk

As you probably already know, 2010 is a great time to convert your Traditional IRA to a Roth IRA.  The year is now more than half over, so I thought I’d share my thoughts on the Roth IRA Conversion.

In 2010, you can convert a Traditional IRA to a Roth IRA even if you make over $100,000.  Also, you will pay taxes over a two year period and the first payment (1/2) isn’t due until April 2012 and the other half will be due by April 2013.  Here is a full list of 2010 Roth IRA conversion rules.

Even though I knew converting in 2010 would provide some distinct advantages, my wife and I decided to do it back in 2008.  Here’s why …

Why we Converted our Traditional IRA to a Roth

1. Bookkeeping – Keep everything in one account – Basically, over several years we had been lazy and accumulated some 403bs here and some there.  My wife had a Roth IRA and 403bs through two different organizations.  We didn’t roll anything over when she left old employers.  We decided that everything was getting hard to track and properly diversify, so we wanted to roll everything into one account.
2. Economic Meltdown – Since around 2007, I’d toyed with the idea of converting my Roth IRA.  By the middle of  2008 when our account values were cut almost in half, I decided that I would take advantage of the economic downturn and convert our traditional IRAs to a Roth.
3. Anticipated income increase (also higher tax bracket) in the future – My wife is currently a stay at home mom.  However, since she has a Master’s Degree in Education, we anticipate that sometime she will go back to work.  Being in a lower tax bracket now made this a perfect time for us to convert to a Roth IRA.

Should You Convert To A Roth?

Because this is a very complex situation, you should ask your tax accountant to help you think through all of the various implications.  I’m not advocating that you go crazy with some type of Roth mania. 

The best piece of advice I’ve heard on the topic is to consider diversifying your investment vehicle – not just your investments.  In other words, have some money in a Traditional and some in a Roth.  This way you are in a position to financially benefit regardless of your tax bracket at retirement.

Since there are so many unknown retirement variables, you should think through this decision carefully.

Free Money Finance quoted the following from this piece from Kiplinger:

1. Can you afford to pay the tax on the conversion with money from outside your IRA?
2. Do you expect to be in a higher tax bracket in the future?
3. Will you need your IRA money in retirement, or do you think you’ll be able pass most of it on to your heirs?
4. How long do you plan to keep the money in the account?
5. Do you plan to pay college bills soon?

What if the government changes rules regarding the Roth IRA?

Well, that is bad new for me.  This is also one of my major concerns.

One of my regrets about converting is that the government has been known to do whatever it wants regardless of former laws.

Also, what if, despite all your best guesses, tax rates are lower in the future?  If you are diversified (some Roth IRA and some Traditional IRA) then you are in a position to benefit either way.  At least you are in a position where you won’t be financially hurt.

What if a Roth conversion isn’t right for you, but you still like the Roth IRA?

Perhaps you have run the numbers and converting your Roth is appealing, but you don’t have the money for the taxes.  In this case, you should simply start a Roth and contribute future retirement savings into that account.

Did anyone convert or plan to convert a Roth IRA this year?  What are your thoughts on it?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Why We Converted Our Traditional IRA To A Roth IRA

Other Great Articles:

1. Should You Have Money in a Roth IRA and a Traditional IRA?
2. Contribution Limits 2011 – IRA, 401(k), 403(b)
3. Kid’s Roth IRA | Can Teens and Kids Open A Roth?