Dan Solin's Newsletter, May 4, 2017
What do marshmallows have to do with investing for retirement? Quite a bit, as you will see.
A seminal study done at Stanford University in 1972 found the ability to defer gratification (by waiting for a short time before consuming a marshmallow) correlated positively with higher academic performance, better social skills and coping with frustration and stress.
How can you apply these findings to saving for retirement? Resist the immediate gratification you get from a traditional 401(k) plan and a traditional IRA and choose a Roth 401(k) plan (if it’s an option) and a Roth IRA (if you qualify).
The traditional 401(k) plan and IRA give you the benefit of an immediate deduction that lowers your taxable income. But when you take a distribution from these accounts, the entire amount withdrawn is included in your adjustable gross income and taxed at your marginal tax rate. No one can tell you what that rate will be.
With a Roth 401(k), you’ll fund the account with after-tax money and receive no tax deduction. But’s here’s the silver lining. You won’t have to pay taxes on withdrawals (including appreciation) that conform to Roth rules. You can read more about Roth 401(k) benefits here.
The tax treatment of Roth IRAs is the same as for Roth 401(k)s. Roth IRAs have contribution limits and are only available to those who make less than a certain amount of money. You can find details about Roth IRAs here.
When you invest in a Roth (either a 401[k] or an IRA), you are sacrificing current benefits for future ones. There can be a significant benefit to deferring gratification.
Just like waiting to consume more marshmallows.
This week's video: Stay Invested
Did you know that if you missed just 5 days with the biggest gains over the past 20 years, your earnings are 40% less than those of someone who stayed invested?
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Each week I’ll recommend a resource that provides sound investing advice.
This week’s pick is: http://thereformedbroker.com
Why I like it
Josh Brown is an author of financial books and a well-known financial blogger. His blog is one of the most widely read financial blogs on the Internet. It’s filled with sound, no-nonsense advice.
Pigs feeding at the trough have nothing on 401(k) plan administrators who permit high-cost funds to populate 401(k) plans, when comparable lower cost funds, with the same or higher expected returns, are readily available.
Question from Quentin:
How do I know if my broker or advisor is taking advantage of me?
A competent broker or advisor will focus on your asset allocation and invest your money in a globally diversified portfolio of low management fee index funds. He or she will also agree in writing to disclose all conflicts of interest and to always act solely in
your best interest.
If this doesn’t describe your broker or advisor, you should find someone who meets these standards.
Solin says: The KISS principle (keep it simple, stupid) applies to investing.