If you happened to be living underneath a rock or doing research in Antarctica for the past year or so, you may have missed an important development in the stock market…we are in a red-hot bull market. The S&P 500 has more than doubled from its recession lows, housing prices are rising fast and unemployment is slowly, but steadily dropping. The good times are here again!

If you’re relatively young, or just happen to be a new investor all this positivity probably feels pretty strange…“You mean, my investment balances can actually go..up?!”

I admit, it’s a bit strange for me as well. I started with my first job in 2007, just months before the bottom fell out of the economy. For the majority of my investing “career” all I’ve known is doom and gloom. In all actuality, investing in a down market is pretty easy. If you stayed calm and rational during this last recession and had the guts to stray from the herd it was pretty easy to find attractive investment opportunities and catch some big gains once the recovery started.

But a bull market is a little trickier. Warren Buffett says: “Be greedy when others are fearful, and fearful when others are greedy.” and the herd is pouring all their money back into the stock market. Greed is definitely back. So what are we supposed to do?

Should we sit on the sidelines holding on to a pile of cash waiting for the next recession to give us buying opportunities? Should we go all-in and hope the good times never end?

Fortunately, we can invest even when greed is rampant in a bull market. Here’s how:

Stay The Course - You have an asset allocation and investing strategy, stick to it. Continue to make your regular contributions and investments. During a bull market your stocks will be rapidly rising in value which will naturally lead you to invest in your more conservative investments so that your portfolio balance doesn’t get thrown out of whack.

Be Cautious - If you invest in individual stocks it’s going to be harder to find companies that are trading at attractive valuations but that doesn’t mean they don’t exist. Don’t go throwing your money around wildly thinking that everything you touch will turn to gold because the market is rising. Take time to uncover stocks that are true values. Europe is still struggling, so looking overseas may be a good place to start searching for diamonds in the rough.

Pay Off Debt - Obviously getting out of debt should always be a priority. But when times are good and jobs are a bit more stable, it might be a good time to increase your monthly debt payments. Getting out of debt while the economy is roaring along will in turn allow you a greater opportunity to save up an emergency fund and better prepare yourself for the next downturn. It always sucks to be laid off, but the pain is only multiplied if you have a mountain of credit card debt and no savings to fall back on. Use the current stability to get ahead of the curve in those areas.

Real Estate - Did you buy a McMansion that you couldn’t really afford back in 2006? Now might be the time to try to look to downsize. Real estate markets are heating up: prices and competition for properties are increasing daily, even in markets that were hardest hit by the housing bust. You can take advantage of the trend by selling your house and downsizing into something smaller and more affordable.

If downsizing is a little too extreme for you, refinancing is still a great option. Interest rates on mortgages are still extremely low and the HARP program is available to help people refinance their mortgage even if it’s underwater (more is owed on the mortgage than the property is worth).

Avoid Lifestyle Inflation - When the economy is in good shape consumer spending starts to rise. That means your friends and neighbors are all out buying new cars and huge new TV’s. Now, more than ever it’s important to remember that most basic personal finance advice and resist the temptation to “Keep up with the Joneses”.

Even though I said we shouldn’t stop investing entirely, a rising market is a time to increase the amount of cash we have on hand so that we’re ready to take advantage of the great buying opportunities that the next down market is sure to bring.

Invest In Yourself - Over the past 4 or 5 years we’ve learned to just be happy that we have a job. Opportunities were scarce so maybe you stopped even considering looking for a better position (I know I did!).

As the job market continues to improve, now is the time to make the leap. Like the company you’re with? Ask for a promotion or a raise…worst case scenario, you don’t get it and you now have more incentive to chase down one of the increasing number of other opportunities that are available out there. If you’ve wanted out of your job for some time, now is probably your chance. Start sending out resumes, apply for jobs that might be a step or two up from where you are now, or jobs that you might not be totally qualified for. As the employee the leverage is starting to swing back into our favor, and it’s our responsibility to take advantage of it for our own good!

Final Thoughts

It’s easy to get caught up in the excitement of a bull market. Every day you hear about a new record the stock market is setting and you don’t want to be left behind. Everything may seem like easy money but resist the urge to follow the herd. Stay cautious and stick to your investment plan. There is opportunity in every type of market. It’s just that when it comes to stocks those opportunities are a bit harder to find in bull markets.

Patience is your friend. Stay invested, seek out opportunity where you can find it and enjoy the good times. But also remember that neither the good times, nor the bad last forever. It’s fun watching stocks set new records every day, but the people enjoying that the most are those that bought in 2009, not last week. The next recession is coming eventually and you want to be ready for it. Because real wealth in the stock market is made by those who have the guts to buy when everyone else is too afraid, not by those who jump on the speeding bandwagon.

How are you approaching the current market? Are you cautious that it might not last, or optimistic that the party will continue?

Thanks for reading! If you enjoyed this post be sure to subscribe by email or RSS to keep up with all the latest posts! 

The post How To Invest In A Bull Market appeared first on The First Million is the Hardest.

“It takes money to make money.”

You’ve no doubt heard that phrase thrown around before. It’s a phrase that unfortunately stops people from investing before they even start. The idea that you need to have a lot of money before you’re able to invest (and make more) is all too common, and it’s simply not true. 

Years ago when you needed a financial advisor at a big brokerage firm, and you had to pay them insane commissions in order to trade this may have been true. But now, the internet is your savior! You don’t need a financial advisor at all! Thanks to the internet, it doesn’t matter if you have $100, $1000, or $10,000. You can invest and get your money working for you no matter who you are.

A couple of assumptions before we continue with this post…I’m assuming that A) you don’t have a mountain of debt hanging over your head. If you do, focus on paying that off first! Paying off a credit card at 18% interest will give you more bang for your buck than investing in the market. B) I’m assuming you have something resembling an emergency fund. Just some amount of cash in a savings account that you feel safe falling back on should something bad happen. 

So, with that out of the way…let’s get down to it.

“How do I invest if I don’t have much money?”

Employer Sponsored Retirement Plans

I know, I know. It’s not the sexiest thing in the world, but investing through your 401k or other similar type of retirement plan is the absolute easiest way to get started investing. No matter how much money you make you’re able to invest in a 401k. If you’re lucky you employer will match the funds you contribute and really help you to get started on your investing journey. Even if your employer doesn’t match your 401k contribution it’s still a good idea to contribute, simply because it’s the easiest and most available way for each of us to invest.

If you don’t know how to get started investing in your employer’s retirement plan, contact your HR rep and they will be able to help you get started. Many employers are now automatically enrolling new employees into their 401k plans, so there is a chance you’ve contributed all along and just didn’t know it!

The Game Changers: Online Brokerages 

Online brokerages have made it increasingly easy for the average joe to get started investing. With most online brokerages you can open an account with as little as $500 (sometimes you don’t need any money at all!). The best part about online brokerages is that you don’t have to pay a lot to buy or sell an investment. $9.99 per trade is standard these days, but there are ways to pay $0 in commission.

Commission Free ETF’s - Commission free ETF’s have totally changed the investing game and made it possible to invest with as little as $50 or $100.  Don’t believe me? Here’s an example:

Vanguard’s Total Stock Market ETF (VTI) is available commission free from a number of online brokerages. This ETF invests in over 3000 stocks, representing the entire U.S. stock market. At the time of this writing it was trading for around $83/share.

That means you can take that $100 your grandma gave you for your birthday, buy a share of VTI and automatically be diversified across each size and sector of the US stock market. It really is that easy!

Have $500 you want to invest? You can have a completely diversified portfolio for $500…

Buying VTI will give you all the exposure you need to the US stock market. If you want to add a little international flair to your holdings it’s as simple as buying VXUS which is Vanguard’s Total International Stock Etf.  For $50/share (as of writing) you can gain exposure to foreign stocks across the globe. China, Brazil, Japan, Germany, India, England…you name it, it’s in there.

Next up you can add a little more stability to your portfolio with Vanguard’s Total Bond Market ETF (BND) which gives you exposure to the entire market of investment-grade bonds in the United States.

To recap your balanced, totally diversified, all-encompassing $500 portfolio could look like this:

2 Shares VTI: $83 *2 = $166
3 Shares VXUS: $50*3 = $150
2 Shares BND: $83*2 = $166

Total Cost: $482 

See! Who says you need a lot of money to invest?! You can take $500, invest in all the worlds stocks, the entire US bond market and still have $18 left over for pizza! After your initial investment you can just keep adding to your shares of those 3 investments any time you have some extra cash lying around. You never have to worry about owning anything else, just keep watching your investments grow!  You can do this in a Roth IRA, Traditional  IRA or a taxable brokerage account, the choice is yours.

Dividend Reinvestment Plans

Many people will suggest dividend reinvestment plans (DRIP) as a way to cheaply invest. It is true that DRIP plans are a great way to invest in individual stocks cheaply, I don’t agree that they should be something you look at if you only have a few hundred dollars to invest. Because you’re investing smaller amounts of money you won’t be able to spread out your risk if you invest in individual stocks. That’s why I prefer the broad index etf’s mentioned above. You diversify your holdings and spread out your risk as widely as possible with your investment. What I do recommend is that you reinvest the dividends of whichever investment you do buy. With most online brokerages it’s as simple as checking a box or a one-time enrollment for your account.

Automatically reinvesting dividends will start a snowball effect with your investment very similar to how the power of compounding helps your savings grow.

What are you waiting for? Get started now!

E*Trade, TD Ameritrade, Charles Schwab, Fidelity and Vanguard are all reputable online brokerages where you can get started investing on the cheap. They all offer a large list of commission free ETF’s and have super low commissions on other investments you may make.

Choose whichever broker you like the best. If you need help figuring out an asset allocation (proper mix of stocks and bonds) for yourself. Check out my post on how to do just that.

If you didn’t think you had enough money to invest, or you’ve been dragging your feet getting started. I hope this post served as a little kick in the pants to get you investing! Time is your friend when it comes to investing and even small amounts now can add up to big bucks down the road. Stay patient, keep investing what you can, and barring a zombie apocalypse…you’ll make money.  Good luck!

If you have questions about getting started investing a small sum, ask away in the comments! Myself or some of the more experienced readers will be glad to help! 

Are you an experienced investor? What other advice would you give someone starting out with a small amount of money?

Thanks for reading! If you enjoyed this post be sure to subscribe by email or RSS to keep up with all the latest posts! 

Disclaimer: I own shares & am long BND. I used Vanguard EFT’s in my examples…this was for simplicity as they are among the most popular ETFs on the market. Their appearance in this post does not constitute an official recommendation. As always, do your own homework and choose your own investments. Don’t trade based solely on what some guy on the internet says!

The post How To Invest Without A Lot Of Money appeared first on The First Million is the Hardest.

I’ll start this update off with a little rant about the joys of blogging.

Normally the hardest part of running this website is coming up with a topic interesting enough to me that I want to write about it, and then attempting to do so in a way where you don’t want to gouge your eyes out while reading it.

I’ve been through a lot in the relatively short time I’ve had this site. I had no clue what I was doing in the beginning. One day I decided I wanted to start a blog about finance and the next day I bought the domain name not knowing anything about how to run a website. I’ve been learning on the job so to speak, and somehow I’ve managed to keep this thing alive and more people read this website each day than I ever would have imagined.

However, the technical aspects of running a website are still a bit foreign to me. So when problems arise it usually means a few hours of searching through message boards, YouTube, and countless Google searches until I can find a fix.

April presented me with several opportunities to spend my time fixing things on the back-end and not writing new content for you all to enjoy.

You’ve probably noticed that I have some advertising on the site. I don’t make much money from it, nor do I expect to. Any advertising money I make basically goes to feed the hamster that keeps this site up and running. Early in the month, my site, along with many others in the finance world were victims of “clickbombing” attacks. Basically some a**holes show up on your site and repeatedly click on your ads in unnatural volumes. This shows up as a big red flag to Google who then often bans the blogger from its Adsense program for invalid activity. You’d think with as smart and powerful as Google is, they would recognize the situation for what it is and not punish the blogger. But, that’s a discussion for another day.

Luckily, I haven’t been banned from Adsense (yet… *knocks on wood*), but many others weren’t as lucky. Through the process I had to learn a lot about security features and a few new things on the back-end that help me track who’s visiting the site, and what they click on when here. So if you were the one’s doing it before…or you get any bright ideas after reading this. I have a message for you…

If you visited my site any time over the past 3 or 4 days, you might have noticed everything was a little wonky and most of my posts were missing!

I spent countless hours trying to diagnose the problem and couldn’t find a solution (or even what the problem might be!) so I decided to uninstall everything from my server and start fresh. It was only as I deactivated all the backend plugins that are installed on the site in order to delete them that I noticed the problem disappeared after doing so! A few hours of trial and error later and I figured out that one minor setting within one of the individual plugins was f-ing up my entire website. Literally checking one box in an options menu fixed everything. Imagine spending 6+ hours trying to find a solution, thinking you may have been hacked, only to discover that. My laptop is lucky it didn’t get thrown out the window.

I’m happy to report that all is well for now, and hopefully it stays that way for a long time (again, *knocks on wood*). So without further ado…let’s get into April’s numbers, shall we?!

For those of you who are new: This is a monthly review of my investment accounts, not a tracking of my complete net worth. I give these monthly updates to add a level of transparency to all you readers. So you can rest assured that yes, I’m practicing what I preach on this little corner of the internet. Mainly though, it’s just to keep myself motivated and track my progress towards my goals. 

Roth IRA: $21,205 (+4.61%)
Trad. IRA: $10,627 (+5.01%)

I made one small move in my Roth IRA, using some of the non-invested cash I had in the account to add more shares of Apple pretty near it’s 52-week low. Apple is a fascinating stock to me right now. Investors are still in the mindset that Apple should perform like a hot tech startup that posts mind-blowing growth rates each quarter. When in reality (or in my opinion) Apple is now a value stock with great dividend growth potential. It’s more IBM than it is Netflix, if that makes sense. I think the market is being pretty irrational about Apple recently and sooner or later the fundamentals will have to take over. However, I’m reminded of a famous quote “The market can remain irrational longer than you can remain solvent.” So who knows how it will all turn out.

*Disclaimer: I obviously own a stake in Apple and plan on holding it long-term. If you didn’t know that you might need to work on your reading comprehension. And if the previous paragraph was enough to influence you to buy or sell a stock you probably need to reevaluate your investing criteria anyway. 

401k: $4,686 (+7.85%)

Not much to add here. Just my normal contributions and the bull market at work!

Brokerage: $3,146 (+5.71%)

I did make a new purchase in my “freedom fund”. I took a gamble on a new technology and bought shares in 3D Systems Corporation (NYSE: DDD). The valuation on the stock is a little nuts, but the more I read, the more I think 3D printing is the real deal and there is room for amazing growth in the field. Plus, my attitude with this account is “go big or go home”. I’m willing to take on some riskier investments and swing for the fences a bit more. The goal of this account is to help me reach financial independence and I’m going to need to take a risk here or there to help that process along.

*Disclaimer: Same as the one above! Do your own homework, don’t make any trades based on something I write.

Lending Club: $532 (+0.38%)

Not much to say about this one either. I’m now invested in 23 loans (+1 from last month) and my net annualized return is still a touch above 9%. May is looking like the month where I’ll be adding more money to my Lending Club account, so stay tuned for changes here in next month’s update.

Cash: $6,511 (-2.82%)

Not much news here. I’m working on slowly reducing this amount and putting more of it to work where I find opportunities to do so. That will continue for the foreseeable future.

Total Portfolio Value: $46,707 (+3.93%)

The Dow, S&P500 , NASDAQ and just about every other market index has been on a tear over the past few months. I don’t know how long it will continue, but I’ll be sure to enjoy the ride!

April’s Top 5 Posts on The First Million is the Hardest

As always, here are the top 5 posts from the prior month based on number of views. So if you missed them, be sure to check them out!

1. Should I Contribute to a 401k With No Match?

2. Do You Really Need A Financial Advisor?

3. 8 Questions About Money and Relationships

4. The Government Wants To Limit Your Retirement Savings!

5. Saving Half of My Income – Can It Be Done?

I hope April treated you well. How did your investments fare this past month? 

Thanks for reading! If you enjoyed this post be sure to subscribe by email or RSS to keep up with all the latest posts! 

The post April 2013 Portfolio Review appeared first on The First Million is the Hardest.

One of the most popular “perks” of working for a publicly traded company is that your employer will offer you the chance to buy their stock. Most, if not all companies have a company stock fund in their 401k plans that invests in nothing but your employer’s stock. I’ve even seen some companies who give their 401k match as a contribution into the company stock fund.

Stock options are another popular way employers offer employees chances to buy company stock. Stock options are a chance for the employee to buy shares of stock in the company for a significant discount to the current market price of the stock. The catch with stock options is that there are usually a bunch of terms and conditions attached. You may have to work for the company for several years before your stock options will fully vest. There may be other restrictions on when, and how much of the stock you’d be able to sell at any one time as well.

Even if your company doesn’t offer purchase plans in the form of options or a 401k fund there is nothing to stop you from loading up on shares of your employer in the open market  like any other investor is able to.

But is it really a good idea to load up on shares of the company you work for? Let’s look at some of the pros and cons…

Pros of owning stock in the company you work for

More knowledge about the investment – Chances are if you’ve been working for a company for any serious amount of time you have a pretty good feel for the inner workings of the company. You know the inner workings of the company’s operations, what business prospects or risks may lie ahead, how good/bad employee morale is, and various other bits of information that the average investor wouldn’t have access to.

Investing is a game of imperfect information. By actually working for the company you theoretically have more information than any other randomly chosen investor and should be able to make a smarter investment decision.

Higher Return on Investment – If you’re lucky enough to be able to purchase your employer’s stock at a discount. Your return on investment is automatically improved by that amount. A friend of mine can buy shares in his company at a 10% discount. He has to hold the shares for at least 3 months before he is able to sell them. Assuming shares rise over that time period, he’ll make 10% more on his investment than a typical investor would. Not a bad deal, right? You’d be a sucker to pass up on that!

Increased Loyalty – This is kind of a shared benefit between you and your employer. By owning stock in the company you work for you gain an added sense of loyalty to that company. Your company gains because you’ll work harder (in theory) now that you have skin in the game. You gain because the better of a job you do, the better your company performs (in theory) and the more money you all make as a result of the rising stock price.

Cons of owning your employer’s stock

Increased Risk – One thing most people forget is that your financial future is already heavily tied to the company you work for. In the form of your salary! Investing in shares of company stock on top of that only magnifies how intertwined your future is to your company’s performance. If the company you work for hits a rough patch, not only may you end up losing your job, but you may be holding a whole lot of stock that’s worth a fraction of what it used to be as well.

I’m not saying you should be scared that you’re working for the next Enron or Lehman Brothers. Just keep in your mind that no company is 100% safe. For years, bank stocks were considered some of the best investments around. Yet in 2007 I watched my company’s stock price fall from ~$60/share to $0.75/share at one point. I was lucky that I only held a small amount of company stock in my 401k. Others weren’t so lucky and any shares they’re holding onto today are still worth a fraction of what they were 5-10 years earlier. Something like that might have an impact on your future retirement plans, no?

Lack of Diversification – Diversifying our investments across different sectors of the stock market, bonds, real estate etc… is something we do to protect ourselves from any crazy swings in one sector (ie: European stocks may drop, but that will have no effect on how our US real estate investments fare).  It’s the reason we develop an asset allocation strategy and try to stick to it!

Readily investing in company stock through your 401k plan or loading up on discounted shares through an employee purchase program can make it very easy to throw off your asset allocation , exposing yourself to too much risk as mentioned above.

The Bottom Line

It’s only natural to want to own stock in the company we work at. However, as with any investment, it has its risks and drawbacks. These risks shouldn’t automatically deter you from investing because owning stock in your employer can be as lucrative as any other investment out there. Just make sure you invest right by following some simple guidelines.

Stay Rational – Treat your employer’s stock just like any other investment you would be considering. Don’t put blinders on to the risks your company faces just because it’s your company. Remove emotion and loyalty from the equation and weigh the investment objectively before making your decision to invest.

Don’t Overdo It - If you choose to invest in your company’s stock make sure you do so within the confines of your overall portfolio strategy. Don’t buy so much that you throw your portfolio out of whack. Making sure the investment you make in your employer’s stock doesn’t exceed 5% of your portfolio is probably a good guideline to follow. Remember, just because you work there doesn’t mean the stock will perform better than any alternatives.

Does your employer offer you a chance to invest in their stock? Do you take advantage of the opportunity? How has it worked out for you?

Thanks for reading! If you enjoyed this post be sure to subscribe by email or RSS to keep up with all the latest posts! 

The post Should You Buy Stock In the Company You Work For? appeared first on The First Million is the Hardest.

Long ago, tracking your investment portfolio meant waiting for the morning paper and sifting through pages of ticker symbols in the business section to find out what price your stocks closed at the prior day. In order to make a trade you had to pick up the phone and call your financial advisor or broker. If you talk to people about what it was like back then, they’ll likely tell you about walking uphill both to and from school. They’ll tell you about how they only had 3 TV stations, and they liked it!

Ok, maybe it wasn’t that long ago. Still…today Twitter brings us the news in real-time, we can get streaming quotes on all our investments from a number of websites, and we can buy or sell any stock instantly with just the click of a button.

We live in a world of “now” and we’re better off for it. Or are we?

Having this constant stream of information can be a double-edged sword when it comes to our money and our portfolios. On one hand if some really bad news breaks about a company we own, we can act on the information quickly and hopefully save ourselves from major losses (Example: BP’s gulf oil spill). On the other hand, too much information can lead us to make impatient, emotional decisions (Example: Any stock that’s dropped like a rock after missing an earnings estimate by 0.01).

Often the question becomes: “How often should I be checking up on my portfolio?”

The answer is: “As often as you are comfortable doing so.”

I know, I know. That answer sounds like a cheap cop-out and you’re mad I made you read 200 words to get there, but hear me out…

Some people, myself included, like to track their investments constantly. When I’m at work  I always have a browser tab open to Google Finance so I can keep track of what the market is doing and which of my stocks are up or down at any given moment.  For me, it’s part of the fun of being an investor. I like to feel connected and in tune with what’s going on at all times. It’s definitely not important to monitor things constantly and for most people this would lead to more harm than good. If you’re going to constantly monitor your positions you must be able to keep your long-term focus and refrain from getting too emotional over day-to-day movements in price.

For other people, checking in weekly or even monthly is their preferred monitoring period. Just often enough to keep in touch with the important happenings and to have an overall feel for how their investments are performing.

Weekly may still be too often for some investors. I know plenty of people who track their portfolio’s simply by glancing at the quarterly statements that come in the mail from their 401k provider or brokerage firm. Honestly if you’re a passive, long-term investor this is really all you need to do. Check in on your portfolio once in a while to see if it needs rebalancing to maintain your set asset allocation.

Some people prefer not to watch things at all. They may check in once a year and sell their losers for tax purposes or they may just leave everything in the hands of a professional.

Obviously there is a pretty broad spectrum of ways people check their investments. None of these ways is more right or wrong than any other. As I mentioned, I can watch my stocks all day every day and shrug off any big daily gains or losses. My girlfriend breaks out into a nervous sweat if one of her stocks closes in the red by the slightest bit. Monitoring the daily ebbs and flows of the market would probably put her into a mental institution by the end of the year so she takes a more hands off approach.

The real lesson here is that it doesn’t matter how often we check our investments. It’s how often we’re buying or selling that counts.

We should really only make major changes to our portfolios once or twice per year to rebalance our portfolios to stay in line with the asset allocation we’ve chosen for ourselves. If you feel the need to make major moves every time a CNBC talking head yells “buy!” or “sell!” it’s probably better to monitor things less closely. The same goes if short-term moves in the market cause you to get really high or low emotionally. Emotion is one of the worst enemies of good investing decisions. You don’t want to end up sabotaging your long-term goals because you panicked when the market dropped for 2 straight weeks!

Whether you choose to keep up to date on the minute by minute moves of the stock market, or you like to watch from afar. It’s important to focus only on the things you can control. Focus on making money, saving as much of it as possible, putting your money to work, and sticking to your long-term investment strategy.

How often do you check in on your investments? Does following your investments more closely tempt you to make more trades than you otherwise would?

Thanks for reading! If you enjoyed this post be sure to subscribe by email or RSS to keep up with all the latest posts! 

The post How Often Do You Check On Your Investments? appeared first on The First Million is the Hardest.

The US government wants to limit how much money you can save across your tax-advantaged retirement accounts (401k,IRA, Roth IRA…).

President Obama released his budget plan the other day and one specific proposal really caught my attention. In the name of raising $9 billion in new revenue for the government, the President wants to limit the amount you can save in your retirement accounts to $3 million.

The reasoning for the $3,000,000 limit is that it’s about equal to an annuity that would pay out $205,000 per year. A “reasonable retirement” in their terms.

My initial reaction to the plan was some combination of shock and anger. “How dare they tell us how much we can save in our retirement accounts!” However, after taking the time to sit down and think about it some more, I can see both side of the argument.
 

Not many people are affected, at all. Currently 0.3% of all IRA’s and 0.11% of all 401k’s would be affected by the change. Given that the average retirement savings of people approaching retirement is less than $200,000 it’s unlikely that many more will be affected down the road.

Just in case you think you’re special, with a 7% return a 25-year-old starting to save for retirement today would need to max out both their 401(k) and Roth IRA ($23,000/yr at current limits) for the next 35 years. Possible, but highly unlikely.
 

I also get that rich people use tax advantaged accounts to avoid taxes. During the 2012 presidential campaign Mitt Romney said that he had somewhere between 18 and 84 million dollars saved in his IRA.  I also get that the tax benefits on these accounts were designed to encourage lower and middle class people to save more, not to help the rich avoid taxes. You won’t find me shedding any tears because a rich guy has to pay a bit more in taxes, but reducing the average person’s incentive to save for retirement is not a smart way to accomplish that goal.
 

However, what worries me is the precedent that this sets. It’s basically saying that retirement accounts are fair game. It says that at some point down the road the government can just decide that distributions and earnings taken from a Roth IRA are no longer exempt from taxes. Or that your 401k contributions are no longer tax deferred. We all assume these benefits are a sort of sacred cow that will be with us for our lifetimes, but this should be a wake up call for us to not take anything for granted.
 
Another worry is that this will discourage people from contributing as much as they should in these accounts in the first place. The average American isn’t going to do the math and realize how hard accumulating $3,000,000 is. The average American is going to hear that your 401k and IRA balances are capped and think…why bother?
 
The good news is that there is little to no chance that this budget passes. Not only because of the attention that this particular proposal is generating, but because this congress would (and has) shoot down its own ideas as soon as the President agrees to them. Don’t lose any sleep worrying that anything will get passed “as is” by this government.
 

Even if this were to pass, it would be extremely difficult to implement. Many people have multiple 401k’s and IRA’s. The monitoring of balances would be a huge administrative task to begin with. Then add in the fact that balances are constantly fluctuating and it becomes a downright mess.
 
Say I have just over $3 million in my accounts right now. By this law I wouldn’t be able to contribute any more to my retirement accounts. Now say the market drops 5% over the next 2 months. I can contribute to my accounts again? If I contribute after that drop and the markets then take off and send my balances over $3 million again, what happens? Do I get penalized for contributing? It just becomes a confusing mess.
 

There also aren’t many details on how the retirement cap would be implemented. Would there be a higher cap for married couples? Would the cap be indexed to increase with the inflation rate? Would there be any exceptions?
 

A better way to accomplish this goal is to simply phase out the tax benefit at the set limit like happens already with the traditional IRA. Allowing people to contribute but phasing out the tax benefits after certain levels would accomplish the same goal but be received much more warmly than this current plan (in my humble opinion). Simply lowering the maximum yearly contributions or income limits would be another way to accomplish this goal while causing a little less of an uproar as most people don’t come close to maxing out their tax deferred accounts in the first place.
 

Even with the cap, people aren’t barred from saving. Chances are that if you were able to save up $3,000,000 in your retirement accounts you probably have a healthy amount of money saved in various taxable accounts. You’d still be able to contribute as much as you wanted to those.
 

The takeaways from this debate should be that nothing is sacred and that we all need to take long hard looks at our retirement savings strategies.

Hopefully the government will never decide to change the taxation rules on our 401k’s and IRA’s but we can’t assume that those tax benefits will last forever either. Just like how an employer cutting its 401k match isn’t necessarily a reason to stop contributing. The government changing the rules on retirement accounts shouldn’t be a reason to stop saving in them.
 

What should happen is that we take a look at our savings strategies and diversify how much and where we’re saving. Relying on just a 401k or a Roth IRA to get you through retirement could be just as misguided as someone who thought Social Security would be all they’d ever need.
We can only control what is in our power. Paying taxes is just a fact of life, and it shouldn’t be a deterrent to saving or making a profitable investment. If tomorrow morning the government decided that nobody got any tax breaks for retirement savings anymore. I would still save as much, if not more than I do today and you should too.
 

If you want to read the entire proposed budget for 2014 you can do so here.

What are your thoughts on the proposed cap? How would a $3,000,00 cap affect how you save for retirement?

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The post The Government Wants To Limit Your Retirement Savings! appeared first on The First Million is the Hardest.