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2012: Plan To Succeed At Investing

January 1st, 2012 Leave a comment Go to comments

A new year is always exciting. Clear out the old and make way for the new. Start on those resolutions, and face the reality that the gym is going to really get crowded for a few months. And those inevitable posts about what stocks you should invest in. I’ve submitted my 2012 stock picks in the MONEY PROS Index Fund challenge.

Investing is exciting, every day I am watching markets, reading news/analysis looking for that next great thing to invest in. As much as I like investing, I’ll be the first one to tell you that your success as an investor depends mostly on your persistence and consistency in your savings, not your returns. I could tell you to buy “this” stock or “that” stock to make your rich, but that isn’t typically how it works. It is possible to make lots of money finding great stocks (believe me I am trying!); however, it is much easier and more likely you will succeed by saving a lot and assuming modest rates of return. If things work out better, then great!

The reality is investing successfully comes down to boring habits that are not particularly exciting. So, in this post, for 2012 I want to encourage you to focus on these habits and not just on stocks and returns. Here’s some detail on what I am planning.

A 2012 Savings Plan

For 2012, my investing plan will be changing. There are some big changes from my employer:

  1. Company now offers ROTH 401(k).
  2. Company has converted pension plan to a Cash Balance Account (CBA).

My employer has offered a new ROTH 401(k) plan which works just like a ROTH IRA. The exciting development here is that the contribution limits for this plan are 17K, not the typical 5K limit that a ROTH IRA has outside an employer plan. This presents an opportunity to use this as a savings account for uses other than retirement.

The kicker here is that once a ROTH account becomes 5 years old, you can withdraw your contributions at anytime without any consequence. This will provide a convenient way to establish higher savings while creating an earnings stream that will be tax-free upon retirement.

The CBA converts the pension liability into hybrid pension/defined contribution account that defines the long term liability for the company. Another advantage is that this CBA explicitly defines what the value of the pension is in a transparent way. Read more about these plans.

This is my 2012 investment plan:

Roth 401(k) Contributions: 15%

Roth 401(k) Match: 6%

Company CBA Pension Contribution: 6%

Taxable Account Contribution: 15%

Payroll Tax Cut (Extra): 2% – assuming Obama payroll tax cut is resumed for 2012

Total Contributions: 44%.

So in total, 44% of income will be put away either through my own contributions or through my employer. It doesn’t take too much calculation to see that even a modest return of 3-4% per year will create a nice pile of money if this plan is continued over many years.

I chose 3-4% because a typical stable money market fund in your 401(k) will earn about 3%, while most CBAs are earning about 4% while the money is in the company plan. While it’s a good idea to put some money in stocks, you don’t have to go crazy to get outsized returns if your savings rate is high.

Have you reviewed your savings options for 2012? What is your investing plan?

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  1. January 2nd, 2012 at 10:14 | #1

    Very nice SFI! Mine went in the reverse direction. From a company match, it’s no match from this year! I have to adjust contributions accordingly.

    Wish you a very happy new year SFI!

  2. January 2nd, 2012 at 10:30 | #2

    Thanks for stopping by MC. It’s a bummer that you lost your match!

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