Pay Yourself First—and Regularly—With Dollar Cost Averaging

To remain financially responsible, everyone must pay bills on a regular basis. These bills include mortgages, utilities, car loans and credit cards. Unfortunately, many people do not also heed the oft-quoted advice to pay themselves first.

The reality is that a steady saving and investing plan is sometimes necessary to help pursue such financial goals as paying for a wedding or new car, buying a house and funding retirement. One strategy that can help you develop a systematic investing plan, while potentially saving you money and easing your mind along the way, is dollar cost averaging (DCA).

DCA Defined

Dollar cost averaging is a technique in which investments of defined amounts are made on a regular basis.¹ As a long-term, disciplined strategy, DCA can help you take advantage of the benefits of compounding to potentially build a sizable sum.

Aside from offering a disciplined, trouble-free way to save and invest, another potential benefit of using DCA is that it ensures that your money purchases more shares when prices are low and fewer when prices are high. Over time, the result could be that the average cost to you may be less than the average share price. For example, consider the accompanying chart, which shows the result of investing $50 in stocks every month for 12 consecutive months.²

As you can see, every month the share price fluctuates a bit, and by the end of the 12-month period, your $600 would have bought you 42.7 shares. The average price per share, as calculated by adding up the monthly price and dividing by 12, would have been $14.25. However, the average cost that you would have actually paid, as calculated by dividing the total amount invested by the number of shares, would have been $14.05 per share. Over the years, this method could potentially save you a lot of money.

The Benefits of DCA
Month	Share Price	Shares Bought
Jan.	$15	3.3
Feb.	$13	3.8
Mar.	$12	4.2
Apr.	$14	3.6
May	$13	3.8
June	$12	4.2
July	$13	3.8
Aug.	$14	3.6
Sept.	$16	3.3
Oct.	$16	3.1
Nov.	$17	2.9
Dec.	$16	3.1
Total Shares		42.7
Average Price Per Share		$14.25
Average Cost Per Share using DCA		$14.05

Dollar cost averaging also can offer the psychological comfort of easing into the market gradually instead of plunging in all at once. Although DCA does not assure a profit or protect against a loss in declining markets, its systematic investing “habit” helps encourage a long-term perspective, which can be soothing for people who might otherwise avoid the short-term volatility of riskier, but potentially more profitable, investments, such as equities.

And last, DCA may help you make savvy investment decisions if you stick with it. For example, if your investment rises by 10%, you will likely post big gains because of the shares you have accrued over time. And if it declines by the same amount, take comfort in knowing that your next investment will purchase more shares at a less expensive price—shares that may regain their value and even exceed the higher price in the future.³

Regular Investing Makes Sense

As a long-term strategy, you may find DCA can help to potentially lower your average cost per share, while allowing you to feel more comfortable during uncertain markets. Keep in mind, however, that you should consider your ability to purchase over long periods of time and your willingness to purchase through periods of low price levels.

¹Periodic investment plans do not assure a profit and do not protect against loss in declining markets. Dollar cost averaging is a strategy that involves continuous investment in securities regardless of fluctuating price levels of such securities, and the investor should consider their financial ability to continue purchasing through periods of low price levels.

²Source: Standard & Poor’s. Stocks are represented by the S&P 500 index.

³Past performance is no guarantee of future results.

This article was is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.

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Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness, or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special, or consequential damages in connection with subscribers’ or others’ use of the content.

Tracking # 1-095838

Changing Jobs or Retiring? Don’t Forget Your Retirement Savings!

Changing Jobs or Retiring? Don’t Forget Your Retirement Savings!

If you’re like many Americans, you probably intend to rely on your employer-sponsored retirement plan savings for a significant portion of your retirement income. So when it comes time to make important decisions, such as what to do with the money in your plan when you change jobs or retire, you should be fully aware of your options.

“Distribution” Defined

You may have read about or heard benefits administrators at your workplace refer to retirement plan “distributions.” This is just a fancy term used to describe a payout of the money that has accumulated in your retirement savings account. Distributions may include amounts you have contributed and the “vested” portion of any amounts your employer has contributed, in addition to any earnings on those contributions.

Retirement plan participants have several options for managing the money in their account when they change jobs or retire. Depending on your age and goals, each option may carry different tax consequences and investment opportunities. That’s why it is important to think through each option carefully before making any decisions.

Typical Distribution Options

Keep money in a former employer’s plan. Depending on the plan’s rules, you may be able to leave your savings in your former employer’s retirement plan whether you are changing jobs or retiring. Retirees -- particularly those who plan to work in some capacity or who can draw on other sources of retirement income -- may want to leave the money where it is and continue to reap the benefits of tax deferral. In addition, if you plan to start your own business when you leave the company, keeping your retirement money in your former employer’s plan may help protect your retirement assets from creditors should your new venture run into unforeseeable trouble.

While you will no longer be able to contribute to the plan, you will still have control over how your account is invested. If you are happy with the investment options available through your former employer’s plan, this may be a choice worth considering. Of course, keep in mind that minimum distributions must begin after you reach age 70½.¹

Make a “direct rollover” to another retirement account. You can move your money into another qualified retirement account, such as an individual retirement account (IRA), or, if you’re changing jobs, your new employer’s retirement savings plan. With a “direct rollover,” the money goes directly from your former employer’s retirement plan to the IRA or new plan, and you never touch your money. With this method, you continue to defer taxes on the full amount of your plan savings.

If you are about to retire, are between jobs or simply prefer the flexibility and wider assortment of investment choices offered through an IRA, then an IRA rollover may be a better option.

Take a cash distribution. You can choose to have your money paid to you in one lump sum when you retire or change jobs. This action is considered a cash distribution from your former employer’s retirement account. The cash payment is subject to a mandatory tax withholding of 20% and possibly a 10% penalty if you were under age 55 at the time you left the company.²

Lump-Sum Distributions: Not Always What They Appear to Be

Amount of distribution	$25,000
Amount withheld for federal income taxes	$5,000
(Potential) 10% penalty	$2,500
Additional tax obligation (based on 25% tax bracket)	$1,250
Net Payout	$16,250

This hypothetical example has been simplified for illustrative purposes. It is not representative of any specific situation. Your results may vary.

Consider an “indirect rollover.” You can avoid paying taxes and any penalties on a cash distribution if you redeposit your retirement plan money within 60 days into an IRA or your new employer’s qualified plan. With this strategy, called an indirect rollover, you’ll still have to pay the 20% withholding tax out of your own pocket, but the tax will be credited back to you when you file your regular income tax, and any excess amount will be refunded. If you owe more than 20%, you’ll need to come up with the additional payment when you file your tax return.

Seek Guidance

It is important to remember that these are complicated choices with lasting implications for your retirement years. Before making any decisions, consider talking to a tax and/or financial advisor who has experience helping people make prudent choices for funding their retirement years.

¹Distributions will be taxed at then-current rates.

²Additional taxes may be due, depending upon an individual’s tax bracket.

This article is not intended to provide specific investment advice or recommendations for any individual. Please consult me if you have any questions.

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Tracking #1-205374

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content. 

Four Retirement Planning Mistakes to Avoid

We all recognize the importance of planning and saving for retirement, but too many of us fall victim to one or more common mistakes. Here are four easily avoidable mistakes that could prevent you from reaching your retirement goals.

1. Putting off planning and saving

Because retirement may be many years away, it's easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That's because the sooner you start saving, the more time your investments have to grow.

The chart below shows how much you could save by age 65 if you contribute $3,000 annually, starting at ages 20 ($679,500), 35 ($254,400), and 45 ($120,000). As you can see, a few years can make a big difference in how much you'll accumulate.

Note:   Assumes 6% annual growth, no tax, and reinvestment of all earnings. This is a hypothetical example and is not intended to reflect the actual performance of any investment.

Don't make the mistake of promising yourself that you'll start saving for retirement as soon as you've bought a house or that new car, or after you've fully financed your child's education--it's important that you start saving as much as you can, as soon as you can.

2. Underestimating how much retirement income you'll need

One of the biggest retirement planning mistakes you can make is to underestimate the amount you'll need to accumulate by the time you retire. It's often repeated that you'll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it's not inconceivable that you may need to replace 100% or more of your preretirement income.

With the future of Social Security uncertain, and fewer and fewer people covered by traditional pension plans these days, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19.2 years (Source: National Vital Statistics Report, Volume 60, Number 4, January 2012). However, that's the average--many can expect to live longer, some much longer, lives.

In order to estimate how much you'll need to accumulate, you'll need to estimate the expenses you're likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire.

3. Ignoring tax-favored retirement plans

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it's on a pre-tax or after-tax (Roth) basis.

If your employer's plan has matching contributions, make sure you contribute at least enough to get the full company match. It's essentially free money. (Some plans may require that you work a certain number of years before you're vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.)

4. Investing too conservatively

When you retire, you'll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It's common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds.

Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.

This publication is not intended to provide specific investment advice or recommendations for any individual.  Consult your financial advisor, or me, if you have any questions.  

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Broadridge Investor Communication Solutions, Inc. does not provide legal, taxation, or investment advice. All the content provided by Broadridge Investor Communication Solutions is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.Copyright 2011 by Broadridge Investor Communication Solutions Inc. All Rights Reserved.