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Retirement and Mutual Funds

Retirement and mutual funds seem to go together like bread and butter.  Mutual funds are when people pool their money together and use it to buy securities.  These investors each own shares in the mutual fund in direct portion to the amount they have invested.  Each share represents ownership of part of securities owned by the mutual fund.  The price of a share is based on the current value of the fund's investments.  If the fund's investments increase in value, then the fund share price rises. Conversely, if the fund's investments decrease in value, then the fund share price declines. At the end of every trading day, the fund totals the value of all the securities in its portfolio and divides the portfolio value by the number of shares outstanding.  This gives you the mutual fund's net asset value (NAV) - the price of a single share of the fund.  See the formula below. NAV = Total Value of Assets Owned by a Fund - Fund Liabilities Number of Shares Outstanding Mutual funds have many advantages and disadvantages. The biggest advantage to investing through a mutual fund is its diversification. Fees, on the other hand, are a fund's largest disadvantage.  Fees are used to pay professional money managers to direct the mutual fund.  Fees charged by mutual funds vary.  Legally a mutual fund can charge each of the following fees as long as it lists it in its prospectus.  Sales load (also called a front-end load): This fee takes a portion of your money upfront before investing the rest in its fund.  [For example: You have $1,000 to invest.  The mutual fund charges a 3% sales load.  Thus, only $970 in actually invested in the fund]. Redemption fee (also called a back-end load): this fee takes a portion of your money when you sell your shares of the fund.  [For example: Your shares are valued at $1,000.  The mutual fund charges a 5% redemption fee. Thus, you only receive $950]. Management fees.  These fees are an annual fee paid to the professional money manager who directs the fund's investments. [For example: You have $1,000 invested in a mutual fund on December 31st, which has a management fee of 1%.  Thus, on January 1st, you will only have $990, because of the management fee]. 12b-1 fees.  These are fees charged by the mutual fund to provide information to potential investors (i.e. an advertising fee).  [For example, you have a $1,000 invested in a fund with a 0.50% 12b-1 fee. You will have only $995 after the fee is deducted from your account]. An alternative to investing in mutual funds for your retirement is joining an investment club.  Investment clubs are a group of people who pool their money to buy securities, just like mutual funds.  These groups meet on a regular basis, either in person or online.  During these regular meetings, the members of the club socialize, study stocks and learn about investing and personal finance.  They offer all the advantages of a mutual fund, but less the fees that can quickly drain a portfolio.  You can learn more about investment clubs from the industry leader BetterInvesting. The key to developing a successful retirement portfolio is not to simply choose the right mutual funds, although that can be an important element. But, rather to educate yourself about finance and investing so you can choose the best investments for your goals.  How do I educate myself on the latest news impacting my retirement? To keep informed about retirement topics, try a FREE membership to Retirement Intelligence Information Services. At no cost to join, you will receive a bi-monthly newsletter full of financial information to inform and empower you to have a successful retirement. As an added bonus, www.retirementcalc.com will include the Retirement Calculator Software Version 2.0 (a $24.95 value seen live on CBS TV) for FREE. Copyright © 2008, Retirement Calculator, Inc. All rights reserved.

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Analysis of the Economics of Early Social Security Withdrawal

Robert J. Phillips
Chief Retirement Consultant

Deciding whether or not to take the early withdrawal of social security at age 62 can be difficult. If you need this income at 62 to fund your retirement the decision is fairly straightforward. Take it early! On the other hand, if you have another source of revenue to fund your retirement your decision will be primarily based on lifestyle, health and investment preferences.

Several factors can affect your decision. First is your life expectancy. If you are in good health and have a family history of living beyond 90 then waiting for full benefits may be best. Two other factors impact this decision. First and most important is the value of money or your expected return from your investments. If you are using other investments instead of social security to fund your retirement you should use the rate of return of these investments as your value of money. There is another way to look at the value of money. If you do not require the social security money to live, you can invest the distributions for the future. The rate of return of this investment is your value of money. If your investments will make larger returns such as stocks this would favor taking the early withdrawal.

The last factor impacting your decision is inflation. Social security includes an annual adjustment based on inflation. You cannot control this variable but you should be aware of its impact. If future inflation is significant it will favor a later full distribution

FREE Social Security Calculator:

We developed a calculator to assist in analyzing the impact of taking early benefits at age 62 or waiting for full benefits at age 66 to 67 depending on the year you were born...If you were born in 1960 or later your full benefits will begin at age 67 and your reduction for early benefits at age 62 will be 30%. If you were born between 1946 and 1960 your full benefits begin as early as age 66. We have included a chart that summarizes information.

To use the calculator you need to input your year of birth. You also need to input a value of money up to 10% and a projected inflation adjustment. The calculator analyzes income generated over time from both the early and full benefit investments. It calculates the age at which full social security will catch up and breakeven with the early withdrawal. If you were born before 1960 your breakeven age will be impacted by the year you were born. An early breakeven age favors waiting for full benefits.

The social security calculator is not the final answer whether to take an early withdrawal but it does give you additional economic data to assist in that decision. Ultimately you must balance income, investments and lifestyle to optimize your enjoyment during your retirement years.