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The Independent Investor: Best Avenues to Save For Retirement

By Bill Schmick
iBerkshires Columnist
Today savers are offered a plethora of tax-deferred retirement plans. For those of you who are just starting out the choices can seem overwhelming but it is not as hard as you think.

Back in the day, before the advent of government-sponsored savings plans, defined benefit pension plans and the odd annuity were the only investment vehicles available to me. As a young stud on Wall Street, it didn't matter. Retirement saving was for others. I would live forever, make millions in the market and retire when I was 30. Fortunately, I woke up to the realities of the real world and started saving early in my career. You should, too.

In fact, the earlier you recognize that saving for retirement regularly is a no-brainer, the easier it will be to retire. So let's say you recognize that and want to start saving. The choices today can seem overwhelming. Start with the obvious: tax deferred plans where the U.S. government gives you a tax break. There are traditional IRAs, Roth IRAs, employee 401(k) s, 403(B)s, 457 plans, deferred annuities and many more. In my opinion, if you have earned income and your employer offers some kind of tax-deferred plan, that is where you should concentrate.

Any financial planner will tell you to try and take maximum advantage of the amount you can save in your tax-deferred plan. That would be $16,600 a year in a 401(k), 403(b) and 457 plan and $5,000 in a traditional IRA or Roth IRA. For those over 50 years old, an additional "catch-up" amount of $1,000 a year in your IRA is allowed and $5,500 in your 401(k), 403(b) and 457.

Yet, few of us make enough to contribute the maximum. Instead, the best place to start is your employer plan, especially if it offers a matching contribution to your own. As an example, let’s say you make $50,000/year and your employer will match 3 percent of your salary ($1,500). It doesn’t take rocket science to figure out that you should put your first $1,500 of savings into your tax deferred employee program since your company is matching that amount as a free employee benefit.

But let's say you want (and can afford) to save even more, possibly an additional $5,000. Should you just put it into your company's 403(b) or 401(k) plan or open a traditional, tax-deferred IRA? In my opinion, you should open an IRA. Here's why.

Both contributions are treated equally (i.e. tax deductible) by the Federal government. However, your company's retirement plan will offer a limited number of investment choices. In addition, the fees you pay for investing in your company’s plan are quite high compared to opening your own IRA. Although you can't contribute as much in your IRA, you have much more control over what to invest in and at a lower cost.

There is one caveat, however, if you are contributing to both your traditional IRA and your company plan: at a certain salary level (above $56,000-$66,000) the amount you can contribute as a single taxpayer to a traditional IRA is reduced. For those married couples who file jointly the phase-out range for deductibility of your salary is higher ($90,000-$110,000). If your spouse does not participate in a qualified employer plan but you do, then the cutoff level for your spouse becomes $169,000 to $179,000 if filing jointly.

You can also put your IRA contribution into a Roth IRA but remember, a Roth is not a tax-deductible IRA. However, qualified withdrawals are tax-free while in traditional IRAs withdrawals are taxed as ordinary income. And like traditional IRAs, the Roth contribution is $5,000 yearly and phase-out salary limits also apply.

I suspect most of you will already be tapped out if you contribute the full Monty to both your employer plan as well as a traditional IRA, but in some cases a Roth might work better for you. If you still have money to save, then I suggest you give me a call and we can discuss how best to deploy it.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.


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Independent Investor: Who Do We Owe?

By Bill Schmick
iBerkshires Columnist
Our national debt stands at $14 trillion and rising $3 million a minute or $3.99 billion a day, every day. Given that our debt ceiling at the moment stands at $14.294 trillion, it is only a matter of time before we once again have to renegotiate the debt ceiling.

Readers may recall that as a result of the last go-around over the debt ceiling, investors worried that a technical default by the U.S. would create massive negative fallout among the holders of our national debt. "They" (so the story goes) would dump our debt overnight creating a huge spike in interest rates, etc. etc.

So who are "they?"

Let's start with foreign holders. China is often mentioned as a critical investor of U.S. government debt. The horror story most mentioned is that China could use their position as a weapon. They could sell their holdings in our bonds sparking a global financial disaster. As the largest foreign holder of our debt, I do not discount the importance of China's holdings. But as an investor in U.S. Treasuries, China still ranks as a minor player with less than $1 trillion in holdings ($895.6 billion).

China has actually reduced its level of U.S. government debt by $33.4 billion over the last two years. The bond market barely budged as a result. In fact, U.S. interest rates have declined during that period.

For all the talk about China, few know that Japan, considered one of our most reliable economic and political partners, holds only slightly less of our debt at $877.2 billion. The United Kingdom (another ally) is next followed by a global group of oil exporters who use our debt holdings as part of their oil export business. In addition, Brazil, the Caribbean Banking Centers, Hong Kong and Canada hold portions of our debt. None of the above would likely dump our bonds and might even buy more if asked.

It may surprise you to know that over a third of our government debt is held by the United States. The Fed and other intergovernmental holders own $5.351 trillion while state and local governments account for another $511.8 billion (roughly the same amount as Great Britain).

About 60 percent of our debt is in the hands of the private sector. Insurance companies and depository institutions (banks) hold just over half a $1 trillion while a diverse group of investors including individuals, brokers/dealers, personal trusts, estates, savings bond and corporate institutions, among others, hold $1.458 trillion. Mutual funds own $637.7 billion and pension funds another $706 billion or so.

The point is that contrary to popular opinion, the majority of our debt is held in friendly hands. Sure some holders of our debt might sell if our credit rating is reduced again or there is some kind of technical default on U.S. sovereign debt, but those would be marginal sellers. Certainly the U.S. federal, state ad local governments would keep what they owned and possibly buy more.

Most of the private sector holders would also keep their investments. It would be difficult for pension funds, insurance companies and others to find a comparable alternative for their government debt holdings. Despite the possible downgrades, U.S. debt is still the safest investment around.

Finally, any credit rating change to our debt would not occur in a vacuum. Investors will always need to find a suitable replacement and in a world where Europe is teetering on the edge, where emerging economies are slowing and currencies go up and down like yo-yos. Our sovereign debt, while not stellar, still appears to be more appealing than the alternatives.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.


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The Independent Investor: The Super Committee

By Bill Schmick
iBerkshires Columnist
In less than two weeks, the U.S. Joint Select Committee on Deficit Reduction is supposed to come up with a list of recommendations to cut the country's deficit by at least $1.2 trillion. Will this Super Committee make their Nov. 23 deadline? Don't hold your breath.

By now we should be well acquainted with these binary events. You know these do or die, pass or fail decisions that promise to send us all to Nirvana or Armageddon every other week or so. This year we've lived through the U.S. deficit reduction/debt ceiling 11th hour deal, the will-they-or-won't-they credit rating downgrade of our sovereign debt, the two-year-old Greek tragedy, the EU bailout plan and more recently, Italy's antics.

What is really at stake in this Super Committee decision? As readers may recall, the Republican Party originally demanded a deficit reduction package before agreeing to an increase in the country's debt ceiling. In August, an austerity package of cuts worth $2.4 trillion was announced by the Obama administration.

At the 11th hour, both parties agreed to raise the debt ceiling and set up a committee charged with coming up with a deficit reduction compromise by Nov. 23. Failure to do so will automatically trigger cuts of $600 billion in Washington's two sacred cows—defense (Republicans) and entitlements (Democrats) beginning in 2013. But none of these efforts were enough to stave off a reduction in U.S. debt rating by the credit agencies, which happened on Aug. 6.

Many pundits had warned that markets would collapse around the world if and when we lost our triple "A" credit rating. None of that occurred. In fact, markets rallied and rates declined. Yet, party leaders swear up and down that they feel duty bound to uphold the automatic cuts if the Super Committee fails to come up with a deal. At the same time, 100 House members of both parties are urging the committee to "think big" and expand their deficit reduction efforts to $4 trillion or more. It all sounds to me like more of the same — political theatre with little substance — a legacy of this do-nothing congress.

Will the Super Committee find cuts by Nov. 23?
No, $1.2 trillion is too much to cut
Yes, but they won't be enacted
Nothing's going to happen - 2012 is an election year
  
pollcode.com free polls 
Wall Street is fairly cynical about the "automatic" 2013 cuts and with good reason. Remember, new federal elections will occur in November of next year. It is doubtful that a new Congress and Senate will just sit back and watch this indiscriminate $1.2 trillion reduction of these two important programs.

If the worst happens and no Super Committee deal is forthcoming, how bad would it be?

The credit agencies could use that as an excuse to ratchet down our debt rating again. But given the results of the first reduction in our credit rating, I'm not sure that another one will have much impact, especially given the turmoil occurring in the rest of the world.

It was also interesting that the markets declined on the news of a $2.4 trillion austerity deal in August but not on our debt downgrade. That tells me the markets are far more concerned with economic growth and the high rate of unemployment than they are with the nation's deficit. I'm all for reducing the deficit when the economy is strong enough to withstand the hit. But now, while the economy is still floundering, is not the time. I suspect that the deadline will come and go with little in the way of compromise and the markets will disregard the entire exercise.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.



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The Independent Investor: Should You Consider Renting What You Can't Sell?

By Bill Schmick
iBerkshires Columnist
Patience is a virtue but even virtues can run their course. The housing market is in its third year of continued decline. Those who have been waiting to sell and can't are starting to rethink their alternatives.

The first thing to remember is there is no such thing as "can't" when selling your home. It is just what price you are willing to take for it. Some homeowners have no choice. Underwater owners that are running out of money to pay their mortgage must sell or face foreclosure. Their woes have been well documented. But what about those of us who would like to sell, either a primary residence or a second home, but have the money to wait for a bottom in the real estate market?

The rental market is booming across America. More than 3 million Americans have entered the rental market over the last three years and as foreclosures mount, that number will only increase. It appears that demand for rental properties is outpacing supply.

Obviously, renting your home only makes sense if you have another place to live. If you are relocating because of employment, on sabbatical for a year or two, if you have a second home, or will be moving in with someone else (because of a marriage, death of a relative, etc.) then the economics of renting may be appealing.

On the plus side, renting allows the owner to keep the property until prices bottom out and, hopefully, begin to appreciate. In the meantime, rental income can cover mortgages, taxes and insurance payments if the rental price is right. Better yet, certain expenses such as mortgage payments, property taxes, repairs, maintenance, advertising, broker's fees, transportation and insurance can be deducted from rental income.

There's also a phantom tax deduction called depreciation (the wear and tear on your property) that you can deduct each year from your rental income. All you do is divide the fair market of your home (excluding cost of land) by its recovery period, which is 27.5 years for residential property. For example, assume your home is worth $350,000 divided by 27.5 years equals an annual deduction of $12,727.27 from rental income.

But there are some negatives as well. Landlords have plenty of headaches ranging from renters who fail to pay their rent, to vandalism of their properties. Housing maintenance issues don't go away simply because you no longer live in your home. Depending upon its age, everything from leaky faucets, non-flushable toilets to really big emergencies like roof leaks, and lack of electricity and heat must be addressed immediately or you may be hauled into court and sued.

Renters too have rights and in some cases, even obvious reasons for evictions, such as failing to pay the rent, may involve the courts and we all know how lengthy court cases can be.

As it now stands, the U.S. government provides a generous tax break for homeowners who have lived in their house for at least two of the last five years. Married couples who file jointly can keep up to $500,000 in capital gains from the sale of their home, tax-free. Singles can enjoy up to $250,000 in windfall profits. By renting your home that tax break disappears under certain circumstances.

If you are renting for just a year or two, there is no problem. Simply move back within the qualifying time period, sell, and enjoy your gains. However, if you want to rent over the long term (five years or more), you need to understand the tax consequences. Of course, you can always have your cake and eat it too. If you are willing to rent for a period of years, then move back into the house for two years and then sell it, you will qualify for the tax break.

Before you decide, find out your rights as a landlord by consulting with an eviction attorney. You should interview property managers. They will charge a percentage of the rental income for handling all of your landlord duties; but it could be worth it. Finally, create a budget that encompasses all the expenses, taxes and other items you might incur as a landlord.

All of this may take more time and effort then you are prepared for, but let's face it, renting is a business just like any other and requires preparation, planning and work.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.


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Independent Investor: Europe — A Train on the Right Tracks

By Bill Schmick
iBerkshires Columnist
It finally looks like the European Union is on the right track. After almost two years of vacillating, finger pointing and empty promises, the outlines of a deal were announced this week in Brussels that could provide a solution to Europe’s debt crisis.

The EU gave itself a self-imposed deadline of this Wednesday to come up with at least an outline of a deal. It wasn't easy. There were so many moving parts to include that in the end it took a marathon, ten-hour series of negotiations to get everyone on board.

The respective finance ministers addressed the three areas that most threatened the financial well-being of the Union. Greek debt was the first order of business. Europe's leaders vowed to reduce that nation's debt to 120 percent of GDP versus its present rate of 180 percent. Much of this reduction will be accomplished by asking private creditors (mostly banks) to accept a 50 percent loss on the Greek bonds they hold. It remains to be seen whether these financial institutions will cooperate, but governments have historically managed to get what they have wanted from the private sector (or else).

This 50 percent "haircut" is equal to roughly $139 billion, which will be applied to a second rescue plan for Greece. The Euro leaders promised to guarantee the remaining half of Greece's existing debt and will spend as much as $42 billion to insure against further losses. It will take at least another two or three months to finalize this debt deal.

The next issue, of course, was how to mitigate the big hit Europe's banks are going to take in this haircut. The losses they will incur will drastically lower their reserves and the major concern was how to replenish these reserves quickly. The banks have been directed to go out into the open market and raise as much as $148 billion between now and next June.

Of course, the devil is in the details. There is no guarantee that there will be an appetite for new European debt or equity offerings. Still, depending on the terms, there may be demand from countries such as China, Brazil or in the worst case, European governments themselves that may be buyers of last resort if push comes to shove.

The EU recently agreed to establish a European Financial Stability Facility and fund it with $610 billion. Somewhat akin to the U.S. TARP, the ESFS is a bailout mechanism, only instead of baling out banks, the money was earmarked to save countries like Italy, Portugal and Greece.

The problem was the EFSF is just too small to insure the debt of bigger countries. There was a need to leverage the fund in order to insure at least part of the debt of borderline economies like Italy and Spain. The ministers agreed to allow the ESFS to act as a direct insurer of bond issues, which will bring the total firepower of the fund up to $1.39 trillion. This should make new bond offerings by Italy and Spain more attractive to investors, according to the EU.

There is also an effort to entice big institutional investors from both the private sector as well as government sovereign funds to contribute to a special fund, backed by the EFSF, which could be used to buy government bonds as well as to help in the recapitalization of Europe's banks.

I admit there are still a lot of details to work out but the Europeans should get an "A" for effort in finally addressing the core problems of their financial crisis. I do believe that implementing this program will take time. The process will be less than perfect and that could mean more disappointment ahead, but at least Europe is on the right track at last.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.

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