Things I've Learned in Angel Investing

I've helped friends start three companies so far, and helped another continue on for a bit before losing everything I put in. Here's a few things I've learned in my informal angel investing adventures.

1. Only invest what you can afford to lose.

   As with all investing, really. Investing in a single company is very risky; it's putting all your eggs in one basket. Investing in a startup is like putting all your eggs in a basket made of a new experimental material with properties unknown. It might be a nice titanium alloy, or it might end up being a new origami pattern that disintegrates in a bit of rain. It can be a decent place to put truly spare cash, though.

2. Put the terms in writing.

   There will be confusion on anything not in writing, and even then there could be some. Think the arrangement is trivial? Someone will remember it as an investment, and someone else will remember it as a loan. The small business owner is going to forget the need to pay out quarterly for estimated taxes (though, this isn't a problem until you are in a position to have to pay them -- earning so much on the side that you surpass your regular employment's withholding, or retired and not withholding anything). Questions will arise when new investors want to join. Does the owner get a salary paid off the top? Better to just write it down and amend things when new issues come up and are decided.

   Do as I say, not as I do, on this one.

3. Be wary of replacing a departing investor.

   If you are being approached to provide capital to replace some that a departing investor pulled out, extra caution is warranted. Investors can cash out for plenty of legitimate reasons (retiring and buying a summer home, for example). But, it could also be a sign that they saw something wrong. If it's been long enough for an investor to pull out, it's probably an established business. That means they've been in business for awhile and have not built up enough reserve capital in all that time. It's an increased risk, for sure.

4. Be wary of contributing only a portion of initial startup costs.

   Let's say a company needs $100,000 to start up, but you can only afford to invest $50,000. Include a clause to cover the possibilities. Either they don't raise enough to start at all, in which case you want to make sure you get back whatever money you've already given them, or they find a cheaper way to start up. But in this latter scenario, the likelihood of needing to raise more capital increases, and you need to make sure you're fine with the consequences. You're going to have your share diluted, or you need to include a clause about where that dilution comes from, up to their initial capital raise goal, as an example. Or they fail to raise more capital and go out of business.

5. Be prepared to do your taxes late.

   K-1s almost always arrive late. The more businesses that you invest in, the higher the probability you will have to file an extension. Pretty much always, in my experience.

6. Feel good about it.

   This has two parts. Before you pull the trigger, have a generally good feeling about the investment. Trust your gut to whatever extent you normally do. Afterward, don't stress too much. If all else fails, you helped employ one or more people, and you helped someone try to achieve their dream. And since you followed #1, you can afford to fail economically. Silver linings!

Q&A: Should I Pay Down Extra Principal Each Month?

Whether or not to pay down extra principal each month is a complicated question, and one that doesn't have a universal answer by any means. For the purposes of this discussion, we'll assume that an extra payment fits in your budget. Otherwise, the question is a bit moot.

Paying down principal has two primary effects. First, it takes money out of your pocket. Second, it increases your equity. Increasing your equity has the effects of reducing the interest you pay over the life of your loan and increasing your borrowing power. We'll go backwards through these effects this time around.

The borrowing power I'm referring to here will usually take the form of a home equity line of credit (HELOC). If you make a larger down payment, your monthly expenses can be lower, which can increase your borrowing power for a new loan, but if you're just getting a mortgage, chances are you're not looking for many other new loans. (Indeed, you shouldn't be, as new loan credit inquiries can negatively affect your credit score! Wait for your mortgage to be finalized before looking at car loans, for example.) The only thing I would use a HELOC for is an emergency fund. It's a great way to be able to pay down principal and still have access to that money in a pinch. If the pinch comes and you don't already have a HELOC, you're unlikely to be able to get a HELOC, so it's important to plan ahead. HELOCs are usually restricted to whatever equity you've built beyond 20%, so that your combined LTV remains at 80% or less. They also usually require a recent appraisal, so even the no-fee HELOCs aren't entirely cost-free to set up.

To me, though, this benefit of paying down principal isn't a major selling point, as evidenced by the fact that I do not have a HELOC. For emergency funds beyond my cash on hand, I would rely on loans from my family. I haven't formalized that line of credit in any way, and maybe I should do so rather than taking it for granted. At the same time, I can make sure my family knows that I would be there for them, too.

I view principal reduction as an investment that returns a savings in interest payments. Unfortunately, the rate of return on that investment isn't always just the interest rate of your mortgage. I included a simple calculator in my post on your effective mortgage interest rate, but that doesn't give a complete picture of your investment.

First, just as in my discussion on S&P 500 growth, values were not inflation adjusted. When it comes to the returns of the S&P 500, you have to subtract the inflation rate to get an inflation-adjusted return (approximately, anyway). Your mortgage works much the same way except that inflation helps debt, so you get to subtract the inflation rate from the interest rate you pay and get an inflation-adjusted interest rate. You get a benefit now (the home) and pay for it with less and less valuable dollars. Not a bad deal for the purchase, but it lowers the rate of return on principal payments. For the default values in the calculator above, the effective interest rate is 3.75%. After adjusting for inflation by subtracting 3.3% (though recent inflation has been lower), you're left with a nice low 0.45% inflation-adjusted effective interest rate.

Second, paying down principal now takes off interest from the very end of the loan. Your minimum payment doesn't go down and you can't readily access that money except through a HELOC. It is definitely a long-term investment, and the rate of return is locked for that entire period. It's similar to buying a multi-year CD with a rather - even ridiculously - low rate, given the current interest rate environment.

Third, paying down principal really shows the nature of compounding. Every payment that goes by, the principal you pay down saves you one fewer compounding of interest. Take a look at a monthly amortization schedule (my favorite calculator). You'll notice that the principal you pay goes up each month, while the interest paid goes down. Where you are in the schedule depends entirely on the principal outstanding, so to move up the schedule by a month (and in effect take a payment off the back end), you just have to pay the principal for the next month ahead of time. Thus, the extra payment required to gain a month goes up each time. The rate of return doesn't go down, but the time horizon is shortened and the compounding reduced. If that shortening of the time horizon is your goal, there are definitely diminishing returns.

As mentioned above, paying principal takes money out of your pocket. Whether or not paying principal is a good investment really depends on which pocket the money comes from. If it's coming from a cash account, chances are good that you will get a larger return by eliminating interest. If you are paying extra principal instead of making an IRA or 401(k) contribution or otherwise investing, then you are missing out on what is very likely to be a higher return in the stock market. Remember that it is important to compare inflation-adjusted rates to each other, and non-inflation-adjusted rates to each other. Mixing and matching is not a valid comparison.

Basically, as near as I can tell, prepaying principal doesn't make financial sense unless mortgage interest rates are over ten percent or so. I don't think many people today would pay down their mortgage if it weren't for the psychological benefits. Being in debt just doesn't feel very good - especially when it's tens or hundreds of thousands of dollars and can result in being homeless. Conversely, there's no feeling quite like knocking another month off the end of your mortgage. It's also a lot of fun to reduce your principal by the first $1,000; the first $10,000; the first $100,000 (I imagine). I'm also really looking forward to the day (soon, I think!) when my various investment and cash accounts could pay off my mortgage if I liquidated them. That would mean I could pay off the house if I had to, significantly lowering my monthly expenses so that I could live off a minimum wage job, for example. However, when I get close to the end of my mortgage, I imagine that I will pay it off simply for the monthly cash flow improvement, whether I need it or not.

In the end, I pay a couple hundred extra each month despite the logic behind investing it instead. I guess that's the price I put on the psychological benefits above. Pretty cheap therapy, actually.

Infinite Retirement Calculator

As you may know, I plan on living forever. Dying just seems so wasteful, so I think I'll skip that part of life. Living forever requires some planning, though. It'd be rather annoying to retire and then be forced back into the workforce at age 2718 because I ran out of money. Every retirement calculator I've ever found requires you to choose how long you will be retired. The longest option I've seen is 120 years, but even that's rather pessimistic. So then, I need to know how much money I need to save up in order to retire - forever. Alternatively, I'd like to know how much I can take out every year given my current investments.

I tried to be as conservative as possible in my planning. I assumed I would take out the entire year's spending money at the beginning of the year, i.e., I was pessimistic about how much of my net worth would grow each year. Of course, this pesky little recession has shown that I'm being ridiculously optimistic by assuming any sort of consistent growth during my retirement. Still, this is for planning purposes only, and certain assumptions have to be made in order to make the math at all reasonable.

So, without further ado, the calculator!

• Modify either the "Net worth" or the "Max sustainable income" field and the other will be calculated.
• "Growth rate" and "Inflation rate" are configurable as well.
• The bold label indicates the calculated value.

Net worth ($):
Growth rate (%):
Inflation rate (%):
Max sustainable income ($):
Monthly values?

For every $0.00 you save, your eternal retirement income increases by $1.00.

Some following ado is in order. It should be noted that the "Net worth" and "Max sustainable income" values are in current dollars. The amount you withdraw is assumed to adjust for inflation each year; your infinite retirement should maintain a consistent quality of life. Since money equals happiness, this means your purchasing power should remain the same no matter how long you live. Similarly, the "Net worth" (when calculated) is how much you would need today in order to retire. The amount you need goes up each year, since your income requirements get larger as you postpone your retirement, but most of the difference should be accounted for in the principal growth that would be occurring. It should also be noted that the amount you have to save per dollar is entirely dependent on the growth and inflation rates, so these are rather important to estimate right (and/or conservatively).

Observant readers may have noticed that the default inflation rate of 3.3% closely matches the annualized inflation rate discussed previously. They may have also noticed that the default growth rate of 7% does NOT match any of the numbers in my discussion on the annualized growth rate. I chose 7% because this calculator models retirement, and people tend to be more conservative in their retirement. I think 7% is a better reflection of a portfolio with a significant percentage allocated to bonds, for example.

The "Net worth" label is probably a bit misleading, but it gives you a good place to start. I would probably not include my home equity in these calculations because I don't plan on using that for income in any way. Similarly, cash accounts won't come close to the average growth most people assume in their models, and would probably best be ignored. I would have used "Retirement savings" except that term is usually used to refer to 401(k) and IRA accounts, and regular taxable accounts can grow and produce income, too.

Growth and inflation rates are APY values. The default values reflect yearly budgeting, and for yearly values, APR=APY and things are simple. When the "Monthly values?" checkbox is checked, the growth and inflation rates are adjusted such that the APY remains the same as for the yearly case, other than rounding errors. When looking at monthly values, your overall income will still be higher (or your net worth needed lower) because you are leaving your money growing a few months longer.

Annualized S&P 500 Growth Rate

I talked before about the annualized inflation rate since 1913, and how this is a good number to use in modeling the future. This time, I'll be looking at the annualized return of the stock market as a representative of investments in general.

Once again, my efforts started by trying to find everything I needed online. I came much closer this time around than before. I found an excellent CAGR calculator for the S&P 500 going back to 1871. Again, this is good to get a final answer for a given time period, but I'd like the time period to be less arbitrary. The problem is that historic price data is readily available, but that doesn't include dividends. We really need data reflecting the total return seriously, visit this link - 44% of the total return is dividend reinvestment - amazing!). After a lot of searching for raw data, I found some detailed monthly data for the S&P 500 going back to 1970, much of which was reconstructed. While not raw, it's at least data!

The graph below (click for full size) shows the 1970-2009 data - individual monthly total returns, trailing 12-month total returns, trailing 20-year annualized total returns, and cumulative total returns since 01/1970. The overall total return from 1970-2009 was 9.44%-9.93% depending on what month you end on. The average 20-year annualized return was 13.31%, and the average 12-month return was 11.33%. It's not included in the graph or the table below, but the average 30-year annualized return over 1871-2009 was 9.36%, while the overall annualized return was 8.89% for that range. (NOTE: The average of a sliding window is not a great statistic - the time periods on each end are under-weighted. I include them because if any readers are like me, taking the average of a series of numbers is one of the first things you try to do. I am simply saving them a bit of work. ;)

For modeling my future investments, I use a more conservative 8% growth rate. However, I have a column in my spreadsheet that projects a 10% growth goal from when I first created it. Of course, the financial crisis and recession means I have a lot of catching up to do, even to my original 8% plan.

S&P 500 Data Table Display S&P 500 Data Table

Date	Total Value	1-Month Total Return	12-Month Total Return	20-year Annualized	Annualized Total Return
01/1970	$85.28	---	---	---	---
02/1970	$90.03	5.575%	---	---	---
03/1970	$90.43	0.437%	---	---	---
04/1970	$82.52	-8.747%	---	---	---
05/1970	$77.75	-5.777%	---	---	---
06/1970	$74.12	-4.664%	---	---	---
07/1970	$79.82	7.686%	---	---	---
08/1970	$83.64	4.779%	---	---	---
09/1970	$86.66	3.619%	---	---	---
10/1970	$85.94	-0.832%	---	---	---
11/1970	$90.29	5.057%	---	---	---
12/1970	$95.68	5.975%	---	---	---
01/1971	$99.82	4.319%	17.045%	---	17.045%
02/1971	$100.98	1.168%	12.160%	---	16.883%
03/1971	$104.96	3.937%	16.069%	---	19.478%
04/1971	$109.04	3.888%	32.141%	---	21.727%
05/1971	$104.78	-3.906%	34.765%	---	16.701%
06/1971	$105.13	0.331%	41.826%	---	15.915%
07/1971	$101.06	-3.872%	26.605%	---	11.981%
08/1971	$104.98	3.882%	25.520%	---	14.027%
09/1971	$104.51	-0.445%	20.597%	---	12.978%
10/1971	$100.42	-3.914%	16.849%	---	9.790%
11/1971	$100.44	0.021%	11.247%	---	9.337%
12/1971	$109.37	8.884%	14.300%	---	13.859%
01/1972	$111.62	2.057%	11.822%	---	14.404%
02/1972	$114.71	2.771%	13.594%	---	15.292%
03/1972	$115.66	0.826%	10.193%	---	15.099%
04/1972	$116.44	0.680%	6.790%	---	14.847%
05/1972	$118.74	1.969%	13.319%	---	15.239%
06/1972	$116.43	-1.945%	10.749%	---	13.749%
07/1972	$116.98	0.476%	15.757%	---	13.477%
08/1972	$121.30	3.688%	15.541%	---	14.610%
09/1972	$120.99	-0.252%	15.765%	---	14.015%
10/1972	$122.42	1.185%	21.909%	---	14.050%
11/1972	$128.32	4.813%	27.749%	---	15.511%
12/1972	$130.14	1.422%	18.995%	---	15.594%
01/1973	$128.20	-1.491%	14.858%	---	14.555%
02/1973	$123.68	-3.525%	7.822%	---	12.814%
03/1973	$123.78	0.081%	7.025%	---	12.486%
04/1973	$119.04	-3.829%	2.231%	---	10.807%
05/1973	$117.11	-1.626%	-1.374%	---	9.981%
06/1973	$116.64	-0.400%	0.180%	---	9.597%
07/1973	$121.38	4.067%	3.760%	---	10.611%
08/1973	$117.24	-3.410%	-3.342%	---	9.289%
09/1973	$122.25	4.269%	1.039%	---	10.319%
10/1973	$122.45	0.165%	0.020%	---	10.127%
11/1973	$108.87	-11.090%	-15.156%	---	6.578%
12/1973	$111.02	1.980%	-14.689%	---	6.967%
01/1974	$110.23	-0.718%	-14.020%	---	6.625%
02/1974	$110.15	-0.073%	-10.943%	---	6.467%
03/1974	$107.89	-2.047%	-12.836%	---	5.807%
04/1974	$104.02	-3.586%	-12.616%	---	4.786%
05/1974	$100.88	-3.022%	-13.856%	---	3.953%
06/1974	$99.73	-1.135%	-14.491%	---	3.608%
07/1974	$92.34	-7.419%	-23.929%	---	1.782%
08/1974	$84.36	-8.637%	-28.046%	---	-0.236%
09/1974	$74.64	-11.517%	-38.940%	---	-2.814%
10/1974	$87.19	16.809%	-28.793%	---	0.468%
11/1974	$82.93	-4.886%	-23.824%	---	-0.576%
12/1974	$81.64	-1.558%	-26.467%	---	-0.884%
01/1975	$92.02	12.719%	-16.515%	---	1.534%
02/1975	$97.89	6.378%	-11.126%	---	2.750%
03/1975	$100.38	2.537%	-6.966%	---	3.205%
04/1975	$105.49	5.099%	1.414%	---	4.135%
05/1975	$110.52	4.764%	9.557%	---	4.981%
06/1975	$115.80	4.773%	16.104%	---	5.810%
07/1975	$108.34	-6.440%	17.331%	---	4.447%
08/1975	$106.43	-1.757%	26.166%	---	4.048%
09/1975	$103.11	-3.119%	38.141%	---	3.408%
10/1975	$109.85	6.534%	25.989%	---	4.502%
11/1975	$112.95	2.819%	36.195%	---	4.935%
12/1975	$112.03	-0.811%	37.229%	---	4.719%
01/1976	$125.67	12.174%	36.565%	---	6.675%
02/1976	$124.61	-0.843%	27.295%	---	6.433%
03/1976	$128.81	3.370%	28.328%	---	6.916%
04/1976	$127.81	-0.779%	21.152%	---	6.688%
05/1976	$126.39	-1.112%	14.357%	---	6.409%
06/1976	$131.99	4.432%	13.985%	---	7.044%
07/1976	$131.36	-0.480%	21.246%	---	6.872%
08/1976	$131.12	-0.183%	23.189%	---	6.752%
09/1976	$134.50	2.585%	30.442%	---	7.074%
10/1976	$132.00	-1.862%	20.162%	---	6.686%
11/1976	$131.46	-0.408%	16.390%	---	6.538%
12/1976	$138.84	5.612%	23.927%	---	7.300%
01/1977	$132.27	-4.728%	5.254%	---	6.471%
02/1977	$129.86	-1.823%	4.214%	---	6.117%
03/1977	$128.50	-1.052%	-0.244%	---	5.887%
04/1977	$129.03	0.416%	0.958%	---	5.878%
05/1977	$126.50	-1.961%	0.091%	---	5.524%
06/1977	$132.75	4.942%	0.580%	---	6.149%
07/1977	$130.71	-1.543%	-0.495%	---	5.859%
08/1977	$128.85	-1.421%	-1.728%	---	5.593%
09/1977	$129.05	0.155%	-4.056%	---	5.552%
10/1977	$124.02	-3.895%	-6.043%	---	4.951%
11/1977	$127.94	3.162%	-2.675%	---	5.315%
12/1977	$128.90	0.749%	-7.157%	---	5.357%
01/1978	$121.50	-5.742%	-8.144%	---	4.524%
02/1978	$119.04	-2.028%	-8.336%	---	4.212%
03/1978	$122.54	2.941%	-4.637%	---	4.539%
04/1978	$133.60	9.024%	3.537%	---	5.592%
05/1978	$134.82	0.919%	6.579%	---	5.650%
06/1978	$132.97	-1.377%	0.160%	---	5.419%
07/1978	$140.72	5.831%	7.661%	---	6.069%
08/1978	$144.96	3.010%	12.500%	---	6.375%
09/1978	$144.49	-0.320%	11.966%	---	6.273%
10/1978	$131.89	-8.718%	6.347%	---	5.110%
11/1978	$134.73	2.147%	5.301%	---	5.313%
12/1978	$137.37	1.964%	6.571%	---	5.492%
01/1979	$143.46	4.432%	18.074%	---	5.949%
02/1979	$138.85	-3.213%	16.646%	---	5.513%
03/1979	$147.13	5.962%	20.070%	---	6.130%
04/1979	$148.06	0.629%	10.824%	---	6.145%
05/1979	$144.84	-2.171%	7.430%	---	5.840%
06/1979	$151.14	4.350%	13.670%	---	6.266%
07/1979	$153.17	1.340%	8.847%	---	6.358%
08/1979	$162.01	5.771%	11.764%	---	6.925%
09/1979	$162.70	0.430%	12.605%	---	6.911%
10/1979	$152.29	-6.403%	15.461%	---	6.127%
11/1979	$159.53	4.754%	18.407%	---	6.576%
12/1979	$162.94	2.138%	18.609%	---	6.746%
01/1980	$173.06	6.216%	20.635%	---	7.334%
02/1980	$173.05	-0.009%	24.628%	---	7.270%
03/1980	$156.23	-9.722%	6.181%	---	6.135%
04/1980	$163.45	4.623%	10.395%	---	6.553%
05/1980	$171.86	5.147%	18.653%	---	7.017%
06/1980	$177.30	3.164%	17.305%	---	7.279%
07/1980	$189.64	6.959%	23.808%	---	7.908%
08/1980	$191.55	1.011%	18.237%	---	7.946%
09/1980	$197.19	2.942%	21.194%	---	8.175%
10/1980	$201.18	2.024%	32.107%	---	8.311%
11/1980	$222.61	10.654%	39.547%	---	9.261%
12/1980	$215.90	-3.017%	32.504%	---	8.881%
01/1981	$206.86	-4.184%	19.530%	---	8.389%
02/1981	$210.46	1.737%	21.616%	---	8.492%
03/1981	$218.87	3.999%	40.101%	---	8.807%
04/1981	$214.64	-1.934%	31.321%	---	8.551%
05/1981	$215.19	0.256%	25.212%	---	8.510%
06/1981	$213.84	-0.626%	20.612%	---	8.385%
07/1981	$214.28	0.206%	12.997%	---	8.341%
08/1981	$201.91	-5.775%	5.406%	---	7.724%
09/1981	$191.96	-4.927%	-2.651%	---	7.202%
10/1981	$202.32	5.397%	0.567%	---	7.630%
11/1981	$210.67	4.127%	-5.365%	---	7.942%
12/1981	$205.27	-2.565%	-4.923%	---	7.649%
01/1982	$202.59	-1.305%	-2.067%	---	7.477%
02/1982	$191.26	-5.590%	-9.119%	---	6.913%
03/1982	$190.27	-0.522%	-13.070%	---	6.818%
04/1982	$198.87	4.519%	-7.350%	---	7.156%
05/1982	$192.09	-3.409%	-10.737%	---	6.805%
06/1982	$189.20	-1.502%	-11.524%	---	6.628%
07/1982	$185.83	-1.779%	-13.276%	---	6.430%
08/1982	$208.39	12.139%	3.211%	---	7.359%
09/1982	$210.99	1.247%	9.913%	---	7.414%
10/1982	$235.28	11.510%	16.288%	---	8.285%
11/1982	$244.78	4.039%	16.190%	---	8.563%
12/1982	$249.50	1.927%	21.547%	---	8.666%
01/1983	$258.77	3.719%	27.734%	---	8.914%
02/1983	$264.70	2.292%	38.397%	---	9.043%
03/1983	$274.48	3.694%	44.263%	---	9.284%
04/1983	$296.11	7.878%	48.898%	---	9.850%
05/1983	$293.53	-0.870%	52.813%	---	9.714%
06/1983	$304.96	3.892%	61.181%	---	9.963%
07/1983	$295.96	-2.950%	59.259%	---	9.655%
08/1983	$300.40	1.501%	44.151%	---	9.713%
09/1983	$304.55	1.381%	44.342%	---	9.761%
10/1983	$301.03	-1.156%	27.946%	---	9.607%
11/1983	$307.38	2.109%	25.574%	---	9.712%
12/1983	$305.77	-0.523%	22.556%	---	9.609%
01/1984	$304.06	-0.558%	17.502%	---	9.506%
02/1984	$293.37	-3.519%	10.828%	---	9.169%
03/1984	$298.45	1.732%	8.730%	---	9.245%
04/1984	$301.28	0.949%	1.746%	---	9.261%
05/1984	$284.60	-5.536%	-3.043%	---	8.772%
06/1984	$290.78	2.172%	-4.648%	---	8.881%
07/1984	$287.17	-1.240%	-2.968%	---	8.734%
08/1984	$318.89	11.045%	6.155%	---	9.466%
09/1984	$318.97	0.024%	4.735%	---	9.411%
10/1984	$320.20	0.385%	6.368%	---	9.384%
11/1984	$316.61	-1.120%	3.004%	---	9.246%
12/1984	$324.95	2.635%	6.274%	---	9.383%
01/1985	$350.27	7.791%	15.196%	---	9.876%
02/1985	$354.56	1.225%	20.860%	---	9.908%
03/1985	$354.80	0.066%	18.881%	---	9.855%
04/1985	$354.46	-0.094%	17.653%	---	9.792%
05/1985	$374.94	5.778%	31.744%	---	10.139%
06/1985	$380.82	1.567%	30.964%	---	10.193%
07/1985	$380.26	-0.146%	32.415%	---	10.125%
08/1985	$377.01	-0.854%	18.226%	---	10.008%
09/1985	$365.22	-3.128%	14.501%	---	9.729%
10/1985	$382.09	4.619%	19.330%	---	9.990%
11/1985	$408.30	6.859%	28.959%	---	10.397%
12/1985	$428.05	4.838%	31.727%	---	10.667%
01/1986	$430.44	0.558%	22.888%	---	10.647%
02/1986	$462.62	7.475%	30.476%	---	11.086%
03/1986	$488.42	5.579%	37.664%	---	11.400%
04/1986	$482.93	-1.126%	36.242%	---	11.260%
05/1986	$508.62	5.320%	35.653%	---	11.553%
06/1986	$517.21	1.690%	35.817%	---	11.605%
07/1986	$488.28	-5.593%	28.408%	---	11.155%
08/1986	$524.49	7.416%	39.118%	---	11.576%
09/1986	$481.13	-8.267%	31.737%	---	10.939%
10/1986	$508.88	5.767%	33.183%	---	11.254%
11/1986	$521.25	2.430%	27.663%	---	11.354%
12/1986	$507.95	-2.552%	18.665%	---	11.125%
01/1987	$576.34	13.466%	33.896%	---	11.896%
02/1987	$599.12	3.951%	29.507%	---	12.088%
03/1987	$616.40	2.885%	26.203%	---	12.212%
04/1987	$610.93	-0.888%	26.506%	---	12.092%
05/1987	$616.23	0.867%	21.158%	---	12.086%
06/1987	$647.35	5.050%	25.161%	---	12.342%
07/1987	$680.14	5.066%	39.292%	---	12.597%
08/1987	$705.52	3.731%	34.514%	---	12.769%
09/1987	$690.05	-2.192%	43.422%	---	12.564%
10/1987	$541.44	-21.536%	6.399%	---	10.974%
11/1987	$496.82	-8.241%	-4.686%	---	10.387%
12/1987	$534.62	7.608%	5.251%	---	10.788%
01/1988	$557.10	4.206%	-3.338%	---	10.990%
02/1988	$583.07	4.661%	-2.678%	---	11.216%
03/1988	$565.06	-3.089%	-8.330%	---	10.970%
04/1988	$571.31	1.106%	-6.486%	---	10.984%
05/1988	$576.25	0.865%	-6.487%	---	10.984%
06/1988	$602.70	4.589%	-6.898%	---	11.202%
07/1988	$600.41	-0.379%	-11.723%	---	11.126%
08/1988	$580.03	-3.395%	-17.787%	---	10.867%
09/1988	$604.74	4.260%	-12.363%	---	11.064%
10/1988	$621.58	2.784%	14.801%	---	11.175%
11/1988	$612.72	-1.425%	23.328%	---	11.038%
12/1988	$623.41	1.745%	16.608%	---	11.089%
01/1989	$669.06	7.323%	20.096%	---	11.451%
02/1989	$652.39	-2.492%	11.888%	---	11.251%
03/1989	$667.60	2.333%	18.148%	---	11.334%
04/1989	$702.27	5.192%	22.922%	---	11.575%
05/1989	$730.68	4.046%	26.799%	---	11.751%
06/1989	$726.53	-0.567%	20.548%	---	11.665%
07/1989	$792.13	9.029%	31.932%	---	12.108%
08/1989	$807.62	1.955%	39.238%	---	12.165%
09/1989	$804.34	-0.406%	33.007%	---	12.087%
10/1989	$785.67	-2.322%	26.399%	---	11.900%
11/1989	$801.69	2.039%	30.841%	---	11.961%
12/1989	$820.94	2.401%	31.686%	---	12.042%
01/1990	$765.83	-6.714%	14.463%	11.600%	11.600%
02/1990	$775.69	1.288%	18.901%	11.369%	11.620%
03/1990	$796.25	2.650%	19.269%	11.490%	11.714%
04/1990	$776.38	-2.495%	10.554%	11.860%	11.524%
05/1990	$852.08	9.751%	16.615%	12.717%	11.986%
06/1990	$846.33	-0.675%	16.489%	12.948%	11.897%
07/1990	$843.62	-0.321%	6.500%	12.513%	11.828%
08/1990	$767.36	-9.039%	-4.984%	11.720%	11.264%
09/1990	$730.02	-4.867%	-9.240%	11.244%	10.948%
10/1990	$726.91	-0.426%	-7.478%	11.266%	10.879%
11/1990	$773.90	6.464%	-3.466%	11.340%	11.167%
12/1990	$795.46	2.786%	-3.104%	11.170%	11.266%
01/1991	$830.10	4.355%	8.393%	11.172%	11.445%
02/1991	$889.46	7.152%	14.667%	11.492%	11.763%
03/1991	$911.00	2.422%	14.412%	11.410%	11.840%
04/1991	$913.16	0.237%	17.618%	11.211%	11.804%
05/1991	$952.55	4.314%	11.791%	11.668%	11.977%
06/1991	$908.91	-4.581%	7.394%	11.389%	11.682%
07/1991	$951.28	4.661%	12.761%	11.863%	11.871%
08/1991	$973.82	2.369%	26.904%	11.781%	11.944%
09/1991	$957.52	-1.674%	31.163%	11.712%	11.809%
10/1991	$970.39	1.344%	33.495%	12.010%	11.829%
11/1991	$931.29	-4.029%	20.338%	11.779%	11.571%
12/1991	$1,037.80	11.437%	30.466%	11.908%	12.077%
01/1992	$1,018.46	-1.863%	22.692%	11.689%	11.933%
02/1992	$1,031.65	1.295%	15.986%	11.608%	11.951%
03/1992	$1,011.59	-1.945%	11.041%	11.453%	11.804%
04/1992	$1,041.34	2.941%	14.037%	11.577%	11.903%
05/1992	$1,046.44	0.490%	9.857%	11.495%	11.881%
06/1992	$1,030.88	-1.488%	13.418%	11.521%	11.759%
07/1992	$1,072.99	4.085%	12.794%	11.718%	11.912%
08/1992	$1,051.03	-2.047%	7.929%	11.401%	11.763%
09/1992	$1,063.38	1.175%	11.056%	11.480%	11.775%
10/1992	$1,067.05	0.345%	9.961%	11.434%	11.747%
11/1992	$1,103.39	3.405%	18.479%	11.358%	11.865%
12/1992	$1,116.93	1.227%	7.624%	11.348%	11.879%
01/1993	$1,126.21	0.831%	10.580%	11.477%	11.874%
02/1993	$1,141.56	1.363%	10.654%	11.753%	11.894%
03/1993	$1,165.65	2.110%	15.230%	11.865%	11.950%
04/1993	$1,137.47	-2.417%	9.232%	11.947%	11.787%
05/1993	$1,167.90	2.675%	11.607%	12.187%	11.869%
06/1993	$1,171.32	0.293%	13.624%	12.226%	11.838%
07/1993	$1,166.61	-0.402%	8.725%	11.980%	11.775%
08/1993	$1,210.87	3.794%	15.208%	12.383%	11.907%
09/1993	$1,201.59	-0.767%	12.997%	12.105%	11.827%
10/1993	$1,226.44	2.069%	14.938%	12.211%	11.879%
11/1993	$1,214.74	-0.954%	10.092%	12.818%	11.790%
12/1993	$1,229.43	1.209%	10.072%	12.775%	11.803%
01/1994	$1,271.22	3.400%	12.876%	13.005%	11.916%
02/1994	$1,236.72	-2.714%	8.336%	12.853%	11.744%
03/1994	$1,182.80	-4.360%	1.472%	12.719%	11.496%
04/1994	$1,197.97	1.282%	5.319%	12.997%	11.513%
05/1994	$1,217.63	1.641%	4.258%	13.262%	11.546%
06/1994	$1,187.78	-2.451%	1.405%	13.187%	11.391%
07/1994	$1,226.79	3.284%	5.158%	13.807%	11.497%
08/1994	$1,277.08	4.100%	5.468%	14.552%	11.638%
09/1994	$1,245.85	-2.445%	3.684%	15.113%	11.484%
10/1994	$1,273.84	2.247%	3.865%	14.349%	11.544%
11/1994	$1,227.45	-3.642%	1.046%	14.423%	11.336%
12/1994	$1,245.66	1.484%	1.320%	14.597%	11.362%
01/1995	$1,277.96	2.593%	0.530%	14.059%	11.436%
02/1995	$1,327.77	3.897%	7.362%	13.925%	11.566%
03/1995	$1,366.95	2.951%	15.569%	13.948%	11.655%
04/1995	$1,407.20	2.945%	17.465%	13.830%	11.742%
05/1995	$1,463.44	3.997%	20.188%	13.788%	11.875%
06/1995	$1,497.43	2.323%	26.070%	13.654%	11.934%
07/1995	$1,547.09	3.316%	26.109%	14.219%	12.037%
08/1995	$1,550.98	0.251%	21.447%	14.334%	12.006%
09/1995	$1,616.44	4.220%	29.745%	14.752%	12.145%
10/1995	$1,610.66	-0.357%	26.441%	14.369%	12.088%
11/1995	$1,681.36	4.390%	36.981%	14.456%	12.233%
12/1995	$1,713.75	1.926%	37.578%	14.612%	12.274%
01/1996	$1,772.08	3.404%	38.664%	14.146%	12.377%
02/1996	$1,788.51	0.927%	34.701%	14.247%	12.375%
03/1996	$1,805.72	0.963%	32.099%	14.113%	12.374%
04/1996	$1,832.35	1.474%	30.212%	14.241%	12.396%
05/1996	$1,879.60	2.579%	28.437%	14.451%	12.463%
06/1996	$1,886.77	0.382%	26.001%	14.224%	12.437%
07/1996	$1,803.42	-4.418%	16.568%	13.994%	12.204%
08/1996	$1,841.46	2.109%	18.728%	14.124%	12.252%
09/1996	$1,945.10	5.628%	20.333%	14.291%	12.442%
10/1996	$1,998.75	2.758%	24.095%	14.554%	12.515%
11/1996	$2,149.83	7.559%	27.862%	14.995%	12.780%
12/1996	$2,107.23	-1.981%	22.960%	14.567%	12.654%
01/1997	$2,238.88	6.248%	26.342%	15.193%	12.866%
02/1997	$2,256.43	0.784%	26.163%	15.344%	12.856%
03/1997	$2,163.72	-4.109%	19.825%	15.164%	12.640%
04/1997	$2,292.89	5.970%	25.134%	15.474%	12.839%
05/1997	$2,432.49	6.088%	29.415%	15.930%	13.042%
06/1997	$2,541.47	4.480%	34.699%	15.905%	13.180%
07/1997	$2,743.68	7.957%	52.138%	16.440%	13.453%
08/1997	$2,589.98	-5.602%	40.648%	16.188%	13.173%
09/1997	$2,731.82	5.477%	40.446%	16.489%	13.349%
10/1997	$2,640.59	-3.340%	32.112%	16.523%	13.168%
11/1997	$2,762.83	4.629%	28.514%	16.605%	13.310%
12/1997	$2,810.27	1.717%	33.363%	16.661%	13.337%
01/1998	$2,841.36	1.106%	26.910%	17.070%	13.340%
02/1998	$3,046.29	7.213%	35.005%	17.599%	13.579%
03/1998	$3,202.29	5.121%	47.999%	17.722%	13.737%
04/1998	$3,234.50	1.006%	41.067%	17.274%	13.735%
05/1998	$3,178.91	-1.719%	30.686%	17.119%	13.622%
06/1998	$3,308.03	4.062%	30.162%	17.433%	13.739%
07/1998	$3,272.81	-1.065%	19.285%	17.038%	13.653%
08/1998	$2,799.63	-14.458%	8.095%	15.956%	12.992%
09/1998	$2,978.98	6.406%	9.047%	16.335%	13.197%
10/1998	$3,221.30	8.134%	21.992%	17.325%	13.464%
11/1998	$3,416.53	6.061%	23.661%	17.546%	13.654%
12/1998	$3,613.41	5.763%	28.579%	17.761%	13.833%
01/1999	$3,764.51	4.182%	32.490%	17.747%	13.951%
02/1999	$3,647.51	-3.108%	19.736%	17.753%	13.785%
03/1999	$3,793.44	4.001%	18.460%	17.643%	13.896%
04/1999	$3,940.35	3.873%	21.822%	17.830%	14.002%
05/1999	$3,847.30	-2.361%	21.026%	17.818%	13.867%
06/1999	$4,060.82	5.550%	22.756%	17.886%	14.034%
07/1999	$3,934.02	-3.122%	20.203%	17.621%	13.869%
08/1999	$3,914.56	-0.495%	39.824%	17.262%	13.809%
09/1999	$3,807.24	-2.741%	27.804%	17.074%	13.661%
10/1999	$4,048.17	6.328%	25.669%	17.823%	13.854%
11/1999	$4,130.46	2.033%	20.896%	17.668%	13.890%
12/1999	$4,373.73	5.890%	21.042%	17.880%	14.067%
01/2000	$4,153.98	-5.024%	10.346%	17.223%	13.829%
02/2000	$4,075.35	-1.893%	11.730%	17.112%	13.716%
03/2000	$4,474.03	9.783%	17.941%	18.263%	14.028%
04/2000	$4,339.43	-3.009%	10.128%	17.816%	13.872%
05/2000	$4,250.40	-2.052%	10.477%	17.399%	13.753%
06/2000	$4,355.18	2.465%	7.249%	17.359%	13.804%
07/2000	$4,287.09	-1.563%	8.975%	16.872%	13.705%
08/2000	$4,553.38	6.211%	16.319%	17.166%	13.890%
09/2000	$4,312.99	-5.279%	13.284%	16.680%	13.648%
10/2000	$4,294.76	-0.423%	6.091%	16.538%	13.593%
11/2000	$3,956.16	-7.884%	-4.220%	15.475%	13.252%
12/2000	$3,975.53	0.489%	-9.104%	15.680%	13.232%
01/2001	$4,116.57	3.548%	-0.900%	16.130%	13.322%
02/2001	$3,741.22	-9.118%	-8.199%	15.476%	12.936%
03/2001	$3,504.21	-6.335%	-21.677%	14.874%	12.662%
04/2001	$3,776.52	7.771%	-12.972%	15.417%	12.896%
05/2001	$3,801.83	0.670%	-10.554%	15.441%	12.884%
06/2001	$3,709.29	-2.434%	-14.830%	15.335%	12.759%
07/2001	$3,672.78	-0.984%	-14.329%	15.266%	12.688%
08/2001	$3,442.86	-6.260%	-24.389%	15.236%	12.422%
09/2001	$3,164.84	-8.075%	-26.621%	15.042%	12.089%
10/2001	$3,225.19	1.907%	-24.904%	14.849%	12.122%
11/2001	$3,472.58	7.671%	-12.224%	15.041%	12.349%
12/2001	$3,503.00	0.876%	-11.886%	15.241%	12.346%
01/2002	$3,451.88	-1.459%	-16.147%	15.232%	12.260%
02/2002	$3,385.31	-1.929%	-9.513%	15.451%	12.158%
03/2002	$3,512.63	3.761%	0.240%	15.695%	12.254%
04/2002	$3,299.67	-6.063%	-12.627%	15.079%	12.003%
05/2002	$3,275.36	-0.737%	-13.848%	15.236%	11.944%
06/2002	$3,042.02	-7.124%	-17.989%	14.898%	11.657%
07/2002	$2,804.91	-7.795%	-23.630%	14.535%	11.347%
08/2002	$2,823.33	0.657%	-17.995%	13.918%	11.339%
09/2002	$2,516.49	-10.868%	-20.486%	13.195%	10.917%
10/2002	$2,737.98	8.802%	-15.106%	13.056%	11.174%
11/2002	$2,899.14	5.886%	-16.513%	13.155%	11.338%
12/2002	$2,728.82	-5.875%	-22.101%	12.706%	11.103%
01/2003	$2,657.33	-2.620%	-23.018%	12.351%	10.984%
02/2003	$2,617.46	-1.500%	-22.682%	12.139%	10.904%
03/2003	$2,642.88	0.971%	-24.761%	11.990%	10.908%
04/2003	$2,860.57	8.237%	-13.307%	12.008%	11.143%
05/2003	$3,011.29	5.269%	-8.062%	12.345%	11.285%
06/2003	$3,049.70	1.276%	0.252%	12.202%	11.298%
07/2003	$3,103.47	1.763%	10.644%	12.468%	11.326%
08/2003	$3,164.00	1.950%	12.066%	12.493%	11.361%
09/2003	$3,130.40	-1.062%	24.395%	12.356%	11.296%
10/2003	$3,307.48	5.657%	20.800%	12.731%	11.448%
11/2003	$3,336.58	0.880%	15.089%	12.663%	11.447%
12/2003	$3,511.57	5.244%	28.685%	12.981%	11.585%
01/2004	$3,576.02	1.835%	34.572%	13.115%	11.615%
02/2004	$3,625.73	1.390%	38.521%	13.396%	11.630%
03/2004	$3,571.02	-1.509%	35.118%	13.213%	11.551%
04/2004	$3,514.95	-1.570%	22.876%	13.070%	11.469%
05/2004	$3,563.18	1.372%	18.327%	13.470%	11.484%
06/2004	$3,632.44	1.944%	19.108%	13.457%	11.517%
07/2004	$3,512.21	-3.310%	13.170%	13.337%	11.379%
08/2004	$3,526.36	0.403%	11.453%	12.768%	11.363%
09/2004	$3,564.56	1.083%	13.869%	12.827%	11.369%
10/2004	$3,619.02	1.528%	9.419%	12.891%	11.389%
11/2004	$3,765.45	4.046%	12.853%	13.179%	11.487%
12/2004	$3,893.59	3.403%	10.879%	13.221%	11.565%
01/2005	$3,798.68	-2.438%	6.226%	12.658%	11.457%
02/2005	$3,878.60	2.104%	6.974%	12.707%	11.495%
03/2005	$3,809.91	-1.771%	6.690%	12.602%	11.409%
04/2005	$3,737.53	-1.900%	6.332%	12.500%	11.320%
05/2005	$3,856.45	3.182%	8.231%	12.360%	11.391%
06/2005	$3,861.93	0.142%	6.318%	12.281%	11.367%
07/2005	$4,005.55	3.719%	14.047%	12.494%	11.453%
08/2005	$3,969.02	-0.912%	12.553%	12.491%	11.396%
09/2005	$4,001.17	0.810%	12.249%	12.715%	11.394%
10/2005	$3,934.47	-1.667%	8.716%	12.366%	11.313%
11/2005	$4,083.28	3.782%	8.441%	12.202%	11.401%
12/2005	$4,084.66	0.034%	4.908%	11.939%	11.374%
01/2006	$4,192.83	2.648%	10.376%	12.055%	11.427%
02/2006	$4,204.19	0.271%	8.394%	11.667%	11.408%
03/2006	$4,256.53	1.245%	11.722%	11.433%	11.418%
04/2006	$4,313.70	1.343%	15.416%	11.570%	11.431%
05/2006	$4,189.55	-2.878%	8.637%	11.119%	11.314%
06/2006	$4,195.25	0.136%	8.631%	11.034%	11.291%
07/2006	$4,221.13	0.617%	5.382%	11.388%	11.283%
08/2006	$4,321.59	2.380%	8.883%	11.121%	11.327%
09/2006	$4,432.96	2.577%	10.792%	11.743%	11.377%
10/2006	$4,577.43	3.259%	16.342%	11.609%	11.447%
11/2006	$4,664.49	1.902%	14.234%	11.580%	11.477%
12/2006	$4,729.94	1.403%	15.797%	11.803%	11.491%
01/2007	$4,801.45	1.512%	14.516%	11.182%	11.509%
02/2007	$4,707.54	-1.956%	11.973%	10.857%	11.423%
03/2007	$4,760.17	1.118%	11.832%	10.761%	11.429%
04/2007	$4,971.04	4.430%	15.239%	11.051%	11.532%
05/2007	$5,144.53	3.490%	22.794%	11.194%	11.607%
06/2007	$5,059.13	-1.660%	20.592%	10.827%	11.530%
07/2007	$4,902.30	-3.100%	16.137%	10.380%	11.409%
08/2007	$4,975.78	1.499%	15.138%	10.260%	11.427%
09/2007	$5,161.88	3.740%	16.443%	10.585%	11.509%
10/2007	$5,244.00	1.591%	14.562%	12.023%	11.528%
11/2007	$5,024.75	-4.181%	7.723%	12.265%	11.376%
12/2007	$4,989.88	-0.694%	5.496%	11.816%	11.329%
01/2008	$4,690.59	-5.998%	-2.309%	11.241%	11.122%
02/2008	$4,538.19	-3.249%	-3.597%	10.805%	11.000%
03/2008	$4,518.68	-0.430%	-5.073%	10.955%	10.962%
04/2008	$4,738.74	4.870%	-4.673%	11.158%	11.075%
05/2008	$4,800.12	1.295%	-6.695%	11.181%	11.087%
06/2008	$4,395.47	-8.430%	-13.118%	10.445%	10.807%
07/2008	$4,358.50	-0.841%	-11.093%	10.419%	10.758%
08/2008	$4,421.52	1.446%	-11.139%	10.689%	10.775%
09/2008	$4,027.53	-8.911%	-21.975%	9.945%	10.484%
10/2008	$3,351.11	-16.795%	-36.096%	8.789%	9.937%
11/2008	$3,110.67	-7.175%	-38.093%	8.463%	9.704%
12/2008	$3,143.76	1.064%	-36.997%	8.426%	9.712%
01/2009	$2,878.79	-8.429%	-38.626%	7.569%	9.443%
02/2009	$2,572.26	-10.648%	-43.320%	7.100%	9.107%
03/2009	$2,797.58	8.759%	-38.089%	7.427%	9.321%
04/2009	$3,065.33	9.571%	-35.313%	7.646%	9.555%
05/2009	$3,236.79	5.593%	-32.569%	7.726%	9.686%
06/2009	$3,243.21	0.198%	-26.215%	7.767%	9.670%
07/2009	$3,488.51	7.564%	-19.961%	7.694%	9.851%
08/2009	$3,614.45	3.610%	-18.253%	7.781%	9.928%
09/2009	$3,749.27	3.730%	-6.909%	8.000%	10.008%
10/2009	$3,679.62	-1.858%	9.803%	8.026%	9.934%

Q&A: Roth Versus Traditional

I was recently asked a few interesting (to me) financial questions about 401(k)s, IRAs, and contribution strategies. I've decided to answer those questions in a few Q&A blog posts so everyone can benefit (or get screwed if my strategies aren't sound).

The primary difference of concern between Roth and traditional IRAs and 401(k)s is taxes. Traditional contributions are pre-tax (they are tax deductible), but the distributions are considered as regular income and taxed accordingly. Roth contributions are post-tax, but the distributions are tax-free. So, traditional contributions lower our tax burden now, but increase it later, and Roth contributions raise (or don't benefit) our tax burden today, but lower it later. Another way of looking at it is that traditional contributions are tax-deferred, and Roth contributions include prepaid tax. This gives us two things to think about: our tax bracket now and our expected tax bracket when we start taking distributions.

The general wisdom is that if you expect your income tax bracket to be higher in the future, you should choose Roth retirement accounts. Determining if your tax bracket will be higher can be a complicated question. Personally, I took the following items into consideration when trying to evaluate my future tax bracket:

• Current income - For IRAs, traditional contributions are only tax deductible for those earning less than $53,000 (phased out through $63,000). This made my decision for IRA contributions easy - Roth is still allowed until you make $105,000-$120,000. Traditional 401(k) vs Roth 401(k) still required the following bullet points, too.


• Future income - I've been maxing out my 401(k) and IRA contribution limits since I've been working at IBM. I am on track to have more money coming in than I really know what to do with. I expect my future income to be quite high.


• Current vs. future tax deductions - I can currently deduct mortgage interest, but when I retire, I will not have a mortgage. That's actually my only major deduction at the moment. But, does your employer only offer a traditional 401(k) plan, or have you already decided against the Roth 401(k)? Have children? Taking classes? More deductions that might not apply in retirement!


• Historical tax bracket trends - As you can see from the graph in the link, we are enjoying relatively low tax rates (especially for the rich, which we all hope to be). Does this mean tax rates will rise in the future? Not necessarily, but it wouldn't surprise me.


• National sales tax - I like a lot of the features of a national sales tax instead of an income tax. However, if we go to a national sales tax, our future tax brackets will all be zero percent. After George W. Bush got torn apart for merely suggesting that we look at the plan, I decided a national sales tax isn't too likely to happen, but it's still something to consider.


• Alternative Minimum Tax - The AMT is one of the most complicated set of tax laws out there. It was designed to ensure the wealthy can't deduct their way out of too many taxes, basically. There is some fear that an AMT-like system will be implemented to tax some ROTH distributions that are currently promised to be tax-free. As much as the government loves to tax, I think this, too, is unlikely.

Another thing to consider is how much you will contribute. When you contribute fully, there is an advantage to Roth accounts. Each dollar contributed into a Roth account is equivalent to a pretax contribution plus taxes. Thus, you can make a larger (pre-tax equivalent) retirement contribution via a Roth account. This assumes the same tax bracket now and at retirement, and is definitely not the only consideration. This same type of idea is relevant to estate planning, too. Roth accounts are more valuable, dollar for dollar, than traditional retirement accounts. Retirement accounts are assessed at their account value, not at their after-tax value. A traditional and a Roth account of the same value will be taxed the same amount as part of the estate tax, but the traditional IRA will then have additional income taxes taken out when your heirs take their mandatory distributions.

There are a couple of features that really sold Roth IRAs to me. Because Roth 401(k)s can be converted to a Roth IRA without having to pay taxes when you leave the company, these also end up applying indirectly to Roth 401(k)s! The first feature is that there are no forced distributions from a Roth IRA. You can keep compounding those returns as long as you don't need the money. This gives you a lot more flexibility in your tax and estate planning. The second feature is that Roth IRAs allow you to withdraw the contributions at any time. This makes Roth IRAs a sort of emergency fund - but definitely an emergency fund of near-last resort. Once withdrawn, there is no way of putting that money back in, and you will lose future compounding returns. A better option is probably a 401(k) loan, and a better option than that is probably a home-equity loan (HELOC). Still, it's a nice feature.

As I mentioned in the current income bullet above, only the Roth IRA made sense for me at all. For 401(k)s, there are no income limitations for the vast majority of people. When deciding between a traditional 401(k) and Roth 401(k), or a mix between the two, I looked at the above points and decided that my income is likely to be greater in the future, my tax rate is likely to be higher, and the Roth variety gives me more flexibility later. Still, it is tempting to hedge your future-tax-bracket bet by splitting 401(k) contributions between traditional and Roth 401(k)s. Splitting contributions is allowed, but I have decided against it for the time being for two reasons. First, the Roth 401(k) option has only been offered at IBM as of the beginning of 2008. This means I've already bet two years worth of contributions on traditional 401(k) being better because there was no other bet to make. This year will mark two years of Roth 401(k) betting. Second, employer match contributions have to sit in a traditional 401(k) account. I view these matching contributions as an additional bet on traditional 401(k). Even if you don't view it as a bet, it is at least going to affect your future income levels at retirement and/or when forced distributions kick in at 70.5. Thus, I am maxing out my Roth 401(k) contributions, for the time being.

[For anyone curious, as of the time of this writing, Roth contributions make up 47.19% of my 401(k), and 100% of my IRA.]

In my next post, I will take a look at how tax-advantaged accounts can affect investment choices and how I (plan to) balance my portfolio across my varying accounts to better utilize that tax advantage.

Favorite Time of the Month

I look forward to the beginning of the month. It's a very special time for me. My mortgage payment goes out at the beginning of the month. This prompts me to... wait for it... update my spreadsheet!

My budget spreadsheet is the first I created with multiple worksheets. It has nine (one of which goes unused, and the other just has information used in calculations on other sheets)! I've always been a long-term thinking/planner. While I like the idea of tracking things monthly, like Jonathon does over at MyMoneyBlog, I think I'm content with updating things monthly but tracking things on a yearly basis. You can look at my spreadsheet as a long term planning item, and Mint.com as my monthly tracking place. Alternatively, you can look at Mint.com as my monthly history, and my spreadsheet as my yearly outlook. It's really not much of a budget, I guess.

Recently, I haven't been using much of the spreadsheet besides the Retirement Planning tab. (I may have to look at what this says about my current job satisfaction at a later time.) This tab isn't so much of a plan of how to get to retirement - my 401(k), Roth IRA, other savings, and house are my retirement plan already being taken care of. The Retirement Planning tab lets me know when I can retire and live forever off of my accrued savings. I compute the live forever part of that by determining if the growth of my investments will outpace inflation.

By my current assumptions of 3% inflation, 7% retirement portfolio return, and $70,000 (in 2006 dollars) yearly withdrawals, I can retire permanently at age 56. Now, $70,000 seems like a ridiculously large amount of money to spend in a year, to me. However, I would like to have a wife, and I don't want to underestimate those associated expenses... Seriously, though, that should allow for most travel plans I can think of, charitable giving, and regular living expenses, with hopefully enough left over to handle unexpected expenses, or temporary-ish ones like college costs for children.

Even though I don't use most of the parts that I programmed into it, updating the spreadsheet is still a very fun activity. Very few things are better than a large table of numbers.

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This was supposed to be posted nearer to the beginning of the month, but my main computer was having issues. Chkdsk seems to have sorted them out, though. It took a few hours, but it completed. I was fooled a few times by long periods of no screen updates and the keyboard not working. That is, I restarted the process more times than necessary, I think. For future reference, the Num Lock and Caps Lock keys don't work when chkdsk is running, and it's apparently normal for some operations to take an hour without updating the screen.