Saturday, April 11, 2009

Time to fund my retirement plans for 2008

I am finally in the process of finalizing my tax return, so I finally have numbers for the retirement plan contributions I can make for 2008. I can max out the $6,000 Roth IRA contribution since I am over 50 and under the phase-out income threshold. Since I was self-employed for most of my income in 2008 I set up a new SEP-IRA retirement account and will be contributing the maximum contribution of 25% of my taxable income for 2008.

I do in fact have enough cash sitting idle to fully fund my contributions, but this does reduce my cash "cushion" for an extended period of lack of work income. The flip side is that this reduces the likelihood that I might find that cushion too comfortable and use it for too long instead of finding new work sooner. On the other hand, I will be getting more cash from my mother's estate within a few months, so I am "covered" well enough.

I had already made a 15% contribution to my Roth 401K for January and February 2008 when I was a full-time employee of Microsoft.

The other "problem" is that by moving the cash from a higher interest bank account to a Fidelity money market fund I will see a big drop in interest income. But, since the money is now clearly targeted at "retirement" rather than short-term "rainy day" contingencies, I can now afford to "invest" the money for the long term.

My default investment is a so-called "life cycle" fund whose asset allocation is automatically adjusted to reduce the stock allocation as my retirement "target date" (age 70, which for me would be close to 2025) gets closer. A year ago I did put some money into the Fidelity Freedom Fund 2025 (FFTWX.) Alas, it has declined by 30% since then, but a lot of other investments have done worse. By comparison, my Microsoft (MSFT) stock declined by -33% over that same one-year period. Actually, that comparison is a little off because it excludes Microsoft dividends (about 2% to 2.5%) but includes the Freedom Fund income. But, that's close enough.

I am not convinced that FFTWX is my "best" retirement investment, but it is certainly optimal for me right now. It aims to do what I need to do for retirement and does enforce the appropriate discipline. Left to my own devices, I would probably chose the most ultra-aggressive equity fund. For now it is a great "fire and forget" investment.

-- Jack Krupansky

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