Friday, October 16, 2009

Structuring Your Simple Portfolio: Part 3 – Simplicity in Contributions

There’s a lot to learn and know about investing. But, you can successfully invest and achieve a comfortable retirement without becoming a financial expert. With a simple portfolio and a simple strategy you can succeed.

For beginners, and for the uninterested, simplicity is the key to success.

1. Simplicity in investment portfolio
2. Simplicity in account types
3. Simplicity in making account contributions
4. Simplicity in increasing annual contributions over time
5. Simplicity in rebalancing your portfolio

Simplicity in investment portfolio and simplicity in account types were discussed in Part 2 of this series; next up – simplicity in making account contributions.

3. Simplicity in Making Account Contributions
Absolutely the simplest way to make contributions to your simple portfolio is through payroll deductions to your employer’s 401k plan.

When you establish your 401k account you will also choose a percentage of your gross income that you want to contribute to the plan. Then every payday an amount equal to the percentage of your gross pay (before taxes and other deductions) for that pay period will be withheld and contributed to your 401k account.

The contributed money will be allocated to the chosen investments of your simple portfolio. In the case of a Target Year Mutual Fund 100% of your contribution will be applied to the mutual fund. If you are using an Equity Index Fund and a Bond Index Fund your contribution will be allocated to each according to the allocation percentages you chose when you set up the account.

In Part 2 of this series, I suggested an allocation of 60% to the Equity Fund and 40% to the Bond Fund.

Some employers automatically enroll new employees in the company 401k plan with a pre-selected portfolio and a pre-selected contribution percentage.

Don’t count on that, though. And, even if your employer did enroll you automatically, check it out and make sure your enrollment conforms to one or the other of the simple portfolios.

If your simple portfolio is in a Roth IRA you don’t have the option of contributing through payroll deductions. So, you have to create an effective substitute. The way to do that is:

A. Have your pay direct deposited to a checking account
B. Set up a weekly, monthly or twice monthly automatic transfer from the checking account to your Roth IRA cash account.
C. Set up a monthly purchase of your chosen simple portfolio investment(s) using the money in the Roth IRA Cash account.

Each investment option under the Roth IRA umbrella is assigned its own account number. Cash contributions will probably have to be initially received in a cash account or money market fund which will be one of the investment options under your Roth IRA umbrella.

Then, you will buy or exchange into the Target Year Mutual Fund (100%) or into the Equity Index (60%) and Bond Index (40%) Funds from the cash or money market account.

This is more complex to set up but your bank or Vanguard account representative will do the heavy lifting if you ask.

In either simple contribution scenario above, once you have the payroll deductions or account transfers set up, the whole thing will run on automatic pilot. Just read your monthly and quarterly statements to ensure everything is still running and to watch your balances grow.

Successful investing for your retirement can be simple.

The next post will explain simplicity in increasing annual contributions over time.

Link to Other Topics in the Special Report: Structuring Your Simple Portfolio

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