Friday, October 23, 2009

Structuring Your Simple Portfolio: Part 4 – Simplicity in Increasing Contributions

With a simple portfolio and a simple strategy you can successfully invest and achieve a comfortable retirement without becoming a financial expert.

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. Simplicity in making account contributions was discussed in Part 3; next up – simplicity in increasing contributions over time.

4. Simplicity in Increasing Annual Contributions Over Time

A simple and painless way to increase your 401k contributions is to save a portion of every raise you get.

For example; assume you started with a 3% payroll deduction to your 401k. A year later you receive a 3% raise; so you increase your 401k contribution percentage from 3% to 4%. You keep the balance of your raise to increase your lifestyle a bit.

The following year you get another 3% raise and you increase your 401k contribution by another 1% from 4% to 5%. After 10 years, your 401k contributions are up to 13%.

You can continue this sequence until you are contributing the maximum allowed by law and still increase your standard of living every year – just not as much as the entire raise would have supported.

On the other hand – if you start early enough - your retirement will be not only secure but very pleasant.

Similarly, if your simple portfolio is in a Roth IRA, you can set your account transfers at some initial amount and increase the amount with each pay raise.

In this case, you will deal in actual dollar amounts – not percentages of your pay.

For example; assume your initial account transfer to your Roth IRA cash account is $100 per month. For the first year you contribute $1,200 and then you get a raise of $200 per month.

You will increase your transfer into the Roth from $100 per month to $200 per month and pocket the other $100 of your raise. Don’t forget to increase the monthly buy (exchange) amount so the money actually goes into your simple portfolio and doesn’t accumulate as cash.

The following year you contribute $2,400 to your Roth and you get a $300 per month raise. So, you increase your account transfer into the Roth from $200 to $350 and pocket the remaining $150.

The next year your contribution is $4,200 – closing in on the maximum allowed $5,000 per year contribution.

When you get your next raise you increase your transfer to $416.66 per month and contribute the maximum $5,000 per year – until the legal limit is increased, then you will again increase your contribution.

Successful investing for retirement can be simple.

The next post will discuss simplicity in rebalancing your portfolio.

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

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