The rat race. The apparent eternal pursuit of what seems to be unachievable. It is often used to describe the 9-to-5 career of an overworked, underpaid employees who just can’t get ahead in life despite their exhausting efforts. And, it is anyone’s goal to not participate in or to escape the rat race.

It is easier said than done. I’ve been a witness to prime participants of the rat race – my parents. They’ve worked in the same fields and held the same general occupations ever since they came to the U.S. over 23 years ago.

As I enter the workforce, their looming shadows remind me what I should be striving for. So, I’m here wondering what would be my definition of an escape from the rat race.

A New Jobs Era
The employment environment has changed drastically since the recession began – and it seems that the idea of a “job” has been forever revolutionized. Job hirings are becoming scarce and layoffs are occurring left and right.

The situation has opened a moment of reevaluation for everyone. Many are taking matters into their own hands while others are finding a better life in another field. Some would agree that the idealistic image of climbing the ladder in corporate America has been tarnished. More and more people are opting out of the rat race. Most do it by starting their own business or by simply retiring.

There Is No Finish Line
For the majority of us, we would have been a participant in the rat race at one point or another. One essential realization is that there is no finish line in this race – either keep going or get out. As long as the job arena breeds a competitive nature, there will always be a relentless scramble to the higher ranks.

Escaping the rat race is the goal – not to finish it. I believe that point is marked only by retirement. Running a business may be a move that many consider to be a withdrawal from the rat race but it still entails a working life.

To me, the ability to retire comes with the notion that I do little to no work but still have sufficient income to maintain a certain lifestyle. With that in mind, my primary objective is to build income-generating assets, not to establish a substantial cash reserve (though it is still very important to do so).

The optimal cash-generating assets that I’d like are:

• Real estate. Many of my neighbors are owners of several pieces of real estate. I typically see them in front of their houses tending their plants and lingering about like full-time neighborhood watchers. They’ve told me that they are able to live comfortably by owning a few houses and collecting rent. In New York City, rental income can account for a major part of retirement income.
• Business ownership. The entrepreneurial spirit in me hopes that I can someday start my own business and make it the source of a comfortable life. If management of a business can be transferred to reliable hands, I’d consider stepping down and collecting residual business profits.

When these assets are able to sustain my preferred lifestyle, that marks the great escape from the rat race.

(Photo credit: @ LaRsNoW @)

Related posts:

1. Book Review: Rich Dad Poor Dad Robert Kiyosaki, author of the Rich Dad Poor Dad, is...
2. The Road to Retirement Includes More Than Just Yourself As a guy in my early 20′s, the scope of...
3. My Financial Accounts Setup Everyone has their own formula for the number of accounts...

As a guy in my early 20′s, the scope of my financial concerns does not extend far beyond myself and my immediate family. Being the independent person that I am, I seem to have adopted a selfish outlook when it comes to my future with money.

When I look at my parents, hard working immigrants who spent the last 23 years in the U.S., their family has often placed them in tough positions when it comes to money.

Through their experiences, I can see the many impending financial obstacles that would trouble me as well.

The Typical Thought Process
Not yet introduced to the many other burdens of life, I disregard them when I go off planning for retirement. Evidently, I’m not the only one who puts little thought into the financial situations that our futures will present. Most young adults coming out of college think of climbing the corporate ladder, becoming rich, and splurging on the many luxuries offered in life.

Many are not even thinking about retirement – those that do, often think about themselves and themselves only, just like me. Now that I’m conscientious about what the future may hold, I need to account for the twists and turns along the road towards retirement.

A Very Bumpy Road Ahead
For those who like to set goals, one of them may sound like this:

“I want to become a millionaire by the age of X.”

Well… throw these people into your calculations and figure the probability of that statement coming true.

• The spouse. Retirement will become a worry for two people. We must take account of contributions that each person will make towards the desired retirement lifestyle. Should the wife stay at home? Should I take a second job? The dynamics of financial planning changes every time another person enters the picture. A spouse can delay or accelerate the realization of retirement. From the time the relationship starts getting serious, one’s money no longer concerns only one person.
• The parents. Turning away those who raised you is a despicable act. So when mom and dad needs money, it’s nearly impossible to say “no”. The major financial responsibilities arise when elderly parents begin suffering the health problems that come with old age. Should the parents have difficulty paying the medical bill, it’s up to the children. And not to forget, this applies to the in-laws as well.
• The children. The word on the street is that the average cost to raise a child in the United States from birth to 18 years of age is roughly $250,000. That amount doesn’t include a college education. And, that’s only for one child – dare you have two? A small sigh of relief results from the possibility that your children may help support you when you reach your later years.

I expect to have all these people in my life so I better be prepared. I won’t be surprised to find out in the future that my efforts to grow my Roth IRA would help pay for my child(ren). While we must not elude the fact that these people will pose a financial threat, they are also the source of love, joy, and happiness.

So, remain optimistic!

(Photo credit: Hey Paul)

Related posts:

1. Low-Income Earners: Take Advantage of the Retirement Savings Contribution Credit Tax season is here! With the tons of tax credits...
2. My Proposed Retirement Portfolio Allocation Ever since I’ve found a part-time job leading to some...
3. Classes Have Started And It’s A Bumpy Road Ahead (Financially) Senior year doesn’t seem to be much of a difficult...

Roth or Traditional? For many latecomers to the retirement game, this question is a puzzling one. For me, it was simple – the Roth IRA.

Why? Because my mom said so. I kid, of course.

The appeal for the Roth IRA has been contagious ever since it came into existence in 1998. Personal finance gurus and experts have contributed to the popularity of the Roth IRA while giving less love to the Traditional IRA, which has caused some of the confusion over the paramount question – “Which one do I use?”.

The answer to this question lies entirely on the individual’s financial situation, prospects, and attitude. Here are the reasons that led me to determine that the Roth IRA best suited my personal goals towards retirement planning.

• Tax-free growth. I love the fact that I don’t have to worry about paying taxes when I withdraw my earnings. The thought of losing a good chunk of an account worth $10 million (fingers crossed) is disheartening. Like for most others, taxes-free earnings and withdrawals are the main benefits that led me to choose the Roth IRA.
• Time is on my side. The power of compounding is best abused by those who have time – more time for my money to make more money. Accompanied by tax-free growth, lots of time clears a smoother path toward accumulating a substantial nest egg. At 22 years of age, I have to time to recover from the bad economic times that lay ahead.
• Account flexibility. Because I can withdraw my direct contributions any time without taxes or penalties, the Roth IRA can act as a highly inaccessible financial account – but accessible nevertheless. With more time in my hands, more unexpected and spontaneous situations can occur and it’s nice to know that I have somewhat of a backup as a last resort.
• Dedication to saving. To maximize the tax benefits of a Roth IRA, it is obvious that I need to contribute the maximum. Without a committed attitude towards saving, I won’t be taking full advantage of such a lovely tax-deferred account – it doesn’t matter what type of IRA.

Roth IRA’s Fame
It’s probably for those same exact reasons I stated above that persuaded others to sign up for their Roth IRAs. The Roth offers great tax advantages, especially for the many twentysomethings who are just getting serious about their personal finances.

(Photo credit: Mykl Roventine)

Related posts:

1. No 401k, Maxed Out Roth IRA, What Else Do You Use to Save? The rare dilemma of having too much money and where...
2. The Roth IRA: In Terms You’ll Understand An IRA (individual retirement account), not just the Roth IRA,...
3. Weekend Links: Controlling My Parents Roth IRAs Both my parents have Roth IRAs with Capital One Investment...

The rare dilemma of having too much money and where to put it next is a dilemma that we all wished we had. For those who are able to resist splurging on the newest gadgets and fashion with the intent of saving for the future, you may have exhausted all possible financial retirement vehicles – and desperately seeking more options to grow your nest egg.

Such avid savers do exist because reader Josh posed some questions regarding a similar situation.

Josh’s wife doesn’t have a 401k or any sort of employer-sponsored retirement plan. After maxing out her Roth IRA, what other ways are there to help her reach her retirement goals?

While there are a plethora of other options that one could invest and save money, none of them can really provide the tax benefits that make 401k’s and IRAs such popular retirement vehicles.

• A taxable brokerage account. Despite not being a tax-advantaged account, a taxable brokerage account is a valuable alternative because they offer the widest variety of investments without income and contribution limits. For an aggressive approach, individual stocks are great for rounding out your portfolio allocation. Many advisors also suggest investments that would be bad for retirement accounts – such as tax-exempt funds and municipal bonds.
• 529 college savings plan or Coverdell ESA. Education costs are going up year after year. If you have children, the decision to start saving for their college education costs now would be wise. The 529 plan and Coverdell Education Savings Account are tax-advantaged since the contributed money grow tax-deferred and can be withdrawn tax-free for eligible educational expenses. These accounts won’t need $100,000s of dollars (hopefully) and will go towards your children, so they serve the purpose of reducing your financial burden in the future rather than actually helping you save for your own retirement.
• Money market funds, high-yield savings accounts, and CDs. While these accounts don’t have the ability to match the higher potential gains of true investments, they are the safest methods of building a savings. These accounts are often havens for liquid cash but not the best choices for meeting your retirement goals. Currently, they don’t pay enough to compensate for inflation. Outside of establishing an emergency fund and having some solvent cash, money for retirement should have a better home.
• Peer-to-peer lending. The social lending industry is growing at such a rapid pace that it could be the best new way to diversify one’s investment portfolio. For some people, stock selection may not be within their realm of expertise so investing in your peers may be a unique and intriguing alternative to buying shares of a company. Even though I’m a small and recent lender at LendingClub, I’ve found that peer-to-peer lending can be a great way of investing – I feel like a bank and I’m making (so far) an annualized return of 13.20%. Like all other investments, peer-to-peer lending doesn’t come without risks. People can default so it is best to diversify peer-to-peer loans.
• *Pay down any form of debt. Sure, this isn’t considered an investment or a type of savings. But, debt is counterproductive towards your retirement goals. If there is extra cash that won’t earn more than the 29.99% APR on your credit cards or even the 5.5% APR on your mortgage, why not pay them down so you are not losing money? Becoming debt-free early on paves a smoother path toward retirement.

The fundamental rule is not to spend or lose it – courtesy of Warren Buffett’s great investing mind. Many people find themselves in this situation where they feel like they are constrained to the typical 401k and IRA. Branching out and diversifying is a sound investment mentality.

With or without tax benefits, all we want is to see the money grow.

Related posts:

1. The Roth IRA: In Terms You’ll Understand An IRA (individual retirement account), not just the Roth IRA,...
2. Weekend Links and Designing My Roth IRA Portfolio As I am accumulating funds to beef up my Roth...
3. Weekend Links: Controlling My Parents Roth IRAs Both my parents have Roth IRAs with Capital One Investment...

An IRA (individual retirement account), not just the Roth IRA, is a mysterious creature to most young adults. We hear “retirement” and immediately think of an old man and woman sitting on rocking chairs on the front porch of their cozy home. What twenty-something-year-old wants that image in their heads when they’ve still got plenty of time to have fun and get wasted?

Avoiding the thought of the unforeseeable future is what deters most young adults from thinking about IRAs – plus they sound so confusing to understand that they don’t bother with it. After repeatedly letting friends know that I have a Roth IRA, they shoot awkward faces and ask me what it is.

The Roth IRA in a Nutshell

IRAs, whether it is a Traditional IRA or Roth IRA, is simply an account that you use to hold certain investments that often include stocks, options, ETFs, mutual funds, bonds, money market funds, U.S. Treasury securities, and certificates of deposit. So basically, it is a place where you put money with the hopes of it becoming more a lot more money.

Think of an IRA as your wallet. You have the choice of putting cash, credit cards, debit card, membership cards, a library card, receipts, identification, and the handy BandAid in it. It is nothing more than a place to put things.

The functions of an IRA sound very similar to that of typical brokerage accounts but there are key differences that make them “retirement” accounts rather than any other investment account. The Roth IRA has been a popular investment vehicle lately so I’ll break down the key points into easily consumable information that will hopefully encourage other young adults to start establishing their nest egg.

Funding Your Roth
You cannot just put $100,000 in a Roth IRA and start buying shares of Google, Apple, and Coca Cola or invest in the top 5 funds highlighted in a Kiplinger magazine. How much you are allowed to put in is based on how much you put down as earned income when you file your taxes.

• If you made $50,000 the first year out of college, your maximum contribution is $5,000 for 2010. Contribution limits can change every year so visit here to see this year’s limit.
• If you made $2,000 this year serving fries at McDonald’s, you put a maximum of $2,000 into your Roth IRA.
• If you made money off-the-books and don’t report it, you cannot contribute.
• If you didn’t make any money, you cannot contribute.
• If all you got this year was $3,000 from Mom and Dad, you cannot contribute.

It is possible to make too much money when it comes to contributing to a Roth IRA – a high salary would decrease the amount you contribute for a particular year. If this applies to you (I’m so jealous), the IRS website breaks it down for you.

Taking Money Out
Young adults shun the idea of the Roth IRA when they hear that the money is locked in until they reach the age of 59 1/2. There is a reason they call it an “individual retirement account” – it’s your survival money when you retire and have little to no income. While there are exceptions to withdrawing from your Roth IRA, each penny in it was designated for ‘the-older-you’ and not meant to be taken out on a whim.

Tax Advantages
With a Roth IRA, your contributions are made with post-tax income and distributions (or withdrawals) are tax-free. With a Traditional IRA, your contributions are made with pre-tax income and distributions are taxed at the rate of the year they are made. With a regular brokerage account, there is no limit on how much you can put in it but all capital gains on your investments will be taxed.

Essentially, with a Roth IRA, you are betting that the future tax rate (when you reach the age of 59 1/2) is going to be higher than the current tax rate because you are choosing to be taxed earlier rather than later.

Not So Complicated
Opening a Roth IRA can be done at online through most banks and brokerages in less than 10 minutes – just like opening an regular bank account. Work your butt off and contribute as much as you possibly can.

The hardest part for me was probably designing my portfolio allocation and picking the right investments. And that is something that should definitely take more time to understand than the Roth IRA.

If you are interested in learning more about the Roth IRA, visit the IRS website here.

(Photo credit: stevendepolo)

Related posts:

1. Why I Chose a Roth IRA Over a Traditional IRA Roth or Traditional? For many latecomers to the retirement game,...
2. No 401k, Maxed Out Roth IRA, What Else Do You Use to Save? The rare dilemma of having too much money and where...
3. Roth IRA Finally Open!! Today, I signed up online for a Roth IRA through...

“Pick index funds over actively managed funds” have always been the conventional advice. Actively managed mutual funds would often carry higher risks in hopes of higher returns. There is nothing wrong with adding risk to one’s portfolio but most experts continue to support diversification with funds that track certain indexes.

An article on Yahoo Finance titled “5 Reason to Sell a Mutual Fund” advises us on warning signs that an investor should ditch their mutual fund. Upon looking at these five reasons, I realized that I would never have to be on the lookout if my investment portfolio consisted of mostly (if not all) index funds.

Let review how these 5 reasons to sell a mutual fund can be disregarded with index funds:

1. “Market underperformance”
   With an index fund, it would perform closely with the market. If I am losing money, there is no portfolio manager to blame – I’ll bark at the economy. There is no need to go through the hassle of comparing to benchmarks or similar funds.
2. “Fee increases”
   Every fund will have fees. The more work that is put into managing a mutual fund, the higher the fees will be. Management of index funds requires much less work than actively managed fund. Thus, their fees are low and tend to remain low.
3. “Manager Changes”
   Typically, investors believe in the talent of a portfolio manager. They often trust the stock selection strategy and asset allocation that produces solid returns. In index funds, the investment objective is to follow the simplest of investment strategies – buy the whole index. I believe almost every portfolio manager can complete this task. If a fund company fails to find someone to fulfill this role, then I don’t this company is worthy of any investors.
4. “Changing Investment Policies”
   I picked a fund for a particular fund for a particular reason – their investment objective, which aligns with my investment goals. If a manager decides to deviate from the fund’s objective by investing somewhere else, it is no longer serving my goals. All index funds will always invest in the index – otherwise, it is no longer an index fund.
5. “Other Radical Changes”
   Major changes send out red flags because a perfectly fine mutual fund shouldn’t need any changes. The article says to be cautious if a fund “suddenly changes its name, merges with another mutual fund or if your fund company gets absorbed into a new fund management company”.

   Index funds use a generic, straightforward name. An index fund that combines with a similar index fund would still maintain its purpose and if combined with a different fund, its investment objectives have changed. Also, an index fund will do its job even under new management unless new management decides to mess with it.

Simplicity is Bliss
When investments become too difficult to understand, it is a telltale sign that you shouldn’t be touching them because you do not know how they work. Why deal with funds that are too complex? They will often encounter more complications down the road.

Index funds are the migraine-free investments for any portfolio and it is always believed that the majority of our investments should consist of index funds. I totally agree. Do you?

(Photo credit: BLW Photography)

Related posts:

1. Say “No” to Mutual Funds with High Fees This is a guest post by Mariusz Skonieczny, founder and...
2. My Proposed Retirement Portfolio Allocation Ever since I’ve found a part-time job leading to some...
3. Dollar-Cost Averaging: Go Discount Shopping in the Stock Market If you follow me on Twitter, you will find that...

Ever since I’ve found a part-time job leading to some steady source of income, I have been slowly saving up for contributions to my Roth IRA. After plenty of research and an assessment of risk tolerance, I designed the retirement portfolio that I will be working towards.

Here is the asset allocation and funds I intend to use:

An All Stock Portfolio???
I’m 22. Using bonds or some other sort of fixed income investments to diversify my portfolio never crossed my mind. To me, having 10% in bonds does not represent much of a safety net to volatility. An all-stock portfolio definitely contradicts my typically conservative nature.

The Two Actively Managed Funds
While index investing certainly seems like a great way to start, I want to be a little more aggressive and try to get higher returns. Dodge & Cox has held a long time reputation of outperforming the market on a consistent basis. Despite recently dropping in ratings, I believe that everything will return to normal once the market turns around for the better.

Look! ETFs!
It’s a new age in investing and ETFs have become increasing popular and I can see why. Vanguard’s funds have always been popular choices for their simple diversification purposes. But, their $3,000 minimum initial investment has deterred many from even beginning to invest in their funds. Vanguard’s ETFs enables newbie investors (such as myself) to diversify without needing too much money. And look at those close-to-non-existent expense ratios!

Staying On Track
Well, simply saying that this is what I want isn’t exactly going to get me there. In the near future, I’ll be sharing my financial reports with everyone – much like many other personal finance bloggers have done. Doing so will reveal my progress towards my goals.

I mean come on. How many 22-year-olds do you know who are doing this??

Disclosure: At the time this post was published, I do own shares of Dodge & Cox Stock Fund (DODGX).

Related posts:

1. Weekend Links and Designing My Roth IRA Portfolio As I am accumulating funds to beef up my Roth...
2. Please Keep The Markets Falling I’ll probably receive a bunch of dirty looks from the...
3. Everyone Wants to Know How to Invest With Less Than $1000 Is the stock market such a treacherous place? It’s easy...

As I am accumulating funds to beef up my Roth IRA , I’ve begun putting some thought into building my investment portfolio. I’ve been reading up and researching on sound investing for retirement.

I love the thought of buy-and-hold-then-forget investing. Because I’m young, I do believe that I should be aggressive but I am considering the current volatile stock market amidst a dangerous economic time.

My primary choices are Dodge & Cox funds and the increasingly popular ETFs by Vanguard (of course, the notorious fund company among the personal finance blogging community). I’d by index investing while using one of two actively managed funds to add growth potential – and risk.

While I’m still figuring out which mutual funds or ETFs to use and the fund allocation, take a look at a few posts around the personal finance blogosphere:

• Triage Your Finances at Consumerism Commentary. I have an EMT-Basic certificate and was intrigued at the thought of applying the process of rapid triage to personal finances. It employs the same idea that we must do the most good with what limited resources we have – in this sense, the limited resource is money.
• The X-Men Guide To Unlocking Your Financial Mutant Powers at Man Vs. Debt. Baker writes an amazing post bringing together finances and some of our favorite comic book heroes. Since I’m set on a path to get rid of my debt, I guess my X-men mutant power is that of Wolverine’s.

Also, visit the recent carnivals in which Realm of Prosperity was featured:

• Carnival of Personal Finance Thanksgiving Survival Edition at Fiscal Geek
• Money Hacks Carnival Thanksgiving Dinner Edition at Being Frugal

Some mention of Realm of Prosperity thanks to:

• Links Roundup: No Credit Needed Edition at Get Rich Slowly
• Weekly Grab Bag: Best of Black Friday at Spend on Life
• Black (Friday) Coffee: My Favorite Blogs, Money News & Opinions #23 at Len Penzo dot Com
• The Ultimate Black Friday Roundup at Fiscal Fizzlettes
• Best of Personal Finance Roundup: Does Your Investment Strategy Need to be on Ritalin? at WiseBread

Related posts:

1. Weekend Links: Controlling My Parents Roth IRAs Both my parents have Roth IRAs with Capital One Investment...
2. Weekend Links: Becoming a Writer for Money Under 30 As of this week, I am a contributing blogger for...
3. Weekend Links: Not One to Pay for iPhone Apps No, I didn’t jailbreak my iPhone, never did, and don’t...

Today, I signed up online for a Roth IRA through Scottrade. It feels great!

Even though I won’t be moving funds over any time soon. I’m definitely looking at mutual funds for possible candidates in my portfolio since several great funds have re-opened and the market seems to have become much less volatile compared to the previous month.

Also, Scottrade has given me a complimentary gift: a 12-month subscription to SmartMoney magazine. Nice!

Related posts:

1. Introducing Tip’d: Social Media For The Financial Community Last week, I noticed that an ad spot was purchased...
2. The Roth IRA: In Terms You’ll Understand An IRA (individual retirement account), not just the Roth IRA,...
3. Weekend Links: Controlling My Parents Roth IRAs Both my parents have Roth IRAs with Capital One Investment...