published Sunday, April 13th, 2014

Kennedy: Shorthand for money matters

I read the other day that Warren Buffett, arguably America's most gifted investor, plans to use a plain, vanilla S&P 500 index mutual fund for the bulk of his wife's trust fund.

Index mutual funds are low-fee financial products that track market averages. In other words, Buffett thinks the best stock pickers and mutual fund wizards in the world are incapable of beating market averages consistently -- or at least beating them by enough to offset their higher fees.

Imagine Angelina Jolie shopping at J.C. Penney because she appreciates the intrinsic value of their off-the-rack clothing. It's kind of the same thing.

It reminded me how people want to make money matters more complicated than they probably are. Like it or not, we are living in an age when people without defined-benefit pensions are largely responsible for their own retirement savings investment choices.

I'm no expert -- underline "no expert" -- but I have spent years reading personal finance books and periodicals. Most objective financial advice seems to be built around a basic set of numbers and ratios that are fairly static and possible to commit to memory.

If you can juggle just a few golden facts in your head, personal finance doesn't seem so daunting. While there are no one-size-fits-all solutions to money matters, these numbers can serve as mental reference points.

60/40 The ratio of stocks to bonds (60 percent stocks, 40 percent bonds) in a traditional balanced investment portfolio. Although many financial advisers today might say this approach to diversification is antiquated and oversimplified, its historical average of 8 percent to 9 percent annual return with relatively low volatility looks good to lots of folks.

28 The percentage of your gross income you should generally not exceed for your total housing costs -- including mortgage, interest, property taxes and insurance. So, if your gross household income is $100,000, your annual outlay for housing should be no more than $28,000 or $2,333 a month.

72 The magic number for mentally estimating how fast your money will double. Divide 72 by your expected earnings rate to mentally estimate your doubling time. For example, at 10 percent earnings your nest egg will double in about 7.2 years. At 5 percent, it will take about 14.4 years.

$73,801 The tipping point in 2014 for the 25 percent federal income tax bracket (the step up from 15 percent) for married people filing jointly. This is taxable income, not gross income, so some households can cut their tax bill efficiently by diverting a porting of their income over $73,800 into tax advantaged retirement savings vehicles such as a 401(k) or IRA. (FYI: For 2014, the 28 percent bracket kicks in at $148,851.)

4 percent The often-quoted magic draw-down rate for your nest-egg during retirement. Most financial pros say a 4 percent draw -- thereafter adjusted each year for inflation -- is a fairly safe bet for a 30-year retirement. Any more and you risk running out of money. Take out less and you might be leaving retirement income on the table -- or at least leaving more for your heirs, which is not a bad thing.

59.5 One of those odd numbers that smacks of compromise, 59.5 years is the age -- in most cases -- at which you can begin drawing down retirement savings from a tax-deferred accounts -- again a 401(k) or IRA -- without paying a 10 percent tax penalty. Remember though, these withdrawals will still be taxed like ordinary income.

70.5 The age at which the IRS says you must start taking required minimum distributions (RMDs) from your tax-deferred retirement accounts. The tax man won't let you delay paying indefinitely.

15 The percentage of your income some financial planners say you should save annually to have a reasonable shot at a comfortable retirement if, like most, you begin building your nest egg in your 30s. Include any employer 401(k) match in your calculation.

0 The percentage chance most of us will have for a secure financial future if we vow to never think about any of this stuff.

Contact Mark Kennedy at mkennedy@timesfreepress.com or 423-757-6645. Follow him on Twitter @TFPCOLUMNIST. Subscribe to his Facebook updates at www.facebook.com/mkennedycolumnist.

about Mark Kennedy...

Mark Kennedy is a Times Free Press columnist and editor. He writes the "LIfe Stories" human interest column for the City section and the "Family Life" column for the Life section. He also writes an automotive column, “Test Drive,” for the Business section. For 13 years, Kennedy was features editor of the newspaper, and before that he was the newspaper’s first Sunday editor. The Times Free Press Life section won the state press award for ...

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