100 Rules of Success: Investing Part 2

What follows is the continuation of success habits that will become part of a book I’m writing, “100 Rules of Success”. 

Success in Investing

Investing does not have to be complicated.  If you’re willing to establish and follow a handful of proven ‘rules of investing’ you can create a successful investment program. 

RULE:  Choose the Best Investment Environment.  You can significantly magnify the power of your investment accumulation program by choosing the best investment environment. The investment environment relates to whether the investment is a retirement account like a 401k, traditional IRA or Roth IRA; a tax-deferred account such as an annuity or cash value life insurance; or a personal investment account. Each environment has its advantages and disadvantages, but some are better than others, particularly for accumulating money for your estate and retirement. By prioritizing where your investment dollars go, you can significantly enhance your long-term accumulation results. Let’s begin with a review of your best options.

Under most circumstances, the best strategy for accumulating money for your retirement is through a qualified retirement plan. This may seem obvious, but you would be surprised at how often we find that people fail to understand this. For example, a new client was very concerned about saving for retirement. Every month he contributed 4 percent of his salary to a 401(k) plan.  His company provided matching of 50 percent up to 6% of salary and he could contribute another 9% unmatched (15% total). When asked why he was not investing enough money in his 401(k) to capture the full company matching contribution, he said he could not afford to contribute more. It turned out that he was personally paying several hundred dollars each month toward a whole life insurance policy. Through some rearranging of his life insurance, he was able to maintain the insurance policy without further premium payments and divert the insurance premiums into his 401(k). Not only would those life insurance premium dollars grow faster in his 401(k), but he got a tax deduction to boot! This is actually an easy mistake to make. To avoid it, you must review where all your investment dollars are going. In general, here is the best priority for investing your money:

  1. Company Matching Retirement Plan. Invest the maximum in your company 401k plan for which you receive a ‘matching’ contribution.  For example, say your salary is $100,000 and your company will match 50% of your salary up to a 6% contribution.  So, you put in $6,000 and they match it with $3,000…or a guaranteed 50% return on your investment in year one!  There is no other investment that can guarantee this type of return.
  2. Roth IRA…If You’re in a Lower Tax Bracket. Now it gets a bit trickier.  If your marginal income tax rate is 12% or lower, and you are eligible for a Roth IRA, this is your second-best choice for investing your money.  Remember, with a Roth IRA, you don’t receive an income tax deduction for your contribution but your money grows tax deferred and withdrawals during retirement are tax free.
  3. Deductible Traditional IRA…If You’re in the Two Highest Tax Brackets. Under the Trump Tax Plan, there are seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35% and 37% (so much for tax simplification!).  If you anticipate being in one of the highest two tax brackets, the current tax deduction makes this choice worthwhile.  If you don’t qualify for a deductible Traditional IRA because you make too much money, see if you can invest through your company’s 401k plan under eligible non-matched contributions.
  4. Personal Investment Account. If you fall in the middle-income tax brackets or are not eligible for the Traditional or Roth IRA, invest using a personal investment account.  You don’t get a tax deduction and interest, dividends and realized capital gains are taxable, but these accounts can prove very beneficial during your retirement years (See Success in Retirement section of this book).

Avoid Tax-Deferred Annuities and Cash Value Life Insurance.  The primary reason to avoid these products is that they are typically loaded with up-front commissions and ongoing expenses making them poor investment choices.  Never buy an annuity inside a retirement account such as an IRA.  To do so is to purchase a ‘Tax Shelter within a Tax Shelter’, or the analogy I like to use is, “It’s like taking a shower in your raincoat”.  You’ve created unnecessary redundancy and, typically, greater expenses.