Dear Editor, The Diaporan Star

The Editor,

The Diasporan Star

I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.

I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.

ELIGIBILITY

It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.

CONTRIBUTIONS

It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.

VESTING

It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.

A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.

An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.

LOANS / WITHDRAWALS

It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.

While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.

CASHING OUT

Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.

MANDATORY WITHDRAWALS

You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.

An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.

DIASPORAN ANGLE

You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.

Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.

Thanks

Reuel

5 Easy Steps to Becoming a Millioniare

5 Easy Steps to Becoming a Millionaire
Erin Joyce
Wednesday, May 18, 2011Share
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Who wouldn't want to be worth a million dollars? Many of us dream of achieving this goal, more often than not for the sake of the freedom financial stability would bring. So how can we get there? The answers are actually much easier than you might expect. Here are several easy steps to get you into the millionaires' club. (With a little discipline and the help of some powerful savings vehicles, anyone can hit this mark.)

1. Only Marry Once
According to "The Millionaire Next Door" by Thomas J. Stanley, Ph.D and William D. Danko, Ph.D, the average millionaire is married with three children. The wives of these millionaires are good budgeters and most often described as even more frugal than their husbands. Interestingly, according to Stanley and Danko's survey, half of these wives do no work outside the home and of those who do, they are most likely teachers.

One upside of only marrying once is avoiding the costs of divorce and of subsequent weddings. The cost of a divorce depends on many factors including income, attorney fees, court fees, and the assets a couple has and how they are divided. The average wedding cost in the United States in 2010, according to The Wedding Report.com, was $24,070.

2. Live Off One Income
One of the advantages of having a life partner is the potential to pull in two incomes. If you are able, consider structuring your set expenses based on only one income, and save what comes in from the other income. Doing so strengthens your financial position in two ways: In case of an emergency or if one partner loses their job, you will not only have less set expenses to cover, but you will also have built up your net worth as a safety measure.

3. Choose the Right Career
According to The Millionaire Next Door, "self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires." The book goes on to list an average of 45 to 55 hours spent working per week, so by no means is this the self-employed fantasy of playing golf while your business grows.

The idea of the "right" career can encompass a myriad of factors. Ideally, this would be a career you enjoy, otherwise you likely won't be putting in the dedication required to be successful. The right career would also coincide with overall working trends, or at least not work directly against them. For example, starting a career in typewriter manufacturing may be something you are passionate about, but it would likely suffer due to the current technological trends.

4. Put Your Money in Appreciating Assets
According to Stanley and Danko, the millionaires in their survey invested nearly 20% of their realized household income each year. Nearly 20% of the household's wealth is held in "transaction securities such as publicly traded stocks and mutual funds" and the millionaires tended to rarely sell their equities. Only a very small number of the millionaires surveyed had ever leased a car; few even drove the current year model. Half of those surveyed had lived in their homes for more than 20 years, which, as the authors point out, means they have likely enjoyed "significant increases in the value of their homes."

The end result? These people put a financial priority on assets that will make them money, from their homes to their businesses.

5. Don't Live the Millionaire Lifestyle
Warren Buffett's frugal lifestyle (especially relative to his net worth) is the go-to example for this point. The average value of the surveyed millionaires' homes was $320,000. The bottom line is, those who spend their money on non-appreciating assets cannot put that same money in an asset that will net them a return and increase their wealth. If it is important to you to build your financial worth, stop spending it on new cars, toys and clothes. (The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think.)

The Bottom Line
Becoming a millionaire is easier than ever. While this is a dream that will take work and discipline to achieve, it isn't as far out of reach as you might think. Be smart with your money and before you know it, you'll be able to count yourself among the world's wealthier citizens.

This article is part of a series related to being Financially Fit