If you've followed my writings for a while, you may have noticed my slant on financial planning is less about money and more about a rewarding and satisfying life.  Money is a necessary part of life, but not the purpose of it.  Sometimes we get so focused on earning money, that we forget what that money is for.

Here is a tale that always brings me back to reality when it's easy to miss the forest for the trees.   I've seen this many places so I don't know who credit as the original author.

It had been almost two years since the American businessman, with an MBA from a prestigious Ivy League school, took a vacation.  He had a very important role as a business advisor at a Fortune 500 consulting firm.  While vacationing in Mexico, he met a Mexican fisherman with a small boat who'd just caught a lot of fish.  Impressed by the Mexican's catch, the American began talking with him.

It was only 2:00 in the afternoon, so the American asked the man why he was coming in from fishing so early.  The Mexican said he had enough fish for his family and friends and had no need for more.  He continued by saying he wanted time to take a siesta, play with the kids, and have his neighbors over for dinner and dance.

The businessman proudly told the Mexican that if he worked longer he could form a corporation, buy more and larger boats and expand the company by exporting fish out of Mexico.  He continued by saying that after about 20 years the company would be large enough to sell for millions of dollars.

The Mexican was impressed by this idea and asked what he would do next.  The American said "that's when all the hard work will pay off."  He could sell the company, retire and live on the beach, spend his time doing a little fishing, playing with the kids, and enjoying dinner and dance with friends.

What do you think?  Does this make you reconsider what you are doing?  It serves a good reminder to me every time I read it.

I invite you to find out more by visiting http://www.cjrylantwealthmanagement.com and download the FREE workbook, 7 secrets to Financial Independence.

Chuck Rylant, MBA, CFP^©

C. J. Rylant Wealth Management

Photo: www.flikr.com

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Retirement plan rules are incredibly complex and change frequently, but for most plans like the 401K and IRA, you won't pay income taxes on the money you contribute until you withdraw it.  So, for example, if you earned $65,000 from your employer and contributed $5,000 to your 401K plan, you would only pay income tax that year on $60,000 of income.  This is an oversimplified example, but it helps illustrate the idea.

Now let me explain the other investments in the question.  The money you contribute to the retirement plan can be used to buy many different kinds of investments.  These can range from investing in a small business to buying stocks, bonds, CD's or mutual funds.  The retirement plan is just a basket that holds money that you use to buy investments, but it has great tax benefits.

Now on to the original question of which is better.  No one is better than the other, it's a matter of timing and making sure you have the right mixture of investments to fit your needs at the time.  The IRS generally imposes stiff penalties for withdrawing money from retirement plans before age 59 ½, so if you may need (notice I did not say will need) the money sooner, you should probably eliminate those plans as an option.

Then you need to decide which investments to buy either within or outside the retirement plan.  Here again it's a matter of how soon you'll need the money. Generally if you'll need the money within five or fewer years, stocks are probably not the best way to go and a CD, money market or short term bond are more appropriate.  When your time line is five or more years away, stocks become a better idea.

At the risk of completely complicating things, mutual funds are investments that buy all of the investments we've discussed so far--stocks, bonds, real-estate, and CD's. So you really need to examine what the mutual fund is invested in to make an informed decision.

I've tried to tackle a whole range of complicated topics and give you a basic idea of "which investment is best." Obviously there are entire books on these topics, but hopefully you have a better idea of the difference between an investment (stock, bond, CD and mutual fund) and a retirement plan (401K and IRA) so you can get closer to your own retirement.

There are many different ways advisors are paid in the financial services industry. For the sake of this brief article, I will broadly categorize all of the fee structures into three categories. They are Commissions, Fee-Only and Fee Based.

Commissions

The traditional and most common way fees are charged is through commissions. Commissions are typically paid when an investment or insurance product is either bought or sold. Commission based advisors do not get paid unless you buy or sell something. If you believe you do not pay fees to your insurance or investment advisor, than you most likely work with a commissioned advisor that receives a percentage of each transaction.

Fee-Only

The Fee Only model is the newest payment structure on the block. There are different ways Fee-Only advisors are paid. Fees may come from a flat annual retainer, by the hour, or a flat annual fee based on a percentage of your investment assets. Fee-only advisors do not receive any commissions or kickbacks from the investment products they recommend. Fee-Only advisors tend to be more comprehensive and objective because they are paid the same regardless of which investments you choose.

Fee Based

Fee Based advisors are a hybrid of the Commission and Fee-Only model. Fee Based advisors are commonly mistaken for Fee-Only, however, there is a distinct difference between the two. The Fee Based advisor receives commissions for products sold, but also charges an additional fee for advice. In contrast, Fee-Only advisors don’t receive any compensation from insurance or investment products sales.

So which is best?

As objective as I’ve tried to be in this article, I’m a Fee-Only advisor so I’m obviously biased. As in any industry there are good and bad people in each of the categories. Your job is to understand exactly what you’re paying and what you get in exchange for that fee. Each of the three fee structures has advantages and disadvantages to both the advisor and the consumer. There is not enough space in this article to cover all the pros and cons, but I encourage you to learn more and then choose an advisor with a fee structure that is most likely to put your interests first.

Part of the frustration with credit card debt is the trapped feeling you get. Every time you make a payment, only a small portion of the payment goes toward the principle. This is because of their ridiculously high interest rates. So to get out of this cycle you need to take two steps; stop making credit card purchases and increase the amount of your payment that goes toward the principle. Those steps are rather obvious, but with today’s economy it may be tough so I’m going to share a very simple secret that may help.

Call each of your credit card companies and simply ask for a lower interest rate. It’s that easy. If your payments are current they will probably lower your rate several percentage points just for asking. If they are reluctant you may have to remind them of the many better offers you receive every day in the mail. Many of my clients have had a lot of success doing this and I think you will as well. So pick up the phone tonight and just ask. Your next credit card bill may be just a little lower for the effort.

An HSA is a tax-exempt account you use to pay for certain medical expenses. If eligible, you may claim a tax deduction for contributions to the HSA account even if you do not itemize deductions. Another benefit of the HSA is that medical expenses that are otherwise not deductible can be paid for with tax deductible funds. For example, the Treasury Department has said over the counter drugs such as “aspirin” are eligible expenses.

Unused contributions remain in the account and the interest or earnings grow tax free. HSA investment options are very flexible and range from money market funds to stock market mutual funds. Most HSA custodians provide check writing and debit cards making it very easy to use the accounts.

The combination of the HSA and the HDHP is not appropriate for everyone, but it’s a perfect example of the benefits of comprehensive financial planning. By taking advantage of the HSA tax benefits, selecting appropriate investments, and choosing a compatible insurance plan, you can drastically reduce your health insurance costs.

Retirement on Hold - FA Magazine