By Simon Constable | Contributor
March 15, 2016, at 10:19 a.m.
So you've accumulated a nest egg by investing in mutual funds. Congratulations! That puts you ahead of the game.
But to grow an even bigger stash, try squeezing out the fees.
"Make sure you pay as little of that gross return in fees as you can," says Mitch Tuchman, managing director at Rebalance IRA, a financial services company in Palo Alto, California. Fees ultimately eat into any gains made by the mutual funds you own.
But mutual fund fees are only about 1 percent of the assets, right? Wrong – on three counts.
Mutual funds can be expensive. The average mutual fund annual expenses for equity funds was 1.33 percent in 2014, according to the latest data available from the Investment Company Institute that tracks these things. That 1.33 percent is equivalent to $133 dollars per year for each $10,000 invested.
Bond funds' annual expenses averaged 0.99 percent a year, or $99 per $10,000.
For someone with a heavy stock allocation, which most young people should favor, the annual expenses for the entire portfolio will average more than a percentage point.
Fees cut into your returns. Annual fees of only $1 out of $100 may sound puny, but they're not. The broad stock market, such as the Standard & Poor's 500 index, can be expected to grow by 6 to 8 percent a year, Tuchman says.
If you give away 1 percent of that return, you reduce the return by one sixth to one eighth. It's worse for bond funds, where returns are likely to be more like 2 to 3 percent. In that case, you'd be reducing your gains by up to half, each and every year.
Know the different types of fees. The fees you may possibly pay are not solely the annual expenses. There are plenty more which can crush your portfolio returns.
Sales loads are a percentage of the money that is charged before it is even put to work. For instance, a 5 percent sales load, which is common for stock funds with such fees, would reduce a $10,000 investment to $9,500 immediately. You'd already be down $500 on day one!
Some people may pay a smaller load if they are investing a large dollar amount. Still, lower isn't zero, which is the best size of any fee.
"There is no research showing load funds perform better than no-load funds," says Bob Stammers, director of investor education at the CFA Institute. "You want to avoid the sales load."
Instead, look for so-called "no-load funds," of which there are many.
Sometimes the load charge happens when you cash in your investment rather than at the very beginning. Again, it's something you want to avoid, so read the fine print.
Short-term trading fees get charged when investors sell a mutual fund after holding it for less than a certain period. That length of the period when you'd pay the fee can be as little as 30 days, but such stipulations vary. Investors may see a note by a fund which states a 1 percent charge on sales of shares held less than 60 days, for example.
"The idea is to discourage short-term trading," Stammers says. Most retail investors simply do not have the skill to profitably time the market.
If you think there is a chance that you might want to bolt from a fund quickly, then avoid funds with such provisions.
A 12b1 fee can be confusing to investors, partly because not every fund has it. The fee is disclosed in the fund prospectus and is used for marketing or distribution costs. It can vary from 0.25 percent and 1 percent.
But you don't have to add that to the annual expenses because they are already included in that total, says Russ Kinnel, director of manager research at Morningstar.
Look at the overall expense. The good news is that many investors are catching on to the idea that fees should be avoided as much as possible. For some though, the big psychological problem is that in much of life you get what you pay for.
For instance, a prime porterhouse steak at a restaurant is going to cost a lot more than a hot dog from a street vendor, but many would say the price difference is worth it. But for investors, the less you pay, the more you get. "Generally with investing it goes the other way around," Kinnel says.
The trick is to find funds with low overall expenses, such as index funds. Many fund companies make such offerings, two of the biggest are Vanguard and Fidelity Investments.
One fund is the Vanguard 500 Index Admiral fund (ticker: VFIAX), which has annual expenses of 0.05 percent, or $5 a year per $10,000 invested.
Likewise, Fidelity Investments has the Fidelity Spartan 500 Index (FUSEX) fund, which has annual expenses of 0.1 percent.
There are low-cost funds that do not simply track an index, but it's worth noting that much research has shown that few if any funds can manage to beat their benchmark indices over the long term.
If you are saving for retirement — and you should be — there’s a good chance that money is going into a 401(k) plan.
The plans have become the primary vehicle for retirement saving in recent years, fueled by a decline in the number of pensions and uncertainty over the future funding of Social Security. But many workers never bother to fully understand their investment options or to take full advantage of the tools being offered by their employer.
Before you take a set-it-and-forget it approach with your 401(k) accounts (or continue with such an approach), it may be worth it to take a few steps to make sure you’re on the right track and that you’re not leaving any perks on the table. That includes making sure you are saving enough: Many advisers say workers should save up to 15 percent of pay, including any company match. And workers can contribute a maximum of $18,000 a year to a 401(k) or up to $24,000 if they are at least 50 years old.
Here is a checklist of sorts to help you make full use of your 401(k):
Know what planning tools are available. Many retirement plans offer tools online to help people figure out if they’re saving enough and if they’re investing appropriately. For instance, some savers who have workplace retirement plans with Vanguard may be able to answer a questionnaire that helps them figure out how much they may want to invest in stocks versus bonds, based on when they plan to retire, how long they expect to be in retirement and how they would react during periods of market volatility.
Many retirement plans also offer projection calculators that estimate how much income people might have in retirement, based on how much their saving, how their investments are allocated and when they plan to retire. For example, Fidelity has a planner that helps people estimate how much money they’ll have in retirement. Vanguard offers a calculator that projects how long a person’s savings will last, based on how much they’re spending each year and how the savings are invested.
Crunching the numbers with the help of these tools can give you time to figure out if you should be saving more or if you might need to push back retirement. “Most people don’t even know if they’re on track,” said Liz Davidson, chief executive of Financial Finesse and author of “What Your Financial Advisor Isn’t Telling You.” Working out the math can also help you figure out how your savings should be invested.
Understand your options — and use them wisely. The average 401(k) plan offers 26 funds, according to a report from BrightScope and the Investment Company Institute. Sorting through those funds can be overwhelming, but less so if you understand how they work. Generally, the line up will consist of a cash option, such as a money market fund, as well as stock funds, bond funds and balanced funds, which invest in both stocks and bonds.
Savers can use one fund, or a mix of funds, to create an investment portfolio. Those people who want to be active with their retirement accounts can decide how much of their savings they want to allocate to various types of stocks or bonds. However, people who don’t want to put in the time to manage their portfolios can opt to use target-date funds, which invest in both stocks and bonds and re-balance automatically to become more conservative as a person approaches retirement. (Be careful not to put all of your savings in cash, which would force you to miss out on potential market returns over time.)
Savers who decide to use target-date funds should also know that they are meant to be an all-or-nothing deal, advisers say. Target-date funds are already designed to invest in a range of assets, including different types of stocks and bonds. So investors who put a portion of their savings into a separate fund invests only in stocks, for example, may lose track of how much of their total savings are invested in stocks.
Calculate your costs. Basically, the more money you spend on fees, the more those costs take away from your investment returns. Still, few people pause to do the math on what they’re paying or understand how the fees work. For comparison purposes, the average 401(k) plan charged 0.89 percent in total fees in 2013, or $89 for every $10,000 invested, according to the report by BrightScope and ICI. (Fees tend to be lower for larger plans, since administrative costs are spread out across more savers.)
Retirement plan fees are generally split into three categories: investment fees, administrative costs and service charges. While administrative costs are usually baked in to other fees or paid by an employer, savers can lower investment fees by shopping for funds with low expense ratios. Those fund costs should be available online under the section that lets you compare your fund options. Expense ratios are generally shown as a percentage of the assets invested. For instance, a stock index fund may have an expense ratio of 0.15 percent, or $15 for every $10,000 invested.
Check in every year. Once the account is set up and the savings are spread out across various investments, savers should check in on their accounts once a quarter or at least once a year to make sure their money is still invested where they want it to be. This is especially true for people going the DIY route, says Neil Gilfedder, vice president of portfolio management at Financial Engines, a registered investment adviser.
Wild market movements throughout the year may leave you holding too much, or too little, of a particular asset class, he says. Say someone goes from holding 85 percent of their portfolio in stocks to holding 80 percent in stocks. He would need to sell some other investments to buy more stocks and reach his target allocation. But avoid making changes to your target allocation because of what’s happening in the market, Gilfedder says. Rebalancing should be about sticking to your long-term plan, not about changing the plan or trying to time the market when the market become more volatile.
Even people using target-date funds should review their allocations occasionally to be sure it matches their risk tolerance. Some people who expect to retire by a specific year may feel that the target-date fund aimed for that year holds too much, or too little, in stocks, Davidson said. They may want to switch to a fund that is designed for a slight later, or earlier retirement date.
Get advice. Your company may offer you the option of sitting down with a financial consultant who can help you figure out your risk tolerance and create a rough plan for how you should invest your savings. Sometimes, the experts will be limited as to what kind of advice they may not be able to point you to one fund or another. But generally, the consultants can help you understand the different categories of funds and how risky they are. “Take advantage of the fact that somebody will talk to you about what those particular investments are,” says Lisa Bleier, who specializes in retirement and savings issues for the Securities Industry and Financial Markets Association, a trade group.
Some companies have the experts come visit the office on certain days and others offer the option to chat with someone online or on the phone. People who need more hand holding or guidance may want sit down with a financial planner or adviser who can help them decide between specific investments. But before making the appointment, it may be worth asking your human resources department about what resources are already available.
Millions of investors use mutual funds to reach their investment goals. When you make withdrawals from a mutual fund, there will usually be tax consequences. Exactly how your withdrawals will get taxed depends on several factors, each of which we'll consider below.
Taxation of regular mutual fund sales
Most of the time, if you want to make a withdrawal from a mutual fund, you have to sell some of the shares that you own. In that case, the usual rules apply governing taxes on the profit or loss that you've earned since you initially purchased the shares. If you have a profit, then you'll realize a capital gain and owe tax. If you have a loss, the resulting capital loss could give you a tax break.
The length of time you own mutual fund shares determines whether the gain or loss is long-term or short-term in nature. Long-term capital gains apply to fund shares held for longer than one year, while fund shares held for a year or less incur short-term capital gains liability. Rates on short-term gains are higher than on long-term gains, so there's an incentive for investors to hold onto shares on which they have a profit.
If you choose to make a partial withdrawal, you have control over some of the tax aspects of the sale. You can specifically identify the shares you want to sell, and if you choose those shares for which you paid the highest amount, your capital gains will be smaller -- or your loss bigger -- than if you choose shares for which you paid less. Also, you can choose shares based on the date you bought them if you want to specify whether you'll pay long-term or short-term capital gains tax rates.
Withdrawals due to fund distributions
Some mutual fund investors set up their accounts so that any distributions that the fund makes are paid to the investor in cash. That resembles a withdrawal, and in that case, the taxation of the amount withdrawn depends on the reason for the distribution. If the fund distributes dividend income that it received, then the applicable tax rate on dividends will apply. If the fund distributes capital gains on fund assets that it sold at a profit, those capital gains get carried out to shareholders within the distributions.
Note that unlike in the capital gains situation, the entire amount of the distribution is typically taxed. That's because the fund only distributes the amount of taxable income, not the full proceeds of any sale that generated that income.
Understanding mutual fund taxation can be confusing. However, it's important to know when an entire withdrawn amount will be subject to tax and when only a portion will be.
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Certified financial planner Sophia Bera answers:
My husband and I want to buy a home in our current city, an area that is already pricey and one where the prices are steadily rising.
Does it make more sense to keep saving for a down payment amount that would let us not pay the mortgage insurance, which will take us several years, or to pay the bare minimum necessary to secure a home sooner rather than later, accepting that we'll have to pay mortgage insurance, but that we may buy at a lower cost?
This is challenging one without knowing more about your overall financial situation. I always say that it's more important to address what's going on in your "personal economy" rather than worry about the US economy.
People get so caught up in rising home prices, low interest rates, and other people buying homes that they think "Now is the ONLY time to buy a house!" But we all know that people have bought houses at all different times in history and will continue to do so.
When evaluating whether or not you should buy a home, consider how long you're going to live there. A lot of people end up moving every few years or even switching jobs to a location across town, which could result in a longer commute, so consider how owning a home might limit your job opportunities. By being mobile and renting, you're putting yourself in a position to grow your income faster by being open to a job opportunity in a new city.
There's a lot of time and money that goes into homeownership that people forget about: yard work, home repairs, renovation costs, property taxes, insurance, etc. It's important to consider all of the costs and not just compare the monthly mortgage payment to your current rent amount. One of the first things people do when they move is paint, buy new furniture, and start doing a home project.
If you're planning on living there at least five years and you really want to own, then I would make sure to put yourself in the best financial position possible before you purchase. I wouldn't buy if you have credit card debt or other high interest rate debt (above 5%). Knock out some student loans, get rid of a car payment, and try to lower your monthly payments to free up additional cash flow.
If you can put 20% down and avoid PMI, that is ideal. However, if putting 20% down means that you use all of your savings, then don't do it! I would much rather see people put 5% down, wipe out all their other debt with cash, and still have three months of emergency savings versus putting 20% down on a house.
Another thing: I don't think you should think of your home as an investment. You need a roof over your head whether that's an apartment or a house. Over the last 100 years houses have increased an average of about 3% which is roughly the rate of inflation! Compare this to the Dow Jones over 100 years, which has returned 6.8%.
Before you move anywhere, consider how this will affect your lifestyle. If you live in a city and you end up moving to the suburbs then this is a very big lifestyle change. What's the motivation to moving there? Cheaper home prices or is it a better school district? Think about how this will change your commute, your lifestyle, and your community.
One of my best friends recently moved from an apartment close to downtown Austin to a place 15 minutes north of the city (when there's no traffic, and there is traffic a lot!). She had no idea how this would affect the coffee shops she visits, the shows that she attends at night, and the way she plans her day. It was mentally exhausting for her. She's now moving back to her ideal location in Austin because it makes her everyday life much less stressful. She isn't going to spend time stuck in traffic, she'll be within walking distance to her favorite coffee shops, her friends will all be close by, and the amenities in her building (like a gym) will be super convenient.
Homeownership versus renting an apartment is a really big decision, so think carefully before making the plunge. Good luck!
A:Congratulations on saving for retirement! In 2016, you can contribute a maximum of $5,500 (or $6,500 if you are 50 or older) to a Roth IRA.
Aside from a Roth IRA, there are a number of different retirement plans and tax-deferred savings vehicles for which you may be eligible.
The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer offers one of these plans, you can contribute up to $18,000 (or $24,000 if you are 50 or older). Many employers offer a contribution match, which is one of the best retirement investment features available.
If you have self-employment income or have your own small business, there are alternative retirement plans available to you. A SIMPLE IRA allows you to save up to $12,500 ($15,500 if you are 50 or older) in pretax dollars, and no tax is owed until you make withdrawals. Depending upon your income, you may be able to set up your own 401(k), also known as a solo or independent 401(k), or a SEP IRA. For 2016, you can then defer up to $53,000 in either of them.
Beyond defined contribution plans, depending on your age and income, it might be worthwhile to set up a defined benefit plan. These are complicated retirement plans that require significant paperwork, administration and fees. But if you earn a large amount of self-employment income and are nearing retirement, you could defer up to $210,000 per year.
As you know, a Roth IRA contribution is made with after-tax money, which means that you don’t receive a tax deduction for your contributions. But you won’t owe any taxes in the future. Other IRAs and defined-benefit plans are tax deferred, meaning you get a tax deduction at the time of making the contribution, but you will owe taxes later.
If you have exhausted all the normal tax-deferred and tax-exempt retirement accounts and are in a high tax bracket, you might want to look into annuities, which are insurance products that confer tax benefits. Annuities have a justly deserved bad reputation for high fees and poor investments options. But there are a newer class of annuities, sometimes called “investment-only” annuities, that are lower in cost. These annuities are created for tax-deferral purposes, not for insurance benefits. When you purchase them, be sure to avoid any guarantees, protections or life insurance riders. Your after-tax contributions will grow tax deferred, and there is no limit on the amount of after-tax money you can contribute. Unlike a Roth IRA, you will owe taxes on the gains at withdrawal, but you won’t owe tax on the principal.
So you have many options to choose from after you have contributed the maximum to your Roth IRA. However, your ultimate contributions may be limited by the amount and type of income you have earned and by other accounts you have contributed to, so you should check with a tax professional
Read more: Where else can I save for retirement after I max out my Roth IRA? | Investopedia http://www.investopedia.com/ask/answers/102714/where-else-can-i-save-retirement-after-i-max-out-my-roth-ira.asp#ixzz41gJqaH8W
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Let’s say you’re switching jobs in 2016. What do you do with your 401(k)?
Well, the worst thing you can do it cash it out if you’re under 59 1/2. You’ll pay taxes and a 10% penalty on the proceeds and will deplete your retirement kitty.
Your first option, which is perfectly legal, is to leave the money in your old employer’s plan. Although the money is always yours, where you put it is also your business. Your ex-boss can’t take the money from you at any time.
Why leave the money in your old plan? Let’s say you like the investment options and it’s relatively low cost, that is, the funds within the plan charge you less than 0.50% annually. When you look at your new plan, maybe the set-up isn’t as good.
You also may not have the ability to take out a loan in your new plan. That’s another reason for sticking with your old 401(k). Just be careful, warns Stuart Ritter, a financial planner with T. Rowe Price, many employers have a $5,000 minimum.
Rolling over your 401(k) funds into a new plan is a matter of filling out a form. The transfer shouldn’t take long. Just make sure you have all confirmations in writing, so that you can track the transaction and ensure the money has made it over.
Your decision to move your money into a new plan should be based on betting what your new employer has to offer. Ritter says you should consider:
* The new plan limits investment options to those in the new plan.
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* What are the limits on withdrawals?
* Is there a waiting period prior to moving assets from a former employer’s plan?
* What are the differences in the services offered?
* What are the fees and expenses between your former employer’s plan and the new employer’s plan?
* Generally, rollover contributions to a new plan (if permitted) can be withdrawn at any time and do not have to meet a permissible distribution event.
Don’t like your old or new plan? You can move your money into a rollover IRA. You may have less options, but you could find plans without lower expenses. Generally, companies that offer low-cost mutual- and exchange-traded funds will offer bargain expenses.
But an IRA isn’t a panacea when to comes to improving the flexibility of your retirement account. Ritter notes some drawbacks:
* The Rollover IRA Does not offer loan provisions.
* Generally, you may not make penalty-free withdrawals until age 59½.
* IRA assets are protected in bankruptcy proceedings only. State laws vary in the protection of assets in lawsuits.
* There may be negative tax consequences of rolling over significantly appreciated employer stock to an IRA.
* There may be differences in the services offered, as well as in the fees and expenses, between your former employer’s plan and the Rollover IRA.
The age-old question of how to lower taxes is one of the most common financial planning concerns among individuals and business owners. Paying taxes is unavoidable, but ample opportunities exist to help achieve a lower tax bill. Although each taxpayer has a different obligation to the Internal Revenue Service (IRS) each year, the potential to reduce taxable income is available across the board with the help of a few strategic steps.
Save Toward RetirementThe simplest way to reduce your taxable income is to maximize retirement savings. If your company offers an employer-sponsored plan, such as a 401(k) or 403(b), make pretax contributions throughout the year up to a maximum of $18,000 (for the 2015 tax year). If you are over the age of 50, make catch-up contributions of $6,000 above that limit as well for an additional opportunity to save money while reducing your taxes. Because your contributions are made on a pretax basis through paycheck deferrals, the money saved in your employer-sponsored retirement account is a simple and direct way to lower your tax bill.
If you do not have the option to save through an employer-sponsored plan, contributions to a traditional individual retirement account (IRA) may be a smart alternative. The maximum contribution to an IRA for the 2015 tax year is $5,500, with a catch-up provision of an additional $1,000 if you are over 50. Contributions to a traditional IRA lower your taxable income only if you do not have access to an employer-sponsored plan or when your total income is under a certain threshold.
A wide variety of retirement savings plans exist for the self-employed, including an individual 401(k) and a simplified employee pension (SEP) IRA. Both options provide an opportunity to lower your taxable income through pretax contributions and allow for higher limits on contributions each year.
Consider Flexible Spending PlansSome employers offer flexible spending plans that allow for pretax savings for expenses such as medical costs and dependent care. A flexible spending plan (FSA) provides a way to reduce taxable income by setting aside a portion of your earnings in a separate account managed by your employer. An FSA has a contribution limit of $2,550 for the 2015 tax year, and the total balance must be used each year contributions are made.
A health savings plan (HSA) is similar to an FSA in that it allows you to make pretax contributions that you can use for health care costs later. HSAs are only available to employees with high deductible health insurance plans, and contributions can be made up to a maximum of $3,350 for individuals and $6,650 for families. Unlike FSA balances, HSA contributions can be rolled over if you do not use them in the year in which they were saved. However, both HSAs and FSAs provide for a reduction in your tax bill during the years in which you make contributions.
Track Business DeductionsA lengthy list of deductions are available to lower taxable income if you are self-employed either full- or part-time. Use a home office deduction to reduce your taxable income if at least one-fifth of your home is utilized as dedicated office space, and you can deduct a portion of your mobile phone and Internet bills as well. In addition, expenses for advertising, marketing, travel and shipping can all be used to lower your taxable income each year.
Read more: What are the best ways to lower my taxable income? | Investopedia http://www.investopedia.com/ask/answers/012715/what-are-best-ways-lower-my-taxable-income.asp#ixzz41ZokHCiF
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Q: I have an opportunity to take my pension in a lump sum. I found out when the interest rate increases, my pension decreases. What product(s) would you recommend I investigate? What are your thoughts between a fixed index annuity and a fixed annuity? Currently, I am 55 years old and looking to preserve and maybe grow my future income. Can you provide any resources that will help me make an informed decision? — Sherri Church, Columbus, Ohio
A: First, it’s important that you understand the provisions of your pension. According to Joe Tomlinson, a certified financial planner in Greenville, Maine, it is indeed typical for lump sums being offered to decrease when interest rates increase, but not for the monthly income offered to change with interest rates. “So step one would be to understand what monthly income the pension offers and whether such payments are fixed for life or adjust for inflation,” he says.
Of note, the Consumer Financial Protection Bureau (CFPB) just released a guide for consumers thinking about a taking their pension as a lump-sum payout vs. a monthly payment. According to the CFPB, the guide is for consumers with a private-sector defined-benefit pension plan. It’s designed to help workers like you think though the trade-offs and implications of taking a lump-sum payout.
Here are some links to what they published:
So, here’s the pinch point in this process. You might learn after going through this exercise that, in addition to Social Security, you’ll need additional sources of guaranteed income to pay for your essential expenses. In your case, you may have to decide between taking the pension (either as a single-life annuity or as a joint-and-survivor annuity if appropriate), or taking the lump sum and investing it in the fixed index annuity (FIA), some form of fixed annuity, or something entirely different.
How to decide? Well, the pension is straightforward. You get income for life. Plus, a consumer’s pension is typically insured by the Pension Benefit Guaranty Corporation(PBGC), according to the CFPB. So, if your company declares bankruptcy or cannot make its pension payments, the PBGC guarantees those payments up to a certain amount. Pension payments are also protected against certain creditor claims or debt collectors. With a lump-sum payout, you typically lose these protections, the CFPB reports.
By contrast, you’ve got at least two products (or product categories) to consider if you take the lump sum:
Protect your nest egg from stock drops in 'retirement red zone'
According to Tomlinson, when you get to retirement, you could consider shifting this bond fund money to a couple of different options (noting, of course, that other options may also become available in the future). The most straightforward option would be a single-premium immediate annuity (SPIA). Of all the products you could buy, SPIAs are the most straightforward and easy to understand. You pay X dollars up front and receive Y dollars per month for life — it’s as simple as that.
By contrast, Tomlinson says FIAs are not straightforward at all. “There are a variety of methods for crediting interest to the accounts, and insurance companies have the flexibility to adjust charges after issuing contracts,” he says. “A lot of careful reading and analysis is required to understand what is being purchased.”
SPIAs are also fairly easy to purchase; you can buy one directly through a firm such as Vanguard, says Tomlinson. By contrast, FIA purchases (and a fixed annuity for that matter) require the involvement of an insurance agent.
Tomlinson gave this example comparing payouts for a SPIA vs. a FIA:
For a 65-year-old female and a $100,000 purchase, highly rated insurers offer SPIAs paying about $533 per month for life. A popular FIA offers a level $442 per month for this same case. If one wants annual inflation increases, the starting monthly income for an inflation-adjusted SPIA would be $393 per month. That would be for payments that actually increase with the consumer price index (CPI) similar to the way Social Security increases. A SPIA with fixed 2% annual increases would pay $439 per month. There are FIAs that offer the potential for increases, but such increases are uncertain and depend on product performance.
Buying an annuity? 6 questions to ask
By the way, if you decide to take the lump sum, the CFPB suggests checking for lump-sum calculation errors: “Many factors determine a lump-sum payment amount, including age, years of work, earnings history, taxes withheld, and the terms of the plan, the CFPB reports. “Consumers can detect errors by taking a look at their most recent pension statement or a consumer can contact a pension counselor for assistance or to resolve errors.”
Also, if you take the lump sum, you’ll likely pay taxes on a lump-sum payout, unless you roll over that money into a qualified retirement account.
Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Emailrpowell@allthingsretirement.com.
A new year means new resolutions, and for many people, that includes getting their financial house in order. For many, that might mean getting professional financial help.
Retirement planning, reviewing your investing strategy, and setting up an emergency fund can be a lot easier with a financial advisor. My firm studied millennials and their money and found that a large number aspire to start financial planning — and many would like to have their serious investing handled by a professional advisor.
For many people, however, the prospect of meeting with a financial advisor can be intimidating and stressful. Establishing a productive working relationship with a financial advisor doesn’t have to be difficult, however. Just remember that the right financial advisor can be immensely helpful, as long as you know what she can and can’t do for you.
One way to get the most out of your financial advisor’s services is to think about what you shouldn’t expect. Avoiding certain questions or expectations will ultimately serve you better by keeping the focus on smart planning.
With that in mind, here are my six tips on what not to say to a financial advisor.
1. “Just do whatever you want; I trust you.”Although it’s important to trust your financial advisor, you’re still the CEO of your household’s finances, and you should take an active role.
Take advantage of the time you spend with your financial advisor and soak in the knowledge. Learn how proper financial planning and investing works. Learn some basic terminology and be involved in determining whether something is risk-appropriate for you.
If you understand what you’re invested in, you’ll be able to determine whether an investment portfolio has met your planning goals. And most of all, just like meeting with a doctor, lawyer or other professional, the better the communication you have with your advisor, the better your likelihood of long-term success.
2. “What’s your performance?”This is the million-dollar question, and one that many clients ask at the very first meeting with the financial advisor. But without knowing all of your financial planning factors, it’s impossible for someone to give you a true answer.
I tell my clients it’s like looking at an empty lot where you plan to build a house and asking someone whether you should buy a red sofa. You need to settle on the architectural plans long before picking the furniture, just as you should have a proper financial plan before delving into investment selection. Because every investment has different performance and fees, performance numbers will differ based on what your overall goals are.
3. “Can you get me tickets to the Super Bowl?”You’d be surprised how many advisors have been asked a variation of this question. Remember, your advisor is here to manage your investments. He or she certainly isn’t allowed to give out big gifts. In fact, the investment regulatory powers that be clearly prohibit financial advisors from doing so.
4. “Who else do you manage money for, and what are they invested in?”Financial advisors are bound by strict client confidentiality rules. Speaking with you about your money is similar to your doctor or divorce attorney speaking to you about your health or legal issues. What is said to us, stays with us.
5. “I was introduced to you by ‘so and so’ … I want what they have.”Unless you’ve been cloned and are the same exact person as the friend who introduced you, this isn’t the best idea. As advisors, we must consider each client’s individual preferences and life experiences when building a customized portfolio. It’s also known as the “Know Your Client” rule.
6. “How busy are you? I want the advisor with the most free time.”If you needed medical care, would you go into the hospital and look for the surgeon with the most open calendar? There are always exceptions to every case, but often this will lead right to the rookie in the office, or someone who’s in low demand for a reason. Experience and reputation create demand; that’s a good thing, not a bad thing.
Click here for Winnie’s video summary of this article.
Winnie Sun is the founding partner of Sun Group Wealth Partners in Irvine, Calif.
By Kira Brecht | Contributor
Feb. 2, 2016, at 9:33 a.m.
Was one of your New Year's resolutions to manage your finances better in 2016? Perhaps your list included saving more, spending less, paying off credit cards and student loan debt. Here's another important task to add to your financial health to-do list: rebalance your portfolio.
Don't worry – it's not that hard. But for do-it-yourself investors, it's important to analyze your current asset allocations at least once a year to make sure recent market fluctuations haven't stretched your stock or bond allocations in the wrong direction.
Your portfolio can get unbalanced. Let's say you have a baseline portfolio allocation of 70 percent stocks and 30 percent bonds. If the equity markets posted strong gains since you last looked at your portfolio, you may now be sitting at an allocation of 75 percent stocks and 25 percent bonds.
"This larger allocation brings with it more market exposure and may be riskier than that investor can tolerate. Rebalancing will bring the portfolio back into alignment so the investor can sleep at night," says Ann Minnium, certified financial planner and principal at Concierge Financial Planning in Scotch Plains, New Jersey.
You will need to rebalance back to your baseline allocation target – it's as simple as selling 5 percent of your stock allocation and buying 5 percent of your bond investments to bring you back to your 70/30 goal. "The whole idea of rebalancing is selling the winners and buying the losers and not letting your portfolio get off track from your goals and objectives. You want to realign the portfolio for your pre-established risk-level," says Todd Douds, director of operations at Fort Pitt Capital Group in Pittsburgh.
Rebalancing can bring psychological challenges, and the disciplined investor needs to stay focused on long-term financial goals. "Our experience is that investors who are left to their own devices struggle with the actual implementation of rebalancing: selling what's high and buying what's low," says Zack Shepard, vice president of communications at Matson Money in Scottsdale, Arizona.
"It's very similar to a diet. Almost everyone knows how to lose weight – eat less and move more – but when the cheesecake comes around after dinner, it's really hard to force yourself to refuse even though you know you should. In investing, it's really hard to force yourself to sell what is up and buy what is down, but that is what you have to do," Shepard says.
Review your allocations. This is also a good time to review your allocation to make sure it's still appropriate for your goals and determine if any circumstances have changed that will alter your investment plan, Douds says.
If you aren't sure how much you should allocate to stocks and bonds, there's isn't a surefire formula – but there are some guidelines. A rule of thumb you can use as a starting point: Subtract your age from 100, and that's the percentage that your portfolio should be in stocks; the rest should be in bonds. However, age is only one consideration to determine a particular asset allocation. "There is no one-size-fits-all allocation at any age," Minnium says.
How risk-averse are you? Financial advisors say it is important to stretch out the risk continuum and invest in stocks to grow your money for retirement. However, a 2014 UBS survey found that many investors continue to avoid the stock market and that millennials are even more skittish about equities. The survey revealed that a typical millennial holds 52 percent of their portfolio in cash and 28 percent in stocks.
Investors should take into account their age, goals, risk tolerance and other income sources and assets, says Derek C. Hamilton, certified financial planner at Indianapolis-based Elser Financial Planning. "It varies greatly from person to person. In your 20s, a 90 percent stock and 10 percent bond allocation may be appropriate. In your 60s, you might start the discussion at a 60 percent stock and 40 percent bond allocation, but you may not end up there for good reason," he says.
Investors can also look to target-date mutual funds for additional guidelines. For example, a 30-year-old has about 35 years to retirement. The Vanguard Target Retirement 2050 Fund (ticker: VFIFX) holds 89.8 percent in stocks and 10.1 percent in bonds.
Do-it-yourself investors may want to consider using target-date funds in certain situations or for a portion of their portfolio. Many 401(k)s have target-date funds as the default investment option if the employee doesn't specify an investment choice. "This is a much better default than cash," Minnium says. "I also like target-date funds for investors with a small amount of money to invest. My son started his Roth IRA with $1,000, and he invested in a target-date fund, which enabled him to be completely diversified and well-allocated with only a small sum," Minnium says.
However, for investors with larger sums of money, a target-date fund may not be the best idea, Minnium says. "They can cost more, and it may be difficult to fine-tune their asset allocation without accessing other investments."
How often is enough? Mark your calendar for a once-a-year checkup on your portfolio to make sure it's not out of whack with your goals and risk tolerance levels. "Rebalancing too often can be expensive due to transaction costs, which can weigh heavily upon returns. It's also smart to rebalance if you have been lucky enough to inherit money or if you experience a significant change that affects your financial position," Minnium says.
The important thing about rebalancing is that you do it systematically, not based on a prediction or feeling about the future, Shepard says. "We look at market dips as opportunities and rebalance if portfolios move away from their target allocation percentage. For example, if fixed income is up and equities are down, which is what is currently happening in markets, we will sell fixed income and buy equities."
And don't try to time the market. "It has been shown time and again that trying to outsmart the collective wisdom of the millions of smart, well-informed people who trade in the market is very hard to do consistently no matter who you are. Disciplined rebalancing keeps you away from that market-timing trap," Hamilton says.