Why The Traditional 401(k) Is Underrated

August 31, 2017

Do you like paying “hefty tax bills?” According to this article titled, “If you like paying hefty tax bills, stick with your regular 401(k),” you’re likely to be better off contributing to a Roth 401(k) since required minimum distributions from a traditional 401(k) can keep you at the same or a higher tax bracket in retirement. That sounds pretty cut and dry but as with most universal financial recommendations, it’s a bit oversimplified.

Let’s take a look at some reasons why you might want to contribute to a traditional 401(k) even if you don’t like paying “hefty tax bills:”

1. Lowering your taxable income now can make you eligible for other tax breaks. One of the main differences between a traditional and Roth 401(k) is that the former lowers your taxable income now, while the latter can lower your taxable income in retirement. In other words, would you rather pay the tax now or later? One way to answer that is to compare your tax rate now with the one may pay in retirement.

However, there’s another factor to keep in mind. There are a number of tax breaks that phase-out based on your taxable income. Since almost all of them involve working, having children, saving or paying for education expenses, or saving for retirement, you’re much more likely to be eligible for them now than when you’re retired…assuming your taxable income doesn’t disqualify you. Before switching to a Roth 401(k), see if traditional 401(k) contributions can help you qualify for other tax breaks.

2. Your effective tax rate in retirement may be lower than you think. First, don’t forget that not all your income will be taxable in retirement. Even if you have no other tax breaks, you’ll still likely be eligible for at least the personal exemption and standard deduction and your Social Security will at most be partially taxable depending on your “combined income.” Any withdrawals from Roth accounts may be tax-free and only earnings on outside savings and investments are taxable (as opposed to any principal that you sell or withdraw).

More importantly, we need to examine what we mean by “tax rate.” For example, let’s say you currently earn a joint taxable income of $100,000. That would put you in the 25% tax bracket. If you contribute $18,000 pre-tax to your 401(k), all $18,000 would otherwise have been taxed at that 25% rate.

You then retire with the equivalent of $80,000 of taxable income (including RMDs) and are still in the 25% tax bracket. However, only the taxable income above $75,900 (in today’s dollars but the brackets are adjusted for inflation) or about 5% of your taxable income is taxed at that 25% rate. This means your average or effective tax rate is only 14.35%, despite still being in the 25% tax bracket. Would you rather pay a tax rate of 25% now or 14.35% later?

3. You can always convert to a Roth IRA later. If you make pre-tax contributions, you always have the option to later roll them into a traditional IRA and then convert them into a Roth IRA. You’ll have to pay taxes on the amount you convert, but if you plan to take time off from work to go back to school or take care of a child or elderly parent or even start a business that takes time to ramp up, you may be able to convert at that time and pay a lower tax rate. If your taxable income is low enough in retirement, you may even decide to convert then so your Roth account can grow tax-free for your heirs. However, if you make Roth contributions, you don’t have the same option to convert them to traditional.

None of this is to say that the traditional 401(k) is better for everyone either. In fact, there are some very good reasons to make Roth contributions such as if you’re maxing out your 401(k) contributions, you want to have tax-free income in retirement to qualify for higher health insurance subsidies under the Affordable Care Act, or you expect your tax rate to be the same or higher in retirement. If you’re not sure what the best option for you is, consult a qualified and unbiased financial professional.

Don’t just rely on one article’s headline. If it sounds too simple to be true, it probably is.

This post was originally published on Forbes, July 26.

Retirement Planning Step 3: Choose Your Investments

May 17, 2017

When it comes to choosing how to invest the money you deposit into your 401k and/or your IRA, it’s easy to get overwhelmed, but don’t let information overload stop you. It’s true that investing can get complicated and involved, but there are also things out there that make it pretty easy.

First thing though, is knowing whether you are a conservative, moderate or aggressive investor. The younger you are, the more aggressive you MAY be, but just to be sure, take this quiz to find out. Once you know what your investing personality is, the best way to narrow your options is by declaring yourself either a hands-off or hands-on investor.

What’s the difference?

Typical things a hands-off investor might say:

“I wish someone would just do this for me.”

“Words like ‘allocation’ and ‘portfolio’ are foreign to me.”

“I want to set it and forget it.”

“I rarely review my account and prefer a pre-mixed solution.”

The good news is that the investing industry recognizes that there are plenty of people out there who want the benefits of investing but who don’t have the knowledge, interest or even just the time to do it well, so they have created solutions that can be really great. If that sounds like you, then you don’t need to worry about how to pick a stock or watch channels like CNBC or Bloomberg TV – that’s more for the hands-on folks.

If you’re a hands-off investor, look for Target Date Funds in your 401k or IRA – the easiest way to spot them is that they have a year, like 2050, in their name. Target Date Funds are great because they choose the mix of stocks and bonds for you, in a mix according to the year you choose, and they typically charge lower fees than more actively managed options. Moderate investors typically choose the fund with the year closest to when they turn 65, while conservative investors may look for a year that’s closer to today and aggressive people often choose the one closer to the year they’ll turn 70 or 75.

When Target Date Funds aren’t available, then hands-off investors may opt to hire an investment manager to help them pick or they use the suggested investment mixes that can be found on the last page of the Risk Tolerance Profile and Asset Allocation Worksheet to help them put together a mix of the funds available in their 401k.

Typical things a hands-on investor might say:

“I enjoy researching mutual funds and their objectives.”

“I love my Jim Cramer bobblehead.”

“I log into my account regularly to check in on things.”

“Investing is interesting and I enjoy learning about it.”

If you’re a hands-on investor, chances are you probably have a pretty good handle on what you want to do with your money, but here are a few resources to check out to keep your knowledge and skills top notch:

How to Invest in Your Employer’s Retirement Plan

Should You Care About a Mutual Fund’s Past Performance?

How Investing is Like Eating Pizza

Retirement Planning Step 2: Choosing the Right Account

May 10, 2017

Now that you’ve set your goal, you need to figure out where you are going to save all that money. Do you use a 401(k), an IRA, or something else? What’s the difference?

The 401(k) is the account you can save through payroll deductions at work (or if you work for a not-for-profit like a hospital it may be a 403(b), but they’re basically the same thing).

401(k) positives:

It’s easy. You just elect your percentage and voila! The money comes right out of your check and you don’t have to do anything else.
You may get a match. Most employers these days offer a match as an incentive to get you to use the 401(k). As long as you put a certain percentage or dollar amount in your account, your employer will match those dollars. FREE MONEY ALERT!
You may have other tools available. For example, the rate escalator, where you tell your account that you want to increase what you’re saving on, say, an annual basis. You can make it happen automatically – no calendar reminder or phone alarm needed.
You can reduce your taxes. If you’re saving in the pre-tax 401(k), your contributions will reduce your taxable income in the year you put them in. In other words, if you increase your contribution by 1%, your check will go down LESS than 1%. Bonus!

Most people start with their 401(k) because it’s easy and to capture their full match. Don’t leave that free money on the table!

What if you want to save more once you’ve reached the match (or even the max) in your 401(k)? At that point, an IRA can come in handy. The big difference between a 401(k) and an IRA is that you’re fully in charge of your IRA. You have to choose where to open it, how to invest it, and what type you want. There are some special rules that may not allow you to deduct deposits you make into a pre-tax IRA or you may not even be able to contribute to a Roth IRA because you make too much money, (although there are ways to get around that) so just beware as you’re making your choice.

Which account you choose will be up to you. But no matter what, it’s important to pick one and start saving. The good news is that you can always switch where your money is going in the future if your circumstances change!

How to Invest in Your Employer’s Retirement Plan

April 27, 2017

Last week, I wrote about how to invest in a Roth IRA but how about your employer’s retirement plan like a 401(k) or 403(b)? After all, that’s where most people have the bulk of their retirement savings. Here are some options:

Keep it simple…real simple. If you have a target date retirement fund in your plan, this is the simplest option. In fact, it’s probably the default so you may not need to do anything at all.

The idea is to pick the fund with the target date closes to when you think you’ll retire. Each fund is fully-diversified to be a one-stop shop that automatically becomes more conservative as you get closer to retirement so you can set it and forget it. It doesn’t get much easier than that.

There are a couple of downsides though. First, you may not even have this option in your plan. Second, your plan’s target date funds may have high fees. Finally, you don’t have the ability to customize the mix of investments to match your particular risk tolerance (although you can pick an earlier date if you want to be more conservative or a later date if you want to be more aggressive) or to complement any outside investments you may have.

Target a particular risk level. If you don’t have a target date fund or want something more tailored to your particular risk tolerance, see if your plan has a target risk fund or an advice program. A target risk fund is fully diversified to be a one-stop shop, but it stays at a particular risk level so you may want to switch to something more conservative as you get closer to retirement.

An online advice program can recommend a particular mix of investments based on your risk tolerance. Many programs will even use the lowest cost options in your plan and/or factor in any outside assets you may have. For example, if you have a lot of stocks in a Roth IRA, the program may reduce your stock holdings in your plan accordingly. However, it will need to be periodically updated as your situation changes and some programs charge additional fees.

Create your own mix. If the above options aren’t available to you or if you prefer to have more control, you may have to create your own mix of investments. You can take a risk tolerance quiz like this one and use the suggested allocations as guidelines.

Just be sure to look for low cost fund options to implement your portfolio. You may want to use your plan for those assets in which you have low cost fund options and use outside accounts for the rest. (That’s why I invest mine all in a low cost S&P 500 index fund.) Don’t forget that taxes are another cost. If you have investments in taxable accounts, you may want to prioritize the most tax-inefficient investments like taxable bonds, commodities, real estate investment trusts, and funds with high dividends and turnover for your tax-sheltered retirement account since more of their earnings will otherwise be lost to Uncle Sam.

Consider a small amount in company stock. If company stock is an option, you might want to keep a small amount there to benefit from potentially lower taxes on the gains when you eventually withdraw it from the plan. Just don’t have more than 10-15% there because having too much in any one stock is too risky, no matter how great the company is. This is especially true with employer stock because if something happens to your company, you could be out of a job at the same time as your portfolio is decimated.

Not sure what to do? Don’t let analysis paralysis prevent you from investing at all. You can start with a simple option like a target date or target risk fund for now and adjust later. You don’t want to make the perfect investment plan the enemy of the good.

Should You Follow Senator Elizabeth Warren’s Investment Advice?

March 23, 2017

Last week, I wrote about some of her money management tips as described in an article titled “You, Too, Can Invest Like Elizabeth Warren!” Overall, I found them a bit too simplistic. Now let’s take a look at the investing side:

1. Visualize. Specifically, “take a moment to savor your dream.” It’s hard to argue with this. If visualizing your retirement or other goals helps motivate you to save and invest, go for it. Just remember that the dream probably won’t become reality unless you wake up and take action, which brings us to…

2. Create a retirement fund. Warren suggests contributing 10% of your income to a 401(k) or IRA. This isn’t a bad idea on its face but lacks detail. Why just 10%? The consensus seems to be that the average American household needs to save about 15% of their income for retirement so 10% is probably too low.

Even better, you should run a retirement calculator to get a more personalized number. That’s because the percentage you should be saving depends on your age, your current retirement savings, how aggressively you invest, when you want to retire, how much retirement income you need, and how much you can expect to get from Social Security and other income sources. In other words, you may need to save a lot more or a lot less, depending on your particular goals and situation.

It also matters whether you choose a 401(k) or an IRA. While they can have similar tax benefits, you’ll want to contribute at least enough to your 401(k) to get your employer’s full match. After that, your choice depends on a variety of factors like the investment options in each account and whether you prefer the convenience and simplicity of having everything in your 401(k) or the freedom and flexibility of an IRA. Don’t forget that you can also do both.

3. Invest prudently in the stock market. Warren also recommends investing another 5% (or 10% if you’ve paid off your mortgage) in an indexed mutual fund. Her own non-retirement account portfolio is largely invested in fixed and variable annuities with some money in stock, real estate, and bond funds.

Again, why 5%? The amount you save should depend on how much you’re willing to put away to reach your goals. If your goal is retirement, you’ll probably want to max out your 401(k) and IRA before investing in a taxable account. If your goal is education funding, consider tax-advantaged education accounts like a Coverdell account or 529 plan.

The index fund recommendation makes sense since compared to actively managed funds, they generally have lower costs, outperform over the long run, and generate less in taxes since they don’t trade as much. However, Warren seems to be using deferred annuities instead to shield her personal money from taxes. There are a couple of downsides to this strategy. One is that variable annuities tend to have high fees. Another is that the earnings are withdrawn first and are taxed at ordinary income tax rates.

In addition, her heirs will also have to pay taxes on the earnings they inherit after she passes away. In contrast, long term (over one year) capital gains on stocks and funds are taxed at lower tax rates and won’t be taxed at all when passed on to heirs. Her real estate and bond funds also generate a lot of taxes.

A better strategy for Warren would be to prioritize the bonds and real estate investments in her 401(k) and IRA and use the taxable accounts for the remaining stock funds. This is because stocks are more tax-efficient and their higher volatility would allow her to use losses to offset other taxes. By sticking to index funds, she could save even more in taxes and other costs.

4. Oh, and avoid investing in these: gold, prepaid funerals, and collectibles. I’m not sure I’d call prepaid funerals an investment at all, but collectibles can be a fun way for someone to speculate as long as they’re not counting on them for anything. A small amount in gold is used by many investors as a hedge against rising inflation and other types of instability and can help diversify a portfolio since it typically moves differently than stocks and bonds.

As with her money management advice, you could do a lot worse than funding a retirement account, investing in an index fund, and avoiding speculative investments. But Warren’s investment advice is a bit too oversimplified as well. Instead, find out what retirement and investing strategy makes the most sense for your particular needs or work with an unbiased financial planner who can help you. After all, we don’t all have a senator’s pension to bail us out of any mistakes.

Should You Be Making Catch-Up Contributions?

February 01, 2017

Turning age 50 is definitely a milestone – one that some people celebrate and some mourn while others remain ambivalent. No matter how you may feel about it, there’s at least one minor thing to celebrate from a financial planning perspective: 50 is the age when the annual contribution limits to retirement savings accounts is increased for savers via what’s called “catch-up contributions.” Here’s how they work.

Each type of retirement savings account has an annual limit that savers can contribute to each year. Catch-up contributions are intended to allow people who perhaps got a late start to “catch up” by giving them the ability to save above and beyond those annual limits:

So someone with a workplace retirement plan and a Roth IRA over the age of 50 could conceivably tuck $30,500 away after age 50 versus the lower $23,500 that younger workers are limited to. Even if you’re right on track with your retirement goal, the catch-up contributions can help to lower your taxable income and accelerate that financial independence day.

A strategy for 401(k) and 403(b) savers

For workers who are contributing to 401(k) or 403(b) accounts via payroll deductions at work, the catch-up contribution is typically a separate election that must be made in dollar amounts versus the regular contributions where you must elect a percentage of income. For workers whose pay varies due to hourly wages or commissions, it can be challenging to budget for these contributions or ensure that a certain amount is going in each pay period. The good news is that you don’t have to be maxing out your regular contributions in order to elect catch-up contributions.

So if you’re looking to bump your contributions up by a certain dollar amount and don’t feel like doing the math to figure out what percentage that is, you can just enter it as a catch-up amount. A small consolation for hitting that half-century mark? I think so.

Of course, I would always recommend trying to get the maximum amount into your retirement account each year, but that’s not always realistic for lower income workers or people with competing priorities like family needs or high interest debt. If you’re over 50 and thinking about making catch-up contributions, run a retirement estimate to see how they can help you get to your retirement goal sooner. Then start catching up today!

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Why I’m Making Pre-Tax 401(k) Contributions

December 22, 2016

Last week, I wrote about how I’m investing in our company’s new 401(k) plan. That wasn’t the only decision I had to make though. Another choice was between making traditional pre-tax versus Roth contributions. Here are three reasons why I chose the former:

I expect my tax rate to be lower in retirement. The choice is basically between paying taxes now versus later. I’m currently in the 28% federal income tax bracket and the 6.65% NY state income tax bracket for a total marginal tax rate of 34.65%.

When I retire, my tax brackets are likely to be lower and I may end up living in a state with a lower state tax rate or even no state income tax at all. This is partly because I’ll need less income in retirement (especially since I won’t be saving for retirement anymore) and also because some of my retirement income will be coming from a tax-free Roth IRA. If I do end up being fortunate enough to retire in a higher tax bracket, I won’t mind paying the higher tax rate on my 401(k) as much since those additional dollars will be less valuable to me at that point.

I’d rather invest the tax savings outside my 401(k). With the pre-tax contributions, I get that 34.65% that would normally go to Uncle Sam if I made after-tax Roth contributions. I can then invest those tax savings in practically anything I want. Yes, I’ll have to pay taxes on the investment earnings, but I estimate that my higher expected returns in those outside investments will outweigh the taxes.

I can convert to a Roth later. One thing I love is keeping my options open. When I eventually leave the company, I can convert my 401(k) into a Roth IRA. (I’ll have to pay taxes on anything I convert so hopefully my tax bracket will be lower in at least that year.) However, if I choose the Roth option, there’s no way to go back and recover the benefit of lower taxable income.

Does this mean everyone should make pre-tax contributions? Absolutely not. If you expect your tax rate will be higher in retirement or if you’re maxing out your contributions and want to shield as much of it from taxes as possible, the Roth option would probably make more sense. As always, the best choice depends on your particular situation. Just remember that either choice is better than not contributing at all (or delaying due to analysis paralysis).

Why I’m Investing 100% of My 401(k) into One Stock Fund

December 15, 2016

Like many companies, Financial Finesse recently changed the fund line-up in our 401(k). As part of the new offering, we now have target retirement date funds that are fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date. But rather than this more diversified approach, I’m choosing to put 100% of my 401(k) into an S&P 500 index fund. While this strategy is certainly not for everyone, here’s why I decided it makes sense for me:

It complements my investments outside the 401(k). If you have retirement investments outside your employer’s retirement plan, you might want to look at all of your retirement accounts as one big portfolio. In my case, the bulk of my outside retirement investments will be in real estate and microcap and international value stocks. Since I’m a very aggressive investor with my retirement portfolio, I have no interest in bonds or stable value. Therefore, domestic large cap stocks can best diversify my overall portfolio without sacrificing much in expected returns.

Index funds tend to outperform actively managed funds. It’s also the only index fund offered in the new plan. This is an important point because studies have shown that index funds tend to do better than the vast majority of actively managed funds in the long run, primarily because of their low fees and trading costs. While value stocks tend to outperform in the long run and growth stocks would better complement my already value-heavy portfolio, both advantages can be wiped out by the higher costs of active management.

Warren Buffett recommends it. Arguably the greatest investor alive today has recommended index funds to both Lebron James and average Americans. He’s also put his money where his mouth is, instructing his trust to invest 90% of his estate in an S&P 500 index fund for his wife when he passes away and betting a $1 million to charity that a simple S&P 500 index fund would outperform a selected group of top hedge fund over 10 years. (It’s year 9 and he’s way ahead so far.) If it’s good enough for Buffett, it should be good enough for me.

Of course, this certainly doesn’t mean everyone should put 100% of their employer’s retirement plan in an S&P 500 index fund. If you don’t have much outside your plan, your portfolio may not be diversified enough without international and small cap stocks. Unless you’re also a very aggressive investor, you’ll probably want some bonds and cash as well to reduce the portfolio’s risk. This is why most people are probably better off investing in a more diversified portfolio like the target date retirement funds we have now. As always, you’ll want to make sure you’re making an informed decision that’s best for you.

Why You Should Roll Your 401(k) to Your New Employer

September 19, 2016

When changing jobs, what should you do with your employer-sponsored retirement account balance? Our blog editor, Erik Carter, JD, CFP®, recently wrote a post titled What Should You Do With That Old Retirement Plan, in which he stated that if he left an employer, he would be very likely to roll over his retirement account balance to an IRA in order to have access to more investment choices. Erik outlined a job-changing employee’s four options: 1) leave the money in the former employer’s plan, 2) cash out your account, 3) roll over your balance to a new employer or to an individual IRA or 4) purchase an immediate income annuity (if it’s a feature of your former plan.)

Option 3, rolling over your balance, is by far the preferable choice for the large majority of retirement savers. For most people, it may make more sense to roll their retirement plan balance to their new employer’s plan rather than an IRA. Here’s why:

Lower Fees

Many 401(k) plans offer participants access to institutional share class mutual funds and very low cost index funds, especially those sponsored by large employers. Conversely, investing in your IRA can get expensive if you aren’t careful to monitor the mutual fund fees, trading costs and account fees. Before you make your distribution decision, compare and contrast the fees for all your options, including leaving your account with your previous employer, rolling your balance to an IRA and rolling it to your new employer. Not sure which option offers you the lowest cost of investing, given the type of investments your want to choose? Use FINRA’s free mutual fund fee analyzer tool.

Keep it Simple

While it’s true that there is a broader universe of investment options in a self-directed IRA account at a brokerage firm or mutual fund company than in your workplace retirement plan, many investors don’t need or want that kind of customization in their investment strategy. Keeping your retirement plan balances in one place allows you to see at a glance the investment mix of your retirement savings and how much you’ve saved simply by logging on to one site. If you’re a more “hands-off” investor, a target date fund in your plan with a date near your target retirement can offer you an easy, diversified, one-stop-shopping investment strategy.

Protection Against Lawsuits

Balances in retirement plans, such as 401(ks), are protected against civil judgments and bankruptcy. (But if you owe taxes, your 401(k) assets can be seized to settle the tax debt – and you’ll have to pay more taxes and a 10% penalty if you take an early withdrawal to settle the bill.) The higher your income and/or net worth, the more important it is to consider this factor. However, depending on where you live, your state may not extend that protection to IRAs.

Borrowing Power

Many 401(k) plans permit participants to borrow from their plan assets at a very low rate of interest. If you roll your old plan into your new plan, you’ll have a bigger base of assets against which to borrow. (A common borrowing limit is 50% of your vested balance up to $50,000, but check with your plan administrator for the specifics of your plan.)

While the disadvantages usually outweigh the advantages in borrowing against your retirement plan, there are times when it may make sense, such as preventing eviction, foreclosure or auto repossession, paying off very high interest debt or putting 20% down on a home purchase to avoid PMI. Keep in mind that you’ll repay the loan with after-tax dollars so you’ll end up being double-taxed on the interest when you eventually withdraw it, and those funds won’t have access to market performance during the loan repayment period. Also, if you leave your company for any reason before the loan is repaid, your unpaid balance becomes a taxable retirement plan distribution, subject to a 10% penalty.

Workplace Financial Guidance

More and more companies are offering workplace financial wellness programs, where financial education and guidance are offered to employees as an employer-paid benefit. Can you attend a workshop or webcast, use an online learning resource or work one-on-one with a financial coach? More 401(k) plan sponsors also offer access to robo advice, where an online investment adviser service sets your investment mix based on your risk tolerance and time horizon and regularly re-balances your portfolio.

How about you? What do you think is a better idea: rolling an old retirement plan into an IRA or into your next employer’s plan? Email me at [email protected] or let me know on Twitter @cynthiameyer_FF.

How to Be Better With Money

September 16, 2016

The NFL season is underway, and I’ve seen more purple in Baltimore recently than I have in months. Everywhere I go, I’m seeing enthusiastic fans getting ready for the upcoming season. Before the first game of the season, fans of every team believe that THIS is the year that their team is going to win the Super Bowl. 31 of 32 fan bases will ultimately be disappointed. But at this time of year, hope springs eternal everywhere (except maybe Cleveland!)

I see the same “Let’s Get Started” level of enthusiasm from people who tell me that they have been a bit of a mess financially in the past but are ready to make progress now. I’ve heard countless people say “I’m bad with money” or “I have no clue what I’m doing financially.” I refuse to believe that they can’t, in a few quick and easy steps, develop lifelong habits that will take them to a place of financial security. I refuse to allow them to speak poorly of their financial habits.

I ask if they have ever played an instrument or a sport or any type of art. Almost everyone has tried something like that at some point in their life. I ask them to go back to their very first day of playing the clarinet or saxophone or whatever it is, and they laugh at just how terrible they were on that first day.

After I get them to talk about how they went from horrific to actually having a clue about what they’re doing, they understand that managing money is merely a skill that they haven’t practiced yet, and today is day 1 of their new talent coming to the surface. At that point, there is an enthusiasm that tells me they are ready. When I see and hear that level of enthusiasm, I know that they are serious about making progress.

The secret to building a foundation of financial success is keeping things simple and automating as much of it as possible. With automation, simplicity and just a little bit of work, managing your personal finances is rather easy. Here are some steps to take:

Step 1: Get some basic facts together so that you have a starting point.

This financial organizer will help you see the aerial overview of your financial life on one page. What do you own vs. what do you owe?
This expense tracker can help you see how much money comes in during the month and how much goes out. With these two worksheets, you have a lot of useful data, and if you update these quarterly, you will start to see progress.

Step 2: Automate things.

Contribute to your 401(k) at an amount at least up to the company match. Then, enroll in the rate escalator feature to increase your contribution by 1% annually – either on 1/1 or on your anniversary or your birthday. Just pick a day and enroll in it.
Open a savings account at a credit union or online bank, one that is NOT where your checking account is and get a direct deposit going there. The amount isn’t important. A $5, $10, or $20/pay deposit will suffice. It’s the momentum that’s important and the speed bump! When you have your savings account at the same bank as your checking account, it’s way too easy to log in and slide money from one account to the other.
A great tool for “accidental savings” is the Acorns phone app. It rounds your transactions up to the next dollar (so if pay $1.86 for a coffee, it adds $.14 and slides it over to Acorns, where you can invest in a very conservative portfolio). I “accidentally saved” a couple thousand dollars that were used as a part of my down payment on the house I just bought.

Step 3: Stay alert and updated.

For your credit score, CreditKarma.com and CreditSesame.com are great free tools to stay on top of any changes in your credit file.
AnnualCreditReport.com allows you to get a copy of your credit reports at no cost once/year. Make sure that everything there is actually yours!
Mint.com can show you on a daily basis all of the transactions in all of your accounts from the prior day. (I launch that app from my phone every morning while I’m still half asleep and before I hop out of bed.) This is a great way to make sure that no one is accessing your accounts without your knowledge.
The financial organizer and expense tracker above are excellent tracking tools. Keep a binder full of reports that you can look back on in the future to see where you started and where you are. You’ll be shocked at the progress, and when you see it, you’ll want more of it.

For anyone who has ever said “I’m lousy with money,” I say “You are no longer allowed to say that! EVER!!!” Your new phrase is “I’m always learning to be better with my money.” With that new phrase and these tools, you can transform your financial life in relatively short order.

Don’t Believe Everything You Hear

July 01, 2016

I’m the kind of person who will always try to listen with an open mind to different points of view and find something to learn from the speaker. I hear a lot of theories that way, some which appear to be myths, superstitions or misinterpretations, and some of which offer a refreshing change in perspective. In many cases, what’s true for most people might not be true for everyone. When sifting through financial advice, make sure to ask yourself if that guidance makes sense for your situation. Here are three common examples of financial guidance where you might want to think about things differently:

Question: I’ve been told that I should always have a mortgage so that I can get the mortgage interest deduction. Is that always true?

My view on it: MYTH

For each $1 in interest they pay the mortgage company, the typical family gets ~$.20 in tax relief (using the tax rate as the real payback number). To me, you lose $.80 on the dollar by paying interest. Plus if you have no mortgage, your embedded cost of living is permanently lower, so your accumulated savings and investment dollars can last a whole lot longer. Financial advisors typically say disciplined, long term investors could do better in the stock market rather than using savings to pay off a mortgage, but I’ve observed that most people prefer to have the peace of mind that comes with low or no debt so I’m not a huge fan of carrying a mortgage just to get a tax deduction.

Question: I should never contribute more to my 401(k) than my company’s matching contribution. Once I reach that, I’m told I should open a Roth IRA. Is that the right choice?

My view on it: MYTH

Most people I see who try to implement this, forget one critical part – funding the Roth IRA. The problem with this guidance is that many people never get around to funding the Roth IRA every time they get paid. Once their paycheck hits their checking account, it gets accounted for in so many other ways. I’d prefer to see people shoot for the maximum 401(k) contribution ($18,000 this year, plus $6,000 in catch-up contributions for those over 50) and once they max out the 401(k), THEN contribute to an IRA.

Also, maxing out the 401(k) doesn’t have to be an instant thing. You can increase your contribution level by 1-2%/year until you get there. If you have a rate escalator in your plan, sign up for it today!

Question: If I close out some of my credit cards, that should improve my credit score, right?

My view on it: MYTH

Well, it’s not that simple! There are a lot of factors that go into your credit score. A few great places to see the multiple factors are CreditSesame.com and CreditKarma.com.

If the credit cards you want to close are relatively new, closing them may help you because it could increase your average “age of credit” (how long your open accounts have been open). But it may decrease your score because it reduces your overall credit limits and if you carry balances, it makes your “utilization ratio” higher. That’s the amount of overall credit balances divided by overall credit limit. Keeping that ratio below 25%, ideally at 0%, will be additive for your credit score. If closing accounts increases your utilization percentage, then closing the accounts can harm your score.

The thing to take away from this is that credit scores are fluid things. They change constantly. But if you take the time to review your scores and factors on the sites above, you will be able to make well informed decisions that impact your credit score.

As you go about living your life, learn how to discern the differences between good, solid personal financial management and misapplied financial principles. How? Ask a financial planning professional, pose a question on our Facebook page or ask me a question in the comments section below. Having the facts on your side can help save you from the many conflicting theories of managing your personal financial life.

4 Things I Wish Someone Told Me Before I Graduated From College

May 10, 2016

As I talk to my friends’ graduating children, I am always struck by the hope in their faces. They believe that they control their futures and that their lives will be better. It makes me think about my own graduation and reflect on what I wished someone would have told me about finances:

#1- I will actually have to pay back the money I was taking out in student loans. I do not remember thinking about paying back my student loans. I probably thought that the student loan fairy dropped into my college’s financial aid office after graduation and deleted my debts. If I had known how long and painful it would have been to pay back my student loans, I may have made different choices. I encourage parents to sit down with their kids, calculate repayment costs, estimate their starting salary and give them a cold dose of reality as to what their paycheck may look like after taxes and deductions come out.

#2- The car I stupidly bought after college graduation will become the story I tell people about what not to do when you graduate. I worked so hard to graduate and my car was old so I purchased a car I really did not need. It was cute and in the showroom and the second I saw it, I said “I do.” What I did not realize was that I was also saying “I do” to a 5 year car loan that took almost a 4^th of my income at that time. I wished someone would have told me that the car I get will dictate my ability to save money, take vacations and contribute to my 401(k) plan.

#3- A business wardrobe is not a reason to get into credit card debt. I was lucky enough to land a job with a large corporation but I realized that I needed to get business clothes. I used this as an excuse to run up $3,000 in credit card debt on a new wardrobe. I think this included a Coach bag and wallet that I never used. I wish someone would have told me that credit card debt is not necessary and worked with me on a plan to pay it off

#4 – The earlier you contribute to a 401(k) plan, the less you need to contribute. I wish someone would have told me how important it was to contribute early, the power of compound interest and how starting with even a small amount makes a big difference, especially when your employer is giving you free money in the form of a match to help you save for retirement. Talk to younger people about how your choice to save early has helped you or about your regret in not starting earlier. Run an estimate for them so they can see how a little makes such a big difference .

Looking back, I wished I would have gotten a cold dose of “adult” reality. I wished I would have known that being on my own meant that my financial choices had consequences that can easily be taken care of if I had been willing to buckle down and pay off my debts instead of using credits cards to upgrade my lifestyle. The best gift you can give a college graduate is to help them start off their futures on the right financial footing. Work with them on a budget, encourage them to pay off credit card debt, teach them the importance of contributing to a 401(k) plan and help them come up with a game plan to pay off their student loans before their children are in college.

3 Reasons To Make After-Tax Contributions To Your Retirement Plan

April 25, 2016

Updated for current tax figures

Are you lucky enough to have the option to save after-tax money in your employer’s retirement plan? Most employees probably haven’t given it a thought, and not many utilize the option to save more than the current $18,500 pre-tax annual employee contribution limit (plus another $6,000 if you are 50 and older).

In fact, many people are not even aware that they may be able to save additional money in their employer-sponsored retirement plan, in some cases up to the annual total defined contribution limit (from both employee and employer) of $55,000 (plus $6,000 catch up if 50 and older) or 100% of your compensation, whichever is less. Sure, the likelihood of saving that much for many people might be small.

However, if you are already contributing the maximum in pre-tax and Roth contributions, here are some reasons to save more after-tax:

Automatic savings

Saving for an early retirement or financial independence? Let’s face it. It’s unlikely you’d save that much or invest on such a consistent schedule if you had to write a check every two weeks to a mutual fund company.

That’s one reason your employer can be your best financial services provider. Saving after-tax money in your retirement plan can be as easy as clicking a button or signing a form to choose what percentage of your salary you want to save. Every paycheck, you’ll defer money into after-tax savings and invest them in plan funds, just like your regular contributions. Little by little, you’ll save and grow that extra money without having to think about it.

Ability to withdraw contributions

You should generally be able to withdraw after-tax voluntary contributions, subject to the plan guidelines on withdrawals, even before you’re 59 1/2 and without meeting a specific need like you often do for a hardship withdrawal. That means if you have an emergency, you will be able to access those funds.

However, you may not be able to withdraw associated earnings growth, and if you are, those earnings – but not your original contributions – would be subject to taxes and a 10% penalty if withdrawn prior to age 59 1/2.

Tax-free rollover to a Roth IRA

You’ll reap the biggest rewards from your after-tax contributions when you leave your company or retire. Assuming you’ve been saving for a while, your after-tax balance will contain two components: your original after tax contributions and the tax-deferred earnings growth on those contributions. The IRS allows you to separate those two components out during the rollover process, so you can do a direct rollover into multiple destinations: rolling the tax-deferred earnings growth into a traditional IRA and rolling your after-tax contributions into a Roth IRA.

That’s right. You read that correctly. Your after-tax voluntary contributions can be rolled into a Roth IRA, where any future earnings growth will then be tax-free (assuming you leave the money in the Roth for at least five years and until after age 59 ½ ). You may even be able to convert your after-tax contributions immediately to Roth and have all future growth tax-free (but then you give up the ability to withdraw it early).

Here’s an example: Jane is already contributing the maximum $18,500/year to her pre-tax 401(k) plan at XYZ Company. She wants to save extra for retirement, so she saves an additional $10,000 annually in after-tax voluntary contributions in the plan.

After 10 years, Jane has about $144,000 from her after-tax contributions ($100,000 in contributions and $44,000 in growth). She also has about $260,000 in pre-tax savings and growth from contributing the maximum. When she leaves XYZ to take a new job, she can roll her plan balances into multiple destinations: $100,000 into a Roth IRA and $304,000 into a traditional IRA or her new employer’s 401(k) plan.

Fast forward another 15 years to when Jane retires. Without adding any more money to her Roth IRA and receiving a 7% return, her account is now worth about $285,000. That’s an additional $185,000 of tax-free growth, all because she originally saved after-tax money in her 401(k) plan.

Two Ways To Make Next April 15 Less Taxing

April 15, 2016

In the early days of my career as a financial advisor, there were some “interesting” investments that my clients owned. There were a lot of oil and gas partnerships that were very mediocre investments if viewed solely as an investment vehicle, but they offered spectacular tax advantages that made them wildly popular. People wanted to buy them solely for the tax benefits. And then…tax laws changed and these investments tanked! Clients couldn’t get out of them because no one else wanted them.

Similarly, I have had many conversations lately with people who are looking for magic strategies to reduce or eliminate their tax burdens from 2015. (It must be close to April 15^th.) Newsflash – there is very little you can do in April 2016 to impact your 2015 tax return. When it comes to tax planning, the key is to start early in 2016 (I’d suggest NOW if you haven’t already) to impact the tax return you’ll file on April 15^th 2017. A couple of my favorite ways to reduce income tax burdens are available right through your employer in many cases:

Health Savings Account (HSA): This is my #1 favorite right now. The contribution limit for single in ’16 is $3,350 and for a family it’s $6,750. Contributions are either pre-tax (through your employer) or tax deductible (if you write a check) and if used for medical expenses, they are tax-free on the way out too.

Are you kidding me??? The IRS allows a vehicle to be tax-free in AND tax-free out? That’s remarkable. You can build a substantial bucket of money in the future, and the IRS can help subsidize it. I can’t think of another vehicle where you’re allowed to “double dip” with tax benefits in and out.

401(k): Another great way to minimize next year’s taxes is to get as close as you can to the IRS maximum on your 401(k) contribution. This year, it’s $18,000 ($24,000 if over 50 years of age). If you’re in the 25% tax bracket, getting to the $18,000 mark would save you $4,500 in current year taxation. Rather than just stop at 3% or 6%, whatever the employer matching contribution is…..work toward getting the max contribution. If you can’t do it this year, you can increase your contribution by 1-2% per year until you’re there.

I hear and read a lot of “experts” talking about stopping at the level of employer matching contributions and then opening an IRA or Roth IRA outside of the employer account. I’m not opposed to that, but not everyone is disciplined enough to make that work. But if you get up to the maximum contribution and then do the IRA or Roth IRA, you’re going to be saving an enormous amount of money and getting closer to your retirement goals with each passing paycheck. For perspective – I’ve never met someone who was within months of retiring complain that they had too much money saved for retirement!

These are two quick and easy things that you can do to make next April 15^th much more manageable and reduce your overall tax burden. These are the obvious ones, and a future blog post will touch on some of the not so obvious ones. Until then, get busy contributing to your HSA and 401(k)!

5 Ways You’re Messing Up Retirement in Your 20’s

February 17, 2016

I know how far off retirement seems when you’re bogged down with student loans and credit card debt while being more concerned about buying a house and having kids (let alone putting THEM through college) in the coming years. Retirement seems more like something your parents and your boss should be worried about. I’m right there with you! But I also know that whether or not you are actually able to retire in that distant-feeling future can be a direct result of your financial behavior in your 20’s. Here are the 5 things that I see 20-somethings do that can really mess up their chances for a comfortable retirement. Continue reading “5 Ways You’re Messing Up Retirement in Your 20’s”

Are You Financially Fearless?

January 08, 2016

I love stories about things that don’t always go together. Sometimes it creates a wonderful combination. That’s why when I read this story about a Siberian tiger that isn’t eating the goat it was fed (and is actually becoming a good buddy of the goat), it brought a smile to my face. Continue reading “Are You Financially Fearless?”

Are You Ready For Open Enrollment?

October 27, 2015

It’s open enrollment time…that time of the year when you get this huge booklet or email of benefits and have to wade through all of the papers and links to figure out what to do while planning for the holidays at the same time. Remember to take time to really think about how you used your benefits last year so you can make the best decision. Here are a few things to consider: Continue reading “Are You Ready For Open Enrollment?”

4 Financial Ground Rules For Everyone

September 23, 2015

Figuring out how to prioritize the various things you could do with your money is one of the key quandaries of individual financial planning. Should you use extra money to pay off your car loan, boost college savings for your toddler or finally take that trip to Australia? There are countless options, depending on your individual values and goals. But before working toward any of those goals, there are four aspects of your finances that should be in place, no exceptions: Continue reading “4 Financial Ground Rules For Everyone”

Managing Your Pension In A 401k World

July 15, 2015

Lately there’s been a lot of criticism of 401k plans in the news and some of it is very valid. A 401k that is poorly designed and/or poorly managed can leave people in a bad place when they want to retire, but traditional pensions aren’t a perfect solution either. Don’t get me wrong. If you have a pension that is a GREAT benefit to have. You just can’t assume that everything will work out as planned. Continue reading “Managing Your Pension In A 401k World”

Financial Lessons From The Game Of Thrones Season Finale

June 19, 2015

My apologies if you haven’t watched the Game of Thrones season finale yet. But if you haven’t and you’re a fan, exactly what are you waiting for??? I’ll take a few liberties with the show’s broader themes and hopefully won’t spoil anything that you haven’t already heard or watched. Continue reading “Financial Lessons From The Game Of Thrones Season Finale”