How to Invest in a Taxable Account

January 04, 2024

Investing in your retirement account can be quite different from investing in a taxable account. Here are some options to consider when investing in a taxable account:

Use it for short term goals. One of the advantages of a taxable account is that you don’t need to worry about any tax penalties on withdrawals. For that reason, it probably makes the most sense to use a taxable account for goals other than retirement and education like an emergency fund, a vacation, or a down payment on a car or home. In that case, you don’t want to take risk so cash is king. To maximize the interest you earn, you can search for high-yielding rewards checking accounts, online savings accounts, and CDs on sites like Deposit Accounts and Bankrate.

Keep it simple for retirement. Just like in a 401(k) or IRA, you can simplify your retirement investing as much as possible with a target date fund that’s fully diversified and automatically becomes more conservative as you get closer to the target retirement date. There are a couple of differences in a taxable account though. The bad news is that you’ll be paying taxes on it each year so you want a fund that doesn’t trade as often. The good news is that you’re not limited to the options in an employer’s plan so you can choose target date funds with low turnover (how often the fund trades and hence generates taxes) like ones composed of passive index funds.

Invest more conservatively for early retirement. If you plan to retire early, a taxable account can be used for income until you’re no longer subject to penalties in your other retirement accounts or to generate less taxable income so you can qualify for bigger subsidies if you plan to purchase health insurance through the Affordable Care Act before qualifying for Medicare at age 65. In either case, you’ll want to invest more conservatively than with your other investments since this money will be used first and possibly depleted over a relatively short period of time. Consider a conservative balanced fund or make your own conservative mix using US savings bonds (which are tax-deferred and don’t fluctuate in value like other bonds do) or tax-free municipal bonds instead of taxable bonds if you’re in a high tax bracket.

Make your overall retirement portfolio more tax-efficient. You can also use a taxable account to complement your other retirement accounts by holding those investments that are most tax-efficient, meaning they lose the least percentage of earnings to taxes. Your best bets here are stocks and stock funds since the gains are taxed at a capital gains rate that’s lower than your ordinary income tax rate as long as you hold them for more than a year. In addition, the volatility of stocks can also be your friend since you can use losses to offset other taxes (as long as you don’t repurchase the same or an identical investment 30 days before or after you sell it). When you pass away, there’s also no tax on the stocks’ gain over your lifetime when your heirs sell them.

In particular, consider individual stocks (which give you the most control over taxes) and stock funds with low turnover like index funds and tax-managed funds. Foreign stocks and funds in taxable accounts are also eligible for a foreign tax credit for any taxes paid to foreign governments. That’s not available when they’re in tax-sheltered accounts so you may want to prioritize them in taxable accounts over US stocks.

For retirement, you’ll probably want to max out any tax-advantaged accounts you’re eligible for first. But if you’re fortunate enough to still have extra savings, there are ways to make the best use of a taxable account. Like all financial decisions, it all depends on your individual situation and goals.

What is a 403(b) Plan?

March 21, 2023

What is a 403(b) Plan?

If you have ever worked for a nonprofit organization, you likely have heard the term 403(b) retirement plan. While not as common as the 401(k), a 403(b) shares many of the same benefits that make it a very powerful retirement tool for those working for public schools and other tax-exempt organizations.

The Details

As noted above, 403(b) plans have much in common with the 401(k) plan, which is very common in the private sector. Participants that may have access to 403(b) include:

  • Employees of public schools, state colleges, and universities
  • Church employees
  • Employees of tax-exempt 501(c)(3) organizations

The 403(b) plan has the same caps on annual contributions applying to 401(k) plans.

Employers can match contributions based on the specific plan details, which vary from employer to employer. 

Employees may also be able to contribute to a pre-tax 403(b) and/or Roth 403(b), as both options may be available based on the plan details. A traditional 403(b) plan allows employees to have pre-tax money automatically deducted from each paycheck and deposited into their retirement account. The employee receives a tax break as these contributions lower their gross income (and income taxes owed for the year). The taxes will be due on that money only when the employee withdraws it in retirement.

A Roth 403(b) is funded with after-tax money, with no immediate tax advantage. But the employee will not owe any more taxes on that money or the profit it accrues when it is withdrawn (if they are 59 ½ and have a Roth for five years).

Pros and Cons

Being able to save for retirement automatically is a tremendous benefit of the 403(b) construct. The tax-deferred (pre-tax) or tax-free growth(Roth) nature of these savings is also a huge incentive for employees to save as much as possible – not to mention the free money an employer match may provide. Many 403(b) plans will have a shorter vesting period relative to their 401(k) cousin, which allows. This means employees will have access to the matching funds quicker should they change employers.

On the downside, withdrawing funds before age 59 ½ will likely result in a 10% early withdrawal penalty. And many 403(b) plans offer a more limited range of investment options than other retirement plans.

Other Considerations

While not common, some employers may offer a 403(b) and 401(k) plan. In that instance, employees are still restricted to the current year’s limit for both plans combined. For example, if the limit is $22,500 and $10,000 is contributed to the 401(k), the max 403(b) contribution is $12,500.

Another unique, but not necessarily common, feature that may be available in additional catch-up contributions. Employees with 15 or more years of service with certain nonprofits or government agencies can contribute an additional $3,000 yearly. However, regardless of age, there is a lifetime limit of $15,000.

Summary

Like the 401(k), the 403(b) retirement plan is critical to retirement planning and saving for individuals with access to them. The automatic saving nature of the plan makes it very convenient to save for the future. Saving early, often, and as much as you can afford will set you up for your coveted retirement. Happy Saving!

The Risks Of Employer Stock

November 15, 2021

One of the biggest risks lurking in people’s investments is having too much in a current or former employer’s company stock. What’s too much?

Rule of thumb

You should generally have no more than 10-15% of your investment portfolio in any single stock. It’s worth noting that an investment adviser can lose their license for recommending more than that.

More than just a stock when it’s your job

So why is this such a bad idea? What if your company stock is doing really well? Well, remember Enron, anyone? While it’s practically impossible for a well-diversified mutual fund to go to zero, that could easily happen with an individual stock. In that case, you could simultaneously be out of a job and a good bulk of your nest egg.

Now, I’m not saying your company is the next Enron. It could be perfectly managed and still run into trouble. That’s because you never know what effect a new technology, law, or competitor can have, regardless of how good a company it is.

Nor does the company have to go bankrupt to hurt your finances. Too much in an underperforming stock can drag down your overall returns, and even a well-performing stock can plummet in value just before you retire. As volatile as the stock market is as a whole, it’s nothing compared to that of an individual stock.

Why do we over-invest in our own companies?

So why do people have so much in company stock? There are two main reasons. Sometimes, it’s inadvertent and happens because you receive company stock or options as compensation. For example, your employer may use them to match your contributions to a sponsored retirement plan. Other times, it’s because people may feel more comfortable investing in the company they work for and know rather than a more diversified mutual fund they may know little about.

A general guideline is to minimize your ownership of employer stock. After all, the expected return is about the same as stocks as a whole (everyone has an argument about why their particular company will do better, just like every parent thinks their child is above average). Still, as mentioned before, the risks are more significant. That being said, there are some situations where it can make sense to have stock in your company:

When it might make sense to keep more than usual in company stock

1) You have no choice. For example, you may have restricted shares that you’re not allowed to sell. In that case, you may want to see if you can use options to hedge the risk. This can be complicated, so consider consulting with a professional investment adviser.

2) You can purchase employer stock at a discount. If you can get a 10% discount on buying your employer’s stock, that’s like getting an instant 10% return on your money. If so, you might want to take advantage of it but sell the shares as soon as possible and ensure they don’t exceed 10-15% of your portfolio.

3) Selling the stock will cause a considerable tax burden. Don’t hold on to a stock just because you don’t want to pay taxes on the sale, but if you have a particularly large position, you may want to gift it away or sell it over time. If you do the latter, you can use the same hedging strategies as above.

4) You have employer stock in a retirement account. This is a similar tax situation because if you sell the shares, you’ll pay ordinary income tax when you eventually withdraw it. However, if you keep the shares and later transfer them out in kind to a brokerage firm, you can pay a lower capital gains tax on the “net unrealized appreciation.” (You can estimate the tax benefit of doing so here.) In that case, you may want to keep some of the shares, but I’d still limit it to no more than 10-15% of your total portfolio.

5) You have a really good reason to think it’s a particularly good investment. For example, you work at a start-up that could be the proverbial next Google. It may be too small of a company for analysts to cover, so it may genuinely be a yet-to-be-discovered opportunity. In that case, go ahead and get some shares. You may strike it rich. But remember that high potential returns come with high risk so ensure you’ll still be financially okay if things don’t pan out as hoped.

The ups and downs of the stock market typically get all the media and attention. But your greatest investment risk may come from just one stock. So don’t put all your eggs in it.

4 Steps To Perform Your Own Investment Analysis

January 21, 2021

Two of the most common questions that I get as a financial coach are, “Do my investments make sense for me?” and, “Am I paying too much?” Generally, those are questions that I can’t answer in one minute, but with the right tools and a few minutes anyone can figure out the answer.

When I was a financial advisor trying to convince a potential client that I could do better than their existing advisor, here are the steps I would take – anyone can do them with the right knowledge.

How to do a self-analysis of your investments

Step 1 – Take a Risk Tolerance Assessment

You must know what amount of risk makes sense for you. I don’t care about your friends, relatives or co-workers. Does your mix of investments make sense for you?

To find out, this Risk Tolerance Assessment takes about 2 minutes or less, and will then offer you general guidelines as to how much money you should have in stocks, bonds and cash (aka money markets or stable value funds). If you have two entirely separate goals, such as a college fund that you need in 10 years and retirement in 25 years, then take the assessment more than once, each time with that specific goal in mind.

Step 2 – Figure out exactly what investments are held in your funds

Just because your fund says one thing in their objective doesn’t mean that it’s clear what your fund actually owns. If you really want to know, you can actually find out using a tool on Morningstar. Here’s how:

  1. Get a copy of your statement, then look for your account holdings. You are looking for fund names such as ABC Growth Fund Class R5. Even better, see if you can find the “ticker symbol” for each fund, which is a multi-letter code such as “ABCDE.”
  2. Go to Morningstar.com and enter the name or ticker symbol.
  3. Once you’ve found the Morningstar page for your fund, click on the tab labeled “Portfolio.”
  4. This tab will break down the mix in the fund by stocks, bonds and cash – keep in mind that Stocks include both US and non-US stocks, while bonds will simply be labeled as Bonds, and cash or money market will be listed as Cash.
  5. You can really geek out if you want by digging into how much is in large company stocks compared to mid and small sized companies or look at what sector of the economy your fund focuses on (such as technology or manufacturing, etc.) You may even find some fun in looking at the Top 10 holdings in each fund to see if you have an overload in a certain company.

The most important thing is that when you add up all the money in stocks based on this analysis it is close to what your risk tolerance suggests. The other key thing to check is that everything doesn’t look exactly the same. So if all of your funds are mostly large companies or all of them are US Stocks, then you may be out of balance.

Step 3 – Analyze fees

Once you have determined that your investments are or are not matching up with your risk, the next step is determining how much you are actually paying the mutual fund companies through fees, which are also called “expense ratios.”

While Morningstar has good info on that, the FINRA Fund Analyzer is a more helpful tool for this purpose. Here’s how:

  1. Again, enter the fund name or the ticker symbol into the analyzer, and when you’ve found your fund, click on “View Fund Details.”
  2. Scroll down to “Annual Operating Expenses” to see how the expenses for your fund stack up against its peers.
  3. Also look to see if you must pay a fee to get into or out of that fund.

Obviously, the ideal is to invest in funds where the fees built into the fund are at or below the average fee for that peer group.

Step 4 – Compare your advisor fees to benchmarks (if you have an advisor)

If you are a do-it-yourself investor, you can skip this last step, but if you have an investment advisor who is helping you with your investments then the last step is figuring out if you are paying them more than average.

Commission-based advisor

If you are investing in funds that showed a lot of up-front commissions or “Contingent Deferred Sales Charges” or “CDSCs” in Step 3, then that means your advisor is paid by commission. If so, then the key here is to make sure that the commissions are comparable to industry averages and that you are holding onto the funds – or at least staying in the same mutual fund company options – for about 7 years or longer in order to realize the value of the up front fees. This allows you to minimize the overall fees paid and avoids paying commissions too frequently.

“Fee-only” advisor

If your advisor is “fee-only,” then they don’t charge commissions, and instead they charge a management fee based on the total value of your investments. Generally, this is a fee that is collected quarterly, so in that case each quarter the fee is applied to your balance and then divided by 4. So, if you have a 1% fee on your $100,000 account, your fee would be $1,000 per year or $250 per quarter. Keep in mind that this is in addition to the fees you explored in Step 3, and will show up as a separate fee on your statement.

How much is too much?

As for what your fee should look like, in 2018, the average advisory fee was 0.95% and many people use 1.0% as an industry standard. A good rule of thumb is that if you are paying close to or above the average, then you should be receiving value for that in the form of other services such as financial planning, tax planning, etc. to justify the higher fee.

That said, it can vary quite a bit depending on the size of your account. For accounts between $0 – $250,000, the average advisory fee was 1.1% and over $5 million that dropped to 0.7%. In other words, the more money you have, the lower the percentage, but probably higher the dollar amount of your advisory fee.

Ultimately, it’s up to you to determine if you’re receiving proper value for any advisor-based fees. If you don’t think you are, then consider shopping around.

What about robo-advisors?

Today, there are lots of robo-advisors out there that will do most of the same things when it comes to managing your investments that a typical advisor would do, but the fees tend to be lower, ranging from 0.25 – 0.35%. Does that mean everyone should be using robo? Like anything else, some people are very comfortable with using technology as a tool and getting planning or guidance somewhere else. If that is you, then a lower-cost robo advisor may make sense.

If, however, you are like many folks and prefer someone you can call when you have questions who is intimately familiar with you and your situation, then paying up to that industry average may be worthwhile. Lastly, if you like your advisor but their fees are above average then you can always try to negotiate with them for lower fees and/or additional services like financial planning, retirement or college planning, etc.

Should You Let A Robo-Advisor Pick Your Investments?

January 21, 2021

Technology has revolutionized everything from choosing a restaurant to getting directions or even a ride to that restaurant, but is it time for technology to get you to your investment destination as well? While this may sound like science fiction, the rise of “robo-advisors” over the last few years has made this into a plausible option.

These online automated investment services can provide investment advice or management for typically a lot less than a human advisor. But should you really entrust your nest egg to a computer and if so, which of the many options would make the most sense for you?

Pros of robo-advisors

  • It’s convenient. You don’t have to have a large amount to invest or go to a fancy office and talk to a pushy salesperson. Most robo-advisors have very low minimums and allow you to set up and fund the account from the comfort of your smartphone or at least, your computer.
  • You get a customized asset allocation. “Asset allocation” is a fancy term for dividing your money into various types of investments (called “asset classes”) like stocks, bonds, and cash. Rather than having to make this decision on your own, robo-advisors generally do this for you based on your responses to questions that are designed to determine your time frame and comfort with risk. All you need to do is then fund the account.
  • The costs are relatively low. You could get asset allocation advice from a human advisor, but that typically costs about 1% of your assets. They may also put you into funds with high fees. Robo-advisors generally charge a lot less and use low cost index funds.

Cons of robo-advisors

  • The “advice” is very limited. Robo-advisors generally only help you with your investments. You typically won’t get help with other financial planning issues like how much you should be saving, what type of accounts to invest in, and whether you have adequate insurance coverage and estate planning. The investment advice you do get may also not incorporate taxes or how your money is invested elsewhere.
  • There’s no “hand holding.” One of the most valuable services of an advisor is to talk you out of doing something stupid – whether that’s putting too much in an aggressive tech stock or bailing out when the market takes a downturn. To the extent that robo-advisors do this, they still lack the emotional connection and persuasive/motivational ability of a trusted human advisor.
  • There are generally still advisory fees. Even a small advisory fee can add up over time. You could do a lot of what robo-advisors do without paying their fees by simply investing in an asset allocation fund that matches your risk level or taking a risk tolerance questionnaire and following the asset allocation guidelines.

How to get started if a robo-advisor is what you need

  • Know what you’re looking for. If you’re investing in a taxable account, you might want to look for a robo-advisor that offers tax-efficient investing and/or tax loss harvesting. A few offer access to a human advisor by phone. Make sure you’re also comfortable with the program’s investment strategy.
  • Know your options. Your employer’s retirement plan may offer a robo-advisor program. Some are also offered by particular brokerage firms for their clients. You can find a good comparison of options here.
  • Know what you’re paying. Look at both the fees that the robo-advisor charges and the expenses of the funds it recommends. “Free” robo-advisors typically put you in their own bank accounts and mutual funds, which may be more expensive than another program’s fees.

For investors who are looking for investment management or advice but are unwilling or unable to hire a financial advisor, robo-advisors can offer a simple and relatively low cost solution. (Just be aware of their limitations.) At the very least, they will make human advisors work that much harder to earn the fees they charge.

Should You Be In An Asset Allocation Fund?

January 21, 2021

One of the most common questions we get on the Financial Helpline is how to choose investments in your employer’s retirement plan. Investing can be complex and intimidating so it doesn’t surprise me that people are looking for help with their decision. What does surprise me is how few of them understand and use an option that was created to help simplify their decision.

Target date or target risk funds

Depending on your plan, you may have a target date or a target risk fund available to you. Both are “asset allocation funds” that are designed to be fully-diversified “one stop shops.” All you need to do is pick one fund that most closely matches your target retirement date or your risk level. (Target date funds can also be “set it and forget it” because the funds automatically become more conservative as you get closer to the target retirement date.)

If you think of investing as getting you from point A to point B, asset allocation funds are like the commercial jets of investing. They’re much cheaper than a private jet (a financial advisor) and much simpler than piloting your own plane (picking your own investments). That’s why when I first heard about these funds early in my financial career, I assumed they would take over much of the mutual fund industry and even replace the need for a lot of financial advisors. While they have seen a meteoric rise, especially as the default option in retirement plans, they still aren’t utilized as much as I thought they would be. I think there are 3 main myths responsible for this:

1. Putting everything in one asset allocation fund is having all my eggs in one basket. What you don’t see is that an asset allocation fund is actually a basket of baskets. Each fund is composed of several other funds. In fact, one asset allocation fund is usually more diversified then the typical mix of funds that I see people in.

So why not have other funds in addition to it? Isn’t that making your portfolio even more diversified? The problem here is that these funds were professionally designed to hold a certain proportion of investments so adding others will throw the balance off. It’s like adding extra ingredients to a chef-prepared meal. Only do it if you really know what you’re doing (in which case, you probably don’t need an asset allocation fund anyway).

2. I can probably do better on my own. Remember that these funds were put together by professional money managers who’ve been trained in investment management and do this for a living. What’s the chance that you’ll create a better portfolio? One study of 401(k) participants showed that investors who chose their own funds did worse on average than those who just went with a target date fund.

Part of that is due to lack of knowledge. However, a lot is also likely due to the temptation to buy investments that are performing well and then sell them when they eventually underperform, which is a recipe for buying high and selling low. If nothing else, asset allocation funds provide discipline… assuming you don’t trade these funds too of course.

3. Asset allocation funds are always more expensive. You would think that this professional management would come at a steep price. After all, paying for investment management typically costs .5-1% of your portfolio. However, asset allocation funds are generally only slightly more expensive than other funds and if they’re composed of index funds, they can actually cost much less than most actively managed funds. Check the fund’s expense ratio before making assumptions as to their cost.

That all being said, there are reasons not to use an asset allocation fund. You may not have one available in your plan or the one you have may be too expensive. Sophisticated investors or those with an advisor may want to create a more personalized portfolio that better matches their risk level or complements outside investments to maximize tax-efficiency. But if those situations don’t apply to you, consider an asset allocation fund. Flying commercial may not be a perfect experience, but it’s better than the alternatives for most people.

How Your Company Stock Plan Benefits You

September 16, 2020

It wasn’t long ago (the late `90s, actually) that workers by the hundreds were becoming enviably wealthy through dot-com stock options. While those days of fast fortunes might largely be behind us, employee stock ownership plans, which make owners of all or most of a company’s workforce, can still provide a nice boost to compensation.

Stock ownership (otherwise known as equity compensation) plans come in a variety of forms, with some companies offering more than one type of opportunity to their employees.

Types of Plans

Restricted Stock Units (RSUs):

Restricted Stock Units (RSUs) represent an employer’s promise to grant employees one share of stock per unit based on vesting requirements or performance benchmarks. An employee receives the shares when they vest. Because this is taxable income, often the employer will sell the number of shares needed to cover the income and payroll taxes, thus giving the employee a tax basis on the remaining shares equal to the value of the shares at the time of vesting (vesting date price). The employee is not deemed to own the actual shares until vesting and does not have voting rights.

Because taxes have been paid on the shares when they’re received, short or long-term capital gains tax will be owed on the difference between the selling price and the vesting date price when the shares are sold.

Employee stock purchase plans (ESPPs):

An ESPP gives employees of public companies the chance to buy their company stock (usually through payroll deductions) over a specified offering period at a discount of up to 15 percent off the market price.

As with a stock option, after acquiring the stock, the employee can sell it for a profit or hold onto it for a while. Unlike with stock options, the discounted price built into most ESPPs means that employees can profit even if the market value of the stock has gone down a little since it was purchased.

Employee stock ownership plans (ESOPs):

An ESOP is similar in some ways to a profit-sharing plan. Shares of company stock are allocated to individual employee accounts based on pay or some other measure. The shares vest over time, and employees receive their vested shares upon leaving the company.

Employee stock options (ESOs) and related plans:

A stock option gives an employee the right to purchase a specified number of shares at a fixed price for some period in the future. For example, if an employee has a vested option to buy 100 shares at $10 each and the current stock price is $20, they could exercise the option and buy those 100 shares at $10 each, sell them on the market for $20, and make $1,000 profit. If the stock price never rises above the option price, the employee would simply not exercise the option.

Early on, companies gave stock options only to “key” employees (often to just the executive team). These days, many companies that give options extend them to all or most employees.

Keep in Mind

Equity compensation may not always be a sure road to the country club life, but company equity still offers great potential for financial reward. Just be sure that any company stock you own fits into your overall financial strategy. A good rule of thumb is to avoid having more than 10% in any one individual stock, so your investments are diversified. Consider contacting your personal financial coach to further discuss how these plans can play a part in achieving your financial goals.

Real Estate Investing in a Crisis

April 29, 2020

There has been a surge of renter households in the US. As a result, the economic shockwaves set off by the coronavirus pandemic will reverberate not only for tenants but the owners of those properties. Whether you are an accidental landlord that has enjoyed income from your old primary residence or if you are depending on your multi-family real estate portfolio to provide the majority of your income in retirement, here is a summary of the obstacles and opportunities you need to consider.  

Financing 

Obstacles – The current economic downturn has drawn several comparisons to the most recent recession. While the causes are significantly different lenders have tightened their criteria again for home purchases for both home buyers and real estate investors. Recently, the FHA has significantly tightened their credit scoring criteria for qualifying for a loan.. In addition Non-Qualified (NQ) lending has reportedly taken a hit as well. This is a significant concern for some real estate investors that need short-term lending to purchase and renovate if they do not meet income standards. 

Opportunity – While credit has tightened on several fronts, financing may offer significant upside for property owners that qualify. Today’s rates are near all time lows. If you meet mortgage lending guidelines you may be able to refinance a property at lower rates. Additionally, if you were planning to expand or improve your real estate portfolio you can borrow against the equity in your existing properties at historically low rates. 

Single Family housing 

Obstacles – There is no doubt unemployment has increased as a result of this pandemic. While the actual percentage is still unclear it is clear for anyone owning rental property that they are concerned about tenants not being able to pay.  Because of the passage of the CARES Act evictions are frozen for 120 days starting March 27, 2020 for renters who live in properties that receive federal subsidies such as Section 8 vouchers or for renters whose landlords have government-guaranteed loans, including loans backed by Fannie Mae, Freddie Mac, the FHA, or the USDA. If the rental unit is not covered by the CARES Act, many individual states have issued similar suspensions on evictions.  

Opportunity – While the CARES Act gives some tenants a means to avoid eviction homeowners with government-guaranteed loans may be able to request forbearance for up to a year if their income is reduced as a result of COVID. In order to determine if your mortgage is backed by a government agency, start with the two largest entities FannieMae and FreddieMac.  If your loans are not backed by a government agency speak with your loan servicer and ask about what options would be available in your situation. If your tenant is struggling to pay but they are an otherwise good tenant, consider using the mortgage reprieve to temporarily reduce or suspend rent for a predetermined period. You should also help make your tenant aware of the stimulus support and temporary unemployment benefit increase. These resources will not only help them pay you but help get them get back on their feet faster once the economic downturn subsides.  

Multi-family housing  

Obstacles – Just like smaller properties, multi-unit apartment complexes also are going to face problems with tenants who have lost their job or taken a steep pay cut.  Anything larger than 4 housing units cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae don’t apply.   

Opportunity – That doesn’t mean that you are without options.  If you have a larger rental property, follow much of the same guidance as earlier – work with your tenants if they are good tenants to help them access relief so that they can pay you at least in part and stay in your unit long-term.  You also want to reach out to your bank right away to see how they can work with you.  Just like you don’t want to lose a good tenant, they don’t want your loan to go into foreclosure.  Ask them if they can work with you by skipping some payments and adding them to the end of your loan or temporarily making interest-only payments on your loan.  That way, if your tenants can pay enough rent to cover this lower payment, taxes, insurance, and other fixed costs you should be in a much better spot to navigate the COVID outbreak. 

Commercial property 

Obstacles – Similarly, many small businesses have been forced to close by state and local stay at home orders which limit their ability to bring in the revenue to pay their rent.  Commercial property cannot be financed with a mortgage, so the loan forbearance options through Freddie Mac or Fannie Mae do not apply. 

Opportunity – If your property is leased out to a small business(es) then you may want to work with your tenant to make sure that they have applied for the Payroll Protection Program if they are eligible.  If your tenants qualify for the PPP, then they can use a portion of those funds to pay their rent which is a huge relief to you.  Similarly, if you currently pay yourself a smaller salary but get more of your income from the rent your business pays to you, the PPP can help your business not only protect your paycheck, but also the rent you pay to yourself as long as it is reasonable for the local market. 

Staying prepared for future uncertainty 

By now you have noticed that if you have cash and a good credit score, it gives you more flexibility in terms of dealing with this crisis. In fact, there is a decent chance that if you make good moves in this market you can possibly walk out of this with a better real estate portfolio. Here are a few best practices to live by to keep your real estate portfolio in good standing in this and the next crisis: 

  • Maintain little or no credit card and other high-interest debt 
  • Maintain a credit score is 740 or higher 
  • Maintain enough cash to cover vacancies and maintenance on the target property for a year 
  • Maintain enough income to pay the rental property mortgage if there’s a sustained period of vacancy 

Three Ways to Skin the Asset Allocation Cat

December 02, 2019

Over the past several weeks, you’ve heard me talk a lot about investing and for good reason. Investing is one of the most important parts of any financial goal or wealth accumulation strategy. The problem, like with most things, is that there is no one perfect way to do it. You probably know the basics—diversify, re-balance, dollar-cost average—but did you realize that there are at least three forms of asset allocation? Knowing what they are, how they are different, and which one may be right for you could make you a better investor over time.

Strategic asset allocation

Strategic asset allocation is the one you are probably most familiar with and the one most often used by financial advisors and professionals. The objective of strategic asset allocation is to find an optimal portfolio that offers the highest potential return for any given level of risk. It usually starts with a risk tolerance assessment, followed by a recommendation of how you should split up your assets between stocks, bonds and cash.

Rather than being a typical buy-and-hold strategy, strategic asset allocation requires ongoing attention as certain asset classes perform differently at different times. As such, rebalancing is a key component of strategic asset allocation. Since rebalancing causes investors to sell out of asset classes that are outperforming in order to buy into asset classes that are underperforming, it forces the investor to buy low and sell high. For this reason, some might consider it a contrarian approach to investing.

Buying low and selling high is one potential advantage of strategic asset allocation. Another is reduced volatility. By keeping the ratio of stocks to bonds within a targeted range, potential returns are also expected to stay within a certain range. Investors can implement a strategic asset allocation strategy in a number of ways, including following the guidance of a financial advisor, using an online financial advisory service, or by investing in a target-date fund.

Tactical asset allocation

Ironically, what a lot of investors may think they are getting when they hire a financial professional is tactical asset allocation. The objective of tactical asset allocation is to improve portfolio returns by periodically changing the investment mix to reflect changes in the market. It may seem logical to move assets into fixed income when interest rates are high and away from fixed income when interest rates are low, but tactical asset allocation involves security selection and market timing—two things that are often considered taboo in the investment universe.

Tactical asset allocation can be as simple as sector rotation, such as moving assets away from the best performing sector to the worst performing sector, or as sophisticated as using charts and graphs to try and predict market movements. Style preference (growth v. value) can also be important when using a tactical asset allocation strategy. Investors should exercise caution when using a tactical asset allocation approach as market trends can sometimes last longer or shorter than expected.

Since the goal of tactical asset allocation is to try and increase performance by timing the market and moving money around, it would be appropriate for an investor with a high tolerance for risk, a low sensitivity to taxes, and an ability to devote time to developing and monitoring buy and sell indicators. Investors that wish to utilize a tactical asset allocation strategy should decide whether they will use actively-managed mutual funds, passively-managed index funds or ETFs, or individual securities. Investors may be able to implement this strategy with a financial advisor or on their own through a self-directed brokerage account.

Core/satellite asset allocation

If you are not sure which approach to take, why not take both? The objective of core/satellite asset allocation is to enhance performance by investing in two portfolios. The larger of the two (i.e., the core) typically represents 60-80% of the total portfolio and uses strategic asset allocation for determining its holdings. The remaining share (i.e., the satellite) uses tactical asset allocation to take advantage of market opportunities as they arise. For the core component, you may want to use low-cost index or exchange traded funds (ETFs) and rebalance periodically. For the satellite portion, you can use any combination of funds, individual securities, real estate (e.g. REIT), commodities, options, etc., based on where you see market opportunity.

The benefit of this approach is that it gives you a disciplined investment strategy via the core while still allowing you to “play” the market with the satellite portion. If you make some good investment decisions with the satellite, you enhance your return. If your investment instincts are not so great, you still have the core working for you.

The core/satellite approach may be appropriate for investors that want to test their knowledge of investing against the market by comparing the performance of the satellite to that of the core. It would also be appropriate for investors that want to get more involved in investing but not all at once. Because there is a tactical component, investors will need to consider how much time they can devote to managing the portfolio before taking this approach.

As you can see, there are several ways to build an investment portfolio. Choose the one that is right for you based on your objective and level of involvement. And don’t forget to get help when needed.

Avoid These Common Mistakes When Investing In ETFs

May 28, 2019

ETFs, which are baskets of stocks, bonds, or commodities that are traded on a stock exchange, are becoming an increasingly popular way to invest especially with young investors. Due to their accessibility, instant diversification, transparency, low expenses, tax efficiency, and ability to be traded like individual stocks, some experts even think they’ll eventually make traditional mutual funds obsolete.

However, there are downsides to be aware of too. If you have ever heard the adage “your greatest strength can be your weakness as well,” then you will see why the following mistakes can creep up on an ETF investor if they are not aware of them.

Mistake: not changing how you invest your money

Many people invest by depositing a set amount into their investment account every month (dollar cost averaging strategy), which they use to buy mutual funds. This can be a mistake with ETFs because you pay a commission for every buy and sell order you place which means that your monthly investment will be reduced by commission costs. (Note: this could be negated if you are with an online brokerage firm that provides free trades.)

Mistake: losing focus of your long term strategy

ETFs are generally viewed as a long term investment holding but because of the benefit of being able to trade it (as often as intra-day), a mistake could be made if the investor gets tempted to buy and sell with more of a short term outlook (read: market timing) which can result in selling at the wrong time and having higher trading costs and taxes.

Mistake: not researching how an ETF diversifies your portfolio  

This can work against you in two ways:

  1. Redundancy. For example, by investing in an ETF that tracks the S&P 500 and also holding a large-cap mutual fund, you are investing in essentially the same type of stock and oftentimes both investments will hold the same companies. 
  2. Liquidity risk of specialized ETFs. The other miscue is if your ETF is invested in a specific sector, for example in an Antarctic oil sands benchmark (I’m inventing a sector), you may have difficulty selling your shares when you want.

Mistake: trading “over your head”

“Just because a strategy exists doesn’t necessarily mean you need to use it.”

One of the advantages of investing in ETFs is the flexibility of how they are traded and the different strategies that can be employed. For example, one strategy is to “short-sell” an ETF. This strategy is used by investors who believe the price of their ETF will go down. The investor in effect borrows shares from the brokerage firm and then will pay back the borrowed shares with the cheaper shares – assuming the price does in fact go down. 

Sounds easy right? Nope! This is a practice that only experienced investors might employ and while the reward (a higher return) could be nice, the risk is very high. 

Good rule to live by: just because a strategy exists doesn’t necessarily mean you need to use it.

Finally, if you eventually decide to invest in ETFs, in general it’s best when you have a lump sum to invest as that will help minimize trading costs (see mistake 1). Many ETFs will have low minimum investment requirements (could be as low as $250) but be careful, a very low minimum investment may require monthly deposits which, because of commission costs could eat away at your overall return.

The Real Secrets To Investing Success

May 24, 2019

I always love it when someone asks me for the latest hot investing tip, as if there’s some investing secret that’s being hidden from the rest of the world. First of all, if I really knew what the absolute best things to invest in at any time was, do you really think I’d be writing this blog? 

I can’t blame people for thinking that we can read the tea leaves and know where to invest, and where not to invest though. I think the industry has done this to them on purpose. For years financial institutions have spent countless dollars trying to convince you that they have an edge, a better way to research, a better strategy for picking winners, etc.

Here’s a dirty little secret: when it comes to investing, there are no secrets.

You are just as knowledgeable as most professionals when it comes to choosing investments; we just make it easier for you. That’s not to say that you shouldn’t work with a financial professional, especially if they give you good advice, offer great service, and help you to stay the course when things get rough. That said, anyone can invest like a pro if they stick to these basic principles:

Principle #1 – Define your goals

Whenever someone asks me, “What is the best thing to invest in?” I’ll immediately ask them, “What are you investing for?” The best investment is the one that helps you achieve your goals. That means you have to have a goal before you invest. Goals can range from buying a car or home, to paying for college, retiring, or just becoming a millionaire as quickly as possible.*Here is a guide on setting goals to help you get started.

Principle #2 – Choose appropriate investments

History can tell us that investing in small company stocks over the last 80 years would have generated better returns than most other types of investments, but that doesn’t make them the “best” investment.  Different investments serve different purposes. 

Cash is good for liquidity. Bonds are good for current income. Stocks are good for growth. Build a well diversified portfolio around the investments most appropriate for your goals.*Use this guide on asset allocation to help you develop an investment strategy.

Principle #3 – Dollar Cost Average

Think of investments like a swimming pool. There are two ways to get in: gradually, or all at once. Dollar cost averaging is the gradual approach, and generally works well when you don’t know the best time to invest.

*Set up automatic transfers from a checking account to a savings or investment account to take advantage of dollar cost averaging.

Principle #4 – Rebalance periodically

Everyone knows you should buy low and sell high, so do it! Rebalancing your portfolio forces you to sell the investments that are performing well and to buy investments that are underperforming. Most investors instinctively do the opposite—investing in assets that are performing well and selling assets that are underperforming—thus “chasing” the market. It doesn’t matter how often you rebalance, but doing so at least once a year is a good idea.

*Click here for instructions on how to rebalance your portfolio.

Principle #5 – Invest for long periods of time

Setting aside money you plan to spend in the next five years is “saving;” setting aside money you won’t need for more than five years is “investing.” Successful investors know the key to growing wealth is not picking the right investment at the right time, but rather remaining invested in a well diversified portfolio for the right amount of time.

There you have it: all the investment wisdom of the ages, and you don’t have to buy a book, subscribe to a newsletter, or even be the 15th caller to get it. 🙂

Should You Invest In ETFs?

May 17, 2019

A common investing question I get in my workshops is, “What are ETFs?” and “Should I consider them for added diversification?” 

These are good questions and tell me more people are educating themselves about different financial instruments and that they want to know whether something makes sense for “them” and not blindly investing because everyone else at the office is what I affectionately call “lemming investing.” So let’s see if I can shed a bit of light on the two aforementioned queries.

What are ETFs (Exchange Traded Fund)?

The most simple definition of an exchange traded fund is that it is a basket of different stocks that is designed to track a specific market index, such as the S&P 500, but unlike a mutual fund ETFs can be traded at any point – like an individual stock. Much like an index mutual fund, it is passively managed which means there is no active buying and selling of individual stocks which results in a lower cost of ownership for the investor. 

Now, does it make sense to own ETFs? Let’s take a look at some of the benefits.

Should you be investing in ETFs?

As mentioned earlier, ETFs can offer more diversification. Since they track individual benchmarks you can be invested in broader benchmarks such as the S&P 500 to a more specific industry or country benchmark such as biotechnology or India for example. Some other considerations may be:

  • Low transaction costs. ETFs are not actively managed, so costs are generally below 1% of your investment. One thing to be aware of though is your commission costs. If you actively trade ETFs, commission costs can add up dramatically.
  • Liquidity needs. ETFs can be traded as often as intra-day so there is more immediate access to your money if the need arises. (a lot of people don’t realize that mutual funds are actually only traded at day-end prices, so you can enter an order to buy or sell at any time, but it’s not executed til the market is closed)
  • Ability to employ strategic trading involving option and short selling opportunities (for more experienced investors) These two strategies allow the investor to leverage their investing dollar to possibly gain a larger return. (Note: these strategies also leverage the risk factor as well!)

So at the end of the day, if you are looking for a lower cost investment where you are not throwing a dart at an individual stock, but instead buying into a benchmark which will enhance your portfolio diversification (and you seek the advantage of more liquidity), then looking into an exchange traded fund may well be worth your time.

How Dollar-Cost Averaging Takes The Guesswork Out Of Investing

April 24, 2019

As you might guess, one of the most common investment questions we receive on the Financial Coaching Line is about when to buy and when to sell investments in order to maximize returns. My most common answer to that question is that if I knew precisely how to buy securities at the perfect price, I would be answering that question from my private island.

In all seriousness, the up and down nature of investing often causes investors to hit pause on executing their long-term investment plans, which can cause serious harm to their long-term results. If you are looking to buy and hold for the long run, there is a method of purchasing shares that can help you ride out the ups and downs of the market and potentially improve your returns over time. It’s called dollar-cost averaging.

Dollar-cost averaging is easy to implement

The beauty of dollar-cost averaging is its simplicity. All you do is invest the same amount of money in your desired investment on a consistent basis over time (say, every two weeks or each month, aka when you get paid). When the share price is high, the number of shares you will get for your investment dollars will be lower; when the share price goes down, you’ll get more shares for your money.

If you can resist the urge to adjust your investment amount and keep it constant each period, you’ll reap the rewards of your patience. Eventually, the greater number of shares you pick up when the share price is down will reduce the overall average share price on your investments and increase your average per-share return.

You might already be using dollar-cost averaging – if you participate in your employer’s 401(k)  or other retirement plan, the same amount of money is deducted from each paycheck and then invested per your selections. You are using dollar-cost averaging.

Dollar-cost averaging works

Because the stock market goes through many ups and downs over time, the odds of you being able to predict or pinpoint the lows with any consistency are extremely slim, making it unlikely that waiting and then investing all your money at once would pay off over the long term. But those fluctuations create the perfect conditions for dollar-cost averaging to work its magic.

Let’s say you’ve set up a program of investing $100 a month in a mutual fund. The fund share price generally hovers around $10, so you typically get about 10 shares for your monthly investment. But one month the market experiences a downturn and the share price drops to $5. Your $100 investment buys you 20 shares. You now own more shares that will be worth more when the market returns to its usual level.

In this example, dollar-cost averaging results in a 33% return for our investor. Not bad for someone who simply set up an investment plan and stuck to it.

An example of dollar-cost averaging leading to higher returns


Investment Amount
Shares Purchased
Share Price

Month 1 		$10010$10

Month 2		$10020$5

Month 3		$10010$10
Total$30040

Average Share cost:  $300 / 40 = $7.50

Current market price:  $10

Total Return:  33%

Note: This is a hypothetical example and is not representative of any specific situation. Your results will vary.

Dollar-cost averaging is not for everybody

Of course, dollar-cost averaging can have its downside. Such a strategy does not assure a profit and does not protect against loss in declining markets. If you are an active trader with a significant conviction about the price of a stock or ETF, you probably have zero interest in allowing your purchase price to be picked at random.

If you want to try something a little more active than traditional dollar-cost averaging, consider accelerating your purchases if you see a dip in the price of your desired investment. For instance, if you are dollar cost averaging $10,000 into an investment over 10 months you can decide that if there is a significant shift down in the price of the security, say 10%, you can double your investment that month.

Investing does not have to be complicated

If you’re like most people though, you’ll probably prefer to make dollar-cost averaging something you don’t have to think about. Most investment companies give you the option to set up automatic transfers from your checking account directly into your investment account, making investing on your own just about as easy as accumulating a nest egg in a 401(k) plan.

If you’re not already taking advantage of dollar-cost averaging, start now. As the old saying goes, time is money!

How To Plan For A Successful Launch Of Your Side Gig

April 18, 2019

In today’s age, more people are creating a business of their own, often to supplement their main source of income. Not too shabby of an idea as you look for ways to accomplish your goals sooner like saving more for retirement or passing on a legacy to your family. Perhaps you’re simply looking to pursue a life- long dream of having a business of your own.

Timing is important

I spoke to someone that had recently started a business on the side that she was extremely excited about. She was considering taking out a 401(k) loan to help cover a season of lower profits – it wasn’t due to low revenue, because business profits typically aren’t extremely high when a business is in the new phase.

Her issue was that it was winter and wintertime for her type of business is a very slow season, yet she had opened her doors for business just before the season started. We spoke more and worked through the details to help her move forward.

How to plan for success right out of the gate

People have many amazing business ideas, and some have the courage to go for their dream. I’ve found that people sometimes forget how much market research along with having a solid business plan can help them succeed sooner than later. It’s important to anticipate things like:

Who is going to be interested in what the business offers enough to actually make a purchase?

  • What’s the best time to start the business?
  • When might you expect lower revenue?
  • How can you prepare for that?
  • How can you compete as your industry evolves?

The list goes on.

Questions to answer and plan for

What if the needs or wants of those your business serves changes? What can you do to anticipate that before it happens, and how will you prepare your business to evolve accordingly? How will you serve your customers’ current needs, while anticipating and proactively being ready to serve the needs and wants they don’t even know they have yet.

Where to find help getting started

The good news is that there are plenty of resources out there to help you learn these important aspects. Taking time to review this stuff ahead of time can save you stress, help you avoid having to take on unnecessary debt and could possibly even be the difference between a business that succeeds versus one that fails.

  1. Check out this 10 Step Guide to Start Your Business created by the U.S. Small Business Administration.
  2. Use SCORE to find a mentor in your area, get help with building your business plan, join workshops/webcasts across various business topics and more.
  3. Learn from a fellow planner’s journey with his wife in starting a business.
  4. Finally, here’s another encouraging perspective.

The secret ingredient to all successful businesses

Whatever you do, remember to believe in yourself – you possess everything you need to succeed, and the things you’re missing are out there for you to learn as long as you’re willing to commit. That’s empowering.

The difference between you and the people you see being successful in their business is that they went for it. Fail forward. One guarantee that you will fail is to never try. So, happy planning!

What Should You Do With An Old Life Insurance Policy?

April 17, 2019

If you have an old life insurance policy and you no longer need the life insurance, don’t just stop paying the premiums and let it lapse – it may be worth something. Many people are surprised to learn that there are several options available, depending on the type of insurance. Before you get rid of any policy, you do want to make sure you’ve determined how much life insurance you need. To figure this out, we really like the calculators on LifeHappens.org.

Once you’ve decided you really don’t need a life insurance policy anymore, then you’ll need to determine the type of policy to figure out your options. Most life insurance can be classified as either term or permanent.

Term insurance

Term insurance is designed to cover you for a period of time (like 20 years) and typically has a fixed premium for that period. At the end of that period, it will typically convert into yearly renewable term and become dramatically more expensive. 

Your options when your term is up

  • If you don’t need the insurance, drop it – there is no value there to recoup.
  • If you need the insurance, see if your policy allows you to convert all or part of the death benefit to a whole life policy – this can help you keep some in place without having to pay the higher premiums.

Permanent insurance

Permanent insurance can mean a Whole Life policy or a Universal Life policy – both are designed to cover you permanently (aka for your lifetime) as long as you keep the policy in force. In the earlier years of these policies, keeping it in force typically means paying the premiums, although there are ways a policy can be fully paid-up or begin paying for itself.

That’s because these policies also build up a cash value over time and that can provide you some options if you no longer need the insurance in place. If you own a Whole Life or Universal Life policy and find that you can no longer afford the premiums or you simply don’t have a need for life insurance anymore, before you let the policy lapse, make sure you explore your options.

Your options for a permanent policy

  • You can surrender the policy – Also sometimes called “cashing out,” this is when you ask the insurance company to pay you whatever the cash value is, then the policy is canceled. The difference between what you paid in premiums and the cash value (aka if you made money over the years) is subject to income tax.
  • You borrow against the policy – This is a key feature that many insurance salespeople use to sell policies – this is a way to get at the cash value of your policy without taxes and while keeping the policy in force. The main downside of this is it may result in a taxable event if the policy lapses and what you paid in premiums is less that the amount you borrowed.
  • You can do a 1035 exchange to an annuity – The phrase “1035 exchange” references the tax code that allows for this. You basically use the cash value of your policy to buy an annuity that will pay out to you during your lifetime, rather than waiting until you pass for the policy to pay out. There are no tax implications to do the exchange and your cost basis (premiums paid) carries over. Your distributions from the annuity, whether an immediate income annuity or a deferred annuity, are taxable as they come out.
  • You can do a viatical settlement – That is where the owner of the policy (usually you), sells the policy to someone else (either a person or a business) for an amount less than the insurance face value. For example, if the new owner changes the beneficiary to themselves, then they get the death benefit when you die. You would pay income tax on the difference between what you paid in premiums and what they paid you for the policy. (You may qualify for tax-free income if the insured person has less than 24 months to live.)

The bottom line is don’t treat 30 year-old insurance policies like 30 year-old ties. Old life insurance policies may have some value left and can be a way to access money you didn’t even realize you had.

How To Invest Based On The Goal You’re Saving For

April 16, 2019

You don’t have to listen long to a news report to figure out that investing is a major topic for many Americans. You’ll figure that out right about the time you also realize there is a lot of jargon involved, as well as complex and competing strategies. 

You don’t have to understand everything you hear on the news to be a successful investor. What you do need for success is an idea of what your goals are. Before investing, you’ll want to answer the following questions:

  • What do you want to use the money for? 
  • How much money do you need to meet your goal? 
  • When do you need it?

With the answer to those questions you can then start to make a plan. Don’t worry about making the PERFECT plan. Just make one that is reasonable and based on the information you have to work with. Despite what you may hear, investing success actually comes when you meet your own goals, not from making the absolute most amount of money you possibly could have made.

Investing success actually comes when you meet your own goals, not from making the absolute most amount of money you possibly could have made.

As a financial coach, I have the opportunity to work with a lot of people to design investment strategies to help them meet their goals. These goals often change as you move through life, so it is good to reassess every year, at least, to make sure your investment plan is still working for you. 

How you invest will actually greatly depend on what you’re investing for – what’s your goal? Here are some examples:

Goal: I want to be ready to retire as soon as possible.

How much do you need?

When you get close to retirement, you can work on an actual retirement budget to help you decide how much money you need each year to live on, then use a retirement calculator like this one to help determine how much you need to have saved to generate that much income.

Earlier on, a good rule of thumb is to shoot for replacing about 80% of your current income which, depending on when you start saving, may involve putting aside somewhere between 15% and 20% of your income each year.

When do you need it?

Decide what retirement date you want to shoot for. Run some calculations with the retirement estimator to see how much you would need to save to retire at that time so you can be sure your date is somewhat realistic. 

Investing strategy

Your investment strategy centers around two things: how long do you have until you need the money and how much risk can you stomach. This typically means that, when you’re young, if you can psychologically handle the fluctuations in the stock market, you’ll want to invest a lot of your account in various stock or equity funds. 

As you get older or no longer feel comfortable taking on that much risk of fluctuations, you may gradually add more bonds and cash to the mix. If you’re not sure which investments to choose, you might want to check your plan for a Target Retirement Date option and choose a date close to when you plan to retire. 

This risk questionnaire may help you decide where you fall in terms of how aggressive or conservative you want your investment mix to be.

Goal: I want to buy a house.

How much do you need?

Start by figuring out how much home you can afford. From there you can determine how much your closing costs will likely be and how much of a down payment you will need to bring to closing.

It is a good idea to save enough so that you don’t need to tap into your emergency savings at closing and avoid putting yourself in a sticky financial situation after you move into the home. Also, be sure to take into account any savings needed for repairs to the home and furnishings.

When do you need it?

Use the Saving for Goals calculator to run different scenarios on how much you’d have to save to meet your goal over different time frames, then come up with a plan that is realistic for you.

Investing strategy

If you’re looking at making the home purchase in the next 5 years, then you want to keep those saving safe from the ups and downs of the stock market. You don’t want to run into a scenario where you are ready to pull the money out and the stock market crashes before you get the chance. This usually means putting the money in a savings account, money market fund or some short term CD’s that will mature before you need the money.

Goal: I need to start saving for college.

How much do you need?

Using your own personal philosophy on paying for education and a cost of college calculator, you can come up with an estimate of how much you’ll need to save. 

When do you need it?

This is going to be determined by the age of your child, or maybe your own plans for going to college.

Investing strategy

Consider saving in a 529 or other account that will allow you to invest your college savings in a manner appropriate for your goals. Typically, when your child is younger, you can afford to take a little more risk (have more in stocks or equities) with college savings and as your child approaches college age, you may want to dial the risk back considerably (have less in stocks and more in bonds and cash) so that you don’t have to worry about fluctuations in the stock market when you need to sell the investments and use the money.

Check your 529 plan for an age based option if you are unsure of which investments to choose.

Goal: I’m retiring soon.

How much do you need?

Now is a good time to create a detailed budget for living in retirement, then use the How Long Will it Last Calculator to get an idea of how long your retirement savings and other income will last depending on your spending needs.

When do you need it?

If retirement is imminent, you’ll need at least some of your savings now, but if you don’t feel comfortable with the results of the How Long Will it Last calculator, you may consider working longer, going part-time, or trying to cut back your spending. Also keep in mind that in most instances, you won’t need ALL of the money in your retirement plan right away.

Investing strategy

Most people plan to live a long time after they retire, so even though you want to protect some of your retirement savings from the stock market ups and downs, you also want your account value to continue growing so that you will be able to afford your style of living for many years to come. 

If you put everything in cash at this point, your savings balance will stay the same, but the cost of everything you buy will continue to rise, so eventually, you may not be able to afford half of what you can afford today. See if one of these strategies for investing in retirement would work for you. 

It can be as simple as setting aside in cash (or something fairly safe) the amount that you think you will need from your retirement account for the next 1 to 5 years and keeping the rest invested in a manner appropriate for your risk tolerance. Each year, you can reassess how much you will need for the next 5 years and make adjustments. 

Alternatively, you may opt to hire a financial planner or build a portfolio to Generate Income in Retirement while taking on no more risk than you are comfortable with.

Of course, these are general guidelines to get you started, but if you have more detailed questions or think your situation might be different from the norm, consider reaching out to a Financial Coach if you have access to one through your Financial Wellness Benefit at work or contact your Employee Assistance Program to see if they can refer you to a financial professional who can help.

What Is SIPC And How Does It Work?

April 09, 2019

You may have seen the acronym SIPC associated with your investment accounts and wondered what it means. Particularly, you may wonder what it means for YOU, especially if we have another market meltdown like the one that claimed firms like Lehman Brothers and Bear Stearns.

SIPC stands for Securities Investor Protection Corporation. It was set up to help protect investors in the case of a brokerage firm failure, much like FDIC covers cash you have on deposit with banks and credit unions up to the federal limit. Here is what you need to know.

When does SIPC come into play? 

Any time a brokerage firm fails (aka goes out of business) and/or assets are missing from customer accounts because of theft or unauthorized trading, the SIPC may be called in to restore missing assets and cash.

Are there limits on SIPC protection? 

Yes – the SIPC will replace up to $500,000 worth of certain securities including up to $250,000 worth of cash. If you have multiple accounts under “separate capacity,” then each type of account is insured up to the $500,000/$250,000 limit. 

Separate capacity means accounts with different registration types such as individual, joint, corporate, IRA, Roth IRA, trust, etc. So for example, if you have one account at a brokerage firm in your name alone (individual), one held in your name as a Traditional IRA, and another as a joint account with your spouse, they would all be insured up to the maximum limit.

Not cumulative

Keep in mind that the above example might offer up to $1.5 million in protection, but if one account had $1 million, the second $50,000 and the other had $250,000, you’re only protected up to $500,000 in the bigger account, so you’d be restored a total of $800,000.

What does SIPC NOT cover?

It’s important to understand this part – there is a lot of misunderstanding out there among investors that may provide a false sense of protection. While it’s unlikely that any of the large, well-known brokerage firms will go out of business, if you start to get into more complicated instruments or work with more specialized investment managers, you need to know what protections you have and don’t have so you can know where to be diligent in your research. Here’s what SIPC does not cover:

  • Losses in account value due to stock or bond market fluctuations.
  • Losses that are not part of the overall failure of the brokerage firm.
  • Disputes between the brokerage firm and the customer.
  • Losses of commodities and futures (exceptions apply).
  • Failures of non-SIPC member firms.

How do you avoid firms at risk of financial distress? 

One of the best ways to avoid needing to learn firsthand how SIPC works is to avoid firms at risk. Visit FINRA’s investor checklist for specific steps you can take to protect yourself.

What to do if you hold investments at a failing firm

If a firm you are working with is being liquidated and the SIPC steps in, you should receive notice within 12 months to file a claim form. This notice may come through the mail or you may also have access to file a claim online. If you do not receive a claim form, visit www.sipc.org or contact the SIPC at [email protected] or (202) 371-8300. A deadline will be set for claims, so it’s important to take care of this as soon as possible to ensure you’ll recover as much as possible.

When Should You Exercise Your Employee Stock Options?

April 05, 2019

Do you have employee stock options that you’re not quite sure what to do with? Should you exercise them and take the gain now (if there’s no gain, it’s a moot point) or hold onto them a little bit longer for potentially higher profits down the road? Here are some things to consider:

Can you exercise them?

Before you even think about whether you should, you might want to see if you could. There are two main reasons that the answer to that question may be “no.”

  1. The first is if your options aren’t vested, generally meaning that your employer won’t allow you to exercise them until a certain period of time (usually between 3-5 years) passes. This is basically a way of keeping you at the company for a bit longer and encouraging you to work for the long-term good of the company since you’ll directly benefit if the company’s stock price is higher after your vesting period.
  2. The second reason is if the current stock price is lower than the strike price, which is the price that your option allows you to buy it at. For example, if the current stock price is $75 per share and your strike price is $50 per share, then by exercising your option you can buy the shares at $50 and immediately sell them for the current market price of $75 for a $25 per share profit (less applicable taxes, fees, and expenses). That’s the fun part. But what if your strike price is $75 and the current market price is $50? In that case, your options are said to be “underwater,” which is about as fun as it sounds (and we’re not talking scuba diving here).

When will your options expire?

Just as you can’t exercise your options before they vest, you can’t exercise them after they expire either, which is pretty much what it sounds like. Many places will automatically exercise your options at the expiration date as long as they are “in the money” (the opposite of “underwater”) so you may want to check and see if that’s the case. If not, you’ll want to keep track and make sure you exercise them before they expire.

Do you have too much invested in your company stock?

This is a biggie because if you make this mistake, it can really wipe you out financially if the wrong things happen. As risky as the stock market is as a whole (remember 2008?), any individual stock is a whole lot riskier. After all, the overall stock market practically can’t go to zero, but an individual company can, and sometimes they do (remember Enron?).

No matter how safe and secure your employer seems to be, yes, this applies to your company too. Experts in behavioral finance say that we humans have a “familiarity bias,” which is a tendency to overestimate the value of things we know.

After all, you never know what can happen. Pick your villain. You can work for a company that makes great products in a growing field only to find that someone has been cooking the books (corporate crooks) or that a sudden change in the law has a devastating impact on your industry (politicians).

The risk is amplified when you consider that your job, and perhaps your pension, are tied to this company too. It’s bad enough to lose your job and much of your pension. It’s even worse to lose your nest egg at the same time. For this reason, some financial professionals suggest not even investing at all in the industry you work in much less your employer.

How much is too much?

So how much is too much? A rule of thumb is to have no more than 10-20% of your total portfolio in any one stock. In fact, pension plans aren’t even legally allowed to invest more than 10% of their assets in company stock. This is one reason that a lot of companies these days limit the amount of your 401(k) savings that you can have allocated to company stock.

What else would you do with the money?

If you have high-interest debt like credit cards, you’ll probably save more in interest by paying them down than what you’d likely earn by holding on to your options. Beefing up your emergency fund to 6-12 months of necessary expenses could be another good choice. In the unfortunate event that something did happen to your company, you’ll be glad you have some savings rather than underwater options.

Unless you have good reason to be particularly optimistic about your company’s growth prospects (don’t forget that thing about familiarity bias), diversifying the money into mutual funds or other stocks keeps you invested while significantly reducing your risk.

If you haven’t maxed out tax-sheltered accounts like a Roth or traditional IRA, you could use the proceeds from your options to fund them. You still have until April 15th to contribute for last year.

Will your tax bracket be higher now or in the future?

Remember that $25 per share profit we talked about earlier? Well, Uncle Sam will want his cut but the amount can vary. If you have non-qualified stock options, you’ll have to pay payroll and regular income tax rates on it. If you’re in the 24% tax bracket and about to retire next year in the 12% bracket, waiting that year could save you 12% in taxes. 

On the other hand, if you have incentive stock options, there are more possibilities. If you exercise the option and sell the stock in the same year, you’ll pay regular income tax rates just like with the incentive stock options, but no payroll taxes.

However, if you exercise the options and hold the stock for more than a year (and 2 years from when the options were first granted to you), then when you eventually sell the stock, the difference between the price at which you sell the stock and the price at which you exercised the option is taxed at lower long-term capital gain rates (currently maxed at 20%) rather than higher ordinary income tax rates (currently maxed at 37%). 

In the example we’ve been using, if you held the stock after exercising your options and the stock price continues going up from $75 to $90 then you’ll owe long-term capital gains taxes on the $40 per share difference between the current $90 market price and your original $50 strike price. However, you may owe alternative minimum tax under this scenario so consider consulting with a tax professional.

With either type of option, there could be some reasons to delay. But don’t let the tax tail wag the dog. These tax benefits can be outweighed by the risks of having too much in company stock or the benefits of using the proceeds to pay down debt or build up an emergency fund. The important thing is to understand each of your options (no pun intended) to decide what makes the most sense for you.

4 Steps To Perform Your Own Investment Analysis

April 03, 2019

Two of the most common questions that I get as a financial coach are, “Do my investments make sense for me?” and, “Am I paying too much?” Generally, those are questions that I can’t answer in one minute, but with the right tools and a few minutes anyone can figure out the answer. Here’s how you do it.

How to do a self-analysis of your investments

Step 1 – Take a Risk Tolerance Assessment

You must know what amount of risk makes sense for you. I don’t care about your friends, relatives or co-workers. Does your mix of investments make sense for you? 

To find out, this Risk Tolerance Assessment takes about 2 minutes or less, and will then offer you general guidelines as to how much money you should have in stocks, bonds and cash (aka money markets or stable value funds). If you have two entirely separate goals, such as a college fund that you need in 10 years and retirement in 25 years, then take the assessment more than once, each time with that specific goal in mind.

Step 2 – Figure out exactly what investments are held in your funds

Just because your fund says one thing in their objective doesn’t mean that it’s clear what your fund actually owns. If you really want to know, you can actually find out using a tool on Morningstar. Here’s how:

  1. Get a copy of your statement, then look for your account holdings. You are looking for fund names such as ABC Growth Fund Class R5. Even better, see if you can find the “ticker symbol” for each fund, which is a five-letter code such as “ABCDE.”
  2. Go to Morningstar.com and enter the name or ticker symbol.
  3. Once you’ve found the Morningstar page for your fund, click on the tab labeled “Portfolio.”
  4. This tab will break down the mix in the fund by stocks, bonds and cash – keep in mind that Stocks include both US and non-US stocks, while bonds will simply be labeled as Bonds, and cash or money market will be listed as Cash.
  5. You can really geek out if you want by digging into how much is in large company stocks compared to mid and small sized companies or look at what sector of the economy your fund focuses on (such as technology or manufacturing, etc.) You may even find some fun in looking at the Top 10 holdings in each fund to see if you have an overload in a certain company.

The most important thing is that when you add up all the money in stocks based on this analysis it is close to what your risk tolerance suggests. The other key thing to check is that everything doesn’t look exactly the same. So if all of your funds are mostly large companies or all of them are US Stocks, then you may be out of balance.

Step 3 – Analyze fees

Once you have determined that your investments are or are not matching up with your risk, the next step is determining how much you are actually paying the mutual fund companies through fees, which are also called “expense ratios.”

While Morningstar has good info on that, the FINRA Fund Analyzer is a more helpful tool for this purpose. Here’s how:

  1. Again, enter the fund name or the ticker symbol into the analyzer, and when you’ve found your fund, click on “View Fund Details.”
  2. Scroll down to “Annual Operating Expenses” to see how the expenses for your fund stack up against its peers.
  3. Also look to see if you must pay a fee to get into or out of that fund.

Obviously, the ideal is to invest in funds where the fees built into the fund are at or below the average fee for that peer group.

Step 4 – Compare your advisor fees to benchmarks (if you have an advisor)

If you are a do-it-yourself investor, you can skip this last step, but if you have an investment advisor who is helping you with your investments then the last step is figuring out if you are paying them more than average.

Commission-based advisor

If you are investing in funds that showed a lot of up-front commissions or “Contingent Deferred Sales Charges” or “CDSCs” in Step 3, then that means your advisor is paid by commission. If so, then the key here is to make sure that the commissions are comparable to industry averages and that you are holding onto the funds – or at least staying in the same mutual fund company options – for about 7 years or longer in order to realize the value of the up front fees. This allows you to minimize the overall fees paid and avoids paying commissions too frequently.

“Fee-only” advisor

If your advisor is “fee-only,” then they don’t charge commissions, and instead they charge a management fee based on the total value of your investments. Generally, this is a fee that is collected quarterly, so in that case each quarter the fee is applied to your balance and then divided by 4. So, if you have a 1% fee on your $100,000 account, your fee would be $1,000 per year or $250 per quarter. Keep in mind that this is in addition to the fees you explored in Step 3, and will show up as a separate fee on your statement.

How much is too much?

As for what your fee should look like, in 2018, the average advisory fee was 0.95% and many people use 1.0% as an industry standard. A good rule of thumb is that if you are paying close to or above the average, then you should be receiving value for that in the form of other services such as financial planning, tax planning, etc. to justify the higher fee.

That said, it can vary quite a bit depending on the size of your account. For accounts between $0 – $250,000, the average advisory fee was 1.1% and over $5 million that dropped to 0.7%. In other words, the more money you have, the lower the percentage, but probably higher the dollar amount of your advisory fee.

Ultimately, it’s up to you to determine if you’re receiving proper value for any advisor-based fees. If you don’t think you are, then consider shopping around.

What about robo-advisors?

Today, there are lots of robo-advisors out there that will do most of the same things when it comes to managing your investments that a typical advisor would do, but the fees tend to be lower, ranging from 0.25 – 0.35%. Does that mean everyone should be using robo? Like anything else, some people are very comfortable with using technology as a tool and getting planning or guidance somewhere else. If that is you, then a lower-cost robo advisor may make sense.

If, however, you are like many folks and prefer someone you can call when you have questions who is intimately familiar with you and your situation, then paying up to that industry average may be worthwhile. Lastly, if you like your advisor but their fees are above average then you can always try to negotiate with them for lower fees and/or additional services like financial planning, retirement or college planning, etc.

What To Expect When You Do A Retirement Account Rollover

March 14, 2019

One of the most common questions we receive centers around the decision with what to do with your old 401(k). We offer multiple ways to look at whether to stay or move strategically. But once you decide to move the funds from one firm to another, how do you best proceed? Here’s what to know in order to make the process as smooth as possible.

Opening the lines of communication

Have you ever seen an old movie, or a film set in the early days of the telephone? The switchboard operator actually had to plug and unplug the hardwire lines to connect calls. This a good metaphor for what happens when you initiate a rollover. You, as the account holder, function as the operator in terms of moving the funds from company to another.

Rolling money over from one account to another is a fairly common practice but here a few things you will want to consider when approaching this process.

Talk to the firm you are rolling the account from

First you need to know what paperwork is needed for the money to be released – the best place to find this out is to call your current provider. Do not take anyone else’s word for it. The receiving firm may have a decent idea of what the other firm wants, but there is no way to know for if you do not contact them.

To start, simply ask them what the procedure is to rollover your assets to another provider. That question may get you all the information you need, but before you hang up, make sure you know:

  • What timeframe can you expect from when you request the money to when it will be transferred? (this can take up to a couple weeks)
  • Are there any costs?
  • Is there a need to complete any paperwork?
  • What addresses do they have on file to you?
  • Can correspondence only be sent to those locations?

Be prepared that before you’re able to obtain this information that you may be transferred to an account retention department where someone may try to talk you out of your decision. It’s ok to be firm and state that you’ve made up your mind and to please give you the rollover information without further delay.

Talk to the firm that will be receiving the rollover

Once you know what will be required to get the money out, make sure you’re in touch with the company you’ve chosen to receive the money (either your new employer or the IRA company you’ve chosen). This side is likely to be a bit more flexible regarding the manner in which they receive the money from your old account, but here are somethings you will want to discuss with them in order to make the transition smooth:

  • If the receiving firm is a 401(k) or some other retirement plan at your workplace, be sure they know and understand the type of account the rollover is coming from. The ability to receive funds from another plan or IRA is based on what is in the plan document – not all 401(k) accounts accept all incoming transfers.
  • This also applies to rolling the funds to an IRA. Are the dollars in the old plan pre-tax, after-tax or Roth? This may create a necessity to open both a traditional and a Roth IRA.
  • If the old firm requires sending a paper check, get clear directions on who the check should be made out to. This step is crucial or you could inadvertently create an indirect rollover and its tax consequences.

You will likely also be asked how you want the money to be invested once it’s in your new account. Don’t let this decision delay the process, as you most likely can make changes once the funds are there, but make sure you make some type of selection so the process can be completed.

Initiate the transfer

Once you are clear on what to do from both ends, you can start your switchboard operator magic. It is common to have to sell any mutual funds or other investments in the old account because the new account may not offer the same investment options.

In the case of retirement accounts this tends not be a big deal because there should be no tax ramifications for selling, but be aware as that may change your mind about this whole process. Transferring cash tends to be a simpler process than transferring shares of mutual funds or stocks anyway.

Next:

  • Keep an eye on the process online and maintain any paperwork sent to you about the transfer.
  • Enroll in online access for the new account(s) so you can see when the funds are received.
  • Once the transfer is complete, check to make sure that the amount that left your old account lines up with the amount received in your new account.
  • Consider leaving the old account open for a few weeks to collect any residual interest or dividends in the old account, then make sure those are transferred over as well.
  • You should receive a Form 1099-R from the distributing firm the following year – if you did the transfer correctly, there shouldn’t be anything in the taxable box, but keep the form just in case. Use the paperwork and online history to make sure the transactions line up properly.

Hopefully this will help you navigate the steps to a rollover. Depending on your situation, the transaction may be more complex or you may be able skip steps. Also, if you are working with an advisor they can sometimes simplify the process. In either case, lean heavily on each firm to make sure they are both working toward getting your savings to the right place.