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.

3 Strategies To Manage Withdrawals When You Retire During A Bear Market

March 13, 2019

The stock market has taken investors on a pretty wild ride over the past several months. It is during these volatile times that we experience a higher number of calls from people who are concerned about their retirement savings and wondering what they should do. My most concerned callers are those who are getting close to retirement. With the bells from the 2008 financial crisis ringing clearly in their heads, they are asking, “What should I do if I retire into a bear market?”

Here are three different strategies to consider that can allow you to still retire when you want to without the market fluctuations (or downturn) affecting your plans or causing you to run out of money sooner than you originally projected.

Strategy #1: The bucket strategy

To use some jargon, this is also called the time-based segmentation approach. With this strategy, you think of your money in 3 hypothetical buckets that are aligned with your spending needs and the time line for those needs. For example:

Bucket 1 (Short-term): This is the money that you anticipate needing to withdraw over the next 3 to 5 years. Most people will put this bucket in cash or in very conservative investments. The idea is that this money is protected from market down turns, while the rest of your investments can have time to recover (aka grow back with the market) before you need to begin withdrawing them.

Bucket 2 (Medium-term): This bucket is the money that you may need within a 5 to 10-year period. Most people would invest this bucket in medium and longer-term fixed income assets such as bonds or bond funds.

Bucket 3 (Long-term): This is basically the rest of your money, which you estimate you won’t need to withdraw for 10 or more years, and therefore what you want to keep growing. You’ll typically use stocks (aka equities) for this bucket, as you’ll have time for this money to recover from any longer-term bear markets and ideally will continue its growth over the years.

My colleague Chris Setter wrote in greater detail about the Bucket Strategy here.

The drawbacks: It can often be difficult to trust the process and not let emotions get in the way. During up markets, you may feel like the cash you set aside is just not working hard enough and that you should take on more risk.

Likewise, during down markets you might start feeling anxious and like you should move your money into cash for safety. Both reactions can hurt you, as it is nearly impossible to time markets and more often than not you will only contribute to a reduction in how long your money will last.

In addition, it can be challenging to manage money you have across different accounts like tax-free, taxable, and tax -deferred accounts as you may want to keep different types of investments in different types of accounts (for example, higher growth in a tax-free account like a Roth so that you can earn tax-free growth, while municipal bonds earning tax-free interest make more sense in a taxable account.)

What can make it work better: Sticking to your plan and having a strategy in place to replenish and reallocate your buckets while being mindful of the type of accounts your assets are invested is the key to success with this strategy.

Consider funding your short-term bucket by using the more conservative short to medium term bonds in your medium-term bucket, as they are typically the assets that will be most stable. To replenish your medium-term bucket, you can take the gains from the assets that have grown in your long-term bucket and reallocate them.

Ideally you are following an appropriate asset allocation strategy based on your goals, time horizon and cash needs, so this should flow into your existing investment process.

Strategy #2: Essential vs discretionary

With this approach, the goal is to take retirement savings that you need to fund essential expenses (such as housing, healthcare and daily living expenses) and invest them into assets that produce guaranteed income such as annuities. The remaining savings would only be used for discretionary expenses (like travel, non-essential home improvements, etc.) and would remain invested in more growth-oriented vehicles such as stocks.

The drawbacks: The drawback to this method is that some discretionary expenses might actually be considered essential to an individual with a certain retirement lifestyle in mind. If for some reason their discretionary assets did not last, then those individuals might have preferred to continue working until that lifestyle could have been accomplished versus living more frugally in retirement.

What can make it work better: If that’s the case, then maybe think of your savings again in 3 buckets, but with different labels: the Essentials, the Discretionary Non-Negotiables (such as a country club membership), and the truly Discretionary (like taking your whole family on a Disney cruise when times are good, versus just hosting the grandkids at your home when the market is down).

Individuals looking to secure a minimum retirement lifestyle could then place the expenses that are essential and non-negotiable into guaranteed income buckets, and the remaining assets to the truly discretionary items that they would not really miss if push came to shove.

Strategy #3: Structured systematic withdrawals

A systematic withdrawal refers to the process of taking money out of your retirement accounts based on regularly scheduled fixed (percentage or dollar) amounts. For example, a popular systematic withdrawal rule is the 4% rule. The idea behind this rule is that you can “safely withdraw” 4% a year from your savings for the duration of your retirement and as long as you stick to that amount or less, you shouldn’t (in theory) run out of money.

The drawbacks: As my colleague Scott points out in his article, the drawbacks include not taking into account the timing at which you retire (for example, a 40% down market) or the various income needs, lifestyle, and family dynamics of individuals. In other words, one size doesn’t fit all, which means there is no guarantee that the 4% rule in and of itself is the best approach for you.

What can make it work better: This approach can work in the above considerations as long as you also build in decision rules around certain triggers that would lead you to take action during certain market events. For example, perhaps you would reduce your withdrawal percentage during down markets, and/or possibly tap into stable and liquid assets (such as a cash savings account) to help meet your needs while allowing the investment assets that have taken a beating some time to recover.

For example, a colleague of mine shares that he plans to keep 3 years of expenses in cash, and when market downturns occur he might reduce his withdrawal to 3% and supplement his needs from his cash reserves.

How to decide which is right for you?

Since there really isn’t a one size fits all approach, setting up these rules will require thought, foresight and planning.

All of these strategies require you to have an idea of what your annual financial needs will be – use these 5 steps to help determine the retirement income you are aiming for, and then consider consulting with a qualified and unbiased financial planner to help you determine what the best retirement withdrawal approach is for you. They can also help you maintain and update your strategy as you go along.

With proper planning and preparation, anyone can develop a strategy that can outlast the scariest of bear markets, while helping to ensure that your savings can last to infinity and beyond!

 

 

 

 

 

Are You Investing In The Right Account For Your Goal?

March 12, 2019

When it comes to investing, we talk a lot about “asset allocation” but what about “asset location?” Are you investing in the right account(s) for your goal(s)? Let’s take a look at some common financial goals and which account(s) might be best for them:

Emergency fund

The key here is easy access to your money in case of an emergency. Most tax-advantaged accounts have restrictions and penalties for most withdrawals, but the Roth IRA is an exception. You can withdraw the sum of your contributions at any time and for any purpose without tax or penalty. If you withdraw earnings before 5 years and age 59 ½, you’ll probably have to pay taxes and a 10% penalty on those withdrawals, but the contributions always come out first.

Buying a home

A traditional or Roth IRA can be a good choice here since you can withdraw up to $10k penalty-free (and tax-free from a Roth IRA after 5 years) for a home purchase if you and your spouse haven’t owned one in the last couple of years. (Since Roth IRA contributions can always be withdrawn tax and penalty-free, the $10k limit can be applied just to the earnings.)

You may also be able to borrow from your employer’s retirement plan to purchase a home and have a longer time period to pay it back than with a regular retirement plan loan.

Retirement

If your employer offers a match, start there so you don’t miss out on the free money. Once you’ve maxed the match, you can also contribute to an IRA if you prefer having more flexibility than what your employer’s plan offers. An HSA can also be part of your retirement savings since the money can be used penalty-free for any purpose at age 65 (and will still be tax-free for qualified medical expenses including some Medicare and long term care insurance premiums).

Education

The most popular option is a 529 plan, which allows the earnings to be withdrawn tax-free for qualified education expenses. The plans are run by the states and each has different investment options. You’re not required to contribute to the plan for the state you live in or where you child goes to school, but some states offer special state income tax breaks for contributions to your own state’s plan.

If you prefer more flexibility, you can also contribute to a Coverdell Education Savings Account, which has similar federal tax benefits, but contributions are limited to $2k per year and the money has to be used by the time the beneficiary turns 30. Finally, you can withdraw money from an IRA penalty-free for education expenses, but make sure you’re not jeopardizing your retirement.

Of course, if you max out the contribution limits of any of these accounts or just don’t want to tie up your money, you can always contribute to a regular taxable account too. If you’re still not sure which account(s) makes sense for you, consult with a qualified and unbiased financial planner. Just don’t let indecision about which account to save in prevent you from saving at all!

Too Busy To Manage Your Investments? Here Are Two Possible Solutions

March 08, 2019

I don’t know about you but there are days when I am so busy that I have to look at my iPhone to figure out the day of the week. When you throw picking investments into the mix and most people stick their heads in the sand (probably to take a nap) rather than deal with it (unless, of course, it’s something you’re interested in!). As much as I would love to encourage taking a break, I do not encourage one for your investment accounts. As hard as you work, your money should be working for you.

Luckily, the investment world understands this and has created simple, low-cost methods for managing investments. The two most well-known options are investing in an asset allocation fund and investing with a robo-advisor. Which approach you pick depends on your goals, your investment strategy, how involved you want to be in the investment management process, how much of a say you want with your investments, and how much you’re willing to pay. Here’s a review of both.

Robo-advisors

Robo-advisors provide automated online portfolio management advice, typically without a human financial advisor. Many robo-advisor companies use the same software as human advisors but only offer portfolio management advice for generally lower fees. Most of their investment choices are low cost ETFs, although a few offer stocks and other types of investments as well. Some robo-advisors also offer features to help you minimize taxes in accounts outside tax sheltered accounts like a 401(k) or IRA.

Robo-advisors are popular in part due to the minimum amounts needed to invest. Some companies have no account minimums while others require as a little as $100 a month to invest. This makes them a great option for those who want investment advice but may not have the minimum assets to work with a human financial advisor.

For those who want a human touch, don’t worry. Many investment management companies these days are offering robo-advisor options with a dedicated human financial advisor for a slightly higher fee, but less than what you’d pay to work with someone who might come to your house or invite you to their office.

A robo-advisor might be a good fit for you if…

A robo-advisor may be a good fit for hands-off investors who enjoy low cost investment management and are comfortable using online services. This is also a great option for those who may not have the minimum assets to work with a financial advisor but want the quality of financial advice. If you want a more customized portfolio based on a brief risk tolerance questionnaire, robo-advisors may offer the best solution for you.

Asset allocation funds

Asset allocation funds are mutual funds that are usually pre-mixed with equities, fixed income, cash equivalent and sometimes alternative investments, giving you instant diversification. The fund can be mixed in various ways and typically rebalanced to maintain the desired mix of stocks and bonds.

The title of the fund often gives you clues as to how your funds are mixed. A balanced portfolio is generally a mixture of about 50% stocks and bonds. Lifecycle or target-date funds start off with a higher percentage in stocks and gradually become more conservative as the investor approaches a pre-determined date, which is retirement in most cases. Lifestyle funds are allocated based on risk level (e.g., conservative, moderate or aggressive).

An asset allocation fund might be a good fit for you if…

An asset allocation fund may make sense for those who are in retirement plans such as a 401(k) or IRA and want a fund that does all of the work for you. If you are looking for a true one-stop-shop then asset allocation funds may be for you. If you are not comfortable with online services but want a similar hands-off level of portfolio management you would get from an advisor or even a robo-advisor, an asset allocation fund may be a good alternative.

Reviewing the pros and cons of each

Both asset allocation funds and robo-advisors have pros and cons. The key is to evaluate your needs and wishes to make the best decision for you. Some of the questions to answer are as follows:

How comfortable are you using online services? Robo-advisors require a certain degree of computer literacy and comfort not needed with an asset allocation fund.

How customized do you want your portfolio to be? Robo-advisors typically base their advice off of a questionnaire and you may be able to tweak the asset allocation or change the answers to the questions asked to modify the portfolio. On the other hand, an asset allocation fund is setup based on very broad criteria such as your retirement age and basic risk tolerance level, which may not give you the best allocation for your investment needs.

How much are you willing to pay? Since many robo-advisor firms use ETFs or index funds, the cost can be cheaper than some asset allocation funds, particularly the funds that are more actively managed, although you may find an asset allocation fund in your company’s 401(k) that is cheaper than any robo-advisor.

What type of investments do you want to have in your portfolio?Most robo-advisors use ETFs, although some use stocks. An asset allocation fund is a mutual fund.

What level of service do you want? Some robo-advisor firms can help you maximize tax savings. An asset allocation fund generally does not offer ways to save on taxes.

Once you have decided if you are going to choose to invest with a robo-advisor firm or in an asset allocation mutual fund, do your research to choose the best firm for your needs – this can go a long way to helping you find the right investment strategy to help you reach your goals. Then you can spend more time on the rest of your life!

How Do You Decide Where To Open An Investment Account?

February 22, 2019

When it comes to investing, once you’ve decided how to divide your money between types of investments, which investments to pick, and what type of account to contribute to first (401k or IRA, pre-tax or Roth) there’s another decision you’ll need to make: where should you actually open the account?

If you’re just contributing to your employer’s retirement plan, there’s not much of a choice. On the other hand, if your tax accountant just told you to open your first IRA, leaving the comfort and safety of your workplace benefits can be intimidating. Alternatively, you may already have outside accounts but feel unsatisfied with your current broker/mutual fund company and are looking to make a switch.

A range of options

When I started my financial career, it was pretty simple. There were full-service brokers that also charged full commissions and there were no-load mutual funds and discount brokerages that offered little or no help to investors. Now, there are a range of options in between that can give you some of the best of both worlds. Here are some questions to consider:

Are you looking for investment advice?

If so, your choice of advisor may dictate where you invest. There are generally 3 ways you can go for advice. I’ve worked in all three environments so I can tell you that they each have their pros and cons.

1. Traditional full-service broker. One option is to use a traditional full-service broker that charges a commission for investments that you purchase through them. For example, a full-service broker may charge a “load” for mutual funds, which can sometimes be as high as 5.75%. Be aware that for some investments, such as annuities and class B and C mutual funds, those commissions can be hidden as part of another fee.

For bonds, the commission can take the form of a reduced yield. In addition to many of the big names like Merrill Lynch and Smith Barney, many banks, credit unions, and insurance companies offer investments this way.

Advantage: You only pay for the advice you take and it can be cheaper in the long run than paying a percentage of your overall account every year.

Disadvantage: These “advisors” may be tempted to sell you products that make them money rather than you. If you go to a financial advisor and he/she tries to convince you to invest in insurance products right off the bat, you may want to keep shopping – there is a place for those investments, but that’s often a red flag that the advisor is looking to make the most money for themselves rather than help you grow yours.

2. Independent registered investment adviser (RIA). They generally charge you an annual fee, usually around 1% of the assets they manage for you, or in some cases an annual retainer or hourly rate. Your investments are usually held at a separate discount brokerage firm like Charles Schwab, Fidelity, or TD Ameritrade, or at an independent brokerage that you’ve probably never heard of. This separation can help prevent Bernie Madoff-type fraud, but it also means that you may have to go to one place for advice and another for administrative issues.

Advantage: You can get more objective advice and often more comprehensive financial planning.

Disadvantage: Fees can be higher in the long run and many RIAs won’t even accept clients with accounts smaller than $250k, or often $500k or more.

3. Discount brokerage. Several discount brokers like Schwab, Fidelity, and Vanguard have also started offering advice at a lower cost. The depth of the advice depends on how large your account is, but their starting threshold is generally lower than an RIA, and they tend to charge less as well. You might also be able to get some free fund recommendations if you’re willing to forgo ongoing management and simply rebalance your portfolio periodically.

Advantage: Lower balance required and lower fees.

Disadvantage: You most likely won’t ever meet face-to-face with your advisor and their advice will be limited strictly to your investments, which may not take into account your personal goals for the money.

What do you want to invest in?

If you can’t answer that question, you may want to revisit the previous one. If you do know what you want, this is the question to start with. After all, some companies may not even offer the particular type of investment you’re looking for, and some places may charge more for it than others. For example, it’s generally cheapest to buy Vanguard and Fidelity funds directly from the source. Your choice of investment should determine your provider, not the other way around.

How do you invest?

How you’ll invest matters too. If you’re actively trading stocks every day, you might want to look for in-depth research, trading tools, and quality execution, along with low fees for trading. On the other hand, those factors won’t be as important if you’re just buying a few mutual funds to hold, where you should be more focused on ongoing fund fees.

What are the fees?

Either way, costs are an important consideration because they can really eat into your returns over time. Fortunately, competition has driven commissions on stocks down to as low as $2.50 a trade at Just2trade, and many brokerage firms offer a variety of mutual funds without any loads or transaction fees (NTF or non-transaction fee funds) so see if any of them offer the funds you want for free.

If you’re transferring from another company, the previous company may charge you a hefty fee on the way out, but some companies will rebate those fees, up to certain amounts, back to you if you transfer your account to them. Finally, look out for maintenance fees, especially on IRAs.

How convenient is it?

Once you’ve narrowed your search, see how close the brokerage firms’ branch offices are to you or if they even have one (many only do business over the phone or Internet). Some brokerage companies also provide FDIC-insured banking services. In addition to allowing you to have everything in one place, these accounts can pay more than traditional bank accounts and may even rebate your fees for using another bank’s ATM.

Your choice of brokerage companies probably isn’t something you want to decide based on which office you happened to walk by or which television ad you remember. It will affect how much and what type of advice you get, what investment options are available to you, how much you pay in fees, and your overall investing experience. There is no one best choice for everyone, but some will certainly make it easier for you to achieve your goals than others.

What To Watch Out For When Seeking ‘Non-Traditional’ Investments

February 20, 2019

The stock market is guaranteed to do one of two things: go up or go down. Because so many Americans are dependent on their 401(k)’s as their primary source for retirement, as a financial wellness coach I start to hear more investor discontent when the market is not doing well. When the market is going up, people tend to be content but when the market goes down, many investors go on a quest in search of the perfect investment.

Beware of “outside the box” investments

One of the most dangerous questions an investor can ask an advisor is, “Do you have anything other than mutual funds, stocks or bonds that give me a better return without taking on risk?” The reason I consider this a dangerous question is this is where an investment is often introduced that is hard to understand.

I recently read a story about an athlete that had sued his financial advisor for misconduct. Before I go further, let me emphatically state that the client is not at fault in cases of advisor misconduct. When I hear stories like this I can guess that the investment was something other than a traditional account before I read the details. One reason is the fact that most large firms have substantial checks and balances on advisors. It is difficult for the advisor to operate in felonious activity with traditional investments, but if there is some one-off, unique investment then an unscrupulous advisor may circumvent the built-in safeguards.

The reason most advisors stick to a narrow listing of investments is because that is what they are trained in. When clients ask for something different, the advisor may be able to pull some product off the shelf that functions differently, but in my experience those products tend to have a narrow application. Conversely, I have seen investors, in an effort to get away from traditional investments, squeeze themselves into investments that may have higher risk with a lower opportunity for return.

The exotic investment is never as easy as it sounds

If you move forward with something that’s different from the more typical stock market investments expect some rockiness. When going the road less traveled there is a reason there are not droves of others on the same road. Recognize there may be some risk that not even the person recommending it may be aware of. For example, pay close attention to the need for additional tax filings and keep track of any costs for those filings. This should count against your total rate of return.

Concierge service sounds nice, but beware

If someone is recommending an investment that may be complex, be mindful of trusting the advisor to make everything easy. If you are investing in real estate, expect to have to deal with tenant difficulties and repairs. If you are investing in a franchise, expect to see good and bad months. If you have an advisor or consultant telling how great things are going all the time you need to dig deeper – whoever is shielding you from the realities of these investments is not doing that for free and whatever they are paid will eat in to you returns.

It is ok to ride the downturn

You don’t have to stick to just stocks and bonds. I, along with many planners on our team, own investment real estate and other non-traditional investments not available through a brokerage firm. This is just a warning to make sure you have the time and risk appetite for these type of investments.

A buy and hold strategy of a stock- based portfolio can be difficult to watch on the downside but if your investments align with your goal it is ok to see down periods. A downturn is not a loss unless you sell at the bottom. If your allocation is reasonable and time is on your side, stick to it.

 

 

 

 

4 Red Flags To Watch Out For Before Buying An Annuity

January 25, 2019

Annuities – the word itself can start WWIII in a room full of financial advisors. Some advisors think of annuities as the financial instrument of Satan and other advisors believe it is the Holy Grail for anyone in retirement. I am in the middle.

For the right person in the right situation, they work

I think for the right person, the right annuity can help someone generate the income needed to maintain his or her lifestyle in retirement. For the wrong person, an annuity can tie up money unnecessarily for years. The key (and the challenge) is for the consumer to fully understand both the benefits and risks of an annuity and to assess if the benefits outweigh the risks for their particular needs.

Does anybody really know how these things work?

The problem is that annuities are so complicated that most consumers and most advisors do not completely understand them. The training on annuities at most financial institutions centers on selling them. When I first became an advisor, my company assigned me to an area with a high elderly population. Big surprise – this area also had many annuity sales people.

After a few months in my new location, a client would stop by with a friend who wanted a second opinion on an annuity. Most of the annuities I reviewed were good and a great fit for the owner. Unfortunately, there also annuity contracts I reviewed that did not match the benefits the annuity owner thought they were getting.

Other annuities I reviewed did not match the needs or even long term goals of the annuity owner. These experiences gave me a unique window as to the “red flags” of a potentially bogus annuity salesperson and new perspective on how to help consumers.

Red Flag #1

Your advisor pressures you to sign an annuity contract before fully explaining the contract to you

When you get the annuity contract to sign, have the advisor go over all of your discussed benefits in the contract. Make sure that all of the promised benefits are listed in your contract (your advisor should be able to point them out). If anything that was promised is not in the print of the contract, do not sign. If needed, your advisor can have the contract redone to include your discussed benefits.

Once you sign, no matter what you thought you were getting, you are pretty much stuck with the annuity. Most states have a “free look” provision that gives you the option to get out of your annuity within typically 10-30 days (varies by state), but once that period has passed, it’s yours, even if it’s not what you thought it was.

Red Flag #2

You do not know your advisor’s background

There is an inherent trust people have in anyone presenting himself or herself as a financial professional. One of my friends was told by an aspiring financial advisor that, “All I really have to do is put on a tie and show up, and people are willing to trust me.” The only qualification needed to sell an annuity for most is an insurance license, which requires 20-40 hours of general insurance courses, 6-12 hours of ethics courses and passing an exam. No financial or retirement planning knowledge required.

To sell variable annuities, an advisor would also need at a minimum a Series 6 license. The qualification to getting a Series 6  is for the advisor to be affiliated with an organization that will sponsor them to sit for the exam and for them to pass the 100-question exam with at least a 70% passing score. In most states, an advisor may also have to pass a Series 63, which I personally studied for and passed within a 48-hour period.

This means someone can graduate from high school June 1, go through all of the training, pass the exams and hang a shingle outside of an office as a financial professional by July 1 with absolutely no experience. Ask about the professional experience of anyone managing your money and do background checks by going to your state’s Department of Insurance website and/or by using the Broker Check website.

Red Flag #3

Your advisor did not clearly explain to you why the annuity he or she wants you to purchase is a good fit for you

If you are switching annuities, make sure you understand exactly why switching is such as good idea. I reviewed an annuity sales proposal from a woman who was getting ready to switch from an old annuity to a new one (called a 1035 exchange). The advisor told her it was a good idea, but the client could not explain to me why it was.

Upon reading the proposal, I knew it was because there was no good reason for the exchange except for the commission the advisor would receive. The change would increase her surrender period and cost her more money in fees and the annuity actually had fewer benefits. Make sure you clearly understand how and why the annuity purchase meets your financial goals.

Red Flag #4

The advisor tells you that it is a “no risk” investment

No matter how good an investment is, there are always risks. The risk may be your money being tied up or your money going up or down with the market or getting a low rate of return, or it could be the risk that the annuity company goes out of business. The key is for the benefits to outweigh the risk and for some, the risk may be a deal breaker.

I reviewed an annuity for a friend of a client who wanted to withdraw the money for his child’s education. His advisor told him about all of the benefits but left out the 10% surrender charge for withdrawing his funds. What angered him about this is that he told me that he explicitly told the advisor that he planned to use some of the funds for his child’s education.

The bottom line

Do not sign anything you do not understand. If you don’t understand an annuity, ask questions until you do. Just like Smokey the Bear’s famous quote, “Only you can prevent wildfires,” you are your own best defense against bogus financial professionals.

Where Should You Save Extra Money: Into Your 401(k) Or IRA?

January 15, 2019

When I was a financial advisor, one of the key messages I shared with my peers and prospective clients was that the best way to save their money was to put just enough into their 401(k) plan at work to capture their employer’s match, but that any extra they wanted to save should go into an IRA (with me, of course.)

What I was taught by all the financial firms I worked with prior to finding my dream role at Financial Finesse was that the fees in 401(k) plans are “so high” that investors are always better off using non-employer based investment vehicles for their retirement savings beyond the match. This is a sentiment that’s often echoed back to me by employees who I work with via our Financial Helpline – they’ve been told the same fallacy.

I was SO WRONG in pretty much every instance

One of the biggest “aha” moments I had upon starting my work here as a financial coach was that this “rule of thumb,” which I had blindly subscribed to without ever actually verifying it, was wrong for pretty much anyone who works for a company with more than just a handful of employees.

Here’s why it’s wrong

When a company decides to offer a retirement plan such as a 401(k) to its employees, they assume what’s called a fiduciary duty – basically they become bound by a federal law that says that they have certain responsibilities around protecting the employees who participate in the plan. One of those things is making sure that their employees aren’t overcharged for the services provided by the 401(k) plan provider, including investment fees.

The thing is that mutual funds, like those offered in your 401(k) plan, HAVE FEES. But they can vary, often depending on how much is being invested in those mutual funds. So when large companies with thousands of employees offer a particular mutual fund to their 401(k) participants, they are typically able to negotiate much lower fees than you would be offered should you try to buy that fund yourself through a brokerage account.

Situations where you may pay more in your 401(k) than with a financial advisor

There are still instances where you might have investments that cost more inside your workplace retirement plan than you would pay outside:

  • When you work for a very small employer who may not have the negotiating power to get the fees any lower than retail rates (aka what you’d pay outside).
  • Your retirement plan offers unique investment options that aren’t typically available to average investors, therefore making it hard to compare those options to more standard mutual funds.
  • You choose actively managed mutual funds, where the fund managers try to beat the market, and you’re comparing those to passively managed mutual funds, where the fund objective is just to match the market it’s designed to mirror – actively managed funds are always going to have higher fees than passive/index funds due the nature of the fund itself.

How to figure out what fees you’re paying in all your investments

Every provider is different, so it would be impossible for me to give you exact directions on how to find this information inside your specific retirement account, but generally if you look under the investing or fund information area of your 401(k) website, you’ll find something that says “Fees and Performance” or “Fund Information” or something similar.

The fees are typically presented as a percentage of what you have invested, and are sometimes called “basis points.” When you see basis points, you just have to move the decimal two places. A fund that charges 20 basis points (in financial jargon, we sometimes say “bips” for bps) will cost .20% of what you have invested. So if you have $1,000 in a fund with a 20 bps fee, your fees would be $20 per year.

Other times you’ll just see the percentage, which is pretty straightforward. The bottom line is that if someone is telling you that you’ll save money in fees by investing with him/her instead of in your 401(k), check the facts. Ask for the expense ratio of what he/she is suggesting you invest in, then compare that to the expense ratio of the funds available in your 401(k) to be sure.

8 Things To Do When You’re Worried About The Stock Market

December 28, 2018

It’s been a rough ride lately in the U.S. markets. As I write this, the S&P 500 index fell about 5.8 percent during a short trading week, leaving investors feeling jittery. Part of the yield curve inverted, which means that short term interest rates are higher than some longer term interest rates. Is the powerful bull market we’ve had since the Great Recession beginning to wind down? If so, what should you do to prepare?

Whether this is normal volatility in a market that has room to grow or the beginning of the next economic downturn, recent events are a reminder that financial markets don’t go up in a straight line. Eventually, we’re going to have a bear market because that’s how the business cycle works. Over my adult lifetime, I’ve seen plenty of market bubbles and busts. Consider your worry about the market a sign that it’s time for a check-in on your investments.

1. Measure returns from where you started, not from the highest balance

It’s a natural tendency to look at the highest number on your 401(k) or brokerage account statement and then feel like you lost money when the statement balance is subsequently lower. You feel like you were counting on that sum, and now it’s not there anymore. Unless you sold at the exact moment when your balance was the highest, however, you wouldn’t have realized the gain, so it’s not very helpful to measure that way.

How did you do against your goals?

A more realistic approach is to measure your success vs. your goals. Has your account balance grown since you originally invested the money? Did you require a certain average annual rate of return or that your balance grow by a certain amount by a certain date to fund your goal?

What’s your progress so far? Are you trying to match or beat a benchmark using one or more market indices? (See Why Is An Index Important In Investing?) If you’re saving for a house down payment or an early retirement, and you’re still on track to meet that goal, that’s what matters – not whether you’re down 10 percent from the all time high.

2. Run a retirement projection

For most of us, funding a future retirement is a primary reason we’re investing. Now is an excellent time to run an updated retirement calculator to check your progress, given your savings and reasonable projections for your rate of return and inflation. You can use the Retirement Estimator for a basic check in to see if you are on track. You can also use the calculator to model different scenarios using different rates of return to see what happens.

Make sure you’re using a reasonable expected rate of return

When updating your retirement projections, it’s better to use a conservative expected rate of return. Research from the McKinsey Global Institute suggests investors lower their expectations for average annual US stock returns to 4 to 6.5%. If they’re wrong about it, you’ll be happily surprised, but if they’re right, you’ll be adequately prepared.

3. Check your risk tolerance

Try downloading our risk tolerance and asset allocation worksheet or use the questionnaire from your brokerage firm or retirement plan provider. Compare the results to your current portfolio mix. If they line up, you may not need to re-balance your investments. If there is a big discrepancy between your current investment mix and your ideal one, you may want to make some changes.

Know the difference between risk and volatility

One note about “risk” and “volatility.” Risk is typically measured in portfolio management by standard deviation. The more spread out daily prices are from the average price – either higher or lower — the higher the standard deviation of an investment.

If it were just math, it would be easier to stomach the volatility. But it’s your money! When most people think about risk, they think only about the downside risk – the risk that they’ll lose money and not be able to achieve their goals.

Try putting a dollar number on your risk tolerance. How much would you be willing to see your portfolio value drop in the short run before you’d throw in the towel? For example, if you need $50,000 in ten years to take a sabbatical, would you be comfortable seeing the interim value of your account drop to $45,000 (a 10 percent drop) in return for the possibility of a ten percent gain? How about $40,000 (a 20 percent drop)? If the thought of seeing your balance temporarily drop to $40,000 causes you indigestion, then maybe it’s time to lower your stock exposure.

4. Rebalance your portfolio if needed

Rebalancing back to a target mix of investments helps you keep the level of risk in your portfolio stable by taking some profits from those investment types that grew faster in value and buying more of the investment types that didn’t grow as fast or fell in value. Think about rebalancing as buying low and selling high.

Once you’ve re-checked your risk tolerance and run projections to see if you’re on track to meet your goals, you may or may not need to make some changes in your investment mix:

Examples of rebalancing:

  • If your current investment mix reflects your goals and risk tolerance, you probably don’t need to rebalance. For example: you’re planning to retire in 22 years, have a moderate risk tolerance and you’re in a 2040 target date fund.
  • If your investment mix is out of whack with your target mix, rebalance. During the past decade, many investors have become overweighted in stocks due to strong stock market performance. If your goal is to maintain 60 percent in stocks and you’ve got 80 percent in stock funds, it’s time to rebalance and move 20% back to bonds.
  • If your risk tolerance has changed and your target investment mix is different than before, that’s also a very good reason to rebalance.
  • If you’re within 5 years of retirement, consider building up a much larger cash position. In pre-retirement years, it’s generally a good idea to move at least 3 years of anticipated expenses to cash-type investments (think savings, money market funds, CDs, etc.). That way, if the markets are in a slump when you retire, you won’t have to sell investments at a loss to pay your bills and can wait for a market recovery. Make sure you’ve updated your risk tolerance. Many pre-retirees find that they want to take a lot less risk in their investments during the transition to retirement.

Not sure of the best ways to rebalance your portfolio? See 4 Different Ways To Rebalance Your 401k.

5. Put together a simple investment policy statement (IPS)

You may also find it helpful to put together a brief, written outline of your target investment strategy to use across all your accounts. An IPS doesn’t have to be fancy. Just set some targets for types of stocks, bonds and other investments (like real estate or commodities) that you want to maintain over time. See this Investment Policy Statement Template for some ideas and/or dive deeper here: Morningstar Course (free): Creating Your Investment Policy Statement and Investment Policy Worksheet.

6. Diversify

Are your investments as diversified as they could be? Diversification mixes different types of investments so that the gains of some investments offset the losses on others. That reduces risk (although doesn’t eliminate it). Different types of investments historically have delivered gains at different times – think U.S. stocks vs. international stocks or stocks vs. bonds.

If you’ve got a “plain vanilla” portfolio, consider the pros and cons of incorporating different types of investments to reduce volatility. Many investors are just in the S&P 500 index, for example, or only in stocks and bonds. If it fits your risk tolerance and goals, incorporating some non-correlating investments like real estate, commodities and hedge fund proxies (e.g., market neutral funds, managed futures, long/short funds, hedge fund ETFs, etc.) can help reduce risk and smooth out returns.

7. Build up your emergency cash

You may not know when the next recession will hit, but you can still be prepared. Recessions don’t just bring bear markets. For some people, they also bring layoffs. If you don’t already have 6 months in living expenses in an emergency fund, work to build up that account.

8. Take advantage of volatility IF you’re aggressive

Are you a hands-on investor with an aggressive risk tolerance? Periods of high market volatility also present opportunities, but only for those who are comfortable with the financial equivalent of skydiving. There are new ways to “trade volatility,” including volatility ETFs, futures on the VIX (the volatility index) and options on market indices. My husband, Steve, spent time this past week using his mighty math powers to successfully trade volatility ETFs. I’m not that hands-on, nor am I that much of an aggressive investor, so it’s not something I’d do myself.

What’s the bottom line? Recent market volatility is an alarm clock reminding us that it’s been a great bull run, but there may be some roller coaster times ahead. Make sure you’re buckled in.

What I Learned In 2018

December 26, 2018

Editor’s note: As 2018 draws to a close and we launch 2019, I’ve asked each of our bloggers to reflect on their own personal goals, plans or thoughts on the past or upcoming year. Our hope is that you not only draw inspiration from our sharing over the coming weeks, but also that we are all able to feel more connected through our shared human experience and recognize that no matter where we are on our personal financial wellness journeys, that we all have similar hopes, dreams and struggles. Happy holidays! Here’s what Erik has to say:

As we approach the end of the year, it’s a good time to review your progress toward your financial goals and begin thinking about your goals for the new year.

Tracking toward FIRE

In my case, my main goal is to save and invest for financial independence/early retirement (now popularly called “FIRE”). Despite spending more on dining out than I wanted to this year, I’m currently still on track to achieve my goal of having enough assets to cover my basic expenses in about 2-3 years.

Celebrating my anniversary as a real estate investor

The most significant update is that next year will be my 5 year anniversary as a real estate investor. In reviewing the performance of my rental properties, the bad news is that the cash flow has been less than I hoped for, mostly due to higher than expected vacancies and maintenance expenses. The good news is that the properties have appreciated a lot more than I thought they would, which has more than outweighed the lower cash flow.

One thing I learned about myself

One thing I learned is that your risk tolerance can vary based on the type of risk with different investments. For example, I’m much more comfortable with the ups and downs of the stock market than the uncertainty of maintenance expenses, perhaps because I’m simply more familiar with stocks. I also like knowing that I can easily and quickly access my stock investments by selling them at any time, while real estate takes much longer to sell and the final sales price can vary considerably from its estimated value.

For these reasons, I’m considering selling at least some of my rentals next year and reinvesting the proceeds in a more liquid and diversified investment portfolio of stocks and/or index funds. At the very least, I’m no longer planning to buy more properties, especially with today’s higher mortgage rates.

How about you? Are you still on track for your goals? What lessons have you learned? What changes, if any, do you plan to make to your finances for 2019? It’s the perfect time to review those things this week.

How To Use Tax Loss Harvesting To Reduce Capital Gains Taxes

December 03, 2018

No one invests to lose money, but there can be times when selling investments at a loss can be helpful. It’s a process called “tax loss harvesting,” but it’s nowhere near as complicated as it sounds.

When does tax loss harvesting make sense?

First of all, this strategy only works for investments that are NOT held in a qualified retirement account like a 401(k) or a Roth IRA. So if you have stocks, bonds, mutual funds or exchange traded funds (ETFs) held in a regular brokerage or mutual fund account you may want to consider this.

How does it work?

When I was a financial advisor, one of my favorite clients was Hugh (not his real name). He had a lot of stocks in his portfolio that he was hesitant to sell because he didn’t want to pay taxes on his gains, even when he was ready to get rid of them. We got around that by helping him take advantage of his stocks that were down.

First, we looked for any investments he had that were down since they had been purchased (aka they were trading at a loss). Sometimes he had stock that he had purchased multiple times, so some were at a gain and others at a loss. We focused on the shares that were purchased at a higher cost and were negative at the moment and sold everything we could that had lost money since they were purchased.

Paying attention to short-term versus long-term

After selling everything we could at a loss, we started looking at what type of losses they were. Anything that we had sold that Hugh had owned for less than a year were short term losses. That meant that if we had stocks that we wanted to sell that had made money in the short term (less than a year), we could generate the same amount of short-term gain and not have to pay any taxes because the short-term losses canceled them out.

Then we looked at the losses where the shares had been held for more than one year. Those losses were used to cancel out the profits that he had from stocks that he owned for more than one year. So again, that meant no taxes on those profits.

How a market downturn actually helped

Then 2008 happened. For several years leading up to that market crash, we had helped Hugh reduce the taxes on his investments by using tax loss harvesting, but during 2008 and the years before the market came back, unfortunately he had a lot of stocks he could sell for a loss.

The good news is that when you “harvest” a loss (aka you sell something for less than you paid for it), you get to carry forward anything you don’t use that year. So we were able to harvest a lot of losses in 2008 that Hugh was able to use in the following years of the market recovering while making money for him without paying taxes on those gains.

Getting a deduction for some of your losses

It gets even better though. If you have more losses than gains in any single year, you can use up to $3,000 of those losses as a tax write-off against your regular income. So Hugh was able to claim a tax deduction in 2008 and a few more years after that in addition to avoiding capital gains taxes, all while being able to sell the stocks he wanted to sell anyway!

Beware wash sale rules

One last thing that’s important to know. Like most things with the IRS, there is a catch. Since you are allowed to use losses to offset gains, the IRS wants to make sure you’re not taking advantage of the rules so they made a rule that says you cannot repurchase the same investment within 30 days of selling it for a loss, or you won’t be able to claim the loss. It’s called a “wash sale,” as in your loss is a wash aka it’s treated like you never even sold and re-bought the stock.

So if you’re really just looking to take the loss and “reset” your cost basis on a stock you ultimately want to keep holding, you have two choices:

  1. Leave the money in cash for 30 days and then repurchase the same stock or fund; or
  2. Buy a different but similar investment.

For example, if you are selling a tech stock to claim the loss, but you really want to still hold that stock, you could use that money to buy a technology ETF that includes the stock you sold. Or if you are selling a fund, consider a slightly different fund in the same category.

I hope that you make a ton of money on your investments, but when you have those inevitable losses, remember that a loss today could be your best friend on April 15th!

How To Know If You’re Paying Too Much For Investment Advice

November 13, 2018

A question that I often get is, “Am I paying too much for investment advice?” This really boils down to a question of value, which like beauty, is in the eye of the beholder. So, while you may be paying more than another investment option, if you’re receiving sufficient value for the investment advice, it is worth the additional cost. Here’s how to know.

Step 1: Evaluate your current advisor

  • Performance: Your year-end statements should list your after-fee return for that year, so gather those statements to create a list of what your returns were.
  • Fees: Your fees are often listed in percentage terms so get out your calculator and convert that to dollars so you can see what you are actually paying. For example, your statement might say you pay 110 basis points, which is essentially 1.1%. If you have an account worth $100,000, that means your annual fee will be $1,100.
  • Compare: If you are considering a new investment advisor, make sure you are clear on their advisory fee in addition to any underlying mutual fund fee. For example, if they charge 1.1% and then put your investments in a mutual fund with a fee of 45 basis points (aka .45%), then your total fee is actually $1,550 ([$100,000 x .011] + [$100,000 x .0045]).
  • Risk: Evaluate how much risk your current advisor is taking. Your statements should give you a percentage of stocks, bonds (fixed income) and cash.
  • Compare that to your risk: Complete the Risk Tolerance Profile and Asset Allocation Worksheet to determine how much risk is appropriate for you to take, then compare that to see if your current advisor is taking an appropriate level of risk for you.
  • What else do they do: Finally, consider what your advisor does that you value. This can be face to face meetings, invitations to events, guidance on estate issues, etc. Note, this may not be what the advisor believes that you should value – remember that value is in the eye of the beholder.

Step 2: Evaluate other offers

  • While you won’t have year-end statements for other advisors, they can provide you information about how a portfolio that they would recommend to you performed (or you can enter it into this calculator to see for yourself). Make sure you are looking at after-fee (aka “net”) returns (both the advisory fee and mutual fund fees).
  • Is there anything that the new advisor provides that you value? Is there anything that they do not provide that you value?
  • Look for them to be suggesting a portfolio that takes an appropriate amount of risk, not the one that has the highest return.
  • Finally, consider the points made in two of our other posts about investing: Two Investment Approaches for Busy Professionals and Is Robo Advising Right for Me?.

Step 3: Evaluate your options

  • Value is determined by and unique to you. It is not value in the eyes of your advisor, friend, neighbor, etc. Value can be almost anything.
  • Compare after-fee returns over time (10 year or 5 year — as a long-term investor, you want to know what long-term results to expect, not what’s happened recently, which can be skewed by current events). If the return of option A is lower than option B, ask yourself if you get enough value from B the make it worth trading into higher returns – it may not always be.
  • In other words, a higher cost option may be appropriate if they provide enough value to you.
  • If the more expensive option or the option with the lower return has sufficient value to you, it is the appropriate one for you.
  • Past returns are no guarantee of future performance. This means basing your investment decision on the one with highest return last year is not a good strategy.
  • Additional ways an advisor provides value, beyond those mentioned above, include things like:
    • They balance you out so that you don’t make emotional investing decisions.
    • They help you invest for a variety of goals with different timelines, rather than just for highest performance.
    • They return your calls and answer your questions in a way that makes sense to you.
    • They provide advice on money they don’t manage, such as your 401(k).
    • They help your family members, even if they don’t make money off them.
    • They provide comprehensive financial planning that tells you what you need to do to achieve your life goals.
    • They help you make decisions around college funding, Social Security strategies or even making the most of your workplace benefits.
    • The list goes on…

No matter what, there is no black and white standard that says how much is “too much.” If you don’t feel like you’re getting value in return for what you’re paying, then it’s time to research other options. You may find a much better value out there. Or you may find that you need to adjust your expectations.

 

How To Invest For Income In Retirement

October 26, 2018

All your working life you’ve been saving and investing some of your income for retirement. Now you are getting ready to leave full time work and begin to spend it. How do you figure out how to invest so that your money lasts for what is hopefully a long and happy life? Whether you are a DIY investor or working with an advisor, consider these general guidelines for investing to generate retirement income:

Create both fixed and flexible sources of income

Right now, you have investments that you own. If you are like many retirees, it may make you nervous to spend your assets. Income, on the other hand, is psychologically easier to spend. Rather than spending them down, think about how you can invest some of your assets to create income.

One possible goal of retirement income planning is to create both fixed and flexible income. Fixed income is income you can rely on to arrive at predictable times and in predictable amounts. Social Security is fixed, for example. Ideally, you would create enough fixed income to cover all your fixed, must-pay monthly expenses like housing, transportation and food.

Ways to create fixed income besides Social Security

Pension annuity: Most pension plans have distribution options that include several level monthly payment options as well as a lump sum distribution. Choosing the annuity will offer you level monthly payments, which you cannot outlive in most cases. Married couples can choose a “joint and survivor” option, which makes monthly payments until the death of the second spouse. Not sure if it makes sense to take the monthly annuity or the lump sum? See this blog post for guidance.

Create your own pension by buying an annuity: The traditional pension is an endangered species, so if you don’t have one, you can create your own personal “pension” by purchasing an immediate annuity with some of your retirement savings. Per ImmediateAnnuity.com, a 65-year old man in North Carolina would receive $527/month in exchange for $100,000. This turns your lump sum into a monthly income stream.

Immediate annuities vary from insurance company to insurance company, so run the numbers and do your research before you sign on the dotted line. Remember, you’re looking for consistent monthly income that covers just your fixed expenses. Don’t use all your assets to purchase an annuity. Otherwise you may not leave yourself enough flexibility to meet variable expenses like vacations and entertainment, or unexpected larger expenses like a dental emergency, a new car or a new furnace. Click here to learn more about the ABCs of annuities and here for some situations where they might make sense.

Bonds: A bond is a fixed income investment where the investor is essentially loaning money to a corporation or government entity for a fixed period of time at a fixed or variable rate of interest. There are many types of bonds, with different features and different levels of investment risk. You can invest in them directly or through bond mutual funds, closed end funds or exchange traded funds.

Bond interest is often paid semi-annually, so retirement income investors typically look for a diverse portfolio of bonds so there is some interest coming in every month. The base of a diversified bond portfolio should be “investment grade” bonds, which are issued by companies with a high credit quality, and U.S. Treasury securities, which are bonds issued by the U.S. government. Click here to learn more about how bonds work and how to build a bond ladder.

Dividend-paying stocks: Dividends are a share of company profits paid out regularly to shareholders. High quality, dividend-paying stocks can provide quarterly income, as well as the potential for appreciation. Like bonds, there are several types of dividend-paying stocks, with different features and different levels of investment risk. Dividends from preferred stock (which generally don’t have voting rights) tend to be higher than dividends from common stock.

You can invest in dividend-paying stocks directly or through stock mutual funds, closed end funds or exchange traded funds that focus on dividends. Funds in this category are usually described as “dividend income,” “dividend,” or “preferred stock” funds. Make sure to do your research and read the prospectus before investing.

If you hold dividend-paying stocks in a taxable brokerage account, look for shares which pay “qualified dividends.” Those are taxed at lower long-term capital gains tax rates of 0 to 20 percent, depending on your total income. Learn more about dividend-paying stocks here.

Real Estate Investment Trusts: A Real Estate Investment Trust (REIT) is a company which owns or finances income-producing real estate. Most REITs are publicly traded on major stock exchanges, but some are private. By law, REITs must pay out 90% of their taxable income in dividends annually. REIT dividends are usually taxed as ordinary income. You can invest in publicly traded REITs individually and through closed end funds, exchange traded funds and mutual funds.

While REITs hold portfolios of rental real estate or mortgages, remember that they have many of the same risks as investing in stocks. Generally, it’s a good idea to limit your REIT exposure to 5 to 10 percent of your portfolio, and just like stocks, REITs aren’t a fit for every investor. Adding real estate to a diversified portfolio of stocks and bonds can usually reduce portfolio volatility though.

Maintain purchasing power over the long term

Inflation has been low for the past two decades, but it hasn’t always been that way. Remember the interest rates on passbook savings accounts in the seventies? When you were working, you could rely on your salary increasing (at least somewhat) to keep pace with inflation.

In retirement, if you don’t include investments that generally move up when inflation does, you’ll be losing purchasing power. Click here to read more about protecting your portfolio from the effects of inflation. Investments that can help your portfolio from the inevitable rising cost of living include:

Stocks: A well-diversified portfolio of individual stocks, stock mutual funds or exchange traded funds that grows in value over time can offer a hedge or partial hedge against inflation. Some of the hedging effects come from dividends and some from growth. Wharton School professor Jeremy Siegel suggests that to best insulate a portfolio against inflation, it is necessary to invest internationally. For many retirees, some growth will be required to maintain purchasing power given that a typical retirement could last twenty to forty years.

Treasury-inflation protected securities: TIPS are treasury bonds that are indexed to inflation. The interest rate remains fixed, and the principal increases with inflation and decreases with deflation. It’s best to hold TIPS in a retirement account to protect against paying taxes on phantom income if the bonds adjust upwards.

Inflation adjusted annuities: If you have chosen to purchase an annuity, consider purchasing one where the payment is indexed to inflation. Like a traditional annuity, an inflation-protected annuity pays you income for the rest of your life, but unlike a traditional annuity, the payment rises if inflation rises. Consequently, the initial payout is likely to be lower than with a traditional annuity.

Rental real estate: Real estate tends to perform well with rising inflation. Rental income generally keeps pace with inflation, and inflation can increase the value of your property. However, being a landlord is not for everyone, and it’s difficult to get a diversified rental income portfolio without a large investment. Direct real estate investing has both advantages and challenges. If you are considering rental real estate, take this quiz first.

Prepare for longevity

According to the Social Security Administration, the average 65 year old man today is expected to live until age 84.3, and the average 65 year old woman until age 86.6. Since these are averages, that means some of these 65 year olds will live longer. That’s going to cost some money.

A longevity annuity is a new financial product that helps protect you against the risk of outliving your money. It typically requires you to wait until very late in retirement to begin receiving payment – e.g., age 85 or later. Once the payout period begins, it offers income for the rest of your life. The IRS permits the purchase of longevity annuities within retirement accounts, subject to certain limitations, and they are excluded from the calculation of required minimum distributions (RMDs).

 

A version of this post was originally published on Forbes

Is It Time To Get Out Of The Stock Market?

October 25, 2018

We’ve all heard the advice to “buy and hold” when it comes to investing, but when is it time to “sell and let go?” Surely we aren’t expected to just keep on investing forever and never spend any of that money, right?

What about when the market begins to behave erratically like it has recently – down one day; up the next. Down. Down some more. Up a bit. Up, no wait, it’s down again. It’s enough to make some people motion sick and when that happens, they just want to get off the ride. Just as we wouldn’t hop out of a moving roller coaster the first time our stomach does a few flips, nor should we jump out of the stock market when the returns get bumpy. Let’s all keep our arms and legs inside the car and wait for it to arrive safely back at the platform before we move. But when is that, exactly? Are we there, yet?

Why do we react this way?

Whenever the stock market takes a dip or a swerve or a dive, and the news headlines begin screaming about how the market is “plummeting,” “crashing,” or some equally anxiety-inducing description, our inner lizard brain (a section called the amygdala) begins to twitch and send us into fight or flight mode. Since we can’t exactly fight the stock market, many of us turn to flight and run away by selling our stocks and embracing good old, dependable cash.

Which, logic dictates, is exactly the wrong thing to do. Remember the advice to “buy low and sell high?” Your amygdala just told you to run away from the perceived pain and sell low. Bad amygdala. Bad.

Our fight-or-flight response is quite natural, and it serves us well whenever we need to escape a burning building or react to an unexpected letter from the IRS. It is not so helpful when making investment decisions. Still, there must be a time when it is okay to get off the stock market roller coaster, right? Yes, yes there is.  Several in fact.

Who should sell

Eventually, for most of us anyway, we will need or want to sell those investment dollars because we need the cash so we can buy something important or support ourselves in our golden years. It might also be time to re-balance the mix of stocks, bonds, cash and whatever else you’ve selected for your portfolio because one or more of these categories has grown too heavy relative to the others. Also a good reason to sell (and reinvest).

All of the following are good reasons to take some money out of stocks, regardless of what the market is doing on any given day:

  • You are taking too much risk when considering your limited investment time frame and/or your physical and mental well-being. It is a good idea to periodically measure your risk tolerance and adjust your investments accordingly.
  • You will need this money soon, such as within the next 3-5 years. This might be a down payment on your future house or vacation home, college tuition bills, etc. Whatever the purpose, make sure it is a goal that you already had in place and have been investing toward for several years already. Start moving these funds into cash (CDs or money market accounts) so the dollars will be there when you need them.
  • You are trying to make up for lost time. Sometimes we get a late start with saving and investing for our goals. The temptation is to “bet it all” and invest aggressively in stocks in the hopes of hitting an economic home run and earning 25% on our investments like we recently enjoyed during the 2017 stock market. This may be tempting in theory, but in practice it can be a lousy idea. Remember the 2008 stock market? Down 33.8%. Plummeted. Crashed. Burned. Could you live with that kind of a drop in the short run? Me, neither. Better to re-balance to a more reasonable mix of stocks, bonds, and cash and start aggressively saving instead. Shovel as much money as you can into your retirement plan at work, your IRA, and your spouse’s IRA. As one of my CPA friends is fond of saying when asked how much to save for retirement, “Save until it starts to hurt, then save a little more.”

How to feel healthier (and wealthier) when the market does crash. And it will.

Instead of using market crisis headlines as a reason to fret about our investment performance and beat ourselves up over allegedly bad decisions, we could decide to use this energy as an opportunity to review why we made those investments in the first place (comfortable or early retirement, putting kids through college, etc.). Have any of those reasons for investing changed? Are these dollars we are going to need in the next five years or is their intended use still many years in the future?

If nothing substantial about your life or financial situation has changed, the best course of action is nothing. As in do nothing. Don’t move. Don’t change. Keep your investments right where they are and tell your twitchy amygdala to calm the <bleep> down.

Actually, there are some things we should do when doubt begins to creep into our minds regarding our investments:

  • Breathe.
  • Relax.
  • Remind ourselves that this is what buying low (and selling high later) feels like.
  • Turn off the news for a while. Maybe a long while.
  • Increase your retirement plan contribution at work by another 1%. (This is what buying low feels like.)

We can’t control what the market does, but we can control what we choose to do. And the worst thing you can do when it starts to go down is get out, unless you shouldn’t have been in there in the first place.