Investing Made Easy

July 18, 2016

Can investing be easy? How can you become a more informed, savvy investor without learning a lot of extra financial jargon? Investing really doesn’t have to be that hard. Consider following these three simple principles:

Know Yourself

Successful investing starts with knowing yourself: how you like to make decisions, whether you like advice or you like to do it yourself, and what you do when the going gets rough. The first step is to figure out your investing risk tolerance, which is how much of your invested money you’d be willing to risk losing in order to make a profit. Try and quantify that in real dollar amounts, e.g., you have $1,000 to invest, and you’d be willing to risk it going down to $900 (a ten percent loss) in order to have a good shot at ending up with $1,150 (a fifteen percent gain).

Would that change if your investment was $10,000 or $100,000? Are you a conservative, moderate or aggressive investor? Make sure to take a risk tolerance questionnaire like this one to double check your assumptions.

The next step is to ask yourself how involved you want to be in the day to day management of your investment portfolio. Are you more of a “hands-on” or a “hands off” type? A hands-on investor is actively involved in designing a portfolio, setting target weights for different types of investments and monitoring/re-balancing the portfolio regularly. A hands-on investor may favor individual stocks or actively managed mutual funds or setting up their own asset allocation (mix of investment types) of index mutual funds. The hands-off investor is looking for a one-stop shopping solution and is more likely to favor pre-mixed portfolios like target date mutual funds or use a robo-advisor to set the strategy and automatically re-balance.

Finally, ask yourself if you like to do it yourself or if you’re the sort of person that likes advice. There are many options for do-it-yourself folks, including low-fee financial services firms where you can invest on your own without an advisor. If you are the type who likes having a coach, consider working with a fee-only CERTIFIED FINANCIAL PLANNER™, professional who is paid only by clients and not by commissions or brokerage fees. Make sure to check your advisor’s background with FINRA or with the SEC if they’re a registered investment advisor.

Set a Clearly Defined Goal

When will you need to use the money? Certain types of investments are better suited to certain time periods due to their levels of risk. If you need access to the funds in less than three years, stick with very low risk investments like savings accounts, money market funds and CDs. A stock fund is no place for your savings for a home down payment!

If you will use the money in three to seven years, consider adding some high quality bonds or bond funds. Adding in stocks makes more sense for goals of seven to ten years or longer, like your retirement account. The longer your time horizon until you need the money, the more you can consider adding stocks and stock mutual funds to your portfolio.

How much do you need your investment to be worth in order to make your goal? That’s called your “investment return.” Take the home down payment scenario: The most important thing is that you don’t lose any money, and your investment return is secondary. However, with a large, far-off target like retirement, you may need to achieve a 6-7% average annual return in order to meet your goals.

Match Investments to Your Goals and Preferences

Your investments should match when you need the money (time horizon), your required growth (required return), your investment risk tolerance and whether you are hands-on or a hands off investor. According to fellow CFP® Kelley Long, choosing investments is a lot like choosing a pizza. You can customize it to fit your tastes.

For a longer term, aggressive investor, you could consider adding 5 to 10 percent in stocks to a typical portfolio mix (for example, moving to a 70% stocks/30% bonds instead of a 60/40 mix). A more conservative investor would add 5-10% to their bond allocation (a 50/50 mix using the previous example). The bottom line is that with some easy tweaks, you can customize your investment portfolio to suit your tastes.

How do you make your investment decisions? Email me at [email protected]. You can also tweet them to me @cynthiameyer_FF

Yes, the Investing Game is Rigged

July 14, 2016

Do you ever feel like the investment game is rigged against the “little guy?” In some ways, that’s true. The “little guys” (and gals) generally don’t have enough money to access institutional funds (except maybe in their employer’s retirement account), can’t afford to hire the top investment managers, aren’t allowed to invest in hedge funds, and don’t qualify for some of the best bank rates. The value of many of those investment managers and hedge funds is dubious though. On the other hand, here are some investments for each asset class that the “little guy” actually has an advantage in:

Cash: Reward Checking Accounts. These accounts are insured and if you meet their requirements, they can pay up to 5% in interest and often reimburse ATM fees. The catch is that the high interest rate is only on the first $5-20k, depending on the institution. That may not be worth the hassle for wealthier individuals with hundreds of thousands or even millions in cash, but may be the entire cash savings for the rest of us.

Bonds: US Government Savings EE Savings Bonds. These bonds are fully backed by the federal government, do not fluctuate in value, and are tax-deferred (and tax-free for education expenses if you meet the criteria). Their interest rate is pretty low right now, but they’re guaranteed to at least double in 20 years, providing a minimum 3.6% rate of return. In comparison, the rate for 20-year treasury bonds is only 1.82%, and they can lose value if interest rates rise. However, each person can only purchase up to $10k a year of Series EE bonds, which is one reason why wealthier individuals and institutions stick to regular treasury bonds despite the lower rate and higher risk.

Stocks: Micro Cap Stocks. Studies have found that these stocks with a capitalization of less than half a billion dollars have produced higher returns than larger stocks even when adjusting for risk, and they tend to move differently from other stocks so they can help diversify a portfolio. Because these stocks are generally too small to be purchased by mutual funds and are seldom followed by Wall St analysts, they also offer more opportunity to find bargains. (In fact, this inability to invest in the smallest of stocks has made investing harder for Warren Buffett compared to when he first started.)

Alternatives: Direct Real Estate. The main reason that it’s so hard to beat the stock market is because knowledge about stocks is publicly available. It’s like trying to find money on the street when everyone else is looking too. That’s not true of the real estate market though. Big investment firms can’t afford to hire people to inspect every piece of real estate and even if they could, most properties are too small to be worth it for them.

When you’re buying your home or an investment property, you have the ability to add value by researching the location, having the property inspected, negotiating the price, fixing it up, and then managing it. All of that work can translate into higher returns. (Don’t forget that it is work though.)

Wall St has a lot of advantages over the rest of us, but that’s not always true when it comes to investing. You have the opportunity to earn returns that the Buffetts of the world can only dream of. So yes, the investing game is rigged…in your favor.

How Much is Your Rental Property Earning or Losing?

July 07, 2016

One of the benefits of investing in stocks, bonds, and mutual funds versus in direct real estate is that it’s a lot simpler. A good example is when it comes time to answer a key question: how much money am I actually making or losing in this investment? With stocks, bonds, and funds, this is relatively easy because it’s all spelled out for you on your statement. You can see how much you’ve collected in interest and dividends and how much the investment has gained or lost in value since you purchased it. With real estate, it’s not quite so simple.

After a couple of years of owning rental properties, including having a few big repairs, an eviction, and vacancies that lasted for months, I decided to sit down and calculate what I was really earning (or losing). The good news is that 4 out of my 5 properties have a positive cash flow of about $200/month over the last 6 months, which is about what I expected when I purchased them. The bad news is that the last property had a negative cash flow of about $500/month since it was vacant during most of that time. (Fortunately, I have a tenant there now.) This netted out to a positive cash flow of about $300 per month.

I was glad to see I wasn’t in the red even with a vacant property, but that still didn’t look very encouraging. However, when I annualized it as a percentage of what I spent on the properties, it came out to be a 5% positive cash flow. If you’ve seen interest and dividend rates lately, that’s not too bad. With the tenant in the 5^th property, it would come to about a 17% return on cash. If you have rental properties or are thinking of investing in one, here are some of the factors to consider in determining the return on your investment:

Cost Basis: This is the upfront cost of purchasing the property (the down payment and closing costs) as well as the cost of any improvements you make. (Only some of the closing costs are included in the basis for tax purposes.)

Rental Income: This is the easiest part to measure. If you’re thinking about buying a property, assume a vacancy of at least one month per year.

Rental Expenses: This is the toughest part to measure and estimate. If you have a property, be sure to keep records so you can tally them up. Don’t forget to include the costs of advertising the property to prospective tenants and any property management fees in addition to the mortgage, property taxes, and insurance. You also need to separate maintenance/repairs from capital improvements since they affect your profitability (and taxes) differently. For prospective properties, maintenance costs tend to run 1-4% of the property value, depending on it’s condition.

Tax Breaks: In addition to non-improvement expenses, you can deduct mortgage interest, property taxes, and depreciation.

Cash Flow: Take your total rental income, subtract your expenses (including taxes on the rental income), and then add in your tax breaks. This is how much income you actually pocket.

Return on Cash: Take your annual cash flow and divide it by your cost basis. This is the cash return on your investment.

Total Return on Investment: Take your cash flow and add in any appreciation in the value of your property and reductions in the mortgage balance to get your total return. Then divide it by your costs basis to get your total return. This is the most fair comparison to your total return on other investments.

When you look at all the ways you can make money (rental income, tax breaks, and building equity), real estate can have some of the highest investment returns. (You can use this calculator to make the calculations above.) But with high returns, comes high risk. Sometimes those risks are obvious, but other times they come in the form of small costs that can add up to big losses over time. Make sure you do the math on any property to see if it makes financial sense to buy, hold, or sell.

Can a Computer Replace Your Financial Advisor?

June 30, 2016

If driverless cars can replace your Uber driver, should a computer replace your financial advisor too? This isn’t just speculation. Automated investing services called “robo-advisors” are becoming more popular and even your 401(k) plan may offer an online investment advice program. Let’s start by taking a look at some areas that computers do well when it comes to personal finances:

Expense tracking. Many people use computer programs like Mint and Yodlee MoneyCenter to track their expenses. This can be very helpful if you don’t have the time or inclination to do it yourself.

Insurance needs. Since there can be a lot of variables, a computer program can be very helpful calculating how much insurance you need, especially with life insurance.

Debt payoff. Computers programs can also calculate how long it would take to pay off your debt and the effect of making additional payments.

Credit analysis and monitoring. Online programs like CreditKarma, Credit Sesame, and Quizzle can provide you with a free credit score, advice on improving it, and free credit monitoring.

Retirement and education funding projections. As long as the inputs and assumptions used in the calculation are reasonable, a computer program can do an excellent job here too. In fact, any human financial planner will probably NEED a computer program to calculate whether you’re saving enough for retirement or education expenses. Of course, there are a lot of unknowns but a good program can help you determine if you’re in the ballpark and allow you to measure your progress over time.

Asset allocation. Deciding how to optimize your investment mix is another task that financial planners typically use a computer for. It’s also the quintessential service provided by robo-advisors. The ability to customize your investments around not only your time frame but also your personal risk tolerance and possibly even to minimize your taxes and complement your other investments is one of the advantages of a robo-advisor over a more simple asset allocation fund.

Investment management. A robo-advisor can also add value to a portfolio by automatically rebalancing it periodically. Some robo-advisors even sell losing investments in a taxable account so you can use the losses to offset other taxes.

Simple tax preparation. Programs like TurboTax, TaxAct, and TaxCut are widely used for tax preparation. However, I would suggest using a professional tax preparer if you have a rental property or a business since there’s some judgment involved in knowing which category to classify various incomes and expenses.

Basic estate planning. If you just need basic estate planning documents like a simple will, a durable power of attorney, and an advance health care directive, you can use a computer to draft these documents and even store them online at little or no cost. If you have a more complex family or estate situation, you may want to hire an attorney to draft a trust though.

Account aggregation. Finally, if your financial life involves a lot of the above, you might want to use an account aggregation program to compile all the info in one place.

So what are computers NOT good at?

Getting you to use them in the first place. For example, our research shows that 76% of employees who are not on track for retirement haven’t even run a retirement calculator at all. The fanciest workout equipment won’t do you any good if you don’t actually use them. A financial planner can be like the personal trainer that gets you to go to the gym.

Motivating you to take action after the calculation. Many people run a retirement calculator but then never actually increase their savings enough to get on track. Some programs use a gamification model that can turn action steps into a game, but they aren’t always effective. A good financial planner can both get you to the gym and make sure you actually do the workouts.

Stopping you from sabotaging yourself. How many of us are tempted to overspend on something we don’t need, to make a risky bet with money we can’t afford to lose, or to bail out of our investments during a temporary downturn in the market? Just like a personal trainer can keep us from breaking our diet or over-training to the point of injury, stopping you from making costly mistakes is one of the most important functions of a financial planner. Even the most sophisticated investors can benefit from at least having a second opinion to bounce ideas off of.

This doesn’t necessarily mean that everyone needs a financial planner. You do need to be honest with yourself though. How disciplined and motivated are you when it comes to your personal finances? If you just need the right information to make decisions, a computer can certainly provide that. If you need more, you might need an actual human being.

How to Protect Your 401(k) After Brexit

June 27, 2016

Will the “Brexit” affect your 401(k)? Global stock markets fell on the news that voters in Great Britain voted narrowly to leave the European Union. Investors don’t like uncertainty, and there will be plenty of that during the next few years as Great Britain and the E.U. sort out the terms of their divorce. Employees are worried, calling our Financial Helpline to ask whether they should react now to protect their retirement savings. Here are some questions to ask to determine what action, if any, is needed:

Does my overall portfolio match my risk tolerance?

Does all the news about the Brexit have you compulsively checking your portfolio during the day? Are you tempted to throw in the towel and put everything in the lowest risk investment possible? If that’s the case, then maybe it would be a good time to double check your investment risk tolerance.

Try downloading our risk tolerance and asset allocation worksheet, a questionnaire which help you determine your risk tolerance and time horizon to get an idea of what investment mix is best for you. Compare the results to your current portfolio mix. If they line up, you don’t need to re-balance. If there is a big discrepancy, you may want to make some changes. This blog post from my colleague Scott Spann, PhD, CFP® offers some guidance on choosing the right investments in your 401(k).

Keep in mind that investing in stocks and bonds always involves some financial risk. Bad days or even years in the stock market are completely normal. However the risk of not investing in stocks and bonds means that the money you save will lose purchasing power over long periods due to inflation (the rising cost of living).

Is my stock portfolio well-diversified by sector?

My fellow planner Cyrus Purnell, CFP® noted that, “Even if you have the right mix of stocks, bonds and cash, it is worth checking to see if your holdings are sector heavy. The Brexit shock is beating up some sectors more than others. If you have stock funds that are focused on financials (banks, brokerage firms and investment managers), you may see more than the average downturn.” International funds focused on Europe are also likely to have some hiccups as Brexit gets sorted out. “If you are running into high concentrations of sectors, consider indexing,” he added.

When is the last time I ran a retirement calculator?

The reason you’re investing in your 401(k) is to build a nest egg for retirement. Measure your success against whether or not you are on track to achieve your retirement goals, not from the highest balance on your 401(k) statement. Now is a great time to run an updated retirement calculator to see if you are on track, given your savings and reasonable projections for your rate of return and inflation. You can use our 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.

Be realistic in your estimates: recent research from the McKinsey Global Institute suggests investors lower their expectations for average annual US stock returns to 4 to 6.5%. It’s better to use a conservative expected rate of return. If you’re wrong about it, you’ll be happily surprised, but if you’re right, you’ll be adequately prepared.

Do you have a personal finance question you’d like answered on the Monday blog? Please email me at [email protected]. You can also follow me on Twitter at @cynthiameyer_FF

The Father’s Day Gift That Keeps On Giving

June 16, 2016

Are you looking for a last minute gift for Father’s Day? Instead of another necktie that he probably doesn’t need, why not a gift that keeps on giving: financial wellness? Of course, none of us can actually give someone financial wellness, but the next best thing would be our CEO’s new book What Your Financial Advisor Isn’t Telling You.

Don’t worry. If your dad is like mine and acts as his own financial advisor, this book could still apply because much of it covers essential personal finance information that financial advisors typically don’t tell their clients like how to build wealth in the first place. (Advisors generally won’t work with you unless you already have some wealth for them to manage.) If your dad does have an advisor, the book discusses how to best work with an advisor, how to know if he has the right advisor, and how to find a new one if necessary. Specifically, here are some topics that would be particularly useful for dads:

Life Insurance and Estate Planning. These are important topics for dads because they’re still typically the primary breadwinners in their families, and men generally don’t live as long as women. To really see the value of estate planning for dads and what specific steps they can take, see this blog post by my colleague Greg Ward.

Basic Money Management:Money is often cited as a top source of stress and an issue that couples fight about. It can be particularly difficult for new parents. Among all the other challenges are the additional expenses and possibly a loss of income if one parent takes some time off work. Having a better understanding of money management can lead to lower stress and more marital bliss for both mom and dad alike.

Investing. In my experience working with couples, the husband usually manages the family’s investments. However, it turns out that most would probably be better off letting their wives handle this since research has found that on average, women are better investors than men. This is because hormones like testosterone and cortisol can contribute to more overconfidence and less patience in men, which leads them to invest more in things they don’t fully understand, take bigger risks, and trade more frequently (which costs more money). Learning more about investing from an unbiased source can help them overcome their biology and become better investors.

What Your Financial Advisor Isn’t Telling You or a similar personal finance book can be a great Father’s Day gift that benefits the whole family. At the very least, it will be sure to cost you much less than the $116 average that people spend on a Father’s Day gift. You can always use those savings to buy him a nicer tie next year.

Don’t Be a Financial Horror Victim

June 14, 2016

I love old B-rated horror movies. In fact, I was watching the Halloween countdown of horror movies at a Halloween party, and every male under 20 was impressed by the fact that I knew almost every horror movie by watching one scene. I am sure some of this comes from my male relatives taking me to an R-rated horror movie (sorry mom) when they were forced to babysit me. I felt so grown up watching the movies, and I was surprisingly so fascinated as to how they created the scenes that I never got frightened.

What struck me about every movie is that moment when you almost root for the bad guy. You know the scenes when the next character to die goes into the scary building and then runs upstairs as if he or she will grow wings and fly? They always had a bad feeling and always ignore the outward signs. As I recently watched a horror movie with my husband, I was struck by the similarity between people in horror movies ignoring all of the bad signs and how people ignore the “writing on the wall” about a bogus advisor.

During 2008-2011, the main demographic of the group where my office was located was snowbirds – retirees who spent their winters in Florida and their summers in Georgia. One client at the time asked me to talk to her sister. She said something did not sound right about her sister’s investments. After taking a quick look at her statement, I recognized the name of the investment company, and I unfortunately had to tell her that she was a victim of a Ponzi Scheme. News traveled quickly, and I soon found myself flooded with retirees.

I could feel the panic of most of the retirees I spoke to. Most sensed something was wrong. After I got to know many of them, I asked them what they would have told themselves ten years ago, knowing what they know now. Overwhelming what I heard was:

1. If it is too good to be true, then it is. Many of them knew markets goes up and down and anyone that promises nothing but an upside automatically should raise a red flag. No investment is 100% perfect. As you can see from this chart that markets have highs and lows. If you are promised returns that do not match this chart’s returns question your financial planner as to why their results differ from historic average. Remember, a good planner will go over the benefits as well as the risks with their recommendations and work with you to make the most informed decision.

2. If you do not understand the investment and/or investment philosophy, ask until you do. Over and over again, I heard that the reason why they thought they did not understand their investments was because they weren’t knowledgeable enough. You should always understand the investments and/or investment strategy and how those choices will get you closer to your goal. If you struggle to understand this, keep asking until you do, even if it means finding an advisor that can help you understand. If you struggle to understand financial lingo, consider using websites like Investopedia University or Morningstar’s Investing Classroom to help you translate financial jargon into something understandable.

3. No matter how much you trust your advisor, do a background check. Not one person I spoke to did a background check. All believed everything they were told. In some cases, the background check would have revealed past problems with clients. No matter how trustworthy you think your advisor is, check their records at FINRA BrokerCheck.

You can also use this article as a checklist to finding the right financial advisor for you. Whatever you do, don’t be like a horror movie victim. Noticing bad signs and doing a little homework can go a long way to preventing you from being the victim of a bad financial planner.

How to Build Your Own “Hedge Fund”

June 02, 2016

Hedge funds have long been considered the sexiest investments. Part of it is that they’re exclusive, legally limited to “accredited investors” and financially limited to those who can afford their high fees (typically a management fee of 1-2% plus about 20% of the fund’s performance). They’re also the largely unregulated bad boy of the financially world, which allows them to use complex investments and strategies to try to outperform or hedge against the market for higher returns and/or lower risk.

I’ve always been skeptical of hedge funds though, so I was interested to read an article titled “Hedging on the Case Against Hedge Funds.” It defends hedge funds from a lot of criticism they’ve been getting lately for charging those high fees while producing disappointing performance numbers. (For example, Warren Buffett is on track to win a $1 million bet that a simple S&P 500 index fund would beat a group of top hedge funds over 10 years.)

The article makes the case that hedge funds can’t be expected to always outperform the stock market when stocks are doing particularly well. After all, many hedge funds are designed to “hedge” against the market so while they may not do as well when stocks are up, they should do better when stocks are down. But the article still ends up arguing that hedge fund fees are too high and that they perform too similarly to the stock market rather than acting as a true hedge. Fortunately, there are ways to get that type of hedging without paying such high fees.

For example, one strategy is the “permanent portfolio,” described by the late investment author Harry Browne in his book Fail Safe Investing. The concept is to divide your money with 25% each to stocks, long term government bonds, gold, and cash. The idea is that since stocks tend to do best during prosperity, long term government bonds during deflationary recessions, gold during periods of rising inflation (which can be bad for both stocks and bonds), and cash during “tight money” recessions when all the others may lose value, part of the portfolio should always be doing okay no matter what the economy is doing. By periodically re-balancing, you would sell some of the best performing investments while they’re priced relatively high and buy more of the worst performing ones while they’re priced relatively low. This can reduce your risk and increase your returns.

The numbers speak for themselves. From the year the book was published in 1999 to 2015, the permanent portfolio earned a 6.13% compound annualized return compared to 5.76% for a traditional 60/40 stock/bond allocation and 4.89% for the S&P 500. More impressively, the permanent portfolio’s worst year was a loss of only -3% vs. -20% for the traditional portfolio and -37% for the S&P 500.

Unlike the high fees charged by hedge funds and other active managers, the portfolio can also be created with a mix of low cost index funds. The value of this shouldn’t be overlooked. A study comparing the model portfolio allocations of various financial institutions found that the difference in returns between the best performing portfolio (9.72%) and the worst (9.19%) from 1973-2015 was about half a percentage point. Since the average active stock fund charges .86% in expenses and the average stock index fund charges .11%, going from index to active funds could have turned the best performing portfolio allocation into the worst! (And no, active funds don’t generally make up for their higher fees with higher performance.)

So does this mean you should invest in the permanent portfolio? Not necessarily. You just need to make sure your portfolio is broadly diversified beyond the stock market (including more conservative investments like government bonds and cash and real assets like gold or real estate) and has low costs. If you do that, there’s a good chance you’ll actually outperform most hedge funds. Your portfolio may not be as sexy but you can take it home to mom and dad.

Don’t Let Financial Advisor Speak Confuse You

April 29, 2016

“You have to get off the plane. I have the feeling that something is wrong with the left phalange”… “Oh my GOD…there’s NO phalange!”

That was Phoebe from Friends talking about her fear right before a plane took off. She had no idea what the parts of the plane were called and picked a fun word to say. Having broken a few phalanges in my life, I learned that word was a fun one in my youth. But what’s not so fun is having a professional, in any profession, talk to you in words you may not fully understand. When I’ve busted up parts of my body, I’ve asked the orthopedic surgeon to “dumb it down” a bit for me and explain the surgery in clear and simple terms.

When it’s your health or your money at stake, don’t be afraid to ask for an explanation of terms in real English, not industry jargon, so that you can make informed decisions. Recently, I had my kids (17 & 14) listen to a webcast about the “basics of investing” given by a local financial advisor. Here are some terms that the advisor dropped during the webcast that he thought everyone on the webcast would understand, but instead they had him lose kids who hear their dad and his coworkers talk about financial planning on a fairly regular basis:

Asset Allocation: This advisor must have used this term about 20 times and spoke of it as though everyone in the room would understand it. A few people did, but at one point a participant asked him what that meant and my kids said “Thank you!” very quietly. They have gone to my office and heard my end of work-related phone calls since birth, but they were confused by this one. The advisor believed it was universally understood. Asset allocation is simply how your money is divided between different types of investments like stocks, bonds, cash, real estate, etc. .

Diversification: This one goes hand-in-hand with asset allocation. Diversification simply means not having your eggs all in one basket. What diversification ISN’T is owning 6 different CDs at 6 different banks or 5 different S&P 500 (is that jargon, too?) index funds.

ROI: The advisor talked a few times about meeting with your advisor (who he hoped would be him!) to review your ROI frequently. My kids didn’t realize it was a 3 letter acronym. One thought it was something like “Ahroweye” and they had never encountered that word before. ROI, for those who aren’t sure, is “return on investment” or in English – “how much money did I make?”

Fiduciary: The advisor mentioned that he always acts as a fiduciary for his clients. That made me smile, but I know what that means. He talked about being a fiduciary about a dozen times, but never took it a step further to explain what that meant. After the formal presentation, one of the participants asked what that meant because he had said it so often. Sadly, most of the participants dropped off before he explained that a fiduciary MUST legally put his clients’ interests first, rather than his own.

It’s sad that this concept has a term that requires it to be done. Most clients of financial advisors would be shocked to know that the advisor isn’t required to put their interests first in most client/advisor relationships. That’s the way the world should work, but that’s not the way it actually works…unless the advisor is acting as a fiduciary. This is a very important term that the advisor simply assumed that the audience would understand.

There are a whole lot more terms that I hear advisors use with regularity that the general public wouldn’t understand initially. I will throw some more of them out there in a future blog post. Whether you’re talking about phalanges, uvulas, or hedge funds, the key is to make sure that the professional having this conversation with you slows down and makes sure you understand and don’t allow yourself to say “yes” to a surgery or an investment until you are completely confident that you have all the information you need to make the best decision possible.

How Financial Wellness is Like Weight Loss

April 28, 2016

I always like to say that financial wellness is a lot like weight loss. When I came across this article in Vox about “surprisingly simple tips from 20 experts about how to lose weight and keep it off,” I realized just how true that is. Here are the weight loss tips and how they apply to financial wellness:

1. There really, truly is no one “best diet.” Scientific studies have found that all of the various diet plans have about the same modest long term results. What matters is finding one you can actually stick to. The same is true of money management systems and asset allocation strategies.

2. People who lose weight are good at tracking – what they eat and how much they weigh. They tend to count calories and weigh themselves at least once a week. In the same way, you need to track or otherwise limit spending, continually re-balance your investments, and periodically run a retirement calculator to make sure you’re still on track.

3. People who lose weight identify their barriers and motivations. Like with diet and exercise, we usually know what to do with our finances. The hard part is actually doing it. Start with knowing the “why” that motivates you. Then look for the barriers that are standing in your way of taking action.

4. Diets often fail because of unreasonable expectations. People tend to overestimate what they can achieve in the short run and underestimate what they can achieve in the long run. Don’t try to save too much too fast. Instead, set big long term financial goals that motivate you and then see how much you need to save to achieve them.

5. People who lose weight know how many calories they’re consuming – and burning. Similarly, you need to know how much income is coming in and going out. Making sure the latter number is lower than the former is the only way to increase your wealth.

6. There are ways to hack your environment for health. For example, don’t surround yourself with unhealthy foods. Simple things like where your food is served from and what size plate it’s on can also affect how much you eat. For your financial life, don’t put yourself in situations where you’re likely to spend more and try to automate your savings as much as possible.

7. Exercise is surprisingly unhelpful for weight loss. More accurately, exercise alone isn’t very effective since people often eat more to compensate for the calories they burn. Earning more income can have the same effect when we automatically spend more as well.

8. Weight loss medications aren’t very useful. Neither are “metabolism boosting” supplements. Complex, sophisticated, and high-fee investments are the weight loss medications and metabolism boosting supplements of the financial world. Stick to the basics.

9. Forget about “the last 10 pounds.” If they’re that hard to lose, people generally gain them back. Most of the health benefits came from the other lost pounds anyway. Likewise, trying too hard to save more can backfire if it starts to feel like too much deprivation. Allow yourself to splurge now and then too.

So what’s the main thing that weight loss and financial wellness have in common? They are both about making small changes over a long period of time. Instead of looking for the quick fix, find an approach that you can stick with.

Choosing Investments is Like Choosing a Pizza

April 20, 2016

When financial planners talk about how to invest your money in the market, we often discuss dividing it up among stocks, bonds and cash (also known as your asset allocation). But then when you actually go to make your investment choices, there’s a chance that not one of the options will have the word “stock” or “cash” in it. One of the most confusing things about investing and financial instruments is the fact that there are so many words that mean the same thing. For example: stock, equity, share, capital, blue chip, mid cap, small cap, large cap …they all generally refer to the same thing: ownership in a public company. Likewise, bonds, fixed income, municipals, T-bills, etc. are all referring to similar debt instruments used by companies and governments to finance operations and projects.

I often think that if more people understood that many of the financial terms we hear refer to the same thing that there would be a lot less stress around investing and everyone would feel more comfortable taking advantage of the growth that investing in the markets can offer. So I thought I’d try instead to describe a metaphor that is near and dear to my heart to try to make it easier to understand the different options out there: pizza. When it comes to pizza, there are four main options for how to get a delicious pie onto your plate (on a sliding scale of cost and effort) similar to the options available for investing for long-term goals:

Make your own from scratch
Buy pre-made frozen
Pay someone to deliver it to you, ready to go
Have it served to you at a restaurant

Each level requires a different amount of money and effort. Choosing how to invest money in the market is similar. Here’s how it compares:

1. Make your own from scratch. Making your own pizza requires skill, knowledge and practice, but once you know what you’re doing, it’s the least expensive and can be the most delicious. My husband has mastered the art of homemade pizza, starting with dough he makes from scratch, but it took a couple of years and LOTS of practice (and worthless pizza) to get it right.

To me, this is similar to researching individual stocks and mutual funds and buying them through a discount broker. You have to know what you’re doing or you can end up with nothing, but people who know what criteria to look for and how not to take too much risk can really grow their money. For investors looking to learn the art of DIY investing, start with money you can afford to lose and start reading. The book “Grande Expectations,” was what brought home to me how the stock market really works and why buying the hottest name stock or fund isn’t necessarily the best investing strategy.

2. Buy pre-made frozen. Putting a frozen pizza in the oven and knowing exactly when it’s done (and exactly how long to let it cool so that it doesn’t burn the roof of your mouth) requires some skill and it’s still a pretty cheap way to go. The investing equivalent would be using index funds or ETFs to create your own investment mix. This requires that you understand how to create an asset allocation that is appropriate for your timeline and risk tolerance, but with a little understanding of what the different indices are, it’s pretty simple to put together a decent mix. The trick is knowing when to make changes as time progresses and also knowing when NOT to make changes (for example, not selling when the market tanks and re-balancing even when the market is hot).

3. Pay someone to deliver it to you, ready to go. Minimal effort but a little bit more money. You have to pay to get it to your door, after all.

The investing equivalent would be target date funds. You don’t have to do anything but pick one and let it ride. No pizza or investing knowledge required, you just pick the one that fits you the best (for target date funds, that’s the year that you expect to need the money such as your retirement age).

4. Have it served to you at a restaurant. Paying for someone to make your pizza and serve it to you piping hot along with beverages is similar to paying a financial advisor to manage your investments for you. You can describe what flavors you like and your server will help you pick the best pizza combo.

It’s the same thing with your financial advisor. She’ll listen to your goals and risk tolerance and then suggest an investment mix that is appropriate for you. Along with that, your financial advisor should look at how your investments fit into your overall goals and make suggestions for any changes to support those goals, much like a server at a restaurant might suggest the best beer pairing or salad to start. This is definitely the most expensive option, but if you want a little more hand-holding with your investing, it’s worth it.

In my experience, most people are delivery-types (target date funds will do the trick) but because they’ve heard you should diversify and not just hold one thing, they often think that means they need to choose more than one fund. It’s important to know that a target date fund is already diversified. Just like a pizza is the perfect assembly of crust, sauce, cheese and toppings, a target date fund can be broken down into the perfect mix of large cap, mid cap, small cap, international, fixed income, money market and sometimes even commodities – the fancy way of saying stock, bond and cash funds. But instead of you having to figure out how much of each to select, that decision is made by experts who specialize in asset allocation – just like the pizza chef knows the best mix of ingredients according to the type of pizza you ordered. Now, who’s hungry for pizza?

Are Self-Directed IRAs a Good Idea?

April 18, 2016

If you could buy a private business, a rental property or racehorses in your Individual Retirement Account (IRA), would you do so? Even if you could, would that be a wise choice? Self-directed IRAs (SD-IRA) offering non-traditional investments have become increasingly popular and more broadly available.

The self-directed IRA is a traditional or Roth IRA in which the custodian, the financial institution which keeps records and reports to the IRS, permits the full range of investments allowed by law in retirement accounts. Many types of investments are permitted in IRAs, but there are certain things you can’t do, like buy collectibles (such as art and coins) and life insurance, as well as investment strategies that require borrowing, such as shorting stock or certain options strategies. However, the reality is the vast majority of financial institutions limit retirement account investments to the more traditional ones like stocks, bonds, mutual funds, CDs and exchange-traded funds.

“Self-Directed” Really Means “Alternative Investments Accepted”

The term “self-directed” is a bit off base. What it means is that alternative investments are accepted or offered by the IRA custodian. Technically, at most financial institutions, IRAs default to the more literal interpretation of “self-directed,” in that the account owner makes the final decisions on what investments to buy or sell, unless they have given discretion in writing to an investment advisor.

A custodian who offers self-directed IRAs agrees to keep required records of your non-traditional investments in the IRA and report them to the IRS. The custodian may or may not offer physical custody of the investment, depending on type, or may just house the records of investment activity and valuation. Common alternative investments available in SD-IRAs are precious metals, real estate, loans, and private equity. Certain custodians of self-directed IRA accounts will accept just about anything allowed by the IRS, including tax lien certificates and dairy cows.

Very High Risk

Many alternative investments available in SD-IRAs carry a high risk of losing all or most of your money due to lack of diversification or the inherent risk of the investment itself. You may not be able to sell the investment later (lack of liquidity), meaning that you won’t be able to access the value of it to make distributions in retirement. Keep in mind that the entire burden of investigating the investment (doing your “due diligence”) is on you, the account holder. This could be a benefit when you are investing in an area of your professional expertise (e.g., the experienced real estate investor). However, it can also lead to fraud, when investors are duped into Ponzi schemes or other types of investment scams through slick offerings and piles of legal paperwork.

Beware of investing in anything you don’t understand and can’t explain easily to others. If you are considering an investment within an SD-IRA, read this pamphlet from the SEC first and do your homework. Use the checklist at the end of this post. Remember, if it sounds too good to be true, it probably is.

High Fees

Fees in self-directed IRAs are generally much higher than more traditional types of IRAs. Expect to pay set up fees, custodial fees and annual fees to value the investment. Many of the types of alternative investments offered in SD-IRAs are hard to value, so this can get quite pricey.

Keep in mind that the IRA or Roth IRA is the owner of the investment, so you don’t have direct control over it. With investments like real estate or a business, for example, that means you have to pay the custodian to do things like collect rents or business income. (Per this Bankrate article, some custodians propose that you set up a an IRA LLC to address this issue, which may give you checkbook control but is costly to establish and has legal risk.) No matter what, make sure you do some comparison shopping for a custodian who specializes in the type of investment you want to own in your SD-IRA.

Potential Tax Problems

Investors often get tripped up by unexpected tax consequences in SD-IRAs. Most importantly, in a traditional IRA, distributions in retirement are taxed as income, not the lower capital gains rate. The investor may have been better off holding the asset outside of a retirement account. Additionally, investors miss out on the ongoing favorable tax treatments for some common types of investments, such as real estate.

Depending on the type of investment income, a self-directed IRA may not be completely tax-deferred and a Roth IRA may not be completely tax-free. For example, if the investment generates Unrelated Business Income, the IRA or Roth IRA would be taxed at the high trust rates for the tax year in which it occurs. Those taxes must be paid by the IRA, not the account owner separately.

Can’t Invest in Yourself or Your Family

Don’t get too excited about selling the family business to your IRA! Certain transactions are prohibited in retirement accounts to prevent self-dealing, including transactions with people within your linear family, such as your spouse, your parents, your children, your grandchildren and their spouses. Most of your family could not work in or on behalf of the investment or live in a property held by the IRA.

When to Consider a Self Directed IRA?

SD-IRAs are not suitable for many people. Use this checklist to see if you might be a good candidate for self-directed IRA accounts: (Aim for at least 4 out of 6.)

I am an accredited investor. (If you don’t know what it is, you probably aren’t.) While you don’t need to be an accredited investor to open an SD-IRA, being one means you have the income and net worth to consider alternative investments.
I don’t need my IRA or Roth IRA for future retirement income. Either:
- I am fully on track to completely fund my retirement with my employer-sponsored retirement plan, e.g., 401(k), 403(b), etc.
- I have a pension or other investments (e.g., rental income) which will fully cover my retirement income needs.
I have well-diversified traditional investments in my work-sponsored and non-retirement brokerage accounts that can be liquidated to pay future living expenses if needed.
I have professional expertise and experience in the SD-IRA investment which I am considering.
I want to add a target percentage of precious metals to my retirement portfolio for diversification.
I am considering making a small private equity investment that might pay off big (a possible strategy in a Roth SD-IRA) but could also go bust.

The Investor’s Secret Guide to Understanding Your Account Tax Statement

April 11, 2016

It’s spring time again, that magic time of year when investors with brokerage accounts come face to face with the dreaded Year End Tax Reporting Statement. All over the country, tax filers are cursing at their computer screens. How do they dig through eleven pages of legalese to find out how much they actually paid for the 100 shares of stock they sold in 2015? Why is it that they received a capital gains tax distribution on a mutual fund which actually lost money? What in Heaven’s name is a “qualified dividend” and why is it also ordinary?

Most importantly – is there a hidden meaning in “This Page Intentionally Left Blank?” and what do they do with all the entries that say, “n/a?” It’s enough to make taxpayers throw in the towel, file an extension and head for the stash of stale Halloween candy to ease the anxiety. While I’m not an accountant and I can’t give you tax advice, I can shed some light (or at least light humor) on investment tax challenges.

What is Your Cost Basis?

Your cost basis is what you paid for an investment plus any commissions paid to acquire it. Why is this important? If you sold a security in a taxable investment account, you must report a capital gain or loss on Schedule D, summarizing all the transactions you list on Form 8949. You’ll need the sale price (minus commission if applicable) and the adjusted purchase price to figure out your capital gains and losses. The good news is that if you made a profit and you held the investment for more than a year, you’ll pay long term capital gains tax rates on the profits, which are lower than ordinary income tax rates.

Seems simple to calculate, right? Not always. This can get more than a little complicated if there has been a merger, acquisition, spin-off or stock split. Also, what if your brokerage firm doesn’t list your cost basis on your tax reporting statement? This could happen for a number of reasons:

You inherited the securities. What if your grandfather left you his 1000 shares of Big Oil Company, and you decided to sell 100 of them last year? The cost basis of those shares received a “step up” on the date of his death.

If you don’t have the actual record from the settlement of the estate, you could consider using the market low on that date as your basis. You can generally find that by entering the symbol on market data sites like Yahoo Finance or asking your brokerage firm. Make a printout of the data showing your price and keep it in your tax file in case of an audit.

You transferred them in from another brokerage firm. Technically, you are expected to keep a record of your purchase prices of securities. Did you keep your old statements from previous years? Possibly not, unless you’re the kind of person that also kept your childhood report cards.

While brokerage firms have been required to include purchase data on statements since 2011 – and many firms have been back filling data from previous years – this data isn’t necessarily going to show up on your new statement if you switched firms. As you can guess, your old financial advisor’s team isn’t going to prioritize your 11^th hour call seeking information about your long ago cost basis. This Forbes article has some helpful tips about how to reconstruct cost basis using tools like Netbasis.

You bought the securities at your current firm before they used their current statement software. Good news here. If it’s your current firm, they’ll be likely to prioritize answering your cost basis question. Call early though because they are inundated with these kinds of calls the last few weeks before the tax filing deadline. A firm will generally have old records on microfilm if they haven’t back filled data on customer files.

Please be considerate when you call. There’s an administrative person on the other end who’s been taking outrageous last minute requests for account information for a few weeks now. If you don’t get an answer, you can consider using the low market value for that date (even if the purchase price was less than a few dollars per share) – better to err on declaring slightly more gain than you needed to in case of an audit.

Why Do I Have to Pay Taxes on a Mutual Fund That Lost Money?

No, this is not a Kafka novel. This happens all the time. Investors who hold mutual funds in taxable brokerage accounts have taxes to pay on those investments, even if the fund performance was negative for the year, and even if they didn’t sell any shares. I know it seems cruel. Taxable distributions from mutual funds are likely if you own the fund in a non-retirement account and can take the form of capital gain or dividend income.

This is because the mutual funds must pass dividend income and net short and long term capital gains and losses that happen during the year through to fund shareholders proportionately. Fund managers buy and sell securities over the course of the year, either as part of active portfolio management or to meet fund redemptions. Yes, folks, it’s true…you can even get dividend and capital gains distributions when you own index funds.

There’s good news, though. Many dividends are taxed at a low rate. (See below). Even if they are not, the max you’ll pay is your marginal income tax rate.

Even better, you can net all capital gains and losses from security investments (“active” investments) against each other – short losses against short gains, long term losses against long term gains, and net short term against net long term. If you consistently have net capital gains in your taxable investment portfolio, you may want to consider switching to a more tax-efficient investment strategy. Check out these tips from Morningstar on capital gains tax season.

What is a Qualified Dividend?

A dividend is a distributed share of corporate earnings. According to NASDAQ, a qualified dividend “is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified.” Not sure if your dividends are qualified? See this description from the IRS.

Why is This Page Intentionally Left Blank?

Despite appearances, it’s not for taking a meditative pause to regain your composure during tax time. This is one of the true mysteries of the universe. Is this disclaimer there to inform us that there is not a printing error? Could we not have figured this out on our own? Wikipedia even has an entry on this topic, which goes to show you that others also see this as an enigma.

You Might Need a Tax Preparer

By the way, if your tax filing seems so tricky that you can’t figure it out on your own, this is a sign that you need to see a tax professional. That’s what they’re there for, people. A tax preparer has chosen to help people with their taxes as their life’s work. Seriously – they love this kind of thing!

If you’re looking for ongoing tax guidance and advice, consider engaging a Certified Public Accountant (CPA). Less complex or one-time tax preparation can generally be handled by an Enrolled Agent (EA). Tax preparation fees are usually tax deductible.

How about you? Do you have a financial topic you’d like me to address on the Monday blog? Email me at [email protected] or Tweet me @cynthiameyer_FF.

What The New Fiduciary Rule Could Mean For You

April 07, 2016

You may have heard by now that the Department of Labor announced a new rule requiring any advisor of a retirement account like a 401(k), IRA, and even an HSA to act as a fiduciary, putting their clients’ interest above their own. The good news is that this will drive out many glorified salespeople selling high-priced investments for a commission from “advising” people on their retirement accounts. The bad news is that many people who need advice may not be able to meet the asset minimums required by many fiduciary advisors or may not be willing to pay their asset management fees. If you’re in one of those camps, here are some options for you:

Target Date Funds

Since these funds aren’t providing personalized advice, they aren’t affected by the new rule but they can substitute for an investment advisor in many ways. All you need to do is pick the fund with the year closest to when you plan to retire. You can put all of your money into that one fund (in fact, they’re designed for that so adding more funds can actually throw off the balance of the fund) and set it and forget it. That’s because they are designed to be fully-diversified “one stop shops” that automatically become more conservative as you get closer to the target retirement date.

This doesn’t mean that all target date funds are the same. While they each have slightly different investment mixes, it’s been found that low fees are actually more important than getting the best mix (which no one can know in advance anyway). To minimize your costs, look for target date funds made up of low cost index funds.

Robo-Advisors

If you want a portfolio more customized to your particular risk tolerance, consider a “robo-advisor,” a new breed of automated online investment advisors that design a portfolio for you based on a questionnaire you answer. They already act as fiduciaries so they won’t be negatively impacted by the new rule. However, they tend to have much lower minimums and fees than human advisors.

Flat Fee Advisors

If you’re looking for more comprehensive financial advice or just prefer to work with a human being, another option is an advisor that charges fees that aren’t based on how much they’re managing. Instead, they may charge an hourly, monthly, or annual fee. However, these advisors are relatively rare so the number of local options may be limited.

There will be lots of changes as a result of the new fiduciary rule. Many investors will pay less in fees but if you’re currently working with a non-fiduciary advisor for your retirement account(s), you may have to find a new one. Fortunately, there are a lot of good alternatives if you know where to look.

5 Areas That May Need Some Financial Spring Cleaning

March 31, 2016

With Easter weekend behind us and spring officially in the air, it’s time for some spring cleaning. Don’t forget about cleaning your financial life too. While it’s much easier to see the clutter in your home, the clutter in your finances could have much bigger consequences. Here are several areas that may need some cleaning up:

Your expenses. If you’ve never taken a look at what you spend money on, it can be a real eye-opener. Start by gathering at least 3 months’ of bank and credit card statements and record each expense. You can also use a tool like Mint or Yodlee MoneyCenter to track your spending online for free.

Then go through your expenses and see what areas of waste you can cut. Are there things you’re spending money on that you don’t really need? If you do need it, can you get it in a way that costs less? You can get some ideas for savings here.

Your credit report. It’s been estimated that about 70% of credit reports have errors that could be hurting your score. If you haven’t done so in the last 12 months, you can order a free copy of each of your 3 credit reports (TransUnion, Equifax, and Experian) at the official site: annualcreditreport.com and report any discrepancies. You can also improve your score by getting current on your bills and paying down debt. Just be aware that old debt falls off your credit report after 7 years and making a partial payment or even acknowledging the debt to the creditor can restart that clock so if it’s getting close and you’re past your state’s statute of limitations for being sued by a creditor, you may just want to wait it out.

Your retirement account. Do you have retirement accounts that you left at previous jobs? If so, your overall retirement portfolio may not be properly diversified or you may be paying more than you need to in fees. Unless you have employer stock or are taking advantage of some unique investment option in the plan, you might want to roll those accounts to your current employer’s plan or into an IRA to make them easier to manage.

Your savings and investment portfolio. Many people have accounts they’ve opened or investments they’ve bought for different reasons over the years and now their savings and investments are a cluttered mess. Having 10 different bank accounts or 5 US stock funds isn’t diversification. Here are some simple ways to make sure you’re properly diversified.

Your legal documents. Tax documents only need to be kept for 7 years at the most. After that, you might as well just shred them. Estate planning documents should be checked to make sure they’re still up-to-date. Once your spouse finds out that your ex is still listed as your beneficiary or your youngest child wasn’t included, it may be too late.

How about you? Have you spring cleaned any of your finances? If so, share your experiences in the comments section below.

Can Life Insurance Be a Retirement Plan?

March 28, 2016

Listen to the radio these days and you’re likely to hear a commercial promising tax-free retirement income with no stock market risk. If you call a toll-free number or sign up on a website, you will probably get a follow up contact from a life insurance agent who wants to show you how you can use whole life or universal life insurance for tax-free retirement income. Doesn’t that sound too good to be true? Can permanent life insurance really be a retirement plan?

Be very, very cautious. Life insurance is not designed for retirement savings. Permanent life insurance is primarily designed to protect people in your family who rely on your income to maintain their standard of living. The “permanent” aspect means that this insurance protection stays with you for your life, as long as you pay the premiums.

Both major types of permanent insurance — whole life or universal life — include a death benefit component and a savings component. The savings component consists of a policy cash value, the amount of accumulated policy value which would be paid out to the insured if the policy were surrendered early. The “life insurance as retirement cash flow” strategies are based on the insured person borrowing against the cash value of their policy. While it is correct that you may borrow against the cash value in some circumstances without taxes, and that invested premiums grow tax deferred, there are some significant disadvantages.

A Loan is Not Income

A policy loan uses the cash value of the policy as collateral, and the insurance company charges the borrower interest on the loan. The interest is paid to the insurance company, not back to you. The interest rate may be the same, higher or lower than the rate you are crediting on the growth of the policy cash value. Financial planning expert Michael Kitces aptly calls this borrowing strategy, “nothing more than personal loan from the life insurance company.” That’s not real income.

Policy Dividends Helpful But Not Guaranteed

What about dividends? While certain types of insurance companies pay dividends to policyholders (who hold a “participating” policy) when their annual results are good (those dividends can be applied towards future premium payments or used to purchase additional coverage), they aren’t always likely to make profits every year. You may or may not receive dividends.

Potential Tax Problems

If you are eligible to receive policy dividends from a participating policy, they are not taxable. However, strategies that recommend borrowing against cash value life insurance have potential tax problems. Should you borrow enough of your cash value so that the basis in the policy goes down to zero, you would have to put in more cash or risk a lapse of the policy and having the total outstanding loans included in your taxable income.

No Free Lunch

Another disadvantage of using life insurance as retirement savings are the fees. You’re paying for the insurance component. If you died early, your beneficiaries would receive the full death benefit, so you’ll be charged underwriting costs and mortality charges, etc. Plus you are paying for the distribution of the policy, in other words, commissions. Someone’s getting paid, and those fees and charges eat into the type of returns you might otherwise earn if you invested the money into buying and holding tax-efficient index funds.

The Bottom Line: Do You Need Permanent Life Insurance?

Consider a life insurance proposal primarily in the context of your estate plan, not your retirement plan. Lifehappens.org has an overview of insurance basics and a helpful calculator to figure out how much insurance you actually need. Does the proposed policy meet your needs of providing for your family should something happen to you? Are you comfortable with/interested in having insurance protection you can’t outlive? How do the costs of this policy compare to costs of policies from other companies with the same face value?

If the life insurance meets those needs on its own merits, then your ability to borrow from it later on is an extra bonus. If paying premiums on this kind of life insurance policy are preventing you from other, more effective types of retirement savings, such as maxing out your tax-deferred retirement plans like your 401(k) and IRA/Roth IRA, that could do serious damage to your financial wellness. If you are on track for retirement, have low/no debt and need permanent insurance, then there may not be any harm. Don’t think of it as a retirement income strategy, however. Think of it as life insurance with access to a personal loan.

Do Your Homework

If you are considering one of the currently popular life insurance cash flow strategies, here are some questions to ask the insurance agent about your proposal:

How do you get paid?
What are the other fees involved — mortality, underwriting, surrender charges, investment management, etc. Where can I see them reflected on your proposal?
What is the interest rate I’d be charged if I borrowed against my cash value?
What is the rate I’ll be credited on my cash value?
If I borrow from my cash value, can I repay that at any time? Are interest payments deducted from the cash value, or do I write checks for them?
What happens to the policy if I borrow the entire cash value?
What is the actual return net of all fees?
What’s the worst case scenario? Are there any circumstances in which I could be taxed? Lose money? Lose my insurance?

How about you? Do you have a personal finance question you’d like answered on the blog? Email me at [email protected] or follow me on Twitter @cynthiameyer_FF.

Don’t Make These Common Investing Mistakes With Your 401(k)

March 17, 2016

In our CEO’s new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, Liz Davidson writes about how the best place to invest your money is often where you made that money: your workplace. While most people generally understand the value of contributing to their retirement plan, there’s a lot of confusion about how they should choose investments. Here are the biggest mistakes I see people making: Continue reading “Don’t Make These Common Investing Mistakes With Your 401(k)”

Don’t Make Jeb Bush’s Mistakes…With Your Investments

March 03, 2016

A couple of weeks ago, former Republican presidential front-runner Jeb Bush tearfully exited the race. The self-described policy wonk’s economic proposals may not have won him the election, but they might actually help him with his investment portfolio. Here were some of his policies during the campaign and how they might apply to his finances: Continue reading “Don’t Make Jeb Bush’s Mistakes…With Your Investments”

3 Ways to Make Market Volatility Work For You

February 15, 2016

Does the recent market volatility make you afraid to look at your 401(k) statement? Maybe it’s time to think about adopting a portfolio rebalancing strategy. Rebalancing is the process of periodically selling or buying investments in your portfolio in order to maintain your target mix of investments over time. It helps you keep the level of risk in your portfolio stable by taking some profits from those funds that are now taking up more space in your portfolio than originally intended – usually because they grew in value – and buying more of the funds that are now taking up less space than you intended, possibly because they fell in value. Since stocks, bonds and other investments tend to move up and down at different times, implementing a regular rebalancing strategy with a diversified portfolio mix helps you “buy low, sell high” over the long haul. Continue reading “3 Ways to Make Market Volatility Work For You”

Is That Advisor Really Fee-Only?

January 26, 2016

A few months ago, I was in a coaching session with a woman who was very confused about how her advisor gets paid. Her advisor worked for a major brokerage firm and insisted that he was “fee-only.” She felt uncertain if this was the truth so I asked to look at one of her statements. Continue reading “Is That Advisor Really Fee-Only?”