Should You Let A Robo-Advisor Pick Your Investments?

March 21, 2018

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

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

Pros of robo-advisors

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

Cons of robo-advisors

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

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

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

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

Should You Buy Or Lease A Car? 5 Questions To Ask

November 17, 2017

It might not always seem black and white when it comes to deciding whether to buy or to lease a car. There are pros and cons to each, but there are some things to think about that may have you leaning more in one direction. It also helps to calculate your potential savings to see which makes more sense. When deciding, ask yourself these 5 questions, which should help.

How do you feel about your overall monthly costs?

As long as you lease, you’re renting the car, so you will have a monthly payment. A few things about that:

If the thought of always having a payment bothers you because you’re looking for ways to minimize your monthly expenses, you may want to buy a car rather than lease. If you really want to get a big bang for your buck, consider buying one that’s a couple years old with low mileage. Here are some ideas to get the best deal when buying a car.
You will have a choice to buy the car at the end of the lease, but the details of the contract matter if you decide to go that route.

Does your current vehicle look like it went through a war zone?

Wear and tear matters with leased cars, so consider the following:

If your kids will likely add their own touch, leaving behind stains on your car seats and carpet or you simply find it hard to keep your car in good shape, you may want to purchase instead of leasing. If you return the car in a condition outside of what’s considered “normal” wear and tear in your lease contract, you’ll be responsible for some additional costs. Check the terms of the potential lease for the specifics.
If you buy a car, you can pretty much do as you please since you own it. Wear and tear matters more if you want to resell the car at some point later down the road.

How fast do you rack up miles on your car?

There’s typically a limit to the number of miles (usually 12,000 – 15,000 miles per year) you can put on the car during your lease contract. Going over that limit will be an extra cost.

If you know you’re likely to go over the approved mileage, but still prefer to lease, consider purchasing additional miles upfront.
If you want to drive as far as you want and as often as you want, without restrictions or any additional costs, purchasing might make more sense.

Do you value being able to switch from one new car to the next every 3 or 4 years?

Leasing is an easy way to stay up to date with the newest models available.

We all have things that we value and are willing to pay for. If being able to drive the latest and greatest car is something you fancy, the lease could work great for you. Just make sure that constant monthly payments fit within your budget.
If you aren’t really into cars or you are the type to keep a car for 10 years, without payments, and feel like you’ve won, purchasing will likely make you feel more at ease.

Do you need a car, but you’re short on cash or don’t want to use your savings?

Depending on where your credit stands, you can typically get into a leased car for either no money down, or very little upfront and you usually have a lower monthly payment.

If you want to get into a car without eating up too much of your savings or lack thereof, a lease could work for you.
If you don’t want to return the car in the end or be faced with a choice to purchase it or go another route in 3 years at the end of your lease, you may prefer to simply purchase a car upfront.

The decision to buy or lease is a very personal one. It depends on your financial situation and what you prefer and value.

Either way you go, arm yourself with knowledge. If you decide to go with a lease, be prepared to negotiate the terms of your lease. If you decide to purchase a car instead, know what to consider whether you decide to go with a used car or a new car.

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Should You Do A Balance Transfer?

November 16, 2017

A friend of mine recently asked me about doing a balance transfer, which is a common question I receive. After all, you may get offers in the mail for credit cards with rates that look quite enticing compared to what you’re currently paying. There are definitely some pros and cons, and here are a few other things to consider:

How’s your credit? Depending on your credit score, you may not qualify for the best deals or even any new credit at all. To make matters worse, if your application gets turned down, that will hurt your credit score even more. You can get a free credit score at sites like Credit Karma, Credit Sesame, NerdWallet, and Quizzle to see what balance transfer offers you might actually qualify for before applying. (keep in mind that those sites use their own formula and may not be exactly the same as the credit scoring system the credit card company uses)

What are the fees and how long does the balance transfer rate last? You want the interest savings to outweigh any fees you may have to pay to transfer your balance. Be aware that you may end up with a higher fee once the promotional rate ends. You may be able to find a better long term deal from peer-to-peer lending sites like Lending Club and Prosper.

Can you borrow from your 401(k)? If you can’t qualify for a new credit card or if the balance transfer rate is still higher than 4-6%, you may want to pay off your credit card debt with a 401(k) loan instead. There’s no credit check and you pay the interest back to yourself. But you should also be aware that there are potential downsides to this option as well.

Do you have equity in your home? Another option is using a home equity loan or line of credit to pay off your credit card debt. If you have a good credit, you can qualify for a pretty low rate that’s also tax-deductible. If you’re in the 25% tax bracket, a 4% loan would really be a 3%, which is much less than you can expect to earn by keeping your 401(k) money invested. The big downside is that you can lose your home if you default so this is not a good option if you might have trouble making payments.

Is this part of a strategy to pay down your debt? No matter which of the above options you choose, one of the biggest mistakes people make is to do a balance transfer or otherwise refinance their debt and then run the debt right back up on the old credit card. Make sure any balance transfers you do is part of a wider plan to pay down your balance faster rather than get deeper in debt. That starts with getting control over your spending so you’re living within your means. See some relatively painless ways to save money here and here.

Like with most financial questions, the answer to whether you should do a balance transfer is,“it depends.” Know the pros and cons of your different options. Regardless of your decision, make sure it’s an educated one.

How To Know If You Are Ready To Buy Investment Property

October 09, 2017

“How do I decide if I’m ready to get into real estate investing?”

I get this question all the time over the Financial Helpline and in one-on-ones with the employees we work with. I also hear it regularly from friends who want to know my perspective on this as a financial planner.

What is interesting about this question is that the answer, surprisingly, has very little to do with the real estate market. And that’s why so many people make bad decisions in this area. They base their decisions on what they think the real estate market is going to do, when instead, they should be looking at their own financial situation to make a decision on this.

The answer has very little to do with the real estate market.

You are a good candidate for investment property if you meet all or most of the following:

1. You have a very stable job and significant cash cushion. Ideally that would be 1 year plus of your living expenses in a liquid account that you can tap into immediately with no or very minimal penalty (aka it’s not in a retirement account).

2. You have excellent credit (generally 750 or above). This important for two reasons:

To get a better loan rate and
If you end up having more vacancies or home improvement expenses than you expect, you will have better access to credit to cover these expenses if need be.

3. You are ready, willing and able to be a landlord. Ideally you would enjoy that responsibility and/or you can cover the costs of paying someone to maintain the property like a building super who can address issues that tenants face and ensure the property is properly maintained. This becomes very important when you are ready to sell, not to mention it is your legal obligation as a landlord to maintain the property for tenants.

4. You are looking for a good tax shelter to offset income taxes and capital gains.While all of us want to reduce taxes, investment property can be particularly attractive for those who are in a high-income tax bracket. Some ways you can take advantage of this are through write-offs on such things as mortgage interest, property tax, gardening, property management, etc. You may also be able to write off as much as $25,000 in real estate losses against your total income depending on your adjusted gross income (AGI).

5. You can separate your emotions from the process and buy for purely financial reasons rather than personal preferences. Remember, you won’t be living in this property so whether or not it’s your favorite style of architecture is irrelevant. But whether or not you have a positive cash flow (meaning your rental income exceeds mortgage and other property expenses) is very important. So, you need to be ready to cast aside a love of real estate as an art form and cultivate a love of it as an investment vehicle in order to be financially successful.

Bonus criteria, but not essential

You have a spouse with a stable job. This further reduces risk of a major cash flow problem if you lose your job

You know a lot about real estate and/or have people around you who are experts in real estate and can advise you. Key knowledge areas include:

home improvements/renovations that are most likely to enhance retail value;
understanding of rental and vacancy rates in the area you are looking to buy;
trends in real estate prices and key facts about the neighborhood and how the local economy may impact future housing prices.

Real estate agents can help here, but it’s nice to have people with expertise that you know and trust on your side as well. This is why large real estate investors have teams of people who work for them.

You should not buy investment property if you meet ANY of the following criteria:

1. You are stretching to buy the property, or you have any reason to believe that your job is not secure. If your debt to income ratio begins to exceed 35% after the purchase, then you are stretching. If you do not have a liquid cash cushion (1 year plus of your living expenses is recommended) and would have to tap into your investments to cover a financial emergency (e.g. longer than expected vacancies, roof begins leaking), you are stretching and until you develop this cash cushion, you should not purchase the property.

2. You enjoy a life free of hassle and try to limit your responsibilities. In other words, you don’t want to be tied down. In this case, it doesn’t matter how attractive the deal is, you are not ready to be a landlord and buy an investment property.

3. You have fair or poor credit (below 700). In this case, you may not even qualify for a loan. Or if you do, the interest rate could significantly drive up the cost of the mortgage and make the property a money pit where you are consistently paying more in mortgage than you are getting in rent.

4. You are already heavily invested in real estate relative to other assets. “Heavily invested” meaning 20% or more of your wealth, not including your primary residence, is tied up in real estate. This is particularly important if most or all of your real estate holdings are in one area — if housing prices plummet in that area, you could run into serious financial problems.

One more watch-out

Think twice if you are going to purchase the property with friends or relatives. This is not to say it can’t be done successfully — ironically, I’ve done it myself and it has worked out fine — but the odds are against you here. We were able to make our situation work because we selected partners who were financially responsible and also set up a legal structure to account for contingencies. If you’re skeptical about your potential partners’ financial position, you may want to shy away from the deal or go it alone.

Just the first step

Okay, so after all this, you should have a better handle on whether or not you are a candidate for investment property. But that’s only the first step. It doesn’t mean that the properties you are considering are a good investment. It only means that you are in a good financial position to be able to invest successfully in real estate.

The next step (for those who are good candidates for buying an investment property) is to find the right property. If I had a dollar for every time someone asked me if they should purchase a specific investment property…. well, I’d be able to buy another one myself!

The Pros & Cons Of Balance Transfers

September 20, 2017

If you’re carrying credit card debt and paying on time, chances are you also regularly receive offers from various financial institutions offering you balance transfer deals. If you’re serious about paying off your debt and have fixed whatever issue caused you to accumulate the debt in the first place, then it can seem like a no-brainer — using balance transfer deals can be a key step in getting to zero debt sooner. But before you pull the trigger to transfer your balance to a new card, make sure you’ve considered all the potential pitfalls first.

Advantages of balance transfers

Lower interest rate — The lower your rate, the more impact your payments will make toward your balance. Just make sure you know you’ll qualify for the low interest rate before committing to the transfer or you could end up with a higher rate than your original card.
Accelerated debt pay-off — To determine exactly what the impact of lowering your interest will have on your timeline, plug your info into the Debt Blaster calculator to confirm.
Pay less interest over time — You can also use the Debt Blaster to calculate how much you’ll save in overall interest, but you also need to add in any balance transfer fees. Make sure you do the math before committing to make sure the savings are worth the potential risks.
Consolidation of balances — Balance transfers can also help you to consolidate several small balances onto one lower-interest card, which means you’ll have less hassle and less chance you’ll forget to make a payment.

Potential disadvantages of balance transfers

Transfer fees — Most balance transfer offers include some type of fee, which is typically 1 – 3% of the balance you’re transferring. For example, if you’re transferring a $3,000 balance to a card with a 3% transfer fee, you’ll be starting with a balance of $3,090. Make sure you factor that in to any interest savings calculations you perform. If you can find an offer with no transfer fee and a lower interest rate, take it! (check the fine print first to make sure there isn’t some other catch to make up for it though)
Promo rates — Keep in mind that balance transfer rates are typically lower than new purchase rates, so if you are using the new card to shop while trying to pay down your balance (which is a very slippery slope anyway), you’ll most likely negate the interest savings of the balance transfer. A best practice is not to “comingle” your debt — keep the cards you’re using for low balance transfer rates strictly for paying down balances.
Rate expiration dates — Many times the low rate that card companies offer to entice you to transfer your balance has an expiration date, usually between 8 and 24 months after you open the card. That’s fine, as long as your plan includes that end date so that you can either have the balance paid off or transfer it to another card.
Type A personality traits required — Managing the debt payoff via balance transfer does require a bit of attention to detail, so just be aware that if you’re not Type A like me, you’ll probably need to put some stopgaps in place like setting multiple reminders on your calendar and phone and even asking a friend or family member to make sure you come back and reassess your situation at least a month before any promo rates expire.
Could dig you deeper — The reason that banks offer these deals in the first place is because they know that many people, despite their best intentions, will simply use this new card to accumulate even more debt, rather than pay it off as would be the best plan. When you open a new card to transfer the balance, consider cutting up your old card to avoid the temptation to accumulate another balance on that fresh zero statement. You don’t have to close the card (that could be a hit to your credit), but cut it up or give it to someone you trust for safe-keeping.
Credit score ding — It’s true that applying for credit does cause your score to take a temporary dip, as will closing old cards to make sure you aren’t tempted to run the balance up again, but if your goal is to get out of debt faster and this achieves it, worry less about your credit score (which will rebound) and more about saving money in unnecessary interest and getting out of debt ASAP.

One final thing: make sure that you’re doing balance transfers strictly as part of a debt pay-off plan instead of as a way to accumulate even more debt. I’ve worked with people before who found themselves deeper and deeper over their heads in debt when they started playing musical credit cards with their balance. It’s important that it’s part of a debt pay-off plan and not just a way to stay afloat.

How To Read The “Warning Label” Of Annuity Products

July 28, 2017

I love silly articles that I see on social media sites, and my kids and I love to look at warning labels for things that make us laugh. This article combines both of these highly entertaining things that I like. Since most warning labels are in existence because of someone actually doing the things that are being warned against, I always want to meet these people.

As entertaining as I find wacky warning labels, not all warning labels are intended to be funny. And actually, not all warning labels are actually warning labels, either. Some come disguised as sales literature for financial products.

Buyer beware

Case in point: I recently met with someone who had a 401(k) account from a prior employer, and her financial advisor had recommended that she roll it over into an equity index annuity with him. She had not decided whether or not to purchase the annuity before our conversation, thankfully. During our meeting, we looked at the “warning label” (aka the fee disclosures) for the proposed annuity to see if it was a good deal. Here’s what we found:

10 year “surrender charge” — this means that if she wanted to get out of the annuity for any reason, including to change investments, advisors, or for poor performance, etc. in the next 10 years, she would have to pay a hefty fee to do so;
“Mortality & expense” fees — this is the insurance component, along with the sales charges (aka what the advisor would be paid,) and administrative fees;
“Management” fees — this was the investment component, which was in excess of 2.5% per year.

Finally, the track record of the investments inside the annuity was less than stellar, so she could potentially be paying 2.5% to actually lose money. If I could write a warning label for this annuity, I might have it say something like, “Product contains excessive fees,” or “Warning: your advisor might make more money on this than you do.”

After reviewing all of this information, she obviously decided to opt out of the annuity and transfer her prior account to her current employer’s 401(k) instead — knowing that her 401(k) had much lower fees combined with the ability to make changes to the investments without penalties, I think she made the right choice. The annuity’s “warning label” gave enough information about the product to make her consider another alternative.

Know what to look for

The lesson here is that investment products don’t come with explicit warning labels like hair dryers or plastic bags, but the language is there if you know where to look. Before you make any significant financial commitments, be sure that you fully understand the fine print on the warning labels, even if it’s not labeled as a warning.

Make Your Nest Egg Last as Long as You Do

October 20, 2011

Once you’ve saved and invested for financial independence, the final step will be figuring out how to turn that nest egg into an income stream that will last as long as you do. With people living longer and longer, this can be a challenge for all retirees but is especially difficult for anyone looking to retire early. There’s even a good chance you’ll live longer in retirement than you did working.
Continue reading “Make Your Nest Egg Last as Long as You Do”

Making the Decision: Which Pension Payout Option is Best?

August 30, 2011

I recently met with a multitude of pre-retirees for individual consultations who were contemplating an early retirement deal, so naturally part of the analysis revolved around their pension. I was stunned at the amount of employees who, up until our in person meeting, had never gone online to run a pension estimate. Of those who had already run their estimate, quite a few were still unclear about the various payout options and how to go about making the decision on which payout best fit their own situation. The most common question I got was, “What do most employees pick?” Although I was very tempted to bring up the old adage mom used to say that, “if everyone else jumped off a bridge, would you do that, too?” I resisted, and instead, I stressed to them that it was a personal decision based on their own unique situation. Here are the points I had the employees consider: Continue reading “Making the Decision: Which Pension Payout Option is Best?”