Category Archives: Education

Should I roll over my 401(k) from my previous employer?

Question from young investor to Investopedia:

I am currently 21 years old and a senior in college. I started working at a job back in December of 2016 and opened up a 401(k) with the company. I did this so I could begin saving for future expenses. This job was only meant to be temporary. Within the next month, I will be starting my new career at a different company. Should I roll over my 401(k)? Are there any other options other than this?

My answer:

There are three things you can do with an orphan 401(k).

  1. Leave it where it is.
  2. Transfer it to you new employer’s 401(k)
  3. Roll it into a Rollover IRA.

I prefer option #3 because it gives you several orders of magnitude more investment options.

The problem with #1 is that you may simply forget about it.  In addition, you may find that the account is small enough that your old employer may terminate your account and send you a check, triggering several kinds of taxes and penalties.

Option #2 is better than #1 but it still locks you into the investment options offered by your employer, many of which are poor.

You mentioned that you started your 401(k) to “save for future expenses.”  That’s not the purpose of a 401(k).  Its role, like an IRA, is to save for retirement.  I realize that a 21-year-old starting his first real job is not focused on retirement, but that’s a mistake.  The biggest advantage that you have is time.  If you give time the ability to work for you, you can overcome lots of investment mistakes and end up much richer than someone who starts later in life, even if they save more money.

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What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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How to lose $150 million

Boris Becker

We have written a lot about planning and investing.  But there’s nothing quite as instructive as learning from mistakes.  Learning from others’ mistakes is less painful than making our own mistakes.

This sets up an example of financial mistakes I learned about recently.

Sometimes the most surreal things happen. For example, anyone who remembers the 1980s’ tennis prodigy Boris Becker may be shocked to learn that last month, in a London courtroom, Becker was declared bankrupt.

After winning Wimbledon and countless other tournaments, Becker’s personal fortune was estimated to have reached $150 million. So how could this have happened? How could he have gone from $150 million to zero, and what can we learn from it?

Sports figures often find that they have developed “posses,” hangers-on who encourage extravagant lifestyles.  Fame and fortune at an early age lead to a number of personal mistakes.  These are often combined with poor investment decisions.  In the case of Becker they include things like Nigerian oil companies, and “… a sports website, an organic food business, and more notably, a planned 19-story high-rise in Dubai called the Boris Becker Business Tower, whose backers went bust in 2011.”

This is a special problem for people who become wealthy in sports and entertainment.  Too often they turn their financial lives over to agents who get them involved in complicated schemes that go sour.

The key to gaining wealth and – most especially – for keeping it is: keep it simple.  During 30 plus years of investing the biggest mistakes I have seen made is people getting involved in complex deals, partnerships, and relationships that they don’t really understand.

We provide education for our clients on investment strategy and develop portfolios that allow people to keep what they have earned.  Don’t be like Boris Becker.

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Three Ways to Stay Financially Healthy Well into Your 90s

Image result for living to old age picture

According to government statistics, the average 65-year-old American is reasonably expected to live another 19 years.  However, that’s just an average.  The Social Security administration estimates that about 25% of those 65-year-olds will live past their 90th birthday.  We were reminded of these statistics when we recently received the unfortunate notice that a long-time client had passed away.  He and his wife were both in their 90s and living independently.

People often guesstimate their own life expectancy based on the age that their parents passed.  Genetics obviously has a bearing on longevity.  Modern medicine has also become a big factor in how long we can expect to live.  Diseases that were considered fatal 50 years ago are treatable or curable today.  For many people facing retirement and the end of a paycheck, the thought of someday running out of money is their biggest fear.  And there is no question that living longer increases the risk to your financial well-being.

The elderly typically incur costs that the young do not.  As we get older, visits to the doctor – or the hospital – become more frequent.  There’s also the onset of dementia or Alzheimer’s that so many suffer from.  And, as our bodies and minds age, we may not be able to continue living independently and may have to move to a long-term care facility.

As we approach retirement, we should face these issues squarely.  Too many people refuse to face these possibilities, and instead just hope things will work out.  As a wise man once said, hope is not a plan.

So here is a three step plan to help you remain financially healthy even if you live to be 100:

  1. Create a formal retirement plan. Most Financial Planners will prepare a comprehensive retirement plan for you for a modest fee.  We recommend that you choose to work with an independent Registered Investment Advisor who is also a Certified Financial Planner™ (CFP®).  Registered Investment Advisors are individuals are fiduciaries who are legally bound to put your interests ahead of their own and work solely for their clients, not a large Wall Street firm. CFP® practitioners have had to pass a strenuous series of examinations to obtain their credentials and must complete continuing education courses in order to maintain them.
  2. Save. Save as much of your income as possible, creating a retirement nest-egg.  Some accounts may be tax exempt (Roth IRA) or tax deferred (regular IRA, 401k, etc.), but you should also try to save and invest in taxable accounts once you have reached the annual savings limit in tax advantaged accounts.
  3. Invest wisely. This means diversifying your investments to take advantage of the superior long-term returns of stocks as well as the lower risk provided by bonds.  While it’s possible to do this on your own, most people don’t have the education, training or discipline to create, monitor and periodically adjust an investment strategy that has the appropriate risk profile to last a lifetime.  We suggest finding a fee-only independent Registered Investment Advisor to manage your investments.  They will, for a modest fee, create and manage a diversified portfolio of stocks, bonds, mutual funds and/or exchange traded funds designed to meet your objectives.

The idea of saving for long retirement should not be avoided or feared.  With the proper planning and preparation, retirement gives us the opportunity to enjoy the things that we never had time for while we were working, and, can indeed be your Golden Years.

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What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

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Consolidating your assets

In 1945, two brothers, Jacob and Samuel, were rescued from the Nazi extermination camp of Buchenwald. The rest of their family had been killed. The brothers joined other refugees that left Europe after World War II. Jacob came to the United States, became an engineer, and worked many years for a major corporation. Samuel immigrated to Australia and became an accountant.

Several years ago, Jacob died. He had never married. Samuel — by now quite elderly —came to the United States to settle Jacob’s affairs. What he found was financial chaos. Jacob had always lived frugally and invested widely. Unfortunately, he kept very poor records. Samuel spent several weeks rummaging through files, boxes, drawers, and even under couch pillows trying to gather together all the certificates, statements, and even uncashed dividend checks that Jacob had left behind. We will never be certain that all of Jacobs’s assets have been located.

Few people leave behind as chaotic a financial tangle as Jacob did, but I find that more than half of the people I advise after a death are not certain that they can identify all of a deceased’s investment assets.

The first lesson from this example is this: DO NOT KEEP STOCK OR BOND CERTIFICATES AT HOME OR IN A SAFE DEPOSIT BOX. KEEP ALL FINANCIAL ASSETS IN BROKERAGE ACCOUNTS.

Modern brokerage accounts now allow access via checkbook, electronic funds transfer (EFT) and charge cards. Have all dividends and interest payments deposited in your account; and, if you need cash, you may write a check. There is no reason for your heirs to search through your papers to find uncashed dividend checks.

As people get older, financial advisors and estate planning attorneys often advise clients to consolidate their assets. This is sound advice and greatly simplifies the job of managing an estate at death.

It is often possible to consolidate assets — even mutual funds that you have bought outside of a brokerage account — with a single financial advisor or team of advisors. This has the advantage of giving your financial advisor a better view of your assets and thus providing more comprehensive plans and advice. It also makes it easier for the surviving spouse or heirs to identify your investment assets.

Investment accounts with brokerage firms, money managers, and mutual funds typically make up the bulk of the assets of most families. It is not unusual for a family to have multiple accounts.

Be sure to make a list of your investment accounts. You may use that investment section of the workbook to do so.

From BEFORE I GO by Arie Korving.  Available at Amazon.

 

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The Biggest Myth About Index Investing

Reader Mailbag: Dividend Investing vs Index Investing

John Bogle has done a great job of “selling” index investing.  He started the Vanguard group with the promise that you could invest in the stock market “on the cheap.”  It’s the thing that made the Vanguard group the second biggest fund family in the country.

Selling things based on price is always popular with the public.  It’s the key to the success of Wal Mart,  Amazon, and a lot of “Big Box” stores.

But Bogle based his sales pitch not just on price, but also the promise that if you bought his funds you would do better than if you bought his competition.  He cites statistics to show that the average mutual fund has under-performed the index, so why not buy the index?

The resulting popularity of index investing has had one big, unfortunate side-effect.  It has created the myth that they are safe.

A government employee planning to retire in the near future asked this question in a forum:

“I plan to rollover my 457 deferred compensation plan into Vanguard index funds upon retirement in a few months. I currently have 50% in Vanguard Small Cap Index Funds and 50% in Vanguard Mid Cap Index Funds and think that these are somewhat aggressive, safe, and low cost.”

The problem with the Vanguard sales pitch is that it’s worked too well.   The financial press has given index investing so much good press that people believe things about them that are not true.

Small and Mid-cap stock index funds are aggressive and low cost, but they are by no means “safe.”  For some reason, there is a widespread misconception that investing in a stock index fund like the Vanguard 500 index fund or its siblings is low risk.  It’s not.

But unless you get a copy of the prospectus and read it carefully, you have to bypass the emphasis on low cost before you get to this warning:

“An investment in the Fund could lose money over short or even long periods. You should expect the Fund’s share price and total return to fluctuate within a wide range.”

The fact is that investing in the stock market is never “safe.”  Not when you buy a stock or when you buy stock via an index fund.  There is no guarantee if any specific return.  In fact, there is no guarantee that you will get your money back.  Over the long term, investors in the stock market have done well if they stayed the course.  But humans have emotions.  They make bad decisions because of misconceptions and buy and sell based on greed and fear.

My concern about the soon-to-be-retired government employee is that he is going to invest all of his retirement nest-egg in high-risk funds while believing that they are “safe.”  He may believe that the past 8 years can be projected into the future.  The stock market has done well since the recovery began in 2009.  We are eventually going to get a “Bear Market” and when that happens the unlucky retiree may find that has retirement account has declined as much as 50% (as the market did in 2008).  At some point he will bail out and not know when to get back in, all because he was unaware of the risk he was taking.

Many professional investors use index funds as part of a well-designed diversified portfolio.  But there should be no misconception that index investing is “safe.”  Don’t be fooled by this myth.

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A good Registered Investment Advisor is a “Life Coach.”

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People who are not familiar with Registered Investment Advisors (RIAs) too often view them as stock brokers.  They are not; they are held to a higher standard and are focused on the client, not the money.  RIAs are trusted advisors who put their clients ahead of themselves.    They are fiduciaries that are skilled in the art making good financial decisions.

Younger professionals who are building careers would do well to find an RIA as their financial guru, a “Life Coach.”  It takes time, experience and a high level of expertise to manage money well.  The young lack that expertise but have the biggest advantage of all: time.  They are in a perfect position to build wealth with the least amount of effort if they can lean on experts who can show them how to navigate the risky ocean of investing.  Just as important, they need a wise guide who can advise them on managing their income.  Too many people, even those with six figure salaries, live paycheck to paycheck.  Knowing what to spend and how to save is the role of the advisor.

This is very important for the independent professional – the doctor or lawyer.  Focused on building a practice, they need someone to advise them on managing their money wisely.

For the business owner, the entrepreneur, it’s even more important.  There is no career track and the challenge of building a business often results in poor money management.  Excessive debt can lead to bankruptcy, a common result in many industries that depend on debt financing.  A good advisor can help the business owner create a personal portfolio that’s independent of his business.  At the same time he can advise the owner the best way of financing his growth.

Once the business is established the owner needs guidance setting up retirement and benefit plans for himself and his employees.  This all part of the RIA’s skill set. And finally, as the business matures and the owner starts thinking of retirement, the advisor provides the guidance to transition the individual and his family to life beyond work.

That’s the point at which the coach gets the pleasure of knowing he’s done a good job as part of a winning team.

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New Years Resolutions for 2017

As another year winds to a close, we wanted to present you with some New Years resolutions designed to improve your financial health in the coming year.

  • Update your estate plan. Has there been a change in your family over the last year?  A marriage, a new baby, a death in the family?  If so, you need to update your estate plan, your insurance policies and your beneficiary designations.
  • Update your internet passwords. Are you using the internet to pay bills, shop, or access your investment accounts?  You will want to update your passwords and make them harder to guess.
  • Review your investments. Have you reviewed your portfolio recently?  Is it still aligned with your needs and goals?  If not, make some changes.
  • Get a personal “Risk Number.” Do you know how much risk you can take?  Most people don’t really know.  Resolve to get your personal “Risk Number“this year.  If you don’t know yours, click here to figure it out.
  • Get your portfolio’s “Risk Number.” Do you know how risky your investments are?  Most people don’t know how much risk they are taking.  Get your portfolio’s “Risk Number” and compare it to yours.  If it’s not the same, you need to consult your financial advisor.
  • Update your financial plan. If you don’t know where you’re going you probably won’t get there.  What’s your financial plan?  If you answered: “I don’t have one” resolve to get one this year.
  • Set your financial goals. Do you know how much you need to save to retire?  Here are some guidelines:

A 30-year-old can open a retirement account and make regular monthly contributions.  By investing properly and aiming for a modest 6% per year rate of return:

  • Saving just $200/month, by age 67 his account will have grown to nearly $350,000.
  • By saving $500 per month the account will be worth over $850,000.
  • Saving $1,000 per month will make our 30-year-old a millionaire by age 59.

 

If you have problems with any of these resolutions, you should definitely consider working with a financial advisor; someone who will be like a health coach for your personal finances.  Resolve to find one this year.

Think of the Advisor as your Sherpa, as it were, whose job it is to guide you amid the extreme altitudes and treacherous passes in investing’s hazardous terrain. That is to say, an Advisor is not someone you hire to beat the market for you, but rather someone who can help you achieve your personal financial objectives as “a facilitator, mentor, and market strategist” for those who, on their own, struggle to achieve their goals.

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