MONEY

Tell Us: What Would You Do With $1,000?

$1000 bill
Travis Rathbone

See how other readers would use a grand—then share your own grand ideas by tweeting with the hashtag #ifihad1000.

In coming up with 35 Smart Things to do with $1,000, MONEY put the question out to our readers via Facebook: What smart—or not so smart—thing have you done with that amount of money? What would you recommend someone else do with those funds? Or, what would you do if by some amazing stroke of luck, a grand fell magically into your lap today?

Some of your answers follow, but we’ll also be adding to this post in the next few days. So you still have a chance to share your money move, be it spending or saving, in earnest or good fun. Share your $1K fantasy with us on Twitter, using the hashtag #ifIhad1000.

“The first thing anyone should do before investing $1000 is to pay off revolving credit (credit cards) that’s a 15% to 20% return.”
—Danny Day
……….
“For a $1000, I purchased Bank of America stock.”
—Natalie TGoodman
……….
“It’s all about goals. Fund an emergency savings account, pay off debt, fund a retirement plan at least up to the employers match, pay down/off mortgage, save for college, etc. Needs before wants.”
—Nereida Mimi Perez Brooks
……….
“$1,000 would go into my money market as it really isn’t that much.”
—Paul Mallon
……….
For about $1,000 we purchased a last-minute 5-day Bahamas cruise for our family of four during the off-season month of September.”
—Marc Hardekopf
……….
“Put it in a casino and it doubled.”
—Norma Sande
……….
“I was given $1000 from my grandpa when I went to college. I started trading stocks in ’10 and made about $10,000 from it. Then in 2011 I bet it all on one stock with no stop loss, and it crashed overnight when the FDA shut them down. Lost 90%.”
Jaycob Arbogast
……….
“I would bank it to have savings for a rainy day.”
—Naomi Young Hughes
……….
“With $1000, all small debts were paid, which then made cash available to pay off a larger debt.”
Ana Chinchilla
MONEY 401(k)

3 Things to Know About Your 401(k)’s Escape Hatch

ladder leading to a bright blue sky
Alamy

More and more 401(k)s offer a formerly rare option—a brokerage window. That's raising questions from Washington regulators. Here's what you should watch out for.

While 401(k)s are known for their limited menu of options, more and more plans have been adding an escape hatch—or more precisely, a window. Known as a “brokerage window,” this plan feature gives you access to a brokerage account, which allows you to invest in wide variety of funds that aren’t part of of your plan’s regular menu. Some 401(k)s also allow you to trade stocks and exchange-traded funds, including those that target exotic assets such as real estate.

No question, brokerage windows can be a useful tool for some investors. But these windows carry extra costs, and given the increased investing options, you also face a higher risk that you’ll end up with a bad investment. All of which raises concerns that many employees may not fully understand what they’re getting into with these accounts. Earlier this week the U.S. Labor Department, which has been fighting a long-running battle to make retirement plans cheaper and safer for investors, asked 401(k) plan providers for information about brokerage windows.

You may wonder if a brokerage window is something you should use in your 401(k). To help you decide, here are answers to three key questions:

How common are brokerage windows?

Not long ago these features were rare. As recently as 2003, just 14% of large plans included offered a brokerage window, according to benefits company Aon Hewitt. But they’ve grown steadily more popular over the past decade, with about 40% of plans offering this option as of 2013. Interestingly, the growth has taken place even as more 401(k)s have opted to take investment decisions out of workers’ hands by automatically enrolling them in all-in-one investments like target-date funds.

Those two trends aren’t necessarily at odds. Experts say companies often add brokerage windows in response to a small but vocal minority of investors, who, rightly or wrongly, believe they can boost returns by actively picking investments. But overall just 5.6% of 401(k) investors opt for a window when it is offered. The group that is most likely use a brokerage window: males earning more than $100,000, about 9% of whom take advantage of the feature, according to Hewitt. (Not surprisingly, this group also tends to have the corporate clout to persuade HR to provide this option.) By contrast, only about 4% of high-earning women use a window.

When can brokerage windows make sense for the rest of us?

That depends in part on whether the other offerings in your 401(k) meet your needs. If you want an all-index portfolio, for example, a brokerage window may come in handy. Granted, more plans have added low-cost index funds, especially if you work for a large or mid-sized company. Today about 95% of large employers offer a large-company stock index fund, such as one that tracks the S&P 500, according to Hewitt.

Workers at small companies are less likely to enjoy the same access, however. These index funds are on the menu only about 65% of the time in plans with fewer than 50 participants, according to the Plan Sponsor Council of America, a trade group.

Moreover, even in large plans investors seeking to diversify beyond the broad stock and bond market can find themselves out of luck. Only about 25% of plans offer a fund that invests in REITS. And only about two in five offer a specialty bond fund, such as one that holds TIPS.

But even if a window allows you to diversify, you need to consider the additional costs. About 60% of plans that offer a brokerage window charge an annual maintenance fee for using it, according to Hewitt. The average amount of the fee was $94. And investors who use the window typically also pay trading commissions, just like they do at a regular brokerage.

Where does that leave me?

Before you decide to opt for a brokerage window, check to see if the fees outweigh the potential benefits. Here are some back-of-the-envelope calculations to get you started:

If you have, say, $200,000 socked away for retirement, paying an extra $100 a year to access a brokerage window works out to a modest additional fee of 0.05%. While the brokerage commission would increase that somewhat, you can minimize the damage by trading just once a quarter or once a year.

If your plan includes only actively managed mutual funds with annual investment fees in the neighborhood of 1%, the brokerage window could allow you to access ETFs charging as little as 0.1%. That means you could end up paying something like 0.15% instead of 1%.

If your plan has low-cost broad market index funds, however, a brokerage window offers less value. Say you want to add more more specialized investment options, such as a REIT or emerging market fund. Even if you have $200,000 in your 401(k), you’ll probably only invest a small amount in these more exotic investments—perhaps $5,000 or $10,000. So a $100 brokerage fee would increase your overall costs on that slice of your portfolio to 1% to 2%. Plus, you’ll pay brokerage commissions and fund investment fees. In that case, better to leave the escape hatch shut.

MONEY Ask the Expert

Here’s How to Protect Your 401(k) from the Next Big Market Drop

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Robert A. Di Ieso, Jr.

Q: Bull markets don’t last forever. How can I protect my 401(k) if there’s another big downturn soon?

A: After a five-year tear, the bull market is starting to look a bit tired, so it’s understandable that you may be be nervous about a possible downturn. But any changes in your 401(k) should be geared mainly to the years you have until retirement rather than potential stock market moves.

The current bull market may indeed be in its last phase and returns going forward are likely to be more modest. Still, occasional stomach-churning downturns are just the nature of the investing game, says Tim Golas, a partner at Spurstone Executive Wealth Solutions. “I don’t see anything like the 2008 crisis on the horizon, but it wouldn’t surprise me to see a lot more volatility in the markets,” says Golas.

That may feel uncomfortable. But don’t look at an increase in market risk as a key reason to cut back your exposure to stocks. “If you leave the market during tough times and get really conservative with long-term investments, you can miss a lot of gains,” says Golas.

A better way to determine the size of your stock allocation is to use your age, projected retirement date, as well as your risk tolerance as a guide. If you are in your 20s and 30s and have many years till retirement, the long-term growth potential of stocks will outweigh their risks, so your retirement assets should be concentrated in stocks, not bonds. If you have 30 or 40 years till retirement you can keep as much as 80% of your 401(k) in equities and 20% in bonds, financial advisers say.

If you’re uncomfortable with big market swings, you can do fine with a smaller allocation to stocks. But for most investors, it’s best to keep at least a 50% to 60% equities, since you’ll need that growth in your nest egg. As you get older and closer to retirement, it makes sense to trade some of that potential growth in stocks for stability. After all, you want to be sure that money is available when you need it. So over time you should reduce the percentage of your assets invested in stocks and boost the amount in bonds to help preserve your portfolio.

To determine how much you should have in stocks vs. bonds, financial planners recommend this standard rule of thumb: Subtract your age from 110. Using this measure, a 40-year old would keep 70% of their retirement funds in stocks. Of course, you can fine-tune the percentage to suit your strategy.

When you’re within five or 10 years of retirement, you should focus on reducing risk in your portfolio. An asset allocation of 50% stocks and 50% stocks should provide the stability you need while still providing enough growth to outpace inflation during your retirement years.

Once you have your strategy set, try to ignore daily market moves and stay on course. “You shouldn’t apply short-term thinking to long-term assets,” says Golas.

For more on retirement investing:

Money’s Ultimate Guide to Retirement

MONEY 401(k)s

Ignore This Savings Plan at Your Peril

Workers often think signing up for their 401(k) is all they need to do. But millions fail to enroll right away or raise their contributions, and they'll pay a heavy price.

Call them victims of inertia. These are folks who are slow to sign up for their employer-sponsored savings plan or who, once enrolled, don’t check back for years. Their numbers are legion, and new research paints a grim picture for their financial future.

More than a third of 401(k) plan participants have never raised the percentage of their salary that they contribute to their plan, and another 26% have not made such a change in more than a year, asset manager TIAA-CREF found. The typical saver stashes away just 8% of income—about half what financial planners recommend. Without escalating contributions, these workers will never save enough.

More than half of plan participants have not changed the way their money is invested in more than a year—including a quarter that have never changed investments, the research shows. This suggests many are not rebalancing yearly, as is generally advised, and that many others are not paying attention to their changing risk profile as they age.

At companies without automatic enrollment, a quarter of workers fail to enroll in their 401(k) for at least a year and a third wait at least six months, TIAA-CREF found. These delays may not seem like a big deal. But the lost returns over a lifetime of growth add up. Based on annual average returns of 6% and a like contribution rate over 30 years, a worker who enrolls immediately will accumulate nearly double that of a worker who starts two years later. Even a mere six-month delay is the difference between, say, $100,000 and $94,000, according to the research.

Employer-sponsored 401(k) and similar plans have emerged as most people’s primary retirement savings accounts: 42% of workers say it is their only savings pool and a similar percentage say the plans are so critical they would take a pay cut to get a higher company match, according to a Fidelity survey. So any level of mismanagement is troublesome.

There is a bright spot, however—younger workers have been quicker to catch on. Millennials are the most likely group to boost their percentage contribution after each pay raise, and among millennials who do not boost the percentage, 23% say it is because they already contribute the maximum. Millennials are also most likely to check back in and adjust their investment mix.

That’s not entirely good news. In general, millennials are not investing enough in stocks, which have the highest long-term growth potential. But it reinforces the emerging picture of a generation that understands what Baby Boomers and Gen Xers were slow to grasp: financial security is not a birthright. Millennials will need to save early and often—on their own—and pay attention for 30 or 40 years to enjoy a happy ending.

MONEY Ask the Expert

Here’s One Good Reason To Borrow From Your 401(k)

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Robert A. Di Ieso, Jr.

Q: Should I use my 401(k) for a down payment on a house?

A: Let’s start with the obvious. It’s rarely a good idea to borrow from your retirement plan.

One major drawback is that you’ll give up the returns that the money could have earned during the years you’re repaying the loan. Your home isn’t likely to give you the same investment return, and it’s difficult to tap real estate for income in retirement. There’s also a risk that you’ll lose your job, which would require you to pay back the loan, typically within 60 days, though home loans may have a longer repayment period.

Still, 401(k) borrowing has undeniable advantages. For starters, “they’re easy loans to get,” says Atlanta financial planner Lee Baker. You don’t have to meet financial qualifications to borrow, and you can get the money quickly. Interest rates for these loans are generally low—typically a percentage point or so above prime, which was recently 3.25%. Another big plus is that you pay yourself back, since the rules generally require you to fully repay within five years; 10 years if you buy a house. (Otherwise, the amount will be taxable, plus you will pay a penalty if you’re under 59 1/2.) So you eventually do replace the money with interest. Be aware, most plans limit your borrowing to $50,000 or 50% of your account balance, whichever is less.

Given how easy it is to get a 401(k) loan, it’s no wonder many workers tap their plans for home buying, especially Millennials. About 10% of home buyers borrow from their 401(k) and another 4% use funds from IRAs, according to the National Association of Realtors. And overall some 17% of Millennials report borrowing from their company plan, according to a 2014 Ameriprise study, Financial Tradeoffs. “It is where they have accumulated most of their savings,” says Baker.

All that said, when it comes to buying a home, a 401(k) loan can make sense. If you can put together enough cash for a 20% down payment, you may able to avoid avoid mortgage insurance, which can your lower monthly bill. And with interest rates still low, having a down payment now can enable you lock in a good rate compared with waiting till you have more money when mortgage rates may be higher.

If you go this route, though, take a close look at your financial resources both inside and outside your plan. Will you have to tap all your savings, leaving you vulnerable if you have a financial emergency? Do you have enough cash flow to meet your monthly payment and pay the loan? Is your job relatively secure or do you have to worry about a layoff that will trigger the automatic repayment provision?

And if you borrow, don’t forget to keep saving. A common mistake people make is halting regular contributions during the pay back period, which puts you further behind your retirement goals. At the very least, says Baker, contribute enough to get your employer match.

More on Home Buying:

Should I Pay Off Loans or Save for a Down Payment?

Single and Thinking of Buying a Home? Here’s Some Advice

“At 27, I’m the First of My Friends to Own a Home:” A Buyer’s Story

MONEY Saving

WATCH: How You Can Save More Money

Financial planning experts share easy ways you can trick yourself into saving more money.

MONEY Ask the Expert

Help, My Spouse Is Afraid of Stocks. What Should I Do?

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Robert A. Di Ieso, Jr.

Q: I just got married, and my husband and I are both contributing to 401(k)s. But he is very conservative with his investments and keeps very little in stocks. We have more than three decades till retirement. How can we align our 401(k)s so we both feel comfortable?

A: It’s certainly not unusual for a couple to have different attitudes about how to manage their money. Spouses often aren’t on the same page when it comes to personal finances. But when you are investing for retirement, being too conservative can make it harder to reach your long-term goals.

“You need some of the risk that comes with investing in stocks, or you won’t have enough growth to fuel your portfolio for the long run,” says San Diego financial planner Marc Roland. And the younger you are, the more risk you can afford to take with your retirement money.

That’s because you have more time to ride out the anxiety-inducing downturns in the markets. Financial planners recommend using your age and subtracting it from 110 to get the percentage of your portfolio that you should keep in stocks. A 30-year-old, for example, should have roughly 80% of their holdings in equities.

So how do you mesh that guideline with an asset allocation that doesn’t panic your husband when the market drops?

First, understand that asset allocation isn’t the only important factor you should consider. How much you put away has more impact on your retirement savings success than how you invest your money. When you’re decades from retirement, it’s hard to know exactly how much you’ll need for a comfortable lifestyle at 65. But one rule of thumb is that you’ll need 70% of your pre-retirement salary to live comfortably. You can get a good ball park estimate with a calculator like this one from T. Rowe Price.

The more you are contributing to your 401(k)s, the less risk you have to take on, says Roland. If you’re both saving at least 10% of your income, and you boost that rate to 15% or more as you get older and earn more, a balanced portfolio of about 60% in stocks with the rest in bonds would work, says Roland. (That ratio of stocks to bonds is a bit conservative for investors in their 20s, who could reasonably stash as much as 80% in equities.)

To achieve that overall mix, the more aggressive spouse can invest 80% in stocks, while the risk-averse spouse can hold the line at 40%, assuming you are contributing similar amounts to your plans. “That blend will give them an appropriate asset allocation but each portfolio is tailored to each person’s risk tolerance,” says Roland.

Related links:

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY Ask the Expert

Do I Owe Taxes on a Windfall from a Retirement Plan?

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Robert A. Di Ieso, Jr.

Q: I am the beneficiary of a $15,800 death benefit from my dad’s pension plan. I was under the assumption that I would not be taxed on it, but is that the case? I want to make sure I deduct any taxes before I distribute the money to my siblings. —Tanya, White Plains, N.Y.

A: The answer depends on the source of the death benefit. If the payout is in the form of a life insurance policy—what your case sounds like—you won’t owe any taxes on the $15,800.

But the tax consequences would be different if you had inherited a tax-deferred retirement plan, such as a 401(k), says Charlotte, N.C. financial planner Cheryl J. Sherrard. The money in that kind of plan is taxed only when the owner makes a withdrawal. As an heir, you would owe income taxes on any distributions.

When you inherit a retirement account, you have few payout options. You can take the full amount in a lump sum, which could push you into a higher tax bracket if the windfall is significant. If you do that, you can request federal and state tax withholding when you fill out the distribution paperwork. Or you can ask for the full amount and pay the taxes later.

To spread the distributions over several years, you can open what’s called an inherited IRA and then move the retirement plan assets into this new account (assuming the qualified retirement plan allows you to). You generally have to start taking annual distributions no later than Dec. 31 following the year of the original account holder’s death. Since the rules are tricky, talk to a tax professional, advises Sherrard.

In this case you would either be gifting a small amount to your siblings yearly, or the full amount all at once. But keep in mind that as a sole beneficiary you are not required to give any money to them.

And no matter what, don’t rush to share your inheritance until you have the full picture of what your father left behind.

“You may want to wait until any other assets of your father’s have been split among all siblings, and then if you desire to equalize with them, you can do so via that net retirement money,” says Sherrard. “This is a common gotcha when one child inherits a taxable asset and then needs to take taxes into consideration before splitting it up.”

Have a question about your finances? Send it to asktheexpert@moneymail.com.

 

MONEY Pick Up Speed

Get the Most From Your 401(k) at Any Age

To get the most out of your retirement savings, put the right amount in and take the right steps at all stages of life. Here's some advice to follow, whether you're just starting out or further down your career path.

 

Millennials

Millennials Start small, then auto-escalate. Less than half of workers ages 22 to 32 are saving for retirement, despite how painless it can be. Socking away 3% of a $50,000 salary ($1,500 before taxes) costs you less than $22 a week in take-home pay. Then take baby steps by auto- escalating your savings by one percentage point a year. In plans with auto-enroll and a 1% auto-escalate feature, nine in 10 participants are able to safely generate 60% of their age-64 income, adjusted for inflation, according to EBRI.

Take the easy way out. More than two in five millennials in retirement plans aren’t familiar with their investment options. No problem: Just go with a target-date fund, which automatically adjusts your portfolio to be less risky as you age. The worst-performing target-date investors at Vanguard earned 11.8% annually over the past five years, far outpacing the worst DIYers, who gained just 2.1%.

Roll over as you go. Twentysomethings typically spend 1.3 years at each job. And Fidelity says nearly half cash out 401(k)s when leaving. That triggers income taxes and a 10% penalty, depleting the amount that can compound. The box shows what that really costs you.

Gen Xers

Gen Xers Keep the bottom line top of mind. A funny thing about investing: The more you save and the bigger your balance, the more fees you have to pay in dollar terms. So now that your account has some serious money, shifting to lower-cost options such as an index fund is an easy way to save big (see chart). If you have $100,000 saved by 40 and underlying returns average 7%, the savings by 65 of switching from a 1.2%-fee fund to 0.3% is $102,000—nearly a whole second nest egg.

Shoot for 17%. How much you need to save depends on how much you already have. But 17% is a good mental anchor. That’s the number Wade Pfau of the American College of Financial Services came up with for folks starting from scratch at 35, with a 60% stock/40% bond portfolio, to safely fund a typical retirement goal. You might be okay saving less if the markets go your way, but Pfau’s number is what it takes to get there even with poor returns. That’s far more than the average 401(k) contribution of around 6% to 7%. But take a deep breath. That number includes the contributions from your employer.

Resist the urge to borrow. About 22% of participants between 35 and 54 in plans run by ­Vanguard have borrowed from their retirement accounts. Compared with other forms of debt, a 401(k) loan isn’t the worst. But the amount that you borrow is money that’s not compounding tax-deferred.

Baby Boomers

Baby Boomers Save in bursts. Neither saving nor spending runs along a smooth path. For example, you may have to pare back savings while paying the kids’ college bills. The good news is that “after 50 is when people should be able to save the most, as their kids are moving out, they’ve paid off the mortgage, and they should be in the highest earnings years of their lives,” says economist Wade Pfau. Starting at 50, you can also make extra 401(k) contributions of up to $5,500, on top of the normal $17,500.

Prep for the spend-down phase. Once you retire, you’ll have to spend out of your nest egg regardless of market conditions. Even if stocks do well on average, a bad run early on can deplete your portfolio. So “start taking a couple percent of equities off the table every year in the five or 10 years leading up to retirement,” says financial adviser Michael Kitces.

Readjust your target. According to polls, Americans expect to retire around 66. But the actual age of retirement is 62. Things happen: You may run into health issues or be forced into early retirement. Now many 401(k) savers use target-date funds. As you gain more visibility on your own retirement date, adjust the ­target-date fund you use. As the chart shows, it can make a big difference. Notes: Cash-out growth assumes a 5% annual return. Fee calculations are based on total costs, including forgone gains. sources: Morningstar, T. Rowe Price, SEC, MONEY research

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