MONEY stocks

10 Smart Ways to Boost Your Investing Results

stacks of coins - each a different color
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You don't have to be an investing genius to improve your returns. Just follow a few simple steps.

Recent research shows that people who know their way around investing and finance racked up higher annual returns (9.5% vs. 8.2%) than those who don’t. Here are 10 tips that will help make you a savvier investor and better able to achieve your financial goals.

1. Slash investing fees. You can’t control the gains the financial markets deliver. But by sticking to investments like low-cost index funds and ETFs that charge as little as 0.05% a year, you can keep a bigger portion of the returns you earn. And the advantage to doing so can be substantial. Over the course of a career, reducing annual fees by just one percentage point can boost the size of your nest egg more than 25%. Another less commonly cited benefit of lowering investment costs: downsizing fees effectively allows you to save more for retirement without actually putting aside another cent.

2. Beware conflicted advice. Many investors end up in poor-performing investments not because of outright cons and scams but because they fall for a pitch from an adviser who’s really a glorified salesman. The current push by the White House, Department of Labor and Securities and Exchange Commission to hold advisers to a more rigorous standard may do away with some abuses. But the onus is still on you to gauge the competence and trustworthiness of any adviser you deal with. Asking these five questions can help you do that.

3. Gauge your risk tolerance. Before you can invest properly, you’ve got to know your true appetite for risk. Otherwise, you could end up bailing out of investments during market downturns, turning paper losses into real ones. Completing a risk tolerance questionnaire like this one from RealDealRetirement’s Retirement Toolbox can help you assess how much risk you can reasonably handle.

4. Don’t be a “bull market genius.” When the market is doing well and stock prices are surging, it’s understandable if you assume your incredible investing acumen is responsible for those outsize returns. Guess what? It’s not. You’re really just along for the ride. Unfortunately, many investors lose sight of this basic fact, become overconfident, take on too much risk—and then pay dearly when the market inevitably takes a dive. You can avoid such a come-down, and the losses that accompany it, by leavening your investing strategy with a little humility.

5. Focus on asset allocation, not fund picking. Many people think savvy investing consists of trying to identify in advance the investments that will top the performance charts in the coming year. But that’s a fool’s errand. It’s virtually impossible to predict which stocks or funds will outperform year to year, and trying to do so often means you’ll end up chasing hot investments that may be more prone to fizzle than sizzle in the year ahead. The better strategy: create a diversified mix of stock and bond funds that jibes with your risk tolerance and makes sense given the length of time you plan to keep your money invested. That will give you a better shot at getting the long-term returns you need to achieve a secure retirement and reach other goals while maintaining reasonable protection against market downturns.

6. Limit the IRS’s take. You should never let the desire to avoid taxes drive your investing strategy. That policy has led many investors to plow their savings into all sorts of dubious investments ranging from cattle-breeding operations to jojoba-bean plantations. That said, there are reasonable steps you can take to prevent Uncle Sam from claiming too big a share of your investment gains. One is doing as much of your saving as possible in tax-advantaged accounts like traditional and Roth 401(k)s and IRAs. You may also be able to lower the tab on gains from investments held in taxable accounts by investing in stock index funds and tax-managed funds that that generate much of their return in the form of unrealized long-term capital gains, which go untaxed until you sell and then are taxed at generally lower long-term capital gains rates.

7. Go broad, not narrow. In search of bigger gains, many investors tend to look for niches to exploit. Instead of investing in a broad selection of energy or technology firms, they’ll drill down into solar producers, wind power, robotics, or cloud-computing firms. That approach might work, but it can also leave you vulnerable to being in the wrong place at the wrong time—or the right place but the wrong company. Going broader is better for two reasons: it’s less of a guessing game, and the broader you go the lower your investing costs are likely to be. So if you’re buying energy, tech or whatever, buy the entire sector. Better get, go even broader still. By investing in a total U.S. stock market and total U.S. bond market index fund, you’ll own a piece of virtually all publicly traded U.S. companies and a share of the entire investment-grade bond market. Throw in a total international stock index fund and you’ll have foreign exposure as well. In short, you’ll tie your portfolio’s success to that of the broad market, not just a slice of it.

8. Consider the downside. Investors are by and large an optimistic lot, otherwise they wouldn’t put their money where their convictions are. But a little skepticism is good too. So before putting your money into an investment or embarking on a strategy, challenge yourself. Come up with reasons your view might be all wrong. Think about what might happen if you are. Crash-test your investing strategy to see how you’ll do if your investments don’t perform as well as you hope. Better to know the potential downside before it occurs than after.

9. Keep it simple. You can easily get the impression that you’re some kind of slacker if you’re not filling your portfolio with every new fund or ETF that comes out. In fact, you’re better off exercising restraint. By loading up on every Next Big Thing investment the Wall Street marketing machine churns out you run the risk of di-worse-ifying rather than diversifying. All you really need is a portfolio that mirrors the broad U.S. stock and bond markets, and maybe some international exposure. If you want to go for more investing gusto, you can consider some inflation protection, say, a real estate, natural resources, or TIPS fund. But I’d be wary about adding much more than that.

10. Tune out the noise. With so many investing pundits weighing in on virtually every aspect of the financial markets nearly 24/7, it’s easy to get overwhelmed with advice. It might make sense to sift through this cacophony if it were full of investing gems, but much of the advice, predictions, and observations are trite, if not downright harmful. If you want to watch or listen to the parade of pundits just to keep abreast of the investing scuttlebutt, fine. Just don’t let the hype, the hoopla, and the hyperbole distract you from your investing strategy.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More From RealDealRetirement.com:

 

MONEY retirement savings

Borrowing From Your 401(k) Might Not Be Such a Bad Thing

carton of gold eggs, some are empty
GP Kidd—Getty Images

Most loans get paid back. It's cashing out that's the problem.

“Leakage,” using 401(k) or IRA savings to pay for anything other than retirement, has become something of a bad word in the personal finance world. One policy wonk, Matt Fellowes, the founder and CEO of HelloWallet, took the metaphor even further when he wrote that “the large rate and systematic quality of the non-retirement uses of DC [defined contribution] assets indicates that these plans are now being ‘breached.’ This is a massive systematic problem that now affects 1 out of every 4 participants, on average—which is more like a gaping hole in the DC boat than a pesky ‘leak.’

But leaks come in different shapes and sizes, and it turns out that some of them—such as taking loans from your own account, which you then pay back with interest—are less dangerous to your future financial security than others. Data from Vanguard shows that 18% of people participating in plans offering loans had a loan outstanding in 2013, and about 11% took out a new loan that year, which sounds like a very high rate. But the average loan was about $9,500 and most of it gets repaid, so it actually doesn’t represent a permanent drain on retirement savings. “Loans are sometimes criticized as a source of revolving credit for the young, but in fact they are used more frequently by mid-career participants,” note Alicia Munnell and Anthony Webb of the Center for Retirement Research at Boston College.

The real problem is what is known as a “cash-out,” when employees take a lump-sum distribution when they change jobs, instead of keeping their savings in their employer’s plan, transferring it to their new employer’s 401(k), or rolling it into an IRA. These cash-outs are subject to a 10% early withdrawal penalty (if you’re under the age of 59½) and a 20% withholding tax. Vanguard reports that 29% of plan participants who left their jobs in 2013 took a cash distribution. Younger participants with lower balances are more likely to cash out than older ones.

Equally risky, although more difficult to obtain, are “hardship withdrawals,” which allow 401(k) plan participants to access funds if they can prove that they face an “immediate and heavy financial need,” such as to prevent an eviction or foreclosure or to pay for postsecondary tuition bills. As with cash-outs, these withdrawals are subject to a 10% penalty as well as 20% withholding for income tax. (You can take a non-penalized withdrawal if you become permanently disabled or to cover very large medical expenses.) Employees must prove that they’ve exhausted every other means, including taking a loan from their 401(k). The rules governing IRAs are much more relaxed and include taking penalty-free withdrawals of up to $10,000 to buy, build, or rebuild a first home or even to pay for medical insurance for those unemployed for 12 weeks or more—situations one might argue it would be better to have established a six-month emergency or house fund to cover instead of taking from your IRA.

Policy watchers such as Munnell and Webb recommend tightening up regulations to reduce leakage, arguing in particular that allowing participants to cash out of 401(k)s when they change jobs is “hard to defend” and that the mechanism could be closed down entirely by changing the law to prohibit lump-sum distributions upon termination. It would also make sense to make the rules for withdrawals from IRAs as strict as those from 401(k)s, since more and more assets are moving in that direction as people leave jobs and open rollover IRAs.

But perhaps the biggest lesson of leakage is that if people are reaching into their retirement funds to pay for basic needs such as housing or health insurance, they may be better off not participating in a 401(k) until they have enough emergency savings under their belt. Contributing to a retirement plan is important, but not if you turn your 401(k) into a short-terms savings vehicle and ignore basic budgeting and emergency planning.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

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Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

MONEY Savings

Retirement Savers, Don’t Count on Washington to Protect You

Regulations that would protect the interests of retirement savers are finally gaining traction in Washington. But don't pop the champagne corks just yet.

After years of talk about how to protect retirement savers, the White House has gotten behind a Labor Department proposal that would require financial advisers to put clients’ interests ahead of their own.

Consumer champion Sen. Elizabeth Warren, who says she is not running for president, is doing wall-to-wall media on her view that the government should do more to regulate providers of 401(k) plans, 403(b) plans and individual retirement accounts.

The Supreme Court heard arguments on Tuesday in a case challenging high 401(k) fees.

But savers should not pop champagne corks yet. It takes forever and a day to legislate and regulate in Washington. Even if it ends up on a fast track, the Labor Department’s draft rule is expected to leave a loophole big enough to drive the brokerage industry through.

Labor Department officials have said it would allow retirement advisers to continue selling investments on commission, as long as they disclosed that to clients.

There are several issues involved in regulating retirement investment advice. A primary one is the quality of 401(k) and 403(b) plans. Employers, who have a fiduciary responsibility to provide good plans to their employees, often hand over program management to consultants, who can keep program costs to employers low and jack up investment fees that workers pay when they buy funds in their plans.

A second issue involves the quality of advice investors get on their individual retirement accounts. If the advice is from brokers, there is a possibility investors are being put into mutual funds that carry higher fees than are optimal for them or are in other ways being put into funds that are not right for them. Higher fees may compensate brokers who are paid by commission or may compensate fund companies that spend the extra cash in ways that benefit the brokerage firms that offer their funds. That can result in investment advice that is conflicted.

After years of lobbying by the brokerage industry, the Labor Department is leaning toward a rule that would allow conflicts, such as commissions and fund company payments to brokerages, as long as they were disclosed. So investors take note: you are eventually going to have to read all the small print, so you might as well start now.

Here’s how to protect your retirement savings:

Check your 401(k) plan. Numerous large employers have spent big bucks to settle class action lawsuits focused on mutual fund fees in retirement plans, and fees have fallen. Average annual management fees of 401(k) funds are below 0.5 percent at large companies and below 1 percent at small companies. If your company’s fund choices are out of line, talk to your human resources department. If your only choices are substandard funds and high fees, put only enough in your 401(k) to get the employer matching contributions, and then invest additional funds in a personal IRA or Roth IRA.

Choose inexpensive mutual funds. Investing in low cost index funds instead of costlier actively managed funds will put you ahead. A person earning $75,000 a year who starts saving at age 25 would spend $104,033 in fees over a lifetime if fees were capped at 0.25 percent of assets annually. At 1.3 percent, that same worker would spend $409,202, according to the Center for American Progress. That extra $305,169 could support roughly $1,000 a month for life in extra retirement income.

Separate advice from your investments. If you want help figuring out which funds to invest in, pay a fee-only financial adviser, do not depend on “free” advice from a commissioned broker. You can get inexpensive advice from big fund companies like Vanguard, Fidelity Investments, and T Rowe Price, or from so-called “robo advisers” like Wealthfront or Betterment.

Be especially careful about rollovers. When you leave a job, you typically have the right to keep your money invested in your 401(k), an excellent choice if you work for a company that provides good funds within the plan. Or you can roll it over into a so-called “Rollover IRA” at any brokerage or fund company. Choose a low-fee fund company or discount brokerage that will enable you to choose your own investments from a large pool of individual stocks and inexpensive funds, and buy only the advice you need.

MONEY Ask the Expert

How to Turn Your Tax Loss Into a Gain

Investing illustration
Robert A. Di Ieso, Jr.

Q: I have a substantial amount of tax-loss carry forwards, but all of my net worth is now in tax-deferred accounts, such as my 401(k). I am 68 years old and don’t expect any large capital gains to offset these losses. Is there any way to recover these losses before I die?

A: The silver lining of investment losses is that you can use them to offset future capital gains—and you can carry them forward indefinitely. In other words, if you lose $10,000 on a stock in a taxable account, you can sell other stocks at a $10,000 gain and not owe taxes, even if those gains come years down the road. (Remember that to claim any loss you need to have actually sold the dud investment, and of course you’ll need to fill out the proper IRS paperwork to get that loss on record.)

Unfortunately, as you noted, these losses aren’t as useful if most of your savings is in tax-sheltered retirement vehicles, which aren’t subject to capital gains taxes. “Anything you take out of a 401(k) or other tax-deferred vehicle is taxed as ordinary income,” says Barbara Steinmetz, a certified financial planner and enrolled agent in San Mateo, Calif.

Uncle Sam does offer some consolation. Each year, you can use up to $3,000 of your losses to offset your ordinary income, says Steinmetz. But you need to first use your losses against any capital gains that year.

Moreover, upon death, your spouse effectively inherits those losses. A spouse can then use those losses to offset capital gains or, if there are no gains or excess losses, up to $3,000 a year against ordinary income. Once your spouse passes away, however, those losses are gone.

If you sell your home and make more than $250,000 on the sale ($500,000 if you’re married) you can apply your carry-forward losses toward any gains above those exclusion limits, says Steinmetz.

Likewise, you could open a taxable brokerage account knowing that you’ve banked some losses toward future appreciation and harvest your winners from there. But whatever you do, don’t let the proverbial tax tail wag the dog. Better to forgo the write off than make bad investment choices.

MONEY

25 Ways to Get Smarter About Money Right Now

150212_RET_SMARTER_LEDE
John Lund—Getty Images

Small steps that can make a big difference.

Retirement planning is serious business that requires diligence and patience. But a quick tip, or even an irreverent one, can sometimes be helpful, too. Here are 25 observations from my 30 years of writing about retirement and investing that may spur you to plan more effectively (or to start planning if you’ve been putting it off).

1. If you’re not sure whether you’re saving enough for retirement, you probably aren’t. You can find out for sure pretty easily, though, by going to this Am I Saving Enough? tool.

2. There’s an easy way not to outlive your money: die early. But I think most people would agree that coming up with a realistic and flexible retirement income plan is a more reasonable way to go.

3. If your primary rationale for doing a Roth 401(k) or Roth IRA instead of a traditional version is that “tax free is always better than tax-deferred,” you need to read this story before doing anything.

4. Some people put more thought into whether to have fries with their Big Mac than deciding when to claim Social Security benefits. Unfortunately, giving short shrift to that decision may put those same people at greater risk of having to work behind a fast-food counter late in life to maintain their standard of living.

5. Yes, stocks are risky. But if they weren’t, they wouldn’t be able to generate the high long-term returns that can help you build a sizeable nest egg without devoting a third or more of your income to saving.

6. Just because the mere thought of an immediate annuity makes your eyes glaze over doesn’t mean you shouldn’t consider one for your post-career portfolio. When it comes to retirement income, boring can be beautiful.

7. What do rebalancing your retirement portfolio and flossing have in common? We know we ought to make both part of our normal routine, but many people don’t get around to either as regularly as they should.

8. Lots of people (especially in the media) complain that we’d all be better off if companies would just go back to giving workers check-a-month retirement pensions instead of 401(k) plans. But that’s not gonna happen. So focus your efforts on how to maximize your 401(k) or other savings plan.

9. Target-date funds’ stock-bond allocations can’t match your risk tolerance exactly. But guess what? You don’t need an exact match to invest successfully for retirement. And for most people an inexact target-date portfolio is a lot better than anything they’d build on their own.

10. A really smart fund manager can beat an index fund. Problem is, there’s no way to tell in advance whether a manager is one of the handful who’s truly smart or one of the many who look smart but are just lucky or having a few good years. That’s why you’re better off going with index funds in your retirement portfolio.

11. Your employer’s 401(k) match isn’t really “free.” It’s part of your compensation. Which makes it all the more puzzling why anyone wouldn’t contribute at least enough to his 401(k) to get the full company match.

12. Investing in a fund with high fees is like betting on a racehorse being ridden by a fat jockey. Sure, the horse could still be good enough to win. But do you want to put money on it? A low-cost fund effectively allows you to boost your savings rate and gives you a better shot at building an adequate nest egg and making it last throughout retirement.

13. Every time you move to a new house or apartment do you leave all your furniture and other possessions behind? Then why do so many people fail to consolidate their old 401ks into their current plan or a rollover IRA? (Okay, if the old plan’s investing options are unmatchable, that’s a reason. But seriously, how often is that the case?)

14. A reverse mortgage can be a good option to supplement retirement income if your other resources are coming up short. But be sure to consider a trade-down as well. In fact, you may be able to trade down and then do a reverse mortgage in the future.

15. No rule of thumb can be a substitute for detailed retirement planning. But some rules of thumb are better than no planning at all. And going with a rule of thumb may at least help you get on track toward a secure retirement until you decide to get more serious about your planning.

16. Many people are skittish about investing in bonds these days because they’re worried they’ll get clobbered when interest rates rise. But you know what? Pundits have been predicting bond Armageddon for years and it hasn’t happened. Besides, as this research shows, even at today’s low yields bonds remain an effective way to hedge equity risks and diversify your portfolio.

17. People peddling high-cost variable annuities know that retirement investors love the word “guaranteed.” Which is why as soon as you hear that alluring word, you should ask what, exactly, is being guaranteed and who is doing the guaranteeing? Then ask how much you’re paying for that guarantee and what you’re giving up for it. The answers may surprise and enlighten you.

18. No retirement calculator can truly tell you whether you’re on track for a secure retirement because no tool can fully reflect the uncertainty and complexity of real life. Of course, the same goes for the most sophisticated software and human advisers, too. The reason to fire up a good retirement calculator isn’t to come away with a projection that’s 100% accurate. It’s to get a sense of whether you’re on the right course and see how different moves might improve your prospects.

19. You don’t have to be a financial wiz to invest successfully for retirement. But understanding a few basic principles can improve your investing results. Try this investing quiz to see how much you know.

20. Getting fleeced by an unscrupulous adviser or ravaged by a severe bear market can certainly wreak havoc on your retirement plans. But for most people it’s basic lapses in investing and planning that diminish their retirement prospects the most.

21. Many experts say the 4% rule is broken, that it no longer works in today’s low-return world. Fact is, the 4% rule was never all it was cracked up to be. To avoid running out of money in retirement, plug your spending, income, and investing info into a retirement income calculator capable of assessing the probability that your money will last—then repeat the process every year or so to see if you need to adjust your spending.

22. Diversifying your portfolio can lower risk and boost returns. But if you try to get too fancy and stuff your portfolio with investments from every obscure corner of the market and all manner of arcane ETFs, you may end up di-worse-ifying rather than diversifying.

23. Many retirees pour their savings into “income investments” like dividend stocks and high-yield bonds when they want to turn their savings into reliable income. But such a focus can be dangerous. A better way to go: create a low-cost diversified portfolio that generates both income and growth, and then get the income you need from interest, dividends, and periodic sales of fund or ETF shares.

24. The next time wild swings in the market give you the jitters, don’t look to bail out of stocks and huddle in bonds or cash. Market timing doesn’t work. Instead, do this 15-minute Portfolio Check-Up, and then take these 3 Simple Steps to Crash-Proof Your Portfolio.

25. Financial security is definitely important, but retirement satisfaction isn’t just a question of money. Lifestyle matters, too. Among the lifestyle factors that make for a happier post-career life: maintaining your health, staying active and engaged through occasional work or volunteering, cultivating a circle of friends…and, yes, regular sex.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More from RealDealRetirement.com:

Social Security: Your 3 Most Pressing Questions Answered

5 Questions To Ask Before Hiring A Financial Adviser

How To Tell If You Can Afford To Retire Early

 

 

 

MONEY Benefits

The Treasures Hidden in Employee Benefits

businessman with treasure chest of gold coins
Machine Headz—iStock

People often don't realize that they're missing out on valuable employee benefits. Here's how one planner helps them get what's theirs.

I’m talking with a client, Sarah, about her work benefits.

“Are you signed up for disability insurance through work?” I ask. Since Sarah, who’s in her 30s, has at least 25 years until retirement, this insurance is a very important component of her financial plan.

Sarah says she thinks she is.

“Great,” I say. “How long is the waiting period on that, and what percentage of your salary is covered?”

Sarah responds with a big “Ummmm, I have no idea.”

This discussion is actually much more common than you might think. Life gets busy. When open enrollment happened, Sarah checked the boxes on her benefits form without really understanding what she was looking at. Then she moved on with her life. What’s the harm in that?

The harm is that if she hasn’t closely reviewed her employee benefits, she may have a false sense of safety. She may not have checked the right boxes. Her coverage may have major gaps or important conditions of which she’s not aware.

As a financial planner who specializes in working with Gen X professionals, I perform a comprehensive review of my client’s employee benefits as part of his or her financial plan. I can quickly identify potential gaps in insurance coverage, or tax-saving accounts that she or he is not taking advantage of.

Not every financial planning firm does this. Some advisers think that the client already has it under control. Some advisers put a majority of their focus on investment management, and maybe they don’t think they have time to review outside information. This is a mistake.

Here’s the problem: What you don’t know can hurt you. A client may think she has disability insurance through work, but what if she never actually signed up? She suddenly gets diagnosed with cancer and can’t work. Then she misses out on the 50%-60% of the monthly paycheck that employer-provided disability plans often provide. So now she’s dealing with both the stress of cancer treatments and the challenge of paying for living expenses no longer covered by her income. And her adviser has failed her.

A review of employee benefits doesn’t have to take long. Here are the steps I take with my clients:

  1. My client sends me either the employer benefits summary or screenshots from his or her employer benefits website.
  2. I look at the retirement plan. Is it pre-tax only, or is there an option to do Roth 401(k) or Roth 403(b) contributions? What is the employer matching formula? If the client is behind on saving for retirement, is there room to increase contributions before hitting the IRS-mandated maximum?
  3. Next, I review the disability insurance information. Is there long-term disability insurance offered? If so, is the client currently signed up for it? Is there an option to increase the coverage for a little more money? What is the waiting period? Does the employer or the employee pay the premiums (affecting whether the benefits are taxable)?
  4. I review the life insurance benefits. What is basic included coverage? If the client doesn’t have enough insurance, is there an option to increase the coverage? Does that option require medical underwriting or can he or she increase coverage without a medical exam?
  5. I make sure that the client is signed up for the health insurance plan that makes the most sense for him or her. Sometimes it’s better for spouses to be on the same health insurance policy instead of separate ones through their respective employers. Would the client benefit from doing a high-deductible plan (an attractive choice if the client is in good health)?
  6. Finally, I review the tax-advantaged savings account (usually a Health Savings Account or a health Flexible Spending Arrangement and a childcare FSA) to see if there are any benefits that we could be using, and I check the other benefits (like tuition reimbursement and pre-paid legal services) to see if there is anything else that could save my client money.

Once I report my recommendations to my clients, I find that they really appreciate that I am looking out for their best interests. And it gives them another reason to stick around.

———-

Katie Brewer, CFP, is the president of Your Richest Life, where she works virtually with Gen X professionals, helping them create and stick to a financial roadmap to live their richest life. Katie is a fee-only planner, a founding member of the XY Planning Network, and a member of the Financial Planning Association.

MONEY Financial Planning

The Most Important Money Mistakes to Avoid

iStock

Smart people do silly things with money all the time, but some mistakes can be much worse than others.

We asked three of our experts what they consider to be the top money mistake to avoid, and here’s what they had to say.

Dan Caplinger
The most pernicious financial trap that millions of Americans fall into is getting into too much debt. Unfortunately, it’s easy to get exposed to debt at an early age, especially as the rise of student loans has made taking on debt a necessity for many students seeking a college education.

Yet it’s important to distinguish between different types of debt. Used responsibly, lower-interest debt like mortgages and subsidized student loans can actually be a good way to get financing, helping you build up a credit history and allowing you to achieve goals that would otherwise be out of reach. Yet even with this “good” debt, it’s important to match up your financing costs with your current or expected income, rather than simply assuming you’ll be able to pay it off when the time comes.

At the other end of the spectrum, high-cost financing like payday loans should be a method of last resort for borrowers, given their high fees. Even credit cards carry double-digit interest rates, making them a gold mine for issuing banks while making them difficult for cardholders to pay off once they start carrying a balance. The best solution is to be mindful of using debt and to save it for when you really need it.

Jason Hall
It may seem like no big deal, but cashing out your 401(k) early has major repercussions and leads you to have less money when you’ll need it most: in retirement.

According to a Fidelity Investments study, more than one-third of workers under 50 have cashed out a 401(k) at some point. Given an average balance of more than $14,000 for those in their 20s through 40s, we’re talking about a lot of retirement money that people are taking out far too early. Even $14,000 may seem like a relatively easy amount of money to “replace” in a retirement account, but the real cost is the lost opportunity to grow the money.

Think about it this way. If you cash out at 40 years old, you aren’t just taking out $14,000 — you’re taking away decades of potential compound growth:

Returns based on 7% annualized rate of return, which is below the 30-year stock market average.

As you can see, the early cash-out costs you dearly in future returns; the earlier you do it, the more ground you’ll have to make up to replace those lost returns. Don’t cash out when you change jobs. Instead, roll those funds over into your new employer’s 401(k) or an IRA to avoid any tax penalties, and let time do the hard work for you. You’ll need that $100,000 in retirement a lot more than you need $14,000 today.

Dan Dzombak
One of the biggest money mistakes you can make is going without health insurance.

While the monthly premiums can seem like a lot, you’re taking a massive risk with your health and finances by forgoing health insurance. Medical bills quickly add up, and if you have a serious injury, it may also mean you have to miss work, lowering your income when you most need it. These two factors, as well as the continuing rise in healthcare costs, are why a 2009 study from Harvard estimated that 62% of all personal bankruptcies stem from medical expenses.

Since then, we’ve seen the rollout of Obamacare, which signed up 10.3 million Americans through the health insurance marketplaces. Gallup estimated last year that Obamacare lowered the percentage of the adult population that’s uninsured to 13.4%. That’s the lowest level in years, yet it still represents a large number of people forgoing health insurance.

Lastly, as of 2014, not having health insurance is a big money mistake. For tax year 2014, if you didn’t have health insurance, there’s a fine of the higher of $95 or 1% of your income. For tax year 2015, the penalty jumps to the higher of $325 or 2% of your income. While there are some exemptions, if you are in a position to do so, get health insurance. Keep in mind that for low-income taxpayers, Obamacare includes subsidies to lower the monthly payments to help afford health insurance.

MONEY Ask the Expert

How to Secure Your Finances When Reality Doesn’t Bite

Investing illustration
Robert A. Di Ieso, Jr.

Q: I am a 22-year-old college grad with a six-figure income and minimal student debt. I have no car and live with my parents. Is there something I should do now to lead a secure and fiscally responsible life? My father gave me the name of his planner but he was of little help — Timothy

A: Given your age, healthy salary, low expenses, and minimal debt, you’re financial situation is pretty straight forward. “There is a time and a place to work with a financial planner, and now may not be one of them,” says Maggie Kirchhoff, a certified financial planner with Wisdom Wealth Strategies in Denver.

If you still want some guidance, you may have better luck getting referrals from friends or colleagues. “A planner who’s a good fit for your parents may not be a good match for you,” she adds.

In the meantime, there are plenty of things you can be doing to improve your financial security. The biggest one: “Save systematically,” says Kirchhoff. If you start saving $5,500 a year, even with a conservative 5% annual return, you’ll have nearly $600,000 when you turn 60. “That assumes you never increase contributions,” she says.

It sounds like you’re in a position to save several times that amount now that your expenses are still low. Make use of your current economic sweet spot by taking full advantage of tax-friendly retirement vehicles, such as an employer-sponsored 401(k) plan. You can sock away up to $18,000 a year in such a plan, and any contributions are exempt from federal and state taxes. If your employer offers matching benefits, contribute at least enough to get the most you can from that benefit.

Your 401(k) plan likely offers an allocation tool to help you figure out the best mix of stocks and bonds for your time horizon and risk tolerance. Based on that recommendation, you’ll want to choose a handful of low-cost mutual funds or index funds that invest in companies of different sizes, in the United States and abroad. “You can make it as complicated or simple as you like,” says Kirchhoff.

If you want to keep things simple, look at whether your plan offers any target-date funds, which allocate assets based on the year you expect to retire (a bit of a guess at this point) and automatically make changes to that mix as that date nears. Caveat: Don’t overpay to put your retirement plan on autopilot; ideally the expense ratio should be less than 1%.

Now, just as important as investing for retirement is making sure you protect that nest egg from its biggest threat: you. Build an emergency fund so you won’t be tempted to dip into your long-term savings — and owe taxes and penalties — if you lose your job or face unexpected expenses.

“A general rule is three to six months of expenses, but since his expense are already so low, he should aim to eventually save three to six months of his take-home pay,” says Kirchhoff, who recommends keeping your rainy-day fund in a money market account that isn’t tied directly to your checking account.

With the extreme ends of your financial situation covered, you’ll then want to think about what you have planned for the next five or 10 years.

Is graduate school in your future? What about buying or renting a place of your own? Once you get up to speed on your retirement savings and emergency fund, you can turn your attention to saving up for any near-term goals.

You might also consider eventually opening a Roth IRA. You’ll make after-tax contributions, but the money will grow sans tax, and you won’t owe taxes when you withdraw for retirement down the road. (Note: You can save up to $5,500 a year in a Roth, but contributions phase out once your modified gross adjusted income reaches $116,000 to $131,000.)

A Roth may not only save you more in taxes down the road, it also offers a little more flexibility that most retirement accounts. For example, you can withdraw up to $10,000 for a first-time home purchase, without tax or penalty, if you’ve had the account at least five years. Likewise, you can withdraw contributions at any point, for any purpose.

What about the student debt? Depending on the interest rate and whether you qualify for a tax deduction (in your case probably not), you could hang onto it and focus on other financial priorities.

That said, if you can make large contributions to your 401(k) plan, build your emergency fund and pay off your student debt at a quicker pace, says Kirchhoff, so much the better.

TIME

This Is The Dumbest Reason You’re Losing Money

TIME.com stock photos Money Dollar Bills
Elizabeth Renstrom for TIME

Your inaction could cost you big

Interest rates might be low, but they’re not going to stay that way forever. And when they do rise, the chance to save a bundle will vanish. In spite of that, most Americans won’t take advantage of this window of opportunity.

A new survey from HSH.com, a site for comparing and calculating mortgage rates, finds that only 9% of Americans plan to refinance a mortgage this year, while only 30% say they’re going to pay off credit card debt.

This means we’re leaving money on the table in a big way. “Given that most credit cards are variable-rate, a rising interest rate environment would tend to be more costly over time, so there is even a greater benefit to retiring balances as quickly as possible,” says HSH.com vice president Keith Gumbinger. When the prime rate goes up, so will your monthly rate, even if you haven’t added to your overall balance.

“As far as mortgage refinancing goes, it’s a matter of opportunism,” Gumbinger says. “At the moment, fixed mortgage rates are at about 20-month lows, and very close to as much as 60-year lows.” While there are more variables to consider when refinancing, such as if your credit is good enough to qualify for the lowest rate, how much equity you have in your home and whether or not you plan to stay in that home for a while longer, Gumbinger says the opportunity for greater savings — and month-to-month cash flow — can make refinancing worth it under the right circumstances.

Even though Americans might be aware of their collective inertia when it comes to taking these steps, Gumbinger says the actual number of people who make a proactive improvement to their finances is likely to be low. “Even the best intentions are rarely realized, and over the course of the year there are likely to be many distractions,” he points out. For comparison, last year only 24% of us paid off credit card debt, although 15% did take advantage of low rates to refinance a mortgage.

Unfortunately, it’s not even like we’re socking away the money we do have for the future. The survey finds that only a third of Americans say they’re going to save for retirement this year. That’s an improvement from the 27% who say they did last year, but it’s still low.

“The calendar continues to work against you in the battle to amass assets,” Gumbinger warns. “Incomes are growing again, so if IRA [or] 401k contributions have been on the minimal side over the last few years, here’s a bit of a chance to play catch-up.”

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