MONEY Estate Planning

Mom and Dad’s Money Secret (and How to Get In On It)

Stephen Swintek—Getty Images

Your Mom and Dad may be better off than you knew. But how well are they managing their finances?

Parents and their adult children often aren’t on the same page—and that’s especially true when it comes to money issues. But a new study uncovers a surprisingly big disconnect when it comes to understanding how prepared your Mom and Dad are for retirement. In many cases, the parents may be in better financial shape than their kids realize.

Three-quarters of parents and their adult children agree that it’s important to have frank conversations about wills, estate planning, eldercare and covering retirement expenses, according to Fidelity’s 2014 Intra-Family Finance Generational study out today. Yet 40% of parents surveyed say they haven’t had detailed conversations with their children about any of these topics, while 60% say they feel more comfortable talking to a financial professional than to their kids about their personal financial situation.

“Finances are always a difficult topic to broach with children. Parents want to retain their independence and they don’t want to be a burden to their children,” says John Sweeney, executive vice president of Retirement and Investing Strategies at Fidelity. “People in the sandwich generation know how tough it is from taking care of their own parents.”

The communication gap skews the expectations adult children have about taking care of their parents—and it adds to their stress about saving enough for their retirement. One out of three adults say they expect to support their Mom and Dad financially but 96% of parents say it won’t be needed.

The parents’ confidence may come in part from misunderstanding their retirement income needs. The survey found that 70% of parents don’t know exactly how much money they will have to live on in retirement, up from 65% when Fidelity did the survey two years ago.

The recent bull market may have also lulled parents into complacency. “It’s easy for people to become overconfident about their ability to manage their money,” says Ken Moraif, a senior advisor at Money Matters, a financial advisory firm in Dallas. “They don’t take into account that bull markets don’t go forever.”

Another startling gap from the survey: adult children underestimated the value of their parents’ estate by a whopping $300,000 on average. (The survey participants were an affluent group—parents were 55 or older, had children older than 30 and at least $100,000 in investable assets.)

Parents say a big reason they don’t talk to their kids about their personal finances is that they don’t want their kids to count too much on their future inheritance. Of course, that doesn’t mean parents will be passing on that wealth to their kids. Only half of American retirees are planning to give an inheritance to their children, according to a recent HSBC survey.

There’s also a big misunderstanding about who will care for Mom and Dad if they become ill. Nearly half of adult children expect to take care of a parent but only 6% of parents expect their kids to do that, the survey found.

“Adult children may plan to take care of their parents at the expense of other financial goals. If they know how those things will be funded, they can make better decisions about their own retirement,” says Sweeney.

Have these conversations before a health issue or financial problems crop up. “It’s much easier before there is a crisis,” says Moraif.

Of course, the hardest part is getting the conversation started. You could share a story about a friend who ran into problems because her father passed away before letting his children know how to find important documents. Another approach is to talk about your own plans for retirement and then inquire about how they are preparing.

“Tread lightly but sincerely with your parents. If they feel you’re coming from a place of love and caring, they’ll be more open. If they think you just want to know how much money they have for your inheritance, it’s not going to be a good conversation,” says Moraif.

Related: The Tough Talk Worth Having With Your Parents This Weekend

MONEY financial advisers

Investment Start-Ups Shake Up Financial Industry

Companies targeting mass-market millennials say they're forcing lower prices and greater transparency.

Led by a group of start-ups that have emerged in the last two years to offer previously expensive and exclusive financial services on a low-cost basis to a mass audience, the financial services industry is starting to adapt its ways.

The changing way of doing business is resulting in lower fees and more transparency about services, leaders of the start-ups say. And instead of failing or being gobbled up by larger entities, these online money management and investment product companies have been growing exponentially.

A snapshot of the growth revealed recently at the Reuters Global Wealth Management Summit in New York:

  • Wealthfront.com, a provider of low-fee investment management aimed at tech-savvy millennials, born after 1981, recently crossed $1 billion in assets under management, achieving that feat in two years. (Its closest cohort in the space, Betterment, now has $630 million under management.)
  • SigFig.com, which aggregates accounts and offers investing advice, but does not directly take in assets under management as its main service, tracks $200 billion. The company is on its way to tracking $1 trillion in the next year, said chief executive Mike Sha.
  • Hedgeable.com, which provides low-fee alternative investment products directly and has broad distribution on many traditional platforms such as Fidelity and TDAmeritrade, has $400 million in assets under management. With just six employees, the company is cash-flow positive and developing new products all the time.

For anyone thinking that sounds like a good target for an acquisition, Hedgeable’s chief executive, Michael Kane, said, decidedly, “We are not for sale.”

Already, the companies see their influence in fee slashing industrywide as well as on greater transparency. Firms like LPL Financial, Wells Fargo, and Edward Jones are trying to lower fees by offering bundled services, Kane said.

In five years, 90% of these companies will be offering flat-fee pricing for all of the services they offer a retail client, Kane predicted.

Change is also at hand as traditional firms rethink their pricing model, going from a percentage of assets under management to flat fees. SigFig has helped move this along by showing customers exactly how much they are paying in fees yearly. For clients who have money in traditional mutual funds at a brokerage, fees average $7,000 per year. More than 90% of those costs are avoidable, Sha said.

“Over 30 years, that’s staggering,” Sha said.

Another shift: how firms service customers who don’t have huge account balances. While traditional advisers often have high minimums of $500,000, Wealthfront accounts start at $5,000. In the last few weeks, the company has added about $100,000 in assets under management, all without needing to grow their 40-person staff.

Wealthfront chief executive Adam Nash understands why the big firms still mostly go after baby boomer clients, who control $15 trillion in wealth versus $2 trillion for millennials, a third of whom are still in college.

But Nash sees growth for Wealthfront as millennials age, and wants to engage them as early as possible. The company recently fielded a slew of complaints from college students who couldn’t sign up accounts, so the company lowered its minimum age to 18 from 21.

MONEY Health Care

The Retirement Decision That Could Cost You $51,000

An early retirement may be good for reducing stress but it will also shrink your nest egg.

If you’re worried that health care costs will take a big bite out of your retirement income, don’t retire early.

Couples retiring at age 65 will spend an average $220,000 on health care expenditures, according to the 2014 Retiree Health Care Cost Estimate by Fidelity Investments.

But if you leave the job before 65, you’ll face even higher costs. A couple retiring at 62 would pay $17,000 a year in insurance premiums and out-of-pocket expenses—a total of $51,000—before reaching Medicare eligibility at 65, Fidelity calculated. That would push your total retirement health care costs to $271,000.

“If you have to buy health insurance when you’re older and you’re not on Medicare yet, it’s going to be a lot more expensive,” says Carolyn McClanahan, a doctor and a certified financial planner in Jacksonville, Florida. Even under the Affordable Care Act, older people spend $500 to $1,000 more a month than younger people do in premiums, she points out.

All the more reason to delay your retirement as long as you can. If you wait till age 67, you could save $10,000 a year on your medical expenses. That’s assuming you stay employed and your company pays the majority of your health care costs, which allows you to delay taking Medicare. “On average, Medicare picks up much less than the typical employer plan,” says Sunit Patel, senior vice president of Fidelity Benefits Consulting.

There is some good news in Fidelity’s latest analysis. Health care expenses have moderated in recent years, so this year’s $220,000 lifetime expense is unchanged from 2013. That slowdown is the result of reduced costs for long-term prescription drugs covered by Medicare Part D, as well as lower per-enrollee Medicare expenditures.

Still, whether you retire at 62 or 67, health care is a big-ticket item—and you need to plan for more than just the medical bills. Fidelity’s estimates don’t include the cost of paying for long-term care services, such as a home health aide or a nursing home, in the event you become disabled.

Of course, the timing of your retirement isn’t always something you can control. About half of retirees report that they left the workforce earlier than planned because of health issues, a layoff, or to care for an elderly relative, according the Employee Benefit Research Institute.

If you want to retire early, or think you’ll be forced to leave the workforce, be sure to estimate your health care costs and budget that into your retirement spending. If you’re in ill health or have a chronic condition such as diabetes, you may need to set aside more money for doctor visits and prescription drugs. And take whatever steps you can to improve and maintain your health. “If you’re in your 50s, this is the time to take good care of yourself,” says McClanahan.

MONEY 401(k)s

Whoops! I Forgot to Rollover My 401(k)

The hidden costs of keeping a retirement plan with a former employer.

Up until recently I had two old 401(k) plans from former jobs, one that I haven’t contributed to since leaving the company 10 years ago. I used to have three such dormant accounts, but then I started having anxiety dreams about “losing” one of them—I felt like someone who had too many children to keep track of at an amusement park. So I converted the 401(k) account from my first job into a Roth IRA long ago.

As for the other two accounts, I had kept them in place because I liked the investment options, they performed well, and there seemed to be no reason to do otherwise. In fact, I was always a bit wary of the rollover marketing letters that would arrive after leaving a job—suspicious that if I left the corporate plan, with its bargaining power, I would fall prey to higher fees. And I felt kind of savvy knowing that I didn’t have to rollover.

It turns out that sense of savvy was actually semi-informed inertia. Yes, it’s true that no-load and low-fee funds have now become standard at all the IRA platforms, thanks in part to a fierce rivalry between Fidelity and Vanguard, the top 401(k) providers. But companies have actually become less generous about continuing to house former employees in their employee-sponsored 401(k)s and have begun passing on administration fees.

And yet people are still a bit more likely to leave their money in plans with their former employers than they are to rollover, according to a survey of job changers over 50 published last month by the Employee Benefit Research Institute. More than 27% left money in their old 401(k)s vs 25% who rolled over. Only 0.5% transferred the money to a new employer’s plan—but I don’t have that option as I’m freelancing at the moment. (Some 26% elected to start receiving benefits since they were retiring, and 17% withdrew the money, which, in case you don’t know, is a VERY BAD IDEA.)

You might be very surprised to learn that you may be paying administration fees for the record-keeping and custody of your dormant plans on top of the costs of the underlying investments. I certainly was. As soon as I got that tip-off, which I found in an investing book, I quickly called the retirement benefits offices for my two dormant accounts to find out if I was being charged.

The first, a large media company, acknowledged that it cost me $42 dollars a year for the privilege of keeping my money in the account that they sponsor through Fidelity, whereas I could roll over that money into a Fidelity IRA invested in the exact same funds with no administration charges. That $42 was a stealth fee (or at least, I hadn’t noticed it), and while not large, it deeply offended my sense of transparency and disclosure.

Can you guess whom I called next? 1-800-FIDELITY. It only took a few minutes to arrange for the rollover. The money was available in a few days to invest, at which point I created a similar portfolio, with some rebalancing between domestic and international equity funds, which was probably a good idea anyway.

The second company, also a large media conglomerate, told me that there are custodial costs for administering their plan through T. Rowe Price but that I was not being billed for them. My hunch is this company, being privately owned, has not been under quite as much pressure to cut benefits costs. Or perhaps it’s because I signed up for the plan in 1998, and as such I have been grandfathered into a more generous version. I’m leaving that 401(k) in place for now. There’s no way of really knowing why one employer bills dormant account holders and another doesn’t, but I have a feeling that I won’t have many more jobs where they won’t.

Ruth Davis Konigsberg, a fortysomething journalist and consultant to Arden Asset Management, writes weekly about retirement planning.

 

 

 

MONEY College

Grandma’s Willing to Pay $50,000 of College Tuition—if Only You’d Ask

New survey finds that more than half of grandparents want to help with 529 savings, according to Fidelity. Here's hoping your folks are in that generous majority!

With college admissions season behind us, many high school seniors are eagerly anticipating heading to college in the fall—while parents, on the other hand, are likely be anxious about how they’ll pay for it. Fortunately, many of them appear to be getting help from their own parents: According to a new study by Fidelity Investments, many grandparents are contributing to 529 college savings plans to help finance the high cost of education.

The study found that 53% of grandparents are either already saving or plan to save to assist in paying for their grandchildren’s college costs. Among those who have been socking away money, the median contribution is $25,000, though 35% said they expect to contribute at least $50,000. That’s enough to cover more than two years tuition, room and board at an in-state public college, and more than a year at a private college.

The 529 accounts specifically are an attractive option for grandparents because of the flexibility they offer, said Keith Bernhardt, vice president of college planning at Fidelity. Earnings are not taxed as long as the money is used toward education expenses. Additionally, grandparents are free to change the beneficiary of the account or take the contributions back at any point should they find themselves needing the money for their own retirement. (They will, however, owe income taxes and a 10% penalty on any earnings withdrawn.)

While 529s offer many benefits, families should understand the difference between how parent and grandparent accounts are treated in financial aid assessments. Any distribution from a grandparent-owned 529 counts as untaxed income on the following year’s Free Application for Federal Student Aid (FAFSA). Parent accounts, on the other hand, are counted as assets on the FAFSA— not as income—and factor into determining the Estimated Family Contribution.

“Income is assessed much more heavily,” said Joe Hurley, head of Savingforcollege.com.

Because grandparent accounts have a larger impact on financial aid, he added, owners of these accounts might want to wait to use the account until the final year of college, or they could shift the ownership to the parent.

While the amount and frequency of 529 contributions depends on individual financial circumstances, Mary Morris, chair of the College Savings Foundation and CEO of Virginia529, said she’s seen an overall increase in grandparents getting involved education expenses. Anecdotally, she estimated that 20% of Virginia accounts are owned by grandparents. Many contributions are made as gifts on special occasions, a pattern Morris expects to see more often going forward

Despite the trend, however, “there’s a real disconnect” between generations when it comes to communication about finances, Hurley said. According to the Fidelity survey, 90% of grandparents said they would likely make a contribution to a college savings plan—if asked.

“Parents feel it’s their responsibility to help their children if necessary,” Hurley said. So they’re “reluctant” to ask for help.

But the price tag of higher education has made that conversation one worth having.

“Parents cannot save enough, on average, to pay the full cost of college,” Bernhardt said. “Grandparents recognize that and want to chip in.”

MONEY credit cards

Best Credit Cards

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MDI Digital

Get a better deal from your plastic with these top 15 credit card picks for rewards junkies, balance carriers, frequent travelers, college students, and small business owners. What's the best card for you? MONEY and NerdWallet teamed up to find it.

THE QUANTITY–and quality–of the credit card offers in your mailbox has likely changed in recent months.

That’s owed to the fact that four years after the Great Recession officially ended, banks are finally opening the lending gates again. Until recently, issuers had marketed mainly to low-risk consumers with credit scores of 750-plus. Now card delinquencies are at their lowest level since 1994, TransUnion reports, and Americans are borrowing more than in any year since 2009. So banks are reaching out to a broader swath.

That’s great news for folks who were on the edge of qualifying for the best cards before (FICO scores of around 690 to 749). It’s not so great for those of you who were the target of issuers’ fancy for so long. More qualified borrowers means it’s more of a seller’s market. As a result, the perks you had grown to expect are weakening: Sign-up bonuses are down a bit from their post-recession highs; some issuers have put caps on cash back; and certain rewards are less rewarding (good luck getting 5% on gas anymore, for example).

“What we’re seeing is a reflection of the credit cycle,” says Anisha Sekar, vice president at Nerd-Wallet.com, a site that collects data and offers advice on credit cardsand other financial products.

With all that’s changed, you probably need some help sorting out the credit chaff from the really prime plastic. Et voilà! MONEY teamed up with NerdWallet and combed through its database of more than 1,700 cards to find the best options for five kinds of users: rewards seekers, travelers, borrowers, students, and small-business owners. (For a closer look at the methodology, see page 85.) There’s a card here that’s right for you.

BORROWING

It’s more expensive to carry a balance, with annual percentage rates on new cards averaging 15.31%, up from 14.30% in 2010, according to Bankrate. On the plus side, 0% intro periods have gotten longer, going from eight to 11 months on average over the same time, NerdWallet reports. You can save hundreds—even thousands—by transferring a debt and paying it off within the interest-free window. Or you can take advantage of the 0% trend to pay for a big-ticket purchase over time, at no cost.

1) BEST FOR BALANCE TRANSFERS

Chase Slate (chase.com)

APR: 13% to 23%

INTRO APR: 0% on purchases and balance transfers for 15 months

ANNUAL FEE: $0

BALANCE TRANSFER FEE: $0 if you transfer in the first two months, 3% after that

WHY IT’S A WINNER: Longest 0% period among balance-transfer cards that also have no annual fee and, more important, no balance-transfer fee (a charge that can undercut the benefits of changing cards).

THE CAVEATS: You have to act fast to move the balance or you’ll pay a fee of 3% on the amount you shift over. Also, while Slate offers 0% on new purchases as well, you can get a longer term with the Simplicity (below).

2) LOWEST ANNUAL PERCENTAGE RATE

Lake Michigan Credit Union Prime Platinum Visa (lmcu.org)

APR: 6.25% and up

ANNUAL FEE: $0

WHY IT’S A WINNER: Ideal for those who regularly carry a balance, since it offers the lowest possible APR among no-fee cards (6.25% for applicants with FICO scores of 760-plus).

THE CAVEATS: You have to be a member of the credit union, but you can join with a $5 donation. Not for those who pay in full, since this is a no-frills card.

3) BEST 0% DEAL ON NEW PURCHASES

Citi Simplicity (citi.com)

INTRO APR: 0% on purchases and balance transfers for 18 months

REGULAR APR: 13% to 22%

ANNUAL FEE: $0

WHY IT’S A WINNER: Longest 0% introductory period on new purchases among cards that have no annual fee—so it can be a great way to finance, say, your new kitchen appliances. Plus, it has no late fees and no penalty rates, ever.

THE CAVEAT: Not a great deal for balance transfers. Though it offers 0% for 18 months, you’ll foot a 3% fee.

REWARDS

When it comes to rewards, cash back is king, since it’s more transparent and easier to use than points. The average earn rate on cash cards has edged up from 0.83% in 2010 to 1.09% today, NerdWallet reports. But don’t get too excited: Your ability to earn is often less now, as “some attractive cards have put new limits on the amount you can get back in certain categories, like groceries,” says Alex Matjanec of MyBankTracker.com. Sign-up bonuses have been pared back a bit too, from an average of $82 in 2011 to $79 now.

1) BEST TIERED REWARDS (TIE)

American Express Blue Cash Preferred (americanexpress.com)

APR: 13% to 22%

ANNUAL FEE: $75

SIGN-UP BONUS: $150 after spending $1,000 in first three months

REWARDS:

  • 6% on groceries on up to $6,000 in purchases and 1% thereafter
  • 3% on U.S. gas stations and certain department stores
  • 1% on everything else

WHY IT’S A WINNER: Impressive rates (6% is almost unheard of) on key categories. If you charge $2,000 a month—including the $364 on groceries, $275 on gas, and $166 on department stores the Bureau of Labor Statistics finds typical for households earning $74,000 to $161,000—you’ll reap $489 a year, net the fee (excluding bonus).

THE CAVEAT: The 1% base rate is meager, so you may want to use this card in tandem with the one below.

U.S. Bank Cash Plus (usbank.com)

APR: 14% to 24%

ANNUAL FEE: %0

SIGN-UP BONUS: $50 to $100

REWARDS:

  • 5% on two categories from a list of 12 (e.g., restaurants, department stores, cell service, hotels) on up to $2,000 a quarter
  • 2% on your choice of gas, groceries, or drugstores
  • 1% on everything else
  • $25 bonus when you redeem $100 or more, once a year

WHY IT’S A WINNER: 5% is pretty sweet, particularly since you get to choose where it’s applied and there’s no annual fee on the card. If you dish out $2,000 a month and $450 of it is on restaurants and your cell plan, you’ll earn $557 a year with the redemption bonus (but not the signing bonus).

THE CAVEATS: Must elect categories quarterly—they are subject to change—or you get only 1% on everything. Can apply for card only at U.S. Bank branches.

2) BEST FLAT-RATE REWARDS (TIE)

Fidelity American Express (fidelity.com)

APR: 14%

ANNUAL FEE: $0

SIGN-UP BONUS: None

REWARDS: 2% on every purchase

WHY IT’S WINNER: Rewards are almost double the average earn rate with no limit on cash back, making this the best deal among no-fee, category-free cashcards. You’ll take back $480 a year if you spend $2,000 a month.

THE CAVEAT: Cash has to go into a Fidelity account (IRA, 529, brokerage, or cash management)—though funds can be withdrawn from the latter two.

Capital One Quicksilver (capitalone.com)

APR: 13% to 21%

ANNUAL FEE: $0

SIGN-UP BONUS: $100 after spending $500 within the first three months

REWARDS: 1.5% on every purchase

WHY IT’S A WINNER: Earn rate handily beats the average cash card, and there’s no cap. Rewards are redeemable as a statement credit, check, or gift card. Charge $2,000 a month and you’ll score $360 a year, not including signing bonus.

THE CAVEAT: Pays less than the Fidelity card, but offers easier access to the cash.

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MDI Digital

COLLEGE STUDENTS

The best plastic for your college kid probably isn’t marketed as a student card; such options have all but disappeared since 2009’s CARD Act went into effect. Among collegiate cardholders, 66% carry balances, Sallie Mae/Ipsos found. So a low APR should be a high priority.

Students must be 21 or have real income to get their own cards. Before 21, you can co-sign. A secured card—you deposit cash up to the limit as collateral—caps the damage your kid can do to your credit. But beware: With a low limit, “it’s easy to max out, which isn’t great for his credit score,” says Gerri Detweiler of Credit.com.

1) BEST SECURED

Digital Credit Union Visa Platinum Secured (dcu.org)

APR: 11.5%

ANNUAL FEE: $0

WHY IT’S A WINNER: No annual fee is rare on secured cards, and rates as low as 11.5% can soften the blow if Junior misses a payment. Digital Credit Union reports account status to the credit bureaus, so your child builds a credit history. You can set the credit limit, from $500 to as high as you wish.

THE CAVEAT: Must be a member of DCU to apply, though you can join with a $10 donation to Reach Out for Schools. Set the limit above what you think your child will need to use so as not to harm his nascent credit score.

2) BEST UNSECURED

Northwest Federal Credit Union FirstCard Visa Platinum (nwfcu.org)

APR: 10% fixed

ANNUAL FEE: $0

WHY IT’S A WINNER: Features a very low APR for a no-fee unsecured card available to those without credit history. Account status is reported to credit bureaus. Another plus: Applicants must complete an online course about credit.

THE CAVEATS: Must be a member of the credit union, but a $10 donation to Financial Awareness Network gets you in. Also, maximum credit limit is only $1,000, so caution Junior to spend cautiously.

SMALL BUSINESS

Entrepreneurs using a credit card to finance a startup or capital improvements should look at rates first. Biz card APRs average 13.6%, a hair lower than on personalcards. Almost half of cards also offer a 0% intro period, for an average of eight months. Nearly nine in 10 offer rewards, and a card that pays you back in the categories where you spend can make sense if your business pays in full every month, says NerdWallet’s Sekar.

1) BEST FOR CASH BACK

Chase Ink Cash (chase.com)

APR: 13%

ANNUAL FEE: $0

SIGN-UP BONUS: $200 cash after spending $3,000 in first three months

REWARDS:

  • 5% on office-supply stores, phone service, Internet, and cable on up to $25,000
  • 2% on gas and restaurants on up to $25,000
  • 1% on everything else, no cap

WHY IT’S A WINNER: Offers top-drawer cash-back rates on categories in which businesses typically spend a lot, and the Ink Cash has no annual fee. Assuming that your business spends $75,000 ($25,000 in each reward tier), you’d make back $2,000 a year, not including the sign-up bonus.

THE CAVEAT: Has a 3% fee for foreign transactions, so this is not the card to take to that conference overseas.

2) BEST FOR BORROWING

Wells Fargo Business Platinum (wellsfargo.com)

APR: 9% to 18%

ANNUAL FEE: $0 (or $50, waived the first year, if you join rewards program)

SIGN-UP BONUS: Double rewards for first six months

REWARDS: 1 point per dollar or 1% cash back, your choice

WHY IT’S A WINNER: Lowest APR for business borrowers among no-annual-fee cards.

THE CAVEAT: Rewards are subpar, especially considering the fee. Plus, cash is distributed quarterly, as opposed to on demand.

TRAVEL

The average earn rate on travel rewards cards has reached a cruising altitude of 1%, NerdWallet reports, but redeeming miles can be challenging. Unless you fly one airline a lot, go for one of the newer breed of cards that are airline agnostic. “The generic travel rewards cards don’t have blackout dates or restrictions,” says Ben Woolsey of Creditcards.com.

Go abroad a lot? More cards have no foreign transaction fee (27% vs. 4% in 2010). Only your plastic may not always work: Many countries are moving to a “chip-and-pin” technology available on few U.S. cards.

1) BEST FOR TRAVEL REWARDS

Barclaycard Arrival World MasterCard (barclaycardus.com)

APR: 15% to 19%

ANNUAL FEE: $89 (waived first year)

SIGN-UP BONUS: 40,000 bonus miles if you spend $1,000 in first 90 days (buys a $400 flight)

REWARDS:

  • Two miles per $1 spent
  • 10% miles back when you use them for travel

WHY IT’S A WINNER: Card not only comes with one of the largest sign-up bonuses but also has an impressive ongoing rewards rate of 2% with no caps. Miles can be applied as a statement credit when you spend on any kind of travel, be it flights, cruises, car rentals, or hotels. So you have a lot more leeway than an airline card. Plus, Arrival World MasterCard does not have a foreign transaction fee.

THE CAVEAT: Doesn’t have chip-and-pin technology, so it might not always work overseas. A salesperson can manually put through a magnetic strip card like this one, but you could have trouble at unmanned kiosks.

2) BEST FOR USING OVERSEAS

Andrews Federal Credit Union GlobeTrek Rewards (andrewsfcu.org)

APR: 8% to 18%

ANNUAL FEE: $0

SIGN-UP BONUS: 5,000 points with your first purchase

REWARDS: One point per $1 spent

WHY IT’S A WINNER: One of a handful of cards in the U.S. that come equipped with chip-and-pin technology while also having no foreign transaction fee and no annual fee. You can join the Andrews Federal Credit Union by first joining (for free) the American Consumer Council.

THE CAVEAT: Value of rewards on the Globe Trek is average—and they cannot be redeemed for cash, only for travel and merchandise; this card is really only for use while traveling overseas.

METHODOLOGY

MONEY decided upon the criteria to consider—which included intro and regular APRs, sign-up bonuses, annual fees, rewards, and other fees—then set parameters for what would make the best cards in each category (for example, lowest rates and no annual fee for someone who carries a balance). NerdWallet plugged the terms into its database and made several suggestions for each category, nothing the issuers from which it receives compensation when people apply through the site. MONEY made the final decisions and independently fact-checked the picks.

NOTE: APRs are rounded to the nearest percentage point and are variable except where noted. Rates are based on creditworthiness (largely FICO score) when a range is listed. Many of the winners require excellent (750+) credit.

MONEY

Building Your Own Target-Date Fund

I’m 30 years old and recently rolled my savings from a 401(k) into an IRA. I had been investing in a target-date retirement fund. But now that I have virtually unlimited investment options, I’m wondering whether I should just create the same portfolio using individual funds or ETFs. What do you think? — Brandon L., Rochester, N.Y.

Essentially, you’re asking whether you’re better off building your own target-date retirement fund or buying one off the shelf.

While you might be able to lower your expenses and thus boost your return with the DIY approach, it depends on how much you have to invest, which funds or ETFs you choose and how much work you’re willing to put into building and managing your own target-date portfolio.

To illustrate, let’s take a look at the Vanguard target-date fund designed for someone your age, the Vanguard Target Retirement 2045 VANGUARD CHESTER TARGET RETIREMENT 2045 FD VTIVX 1.5787% .

This fund invests 90% of shareholders’ money in stocks and 10% in bonds by divvying up its assets among three Vanguard index funds as follows: total stock market index (63% of assets), total international stock index (27%) and total bond index (10%). To invest in this fund, you pay annual expenses of 0.19% of assets, or $19 per $10,000 invested.

You could create a virtually identical portfolio by just investing your money in a total stock market index, a total international stock index and a total bond market index fund in the same proportion a target fund holds them. But you wouldn’t necessarily save any money by doing so.

Related: What is an index fund?

Why? Because if you prorate the expenses to reflect the percentage that each fund would represent in your portfolio — 63% of the total stock market index’s 0.18% annual expenses, 27% of international stock fund’s 0.22% cost and 10% of total bond market’s 0.22% expense ratio — you end up with pretty much the same 0.19% in total expenses. (I say “pretty much” because the total bond market fund in the target date fund isn’t available to individual investors and has slightly different expenses than the one that is.)

But there are a few ways you may be able to pay less.

One is to invest in the same three underlying index funds, but buy a different share class of those funds.

When Vanguard assembles its target portfolios, it uses “Investor” shares. Vanguard has a cheaper version — called “Admiral” shares –but doesn’t use them in its target portfolios. You, however, can build your own target fund with the cheaper Admiral shares.

There’s one, rub, though: Each of the Admiral shares requires a $10,000 minimum initial investment, as opposed to a mere $1,000 minimum for the target-date fund.

As a practical matter, that would mean you would have to create a portfolio with at least $100,000 in assets in order to meet the $10,000 minimum for the bond index fund, while at the same time assuring that the bond fund represents no more than 10% of your portfolio overall.

If you can clear that hurdle, duplicating the 2045 target fund with Admiral shares would reduce your annual expenses by almost half from 0.19% to 0.10%. But while that represents a nearly 50% reduction in expenses, in dollar terms we’re not talking about a huge difference: about $90 a year for every $100,000 invested. Whoopee!

The second way you might be able to do better is by building the equivalent of a target fund portfolio with ETFs, which many firms, including Vanguard, allow you to buy without paying trading commissions.

Vanguard requires only a $3,000 minimum investment to open a brokerage account and invest in ETFs, so by going with ETFs you can get around the $10,000 minimum for Admiral shares.

And since Vanguard’s fees on the Admiral share and ETF versions of its total stock market, international stock index and total bond index funds are identical, you could reap the same savings in annual expenses as with the Admiral shares. (Vanguard’s brokerage firm levies a $20 annual fee for accounts with balances under $50,000, but you can sidestep that by agreeing to electronic delivery of confirmations and statements.)

There’s one other move you could try: Going with the funds or ETFs of another firm, such as Fidelity or Schwab, both of which have been chipping away at the fees on their index funds and/or ETFs.

For example, Schwab now charges just 0.04% for its version of a total stock market index ETF and 0.05% for its total bond market index ETF. Schwab doesn’t offer the equivalent of a total international stock index ETF that includes small-caps and emerging markets, but you could cobble one together by combining a few separate international Schwab ETFs.

I estimate that by mixing and matching various Schwab ETFs, you could create something close to the Vanguard target-date fund for roughly 0.06% in annual expenses. That’s about 40% lower than the 0.10% or so that you would pay with Vanguard ETFs.

Again, though, the dollar savings won’t exactly blow you away.

Even on a $100,000 investment, the difference would be about $130 a year vs. the Vanguard 2045 target fund and $40 compared to a DIY target portfolio made up of Vanguard Admiral funds or ETFs. In fact, the savings could be even smaller, as ETFs have other potential costs such as the bid-ask spread and the extent to which the ETF sells at a discount or premium to net asset value.

Which brings us to the larger question: Does it really makes sense to go to the trouble of creating your own target-date portfolio?

The idea behind these funds is simplicity and ease.

A target fund gives you a diversified portfolio of stocks and bonds appropriate for your age and shifts more of its assets to bonds as you age so your savings are less vulnerable to stock-market shocks as you near and enter retirement. They’re not perfect, but target funds can provide a reasonable investing strategy that many investors may not be able to come up with or stick to on their own.

If you build your own target portfolio, you have to set your asset allocation and maintain a “glide path,” or gradually move out of stocks and into bonds.

Even if you mimic a target-date fund for someone your age, you’ve still got to do the work. That will include periodically selling shares to rebalance the mix between domestic stocks, international shares and bonds. If the funds are held outside a tax-advantaged account, such sales could mean paying tax on realized gains.

Bottom line: If you’re investing a large sum and willing to monitor and fine tune your homemade target fund, then I suppose the potential savings you can reap might be worth it. But for the overwhelming majority of investors considering a target-date fund, I think buying a target fund off-the-rack is a more realistic approach.

MONEY

Vanguard Joins the ETF Price War

Now the ETF game is really getting interesting.

Vanguard announced it has removed trading fees on all 46 of its exchange-traded funds. In addition, the fund group lowered its commissions for buying or selling stocks or non-Vanguard ETFs to just $7 to $2, depending on the size of your account.

With these moves, Vanguard has trumped rivals Schwab and Fidelity, at least for now.

Schwab started the commission-free war last year by removing trading fees on eight of its own ETFs; it currently charges $8.95 a stock trade. Fidelity, which charges $7.95 a trade, recently waived fees on 25 iShares ETFs.

Vanguard is clearly determined to dominate. The firm, which took over its brokerage operations from Pershing last year, now manages some $100 billion in ETF assets and ranks as the third-largest ETF provider, behind iShares and State Street. That rapid growth has come about largely because Vanguard’s ETFs generally carry the lowest expense ratios of any fund family, an average of 0.18%.

That growth is likely to continue, since commission-free trading has eliminated one of the few reasons to avoid ETFs: For those who seek to make regular deposits, or simply rebalance, the cost of paying for trades can quickly outweigh the advantage of the lower expense ratios that ETFs may offer. And investors are also attracted by the generally (but not always) low fees and tax efficiency of ETFs, as well as as the ability to trade while the markets are in session.

Still, for longtime Vanguard investors, it’s surprising to see the fund family shift toward commission-free ETF trading. After all, Vanguard founder Jack Bogle has often complained that ETFs foster “short term speculation” — exactly the opposite of the patient, buy-and-hold investing approach he has long advocated.

But the move toward commission-free trading will ultimately benefit Vanguard’s mutual fund investors, says investment adviser Rick Ferri, head of Portfolio Solutions.

That’s because of the unique nature of Vanguard’s ETFs, which are share classes of existing mutual funds. This patented structure gives managers tremendous flexibility in buying and selling the portfolio’s stocks and bonds, which can improve tax efficiency and lower costs.

Ferri notes that the commission-free trades will help attract more assets and trading liquidity to Vanguard’s ETFs, some of which — its new bond ETFs, for example — still lack critical mass. So, odd as it may seem, if Vanguard sees an influx of day traders, who furiously churn their portfolios, that may eventually benefit its core group of buy-and hold investors.

UPDATE: A Vanguard spokesperson says that the fund group “will closely monitor trading of our ETFs, and if a client is engaged in excessive trading, we will reserve the right to reject further trades.”

Does all this mean you should rush out and buy Vanguard’s ETFs? Or swap your existing Vanguard mutual funds for their more glamorous ETF counterparts?

Not at all. You first have to look at your long-term goals and asset allocation strategy. In many cases, your mutual funds may give you access to asset classes that you can’t find in ETFs. Or the ETFs may be thinly traded or fail to track their indexes closely; that’s especially true for micro-cap and some types of emerging market stocks. And many bond funds have had trouble hewing to their indexes, particularly during the 2008 credit crunch.

Still, for your core portfolio, ETFs do offer great choices for tracking broad asset classes. And Vanguard, along with iShares and State Street, offers sound, low-cost options. [UPDATE: According to Vanguard, a switch from a Vanguard mutual fund to its ETF share class is not considered a taxable event.] The Money 70 funds, for example, include Vanguard Total Stock Market ETF VANGUARD INDEX FDS TOTAL STOCK MARKET ETF VTI 2.1408% and Vanguard Europe Pacific ETF VANGUARD TAX MANAG FTSE DEVELOPED MKTS ETF VEA 1.0136% , among others.

And if the price wars continue, the choices are likely to get even better.

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MONEY

Exchange-Traded Funds Get Even Cheaper

Want to avoid trading costs on exchange traded funds (ETFs)? It’s now becoming easier to do so.

This week, Fidelity teamed up with iShares to eliminate trading fees on more than two dozen popular ETFs. The move comes three months after Schwab introduced eight of its own free-trade ETFs.

Traditionally, if you wanted to invest in an ETF, you had to pay a sales charge each time you bought or sold shares. When Schwab rolled out free-trade ETFs in November it put pressure on other big brokerages to do the same.

And Fidelity has responded–in a big way.

Fidelity investors now can choose from among 25 popular iShares ETFs (compared with Schwab’s eight). Examples include the iShares S&P 500 Index (IVV), iShares Barclays Aggregate Bond (AGG) and iShares MSCI Emerging Markets Index (EEM).

And collectively, the iShares ETFs offer sweeping coverage of the market, including emerging-market stocks and bonds, blue-chip U.S. stocks, Treasury Inflation Protected Securities (TIPS), and muni bonds.

To buy the iShares ETFs at no cost, you have to have an account with Fidelity and the trades must be done online. Go here to read the fine print.

But the bottom line is this: Until now, the sales charge on ETFs, which tend to carry lower annual fees than mutual funds, has dinged investors who make small but regular contributions to their portfolio.

Now, however, Fidelity and Schwab (and others soon, perhaps) are offering the best of both worlds: super-low annual fees “without paying the price of admission,” as one Morningstar article put it.

To me, that sounds like a good reason to get in line for a ticket.

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