MONEY Investing

Are You On Your Way to $1 Million? Tell Us Your Story.

There are many ways to build lasting wealth. MONEY wants to hear how you're doing it.

The number of millionaires in America hit 9.6 million this year, a record high and yet another sign that the wealthy are recovering from the Great Recession, thanks in large part to stock market and real estate gains.

Are you on target to join their ranks? Are you taking steps—through your savings, your career decisions, your investments, or your rental properties—to make sure that by the time you retire your net worth will be in the seven figures? MONEY wants to hear your story.

Related: Where Are You On the Road to Wealth?

There are many paths to that kind of wealth, and they don’t necessarily involve a sudden windfall, a big head start, or a six-figure salary. You can build up a million or more in assets through steady saving, a sensible approach to investing, modest real estate holdings, or a winning small business idea. Are you finding ways to boost your savings at certain point of your life, like when the kids are out of school or the mortgage is paid up? Are you planning to take more or fewer risks with your investments as you near retirement? And if you invest in real estate, do you find that owning even one or two rental properties is enough to achieve prosperity?

Got a story like this to share? Use the confidential form below to tell us a bit about what you’re doing right, plus let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

MONEY Ask the Expert

How Do I Find the Best Place to Retire?

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Robert A. Di Ieso, Jr.

Q: I live in New Jersey. Which state would be financially better to retire to: Pennsylvania or North Carolina? – Kevin, Bridgewater, NJ

A: Your cost of living in retirement can make or break your quality of life, so it’s smart to take financial factors into account as you decide where to live. Moving from New Jersey where taxes are steep and home prices are high to a more affordable area will allow your savings to stretch further. Housing and property taxes are the biggest expenses for older Americans, according to the Employee Benefit Research Institute.

By those measures, North Carolina and Pennsylvania both stack up fairly well. Neither state taxes Social Security benefits or has an estate tax, though Pennsylvania has an inheritance tax and North Carolina will begin taxing pension income for the 2014 tax year. When it comes to cost of living, Pennsylvania has a slight edge. The median price of homes in Pennsylvania is $179,000 vs. $199,000 for North Carolina, according to Zillow. Income tax is a flat 3.07% in Pennsylvania while North Carolina has a 5.8% income tax rate. You can find more details on taxes in each state at the Tax Foundation and CCH. But both states have cities—Raleigh and Pittsburgh—that landed at the top of MONEY’s most recent Best Places to Retire list.

Of course, you need to look beyond taxes and home prices when choosing a place to live in retirement, says Miami financial planner Ellen Siegel. Does your dream locale have high quality, accessible healthcare or will you have to travel far to find good doctors? Will you be near a transportation hub or will you live in a rural area that’s expensive to fly out of when you want to visit family and friends?

There are lifestyle considerations, too. If you like to spend time outside, will the climate allow you enjoy those outdoor activities most of the year? If you favor rich cultural offerings and good restaurants nearby, what will you find? Small towns tend to be less expensive but may not offer a vibrant arts scene or many dining options.

To determine whether a place is really a good fit for your retirement, you need to spend more than a few vacation days there. So practice retirement by visiting at different times of the year for longer periods. Stay in a neighborhood area where you want to live and get to know area residents. “Having a strong social network is important as you get older and if you move to a new area, you want to make sure you can make meaningful connections and find fulfilling activities,” says Siegel. By test driving your retirement locations before you move, you”ll have a better shot at getting it right.

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

MONEY

The Simple Formula That Can Help You Achieve Financial Independence

Man writing formulas on a chalkboard
You don't need a Ph.D. in math—or even a chalkboard—to figure out if you're on the path to financial independence. Justin Lewis—Getty Images

Your ability to retire well depends not on how much you save but on how much you spend, says financial planner Kevin McKinley.

As you’re celebrating our nation’s independence this weekend, you might want to spend some time—between your first and second hot dogs, maybe?—contemplating how well you’re doing in achieving your own financial independence.

Your ability to reach a comfortable retirement has less correlation than you might expect with how much money you earn, how much money you already have, or how you invest that money.

Instead, it depends upon how much you spend—and how much you plan to spend in the future. The more money you spend now and going forward, the more you will need to accumulate to support your lifestyle.

A simple formula can tell you not only how much you will need, but also how close you are now to getting where you want to be.

What’s your destination?

Start by looking back on the last month to see how much you’ve spent. You can do this by reviewing your checking and credit card account statements, or you could use an expense-tracking program like You Need a Budget or Mint going forward a month.

Once you have a handle on a typical month’s spending, subtract any Social Security payments you and your spouse or partner expect to receive in retirement (find estimated amounts at the Social Security website). You can also subtract any pension payments you know will be coming your way.

Then multiply the remaining amount by 200. The result is what you will need to have in savings, investments, and retirement accounts before you can retire comfortably.

Or, in a formula:

(Monthly Spending – Expected Monthly S.S./Pension) x 200 = Target Retirement

So, if you’re spending $4,000 per month and can expect $1,500 per month in Social Security retirement benefits, your net required liquid assets are $2,500 x 200, or $500,000.

Are you on track?

You can use a similar variation of this formula to see how you’re doing toward your goal. Again, start with your typical monthly expense amount. Here’s where you should be…

In your 20s: Current Monthly Spending x 10

In your 30s: Current Monthly Spending x 25

In your 40s: Current Monthly Spending x 50

In your 50s: Current Monthly Spending x 100

(By the way, in case you plan on winning the lottery well before retirement age and want to be financially free forever, you’d better hope you hit the Mega Millions, since you’ll need about 300 times your monthly expenses.)

If your net worth isn’t where it should be, don’t panic. Instead, go back to your list of expenses to see what is less important to you than your long-term financial security, and try to reduce or eliminate it. A quick way to increase your net worth and reduce your spending is to bump up your deferral in to a pre-tax retirement plan, like an IRA, 401k, or 403b. The money is still yours, but since you’re taking home less, you’ll be forced to live on a little less (and you can always change it back).

Bonus: Saving more for retirement this way also means you’ll pay less in taxes each year.

Will your kids be on track?

Best of all, this process can help you provide a priceless lesson to your children.

Many of us want our children to have high-paying jobs in adulthood so that they can cover their own living expenses with as little parental assistance as possible.

But simply by learning that it’s easier to spend less money than it is to make more, our children will be free to pick an occupation based on what they find most fulfilling, rather than the one that just fills up their bank accounts fastest. Minimizing their expenditures also gives them more flexibility to change careers, move to a more desirable location, go back to school, or stay home to care for a child (our grandchildren!).

Most importantly, spending less money allows them to save more of what they earn—so that they’ll be able to reach their own financial independence much more quickly.

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Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley:

Four Reasons You Shouldn’t Be Saving for College Just Yet

Yes, You Can Skip a Faraway Wedding

This is What Sting Should Have Done for His Kids

MONEY Taxes

The Moves to Make Now So You Can Cut Taxes Later

A financial adviser explains that to maximize income, you need the right kinds of investment accounts, not just the right investments.

In my work with financial planning clients, I can see that people understand the merits of having a diversified mix of securities in an investment portfolio. Investment advisers have done a good job of explaining how diversification can improve clients’ risk-adjusted returns.

What can be a little harder for advisers to explain and clients to understand, though, is the value of “tax diversification” — having investments in a mix of accounts with different tax treatments. By having some securities in taxable accounts, others in tax-deferred accounts, and still others in tax-free accounts, people can maintain the flexibility that makes it easier to minimize their taxes in retirement.

The benefits of traditional tax-deferred retirement accounts, such as IRAs and 401(k)s, are easy for participants to see. Contributions reduce people’s current tax bills. And the benefits continue to compound over the course of the investors’ careers, since none of the income is taxable until withdrawals are made.

Yet what clients don’t often grasp is the price they’ll wind up paying for this tax benefit later in life. Distributions from tax-deferred accounts are treated as ordinary income. It can be more expensive to spend money from a traditional IRA than from a taxable account, since dividends and long-term capital gains in taxable accounts are taxed at more favorable rates. And IRS-mandated required minimum distributions from traditional retirement accounts can force a retiree to generate taxable income at times when he or she wouldn’t want to.

So how do you get clients to understand that traditional IRAs and 401(k)s may cost them more than they think? Sometimes it’s a matter of being blunt — saying that the $1 million they see on their account statement isn’t worth $1 million; they may only have $700,000 or less to spend after paying taxes.

Once clients understand that, they also understand the appeal of Roth IRA and Roth 401(k) accounts, since current income and qualified distributions are never taxable. Another advantage: The IRS also does not require distributions from Roth IRAs the way it does for traditional retirement accounts. For many high income taxpayers, $700,000 in a Roth IRA is more valuable than $1 million in a traditional IRA.

But Roth IRAs and 401(k)s aren’t perfect and shouldn’t be a client’s only savings vehicle either. Participants don’t receive any upfront tax benefit. And it’s conceivable that future legislation may decrease or eliminate the benefits of Roth accounts. If the U.S. or certain states shift to a consumption-based tax system, for example, a Roth IRA will have been a poor choice compared to a traditional IRA.

And it’s useful to have money in taxable accounts, too. People need to have enough in these accounts to meet their pre-retirement spending needs. In addition, holding some stock investments in taxable accounts allows people to take advantage of a market downturn by realizing capital losses and securing a tax benefit. You can’t do this with a retirement account.

Given that each type of investment account has advantages and disadvantages, advisers should encourage all their clients to keep at least some assets in each retirement bucket. That way, retirees have the flexibility to choose the source of their spending based on the tax consequences in a particular year.

In a low-income year, retirees may want to pull some money from their traditional IRAs to benefit from that year’s low tax bracket. Depending on the retiree’s income level, some traditional IRA distributions could escape either federal or state income tax entirely. In a high-income year, when investments in a taxable account have a lot of appreciation, it may make sense for the retiree to spend from a Roth account instead.

Since we don’t know what a client’s tax situation will look like each year in the future, diversification of account types is just as prudent as investment diversification.

—————————————-

Benjamin Sullivan is a manager at Palisades Hudson Financial Group, where he helps the firm’s high-net-worth clients with their personal financial planning, investment and tax planning needs. He is a certified financial planner certificant, an IRS enrolled agent, and a member of the New York chapter of the Financial Planning Association.

MONEY 401(k)s

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

MONEY Love and Money

5 Money Discussions You Need to Have With Your Spouse Right Now

If you and your spouse haven't yet answered these important questions, you should. Your financial life depends upon it.

This article was originally published on AllYou.com.

Couples with the best shot at marital success keep the lines of communication open—even when it means tackling a tough subject. Here are five difficult conversations all married couples should have.

1. How can we resolve different spending habits?

If you are not on the same page as your spouse with daily money decisions, you probably will not be in sync when it comes to big financial decisions. Even worse, when partners cannot agree, they might engage in financial infidelity, which ranges from occasionally hiding a shopping bag in the back of a closet to more serious offenses such as keeping a secret credit card. The three keys to a financial partnership are compromise, transparency and understanding. It’s not uncommon to look at money in a different light than your husband does. In fact, many people wind up marrying their “money opposite.” It’s important to identify your money personality and your spouse’s so you can address your differences head-on.

2. Could we care for elderly parents?
More than 65 million Americans are family caregivers. The cost of a parent’s assisted-living care averages $3,550 per month, according to the 2012 MetLife market survey. First and foremost, talk with your parents to determine what they desire. Chances are they will want to live independently for as long as possible. Hold a family summit and discuss their wishes, as well as backup options, with siblings and spouses. For instance, is it possible to rotate caregiving among your siblings? Keep in mind each family’s income and flexibility, as well as space issues.

3. What are our retirement goals?
If you and your spouse haven’t discussed retirement, you might not have much of a nest egg, or your visions of how you expect to spend your senior years might vary greatly. According to a 2012 survey by the Transamerica Center for Retirement Studies, 27 percent of employed people never talk about their retirement plans with family or friends. Whatever your goals, plan together.

4. Who would be our children’s guardian?
Drafting a will can give you the opportunity to designate a legal guardian for your children. If you don’t and something happens to you and your spouse, a judge will appoint someone—and it might not be the same choice you would have made.

5. What are our wishes for end-of-life care?
Well-publicized disputes such as the Terri Schiavo case illustrate the importance of designating someone to make health-care decisions if you cannot make them yourself. Many couples avoid this talk because it’s unpleasant, but it’s crucial to discuss the quality of life you would want should one of you be incapacitated. Whatever your wishes, talk them out and declare them in a living will in order to avoid legal battles between family members.

Check out these other articles from AllYou.com:

How to Start Couponing

Free Health Programs at 6 Supermarkets

Money Saving Tips for Buying the Best Refrigerator

 

TIME Retirement

Americans Are Totally Unprepared for This Shock

Sad piggy bank
Simon Critchley—Ikon Images/Getty Images

Never mind saving for retirement: Americans today face the bleak prospect of poverty in their golden years because they have no idea how much nursing homes cost and they wildly underestimate how much they’ll need.

In a new survey by MoneyRates.com, 40% of respondents say they’ve set aside nothing — zilch — towards paying for the care they’ll most likely need in their final years.

“Over two-thirds of individuals who reach age 65 will need long-term care services during their lifetime,” the Centers for Disease Control and Prevention warns.

Two-thirds of survey respondents have less than $75,000 saved. More than half think $75,000 is more than they’ll need for a year in a nursing home, but they could be in for a rude awakening: The average cost for a semi-private room in a nursing home is more than $81,000 a year, and that can soar to nearly $142,000 in pricey locations like New York City.

“It’s scary how quickly nursing care can run through your savings,” says Richard Barrington, senior financial analyst for MoneyRates.com. Barrington says even people who think they’re being diligent about saving for their retirement years can be led astray by the assumption that they’ll be able to live on less money after they exit the workforce.

“You may have a fair amount of discretion in the early years of your retirement, but then your financial needs may accelerate sharply,” he says. “People need to plan their savings and conserve their resources accordingly.”

A new brief from Boston College’s Center for Retirement Research illustrates what happens when people fail to plan for this possibility. It finds that even high-income retirees run out of money and need to use Medicaid to cover nursing home care.

“Medicaid… serves not just the poor, but also relatively well- off retirees impoverished by costly medical expenses,” the brief says, an outcome that has serious implications not just for these people, but for their heirs.

The eligibility rules for Medicaid are strict, with a cap of only $2,000 on what are termed “countable assets” and a five-year lookback period that essentially forces people to burn through the wealth they’ve accumulated. The government says about half of people who enter nursing homes start off paying for it themselves, but many of them spend down their assets — leaving little or nothing for their heirs — and end up on Medicaid.

The Boston College researchers looked at single seniors by income group as they aged and tracked who was covered by Medicaid. While Medicare covers all Americans once they hit the age of 65, the coverage doesn’t cover long-term care like nursing homes. For people without enough savings or who didn’t plan ahead and take out a long-term care insurance policy, the high cost of nursing homes can force even well-off seniors into poverty, at which point they’re eligible for Medicaid, which does cover nursing home care.

Although the percentage of high-income elderly who get Medicaid assistance starts out at zero when they’re 60 years old, it climbs steadily as they age, and around 20% of this population needs and qualifies for Medicaid by the time they hit their late 90s. “Higher income retirees… tend to live longer and face higher medical needs in very old age, which can result in them ending up on Medicaid,” the brief says.

Granted, many don’t live that long, but Americans are experiencing longer retirements and life spans. The CDC says the number of people 85 and older will rise from about 6 million in 2015 to almost 18 million by 2050.

“Medicaid is a safety net and it’s great that it’s there, but… you have to understand it’s likely to limit your options,” Barrington says. “If you want to leave behind any kind of legacy to your heirs or to charity, if you end up going on Medicaid, you can essentially forget about it.
A 2012 study by the Employee Benefit Research Institute found that people who lived in a nursing home for six months or more had median household wealth of only about $5,500. “For nursing home entrants, median housing wealth falls to zero within six years after the initial nursing home entry,” the study says.

“That safety net does come with strings attached,” Barrington cautions. “It’s going to sharply limit what you’re able to pass on.”

MONEY Kids and Money

This is What Sting Should Have Done for His Kids

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Musician Sting performs during the 44th Annual Songwriters Hall of Fame ceremony in New York June 13, 2013. Carlo Allegri—Reuters

Financial Planner Kevin McKinley argues that there are ways to give your children money without having to worry about them becoming trust-fund brats.

Recently rock legend Sting made headlines when he declared that his six children would be receiving little to none of his estimated $300 million fortune.

He joked that he intended to spend all of his money before he died. But on a more serious note, he explained that he wanted his kids to develop a work ethic, and not let the wealth become “albatrosses around their necks.”

His motives are admirable, and he’s certainly within his rights to use his money however he pleases. But as a financial planner and a dad, I’d argue that there is a lot of room between over-indulgence and complete denial. And in fact, used the right way, your wealth can help motivate your child.

Here are three ways you can sensibly use a relatively small amount of your own money—during your lifetime—to encourage your kid’s productivity and self-reliance, without spoiling him rotten.

1. Save something for his college

You don’t need to put every dollar you have in to a college savings account, nor do you need to pay the full cost of some high-priced private school.

But setting a little aside sets an example of your commitment to your child’s education. It also can ensure that she doesn’t have to choose between taking on a six-figure debt load, and not going to college at all.

Let’s say the parents of a recent high school graduate started saving just $50 per month at her birth, and it returned a 6% hypothetical annual rate. By now they would have over $19,000—enough to pay tuition, room, and board for a year at a typical in-state four-year university, according to the College Board.

The remaining years can then be paid for by some combination of parent earnings, a relatively manageable amount of student loans, and the student’s part-time job.

2. Jumpstart retirement savings

Speaking of jobs, once your kid earns his first paycheck you have another chance to use a little money to teach a valuable lesson.

Open a Roth IRA on his behalf by April 15th of the year after he gets his first job. He’s eligible to deposit the lesser of his earnings, or $5,500.

Kudos to you if you can get him to contribute his own money. But if you can’t get a teenager to understand the importance of retirement—I mean, let’s be realistic—you can instead make the contribution out of your own pocket. Or offer to match an amount he puts in, which you can explain to him is the easiest way to double his money. (This is also a good way to set up his understanding of an employer retirement match down the road.)

One way or the other, saving a little now could mean a lot down the road. A $5,000 deposit today into a 16 year-old’s Roth IRA earning the aforementioned 6% annually would be worth almost $100,000 by the time he turns 66.

And if the initial gesture inspires him to deposit $5,000 of his own money into the Roth IRA every year for those fifty years, the account could be worth a cool $1.5 million by the time he hits 66.

3. Help with the house

Hopefully your child eventually becomes an adult in both age and responsibility. That might be the time she wants to buy her first home.

The National Association of Realtors says the median home price in the U.S. as of May of 2014 is about $214,000.

If your child’s (and/or her spouse’s) annual income totals around $60,000, she should be able to qualify for a 30-year 4% mortgage to purchase a home in that price range, leaving her with a monthly mortgage payment of about $1,300. But she may still need to overcome the biggest obstacle to the purchase of a first home: the down payment.

Even the savviest young adult might have a hard time saving up the $42,000 needed to make a 20% down payment on that average purchase price.

Helping her meet that down payment requirement will not only get her the satisfaction of home ownership, but it will help her build equity in something with her own money. And it might mean you have a place to stay if, like Sting, you end up spending all of your money before your time is up.

__________

Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

Read more from Kevin McKinley

Four Reasons You Shouldn’t Be Saving for College Just Yet

Yes, You Can Skip a Faraway Wedding

MONEY Investing

How Harvard and Yale’s ‘Smart’ Money Missed the Bull Market

Some influential investors have been on the sidelines for much of this surprising bull market.

The next time you want to give up on stocks for the long run consider this: Some of the world’s biggest investors did just that and have all but missed this bull market, proving again that the smart money isn’t always so smart and that trying to time the stock market is a fool’s game.

When the things looked bleakest in March 2009, the stock market began a torrid run that has carried into this year. That’s the way the market works. Gains come when you least expect them. You have to be there through thick and thin to consistently reap the benefits. But even big investors (or should I say especially big investors?) get scared and run.

So while the typical large stock has nearly tripled from the bottom, managers of the massive endowments at Harvard, Yale, and Stanford along with legions of corporate pension managers at places like GM and Citigroup were not there to collect. They were too busy sitting in bonds and other “safe” securities, which have woefully lagged the S&P 500’s five-year gain of 187%.

The Harvard endowment, the world’s largest with assets of $33 billion, missed the mark by the widest margin of the big universities. The stock market saw its steepest climb the past three years, a period when Harvard’s fund posted an average annual total return of 10.5%—well behind the 18.5% for the S&P 500. Yale’s $21 billion endowment returned 12.8%; Stanford’s $22 billion fund returned 11.5%. Harvard Management’s CEO recently said she would step down.

How did this happen? Well, the average college endowment has just 16% of its investment portfolio in U.S. stocks—half the exposure they had a decade ago. In the years following the Internet bust and then the financial crisis, managers steadily shifted assets to alternative investments like hedge funds, venture capital investments, and private equity. Corporate pension managers have done much the same, cutting their exposure to stocks, on average, by about a third.

Alternative investments have performed fairly well over the past decade, even outperforming the S&P 500 over that long period including the devastating collapse of 2008-2009. But there is no denying that the smart money was playing it too safe when the economy started showing signs of a rebound. Pension managers missed out on the deep value that had been created in the market.

The lesson is clear enough for individuals, who have limited low-cost access to things like private equity and venture capital anyway. Staying the course over the long pull is the best way to reach your financial dreams. Just three years after one of the worst market slides in history the average 401(k) balance had been totally restored, in part owing to the market’s recovery.

And you can give pension managers an assist. Their reluctance to bet on stocks near the bottom left prices depressed longer and allowed individuals putting a few hundred dollars into their 401(k) every month more time to accumulate stocks at the lower prices. That’s not great for those counting on a pension that, like so many, remains underfunded. It’s also not great for teacher salaries and student scholarships at major universities where endowments may fund a quarter of operating expenses. But don’t worry about all that. Just stick to your investing regimen, don’t panic, and know that you are the smart money more often than not.

MONEY Ask the Expert

Should I Be More Hands On With My 401(k)?

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: I am in my mid-30s and I am hands off with my 401(k). Should I be more active with the funds my 401(k) is plugged into? – William E. Collier

A: When it comes to 401(k) plans, inertia tends to rule—many people never revisit their initial investment choices after enrolling. It’s important to keep tabs on your plan and to make a few tweaks occasionally. But whether you should be a lot more active depends on how comfortable you are managing your own investments.

Most 401(k)s offer low-cost core stock and bond funds, including index options. If you are familiar with the basic rules of asset allocation, you can easily build a diversified, inexpensive portfolio on your own. But recent research makes a good case that getting some professional help with your portfolio can boost returns.

Pros may not outsmart the market, but they can often save your from your own worst instincts—taking too much or too little risk, or changing your investments too frequently. As a recent study by consultants AonHewitt and advice provider Financial Engines found, investors who followed their plan’s financial guidance earned median annual returns that were 3.3 percentage points higher than do-it-yourselfers, net of fees. The study analyzed the returns between 2006 and 2012 for 723,000 plan participants, including investors in target-date funds and managed accounts, those using the plan’s online tools, as well as do-it-yourselfers.

A three percentage point gap is substantial. A do-it-yourselfer who invested $10,000 at age 45 would have $32,800 by age 65; by contrast, the average 401(k) saver using professional advice would have $58,700 at age 65, or 79% more, the study found.

Another analysis by investment firm Vanguard found a smaller difference in returns for those who got help vs. those who didn’t. Target-date investors earned median annual returns of 15.3% vs. 14% for those managing on their own. The do-it-youselfers also had a wide range of outcomes, with the 25% earning median annual returns of less than 9%.

These days more plans are providing guidance in the form of online tools and target date funds: 72% of 401(k) plans offer target-date funds, up from 57% in 2006, according to the Investment Company Institute. The Plan Sponsor Council of America found that 41.4% offered some kind of investment advice in 2013, up from 35.2% the previous year.

Taking advantage of this help can be a smart move. But if you opt for a target-date fund, be sure that you use it correctly—as your only investment. Adding other funds will throw off what’s designed to be an ideal, all-in-one asset mix. Unfortunately, nearly two-thirds of target-date fund users put only some of their money in one, while spreading the rest among other investments. That move may lower your median annual returns by 2.62 percentage points, the study found, compared with investors who put all their money in a single target-date fund.

If you decide to go it alone, make sure to build your own ideal portfolio mix—try Bankrate’s asset allocation tool. To minimize risk, rebalance once a year to prevent any one allocation from getting too far out of whack. As you near retirement, remember to ratchet down the risk level in your portfolio by shifting to more conservative investments, such as bonds and cash.

Make these few moves, and you won’t get left behind by being hands on.

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