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Investing Category

How to prioritize your savings

Apr 19, 2010 | | Comments (2)

Dear Liz: I put 10% of my income into my 401(k) retirement account and my employer matches up to 6%. Should I also be saving another 10% in a regular savings account? I have $2,500 in regular savings right now.

Answer: You don’t say how old you are, how much you’ve saved for retirement already or what your other debts are. All those factors help determine where your savings should go.

You’re smart to be contributing to a 401(k) and getting the full company match. You can use an online retirement calculator, like the one at ChooseToSave.org, to see if you’re saving enough. If you’re not, you can boost your contributions.

If you’re on track for retirement, the next step is to pay off any toxic debt such as credit cards. (Toxic debt is any debt that carries high or variable rates and that erodes, rather than enhances, your wealth.) Once that’s paid off, you can focus on building up your emergency fund. In general, it’s smart to have at least three months’ worth of expenses in a savings account to be tapped in case of real emergency, such as a job loss.

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Beware “exit fees

Mar 18, 2010 | | Comments Comments Off

Dear Liz: My wife and I are rolling over our bank certificates of deposit to another investment company to consolidate our holdings. Two weeks before the CDs’ maturity date, we notified the bank and filed the necessary papers. The bank didn’t complete the rollover for two months and then withheld $50 for something it called a “Trustee to Trustee Transfer Fee.” What is this, and can the bank make this charge?

Answer: Such “exit fees” are a way for banks and brokerages to nip an ounce of extra flesh from departing customers. Many financial institutions charge them, but they often aren’t well disclosed and few investors know to ask about them. You’ll know better next time.

Categories : Banking, Investing, Q&A
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Where to get an 8% annual return

Mar 09, 2010 | | Comments Comments Off

Dear Liz: You suggest that wealth can be accumulated by regular savings and earning an average rate of return of 8%. Where can a safe 8% return be found?

Answer: The same place leprechauns hide their gold.

There is no truly “safe” investment. Investments that have no risk of principal loss, such as federally-insured bank accounts, typically offer such low returns that they expose you to “inflation risk” — in other words, your deposit’s buying power is eroded over time.

If you want to stay ahead of inflation over the long run, you need some exposure to the stock market because that’s the only investment class that’s consistently outperformed inflation over time. According to Ibbotson Associates, the stock market has returned at least 8% on average annually in every 30-year period, starting in 1928. So even if you invested on the eve of the Great Depression, you could have knocked out an 8% return if you just hung on long enough.

Categories : Investing, Q&A, The Basics
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How do you get 8% returns?

Dec 26, 2007 | | Comments Comments Off

Dear Liz: On several occasions you’ve referred to the possibility of getting 8% annual returns on investments. Pray tell us where you can get this much. The best I can find is about 5%.

Answer: That’s because you’re looking at relatively low-risk options such as certificates of deposit where the return is guaranteed. If you’re willing to take more risk, you should be able to attain 8% average annual returns over the long term by investing in a diversified mix of stocks, bonds and cash. Large-company stocks have averaged 10.4% annually for the last 80 years, according to research firm Ibbotson Associates, while small-company stocks have averaged 12.6% in the same period.

Obviously, investing in stocks means you risk significant losses in some years, but if your time horizon is 20 years or more, you should still come out ahead.

Categories : Investing, Q&A, The Basics
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Dear Liz: I have been steadily investing in stock mutual funds since my early 20s. I have been following the buy-and-hold strategy, and unfortunately I have not been rebalancing my portfolio. Consequently, the vast majority of my portfolio is invested in growth mutual funds that have appreciated in value over the years.

I am now approaching retirement and want to reduce my risk. Should I leave my portfolio as is and invest any new money into fixed-income securities, or should I sell some of my growth mutual funds, which will trigger a substantial capital gains tax?

Answer: It sounds as if you’ve done a good job investing for your future. Now, you need to call in some help.

An objective, experienced, fee-only financial planner could take a look at your total financial situation including your age, life expectancy, risk tolerance, expenses and other sources of income to construct a portfolio strategy that will guide you safely through your retirement years.

This really isn’t a do-it-yourself project. There are too many ways to mess up your retirement income stream and too few ways to fix any errors you make. Take too much risk or withdraw too much from your accounts, and you could run out of money. Take too little risk, and the same thing could happen.

You really want professional help. Two sources for referrals are the National Assn. of Personal Financial Advisors (www.napfa.org or by phone toll-free at [888] FEE-ONLY) and the Garrett Planning Network, http://www.garrettplanningnetwork.com ).

If your portfolio truly is overweighted with growth funds, the planner — perhaps in consultation with a tax pro — might have you gradually sell off some of those investments so you can diversify into bonds, cash, value funds and international investments.

The good news is that the top federal capital gains rate, 15%, is low, so you should still have plenty of money to reinvest.

Categories : Investing, Q&A, Retirement
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How to Buy Stocks for Children

Dec 04, 2006 | | Comments Comments Off

Dear Liz: I’d like to buy my children shares of stock to get them interested in investing. How do I go about this?

Answer: It’s not as easy as you might think.

Children under 18 generally are not allowed to own investments in their own names. As a result, you must decide first how to hold the shares: in a custodial account, in a joint account with them or in your own account.

Keeping them in your own name may be the best option if you’re concerned about future college financial aid, because the other two choices could count heavily against them in the federal aid formulas.

You also have many alternatives when it comes to buying the shares  always with a variety of fees, charges and options to watch.

You can buy your shares through a brokerage, but you may face commissions, minimum account balance requirements and account fees.

If this is a one-shot investment or you’re able to commit only small amounts of money at a time, a better option might be ShareBuilder Corp., a low-cost online broker, which has no minimum balance requirements or account fees.

ShareBuilder charges $15.95 for single trades or as little as $1 per trade in its automatic investing program.

You also might consider buying directly from the company that issues the shares.

Hundreds of companies  including many your kids would know, such as Coca-Cola Co., Mattel Inc., McDonald’s Corp. and Sony Corp.  sell shares directly to investors. Again, minimum purchase requirements, account fees and commissions may apply.

DirectInvesting.com, a website that provides direct investment enrollment services for hundreds of companies, can get you started.

All these options are electronic, so you won’t get a stock certificate you can wrap for holiday gift giving. If that’s what you’re after, you might check out the options at OneShare.com, a site that specializes in selling single shares of stock as gifts.

OneShare.com sells shares from about 130 companies; you pay the cost of the stock, plus transfer fees and framing that add about $90 to the cost of each share.

It’s not exactly a frugal option, but your kids will get real stock certificates to hang on the wall. They’ll also get annual reports, proxy statements and all the other paperwork that comes with being an investor.

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Contributing to Ex-Employer 401(k) is Not an Option

Sep 04, 2006 | | Comments Comments Off

Dear Liz: I’m working for a new company and they don’t have a 401(k) plan. Until they put one in place, can I put money into to my prior company’s 401k plan?

Answer: Sorry, but that’s not an option.

You have other alternatives, however. You can put up to $4,000 this year ($5,000 if you’re 50 or over) into a traditional individual retirement account or a Roth IRA. You also can save for retirement in a taxable account.

Your contributions to a traditional IRA would be deductible if you’re not covered by another retirement program at work (such as a defined-benefit pension).

Even if you are covered by such a plan, some or all of your contribution could be deductible if your income is below certain limits (adjusted gross income of $60,000 or less for singles, $80,000 or less for married couples filing jointly).

If your income is very low (generally $30,000 and under) you also might qualify for a tax credit.

Your contributions to a Roth IRA wouldn’t be deductible, but any withdrawals in retirement would be completely tax-free. That’s an enormous advantage.

If you’re young, expect to be in a higher tax bracket in retirement or if you can’t deduct your IRA contributions, the Roth is almost certainly the way to go.

If you can save even more, then a taxable account might be the way to go. You won’t get a deduction for your contributions, but you can qualify for low capital gains tax rates for any investments you hold for more than a year.

Choosing low-cost index funds or exchange-traded funds (ETFs) will help you keep fees and taxes in check.

Whatever you do, don’t allow your new company’s foot-dragging to disrupt your retirement savings plans. You need to be putting money aside–whether your employer is helping or not.

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Getting 8% Return on Investments

Jul 17, 2006 | | Comments Comments Off

Dear Liz: On several occasions you’ve referred to the possibility of getting 8% annual returns on investments. Pray tell us where you can get this much. The best I can find is about 5%.

Answer: That’s because you’re looking at relatively low-risk options such as certificates of deposit where the return is guaranteed. If you’re willing to take more risk, you should be able to attain 8% average annual returns over the long term by investing in a diversified mix of stocks, bonds and cash. Large-company stocks have averaged 10.4% annually for the last 80 years, according to research firm Ibbotson Associates, while small-company stocks have averaged 12.6% in the same period.

Obviously, investing in stocks means you risk significant losses in some years, but if your time horizon is 20 years or more, you should still come out ahead.

Categories : Investing, Q&A
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Should We Sell Our Stocks for an Annuity?

Jul 25, 2005 | | Comments Comments Off

Q: I recently attended an “elder planning” workshop. The presenter said my husband and I should sell our bank stock (worth $95,000) and buy an annuity that’s invested in the Standard & Poor 500 index. Does this sound like a good idea, or is it something to leave alone? We are in our 80s. The presenter is getting antsy and wants us to meet with him to take the annuity.

A: Of course he’s getting antsy. He’s imagining the fat commission he’ll be paid for talking you into what may well be an unsuitable investment.

Variable annuities, which combine mutual-fund-type investments with an insurance wrapper, often aren’t a good fit for elderly investors. You may be in too low a tax bracket to benefit much from the investment’s tax-deferral feature, and heavy surrender charges could take a big bite out of your savings if you needed to access your money in the next several years.

What’s more, selling your stock could set you up for a big fat tax bill, particularly if your shares have grown substantially in value over time.

A final problem with variable annuities: They aren’t given what’s known in tax circles as a “step up in basis.” Your stock would be revalued on your death so that your heirs wouldn’t owe any income or capital gains taxes if they sold the shares immediately. Withdrawals from variable annuities, by contrast, incur income tax.

Unfortunately, these downsides may not have been explained to you. The salespeople who promote variable annuities sometimes neglect to adequately illustrate their disadvantages, which is one of the reasons regulators have gone after insurance companies and agents in recent years for selling unsuitable variable annuities to elderly investors.

Bank of America, for example, just announced a settlement with Massachusetts state regulators that would allow customers who were at least 78 when they bought their annuities in 2003 and 2004 to liquidate them without having to pay surrender charges.

Now, it’s entirely possible that you might be better off in an index fund or even a certificate of deposit than having so much money wrapped up in a single stock. But you’ll want to discuss that issue with someone more objective than an annuity salesperson, such as a fee-only financial planner.

Categories : Annuities, Investing, Q&A
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