Q&A: Fees can do serious damage to your retirement

Dear Liz: When I changed jobs, I rolled my 401(k) account into an IRA and took it to a financial planner. He invested it initially and now has a management company watching it. So now I am paying quarterly fees to him, the management company and the IRA custodian. The fees average about $2,000 a year. I am thinking about moving my account to my current 401(k), which has lower fees.

I feel like the planner has me in way too many investments, and my returns aren’t great. My account is up about $40,000 on a $122,000 initial investment. I will be 60 this year and plan on working for another six-plus years.

Answer: If your employer accepts IRA transfers — and many do — then rolling the money into your current 401(k) could be a great way to go.

Many 401(k) plans offer ultra-low-cost investment options that aren’t available to retail investors. Many also offer target date funds that would take care of diversifying your investments while making sure the mix gets more conservative as you get closer to retirement.

Right now you’re paying above-average fees to get below-average performance. If you had put your money into a low-cost option such as the Vanguard Balanced Index Fund five years ago, your account would now be worth nearly $190,000. The expense ratio for the balanced fund can be as low as 0.08%, compared with the 1.23% you’re paying now. (Your actual cost probably is higher; you didn’t include the expense ratios of the underlying investments in your account.)

Fees matter a lot. Higher fees depress returns and can increase your chance of running short of money in retirement.

At the same time, the years just before and after retirement are crucial because you’ll be making a lot of decisions with major consequences (such as when to claim Social Security and how much to withdraw from retirement accounts). Paying 1% in fees could make sense if you were getting comprehensive financial planning advice that addressed your retirement planning needs as well as other aspects of your finances, such as insurance, taxes and estate planning. If all you’re paying for is investment management, though, you can get that for a lot less.

If your employer doesn’t accept transfers or doesn’t have low-cost options, you could consider transferring your IRA to a custodian that offers low-cost computerized investment services. These include Betterment, Wealthfront, Vanguard Personal Advisor Services and Schwab Intelligent Portfolios, among others. The all-in fee for their services, including expense ratios of underlying investments, is typically less than 0.5%.

If you do opt for less expensive investment management, you still should consider hiring a fee-only financial planner before you retire to review your plan. You can find fee-only planners who charge by the hour at Garrett Planning Network.

Q&A: How to avoid triggering gift taxes

Dear Liz: Is it possible to make student loan payments directly toward our son’s lender without them being considered a gift and thereby subject to the gift tax after a certain amount?

Answer: No. But gift taxes aren’t an issue for the vast majority of Americans. You and your spouse would have to give away more than $10 million for gift taxes to be triggered.

You don’t even have to file a gift tax return if the amounts you give are under certain annual limits. The annual gift exclusion in 2017 allows you to give away $14,000 per recipient without having to file a gift tax return, so the two of you could pay $28,000 of your child’s loans without informing the IRS.

Only the amounts above $14,000 count toward the gift tax, and gift tax is owed only when those excess gifts total more than a certain amount, which in 2017 was $5.49 million.

When gift taxes are an issue, there are some workarounds. In addition to the annual gift tax exclusion amounts, people can pay an unlimited amount of someone else’s medical expenses or tuition without triggering gift taxes — as long as the payments are made directly to providers. In other words, the tuition checks need to be made out to the college bursar, not to the child or to another creditor. Paying student loans isn’t included in that unlimited exemption.

Q&A: Using two-factor authentication

Dear Liz: In a recent column, you discussed the importance of setting up two-factor authentication to protect financial accounts. My concern about using this method is that if my cellphone is lost or not working, I won’t be able to access my accounts when necessary. What do you think about this?

Answer: Two-factor authentication typically combines the use of a password with a code texted to your phone. Most providers have backup options, including one-time-use codes and toll-free numbers to call if you run into trouble.

Thursday’s need-to-know money news

FICO-score-calculation-300x281Today’s top story: Applying for the wrong credit cards can make bad credit worse. Also in the news: Store reward programs worthwhileness, preschoolers and personal finance, and the #1 cause of financial stress in your state.

Applying for the Wrong Credit Cards Can Just Make Bad Credit Worse
Be selective.

Are Store Rewards Programs Worthwhile?
Only if you’ll actually use the benefits.

Should Preschoolers Be Taught Personal Finance?
It’s never too early to start.

This is the No. 1 cause of financial stress in your state
Odds are pretty good your state is worried about debt.

Q&A: Social Security survivors benefits

Dear Liz: My husband and I were married after dating for over four years, but he died suddenly on our honeymoon. When I got home, I was told by our local Social Security office that I did not qualify for survivors benefits because we were not married long enough. I am going to be 66 next month and he was already receiving Social Security benefits. People have been advising me to look into getting this marriage benefit, even by contacting my Congressional representative, since I don’t plan to apply for my own benefit until I’m 70 and could really use the survivor benefit now.

Answer: Social Security isn’t likely to help you cope with your devastating loss. The rule that couples have to be married for at least nine months is meant to prevent deathbed marriages designed just to give the survivor benefits.

There are some exceptions to the nine-month rule, such as when the death was accidental or in the line of duty for service members, or if you had a child together. The exceptions are outlined on the Social Security’s site: https://www.ssa.gov/OP_Home/cfr20/404/404-0335.htm

Tuesday’s need-to-know money news

scamToday’s top story: The red flags of a toxic online loan. Also in the news: What to do when you can’t get enough financial aid, why 43% of Millennials have bad credit, and 10 questions to help start getting your financial life in order.

5 Red Flags of a Toxic Online Loan
Who are you really borrowing from?

Can’t Get Enough Financial Aid? Here’s What to Do
Take a deep breath.

43% of Millennials Have Bad Credit, TransUnion Says
Subprime scores.

Get Your Financial Life In Order By Answering These 10 Questions
Taking the first steps.

Friday’s need-to-know money news

money-vacation-saveToday’s top story: How to save money without disrupting your lifestyle. Also in the news: What you can learn from your tax return, discovering your FI number, and why millennials should consider a robo-advisor.

How to Save Money Without Disrupting Your Lifestyle
Saving doesn’t have to be painful.

5 things you can learn from your tax return
Things worth paying attention to.

Use the FI Formula to Find Out How Much You Need to Be Financially Independent
Finding your FI number.

3 Reasons Millennials Should Consider a Robo-Advisor
Smaller fees make robo-advisors more attractive to new investors.

Monday’s need-to-know money news

1412020991000-ATMToday’s top story: What you could buy with the money you’re paying in ATM fees. Also in the news: How to fix your investment portfolio by January, what you need to do before retirement, and how to make sure your assets go to the right people when you’re gone.

What you could buy with the money you waste on out-of-network ATM fees
ATM fees have soared.

3 Ways to Fix Your Investment Portfolio Before January
Just a couple of months away.

The 4 Things to Do Before Retirement
How to avoid trouble and have piece of mind.

Your Will Might Not Leave Your Assets to the Person You Intended
Making sure your assets go to the right person.

Monday’s need-to-know money news

o-CREDIT-REPORT-facebookToday’s top story: Mistakes that can demolish your credit score. Also in the news: Does giving your kid an allowance make them better with money, how to maintain financial security during retirement, and how much you’ll save with a CD Ladder vs a single CD.

7 Mistakes That Can Demolish Your Credit Score
How to avoid the wrecking ball.

Will Giving Your Kid an Allowance Make Them Better With Money?
Starting them off early.

5 Steps to Maintain Financial Security in Retirement
Putting your fears to rest.

Calculate How Much More You’ll Save With a CD Ladder vs. a Single CD
Use this calculator to find out!

Thursday’s need-to-know money news

thumbs_up_mature_woman-resized-600Today’s top story: Phone calls that can save you money. Also in the news: How to slash your tax liability in retirement, handling the financial challenges of caring for aging parents, and a guide to repaying your student loans.

4 Phone Calls That Can Save You a Ton of Money
Savings could be just a quick phone call away.

5 ways to slash your tax liability in retirement
Keeping more money in your pocket.

How to handle the financial challenges of caring for aging parents
Navigating through tough waters.

The A-to-Z Guide to Repaying Your Student Loans
All your repayment options.

Would you trust a robot with your finances?
But still no flying cars.