Q&A: Investment returns

Dear Liz: In a recent column you mentioned a fund that shows a return of 7% consistently for several years to present. Would you be so kind as to provide me with the name of the fund?

Answer: I don’t know of any mutual fund that’s shown a consistent 7% return year in and year out. What you may be referring to is research showing overall stock market returns. Taking into account each year’s gains and losses, the average annual return over each 30-year period starting in 1928 — from 1928 to 1958, 1929 to 1959, and so on — is greater than 8%, but you can’t expect 8% every year.

Q&A: Invest or pay down mortgage?

Dear Liz: I usually finish the month with $1,000 to $2,000 left over after expenses to invest. My savings are with a money manager who has conservatively invested in a diversified portfolio. Given the uncertainty of the market, does it make any sense for me to start using that monthly excess to pay down the balance on my 15-year mortgage rather than continue to invest? The mortgage has about 91/2 years to go with a balance of just under $75,000. One added point: I would like to retire in about five years.

Answer:
It’s time to talk to a fee-only financial planner who can review your entire financial situation and offer personalized advice. The planner can give you a better idea if you’re really on track to retire within five years. If you are, then paying down the mortgage may be an excellent use of the money. Having a paid-off home will reduce your monthly expenses, which in turn can reduce how much of your retirement funds you’ll need to tap.

Before you prepay a mortgage, though, you should make sure all your other financial ducks are in a row. In addition to saving enough for retirement, you should have paid off all your other debt, accumulated a decent emergency fund (at least six months’ worth of expenses) and be properly insured.

Q&A: Using Roth IRA earnings for a first-time home purchase

Dear Liz: My 29-year-old son recently married, and as a gift I pledged $20,000 as a down payment on a house. My daughter-in-law is beginning a career as a registered nurse and I know they will not be buying for a few years. Is there any type of account that will grow tax-free or tax-deferred for a first-time buyer? Maybe I could gift this money to them into a retirement account for the time being?

Answer: You may be able to give them enough money to fund Roth IRA accounts for both 2015 and 2016. They would be able to withdraw those contributions tax- and penalty-free at any time in the future for whatever purpose they wanted.

Withdrawing earnings from a Roth can trigger taxes and penalties, but that’s not likely to be an issue in this case. Each person is allowed to withdraw up to $10,000 in Roth earnings for a first-time home purchase. If they plan to buy a home within a few years, it’s highly unlikely that your gift would generate enough earnings to cause concern.

The ability to contribute to a Roth begins to phase out for married couples filing jointly at modified adjusted gross income of $183,000 in 2015 and $184,000 in 2016. Assuming their incomes were below those limits, they each can contribute up to $5,500 per year to a Roth. The deadline for making 2015 contributions is April 15, 2016. If you give them the money now, they could fund two years’ worth of contributions at once.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to protect your credit cards online. Also in the news: Tips to avoid investing scams, moves to make before the Fed raises interest rates, and how to handle investments if you divorce.

4 Ways to Protect Your Credit Cards Online
With holiday shopping just around the corner, you can’t be too careful.

Simple steps retirees (and others) can take to avoid investing scams
If it sounds too good to be true…

5 moves to make before the Fed raises rates
It’s only a matter of time.

How to Handle Investments When You Divorce
Making sure your assets are fairly divided.

Finally Start Saving for Retirement With the Help of Your Tax Refund
Saving instead of splurging.

Why banks want you to drop Mint, other ‘aggregators’

Image9Millions of people share their bank account passwords with third-party sites and apps that help them track their spending, but some of the biggest financial institutions, wary of hacking risks, are trying to scare people into not using them.

JPMorgan Chase & Co and Capital One Financial Corp, for example, warn on their websites that customers could be liable for any fraud in their accounts – even though federal regulations say otherwise.

Capital One’s site (here) tells users: “If you choose to share account access information with a third-party, Capital One is not liable for any resulting damages or losses.”

Chase (here) admonishes, “If you give out your chase.com user ID and password, you are putting your money at risk.”

In my latest for Reuters, a look at why banks are issuing these warnings, and if users should be concerned.

In my latest for MoneyWatch, why the best gift to give your kids this holiday season is a head start on investing.

Thursday’s need-to-know money news

check-credit-report-easilyToday’s top story: The email mistake that can hurt your credit. Also in the news: Tools to eliminate student debt, tax identity theft, and scams that target investors.

The Email Mistake That Can Hurt Your Credit
Unsubscribe is your friend.

2 Tools to Eliminate Student Loan Debt
Income-based repayment plans could reduce your monthly payments.

ID Tax Theft: What You Can Do To Limit The Damage
How to fight back.

5 Scary Schemes and Scams That Target Investors
Staying a step ahead of the scammers.

If You Have Poor Credit, Beware Extra Charges on Your Monthly Bills
You could be subject to risk-based pricing.

Thursday’s need-to-know money news

imagesToday’s top story: The FAFSA changes students and their parents need to know about. Also in the news: Why you shouldn’t increase your spending when you have extra money, podcasts that will teach you about investing, and what your children should know about money at different stages of development.

The FAFSA Changes You Need to Know About
What students and parents need to know.

Don’t Increase Your Spending When You Have Extra Money
Don’t set yourself up.

9 Podcasts That Will Teach You About Investing
Learn about different approaches and strategies.

What your child should know about money by grade school, middle school and high school
Teaching the basics

Friday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: How to trick yourself into saving money. Also in the news: Retirement savings for Millennials, how to save $5 a day, and how to plan for retirement as a single person.

Financial Experts Reveal 7 Ways to Trick Yourself into Saving Money
You won’t even notice you’re doing it!

Millennial Investing: A Beginner’s Guide to Retirement Saving
You won’t be young forever.

15 Ways to Save $5 a Day
$5 a day adds up quickly.

How to Plan for Retirement as a Single Person
Preparing for the future.

Beware the “Coupon High” That Makes You Spend More
Just because you have a coupon doesn’t mean you have to use it.

Q&A: Rolling 401(k) into an IRA

Dear Liz: I’m leaving my job later this month and am trying to decide what to do with my 401(k) account. Some of my friends say to leave it where it is, and others say to roll it into a traditional individual retirement account or Roth IRA. Which is best?

Answer: You can’t roll a 401(k) directly into a Roth IRA. You would first need to roll it into a traditional IRA, then convert that to a Roth and pay the (often considerable) tax bill.

But let’s back up a bit. There are few reasons you might want to leave the money where it is, if you’re happy with your employer’s plan. Many large-company plans offer access to low-cost institutional funds that are cheaper than what you might find as a retail customer with an IRA.

Money in a 401(k) also has unlimited protection from creditors in case you’re ever sued or wind up filing for bankruptcy. When the money is in an IRA, the protection is typically limited to $1 million.

If you’re not happy with your old employer’s plan, you could transfer the account to your new employer’s plan if that’s allowed. If not, you can roll the 401(k) into an IRA, but choose your IRA provider carefully.

You’ll want access to a good array of low-cost mutual funds or exchange traded funds (ETFs). The costs you pay to invest make a huge difference in how much you eventually accumulate, so it’s important to keep those expenses down.

If you want help managing the money, many discount brokerages offer access to financial planners and some, including Vanguard and Charles Schwab, offer low-cost digital investment advice services. The services, also known as “robo-advisors,” use computer algorithms to invest and monitor your portfolio.

You’ll want to arrange a direct rollover, in which the money is transferred from your 401(k) account into the new IRA.

Avoid an indirect rollover, in which the 401(k) company sends a check to you. You would have 60 days to get the money into an IRA, but you’d have to come up with the cash to cover the 20% that’s withheld in such transfers. You would get that cash back when you file your taxes, but it’s an unnecessary hassle you can avoid with a direct rollover.

Before you decide to convert an IRA to a Roth, consult a tax professional.

Conversions can make sense if you expect to be in the same or higher tax bracket in retirement, which is often the case with young investors, and you can tap some account other than the IRA to pay the income taxes. But these can be complex calculations, so you should run your plan past an expert.

Friday’s need-to-know money news

Christchurch Earthquake - Avonside House CollapsesToday’s top story: How to invest your 401(k). Also in the news: What you will really spend in retirement, how you’re unintentionally hurting your kids financially, and what to do if your home is damaged while in escrow.

How to Invest Your 401(k)
Choosing the right investments.

How Much Will You Really Spend In Retirement?
Doing the math.

10 Ways You’re Hurting Your Kids Financially
How you’re unintentionally sabotaging your child’s future.

What Happens If a Home is Damaged During Escrow?
You must react quickly.

The Financial Wisdom Of Yogi Berra
Yogi-isms for your wallet.