Get smart with your money
Today’s top story: The mystery database that can sink your mortgage. Also in the news: The changes in store for your credit cards, cash flow killers, and cutting costs at the pump just in time for summer travel.
The Little-Known Database That Can Sink Your Mortgage
Getting to know CAIVRS.
4 Ways That Credit Cards Will Change by 2020
One card fits all?
How To Kill Your Cash Flow in 6 Easy Steps
You’ll want to avoid these.
How to Cut Your Costs at the Pump
Saving on summer driving.
Dear Liz: My son will be graduating from college this June. He is fortunate to have already landed a good job, starting in August, and will be managing his own finances for the first time. His company provides a full benefits package, retirement fund, profit-sharing, a hiring bonus and all that good stuff.
I’d like to give him some guidance on how to organize and allocate his income between living expenses, liquid savings, student loan payments, charities, etc. What do you suggest? With graduations coming up, this might be a good time to help us parents get our kids off on the right foot.
Answer:One of the best things new college graduates can do is to continue living like college students for a little while longer.
In other words, they shouldn’t rush out to buy a new car or sign up for an expensive apartment when they get their first paychecks.
Pretending they’re still broke can help them avoid overcommitting themselves before they see how much of that paycheck is actually left after taxes and other nondiscretionary expenses.
A few other rules of thumb can help them get a good financial start. One is to immediately sign up for the 401(k) or other workplace retirement plan.
Ideally, they would contribute at least 10% of their salaries to these plans, but they should put in at least enough to get the full company match. If they aren’t eligible for the plan right away, they can set up automatic monthly transfers from their checking accounts to an IRA or Roth IRA.
Graduates don’t need to be in a rush to pay off their federal student loans, since this debt has fixed rates, numerous repayment options and various other consumer protections. Private student loans have none of these advantages, and so should be paid off first.
If your son has both types, he should consider consolidating the federal loans and opting for the longest possible repayment period to lower his payments. That would free up more money to tackle the private loans. Once those are paid off, he can start making larger payments toward the federal loans to get those retired faster.
One budgeting plan to consider is the 50/30/20 plan popularized by bankruptcy expert and U.S. Sen. Elizabeth Warren.
In her book “All Your Worth,” she suggested people devote no more than half their after-tax incomes to “must have” expenses such as shelter (rent or mortgage), utilities, food, transportation, insurance, minimum loan payments and child care. Thirty percent can be allocated to “wants,” including clothing, vacations and eating out, while 20% is reserved for paying down debt and saving.
Dear Liz: I turned 50 last year but did not make the catch-up contributions I was eligible to make to my government Thrift Savings Plan. This mistake cost me approximately $5,000 in additional taxes in 2014.
To make matters worse, my wife also did not make catch-up contributions in 2014 or for the previous four years for which she was eligible to do so. Can we retroactively make catch-up contributions for the last three tax years and file amended tax returns so we can get additional tax refunds?
Answer: It’s highly unlikely you cost yourself $5,000 in additional taxes, since the catch-up contribution for people 50 and older in 2014 was only $5,500. Your federal tax rate would have been limited to your tax bracket, which is likely somewhere between 15% and 28%. You could have cost yourself $5,000 if you didn’t make any contribution to the plan, since last year’s limit was $17,500 or a total of $23,000 with the catch-up.
The short answer to your question about whether you can catch up with catch-ups is no.
Contributions to workplace retirement plans typically have to be made before the end of the plan year. IRAs, meanwhile, allow contributions until the due date for filing your returns, so that contributions for 2014 could be made until April 15, 2015, and contributions for 2015 could be made until April 15, 2016.
Presumably you’re now signed up to contribute the maximum to each plan.
If you have extra cash to invest, both you and your wife could open IRAs even though you’re covered by workplace plans. If your modified adjusted gross income (MAGI) as a married couple is $96,000 or less, you can deduct the full contributions of $6,500 ($5,500 plus a $1,000 catch-up) each. You can get a partial deduction if your MAGI is between $96,000 and $116,000.
If you can’t deduct your contribution, consider putting the money in Roth IRAs if you can. Roths don’t allow upfront deductions — but the money is tax free when withdrawn in retirement. You and your wife could contribute $6,500 each to a Roth if your MAGI is under $181,000.
Today’s top story: How to protect your credit cards while traveling. Also in the news: New reverse mortgage rules, why you shouldn’t put off home repairs, and how Health Savings Accounts can benefit your taxes.
5 Ways to Keep Your Credit Cards Safe When You Travel
Don’t let credit card theft ruin your summer travel.
New Reverse Mortgage Rules Open Door To A More Secure Retirement
Find out what’s changed.
Around the House, It’s Better to Pay Now to Save Later
Putting off repairs can cost more down the line.
The Triple Tax Benefit of Health Savings Accounts
HSAs can help save you money during your retirement.
Today’s top story: How to increase you credit card limit. Also in the news: The money mistakes empty nesters make, the terms every homebuyer should know, and the biggest threats to your retirement.
5 Ways to Get a Higher Credit Card Limit
What to do when you need more spending power.
3 Money Mistakes Empty Nesters Make
All that change can shake things up.
10 Terms Every Homebuyer Should Know
Brush up on your real estate vocabulary.
The 7 Biggest Threats to Your Retirement
What you need to avoid.
The best way to pay a financial planner is directly through fees you pay, rather than indirectly through commissions. That way, you don’t have to worry that the advice you’re getting is influenced by how much your advisor stands to gain by selling you certain investments.
But most fee-only planners have adopted the “assets under management” approach, where the fees you pay depend upon how much you invest with them. And people who think deep thoughts about the industry wonder if that’s the best way to go.
One of those deep-thought-thinkers, Bob Veres of the trade information resource Inside Information, moderated a panel exploring “alternative fee structures” yesterday at the annual conference of the National Association of Personal Financial Advisors, the biggest group of fee-only planners.
There are several problems with the AUM model. One is that the planner’s compensation is tied to the whims of the market—income goes up when the market’s up and down when the market’s down, something that’s beyond a planner’s control. While the complexity of planning tends to increase the more money someone has, planners can still wind up doing a lot for a client who isn’t charged much and “charging a lot and doing not a lot” for another, as one panelist put it.
Another issue is that the planner may be tempted to hoard assets, encouraging you to keep your money invested even if paying down your mortgage, buying rental real estate or investing in a start-up may actually be a better deal.
“AUM has too many conflicts of interest to be the long-term solution for the profession,” Veres declared. He qualified the statement saying it was only his opinion, but he’s got a pretty good track record of predicting financial planning trends.
For planners, the biggest hazard with AUM is that they are charging for what is essentially a commodity—investment management—and throwing in the real value, comprehensive financial planning, for free.
“We are the ones training clients to focus on investment management instead of financial planning” through the AUM model, said panelist and CFP Carolyn McClanahan, who charges a flat fee based on the complexity of a client’s situation. Other panelists based their fee on a client’s net worth or charged by the hour.
Investment management fees are about to get squashed, thanks to so-called “robo-advisors” that use computer algorithms to invest and rebalance portfolios. Start-ups such as Betterment and Wealthfront, as well as established players including Vanguard and Schwab, offer digital advice services for about 30 basis points, or .3 percent. That compares to the 1 percent or so charged by many investment managers (and fee-only planners). Yes, some people will still want a human to manage their portfolio, but in the future fewer and fewer will be willing to pay that premium for it, said McClanahan.
I still hear a lot of scoffing from planners who don’t think robo-advisors will affect their business. A conversation I had with a couple of women who aren’t planners, but who use them, will illustrate that many planners are more vulnerable than they think.
Both women acknowledged that their planners did a lot of work up front, setting up their portfolios and advising them on other aspects of financial life: insurance, taxes, estate planning and so on. But neither felt they were getting enough on-going service to justify their AUM fees, and both were thinking of jumping ship to a cheaper solution. After all, if all they were going to get was investment management, why pay three times more for it? That 30 basis point fee starts to look pretty good. Increasingly, those who charge more will face the burden of proving they’re worth it.