Ask Liz Weston

Get smart with your money

Liz Weston

Is a money manager worth the cost?

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Dear Liz: My husband and I are nearing 60. The company where we both have worked for over 30 years recently merged with another firm. The money in our retirement accounts, which totals several hundred thousand dollars, will be distributed to us, and we need to figure out how to manage it.

We took your advice to interview several fee-only financial planners, and all of them are pushing for wealth management. They would manage the money in exchange for a percentage of the assets. How do we find an unbiased opinion of whether it is worth it to spend over $10,000 a year for this service rather than putting that money toward our retirement?

I find it doubtful that any of the planners can earn a return that would be worth at least $10,000 a year. We’re with Vanguard’s Target Fund 2020, which we currently use for retirement funds we have gathered outside of work.

Answer: You’re right that a financial planner — or any money manager, for that matter — is unlikely to offer returns substantially above what you would get in passive investments that seek to match the market, rather than beat it. Study after study shows that few investors, professional or amateur, can consistently outperform the stock market averages.

What wealth management should provide is a suite of services to help you in all areas of your financial life. You should get a comprehensive financial plan as well as assistance with your taxes, insurance needs and estate planning.

Your investments should be targeted to your specific needs, time horizon and risk tolerance. Your planner should advise you about sustainable withdrawal rates once you retire, so that you minimize the risk of running out of money.

Your planner should be willing to act as your fiduciary, meaning your needs come first, so you don’t have to worry about the conflicts of interest that may arise when an advisor is recommending products that pay him or her commissions. The best wealth managers, in short, provide a one-stop shop that alleviates the need for you to try to coordinate all these services yourself.

If you don’t feel you need this level of service, however, seek out a fee-only planner who works by the hour. You can find referrals to this type of fee-only planner from the Garrett Planning Network at http://www.garrettplanningnetwork.com.

Credit scores not perfect? Don’t sweat it

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Dear Liz: I just bought a home and my FICO credit scores are excellent: 842, 813 and 809. I requested copies of my files from all three credit bureaus, and one of them — which showed me with the lowest score — said the reason my score wasn’t higher is that I had “too many inquiries in the last two months” (I had two, one of which was for my mortgage) and an “insufficient length of credit history” (my first credit account was opened in 1980). I called the bureau, but the representative wouldn’t give me any more information and just wanted to sell me my credit score for $7.95. The person I talked to was in India, which upset me even more. If companies want to outsource to foreign lands, that’s up to them, but they are making money of off every American’s personal history. We should have a right to keep our personal information here in the U.S. I have emailed my lawmakers about this, but what more can I do?

Answer: One of the things you can do is stop worrying about why your credit scores aren’t higher. Once you get above 760 or so on the 300-to-850 FICO scale, you’ll get the best rates and terms from virtually any lender. The software that provides the scores is set up to spit out “reason codes” for why your numbers are the way they are, but the higher your scores, the less relevant those reasons may be. The software has to tell you something, even if “fixing” the “problem” wouldn’t really affect your numbers.

You also need to stop turning to the credit bureaus for information about your scores. Although they sell FICO scores to lenders, the bureaus use a proprietary formula purchased from another company (also called FICO). The bureaus can’t really tell you much more about how the formula works than you could find out for yourself at MyFico.com, which is a site FICO co-founded. Plus, the credit scores the bureaus want to sell to you typically aren’t the FICO scores used by most lenders.

As for your right to decide where your credit information is kept, in effect you have none. The credit reporting system was set up to benefit lenders, not consumers. If you want to change that, continue contacting your lawmakers.

More mega millions madness: Money pros weigh in

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Here’s a recent post from Credit.com where a bunch of us money types hold forth about the lottery:

Mega Millions Madness: Money Pros Weigh In (via Credit.com)

Let’s face it. When it comes to things like lottery jackpots, personal finance experts and writers tend to be wet rags. We usually put lottery ticket purchases in the same category of money sins as bottled water or spending $5 for a cup of coffee that can be brewed at home for 25 cents. But whom…

[Read more…] about More mega millions madness: Money pros weigh in

You’re not going to win the lottery. But if you do, read this.

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With so much talk about the record Mega Millions jackpot, I thought I’d throw in my two cents:

First cent: You’re not going to win. The odds are ridiculous.

Second cent: If you should win this or any other windfall, even a much smaller one, you’ve got some work ahead of you.

If you’ve never had money, you may not realize how much effort it takes to manage it wisely–and not lose it. You don’t want to wind up like the folks featured in SmartMoney’s “Why lottery winners go bankrupt“–lottery winners who went bust, or even to jail.

So here’s my MSN column “You won the lottery. Now what?” When you don’t win, you can still read it for advice about what to do should any major windfall enter your life.

The weekly round-up

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Spring break starts tomorrow for my kiddo, so I won’t be hanging out at the computer–we’ve got some serious goofing off to do. Therefore, I’m posting links to some stuff I hope you’ll find interesting, by myself and others, a day early.

Bob Sullivan of MSNBC posted a very scary column about how “Hackers turn credit report websites against consumers.” This one’s a must read.

GoBankingRates.com posted my column “Biggest Myths About Credit Scores.” We know so much more about  how these formulas work than we did a decade ago, but some of the same myths persist. Falling for any of these could cost you.

Fox Business picked up Jodi Helmer’s piece for CreditCards.com “Seven Easy Ways to Go Green with Your Finances,” to which I contributed a thought or three.

Donna Freedman’s latest for MSN, “A cheap death: Donate your body,” may take frugality a touch too far for some, but it could be just the ticket for those who want to benefit science and education while avoiding big burial costs.

Are you pregnant, or hope to be so soon? You might want to check out the baby planner created by “Generation Earn” author Kimberly Palmer. You can find the link, and read about the soon-to-be mom that Palmer’s advising, at Daily Worth’s Money Fix 3.

My MSN column this week “Lose your house, get socked by the IRS?” is about the coming expiration of the Mortgage Debt Relief Act, which protects homeowners from facing a tax bill after they lose their homes to foreclosure or short sales.

Want to know more about Roths? Check out these links

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Nearly 150 bloggers so far have contributed posts to the Roth IRA Movement, which financial planner Jeff Rose organized after speaking to a group of college seniors and discovering none of them knew what a Roth was, or how important it was to their financial futures. (It’s “the best thing since sliced bread,” and really, really important, as you can read in my post “Young and broke? Open a Roth.”)

You can read Jeff’s post here, which is also where you’ll find links to the other 146 (so far) posts. That’s probably more about Roths than anyone can absorb, so here are a few good ones to start with:

Studenomics: “Read This if You Want to Retire Before 70.” An excellent, clear guide to why it’s so important to contribute to a Roth while you’re young.

House of Rose: “I Opened My First IRA Account. Age 22.” The blogger’s personal story of early enlightenment.

Parenting Family Money: “Opening a Roth IRA for a Child.” An early start is good; an even earlier start is better.

Bible Money Matters: “10 Reasons Why I Love The Roth IRA (And Why You Should Too).” If this doesn’t convert you to the wisdom of a Roth, what will?

Amateur Asset Allocator: “Roth IRA: How Do I Love Thee? Let Me Count the Ways.” This blogger wrote a sonnet. Seriously. You must read this.

Lauren Lyons Cole: “How To Pay Taxes Like the Rich.” Why has no one given financial planner Lauren Lyons Cole her own TV show yet? She’s delightful, and hits the highlights of the Roth in a two-minute video.

Please share these links with your friends and anyone you know who isn’t already contributing to a Roth. Help us get the word out about this wonderful vehicle for future financial independence.