December 19, 2016 By

Q&A: How much risk is too much in retirement?

Dear Liz: If you have all your required obligations covered during retirement, is having 70% of your portfolio in equities too risky?

Answer: Probably not, but a lot depends on your stomach.

Retirees typically need a hefty dollop of stocks to preserve their purchasing power over a long retirement, with many planners recommending a 40% to 60% allocation in early retirement. A heftier allocation isn’t unreasonable if all of your basic expenses are covered by guaranteed income, such as Social Security, pensions and annuities. Ideally, those pensions and annuities would have cost-of-living adjustments, especially if they’re meant to pay expenses that rise with inflation.

Historically, retirees have been told they need to reduce their equity exposure as they age, but there’s some evidence that the opposite is true. Research by financial planners Wade Pfau and Michael Kitces found that increasing your stock holdings in retirement, where the allocation starts out more conservative and gets more aggressive, may reduce the chances of running short of money. Their paper, “Reducing Retirement Risk with a Rising Equity Glide-Path,” was published in the Journal for Financial Planning and is available online for free.

That said, you don’t want your investments to give you ulcers. If you couldn’t withstand a big downturn — one that cuts your portfolio in half, say — then you may want to cushion your retirement funds with less risky alternatives.

Filed Under: Investing, Q&A, Retirement Tagged With: , ,
November 21, 2016 By

Q&A: Mixing family and finances

Dear Liz: I have a relative who is a certified financial planner. He suggested we invest in annuities from which he will make commissions. When I asked him about his commission amount, he said he doesn’t feel the need to disclose that information because the fees don’t come out of my investment, therefore making them irrelevant. He says his fiduciary responsibility makes disclosing his commissions unnecessary. Is this correct?

Answer: Your relative needs to review the CFP ethical requirements. He wasn’t required to disclose dollar amounts or percentages of compensation until you specifically asked for that information. Once you did, he’s obligated to tell you. He (and you) can learn the details on the CFP Board of Standards site (www.cfp.net).

Commissions are far from irrelevant, especially when the product is as expensive and complicated as an annuity. Before you invest in any annuity, you should run the investment past a fee-only certified financial planner. Fee-only planners are compensated only by fees their clients pay and not by commissions that could influence their advice.

Filed Under: Investing, Q&A Tagged With: , ,
November 7, 2016 By

Q&A: What to consider when investing in target date retirement funds

Dear Liz: I have 100% of my 401(k) in a fund called “Target Retirement 2030.” This fund is made of several other funds, so does that qualify as “diversified”?

Answer: It does. Target date funds have become increasingly popular in 401(k) plans because they do the heavy lifting for investors. The funds select asset allocations and grow more conservative in their mix as the retirement date approaches.

Target date funds aren’t perfect, of course. Some are too expensive. The typical target date fund charges about 1%, but Vanguard and Fidelity charge as little as 0.15%.

Another issue is the “glide path” — how quickly the funds get more conservative. There’s no consensus about what the right glide path should be, and investment companies offer a lot of different mixes. Any given glide path may be too steep for some people and too shallow for others, depending on their circumstances. As an investor, you can compensate for that by choosing funds dated later or earlier than your targeted retirement date. If the 2030 fund gets too conservative too fast for your taste, for example, you could choose the 2040 fund instead.

Despite the downsides, you’re likely to be much better off in a target date fund than you are in some of the other options. Too often novice investors take too much or too little risk without realizing it. They may have all of their money in “safe” low-return options, which means they’re losing ground to inflation. Or they may have all their money in stocks, including their own company’s stock, and would be unprepared for a downturn wiping out a good chunk of their portfolio’s value.

Even those who know they should diversify often do it wrong by randomly distributing their contributions across their investment options. If you don’t know what you’re doing, or you simply prefer investing professionals to take charge, target date funds are a good way to go.

Filed Under: Investing, Q&A, Retirement Tagged With: , , ,
September 12, 2016 By

Q&A: How to avoid hiring a Madoff-like financial advisor

Dear Liz: What is the best way to pick a financial advisor to make sure they don’t make off with all your retirement money? I don’t want Bernie Madoff handling my retirement savings.

Answer: Even if you turn over day-to-day investment decisions to an advisor, you should make sure your money is invested at an independent custodian such as a nationally known brokerage or mutual fund company. That won’t immunize you from fraud, but Ponzi schemes are a lot harder to pull off when there’s third-party oversight.

Returns that are too good to be true, investments that you don’t understand or pressure from an advisor to invest are other red flags for fraud.

Protecting yourself from fraud is important, but so is protecting yourself from bad or conflicted advice. You need to check out any advisor thoroughly. Ask about experience, credentials and other qualifications. Find out how they get paid. Fee-only advisors are compensated only by the fees their clients pay and don’t accept any commissions for recommending products. Fee-based advisors, by contrast, may accept fees and commissions.

Your advisor should be willing to sign a fiduciary oath to put your interests first. That’s not currently required. Advisors can put you in expensive or underperforming investments just because those options pay them higher commissions and there’s little legal recourse for investors unless they can prove that the investments were clearly unsuitable for their situation.

Starting next year, advisors will be held to a fiduciary standard when counseling clients about retirement funds. There’s no reason you should wait for that rule to kick in, though. You can download a copy of a fiduciary oath for your advisor to sign at www.thefiduciarystandard.org.

Filed Under: Investing, Q&A Tagged With: , ,
July 5, 2016 By

Q&A: How to get out from under high brokerage fees

Dear Liz: I have two accounts at a full-service brokerage. One is an inherited IRA and the other is a Roth IRA that I opened. Both have a mix of stocks and mutual funds that I chose. My accounts have done well, but I am not happy with the commissions that my brokerage charges when I trade, which I don’t do often. What do I have to do to move these accounts somewhere else that doesn’t charge such high commissions? I don’t want to sell the stocks and funds in the accounts, but to transfer them intact. If I had to sell the funds, I’d end up paying some of the fees that I’m trying to avoid.

Answer: As long as you don’t own any proprietary mutual funds in those accounts, you should be able to transfer the actual investments and your IRAs to another brokerage — just pick a discount brokerage this time. Those high commissions erode the amount you’ll have at retirement and aren’t necessary if you’re managing your own investments.

The new brokerage will be eager to help — just call and explain you want to transfer the assets “in kind.” You’ll be provided with the information and forms you need to start the process, and the new brokerage will take it from there.

Be prepared for one bite in the form of “account liquidation” fees. Many (but not all) investment firms charge these when you close IRAs, and they can range from $20 to $95 per account.

Filed Under: Investing, Q&A Tagged With: ,
July 5, 2016 By

Q&A: Dealing with a big lottery win

Dear Liz: My brother-in-law won a good chunk of money playing the lottery. He is waiting for the check to come any day now. He is willing to give me $2 million. The question for you is how I can maximize that amount of money short term or long term?

Answer: If your brother-in-law has any sense at all, he’ll realize he shouldn’t have promised any gifts before he assembled a team of professional advisors. And they almost certainly will have a dim view of him giving you a seven-figure sum.

Handouts that large have gift tax consequences. Anything over the annual exemption amount, which this year is $14,000 per recipient, has to be reported on a gift tax return. Amounts over $14,000 count against his lifetime exemption limit, which is $5.45 million this year. Once that limit is exceeded, he’ll owe substantial tax on any gifts.

Also, the $5.45-million limit is for gift and estate taxes combined. Any part of the exemption he uses during his lifetime for gifts won’t be available to shield his estate from estate taxes when he dies. Although, given his apparent generosity, he may not have enough left at his death to trigger an estate tax.

It’s not uncommon for those who receive large windfalls to wind up broke, especially if the amount is much larger than they’re used to handling. More than a few professional athletes and lottery winners have wound up in bankruptcy court. They spend or give away money at a clip that simply isn’t sustainable.

Which may be the road down which your brother-in-law has started. You can take advantage of your relative’s ignorance by holding him to his pledge or you can do the right thing, which is to encourage him to hire fee-only advisors — including a CPA, an estate-planning attorney and a comprehensive financial planner who’s willing to sign a fiduciary oath — to help him deal with this windfall.

Filed Under: Investing, Q&A Tagged With: , , ,
June 27, 2016 By

Q&A: Tips for divvying up your retirement investments

Dear Liz: With all the investment options offered in 401(k) plans, how as a contributor do I know where to place my money?

Answer: Too many investment options can confuse contributors and lower participation rates, according to a study by social psychologist Sheena Iyengar of Columbia University in cooperation with the Vanguard Center for Retirement Research. The more options, the more likely participants are to simply divide their money evenly among the choices, according to another study published in the Journal of Marketing Research. That’s a pretty random method of asset allocation and one that may not get people to their retirement goals.

As a participant, you want a low-cost, properly diversified portfolio of investments. For most people, that means a heavy weighting toward stock funds, including at least a dab of international stocks. Your human resources department or the investment company running the plan may be able to help with asset allocation.

Some plans offer free access to sophisticated software from Financial Engines or Morningstar that can help you pick among your available options. Once you have your target asset allocation, you’ll need to rebalance your portfolio, or return it to its original allocation, at least once a year. A good year for stocks could mean your portfolio is too heavily weighted with them, while a bad year means you need to stock up.

If that feels like too much work, you may have simpler options. Many plans provide a balanced fund, typically invested 60% in stocks and 40% in bonds, that provides automatic reallocation. The same is true for target-date funds, which are an increasingly popular choice. Pick the one with the date closest to your expected retirement year. If you’re 35, for example, you might opt for the Retirement 2045 fund.

It’s important, though, that you minimize costs because funds with high fees can leave you with significantly less money at retirement. The average target-date fund charged 0.73% last year. If you’re paying much more than that, and have access in your plan to lower-cost stock and bond funds, choose those instead.

Filed Under: Investing, Q&A, Retirement Tagged With: , ,
February 22, 2016 By

Q&A: Saving and investing for a child

Dear Liz: I recently got a court judgment for my daughter’s father to pay me child support. She is 1 year old, and it will be about $1,500 a month. I would like this money to be a gift for her when she is older. I’m told not to put it in her name now, as it may hurt her chance for financial aid for college later. How do you recommend I save and invest it for her? I’d like her to have it when she is a young adult.

Answer: This could be quite a gift for a young woman. If the money earned a 5% average annual return over time, you could be presenting her with a check for half a million dollars.

Consider putting at least some of the money in a 529 college savings plan. Withdrawals from these plans are tax-free when used to pay qualified college expenses. College savings plans receive favorable treatment in financial aid formulas because they’re considered an asset of the contributor (typically the parent), rather than the child.

Filed Under: College Savings, Investing, Kids & Money, Q&A Tagged With: , , , ,
February 15, 2016 By

Q&A: Capital gains tax on mutual funds

Dear Liz: My mother, who is approaching 100 and in good health, has a significant mutual fund holding. It is mostly made up of capital gains. She does not need this fund for her daily living expenses. The question she has: Are the taxes on disposition the same before or after she dies? I am thinking of things like the capital gains tax exemption (never used) as well as inheritance taxes.

Answer: The capital gains tax exemption applies to the sale of a primary residence — a home, not a mutual fund. If your mother sold the fund today, she would owe capital gains tax on the difference between the sale price and her “cost basis.” Her cost basis is what she paid for the fund originally plus any reinvested dividends. The top federal capital gains tax rate is 20%, although most taxpayers pay a 15% rate.

If her objective is to get the maximum amount to her heirs and minimize the tax bill, she should bequeath this investment to them at her death. Then the mutual fund will get a “step up” in tax basis to the current market value. When the heirs sell the investment, they’ll only owe taxes on the appreciation that occurs after her death (if any).

You asked about inheritance taxes, but only a few states levy taxes on inheritors. Typically, it’s the estate that would pay the taxes, and only those above certain amounts. In 2016, the federal estate taxes exemption is $5.45 million

Filed Under: Investing, Q&A, Taxes Tagged With: , , ,
February 1, 2016 By

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.

Filed Under: Investing, Q&A Tagged With: ,