Q&A

Q&A: Tips for divvying up your retirement investments

June 27, 2016 By Liz Weston

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.

Q&A: Fiduciaries can help with estate trusts

June 27, 2016 By Liz Weston

Dear Liz: I enjoyed your recent column about spendthrift trusts. You’re right that when parents assign the job of trustee to one sibling for the benefit of another sibling, it creates a hazardous situation that often results in a court battle. The appointed professional trustee should be a neutral party. You recommended a bank or trust company to fill the bill.

However, there is a third and often better option: a licensed professional fiduciary. There are about 600 in California. We are independent fiduciaries licensed by the state to manage clients’ assets in trusts and estates.

Professional fiduciaries will take the smaller trusts and estates, since banks and trust companies usually require a minimum of $1 million to $2 million under management before accepting a trust or remainder estate. Banks and trust companies also typically charge fees based on the amount of money under management, whereas California Licensed Professional Fiduciaries normally charge on a time-incurred basis.

Fiduciaries also give the beneficiary an annual accounting. A case I have now came to me when the sibling trustee failed to account for money spent for nine years.

Answer: Thanks for highlighting this option. Licensed professional fiduciaries aren’t available everywhere, but certified public accountants also can serve this function. The attorney who drafts the trust may have recommendations.

Q&A: Pros and cons of refinancing college loans

June 20, 2016 By Liz Weston

Dear Liz: We took out parent PLUS loans to finance our two sons’ college tuition at private universities. We’ve received solicitations from a private lender offering to refinance. What are the pros and cons of doing so?

Answer: It rarely makes sense to replace federal student loans with private loans because the federal version comes with low rates, numerous repayment options, many consumer protections and the possibility of forgiveness. You lose all that when you refinance with a private loan.

Parent PLUS are a different story, however. Not only do they have higher rates (6.84% currently versus 4.29% for direct loans to undergraduates), but PLUS loans have fewer repayment options and no forgiveness.

If you have good credit and a solid employment history, you could dramatically lower your interest rate by refinancing with a private lender. Variable rates start at some lenders start under 2%, and fixed rates start under 4%. If you can’t pay the balance off within a few years, a fixed rate is probably your best option since rising interest rates could otherwise boost your payments.

A few private lenders even offer the option to have your child take over by refinancing your PLUS loan into his or her name.

You can shop for offers at Credible, a multi-lender online marketplace.

Q&A: How to start saving

June 20, 2016 By Liz Weston

Dear Liz: I have credit card debt, federal student loans and a car loan. I’m trying to save for a house, but I also know I should save for retirement. How do I figure out what to tackle first?

Answer: If you have a 401(k) with a match at work, take advantage of it first. That’s free money that typically equals an instant 50% to 100% return on your contributions. Then pay off the credit card debt. You normally don’t need to be in a rush to pay off federal student loans. Your car loan is probably OK to pay off as scheduled too, assuming you got a decent interest rate.

After the credit card debt is vanquished, beef up your savings. Eventually you’ll want a separate emergency fund, but for the moment you can earmark the money for your down payment, knowing you can raid it in an emergency.

If you don’t have a 401(k) match or even a workplace plan — about half of workers don’t — you should still save something, but your priority will be to pay off the credit cards as fast as you can. Once that’s done, you can open a traditional IRA or a Roth IRA. The traditional IRA will give you a tax break, but withdrawals will be taxed and may be penalized. If you contribute to a Roth, you don’t get to deduct your contribution but you can withdraw your contributions at any time without taxes or penalties. This makes a Roth a kind of emergency fund-slash-house fund. Ideally, you would leave the money alone until retirement, but it’s good to have a Plan B until you can build up your emergency and down payment funds elsewhere.

Q&A: How long should you keep paperwork about an estate?

June 20, 2016 By Liz Weston

Dear Liz: My mother-in-law died 11 years ago and had money everywhere. Thus, I have five drawers full of paperwork. With the exception of the IRS documents, I would love to throw everything out (shredded, of course). How long do I need the paperwork?

Answer: Two of the biggest risks to a settled estate are an IRS audit and challenges from unhappy heirs or creditors.

State laws limiting such challenges differ quite a bit, so you might want to talk to the attorney who helped you handle the estate to make sure you’re out of the woods. If there’s any doubt, you can always scan documents before you shred them so that you have an electronic record.

If it has been more than seven years since the estate and final income tax returns were filed, an audit is highly unlikely. It’s not a bad idea to hang onto tax returns indefinitely, though. Again, supporting documentation can be shredded, although you may want to scan a copy first if you’re nervous about discarding anything.

All this assumes that the estate was properly settled — that your mother-in-law’s property was inventoried, creditors paid and distributions made according to her will if there was one or state law if there wasn’t. If the proper steps weren’t taken to legally close the estate, you’ll want to talk to an attorney immediately about how to set things right.