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Wednesday’s need-to-know money news

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Today’s top story: Getting the biggest tax write-offs for your home office. Also in the news: What you should ask a potential financial advisor, the cold realities of identity theft, and smarter ways to give to charity. Zemanta Related Posts Thumbnail

Get The Biggest Tax Write-Off For Your Home Office
There are new tax rules this year for those who work at home.

10 Questions to Ask a Financial Advisor
What you need to know about your potential advisor.

Can You Do Anything to Prevent Identity Theft?
You can’t stop identity theft. You can only hope to contain it.

Smarter Ways to Give to Charity
Creating a charitable giving plan can help you avoid the end-of-the-year rush.

How To File Your Child’s First Income Tax Return
A financial rite of passage.

Wednesday’s need-to-know money news

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Today’s top story: Tackling your financial fears. Also in the news: How to trust your financial advisor, curbing holiday spending, and how to sell your haunted house.

Fear of Finance: 5 Tips to Make Dealing With Money Less Scary
It’s time to face your fears head-on.

How Do I Know I Can Trust My Financial Advisor?
Trust is key.

Wellness quantified: These 6 healthy habits will save you money
Nurturing your wallet can be as important as nurturing your body.

3 Ways to Curb Pre-Holiday Money Stress
These tips could help you actually enjoy the holidays.

Real Haunted Houses: What Owners Need to Know
How to sell your house and the spirits hanging out in the attic.

Are you paying too much for advice?

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Dear Liz: You always mention fee-only financial planners and I’m not sure about the true meaning. My husband and I have a financial planner who charges us $2,200 per year, but we got a summary of transaction fees in the amount of $6,200 for last year. Is this reasonable? We have $625,000 in IRAs and are adding $1,000 a month. In addition we have over $700,000 with current employers, adding the max allowed yearly. The planner gives advice on allocations for these employer funds as well. Are we paying too much for the financial planner? The IRAs seem to be doing well, but the market is doing well (today!).

Answer: It appears you’re paying both fees and commissions, so you’re not dealing with a fee-only planner. Fee-only planners are compensated only by the fees their clients pay, not by commissions or other “transaction fees” for the investments they buy. One big benefit of fee-only planners is that you don’t have to worry that commissions they get are affecting the investment advice they give you.

You’re paying about 1.3% on the portfolio you have invested with this advisor. That’s not shockingly high, but once you add in all the other costs associated with these investments, such as annual expense ratios and any account fees, your relationship with this advisor may be costing you 2% a year or more. That’s getting expensive, unless you’re getting comprehensive financial planning — help with insurance, taxes and estate planning, as well as investment advice — from someone qualified to provide such planning, such as a certified financial planner.

What you pay makes a big difference in what you accumulate. Let’s say your investments return an average of 8% a year over the next 20 years. If your costs average 1% a year, that would leave your IRAs worth about $3 million. If your costs average 2%, you could wind up with $2.5 million, or half a million dollars less.

Keeping your expenses low would mean you stop trying to beat the market with actively traded investments. Instead, you would opt for index funds and exchange-traded funds that seek to match market returns. These funds typically come with low expenses, often a small fraction of 1%. Using a fee-only planner can be another way to reduce what you pay for advice.

At the very least, consider bringing a copy of your portfolio to a fee-only planner for a second opinion. He or she can give you a better idea of whether what you’re paying is worth the results you’re getting.

Free money advice

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Offering AdviceYou have questions about money–everybody does. Now you have the opportunity to get answers from some of the best financial planners in the business.

Fee-only planners from NAPFA, the National Association of Personal Financial Advisors, will be answering your questions from 9:00 a.m. to 5:00 p.m. Eastern time on Thursday, February 7 and Tuesday, February 12, 2013.

The events, hosted by Kiplinger, will include four chat rooms focusing on:

  • Taxes and retirement
  • Saving for retirement
  • Income in retirement
  • Other financial challenges
You’ll also be able to post questions on Twitter using the hashtag #JumpStartRetire.

 

Get second opinion before buying cash-value insurance

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Dear Liz: I think you missed one of the possibilities when a reader wrote to you about a pitch he received from an insurance salesman. The salesman wanted the reader to stop funding his 401(k) and instead invest in a contract that would guarantee his principal but cap his returns in any given year. You thought the salesman was pitching an equity indexed annuity, but it’s possible he was promoting an indexed universal life policy, which would offer the same guarantees of principal and offer tax-free loans.

Answer: You may be correct — in which case the product being pitched is just as unlikely to be a good fit for the 61-year-old reader as an equity indexed annuity.

Cash-value life insurance policies typically have high expenses and make sense only when there’s a permanent need for life insurance. If the reader doesn’t have people who are financially dependent on him, he may not need life insurance at all.

Furthermore, the “lapse rate” for cash-value life insurance policies tends to be high, which means many people stop paying the costly premiums long before they accumulate any cash value that can be tapped.

Before you invest in any annuity or life insurance product, get an independent second opinion. One way is to run the product past a fee-only financial planner, who should be able to analyze the product and advise you of options that may be a better fit for your situation. If you just want a detailed analysis of the policy itself, you can pay $100 to EvaluateLifeInsurance.org, which is run by former state insurance commissioner James Hunt.

High fees can break your nest egg

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Dear Liz: We have $130,000 invested in mutual funds, but the returns the last few years have been less than 4%. With the financial advisor taking 2% as a fee annually, we are not satisfied with the growth. A co-worker suggested buying blue-chip stocks with a strategy to hold and reinvest the dividends. If this is done in a self-directed plan to avoid the fees, we could be netting 4% plus. Is this a good plan or should we trust the advisor’s optimism that our returns will improve soon?

Answer: You don’t mention your age, your investment mix or your goals for this money. But if your portfolio isn’t doing significantly better this year — after all, the Standard & Poor’s 500 stock market benchmark is up about 30% over the last 12 months — you have cause for concern.

Even if your returns were better, a 2% fee is pretty high. Small investors need to keep an eagle eye on costs, since expenses can have a huge effect on your nest egg. Paying even 1% too much could shave more than $100,000 off your returns over the next 20 years.

That doesn’t mean, however, that an all-stock portfolio is a better choice. Individual stocks typically are much riskier than a diversified portfolio of mutual funds or exchange-traded funds (ETFs).

What might make more sense is consulting a fee-only financial planner who can design a low-cost portfolio for you. You can get referrals to planners who charge by the hour at http://www.garrettplanningnetwork.com.