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20 years experience in the investment business, with the last 10 spent serving individuals' financial planning needs.
37 people found Jeffrey's answers helpful
6 out of 6 people found this answer helpful
Planning, prioritizing and persistence Planning Planning for the future can seem abstract, almost like fantasizing.
Planning, prioritizing and persistence
Planning for the future can seem abstract, almost like fantasizing. Visualizing what retirement looks like for you is an important but often overlooked step. In addition to answering the questions, “When can I retire?” and, “Will I have enough money?” planning includes defining specific goals – what do you need and want in retirement? Make it real.
Tracking expenses is a must, both to understand your basic needs and to make sure your money is spent where it matters most. Balancing wants with available resources inevitably requires tradeoffs.
This is where prioritizing comes in. When you have established the importance of savings and understand the need for additional income (beyond Social Security) it becomes easier to make tradeoffs because you know what is most valuable and necessary for a more secure future. By prioritizing, you get in touch with your values. These are really your beacons when it comes to decisions about how to spend your money and allocate resources for retirement.
You could simply forego dining out a few times a month in order to save more for retirement. Or the tradeoff may involve a larger purchase – longterm care insurance – in lieu of that ski boat. It really depends on your values and clarifying the difference between wants and needs.
Persistence is where the rubber meets the road. Retirement is not a destination, but a process that depends on a commitment to living a financially sustainable life. That means spending less than you earn. The sooner you start, the better. But no matter when you start, it is vital that you do. People who haven’t started tend to ask, “What’s the use? I’ll have to work until I die.” Beginning with the basic steps will help to define your needs and allow you to direct your money in the ways that matter. Remember that even small changes can make a world of difference. Persistence pays off.
Planning identifies your needs and values. You create a compelling vision of what retirement might be like, one that motivates you to bring it to fruition. By tracking spending, you prioritize putting your money where it matters most. Aligning your spending with your values is as close as you get to money “buying happiness.”
Persistence keeps you on task. You periodically monitor your progress and make adjustments while continuing to live within your means. Small adjustments can have a profound impact on your future. Take these actions and keep at it. Result: retirement success!
4 out of 4 people found this answer helpful
Whether your investments are in a retirement account or with an investment manager, it is extremely important
Whether your investments are in a retirement account or with an investment manager, it is extremely important that you check up on them, both quarterly and annually.
Consistent reviews will help you answer key questions:
What is the value of your investments?
Do the investments still meet your objectives?
Is the fund or manager doing a satisfactory job?
Monitoring the total value of your investments quarterly alerts you to trends. No surprises! If you are caught off guard opening an envelope to discover that your accounts have lost 25% of their value, you may panic and sell at the worst possible time.
Investing is risky. Quarterly assessments let you ask yourself how you are feeling about the swings in value of your investments. If the ups and downs are giving you vertigo, maybe the mix of investments you have is too aggressive and needs adjusting.
The annual evaluation helps you look at your long-term goals in the context of performance – how are your investments doing, overall? Are they meeting your objectives?
Are you on track to reach retirement goals, such as accumulating a desired amount of assets? In an off year you may need to make adjustments, either by saving a little more or changing the investment mix. Does the current mix balance your need for growth with your tolerance for risk?
Although the annual performance evaluation of your funds or investment manager only provides a report card for a single year, it is a good idea to do it. It will help you stay in touch with the bigger picture. If an investment or investment manager is not delivering as expected over a number of years, you need to be aware of this and “keep score.” A “growth” mutual fund may do poorly in a strong stock market year. If it continues to perform differently from similar funds in the same category, this is cause for concern. If this fund continued to lag for three years, I would look for a replacement.
When evaluating an investment manager, you need to establish benchmarks of performance. The manager can provide guidelines for measuring his or her services to you, such as outperforming the S&P 500 or some other index. Other questions may be more meaningful. Are you making progress toward your investment goals, e.g., retirement savings? Are your investments growing faster than the rate of inflation? Is the market going up while your account is going down? An investment manager’s job is to provide answers to these questions. Establishing agreed upon benchmarks is key. Comparing these targets to the performance of your investments gives you a good sense of how the investment manager is doing.
If the ins and outs of tracking your investments seem too complex or beyond your interest level, hiring professional help may benefit you. But there is no substitute for paying attention!
4 out of 4 people found this answer helpful
The FutureAdvisor site does a number of things reasonably well. It seems to make a complicated problem,
The FutureAdvisor site does a number of things reasonably well. It seems to make a complicated problem, determining the "proper" asset allocation for you, simple to answer. It does assume that people know what their "risk tolerance" is. The shortcoming of the software is that it only handles one piece of your retirement plan. For those without much knowledge in the area of investments it may lead to a false sense of security. I'll elaborate on that later.
What the software appears to do well is make it easy to pick a risk profile, though it doesn't help you decide where your are along that continuum; too cold (conservative), too hot (aggressive) or just right (moderate.) Their algorithm creates a respectable asset allocation based upon the risk level selected. There is research to support the recommended allocation and investments. The portfolios look reasonable and could conceivably achieve their objectives...income, growth or something in between.
I like that it provides a sense of how well the portfolio might perform under average and poor market conditions. Particularly cool is the analysis of fees you currently pay vs. the fees you would pay implementing their recommendations!
In your instance, where the software recommends a higher equity allocation, it also requires you to assume more risk than you currently are. Is that appropriate? How do you know? The software doesn't help answer those types of questions. Looking at the graph comparing their recommended portfolio to your current one it is easy to be deceived. It appears their recommendation will "make you a bigger pile" of money. While that may be possible, taking more risk means that you may not hit your goal in the year you want to retire. Do you need to take that extra risk? Can you afford to?
What the software provides is just one piece of a bigger, more complex puzzle. When can I afford to retire? What is my income goal? Will I run out of money? The software doesn't address these. The software financial planners use is so much more robust in allowing us to take life's complexities into account. You want to retire in 5 years, your wife in 7. You need a strategy to optimize Social Security. You may have other big ticket wants and needs to fund. What will your tax rates be? What will inflation be? The list goes on and on.
I conclude that these tools are good as educational devices. They may enable the "do-it-yourselfer" to do a reasonable job of asset allocation. But this simple tool may lead one to think they've got the investment thing "covered." In reality the retirement puzzle is complex and when you're within 5-10 years of retirement I hope you'll see fit to seek expert help. The questions you need to answer most cannot be answered using this software. The primary reason FutureAdvisor provides this tool is to get you to sign up for their service...to manage your retirement contributions and rebalance your portfolio. And of course, to charge you a half of one percent to do that.
Bottom line: don't rely too much on free tools. The solution you get may be worth the price.
4 out of 4 people found this answer helpful
Great question! The obvious answer is "Of course!" One of the classic books on investing is by Peter
Great question! The obvious answer is "Of course!" One of the classic books on investing is by Peter Lynch, who wrote "One Up On Wall Street." In it Mr. Lynch describes some of the keys to his success, one of which was investing in things he understood well. Of course you can invest in individual stocks, the question is, "Should you?" Beware of the obvious answer and consider the following three points.
First, we may believe we have key insights into an industry or business. As a former healthcare analyst, I was part of a large group of people who devoted our entire work lives (60+ hours a week) to developing an information/knowledge advantage over other investors. The underlying assumption is that it will lead to superior stock picking. Consistently picking winners is very difficult and other skills are required in addition to one's superior knowledge. In fact one's "superior insight" could lead to overconfidence, which we as humans are prone to. This tends to lead to mistakes. It is not what we don't know that sinks us, but what we think we know that isn't so!
Second, you cannot trade on "material non-public information." For example, say the CFO of a company inadvertently shares a juicy tidbit about an upcoming product launch that is not public, you may not trade on such information. If you arrive at your stock selection decision through public sources and come to a conclusion based upon your ability to piece it all together in a unique way (a loose description of the "mosaic theory") then you are fine.
Lastly, if what I said in the first point above doesn't dissuade you, why not try your hand at it? I would suggest keeping 90-95% of your retirement assets well diversified and working toward your ultimate goals. Putting 5-10% in a trading account to test your stock picking mettle might be an acceptable risk to take (assuming your significant other agrees with this decision!)
Be disciplined in your approach. Write out your investment thesis and what information you think is not fully reflected in the price of the stock. Assess valuation using appropriate metrics for the industry. Make sure you have adequate upside potential given the risks you are taking. Specify a time horizon. If what you believe doesn't happen within a certain time frame, chances are you are wrong, you must sell and move on. Picking an exit strategy if you are right can be a good challenge. Good luck!
3 out of 3 people found this answer helpful
There is no simple answer to the question, "How much do I need to retire?" However, I will provide
There is no simple answer to the question, "How much do I need to retire?" However, I will provide a framework for coming up with your answer. Essentially, each person’s answer will depend on a variety of factors.
First we need to look at your annual expenses. Imagine you currently have a job, a mortgage and take a yearly vacation. You save for retirement and pay taxes. These expenses will change upon retirement. You may pay off the mortgage, take a trip or two and stop saving for retirement. Your tax rate may decrease. Evaluating your present expenses and anticipating what they will be later is a key first step in answering the question, “How much of a nest egg will I need at retirement?”
Inflation is a significant risk to retirees. When we stop working, expenses tend to rise faster than income (hence the familiar phrase, “living on a fixed income.”) The cost of living adjustments included in Social Security do not give sufficient protection from rising prices, especially healthcare costs which increase more rapidly than overall inflation and consume a greater percentage of our budget as we age.
Next, we must look at how your investments are positioned. Are you invested for growth or income? One of the key reasons we save and invest is to ensure a source of income that we hope will keep pace with inflation. How long our investment nest egg lasts depends on our expenses, the rate of inflation, how we’re invested and how long we live – a fairly complex set of factors.
Nowadays people are living longer. Accordingly, the “calculus of retirement saving” has undergone a staggering change. Most people are unaware of the implications. People used to work for 40-50 years, and then retire for 10 or 20. Now people envision working 40 years or even less, retiring sooner, and can live for another 30 years or more. The whole paradigm has shifted.
Young people getting married and having kids may not start saving right away. But this means it can be unrealistic to think you can save for 20 years and retire for 30. The biggest single factor in reaching our retirement savings goal is time, so starting as soon as possible is a must.
Not only is there no simple answer to the question, “How much do I need to retire?” the answer will be different for each person. That’s why it’s so important to seek the help of a professional. What you want your life to “look like” depends on your values and priorities. First, do a thorough analysis of your present expenses and an estimate of expenses at retirement. Factor in inflation. Then come up with a savings goal and investment plan that increases the probability you will have enough for the number of years you expect to live.
If this sounds daunting, seek help!
4 out of 5 people found this answer helpful
Two excellent questions. First of all, fees require some digging to find. If you are being charged a
Two excellent questions. First of all, fees require some digging to find. If you are being charged a management fee to it should be apparent on your statement under the heading "Fees (and/or) Expenses." This is likely charged on a quarterly basis (and based on the value of your account times a certain percentage.) You would have signed an agreement for this arrangement.
An alternative arrangement is that you may be charged for transactions that occur in your account, such as purchase and sale of investments, i.e., commissions. Commission charges should also be stated clearly on your statement where the buys and sells are located. There you will find the investment bought or sold, the number of shares, the date and commission.
A "hidden" source of expense can be found if your holdings are mutual funds, annuities or life insurance investments. Some funds have a "load" which is a commission. This is money that goes to the broker/financial advisor that sold the investment to you, but is not paid directly by you. Say you bought $100 of Mutual Fund X with a 5% load. The amount of money you will have invested is $95, with the remaining $5 going to your broker. These are "hidden" because they don't show up on a statement and you have to go find them (or ask the advisor making the purchase for you.)
Another cost that is paid by you indirectly is the mutual funds' "expense ratio." This expense is paid to the mutual fund company as a cost of managing the fund. You never see this expense but it eats into the return you get from the investment. If a fund returned 5% last year but has an expense ratio of 1%, the return you see in your account is 4%. Both the load and expense ratio of a mutual fund can be found at Morningstar or Yahoo and Google Finance.
Unfortunately if you have annuity or life insurance investments you have even more homework to find the expenses. They are less transparent and usually higher than mutual fund expenses...and thus why financial planners tend to be somewhat wary of the products. The info is in the fine print and you have to dig. Start by asking the person who sold you the investment, but the best way to get the full story is to look in the documentation.
I would ask your financial advisor to help you understand these fees and expenses because they can significantly lower your returns over a long period of time. I often see people paying meaningful fees and expenses yet receiving no advice...which rubs me the wrong way if you know what I mean.
The asset allocation question is difficult to answer succinctly because the "correct" one for you requires knowledge of your goals, when you want to retire, your income needs in retirement and your stomach and financial ability to assume risk. If you are paying a management fee (one based upon the value of your assets) your advisor should be helping you with this decision and be able to explain why you have the allocation that you do.
To wrap up, you hit upon some key issues people have with their investment accounts and the advisors serving them. How is your advisor paid? What services are they providing? Are they providing the services you need? People who think they aren't paying anything are often mistaken. And if they are paying, are they getting the help they need? Sometimes the answer is to pay for good advice and help making decisions that are crucial to your future financial well being. Thanks for the good questions!
4 out of 5 people found this answer helpful
Great question! Problem is one could practically write a book on the topic. I will distill my answer
Great question! Problem is one could practically write a book on the topic. I will distill my answer down to two ideas for you. First is to decide upon your asset allocation, or the percentages you will invest in each major category of investments, e.g., stocks, bonds, cash (and in some cases real estate and alternatives.) Second, consider index (or "passive" management, as opposed to "actively" managed funds.)
The asset allocation decision is the most important one you make because it reflects the risk you are taking (more stocks means greater risk) and how much your 401k is likely to grow over time. If you are younger, say less than 45 you can probably afford to hold more stock funds in the mix, say 80% or more. Next, and this is a big consideration, if you are uncomfortable seeing the value of your portfolio bounce all over the place and feel queasy when your account loses value, then you may wish to have a smaller percentage in stock funds. Keeping in mind you still need growth and therefore some stocks in your allocation.
Second, and more directly related to your question, picking funds can be a complex and bewildering process. I still have yet to understand why 401k participants are forced to select from 10 different large cap US stock funds. Why even offer that many? Plus, it takes a certain level of knowledge and interest to be able to select funds. You're being forced into making decisions regarding something you may have little knowledge of or interest in learning. Sorry, I can get a little peeved at some plans that offer you a lot of choice...but not offer enough of the right choices. But, I digress...
Yes, you should look at the expense ratios (fees charged by the managers of the funds) and pick those with lower expenses. This is a good practice as it generally means you are paying less to be invested.
You are correct in not giving a great deal of credence to performance numbers. In fact I would take that a step further and suggest that passive or index funds are a better bet than actively managed funds (most of the "choices" you have are likely of the actively managed variety.) It is a "dirty little secret" of the mutual fund industry that most managers of active funds fail to meet or beat their benchmark. In the case of the large company or (large cap) US funds the benchmark is usually the S&P 500. So, why not own the index? If your plan offers index funds, I would recommend going with them. Much lower expense ratios, and you don't take a chance picking a manager that fails to beat the index (which will be most of them!) There are services out there that try to select good managers and funds, but it takes a lot of analysis and at the end of the day, it is difficult to distinguish skillful managers from those who are merely lucky.
In sum, select the asset allocation that is best for you (the percentages in each major category of investments, stocks, bonds, etc.) Then stick with index funds (passive vs. actively managed) and go with low expense ratios when comparing two similar funds. If you want to take your process a step further I would suggest doing some research on Morningstar.com.
Final thought: target date funds have become an "easy" choice, but they shouldn't be relied upon exclusively. They are a "one size fits all" sort of solution and do have their shortcomings. You might do some research on them on this site or on Morningstar.
2 out of 2 people found this answer helpful
I'm sorry to report you are not exempt from the Required Minimum Distribution. You are responsible for
I'm sorry to report you are not exempt from the Required Minimum Distribution. You are responsible for requesting the distribution each year. I'm a little surprised the 401k administrator didn't ask given they probably knew you were retiring. Unfortunately in calendar 2013 you will need to take 2 distributions, one for 2012 (the year you turned 70 1/2 and one for 2013.
The distribution for 2012 should have occurred by April 1 of 2013. There is likely a penalty for not taking the distribution by the due date. Here is the quote from the IRS website on required minimum distributions:
If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.
For the first distribution, go ahead and take it. It should be based upon the value of the 401k on 12/31/11. You may want to ask the company that custodies your IRA if they have any facts regarding the penalty. Otherwise consult a tax person or call the IRS. If you have to do the calculations yourself here is a link to a worksheet from the IRS website.
The good news is that you still have time for the 2013 distribution. You may want to ask your custodian (e.g. Schwab, Fidelity, Vanguard, wherever your IRA is) to automatically calculate and distribute it to you each year. Remember to take it by the end of the year.
If you want more info, here is the link to the IRS website specifically on Required Minimum Distributions./span>
2 out of 3 people found this answer helpful
First, I'd like to commend you for thinking ahead and taking action to prepare for retirement. Starting
First, I'd like to commend you for thinking ahead and taking action to prepare for retirement. Starting early is THE best thing you can do.
As far as "where to go to start investing" I would suggest a place like a Schwab or Vanguard. You open an account and literally have thousands of investment options available to you. You will be required to do some research on your own, and they do have resources for those "just getting started."
Although you sound like a good saver, I would ask about any credit card balances or high cost debt you may have. If none, terrific! If you do have credit card balances pay those off first. They are terribly expensive. Once those are paid off, avoid using them in the future. Pay credit card balances off in full each month to avoid big expenses.
Back to where to start. We can't offer specific advice on which investments to choose, but I can offer some general suggestions. One of the main decisions you have to make is your asset allocation, or the percentages you have invested in each main category of investments, e.g., stocks, bonds, real estate/other, etc. This decision will be based upon your tolerance, or stomach for risk. It will also influence how much (or how little) your portfolio will grow over time. An example would be 60% stocks and 25% bonds and 15% real estate/other. You will often see this pictured as a pie chart. The higher the concentration of stocks, the greater the risk and the more fluctuation you will experience in the value of your account. If you are not the kind of person who can stomach those fluctuations, then less stock is probably a good idea. But, stocks are a primary driver of growth and thus necessary for your nest egg to increase in value over time.
Second main concept is that of diversification, the old 'don't put all your eggs in one basket' idea. While stocks, bonds and real estate are a starting point for diversification, you need to diversify within each major category. For stocks you would consider large companies in the US as well as abroad, in Europe, Asia, etc. There is a category called Emerging Markets comprised of less developed economies with more growth potential. Stocks of small companies, both here and abroad have a place in a well diversified portfolio as well.
To take the diversification concept to bonds, consider government bonds, corporate bonds, high yield bonds, mortgage backed bonds and if you are in a high tax bracket, municipal bonds.
There are mutual funds and exchange traded funds (ETFs) that can provide a lot of diversification without having to choose an investment in each of the categories above.
I would avoid individual stock picking. You mention you don't understand stocks and that observation alone will save you from an easy trip to losing some money. Mutual funds and ETFs are usually well diversified instruments that will serve you much better.
Lastly, you didn't mention your employment, but if you have employer sponsored retirement plans like 401k's make sure you are contributing as much as you can. And if the employer matches contributions up to a certain point, by all means take advantage of this. The concepts of asset allocation and diversification above will serve you well in making choices in those accounts too.
In a couple of years, as your assets grow I would advise seeking professional help.Being DIY, do-it-yourself kind of person serves you up to a point. Then seeking out a Certified Financial Planner (CFP) will be your best bet for unbiased advice. You will want them to take a look at the insurance instrument you are using. Those do tend to be costly in terms of fees. Fees are like taxes, the less you pay, the more money you get to keep!
1 out of 1 person found this answer helpful
Here are three situations where the advice of a professional would be of great value: you want to retire
Here are three situations where the advice of a professional would be of great value: you want to retire within the next ten years, you have gone through a divorce or have inherited money.
Issues around retirement include the questions, “Can I afford to retire?” “How much do I need to retire?” and, “Will I run out of money?” Tracking spending, saving, investing and managing risks form the basis of retirement planning. To some extent, people can do many of these things themselves. Professional help is appropriate when the questions or decisions become too complicated. For instance, seeking professional guidance when choosing the best mix of investments to meet one’s goals is a good idea.
Working with a planner prior to retirement is ideal. It’s never too soon to start saving. Seeking a planner after you’ve left the workforce or your business may still be beneficial, but beginning to plan ten years out gives you more time to maximize savings and investments. Periodic checks and adjustments to your plan will ensure sufficient progress while establishing reasonable expectations.
Divorce inevitably brings tremendous personal change. One must reassess financial priorities and decisions to meet the needs of the newly single person. Plans that always included someone else will no longer work. In a relationship one person may always have taken care of the money and investments. Divorcees may find themselves in over their heads. For example, they may require help making sure investments reflect their attitudes, risk tolerances and goals.
Inheritance brings its own set of concerns. Those who inherit may not have experience managing large sums of money and often worry that it could end up being frittered away if they don’t do something. Typically this means investing to generate retirement income, paying off a mortgage or planning for future medical expenses.
In all of these situations, a financial planner can be a valuable partner in establishing priorities and crafting strategies. A planner can suggest investments to improve returns resulting in more income for retirement, while analyzing and managing risks that could derail your long-term goals. A planner can integrate your values into a big picture vision that ensures your money is used in the best possible ways to support what you care about most (this is the closest you get to money “buying happiness,” by the way.) By looking out for your best interests, and helping you navigate complex choices around investments, a financial planner gives you something else – peace of mind!
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