Category Archives: Investing

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5 Steps to Establishing an Emergency Fund

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I am often asked the question, “How much money should I set aside as an emergency fund?” There is no cut and dried answer but using CFP® guidelines you should keep between three and six months’ worth of fixed and variable expenses in a liquid account such as a money market account.

OK so the next question is usually, “OK is it three or six?” Before we get to that answer we need to get our arms around the whole concept of this “emergency fund” idea. It has been a recommendation by financial planners for many years and the concept stepped into the spotlight in the aftermath of the great meltdown of 2008. Many people were laid off from their jobs and found themselves unemployed for a longer time than they anticipated, often outstripping their savings. In other words, people felt like it could never happen to them or they just didn’t think they could set aside extra money for such an unexpected need.

Well, the truth is it can happen to any one of us so we have to get prepared. The second concern will be addressed in this discussion. Don’t underestimate your ability to save because in reality, you can start today to build a fund.

Experience being the great teacher that it is put a focus on setting aside money while you are employed for the proverbial “rainy day”. The recommendation is three months of fixed and variable expenses if:

  • You are single with a second source of income
  • You are married and both of you work with a similar income or
  • You are married and only one spouse works but you have a second source of income (income property for example)

What is a second source of income?

  • Alimony (if it is significant i.e. not just a few hundred dollars)
  • You are the beneficiary of a large trust fund
  • You consider yourself “financially well off” i.e. you have substantial investment income and/or other income coming in each month

If the above scenarios don’t apply then use six months as your emergency fund gauge.

Here are 5 things you can do to establish your emergency fund:

  1. Enroll in my free Budgeting That Makes $ense Course to learn more about how your emergency fund fits into the all-important budgeting process.
  2. Once you have a good handle on your expenses then determine if you need to multiply by 3 or 6 based on the information I discussed above or you can use this handy calculator.
  3. Open a separate account for your fund. Don’t mingle these funds with your day-to-day checking account, etc. I recommend using SaveDaily for this account because you can link it to your checking or savings account. You can have as little as $1.00 deducted and invested in your emergency account.
  4. Use systematic investing to build up your emergency account. It works like your 401(k). Again, SaveDaily allows you to set up 2 different times during the month to have money automatically withdrawn from your checking or savings account and invested in your money market account.
  5. Be disciplined and vigilant. Think of your emergency fund as untouchable except for those true emergencies like losing a job and/or unexpected healthcare expenses.

No one expects to encounter an emergency. That’s why you have to plan for the worst case scenario and expect the best. Being prepared will put you on the offensive rather than reeling financially and putting yourself and your family in a financial hole that could take years to get out of. It can be painless and if done right can grow fairly quickly.

What challenges have you had or do you foresee when it comes to setting up an emergency fund?  Click here to add your comments

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Five Rollover Blunders That Could Cost You a Fortune

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One of the most important decisions boomers will make when it comes to their retirement is how to handle that 401(k), pension or other qualified retirement plan when they leave their job for good. Not that you necessarily have to roll that 401(k) immediately. In fact about 40% of boomers don’t take action within the first year of leaving their employer. Eventually you will have to rollover those funds.

One of the main advantages of rolling over your retirement account to an IRA is that it gives you many more investment options than those dozen or so mutual funds that you had in the company 401(k). Along with that opportunity come a set of red flags that you need to be aware of so you don’t end of paying unnecessary taxes and penalties. Here are five of the most common blunders pre-retirees make.

  1. Missing the 60-Day Rollover Deadline – You have a window of 60 days to move your retirement plan to an IRA tax-free. The clock starts ticking as soon as your money leaves your 401(k) account. Don’t let time slip by while you are on vacation or when the check gets lost in the mail. Keep track of the time or have your financial advisor assist you. The easiest way to avoid this potential problem is to request a direct transfer of your assets to the IRA account that you will set up ahead of time.
  2. Naming the Wrong Beneficiary – Sometimes if your finances are complex your attorney or other advisor recommends a specific vesting that the financial institution holding your IRA cannot accommodate. Another problem occurs when spouses get divorced and fail to update their beneficiary designation. The halls of attorneys’ offices are littered with ex-spouses who inherited money unintentionally because their ex forgot to change the beneficiary. Sign a beneficiary designation form when you set up your account and get up to date with your life events i.e. death, divorce, marriage and update your beneficiaries as they occur.
  3. Not Paying Off Loans Before Rolling Over – Any loans outstanding when you roll over your retirement account will be considered a distribution – taxable and subject to penalties. Before rolling your funds your plan administrator will deduct the amount of the loan. The IRS considers the difference a distribution. Pay off your loans before you rollover the funds.
  4. Cashing Out Your Retirement Account – Yes, it can be tempting to spend some of that hard earned retirement money. The problem is you can be subjected to taxes, penalties and loss of the growth that you enjoyed while your money was invested. Any cash you take out to pay off loans or to buy something will be considered a distribution and therefore taxable. If you don’t replace it within that 60-day window discussed in #1 above it will be taxable.
  5. Failing to Consider a Roth IRA Rollover – We love the benefits of tax deferral. We can keep Uncle Sam’s mitts off of our money only for so long. We know that eventually we will have to pay taxes on our retirement money. If you rollover your funds to a Roth IRA you will pay taxes in the year you roll the funds but…future earnings will be tax free. Wouldn’t it be great to get the taxes out of the way up front and not have to worry about paying taxes on those Required Minimum Distributions down the road? Does it make sense for you? Talk to your Financial Advisor and ask for a Roth analysis.

Of course there are more blunders that you need to avoid. These are 5 of the most important that come to mind. You have worked hard to accumulate your retirement nest egg. Don’t blow it by making one of these mistakes. There is no “Oops Button”; some of these blunders can be fixed. It can be costly and time consuming. I recommend that you don’t go it alone. Work with an expert who can keep an eye on things while you are getting ready for your retirement journey. Good luck and congratulations!

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What is your biggest concern about rolling over your retirement account? You can leave a comment here.

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What Does the DOL Fiduciary Rule Mean for Retirement Planning?

What You Need to Know as a Retirement Investor

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You have probably seen, heard or read about something called the DOL Fiduciary Standard in recent months. You might have thought, “What does that have to do with the price of tea in China?” or, “What is the DOL and/or what is a fiduciary?” All logical responses because unless you are in the financial planning or investment business you probably haven’t given it a second thought. Here is a brief synopsis of how it will affect you.

First, the DOL is the Department of Labor. They are responsible for enforcing employment law in our country and, in essence, looking after the rights and welfare of employees. A fiduciary is someone who is obligated to act in your best interests, such as a financial advisor. You might ask, “Well, aren’t financial advisors supposed to act in the best interests of their clients?” The answer is, “yes”. However, prior to the passing of the DOL rule financial advisors were only obligated to recommend solutions that were “suitable”. In other words, the product had to be a fit with your investment time horizon, experience and risk tolerance.

That left the notion of “your best interest” up for interpretation. From the government’s perspective that vagueness led to a few “bad apples” taking advantage of retirement investors by putting their hard-earned retirement savings into investments vehicles that were overly expensive, among other things. These overpriced investments may have been “suitable” from the standpoint of fitting the consumer’s risk tolerance and investment time horizon but they were not in the “best interest of the client from a fiduciary perspective.

The outrageous fees diminished the yield on the retirement funds and lessened the chance the investor would reach their retirement goal any time soon. For example, an investment that boasted a yield of 7% after paying 4% in annual fees the yield is 3%. That’s a big “haircut”!

Financial Advisors who operate on a “fee basis” don’t charge commissions. They will typically invest your money and charge a smaller annual “management fee”. These fees typically range from .75% to 2.0%. By pricing the investment in this manner it effectively puts the advisor and the client “on the same side of the table” since the advisor gets paid for an increase in the portfolio and also suffers, just like the client, when the investment value decreases.

One-time commissions can be as high as 8%. All of which raises the question, “If an advisor has two options, one that pays him/her 8% or one that pays 1-2% per year, which one is in the best interest of the client and which is in the best interest of the financial advisor?”

The goal of the DOL is to eliminate that conflict of interest and require that a financial advisor act in a fiduciary capacity when dealing with a client’s retirement assets. This means that the fee-based option is almost always going to be in the best interest of the client. If the advisor wants to recommend a commission-based product, the client and the advisor have to sign a “BIC” agreement (Best Interest Contract). This is a contract that states that the client acknowledges that they are buying a product that has a commission. All fees are disclosed and it lists steps the advisor will take to mitigate any potential conflicts of interest.

While the DOL has the best interest of the public in mind with this regulation, it does “punish” those advisors who are already operating in a transparent manner and are, in essence, acting in an otherwise “fiduciary” capacity. The benefit for the consumer is that it will force more of the “bad apples” out of the industry and force the financial product manufacturers to develop products that are fairly priced and easier to understand.

As with any major financial decision, do your homework. Check out the financial advisor that you are thinking of working with. Ask them if they offer fee-based options. Look for advisors who have the CFP® (CERTIFIED FINANCIAL PLANNER) designation. Always make sure the advisor offers more than one option to your financial need.

 

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Is a Robo-Advisor Right For You?

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There is a lot of information and opinions on the concept of so-called Robo-Advisors. So what exactly as we talking about when we use the term “Robo-Advisor”? While the term is becoming a catch-all phrase for all  technology enhanced investment advice it typically breaks out into four distinct categories – direct channel advice providers, online investment management firms, technology enablers, and traditional RIAs powered by the web.

What started out as a pure technology play is now evolving or should I say morphing into another value-add feature for financial planners and RIAs. In other words the Robo-Advisor can be standalone or part of a comprehensive financial planning relationship.

So far, about $19 billion dollars have flowed into these Robo-Advisors such as Betterment, Wealthfront, Personal Capital and Motif Investing. While that figure seems impressive, consider the $33 trillion of investable assets in the US today. While the original intent may have been to tap into the tech savvy Gen Xers the concept is now viewed as a way to tap into the Mass Affluent. We are also learning that it isn’t only the youngsters who are attracted to a tech based investing platform.

Their Moms and Dads are also interested in a technology based platform. When LPL Financial launched its NestWise financial planning service in 2012 it was looking to capture the underserved Middle Class market which is traditionally shunned by most large investment companies as they are perceived to not have much money to invest. Although the project was shut down in less than a year after launching for reasons largely still unknown, one takeaway from the experiment was that Baby Boomers made up a large part of the clients taking advantage of many of the automated features.

What impact will the Robo-Advisor technology have on the financial planning industry and how can you use that information to decide if it’s right for you? Well, there are three ways the technology is impacting our industry. Putting it simply:

  1. Robo-advisors may actually be drawing out more consumers who are interested in getting financial advice. This increased awareness is making the “pie” bigger in a sense. So it is expanding the playing field and forcing financial planning firms to “up their game” and improve their service.
  2. The Robo technology is providing a tool for advisors to incorporate into their practices to help invest client funds. Kind of a best of both worlds approach.
  3. It is taking away the excuse that the so-called small investor is too expensive to serve. These new platforms can accommodate investors of all sizes at a competitive cost, as low as .20%. The Mass Market now can get advice alongside the Mass Affluent. It’s a leveling of the playing field.

So back to the question of, “Is it right for me”. If you are a relationship oriented person, in other words, you want the human interaction then I recommend that you seek out a CERTIFIED FINANCIAL PLANNER™ with whom you can build a solid working relationship. If you are tech savvy and still want the personal relationship then one of the hybrid models should work for you – where you get the personal service with the tech tools added on. If you are a complete do-it-yourselfer then a pure Robo-Advisor may be just right for you. Need more information? For a more in-depth look at the Robo-Advisor phenomenon, click here.

052614_2244_1FearisRunn2.jpgTime Out! Does the idea of Robo-Advisor technology appeal to you? Why or why not? You can leave a comment here.

 

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5 Key Characteristics to Look for When Choosing a Financial Advisor

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I have trained and coached financial advisors for many years. I have worked with some of the best and a few of the worst along the way. Some of the stories I can tell may not rival The Wolf of Wall Street yet they would definitely raise a few eyebrows. I have made my share of hiring mistakes in search of the best financial advisors.

So I believe I have the insight to help you avoid the pitfalls when it comes to finding a financial advisor you can trust. Here are my top 5 characteristics you should look for when you go searching for a financial advisor.

  1. Patience – You will have a lot of questions and you deserve answers that make sense to you. A good advisor understands this and will take the time to explain (minus the jargon) what you need to know. It’s not unlike going to a doctor. The good ones will sit knee to knee with you and answer your questions instead of making you feel like it’s the NFL draft and you are “on the clock” so hurry up.
  2. Sincerity – Yes, you represent potential income to any financial advisor but the best ones will put your interests first. We’ll get to commissions in a minute. Here I’m referring to the sincere interest in helping you solve your financial problems. I remember getting my tonsils out when I was 14. I was awake in the doctor’s chair. He had tools hanging out of my mouth with a clamp on my tongue. I can still remember the big smile he had on his face as he snipped out my tonsils. At one point he said to me, “I just love doing this.” I didn’t mention that he was about 70 years old at the time. That’s what you want. Someone who smiles and acts like they really love what they do.
  3. Competence – You are interviewing the advisor as much as they are interviewing you. When all is said and done your “gut” will tell you whether or not it’s a good fit. Having a CFP certificate on eh wall is assuring. 20 years in the business is great too as long as they aren’t 20 one-year experiences. Obviously a successful track record is important but a newer advisor that you feel a connection with can do just as good of a job if not better than someone with all of the credentials but you don’t have a good feeling about. Trust your instincts.
  4. Fee Simple – Sounds like a real estate term doesn’t it (it is but it fits here too). What I mean is, can you understand how the advisor gets paid and does it make sense to you. You will talk to people who say, “Oh, only work with a fee-based advisor”. As if that is a guarantee of honestly and fair dealing. Yes, fee-based puts you and the advisor on the same side of the table. The advisor’s fee goes up when your portfolio goes up and goes down if your portfolio goes down. Yet, there are times when a commission-based product may be the right fit for your specific needs.                                                                                                                                                                                                                                          A commission reflects the value of the advisor and the product solution that is being used. It doesn’t automatically represent greed and not having your best interest at heart. A good advisor will explain why a particular solution is being recommended and…you can and should ask about how the advisor gets paid. Full disclosure should be the name of the game in this type of business relationship, especially when it’s your hard-earned money at stake.
  5. A good listener – I subscribe to the motto coined by Stephen Covey, author of Seven Habits of Highly Effective People – Seek first to understand. When I train new salespeople I explain that during the meet and greet step the ratio of listening to talking should be 80/20 i.e. you should be listening 80% of the time and talking 20%. How else can I get to know you and your financial issues? If it’s the other way around that should be a “red flag”. Beware the advisor who talks to impress you and/or recommends a solution before understanding your needs.

There you have it, my top 5 things to look for in a financial advisor. Are there more than 5? Sure. You will know what is most important to you when it comes time to shop for an advisor. Think of it as a doctor’s visit. You want the best care wrapped up in a person you feel comfortable confiding in and, in this case, who has your financial versus your physical well-being at the forefront. Plan well. Live better!


Time out! What is the most important characteristic you want in a financial advisor? You can leave a comment here.