Welcome to our monthly Jump-Start Your Financial Plan live chat! Richard Frazier of Frazier Financial Consultants has joined us to start answering your questions. To get the conversation started, with the 2012 tax season over, Rich, any moves taxpayers should be making now to keep their 2013 tax bill in check?
I think there are a few things that people can do. Anyone with high income, over $450k a year, should try and minimize the amount of interest, dividends, and capital gains in their taxable accounts. This income is going to be taxed higher in 2013 then it was last year. Im sure a lot of people have already felt the "sting" of the added 2% fica tax coming out of their paychecks.
Hi, Phil...thanks for joining us!
Phil, any thoughts on moves that taxpayers should be thinking about for 2013?
I would say that the best thing to do is to make sure that you are having enough money withheld from yuor paychecks for taxes. This could help you from paying a large tax bill in April. Also, contributing to your SE's or traditional IRA's if possible can reduce your income. This is obviousl done before next April, but its something to think about. You can also, if this doesnt hurt your cash flow, contribute as much as you mcan afford to your deferred comp plan (401k, 403b, 457). This will decrease the amount of your paycheck that is taxed and will again decrease your total tax bill.
And let's get started with our first question from a reader...this one's from Ryan Long...
Wow, sorry everyone. A
lot of typos on my part!
Hi Ryan, Set your portfolio mix (e.g., stocks, bonds, cash) based on your risk tolerance. For someone in their 40's generally you would be invested at least 1/2 in stocks. As the market rises, adjust your portfolio by rebalancing your mix back to your target.
Speaking of risk, ChrisG has a question along those lines...
Ryan, thats a good (and tricky) question. As markets have hit all time highs I think this scares a lot of investors away. From a psychological standpoint it seems like the markets have topped out and cannot go an higher. However the valuations of the market are still appealing. Also, its tough to make a case to jump from equities to bonds as they pay small income. I would suggest that you do not enter the market fully right now, but dollar cost average into it over the next 6 months. Your 401k is a good place to do this. Id pick a few solid funds with good managers and buy a little at a time. Most importantly, find an asset allocation that meets your risk level and stick with it. You want to be comfortable with where you are invested.
Another NAPFA planner has just joined us--Curt Weill of Lasecke Weil Wealth Advisory Group...Curt, any advice for ChrisG?
Chris, that is a very hard number to try and put your finger on. No one knows what will happen over the next 7-10 years, or even tomorrow. I advise clients to pick a comfortable allocation and stick with it. However for our newly retired clients we have been using a 5% rate of return in their retirement plans, if that helps. I think that would be a good number for someone with a balanced allocation.
Hi Chris. I can't predict the market but I would advise clients to invest based on when they need the money. If you need the money within the next several years, it should be in the money market, if you don't need the money until retirement (e.g., greater than 10 years) it should be in stocks, and bonds to balance out the rough edges. Historically, the range of stock market returns over a 10-year period has been anywhere between a low of 0% and a high of 20% per year.
For ChrisG: while I'm basically optimistic, current very low yields on bonds and fairly high valuations on U.S. stocks, etc make me conservatively estimate a 6-8% total return on a moderate risk portfolio over the next 5-7 years. Be sure that you are VERY well diversified - U.S & foreign stocks (with a healthy 10% emerging markets) some REITs, very short-term bonds (check out bank loan funds,) natural resources and perhaps some local-currency foreign bonds.
ChrisG has a followup question...
If you do not want to pay adviser/mutual fund management fees then I would suggest looking at Vanguard. They have a great selection of very low cost mutual funds.
Cost is one thing you can control, right, Rich?
Good point Chris; if you want the knowledge and wisdom of a seasoned advisor and the personalized service and the fee-only objectivity, you'll have to pay for it. That said, there are advisors who will perform a one-off portfolio analysis/recommendation and charge a lesser fee with you doing all the implementing. Depending on the size of your portfolio, fees could be lower; using ETFs can also keep total costs down.
Chris, for advisor-managed services, your fee estimate may be in the ballpark. For an investment portfolio I recommend to clients, low-cost indexed funds. Unmanaged index funds have fees more in the range of 0.1% to 0.5%. Over the long-term the savings in fees will increase your portfolio.
Thats true, however it may not be worth trying to slash ALL fees if you are an inexperienced investor or pick low cost mutual funds that may not be the best simply to lower fees.
BTW, Chris, our total cost load to our average client - fund fees, transaction costs, management fees - runs under 1.25%
On the topic of fees, here's a good question...
You can look at the webpage of a mutual fund and look for expense ratio (type in the symbol on google finance). This will tell you the fee for management during the year. Also look to see if they charge a front or deferred load. These are basically sales charges up front and I would advise steering away from these.
Several sources do a good job of listing fees - Consumer Reports, AAII (American Assn of Individual Investors) Morningstar, Kiplinger's Magazine (of course!) In the prospectus you get from the brokerage firm, look in the index for "fees" and then look again for "other expenses."
thanks for the shout out, Curt!
Stephen in ATL has a question related to advisor fees...
For Investment Fees: The volume of information contained in a Prospectus is frustrating at best. Have your advisor go over the fees with you. Fees may include purchase fees, redemption fees, management fee, account fees, transaction fees and 12b-1 advertising and promotion fees.
No, Stephen - fee-based is Wall Street's attempt to look more like fee-only. A long time ago I offered clients a fee-based approach where I charged a fee for financial planning and then deducted from that fee any commissions that resulted from enacting the plan. The CFP Board has a very strict definition of "fee-only:" the only income earned by the planner is paid directly by the client. That is, no commissions of any kind.
Here's a followup question from one of our Twitter followers @AUSanchezz: What's the [recommended] ratio [of stocks] for someone in their 20's? Like 80% [Phil had said at least 1/2 of your portfolio should be in stocks if you're in your 40s]
Hi Stephen. Take a look at the website for the National Association of Personal Financial Advisors located at www.napfa.org who has a good description of fee-only.
This is a difficult question to answer, not knowing anything else about the person. Philosophically, younger people have lots of time to weather the ups and downs of the stock markets, so they should be very heavily invested in stocks - in my 20's/30's I was 100% in stocks.
While I think I can safely say that none of us has a crystal ball, Randy has a question about the direction of the markets...
@AUSanchezz. Old rule of thumb was the % amount of cash and bonds in your portfolio should be your age with the rest in stocks. A newer more robust rule of thumb is cash/bonds your age minus 10. But it really depends on your risk tolerance and when you need the money.