Good morning! Welcome to December's Jump-Start Your Retirement Plan day! Let's give everyone a few moments to finish logging in.
For the next 8 hours, NAPFA planners will be on hand to answer your questions. You can find a Fee-Only financial planner in your area at www.NAPFA.org
Joining us this morning we have NAPFA advisers Kimerly Polak Guerro, Robert Schmansky, Frank Boucher and Marge Schiller.
Thank you to everyone who submitted questions early, and to those who will be joining us live today.
We received a number of questions in advance, and questions will be answered in the order they were received. Each question will be held for moderation until an advisor is available to give you a detailed, personalized response. So, if you don’t see your question right away, don’t be concerned!
The best way to understand investment choices is to learn the basic jargon of the investment world. Your college may offer a course in this field that you can take as an elective if time permits or you can seek out a non-credit offering locally. Be careful that the sponsor of any course is objective since many sales professionals use these non-credit sources for marketing purposes. In addition to Kiplinger's, there is a website at www.morningstar.com that includes a classroom section with free instruction in small bites. It is focused on explaining key concepts and should be helpful in getting you started. The other suggestion I would make is to invest equal sums into a pure stock mutual fund, a pure bond fund and a balanced fund blending stocks and bonds and watch their performance over a couple of years to see how they react to various market conditions.
CalvinC, it's great you are looking into investing. Time is on your side so you should sped a little time learning about investing for growth. Over long periods, we want to not only make sure our balances are up on a nominal level, but also in 'real' after-inflation terms. A broad basket of stocks will offer the best chance for that over the long-run, but of course is always likely to be down (and down a lot!) in the short-run. I would suggest finding some good introductory investment books, John Bogle has a few good ones, and learning about the benefits of investing for the long-run. Keep any money you may have for the next 3-5 years in something more safe and stable, even if it's just a possibility you may need it.
Late 30's: The best advice I have for those who are starting late, but have the benefits of a good income is make it a key point to manage your standard of living. If you expect income may continue to rise, you need to make sure you are banking that increase for the future rather than spending it today. It's very easy any more to get a late start, however, time is slipping away. I would look at your living expenses, debt, and figure out how much you know you will be able to save for that meeting. It will make things much smoother to get to the advice you need with a common understanding of what you are able to do now and going forward.
Thanks for joining us today, Late 30's.
Late 30s should also understand that it is often easier to save toward retirement with larger sums as the children grow into adulthood and leave home. The timing of your retirement is also a factor. If health permits and you plan to work to 70, you can sometimes achieve your goals more readily.
Hello R.A. Since no one is certain how rising interest rates will affect the interest rate curve, or even the stock market for that matter, I think that the best approach is to be well-diversified on the equity side, with exposure to many market sectors. Everyone knows that interest rates will rise in the future, so there has already been a good deal of pre-positioning most likely. Best to stay steady and not try to move a well-balanced portfolio around too much. Now on the fixed income side, I've been favoring the short-to-medium term duration funds, with the feeling that although they will suffer a bit with rising rates, the new higher-rate securities they will be able to buy when current holdings mature will compensate over 2-3 years. However, if the Fed appears to be aggressively moving to control any potential inflation pressures, the longer-duration funds might actually be the winners -- but I don' think that is the place you want to have heavy exposure in this market environment.
I think the key to the gifting decision is simple. If you cannot pay cash for the gift, this is not the time to buy it. Owning a home is costly. If your total cash reserve is going toward a down payment, you will not have emergency funds to deal with the challenges of home ownership--things that break or that you did not plan for. Moving costs money. There are utility deposits required. You may need to paint or repair items in the house, etc. I would suggest that $10,000 go toward down payment with $5000 as reserves at minimum. If this is not sufficient to get the house you want, then wait and save more. You do not want to be enslaved by a house that owns you instead of the reverse if you have no cushion.
Fstone: It's a tricky question. I strongly recommend meeting with a financial advisor before making wholesale moves in any way. There are good financial reasons to continue to keep a mortgage for many, though I agree it's a worthy goal to have it paid off in retirement. It's great you have a pension and other retirement savings, but without knowing where your future income may come from and creating a plan, it's impossible to know exactly what to do. Yes, you will owe taxes and a 10% pre-59.5 penatly. If you choose to go this route it may make sense to do it over tax years. Without running a tax projection or financial plan it is impossible to know the full consequences, however, I'm always cautious of making large moves for any reason. Given that you have time, perhaps it makes sense to roll that money to an IRA and consider a longer-term plan with an advisor.
JMysza, I'd recommend seeking a NAPFA member in Michigan (ahem... :) ) to discuss. A 529 is a great tool, Michigan's is highly rated. There is a lot to be aware of with these plans before deciding they are right for college saving. College saving is different than retirement in that there is a relatively short saving period and an extremely short draw down. I find equity investments are largely inappropriate for a lot of that time period. That said, the pre-paid plans have many flaws, among which they have been poorly managed as a whole. Given low interest rates, they are likely taking more risk than appropriate to generate gains. You may be eligible for a Coverdell Education Savings Account as well which allows you to have more control over your funds.
HthomasD - Good luck with the state tax system. I think your best bet is to contact the credit bureaus and explain the circumstances just as you did here. They will post it in your credit reports. Little things like this can be annoying. I once had a $15 charge off that I never received a bill on and it almost stopped me from getting a mortgage
I'm not an expert in the Michigan Plan, since most of my work is i NY. But it is great that you are starting your son's college savings at this early age, where you can be more aggressive in the investment allocation, since there is a good deal of time to recover from market pullbacks that we will likely experience before he gets through college. I don't know how the Michigan Education Trust works, and what happens if your son decides to go to a college not covered by the Trust. I would suggest that you check the NAPFA website for fee-only advisors in Michigan. On the personal side, I decided to only do the 529's and not the Plan where I could lock in tuition levels, since I wanted my kids to be able to go to a college that fit them best. LI didn't want to limit their choices, since I had no idea what their strengths or interests would be by the time they were teenagers. Constantly adding to the 529's over the years has worked out very well and has been a great relief now that 2 of them are in college -- one in-state and one out-of state. Making the college decision is hard enough without being limited in choices that teenagers might not be on board with.
Marc: I'm not sure I agree the Target fund underperforms. It likely outperforms it's peers, however, you are coming it to different funds. It may be with your time horizon you should have riskier funds. Don't look at share prices, they are meaningless. It's like comparing the cost of a sandwhich to a soda. The question you should ask is what is your long-term goal, how much downside are you willing to accept, and are you invested appropriately. You won't beat the cost of the Vanguard fund for what it invests in, and lowering cost is one key to outperforming. If you find you should be in higher growth (and higher loss potential) investments, you should move there. I would look at it in conjunction with your other saving, if this plan is the best place to save, etc. It appears you have some great market-based options in your plan, so you aren't losing by using them, but I agree that for most it's best to control your own mix to your personal needs.
Thanks for joining Nick and JMysza!
Hello KPAD, It is still makes sense to put money into a nondeductible IRA, since it will allow you to grow your earnings without paying taxes until you must take it out starting at age 70 1/2. Since the earnings will be taxed at your ordinary income rate when withdrawn, it often makes sense to hold more of your fixed income positions in the IRA, since you will not be able to benefit from the often-lower capital gains rates on your equity earnings. If you do contribute to an IRA, make sure that you note the contribution on your tax return, so that when you make withdrawals, those contributions don't get taxed again.
Catherine, you must yourself be at full retirement age in order to make a claim on his record without losing the possibility of allowing your benefit to grow and claim later. You can claim on his record, yes, but won't be able to defer yours.