JeanO: If your investments are in tax-advantaged accounts like IRAs or Roth IRAs, you can make the change from actively managed funds to ETF or index funds at any time with few concerns. However, if the investments are in a taxable account, be very aware of the capital gains implications that might arise from selling your current investments. Also, be aware that the value of a financial planner may not just be in selecting investments. Find a fee-only financial planner that helps with retirement and spending projections, ensuring you are adequately but not overly insured, making sure you are set from an estate planning perspective, and maybe most importantly, can help with behavior management to ensure you don't make mistakes based on short-term emotion.
JeanO, ETF index funds are great for certain categories. Since they are unmanaged, we are not using them for fixed income right now due to the heavy need for a manager to look out for credit changes and maturity of bonds. If all of your money is in retirement accounts, tax consequesces are not an issue for selling mutual funds. Noone can time the market, so trying to get the most profit out of he funds your manager has chosen is not advisable. Lon has added the consequences of taxable accounts, please read his post as well.
We also just got another question via Twitter from YC: Can I claim the american opportunity tax credit on my tax files for two years in a row? (2011 and 2012) I've only claim it twice?
JeanO: Be aware of how a change in investments will affect your upcoming tax bill. If your funds are up, you could get a hefty capital gains tax bill. Not a reason to change your plan but it's good to consider all the facts.
JeanO When you move to ETF you are makng a decision to passive investing. That's a choice but one you should consider. Rebalancing and being tax effective is also important. Make sure you are ready to take on all of the tasks done by your financial advisor.
JeanO: We should also mention that even if you have these investments in a taxable account, for those people in the 15% or lower marginal tax bracket, the current capital gains tax rate is 0%! This is certainly something to take advantage of. However, be aware that the IRS will only allow you to recognize so many gains at that 0% rate. Speak to an accountant to determine your situation.
I think we've heard quite a bit about 529 Plans generally being the preferred method of tax-free savings for college. But the trick is not to take too much money out during the school year which would generate a taxable event. One advantage not yet talked about is the ability to transfer unused portions of a 529 Plan to another student which could also be the parent that incurs qualified higher education expenses. If you are not sure if your child will be attending college or other qualified educational expenses, and you do not have another person that you would want to transfer the funds to, then you may want to consider contributing to a ROTH where contributions could be withdrawn tax free for any purpose if the ROTH account is open for more than 5 years. But I am a strong proponent that retirement plans are for retirement and college savings plans are for college and your retirement savings has a higher priority.
YC: Sorry, that sounds more like a question for your accountant. Can anyone else provide guidance here?
Hi Scooter Squad -- I think the first part of your question got lost somewhere. Could you submit it again?
Martha, another good point re index funds. If managing money was an easy task, everyone would be doing it. It is so easy to get complacent and not rebalance regularly. I am not saying that people should not manage their own money, just that it is like tending your garden, needs attention.
Thanks for bringing that up, Phil.
Here's a follow up from JeanO: Most of it is in tax-advantaged accounts. I understand the bonds and having that managed. I was more interested if any advice on a strategy like dollar cost averaging to move between funds. Also how often to use a fee only planner? Thanks!
JeanO: I'm not sure there are benefits from making the transition with dollar-cost averaging in and of itself. If you are 100% convinced you want to go with passive investing, I don't see any reason not to make the transition in whole. However, some investors choose to keep half of their investments in actively managed funds, and have half in index funds. That would be another way to diversify your investment strategy.
JeanO, I can only speak for our practice. We have very limited services for reviewing portfolios on an hourly fee project. I think you may find that it is common that a fee only advisor can advise you on large issues such as asset allocations and sector allocations, but not making recommendations on specific funds. Do any NAPFA members here offer a more complete service for an hourly fee? Havng said that, there are many other services an advisor can help you with during retirement.
Deb, that's a great thought -- If managing money was an easy task, everyone would be doing it.
You should work with a financial planner to develop a transition strategy, that considers the your tax situation and how to allocate between taxable and tax deferred accounts and discuss appropriate investment choices. You have to consider information from several prospective at the same time to develop an approprite asset allocation. Martha
YC, The American opportunity tax credit, which expanded and renamed the already-existing Hope scholarship credit, can be claimed in tax-years 2009 through 2017 for expenses paid for tuition, certain fees and course materials for higher education. The American opportunity tax credit can be claimed for expenses for the first four years of post-secondary education.
JeanO: Concerning how often to meet with a fee-only planner, that just depends on your needs. As a fee-only advisor, I meet with each of my clients every six months. However, I'm sure for people who like to take a more hands on approach to manage their finances, perhaps they simply need to meet with an advisor every year or two to get a second opinion or make sure they are on track.
S. I don't think gold is on sale, gold is a speculation on inflation, world crisis, etc, not on production for goods. As such, it is really hard to value the price.
We just heard back from Avid on his question: I am 25 years of age and currently attending college, what investment tool should be considered to help pay for it after I graduate? He's currently with a rate of 6.8% with $9,500 in loans.
We do offer investment consulting for the do-it-your-selfer. We are one of the few NAPFA members in our area that offer these servces. It is important to inform these folks that there is no on-going monitoring of the portfolio. They are responsible for the outcomes between visits. Martha
Thanks for the share, Lon.
Avid: With an interest rate of 6.8%, I'm not sure an investment tool is necessary. I'd simply take any funds you'd consider investing and put it towards paying down the loan. In effect, by paying off the loan and eliminating interest payments, you are guaranteeing yourself a 6.8% return on investment. That's a very good guaranteed rate of return these days...
Avid, not completely sure I understand your situation. If you have money now to put in an "investment tool", why not borrow less? If you are asking about when your graduate, most people pay monthly from cash flow.
When we start to discuss investing in gold, I think that it is important to expand the discussion to include real assets as part of your asset allocation. You should also consider alternatives that help you hedge the volatily in the markets. Martha
S brought up a good point about diversification. If not in gold/silver, does anyone have any other advice as to how best to think about diversification?
Avid: You have an outstanding loan that charges 6.8% interest, right? If that is the case, you are much better off paying down the loan rather than putting funds in a savings account.
S, Investing in precious metals is an interesting investment strategy. Precious metals are generally uncorrelated to stocks and bonds and they can also be uncorrelated to your future net worth. Precious metals are speculative and do not provide dividends that otherwise drive the growth of your investment portfolio. Equities over time have been a better hedge in protecting for inflation. If you decide you need precious metals in your portfolio I would recommend no more than 5% of your total portfolio in mining stocks. And if any advisor suggests they know where any investment will be next week, next month, or next year, I would walk away as fast as you can.
Brenda, I think it just depends on what you can afford. If you can manage going full time and graduating quicker, meaning you hopefully find a higher paying job quicker, then why not. Unfortunately, many people's cash flow don't allow this...
Brenda, congratulations on improving your employment opportunities. If you have the finances to go full time, savings, loans, gifts from parents...going full time would allow you to focus on your education and to be finished with a degree sooner. If you are not able to afford going full time, then you actually might have better luck finding part time employment. Employment agencies may be beneficial depending on your skill set. Good luck, you are doing to right thing which will reap it's rewards for your future.
Brenda You should see if financial aid is available if you have the resources to go to school full time. Consider getting education in a specific area that leads directly to a position in that field. We have a clients who recieved a certificate that allowed her to get a position as a social director in a retirement home. Martha
Brenda, on a personal note, I started a Master's program while I was still working and after I had a few courses under my belt I went full time when I saw I could finish my Masters within a year. But I did so while having a part-time job and knowing I could return to my previous workplace. Best of Luck to you Brenda!
That's about all the time we have for today!
Thanks everyone for joining us. See you next time.
This is Lon Jefferies, CFP in SLC, Utah, signing off.
We would like to give a huge "thank you" to our expert team: Matthew Illian, Martha Kapouch, Phil Hogg, Deb Frazier, and Lon Jefferies!
And, thank you to everyone who showed up to ask questions today. We hope to see you again at next month's Jump-Start Your Financial Plan chat on Thursday, September 19, from 1-3 p.m. ET.