New Financial Tools Make It Easier to Plan for Retirement

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your-money-ratios-198x300 2If you’re like most people, you find the process of retirement planning somewhat intimidating.  There are lots of numbers, calculations and assumptions to make before you can decide how much you need for to save each year, how much you’ll ultimately need to retire, how big a mortgage you can handle and what type of insurance to buy.

But there’s an easier way to plan that allows you to focus on some very clear and simple goals.  Professional investors have for years been using financial ratios as shortcuts to evaluating the financial health of large companies.  By looking at a few key ratios, investors can get a quick and comprehensive assessment of what sort of shape a company is in.  The beauty of the ratios is that they compress mountains of data into one simple number that conveys a great deal of information.
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Tax Tips For Parents

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W4 Tax Withholding

Having children is a wonderful experience that is priceless in so many ways! But do they cost you a lot!  Fortunately there is some tax help for parents in the form of deductions and claims.  Robert Meighan, vice president at Turbo Tax, has listed some great tax tips for parents:
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Stop The Retirement Ripoff – Interview With David B Loeper

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Have you wondered how good your retirement accounts are? Is your retirement money getting eaten up by fees you don’t see?  With the way the stock market has been the last year many people have seen their retirement portfolio’s nosedive.  Many people are no longer confident that their retirement savings will support them.  How can you protect your retirement savings so you can live the life you want when your working years are over?

Enter author and financial adviser David B Loeper. Mr Loeper has a new book out – Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money (John Wiley & Sons, April 2009) – which aims to help workers get the most out of their retirement accounts and avoid costly fees.

Mr. Loeper, what prompted you to write your book, “Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money“?  How bad are hidden fees in retirement accounts?

I noticed on my own personal 401k statement a column that said “Fees and Expenses” and the amount on the statement said zero.  As a trustee of our plan having just gone through our annual negotiation with our vendor I knew the fees weren’t zero and this struck me as being more than misleading.  I thought it was unethical.  So I endeavored to calculate what I was personally paying.  That “zero” expense was in reality over $1,500 I was personally paying, not to mention the thousands the company was spending on the plan as well.  Despite being a trustee and having more than 20 years of retirement plan experience, it took me nearly 30 minutes to dig through everything and figure out what I was paying.  I thought to myself, if it takes me this long with me being a trustee and knowing where to look, what are the chances any of my employees would be able to figure it out?  I started researching it more and found a Government Accountability Office study that showed more than 80% of plan participants do not know what, if anything, they are paying.  With the financial services industry lobbying hard to keep these costs hidden, and participant’s not knowing they are being ripped-off, I thought the only way to get this fixed is to educate participants, show them how to figure out if they are being skimmed and tell them how to coach their employer to fix it.  That is exactly what the book does.

What’s the difference in a percentage point or two in expense fees
and why should we care?

The difference between a point or two is expenses is MASSIVE.  An excess fee of 1.5% would cost a twenty five year old couple that each saves $2,500 a year with a $1,000 match OVER $1 million (or about ONE THIRD of their wealth) at age 65.  (see  The OTHER Millionaire You Make ).

How do I know if a plan I’m invested in has hidden fees?

Reading the book and following the step by step instructions is really the only way you will know.  That is the problem.  The fees are hidden and it is legal to do so.  In many cases your employer doesn’t even know.  You won’t know if you have hidden fees without doing a little homework.  Is it worth a few hours of your time to find out?  I estimate over 90% of all retirement plans have excessive fees that cost you your lifestyle in retirement.  Your statements may provide SOME information and starting with expense ratios of your funds can give you a clue, but there are all kinds of schemes to hide expenses from you.  A good place to start is look if you have a large cap index fund.  The going rate for a fair expense ratio for a large cap index fund should be no more than 0.10% annually.  If you are paying more (it is common to have such funds priced 3-5 times what is otherwise available) you are being ripped off.  We are not talking about the difference between a Lexus and a Camry.  We are talking about paying Lexus prices for a Camry!

Where can we put our retirement money to avoid costs and build up
enough to retire at the same time?

Anyone that answers this specifically without knowing the circumstances of the person is selling something.  In general, low cost index funds are what we use to construct portfolios to serve each of our employee’s and client’s personal needs.  They completely avoid the risk of materially underperforming and avoid needless expenses with certainty in exchange for having no risk of out performing.  The value of avoiding underperforming is worth that trade off.

Realistically, what does it take for the average person to retire?

A well thought out plan that identifies ideal and acceptable goals with balanced confidence that avoids too much uncertainty and needless lifestyle sacrifice.  We call this Wealthcare.

How are 401(k) plans as a retirement vehicle and what do we have to
look out for?

It depends on the plan.  They can be great, and they can be terrible.  Looking out for more than expenses is important too.  Active management gambles, auto pilot target date funds, insurance company products and fund wrappers, conflicted advice are all HUGE warning signs that you might be better off investing outside of your 401k (or 403b, 457 plan).

That’s a lot to digest, but it seems like it’s essential that we have to look into our retirement plans ourselves and make sure we are getting what we pay for!

Thank you for your time and insight Mr. Loeper!

You can purchase your copy of  Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money on Amazon.

A popular speaker and writer, DAVID B. LOEPER is the CEO and founder of Financeware, Inc. doing business as Wealthcare Capital Management in Richmond, VA. He is author of the top selling book Stop the 401(k) Rip-off!, three other books being released in 2009 by John Wiley & Sons (Stop the Retirement Rip-off, Stop the Investing Rip-off and The Four Pillars of Retirement Plans). He served on the Investment Advisory Committee of the $30 billion Virginia Retirement System and was chairman of the Advisory Council for the Investment Management Consultants Association (IMCA). He earned the CIMA® designation (Certified Investment Management Analyst) from Wharton Business School in 1990 in conjunction with IMCA.

I Re-Allocated And Re-Balanced My 401(k) Portfolio

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On white: Topsy-turvy

I logged into my 401(k) plan.  Ouch! It’s been taking a beating all year.  In fact I mentioned that my 401(k) was hurting back in December when Hank over at MiB Smarter Money gave me a nice analysis of my portfolio.  Now, I understand that I’m in this for the long haul as far as the investments are concerned.  After all this is for my retirement which is still a ways off.  There’s plenty of time for the investments to recover and do well.  I’m not going to pull my money out because the market isn’t great.  The only reason my contributions were lowered is because we’re a one-income family right now (I only lowered my contributions down to the company match).

So I accept that my 401(k) isn’t so hot. Now what?  Well, I’ve been reading The Bogleheads’ Guide to Investing (which I won from The Digerati Life).  I’m not done with the book (which, by the way, is a great how-to investing read) but I have read how important it is to have a good asset allocation and to re-balance your portfolio from time to time.

This made me wonder what my portfolio looked like.  I set up how I wanted my assets allocated when I started contributing and I’ve made a few adjustments from time to time.  But reading the Boglehead book made me re-think what my allocations should be.  Also, I haven’t re-balanced the portfolio in the longest time.  I’ve changed my future contributions but rarely what was already in there.

So today I changed that.  Looking at my portfolio I realized I had funds that I was no longer contributing to but still had large balances.  I also saw that based on suggested portfolios in the book and my age that I should probably have a higher percentage of bonds in my investments.  Other funds that I was contributing a higher % to really took up a very small % in my portfolio since I haven’t been re-balancing.

First, I changed where my future contributions will be going.  This is money that comes out of my check as well as the company match.  Next, I moved investments already in my portfolio to match my new asset allocation.  Both processes were pretty easy on the Fidelity site (the company that manages the 401k).  Remember, changing your future contributions isn’t the same as re-balancing your portfolio.  You have to look at both if you want it truly balanced to the investments of your choice.

Here’s what the allocation is now:

Stocks

Large Cap

  • Fidelity Contrafund 18%
  • Vanguard Institutional Index Fund Institutional Shares 22%

Mid Cap

  • Artisan Mid Cap Inv CL 10%

Small Cap

  • Fidelity Small Cap Stock Fund 10%

International

  • American Funds New Perspective Fund Class R5 5%
  • Fidelity Diversified International Fund 5%

Bond/Managed Income

  • PIMCO Total Return Inst CL 30%

Before I started changing anything I made sure that there would be no fees for changing investments.  Some funds charge a fee if you sell them before a certain time frame.

I also set up my account to send me an email if any of my percentages exceed 5% of what I set.  This gives me a reminder to check if I want to re-balance the funds that changed.

I’m not expecting my portfolio to all of a sudden jump into the black but it will be interesting to look and see where it’s at year-end.  Again, these funds are for the long haul as I won’t use them until I retire.  That said, I still need to adjust my contributions and allocations as time goes on.

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Creative Commons License photo credit: James Jordan

15 Things To Do With Your Economic Stimulus Check

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The government Stimulus checks started going out on April 28th. If you are expecting one you should start looking for it in May (here’s a post listing the dates).

So what are you going to do with the extra money? Here are a list of ideas for using your stimulus check:

  • Pay off credit cards – If you have any credit card debt the stimulus check will be a great way knock some of that out! Paying off the debt gives you an instant return in savings of whatever you would have paid in interest fees. Psychologically, you will help in getting the debt monkey off your back.
  • Contribute to a Roth IRA – You can take your money and put it into your Roth IRA. For 2008 the contribution limit is $5000.
  • Start an emergency fund – If you don’t already have some sort of emergency fund (three to six months expenses seems to be the conventional wisdom) then your stimulus check is a good way to start one. Even if you have one you can use the money to increase your fund. A great place to start one is with ING Direct (you can even get a $25 bonus by opening your account with $250).
  • Contribute to a 529 college savings plan – You can use the money to help save for your kid’s education by putting the money in a 529 plan. Not only do you help save for college but you might get a tax break as well depending on your home state’s plan.
  • Pre-pay your mortgage – Take the money and make additional payments to your mortgage. By making additional payments you will own your home faster and pay less in interest. Just make sure the payments go towards the loan principle and not next month’s payment (also check that your lender will accept pre-payments without fees or penalties).
  • Go on vacation – You may have been planning to do this anyway so here is a good way to fund the vacation. Go and do something that will be a great experience for the family that you will all remember.
  • Improve the house – If there’s something you’ve needed to improve on your home, such as a furnace, you can use your stimulus check to pay for it (or at least help). Other options could be new paint job, carpet, furniture, appliances, etc…
  • Car maintenance – Have you been putting off a car repair? Need new brakes? New tires? Your stimulus money can fund it. If your car is about to go kaput your stimulus check could help pay for a new car (or a good new used car).
  • Learn to invest – Do some research and take the money and start investing. Companies such as Sharebuilder and Zecco offer low-fee investing. You have to do your homework with this option but it might be just enough money to start investing but not so much that you will be crazy worrying if you lose it. If you invest through Sharebuilder you can buy partial shares of Berkshire Hathaway B class shares. I hear that Warren Buffett is pretty good at investing.
  • Pay off student loans – If you have high interest student loans then your stimulus check can be a great way to help pay your student loans off. Just like with credit cards paying off your high interest student loans give you the instant return in savings of what you would have paid in interest.
  • Have a nice evening out – Take your spouse out to a really great meal. Get babysitting and go to that great restaurant you wanted to try. Go see that new show that everyone’s talking about. Make an experience you will always remember.
  • Get physically fit – The stimulus check should be enough to pay for a year’s gym membership (or more than a year). Use the stimulus check as a catalyst to get in shape and make your life healthier. Not sure about a gym? Find a class such as yoga or martial arts to join. Not into that? Buy a new bike and go riding. Or get yourself some good running sneakers and running attire. Join your local running club and enter a few small races. You never know, you may one day run a marathon.
  • Go to school – Use your stimulus check to enroll in a college course or two. This can be toward a degree or just continuing education. Hey, you can take a personal finance course. Maybe learn a second language?
  • Do nothing – This is the easiest of them all. Put the money in your savings account and forget about it. You don’t have to spend it or find any particular purpose for it. It doesn’t have to burn a hole in your pocket. One day you might find a good use for it but for now it adds to your savings.

Personally, we’re closer to the Do Nothing suggestion. Our stimulus check will come via direct deposit right into our ING account. We have no specific plans for the money so it will be added into our savings. Our check may pay parts of many of the suggestions or for none of them. Either way it will earn interest until it finds a home somewhere else.

Do you have any other ideas for using the economic stimulus check?

photo by Argenberg