.gif) |
|
|
|
|
|
|
|
August 25th, 2011
by Eve Kaplan, CFP(R) Practitioner
Imagine you’re on a train headed for California. You know the train ride will take some time. You know the train will slow or stop at stations, accelerate to a certain speed, ascend to higher elevations, descend again and hit some switchbacks.
You plan on riding all the way to California, but you get motion sickness when you hit a series of switchbacks and you feel the train descending rapidly. Do you: 1) continue your journey or 2) jump from the moving train mid-way?
I hope you answered “continue my journey” and didn’t say “jump from a moving train”! Or should I say – I hope you stick with your investment strategy and don’t bail (panic) by selling into lower markets when they begin to decline?! Because – like all journeys – investing in stocks (US, overseas markets) is not always smooth. However, stocks can get you to your destination: a nest egg that carries you through retirement.
Why not bail on stock markets when you hit a rough patch? For one, it may be easy to exit the market (jump from the train) but how do you get back on board? One of my investment rules of thumb is – don’t do what your gut tells you to do. When markets become choppy, volatile and uncertain, there’s certain to be an overabundance of negative news in the media. If you actually listen to it, your gut feeling will tell you “jump from the train!” But that’s exactly the wrong thing to do, at the wrong time, for the wrong reason.
Here are some things to ponder before you consider jumping from any train:
1. You will have a smoother ride if your portfolio is prudently constructed and well diversified. Exposure to various stock markets (US large, mid and small, international developed, emerging, growth and value) reduces the pain of hitting a speed bump. Add various types of bonds, commodities, real estate investment trusts and alternative investments, and your ride is relatively smooth.
2. Occasionally this system breaks down (e.g. during the 2008 meltdown) and it seems like there is no save place to hide. That experience is temporary because the benefits of diversification resurface.
3. If you live into your 90s, you may have 20-50 more years on your train ride. It makes no sense to jump from a moving train (react to the market short-term) if you’re in it for the long haul.
4. Studies show individual investors typically earn a fraction of their promised rates of return because they hop in and out of holdings –usually at the wrong time. Poor timing means they rack of transaction fees and end up “buying high and selling low.”
5. Rebalancing your portfolio (selling outperforming investments, buying more underperforming investments) can contribute to a smoother ride (better return). If your model portfolio is 60% stocks/40% bonds now, and market movements change this to 55% stocks/45% bonds, consider gradually buying more stocks/selling more bonds until you get back to your optimal 60% stocks/40% bonds portfolio.
If you work with a good investment advisor/financial planner, you’ll have someone prevent you from following your gut reaction to “jump from the train.” If you don’t work with anyone, consider utilizing professionally managed portfolios at Vanguard, Fidelity, T. Rowe Price, etc. Once you find the portfolio that’s right for you, stick with it through market turbulence. Having your investments rolled up in a one-stop-shop will help you avoid the temptation of jumping from the moving train.
Copyright © 2011 by Eve Kaplan
Tags: asset class diversification, dos and donts in investing, investing dos and donts, long-term investment planning, market timing, market volatility, rebalancing, staying the course in investing
Posted in Investing, Investments, Retirement Planning | No Comments »
August 12th, 2011
By Eve Kaplan, CFP®
Do worries about having enough money to cover retirement keep you awake at night? Do you feel unhappy about the prospect of having to work many more years in a job you don’t love? Relief may be at hand if you consider the new retirement paradigm that offers a reasonable trade-off between continuing work and beginning to enjoy retirement activities while you still work.
The new paradigm goes like this example:
Let’s say your financial planner explains you can’t afford to retire now – you need to work another 4 years. Is the advice more palatable if you reduce retirement savings and use it now to pay for the retirement activities you look forward to?
Donald and Jane earn 150K/year. Both are 63. Their immediate retirement dream is to criss-cross the US by trailer to visit all the US National Parks. Their financial planner tells them they need to work to age 67 so they retire on at least 75% of their preretirement income (=113K/year) . If they retire now, social security + withdrawals from their retirement income only provide 55% of their current 150K income. That’s not enough to sustain retirement into their 90s.
Donald and Jane aren’t very enthusiastic about working another 4 years, but their financial planner creates a new transitional retirement strategy:
1) Postpone taking social security until Donald and Jane are 70. Social security benefits increase by approximately 8% per year from ages 66 – 70. It pays to take social security at age 70 once someone lives past 78/79 years of age. Donald and Jane are in good health; their financial planner is assuming they will live into their 90s. They also have enough money to cover living expenses from ages 67-70.
2) Continue to save for retirement, but significantly reduce savings. Instead of
saving 33K/year in their 401(k) plans (16.5K per person, before company match), Donald and Jane scale back their contribution to 10K each. They still benefit from a company match, but they don’t save the maximum amount they could each year in their 401(k).
3) Donald and Jane use the 13K/year amount they would have saved in their 401(k) plans (33K minus 20K = 13K ) and spend it on themselves each year, until they retire at age 67. They use this money to rent a trailer and visit 2 national parks each year during their vacations.
In sum, Donald and Jane agree to work an additional 4 years, but they begin to enjoy some of their retirement activities now. In this example, their financial planner projects they will average 82% of their preretirement income throughout their retirement – instead of the measly 55% they would have had if they retired at age 63.
This nuanced approach toward retirement planning fits better with the new realities of work/retirement in the US – often a prolonged, transitional process instead of an abrupt halt – from one day to the next – of work and retirement.
It’s the job of a good financial planner to balance the need for additional assets and savings with the need for “retirement activities” some people can enjoy before they officially retire. However, I don’t recommend you contemplate making Donald and Jane decisions on your own since outliving your assets remains one of the biggest risk the Boomer generation now faces. Careful planning is involved to achieve this type of transitional retirement approach. See your financial planner for more information.
Copyright © 2011 by Eve Kaplan
Tags: Retirement
Posted in Retirement Planning | No Comments »
July 9th, 2011
By Eve Kaplan, CFP®
If you ask people what their biggest financial asset is, they invariably reply “my home” or “my investments.” That’s true in dollar terms, but how about a huge asset most folks don’t think about? I’m referring to their “work potential” or “work value.”
Your biggest asset – your “work value” — is the cornerstone of any financial plan drawn up for pre-retirees. We financial planners create various scenarios for our pre-retirement clients that include investment projections, annual savings rates, the cost of various goals, etc. We recommend the optimal time to retire and counsel our clients not to retire too soon. After all – our goal is to reduce the risk of our clients outliving their assets.
So it comes as no surprise that one of the biggest body blows to a financial plan – apart from unexpected death or divorce – is “sudden retirement.” According to one study, a whopping 41% of retirees stopped working sooner than they planned to. Sudden retirement throws a monkey wrench into financial plans and needs to be dealt with immediately.
“Sudden” or “unwanted” retirement can occur for a number of reasons. The biggest reason is NOT work-related downsizing/elimination of a position (that’s the reason 37% of the time) – it’s actually poor health (54%) and the need to care for a spouse or family member (19%).
What can we financial planners do to help our clients who become “sudden retirees” or who face the risk of “sudden retirement”? Here are some key issues to consider:
1. If you have a financial plan already, your numbers can be adjusted to show the impact of “sudden retirement,” if it occurs. If you lost your job recently, a “sudden retirement” assessment is vital.
2. If you haven’t suffered a “sudden retirement,” have your planner consider the consequences if this did occur in the future. Having alternative scenarios in your financial plan gives your planner some flexibility regarding ways to shore up your financial plan if this occurs.
3. We recommend clients invest in a professional assessment of skills/interests to uncover other potential career paths. This is critical for “sudden retirees” who lost jobs due to downsizing/elimination of a position. If you’ve lost your job due to health, or the need to care for a spouse/family member, consider any measures you can take to avoid becoming a “sudden retiree” for life.
Your biggest asset may be yourself, but it sometimes takes a professional to match your abilities with a job you otherwise may have overlooked. Having a second career can help people bridge the gap between their retirement savings and the prospect of living into their 90s. Truthfully, many or most folks do not expect to live that long and forget their retirement may stretch 30+ years.
I was reading recently about “media leafcutter ants” (Atta cephalotes) in Panama. Like other ants, colony members have different physical attributes and “jobs for life” to better serve the colony. Foragers, for example, have razor sharp mandibles capable of slicing leaves into small disks so they can be carried back to the nest. Over time, repetitive leaf slicing blunts these mandibles – until foragers no longer can do their job well. Instead of ending their careers, foragers shift their role to gathering up sliced leaf parts and carrying them back to the nest.
People are infinitely adaptable and still can contribute toward society (and earn money) if “sudden retirement” occurs. Sometimes it takes the work of a financial planner to help pre-retirees recognize their financial plan depends upon returning to work – possibly in another capacity.
Copyright © 2011 by Eve Kaplan
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
Tags: career planning, retirement planning
Posted in Fee-Only Financial Planning, Financial Planning | No Comments »
June 7th, 2011
by Eve Kaplan, CFP® Practitioner
People are programmed to follow crowds because it helps our survival. If you see a crowd running in the same direction, you’re likely to follow it since “it must know something.” Doing so could save your life.
What about following the crowd when it comes to investing? Studies show the “wisdom of the crowds” becomes a liability in the investment world. This is true not only during bubble times, but during ordinary times, too.
During bubble times, extensive research underscores the wisdom of heading in the opposite direction when everyone is enthusiastic about something. Joseph Kennedy is said to have cashed out his stock market positions in 1929 when he heard a shoeshine boy giving stock tips. There are many similar stories – from tulip mania in the Netherlands to the 2001 Nasdaq crash. When everyone is excited about an investment, that’s a good sign to “get out early” and avoid running further with the crowds.
But more often than not, we’re not necessarily in the midst of a growing bubble. During these so-called “ordinary times,” data also indicate the crowd is more often wrong than right when it comes to investments. The Economist investigated Morningstar fund flow data and performance statistics in the US in order to determine if investor crowd wisdom paid off. Specifically, the Economist was looking to see if it paid off to invest money into something that already had done relatively well the previous year (something that already had a “good buzz.”) Looking at the most popular investment sector (that beat the average sector by more than 2 percentage points the previous year), the popular sector subsequently lagged the average by under 3 percentage points as investors continued to pour money it. Multiple test runs indicated the herd mentality was wrong approximately 60% of the time. 60% may not seem like a lot, but that’s hugely significant when compared with random statistical outcomes.
How about using “wisdom of the crowds” behavior as a contrarian indicator? The numbers seem to indicate that “pariah” or out of favor funds do better than popular sectors, but do not exceed average returns.
You’ve probably often heard the disclaimer “past performance is no guarantee of future performance” in mutual fund literature. Investment gurus frequently remark that past outperformance of mutual funds does not continue indefinitely due to mean reversion. In other words, an investment that did relatively well in the past likely will not continue to do so in the future. Investors typically get very enthusiastic about something after it’s done well, and end up “buying high, selling low.”
The reversion to the mean phenomenon can be seen as yet another reason to stick to “passive” (index-based) investing since data show it’s difficult to outperform a market on a consistent basis through active management. By some measures, approx. 75% of mutual funds who actively attempt to outperform a benchmark end up underperforming (doing less well).
Volumes have been written about these subjects so I’ll end here by touting portfolio diversification. Even pundits were skeptical after the 2008 crash about diversification since all assets fell together and there was no safe place to hide. However, diversification always reasserts itself and remains the cornerstone of prudent investing. Diversification simply means having exposure to many different assets classes (different types of bonds, different types of stocks, alternative investments) to smooth growth and lower volatility. The right mix of different assets is something your advisor can design for you. If you don’t have an investment advisor, there are some online tools that give you some ideas about ways to increase your diversification and simultaneously lower your risk.
Copyright © 2011 by Eve Kaplan
Tags: contrarian investing, diversification, passive investing, reversion to the mean
Posted in Investing | No Comments »
May 11th, 2011
By Eve Kaplan, CFP®
If you can’t attend our free workshop “You’re Finally Retired – Now What??” (May 26, 2011 at the Scotch Plains Library, 1927 Bartle Avenue, Scotch Plains, NJ), we’ll repeat this workshop in Autumn 2011 at the Berkeley Heights Library.
Here’s a useful summary of the key points from that workshop:
1. When is it best to take Social Security – take it at 62, 66 or 70?
2. What’s the best way to minimize taxes if you consider IRA distributions and/or Social Security payments (if you are not yet taking Social Security).
3. How much (4%? 5%?) should you take from your retirement portfolio to retain principal? Does this change after your portfolio hits a speed bump (euphemism for 2008-type meltdown)?
4. What’s the best way to avoid the risk of outliving your assets?
5. How can you beat back the inflation scourge in your retirement years?
6. How much should you set aside to cover medical expenses in retirement?
7. Is it too late to consider long-term care insurance?
8. If you have long-term care insurance, does it have the “top 3 must have” features?
9. Should you consider annuities? How can you create your own “home grown” variable annuity product and bypass overhead and commissions.
10. Where should you turn for financial advice?
11. What are the key estate planning documents you need?
12. What happens if your partner is impaired or has dementia?
I’ll zero in on several topics this month (to be continued next month).
Social Security: Sure, there’s a lot of talk about the budget deficit, but this program will be around for decades to come. If you can at all afford to postpone benefits, consider taking Social Security at 70. Why? You receive 100% of your benefit if you take Social Security at “full retirement” (66). You take home much less if you take benefits at age 62. If you wait until age 70, you get a whopping 143% of your “full retirement” benefit in exchange for waiting an extra 4 years. This wait becomes increasingly valuable if you live past 78/79.
IRA versus Social Security: Tax rates will increase in 2013, so if you’re retired and your income is relatively low, consider tapping your IRA in 2011-12 if you need cash (and consider postponing Social Security, if you aren’t already taking it). Bunching Social Security with IRA distributions will drive up your taxable income. A financial planner can help you decide the correct timing for both.
The Inflation Scourge: This is a big one – inflation (and periodic portfolio meltdowns) is the enemy of all retirees. Anyone on a fixed income should be concerned about inflation because it eats away at purchasing power. Some basic inflation-mitigating strategies do assume a “pinch of this” and a “pinch of that” since no single strategy should be used in isolation in a portfolio. The key is to diversify amongst various strategies that include:
1) TIPS and I-bonds – both have a fixed rate and an inflation rate. TIPS are issued by the US Treasury. TIPS generate taxable phantom income as the underlying principle adjusts for inflation, so they’re best held in tax-deferred accounts
2) Stocks (especially high dividend-yielding stocks). While more volatile than bonds (who can forget Fall 2008?) they have the ability to grow and outpace inflation. Stocks have outpaced inflation in every 20-year period from 1926 through 2009.
3) Commodities – a volatile asset class that nonetheless has the ability to offset inflation risks in a portfolio. These are best held in tax-deferred accounts in relatively small doses.
4) Commercial real estate. Commercial real estate tends to raise office and retail rents in response to inflation since CPI changes often are factored into rent increases. Real estate securities (REITs) are best held in tax-deferred accounts.
Copyright © 2011 by Eve Kaplan
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
Tags: income in retirement, inflation risk, long-term care insurance, medical expenses in retirement, portfolio drawdown rates, retiree financial planning, retirees, retirement income, retirement planning, social security timing
Posted in Fee-Only Financial Planning | No Comments »
May 1st, 2011
By Eve Kaplan, CFP® Practitioner
There’s a growing body of research on the connection between brain wiring and financial decision-making. Formerly discrete academic areas (economics, psychology, physiology) are converging as experts explore what drives individual financial decision-making.
“The Secret Life of the Grown-Up Brain: The Surprising Talents of the Middle-Aged Mind” by Barbara Strauch (NY Times health and medicine correspondent) is one such book. Strauch already creates a feel-good element since she defines “middle-aged” as the 40s-60s age group. Strauch sets out to demonstrate all the improvements the “middle-aged brain” sports versus younger brains. True – brain processing speed slows a bit as we age, and it’s sometimes hard to retrieve a memory (e.g. a name) from the correct “memory drawer” in our minds. However, Strauch summarizes research showing how certain cognitive functions improve as the brain ages. The middle-aged brain tends to be more content (one of her chapters is called “I’m So Glad I’m Not Young Anymore”).
She goes so far as to say that in some categories that matter most, “our brains are functioning probably at their best in our new modern middle age.”
One example is problem-solving. The middle-aged brain can better grasp the gist of arguments, recognize categories and size up situations than the younger brain. The middle-aged brain also is better at making financial decisions (this skill actually reaches a peak in our 60s).
It’s encouraging to know that our brains are functioning at their optimal level at a time (their 60s) when many individuals are contemplating retirement. We financial planners assume our clients live to 95, so making smart decisions in your 60s means you may have another 30+ years to reap the benefit.
Another engaging book that touches on financial decision-making is “The Art of Choosing” by Sheena Iyengar. Iyengar picks up on the theme of “excessive choice.” We’re now familiar with this argument from previous studies about the brain-taxing excess of consumer choices – be it jam, laundry detergent or anything else. With too many options, the brain can shut down and becomes paralyzed.
In terms of financial decision-making, the situation of excessive choice manifests itself by the thousands of sources of information: TV, newspapers, websites, magazines. Taking it all in is like trying to drink from a fire hose. The more one reads and hears, the more confusing it all seems.
Even if choices are controlled or reduced (e.g. a list of 14 mutual fund choices to invest in a 401k or 403b plan), the problems don’t go away. Decision paralysis can be reduced by automatic enrollment and dollar-cost averaging (the automatic deductions from pay checks that go toward retirement funding)…but it still remains a challenge to make optimal financial decisions. Even if there are “only” 12 mutual funds to invest in a retirement plan, there still are thousands of potential combinations one can create by investing in some or all of these funds (in previous months we’ve written about the virtues of pre-mixed, professionally managed portfolios in 401k and 403b plans).
There are a couple of messages here – individuals become better able to make financial decisions as they age. However, excessive choice (and poor or missing information about these choices – I may add) create confusion and can lead to paralysis. Avoid “doing nothing” with your financial life because you’re overwhelmed by choices on all sides.
Copyright © 2010 by Eve Kaplan
Eve Kaplan of Kaplan Financial Advisors, LLC is a Fee-Only (no products sold) Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors, LLC is a Registered Investment Advisor with wealth management and 401k plan design services. She can be reached at 908-898-0549 or www.KaplanFinancialAdvisors.com
Tags: aging and financial decision-making, mopney psychology
Posted in Financial Planning | No Comments »
May 1st, 2011
By Eve Kaplan, CFP®
Here’s an easy to way to fix 2 investment mistakes. I detailed both at a recent workshop at the Berkeley Heights Public Library on April 6. Both mistakes are very simple ways to get you started with your Spring Cleaning investment project: 1) consolidate your scattered investment accounts into several holdings and 2) confirm your holdings are diversified by weeding out overlapping positions.S
Scattered holdings is like hanging your clothing in closets throughout the house (plus having some of it packed away, out of sight). Imagine dressing for a formal occasion, but running from closet to closet to piece together your outfit. It’s the same with financial accounts. If you have accounts scattered all over the place, it’s very hard (often impossible) to understand what you’re invested in, and where all your money is located. If you don’t know where your money is, you can’t minimize taxes (by knowing how much is taxable vs. tax-deferred). You also can’t know or remember what you have where, what should be rebalanced (positions brought back to your optimal asset allocation levels), etc. Scattered holdings are the enemy of good financial planning. Here are some guidelines for the number of places you should hold investments:
1) one current 401(k) or 403(b) plan per person (take all previous employer 401(k) and 403(b) plans and roll them into an IRA).
2) No more than 2 brokerage house accounts per individual or couple (e.g. TD Ameritrade, Fidelity, Vanguard). Some folks have a checking account at one brokerage house, but most or all their holdings at another. That’s OK, but preferably no more than 2 accounts.
Having money spread across several brokers to “see how each of them is doing” makes no sense. That means no single broker or advisor can see everything you’re invested in – so they invest on your behalf with blinkers on.
3) No more than 2 banks for CDs, checking and savings – per individual or couple. You may have some CDs at one bank, but use another for checking/savings. That’s OK – but preferably no more than 2 banks.
4) If you have annuities and no surrender penalties, these should be consolidated (rolled over, using a 1035 exchange) to low cost, no load annuities with one annuity provider.
5) We haven’t discussed insurance and other financial documents, but the fewer insurers and policies you have, the better.
Let’s turn to another area that’s a perfect target for Spring Cleaning: having an excessive number of mutual funds that may be redundant in content – and end up giving you asset class concentration instead of diversification.
Everyone should have the right portfolio mix of these basic asset classes: short- and intermediate bonds (possibly municipal, corporate and global), large, mid and small cap US stocks, international developed stocks, emerging markets, commodities and REITs. The appropriate weighting of each asset class is determined by your risk tolerance, income and/or growth needs, etc.
How do you know if your mutual fund holdings overlap? You likely won’t be able to tell if they just by looking at the name alone. Here’s what I mean:
Do you know what Janus D (JANDX) invests in? How about Fidelity Contrafund (FCNTX)? (answer: they both invest in US large cap growth stocks). How about Janus Triton D (JANIX) and Catalyst Value Cl A (CTVAX)? (answer: they both invest in US small cap stocks). If you subscribe to Morningstar, Quicken or other investment programs, X-ray functions allow you to enter mutual fund holdings to determine the extent of the overlap.
These are just 2 tips – briefly described – to Spring Clean your investments. Knowledge is power, so this type of Spring Cleaning is essential and not optional.
Copyright © 2010 by Eve Kaplan
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
—-
Tags: investments, mutual funds, portfolio allocation
Posted in Investing | No Comments »
April 1st, 2011
Spring Clean Your Way to Investment Success!
By Eve Kaplan, CFP® Practitioner
I’m going to suggest two things are possible in the next several months:
1) the relentless cold, snow and ice will become a fading memory and
2) it’s possible to Spring Clean you way to a better investment life – based upon advice from a sage Wall Street veteran.
I’m taking my cue for Spring Cleaning from a prominent figure in the financial planning world: Gordon Murray. Mr. Murray, a Wall Street veteran and recent Dimensional Fund Advisors consultant, passed away recently from brain cancer. Gordon decided to cease treatment for his terminal cancer last June. He dedicated the last months of his life to writing a book (with his financial advisor, Daniel Goldie) called “The Investment Answer.” The book was completed before Gordon passed away – allowing him to see this project to fruition.
Gordon embraced simple ideas that could benefit the investment lives of all Americans. The book is simple and elegant. After more than 25 years on Wall Street, it manages to boil things down to 5 simple principles that can have a far-reaching effect on your investment life.
Here are the 5 decision points Gordon Murray recommends you embrace:
1. Hire an advisor who earns fees from you, not from mutual fund or insurance companies (Daniel Goldie works that way – not by coincidence). The thinking here is that commission-based advice-giving can never be as objective as advice that puts your needs before those of the advisor. It’s very hard to give objective advice when an enticing commission lurks behind the scenes.
2. Divide your money into a number of buckets: stocks & bonds, big & small, value & growth. I would add here that a large majority of investors – when in doubt – are well-served by a 60/40 stocks/bonds portfolio. I also would add that the Dimensional Fund Advisors bias favors small over big, and value over growth. 80+ years of investment data underscore the fact that small is better than big, and value outperforms growth.
3. Divide your money further into domestic and foreign buckets. Your home currency is the US dollar and that won’t change unless you plan on retiring in a foreign country. That said, the US percentage of global stocks is shrinking as other markets and economies outpace US growth. You want to consider holding global bond mutual funds, and having sufficient international exposure – directly through international and emerging market mutual funds, and indirectly through large US conglomerates who sell around the world (e.g. Coca Cola and Caterpillar).
4. Decide if you want to invest “actively” or “passively” through mutual funds. I will add here that I’m a former fund manager who embraced active management (stock picking) at the time, but I’ve converted to the passive approach. The passive approach doesn’t aim to do better than markets (and, by adhering to an index, typically doesn’t do worse, either). Costs are lower and some studies show passive investing beats the pants off active management, net of fees.
5. Rebalance regularly. This means you sell your winners (prune them back) and buy more losers. This strategy means you’re one step ahead of most individuals, who bolt for the door when things get bad, and crowd into something near its top. It means you go against your gut reaction (which tells you to buy something when it’s often too late, and sell something when it already has fallen).
If you don’t think you have the discipline to follow Gordon Murray’s 5 simple steps on your own, consider Step 1 (hiring an advisor who earns fees from you) as your starting point.
Spring Cleaning your investment life means you clear out the extraneous clutter, junk expensive or unattractive investments and streamline everything so it’s consistent with your risk tolerance. Doing this sooner – rather than later – means you can get to the goal line (the end of your life) and accomplish everything you need to do that costs money.
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
Tags: investments, mutual funds, portfolio allocation
Posted in Investing | No Comments »
March 1st, 2011
Squeezing More Juice Out of Your 401(k )Plan
By Eve Kaplan, CFP® Practitioner
If you’re like most Americans, you don’t have enough saved in your 401(k)or 403(b) plan to cover more than a few years of retirement expenses. Average retirement plan balances typically are no more than 1 or 2 years times average annual income….woefully inadequate to cover a 25+ year retirement period. Social security was never seen as something that could plug the hole left by insufficient 401(k) or 403(b) plan balances.
However, the 401(k) and 403(b)retirement landscape is rapidly changing so it’s not too late to squeeze more juice out of your 401(k) or 403(b) plan. Here are some steps to take –“common sense steps” and “taking it to the next level measures”:
“Common sense” steps to increase your 401(k) or 403(b) plan balance:
1. Defer the maximum you can afford to defer each year.
2. If you can’t defer the maximum allowable, defer enough to benefit from 100% of your employer match (if you have one).
3. Don’t try to market time – stick with your portfolio (example: 60% stocks/40% bonds) through both up and down markets.
And now for the more challenging part – taking things to “the next level” to squeeze more juice out of your 401(k) or 403(b) plan:
4. The government is shining a spotlight on fees and management abuses in the 401(k) and 403(b) industry. Dramatic changes will occur in 2012. Plan participants like you typically have NOT been aware you’re footing an extra 1-3% in fees per year. That translates into $1,000-$3,000 of hidden fees per year on a $100,000 plan balance. These fees soon will be disclosed on your 401(k) and 403(b) statements in dollar amounts. You may find your current 401(k) or 403(b) plan is excessively expensive.
5. Do research on your own 401(k) plan to see if it’s “great,” “mediocre” or somewhere in between. We like www.brightscope.com because it allows you to review the quality of your 401(k) plan (note: they will add 403(b) later in 2011). This website lists nearly 800,000 plans nationwide and assigns an objective rating. You can enter basic info (your age, your deferral amount, company name) to see how your current plan rates on a number of criteria: fees, quality of investments, company generosity, etc.
6. If you don’t like what you see, contact the Plan Administrator at your company. He or she works for your employer and is responsible for selecting this plan (a board also may have been involved in this decision, but the Administrator is “the bucks stops here” person). Show him or her how your plan is rated, and ask if he or she is aware this information (not necessarily flattering to your company) is available to you and your colleagues.
7. Companies and Plan Administrators are being sued by disgruntled plan participants over fees or poor investment choices within a plan. Savvy law firms are trawling for poorly rated 401(k) plans they can go after on behalf of plaintiffs. An example is a March 2011 $18.2 million award levied against a plan sponsor for using excessively expensive retail mutual funds instead of lower cost, comparable institutional mutual funds.
Be a smart consumer and consider how you’d like your retirement dollars to be invested – in your own 401k or 403b plan or in the pockets of expensive plan providers. If you have any questions about this, consider my firm to be an information resource. After all, it’s your money!
Copyright © 2011 by Eve Kaplan
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides 401k and 403b plans. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com
Tags: 401(k) plans, 403(b) plans
Posted in 401(k) and 403(b) Plans | No Comments »
February 1st, 2011
Overcoming the Force of “Inertia” (Countering the Tendency to Do Nothing)
By Eve Kaplan, CFP® Practitioner
Now that the glow of New Year’s Resolutions is fading, let’s look at one of the most powerful forces shaping human behavior: inertia. The dictionary defines inertia this way:
“The tendency of a body at rest to remain at rest. Resistance or disinclination to motion, action or change.”
Inertia occurs when people are too busy or too confused about where they should turn for financial advice. They may end up doing nothing. This isn’t a permanent solution since the State and other entities force a decision on individuals or families after death or when someone runs out of money.
Here are some examples of how “inertia” was solved (note: circumstances and identities have been changed):
1. John, age 62, owns a small business employing 8 people. His revenues exceed $3 million per year. John’s very absorbed in his work and is too busy to think about “financial stuff.” He has 3 adult children and a wife in poor health. John doesn’t know what his business is worth, hasn’t calculated his total net worth, doesn’t have succession plans for his business and hasn’t managed his investments in years (he’s not even sure what he’s invested in – he has a number of brokerage accounts here and there). If John passes away next week, the State of NJ will oversee the flow of assets to his ailing wife. One adult child has significant financial need but the other two do not. With John gone, his business will go into a tail spin, assets will be thrown into chaos and his adult children will begin to fight over the impending estate since they have unequal needs.
The Solution: A Certified Financial Planner develops a financial plan that draws upon a team of experts: insurance specialists, valuation specialists, estate attorneys and investment specialists. John now can structure his business in the most tax-efficient manner and channel assets to family members in a controlled manner. His investments are prudently managed and will provide for his own retirement needs. His plan precludes potentially damaging fights amongst family members when he passes on.
2. Janice. Janice’s husband, Bill, died 5 years ago. He managed the couple’s assets and handled all investment matters. Janice inherited several file cabinets full of information that she couldn’t make any sense of. Confused, she avoided them and focused on adjusting to life without Bill. Investment statements arrived each month, but she filed them away, unopened. Without realizing it, Janice’s net worth was declining and she was missing key areas (e.g. long term care insurance) that could enable her to outlive her assets.
The Solution: Janice consulted a Certified Financial Planner when she was contacted by the IRS regarding a previous tax return; she realized she didn’t know how to answer it. The financial planner waded through Janice’s paperwork, found the answer, assembled a comprehensive overview of Janice’s situation and created a plan to bolster her finances. Regular meetings allowed Janice to better understand her financial situation. She still makes no direct decisions but she has delegated these to a trusted financial advisor who has a Fiduciary obligation to put Janice’s needs first.
Both John and Janice benefited from consulting a Fee-Only (no products sold) Certified Financial Planner ™ Practitioner who didn’t mix advice with product sales. This advisor has a sworn Fiduciary obligation to put clients before his/her needs. The planner assembles a team of trusted experts to tailor solutions to each individual. If product sales are involved by a member of that team, the Certified Financial Planner doesn’t split fees or otherwise benefit from any products that solve a problem.
Copyright © 2010 by Eve Kaplan
Eve Kaplan is a Fee-Only Certified Financial Planner in Berkeley Heights. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York. Her firm provides financial planning for individuals, and 401k/403b plans for companies. She can be reached at 908-898-0549 or www.kaplanfinancialadvisors.com.
Tags: financial planning, financial plans, inertia in financial planning
Posted in Financial Planning | No Comments »
|
|
Eve Kaplan, CFP®
