A Random Walk Down Wall Street — A Great Read

Listen to this interview with the author of A Random Walk Down Wall Street. The book explains the basics of investing in a very simple way and cuts through a lot of investment myths and hype. http://www.npr.org/2015/01/19/377698238/markets-may-stumble-or-skyrocket-but-this-economist-says-hold-on-tight

Marketplace Weekend Interview — Inheritance

Last week I was interviewed for Marketplace Weekend, a syndicated program on NPR on the topic of inheritance.  One thing that I found interesting was the idea that people can plan to spend all of their money before they die leaving no inheritance.  In my experience this is rare.  What is much more likely is people will run out of assets prior to death or will still have assets when they die.    For example, many people own a house with equity when they die which their heirs will inherit.

To listen to the entire show click here.  My segment begins at 34:45.

When should I move my 401(k) over to my new job?

This is a repost of a recent question I answered on NerdWallet

 That is a great question that I get often.  There are a couple of things to think about.

In most circumstances rolling your old employer plan into IRA is probably the best option.  That option allows you to access low cost funds from places like Vanguard and Fidelity that may not be available in your old employer plan.  It also makes it easier for you to keep up with the money, if you change addresses etc.

If you are thinking about rolling your old employer plan to a Traditional IRA and your Adjusted Gross Income (at the bottom of the first page of your tax return) is more than about $112,000 (single) or $178,000 (married) and you do not have a Traditional IRA now, you may want to skip rolling over your old employer plan into a Traditional IRA.  Keeping that money out of a Traditional IRA allows you to make a tax-free “back door” Roth IRA contribution by contributing to a Traditional IRA and then immediately converting it to a Roth IRA. In that case you would move your old 401k plan balance directly to your new employer plan if it had lower cost options than your old plan, or leave it at your old plan if the opposite were true.

On the small chance that your old employer 401k balance was in a Roth 401k, I recommend rolling the balance directly into a Roth IRA and not into your new employer plan.

I hope this helps.

View the original post on Nerd Wallet

Is Your 401k Plan a Rip-off

The PBS show Frontline aired a great piece last week about 401k plans called “The Retirement Gamble.”   The show exposes some of the excessive fees that 401k plan providers charge, and the lengths they go to hide them from employees and their employers.

If you are an employer or employee that thinks that your 401k plan provider may be charging to much, or you do not even know how to figure that out, you can go to www.brightscope.com to check out how your plan stacks up.  Or you can contact me if you would like me to review your plan and show you some better options.

Having a high income does not guarantee wealth

The recent debates over tax policy and the “fiscal cliff” have raised a pet peeve of mine.  My peeve is when people, use the word “wealthy” interchangeably with “high income”.  I do agree that there is a correlation between the two, but there are people with high incomes, with much lower wealth than people with significantly lower incomes.

I will draw a couple of examples based on a composite of my clients.

High Income/Lower Wealth

John and Mary Smith both age 42, work at high paying jobs and have a combined income of $400,000.  They have two children, ages 6 and 2.  They have high housing expenses, child care expenses, retirement savings, and college savings.  They also spend money on home improvements, eating out and vacations.  They have a net worth of $200,000 equal to a half a year of their income.

Lower Income/Higher Wealth

Doris and Boris Johnson, retired, are 67 and 65.  They both collect pensions and Social Security which total $90,000 which provide enough income for them to live the lifestyle they wish.  They spend time on volunteering, visiting friends and family, and some travel.  They have lower housing costs than the Smiths, even though they have a second home, and do not have to worry about saving for retirement or college for their children.  They have not spent any of their retirement nest egg of $1.8million, and plan to help their grandchildren with college expenses with some of it. Their total net worth is $2.3million or 25.5 times their annual income.

Factors that I have seen that are associated with a higher net worth besides income include.

  1. Age, the older you are the more time your investments have had a chance to grow.  In early retirement expenses may also be lower if you are in good health then they were if you were saving for retirement of college educations for children.
  2. A strong ability to delay gratification.  People who find it easy to delay gratification tend to spend a lot less.  They spend less both on shorter-term expenses (vacations, eating out, ‘stuff’), and longer-term expenses (housing, cars).  This is also manifested in a “pay yourself first” attitude when it comes to their income.
  3. Think about their future often and though generally optimistic, know that financial reversals do occur and want to prepare for them.

Personal Finance Magazines — Bad Advice?

I often read Personal Finance magazines because I know my clients do.  In a big picture way they give solid advice about investing — not timing the market, setting up a long-term asset allocation, etc.  At the same time many of their articles and columnists are advocating just the opposite.  The January 2013 cover story for Kiplinger’s title story is “Where to Invest Now” quoting Katerine Nixon of Northern Trust saying “It’s going to be a pretty good year for stocks.”  I have two issues with this cover.  First, it implies that market timing can be a successful strategy even when research implies that for most people it isn’t.  Second, what the heck does a “pretty good year for stocks mean?”

Opening the magazine we see that they feature a mutual fund manager in a red tie and socks (Cardinals Fan, were told — is that baseball or football?)  who only holds about 20 stocks.  Why don’t they feature the guy that bet on red at the casino and doubled his money in a few seconds.  Arguably a much better result that this guy achieved.  When a magazine features the mutual fund manager “winners” they imply that more than luck is involved in their winning ways, when in reality a long-term statistical analysis implies that it’s all luck.

There are two reasons why many people have a hard time buying this.

1. When it’s something we perceive as complicated and don’t fully understand how it works we give greater deference to those who seem to do well.  Since we do not understand how the stock market really works those who do well are perceived to have have special skills.   Such deference is usually not accorded to someone who flips heads 10 times in a row, a much rarer feat.

2. The mutual fund industry spends vast amounts of money to support this model. If you can make a lot of money convincing investors that you have a winning strategy for the long-term they will give you more money to invest.  If you do well in the short-term you can tout your performance to gather more assets and fees.  When you do poorly, blame it on the market or shut down that fund and start over again.

I understand that Kiplinger’s and the others have to sell magazines and web views but it would be great if they included a disclaimer by every article recommending individual stocks or actively managed mutual funds that “there is no empirical evidence that pursuing this strategy will be more effective than a buy/hold/re-balance asset allocation strategy using low-cost index funds.”

You want a mechanic not a used car salesman

We’ve all heard the story of someone who buys a used car and then takes it to a mechanic and finds out there are all kinds of problems which are really expensive to fix.  The car looked great and the salesman was really sincere. . .

Sound familiar?  I often see people make big financial decisions the same way that and end up with buyer’s remorse because the did not want to take the time or spend the money to get an unbiased opinion.  In many of these situations they have received the advice of a “financial advisor” but unfortunately, he was really a salesperson in disguise, just like the guy at the car dealer.  All he really cared about was selling you the product (annuity, life insurance policy, mutual fund, etc.)

What you want is the mechanic, someone who can give you objective advice, that is not selling you anything, and whom you pay directly, not through the purchase of a product.  Sure the advice is not free, but it’s definitely worth it.

Drive safe.