Now that you’re done spending money on clothing, food, child care – and don’t forget the biggest expense, education – it’s time to focus on your own financial needs. After all, the average cost of raising a child today in middle-class America is nearly $250,000, excluding college tuition expenses. These types of numbers leave many couples in “catch up” mode when it comes to their savings and retirement planning.
The first step, as we all know, is creating a plan. You can’t make any headway towards debt and savings goals without a clear, executable strategy. Three big keys are: concentrate on building up your investments, boost your credit, and reevaluate your real estate needs. This is a major inflection point in your life, and thus an ideal time to consider all these topics.
Regarding your savings, your cash flow is (hopefully) growing, or at least turning positive. Because you have a limited amount of time to get things in order, taking action in the areas mentioned above should be done as soon as possible, especially if any emergency funds have been drained. More parents tend to undersave and overspend while their children are still living under their roof. Here are some questions to ask yourself:
Do we have enough cash to make it through the next economic contraction or bear market?
Is our credit card debt manageable?
Are the balances in our 401(k) and IRA accounts where they need to be?
Is our house “too much” for us without the children?
Do they kids still need insurance?
Now that some of your larger expenses have come and gone, there must be a mental shift from “paying the bills” to “creating a better future”. You will need to monitor your assets more closely now, and extra money should be going more towards retirement accounts and less towards material things. There is good news for those who may be a little behind, as the IRS has increased contribution limits in 2019 for 401(k) and IRA accounts.
However, one key to keeping your nest empty is taking the time to educate your children on the importance of personal finance. This is a very important step in creating and maintaining a “moat” around your new-found savings. The more educated your children are on the basics of day-to-day money management, the less likely they are to need your assistance in the immediate future. These are great opportunities to preach to them about not living beyond their means, sticking to a budget, saving a little each month, and the consequences of debt.
There are a few important things than can be tackled that will allow you to get off on the right foot towards rebuilding your retirement savings. The key is to capitalize on the new-found opportunities to do so. And one of those, in this moment, is a focus on your future, not your child’s future. Of course you should give them the tools to financially fend for themselves, but going forward the main goal is retirement for you and your spouse.
Many feel they don’t have the money they need to invest, so they forego savings altogether. Sound familiar?
If this is you, the time has come for you to stop shooting yourself in the foot, and start saving today. Consistency while saving is key, and can make all the difference over time. Each dollar that you contribute to your portfolio adds up. In the long run, your investments early on can make a real impact, and when the time comes to withdraw your hard earned savings, the interest you’ve earned on your investments will help to provide a comfortable retirement or any long term goal you might be saving towards.
Start Saving Now
Consider the difference of waiting to begin saving. At age 27 you will need to put away $214 a month to reach a goal of $1 million. When you start at age 37, you will need to put away $541 a month to reach your goal. If you wait until age 47, that number rises to $1,491 a month and if you wait until age 57, you’ll need to put away a hefty $5,168 a month. Waiting until the last minute (age 62) would mean having to stash $13,258 a month to reach $1 million by the age 67 – ouch!
When you factor in things like compound interest, the negative impact of delaying your retirement savings becomes increasingly obvious. Compound interest is often compared to a snowball. If a 2-inch snowball starts rolling, it picks up more snow, enough to cover its tiny surface.
As it keeps rolling, the snowball grows, so it picks up more snow with each revolution. If you invest $1,000 in a fund that pays 8% annual interest compounded yearly, in 10 years you’ll have $2,158.93, in 20 years that will be $4,660.96, in 30 years it will be $10,062.66, and in 40 years it will be $21,724.52. It takes patience, but with time you can turn $1,000 into $21,724.52. That sounds like a lot of money, but if we’re being realistic, $1,000 is often spent on:
• A weekend skiing with friends
• A few months of dining out with friends or your spouse
• A new piece of furniture, or tech that you may/may not need
By hitting “pause” on these non-essential goals, you can easily start saving today and take advantage of compound interest.
No matter where you are right now, the crucial point is to begin putting money aside immediately to achieve your long-term financial goals.
What are your future goals?
Travel? Education for your kids? Paying off your mortgage?
Even when you contribute a minimal amount annually, if you’re consistent with that contribution over many years, the growth your investment will make can maximize your wealth in the long ron.
The idea that you don’t have enough money right now to make your investment worthwhile is hurting you and your future. Resist the urge to overthink how much you are investing, and just act by giving what you can to your future savings today. Remember: every dollar counts, and the satisfaction of watching your investment grow over time will give you peace of mind and a freedom to plan for the future.
Don’t Jump Ship When Things Go South
Many investors view themselves as being rationally-minded individuals who don’t take sudden action when the markets become turbulent. Too often, though, people do try to time the markets, and wind up making a wrong decision as a result.
Derek Horstmeyer of the Wall Street Journal writes “Most investors think of themselves as rational and immune from the behavioral elements that periodically roil markets. Human factors, however, do continue to affect our personal portfolio decisions—usually to the detriment of our long-run returns.”
Thinking too much about the “perfect timing” when growing our portfolios is a strategy that will more often than not cause people to lose money in the long run. A far better investment plan is to focus on the big picture, and less on a perfect portfolio – where every decision is made at the exact right time.
Timing the market is less important than time in the market, and getting caught up in getting that “perfect timing” is almost certain to cost you money. Aiming toward a good, solid return on your investment is a smarter strategy than worrying about every detail affecting your portfolio. All too often, people panic as soon as things start to go south (pulling out when the market has already hit bottom and putting in more when at the top). As a result, they often don’t experience this stated return in full. By resisting this urge to make a rash decision, investors showing behavioral restraint may actually wind up saving 1-2 percentage points a year.
Starting early is a critical component to a successful portfolio. It is never too late (or too early) to start, so the sooner the better. Beginning in 2011, studies were conducted where participants were shown a computer generated rendering of what they might look like at their age of retirement. They were then asked to make financial decisions about whether to spend their money today or save that money for the future.
In each study, those individuals who were shown pictures of their future selves allocated more than twice as much money towards their retirement accounts than those who did not see the age-progressed images. Seeing the images gave the participants a connection with their future selves that they did not possess before. As a result, their saving behavior changed dramatically because, “saving is like a choice between spending money today or giving it to a stranger years from now.”
Picture Your Retirement
Instead of viewing your future self as a stranger, think of how you actually might look. Then think of the financial decisions you are making today and how they will affect you in the future.
Are your spending and saving habits today matching up with how well that future self is able to live tomorrow? Every delay you make toward saving for retirement, or investing wisely means a further burden you will place on yourself later on. In fact, starting your retirement saving early is actually more important than earning higher returns at a later date.
The importance of starting now can’t be stressed enough. Luckily, fee-only, fiduciary advisors exist to help everyday people in making wise choices and to lessen the anxiety associated with what can seem like an overwhelming task.
The good news is you don’t even have to be a millionaire to get this customized service. Working with a professional will enable you to maximize your return on investment and tailor a savings plan just for you. Don’t delay getting started. The benefits of starting early and often far outweigh how much you actually save.
One of the most important elements of a good financial plan is regular saving. Unfortunately, it is one of the biggest stumbling blocks as well, with 57% of Americans reporting they had less than $1000 in savings in a 2017 survey. To make matters worse, 1 in 3 American has no retirement account, and only 1 in 4 Americans has over $100,000 in their retirement account.
These are concerning figures, particularly now. As interest rates keep rising – short term treasuries at their highest in nine years – and the market continues its climbing streak, you’re missing out if you are not putting savings to work for you.
Why aren’t more people saving when, according to a recent you.gov survey, “saving more money” was the 4th most popular New Year’s resolution for 2018?
One factor our clients have cited that kept them from saving in the past is discouragement due to past failures. The solution is to make sure your goals are SMART goals: goals that are Specific, Measurable, Attainable, Relevant, and linked to a Timetable.
It is important to set Specific and Relevant immediate, short, and long-term savings goals that you can visualize – like a beach vacation, a bigger home, or a child’s graduation ceremony. Tying savings goals to images that align with your life and your values can make them more emotionally compelling and easier to keep in mind.
Equally critical is to make your goals Measurable and set a Timetable: how much you are planning to save each month, or by a certain date. Don’t set figures or dates that are impossible; make sure they are Attainable as well.
Just like physical fitness, financial fitness is best achieved by setting specific, achievable, and measurable goals. A defined goal, whether it’s “save 5% of each paycheck” or “add extra hours to save for a vacation,” gives you a much better shot at success rather than a simple “I should be saving more.”
A huge part of good financial planning is goal setting. A good financial planner can help you calculate the long-term benefits of saving more and on a regular sustainable basis. It’s particularly important that your financial planner is a fee-only Fiduciary: that means there will be no “additional charges” or investment recommendations with commissions for the broker that could throw off your savings calculations.
And if you’d like help defining financial goals and evaluating whether you are saving enough to achieve them, please feel free to contact me for a free introductory call. We are always on call to help you realize your highest financial potential.
Recent news about a new fiduciary rule has left many folks more confused than ever about fee structures, and concerned about whether they’re getting the best value from their financial advisor’s fees or their brokerage firm’s fee structure. According to a recent podcast from the Wall Street Journal, it’s not only how much you pay – but also what you are paying for – that’s a source of communication breakdown between those clients and their advisors.
While the Department of Labor is pushing to get advisors and brokers to make it easier for clients to understand their fee structures, so far it doesn’t look like many of the bigger firms are taking them up on it.
Since any firm or advisor can claim to be client-driven, transparent, and “fee-based,” how can you be completely sure about what you’re getting and how much you’re paying? If your advisor is fee-based, rather than strictly fee-only, they may be earning commissions when they recommend certain investment products. Obviously, that creates a potential conflict of interest: those advisors have incentives to trade more frequently, and to recommend specific products in order to generate higher commissions for themselves and their firm, whether or not they’re best for you.
One way to avoid uncertainty – and the potential headaches it brings – is to work with a fee-only registered investment advisory firm (RIA). Fee-only RIAs and advisors do not earn commissions so they are not motivated by the frequency of trades, so they are less likely to encourage buying and selling unless it’s the best choice for you. Because RIAs are held to a fiduciary standard, they are legally bound to always – and only – act in your best interest.
Do your advisor’s feed include additional services?
Even if you are working with a fee-only RIA, however, you may be still not getting your full money’s worth. Many clients neglect to take advantage of untapped services that are included in their advisor’s fees, such as tax and estate planning, insurance advice, and financial coaching, among other services. If you’re not sure what additional services your advisor – or the advisors you are considering – provide, ask them. It’s the best way to ensure that there’s an open path of communication and that you are getting the most value out of your wealth management experience.
Only you can decide what kind of fee structure is best for you, what you feel is the appropriate amount to spend on investment management and financial planning, and what additional services are important to you to help you grow your wealth.
If you’re concerned you’re not getting your money’s worth, though, or that you’re paying too much, here are some good questions to ask yourself: How adequately served do you think you are? Are you confused with what services you are getting and what you are paying for? Do you feel valued? Are your goals being met and are you being listened to?
If you’re not satisfied with the answers to any of these questions, remember that you have options. Sherman Wealth Management is proud to be a fee-only independent RIA firm, because we feel it is the best way to meet our ethical standards and guarantee that all potential clients have a simple and cost-effective way to access investment management and financial planning.
Knowing what those options are, and getting clarity in your fee structures – whatever kind of advisor you ultimately choose – will allow you to feel more confident about the decisions you make, now and for your future.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
A year ago the Department of Labor expanded the number of financial advisors required to adhere to the fiduciary standard for retirement asset and accounts. This was clearly good news for investors. Adoption has now been delayed, however, and the future of this consumer protection is not clear.
Fiduciary means “Trust”
The word “Fiduciary” (from a the Latin word for “something inspiring trust”) describes a category of registered independent investment advisors who – like Sherman Wealth – are required to act solely and exclusively in the best interest of their clients. Our decisions are not colored by any expectation of additional income from the products we recommend.
Don’t all advisors work in their clients best interests?
Not necessarily. While it seems obvious that giving you the best advice is what you expect your advisor to do – it’s what you pay them for after all – broker-dealers are not required to operate as fiduciaries.
Broker-dealers have only been required to recommend products that are deemed a “suitable” choice for a client, not necessarily the best choice. Broker dealers can therefore recommend investments they receive commissions for selling or that their firm has an interest in, whether or not they are the best choice for you.
Let’s put it this way: as long as their recommendations are in the ballpark, they don’t have to aim for hitting it out of the park for you.
The new fiduciary rule should be a win-win, right?
Again, not necessarily. The new rule, which was passed under the previous administration, was set to go into effect this week and would have required the widespread adoption of the fiduciary rule for investment accounts and assets.
That would have given investors greater protection and greater confidence in the advice they are getting from their advisors.
The DOL has delayed the date of adoption until June 9, however, as the result of an executive order by the new administration. The current administration says it needs time to examine and review it, given, among other things, the Financial Industry’s concerns about costs to them, including the money they are earning on commissions from clients like you.
How does this affect your Financial Future?
If you are already working with a fiduciary, not at all. You are already covered, for all aspects of your investments, not just retirement funds.
If you are not already with a fiduciary advisor, even if the new rule is adopted in some form or another, it only applies to retirement investments and potentially not the full spectrum of your investing strategy, so you are still not getting the most transparent, trustworthy advice you can.
What should you do to insure you’re getting conflict-free advice?
Find out if your investor is a fee-only Fiduciary. Ask them. They are required to tell you. And don’t be fooled by “fee-based.” A true fiduciary does not take commissions and is conflict-of-interest free.
Hopefully the DOL will act in the best interest of consumers and investors. Even if the future of the new ruling is unclear, you can protect yourself by working with one of the many advisories that has – like Sherman Wealth – already adopted the Fiduciary Standard for all investment categories.
At Sherman Wealth we are proud to operate as fee-only fiduciaries, which means that our decisions are based on your goals, your risk tolerance, and your plan. Nothing more and nothing less. We couldn’t imagine bringing anything but our best advice to our clients’ financial futures.
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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
Last week the Federal Reserve raised its key short-term interest rate to a range between .75% and 1%, the first increase this year and the highest it has been since the Fed lowered rates in response to the financial crisis of 2008.
Why does it matter?
This rate determines the interest rate at which the banks themselves borrow short term. The increase in the banks’ rate is then passed on to their borrowers, through climbing interest rates on things like credit-card debt, car loans, home equity loans and mortgages.
This means borrowers may already be feeling a small, but still noteworthy pinch, when it comes to interest on their loans.
No need to panic though: it doesn’t need to mean turbulent waters ahead. Taking a look at whether your own financial goals and strategies need to be adjusted will help you stay on track for your own future.
How will the hike affect you?
The relationship between the economy and interest rates is so complex that even experts sometimes find it daunting. That said, there are a few key action items to consider when interest rates start to rise:
1. Refinancing options for existing loans
It might be time to consider refinancing to lock into current rates before they begin increasing, including rates on your mortgage, home equity loan, and car loans. Make sure you know which of your loans are adjustable or floating, and discuss with your advisor on what your options are to potentially minimize any increasing costs.
2. Your debt payoff strategy and schedule
Do the math and decide whether it makes sense to reallocate funds and increase your monthly debt payments. By paying more on your loans you reduce the principal quicker and therefore accrue less interest payments over the life of the loan. Your financial advisor may suggest that your investment gains may still offer the potential to offset any interest rate increase however there are many things to consider before making any adjustments (see our risk tolerance point below).
3. Bank and credit card balance transfers
It is always a good idea to shop around for the most favorable credit card and bank rates, particularly if interest rates are about to rise.
4. Your risk tolerance
It is a great time to sit down with your financial advisor and determine whether the level of risk you are comfortable with has changed in light of an expectation of rising interest rates and determine if it is time to rebalance your portfolio or make any adjustments.
5. Your budget
Rising interest rates and a strengthening economy may lead to an increase in the prices for everyday items including gas, groceries, and entertainment. Take a look at your spending and make any adjustments necessary so that you can stay on track with your savings plan.
What’s the good news?
By raising rates, the Fed is signaling its confidence that the economy is strengthening, which is great news if you have clearly defined goals and a diversified portfolio.
Keep an eye out for these possible benefits:
1. Interest rates on your savings accounts could increase
While banks tend to raise interest rates on deposits more slowly than on loans, you may see the interest rates applied to your savings accounts increase over time.
2. Incentives to buy a home now
The specter of rising rates could be just the incentive you need to switch from renting to owning your own home.
3. Increasing employment rates and salaries
The Fed has communicated that it believes the economy will continue to improve and that “labor market conditions will strengthen somewhat further.” That is good news because continued growth could mean more jobs and rising wages.
4. More business
A more robust economy may also lead to more consumer confidence , driving more customers, clients, or contracts to your business and this additional business could offset the less desirable attributes of rising rates.
Take a look, then take it in stride!
March’s rate hike, while small, was an indication that the Federal Reserve is slowly downshifting the stimulus policies it put in place after the financial crisis of 2008. It also indicates confidence that the economy is growing and will continue to grow, at least in the near future.
Take a look at your savings plan, your investment portfolio, and your risk tolerance with your advisor, and see if you need to make any necessary adjustments.
With proper diversification, goal-setting, and the help of a Fiduciary financial advisor, you can stay on track to achieving you and your family’s financial goals despite a potentially more costly borrowing environment.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
We live in a time of great personal freedom when we have the opportunity to choose our own life goals and paths.
While it’s true that very few 26-year-olds are likely to be retiring, you might be that lucky one who just sold an app to Facebook and is considering philanthropy. While most people start families in their 20s or 30s, you might be that 40-year-old who’s just about to adopt a first child. And while most 60-year-olds have hopefully accumulated some retirement savings, you might be that entrepreneurial baby boomer who is moving to Detroit to launch a startup or open a coffee bar.
In spite of this brave, and exciting, new world of personal choices, what’s the first question a financial advisor or online financial site generally asks you? Chances are it’s your age. Then that answer determines the next question, and the next.
Too many financial planners and investment sites, unfortunately, use age to make assumptions that then dictate investment recommendations.
The internet, too, is filled with articles like “Financial Planning Tips Every 30-year-old should know” and “The best financial goals for every age.” There are books and studies that break your life down into age-based phases like “early career phase” and “peak accumulation phase” then make generalization based on those neat buckets.
What’s more important than age?
We’re all individuals, with different dreams, goals, and life situations and when it comes to financial planning, age is not as important as it used to be.
Your goals and your risk tolerance should be the factors to consider first in devising a personalized financial plan or investment plan that works for you.
Is your primary goal buying a house, is it wealth creation for early retirement, is it having income so you can bike around the world for a year? Those answers are more important than the fact that you are 32.
Does a volatile stock market make you anxious? Do you prefer slow and steady to winner takes all? While it’s generally assumed that young people can afford greater risk and volatility because they have time on their side, you may be that 24 year old that wants or needs to preserve savings first and foremost.
Goals differ and investment always involves a certain amount of risk. That’s why a fee-only fiduciary financial advisor works with each client individually to manage goals and risk in a way that works for them. It is vital for success to determine the level of risk each client can afford to take, how much risk is necessary to help them achieve their personal goals, and how much risk and volatility they can comfortably live with emotionally.
You Are Unique
Each of us is unique and that means that no two people will have the exact same goals + risk profile, in spite of being the same age. Yes, living off retirement savings is different than living off a first salary, but the amount may be the same. And paying off student loans is really not all that different from paying off a mortgage.
What’s important is that you find a good fee-only fiduciary financial advisor who looks beyond pre-programmed, one-size-fits all recommendations for 20-30 year-olds or 60+ year-olds and focuses to your goals, your risk preferences, and your uniqueness to create a personalized plan that works for you and evolves as you evolve, not one designed for an entire generation.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.
Confused about the difference between Fee-Only Financial Planning and Fee-Based planning? You’re not alone. Financial planning jargon can be daunting when you’re just getting started.
Understanding the difference between Fee-Only and Fee-Based, however, is important and could be the key to your long-term planning success.
What is Fee-Only Financial Planning?
Fee-Only financial planners are legally registered as investment advisors and have a fiduciary responsibility to you to create a plan in your best interest. Fee-only advisors cannot accept any compensation as a result of product sales. In other words, they can’t make a commission from specific investments they recommend you purchase. They are paid directly by you – and only by you – either through an hourly fee, a retainer fee, or an agreed-upon percentage of your assets that they manage.
As a result, in most cases, Fee-Only advisors have fewer conflicts of interest. They are more focused on your needs, rather than on selling you specific investments, since their compensation is not determined by sales volume or choice. A Fee-Only advisor will not try to steer you toward commissioned annuities; a Fee-Only planner’s advice must be completely free of attachment to financial products. The role of Fee-Only advisors is to only provide you advice that fits your current financial situation and your goals and therefore not recommend products and services that don’t support that goal and that are not the best choices for you.
What is Fee-Based Planning?
“Fee-Based” is a category the brokerage community has created to take advantage of the success – and attractiveness – of Fee-Only advising. Because the terms sound so similar, it’s easy to think they are similar, but there is a major difference between Fee-Based planning and Fee-Only planning.
In Fee-Based planning, the advisor is compensated with a set percentage of your assets instead of a retainer or a flat hourly fee. In addition to that percentage, Fee-based advisors can also accept commissions from financial products, annuities, and insurance products they sell you. Each time you purchase one of those products, their earnings increase.
This leads to a fundamental conflict of interest. Your advisor wants to earn as much as possible while you want someone to provide honest and trustworthy guidance.
If one fund offers advisors a significant commission and another one doesn’t but is better for you and your financial goals, how likely is it that the advisor will forego the opportunity to earn the commission by recommending the better fund?
That is why the legally-binding Fiduciary Rule that Fee-Only Advisors follow is so important: the definition of a fiduciary relationship is one based on trust.
How to Make Sure Your Advisor is Fee-Only
Before selecting an advisor, ask how and what their compensation plan looks like. Ask them to disclose what their compensation fees are in writing and whether or not they accept commissions. By choosing an advisor who provides Fee-Only services, you stand a greater chance of avoiding any conflicts of interests. Remember, Fee-Based advisors are obligated by their brokers or by specific deals to sell certain products. Fee-Only advisors are under no such requirements and have a legal, fiduciary, obligation to work for you, and you only.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.
It’s no secret that many teachers are underpaid, in spite of the vitally important work they do. I know first hand: my mother was a public school teacher and a single mom. While some teachers may have other assets and savings they can draw on, a great number of teachers will rely on the retirement plans commonly used by teachers, known as 403(b) plans, as a source of income once they retire.
This Is Money Teachers Will Need
In a recent series, The New York Times detailed many issues with the 403(b) plans so critical to a comfortable retirement for teachers. Their first piece, “Think Your Retirement Plan Is Bad? Talk to a Teacher” makes many of the same points we touched on previously in Teachers: Who is Managing Your 403(b)?
As the Times correctly points out: “Teachers in about a dozen states may not qualify for Social Security. And while public school teachers often are offered decent pensions, many of them do not work for the decades required to qualify for a full payout. And pension formulas are becoming less generous for newer recruits.”
Unlike 401(k) plans that are overseen and regulated by federal law based on the Employee Retirement Income Security Act (ERISA) of 1974, many 403(b) plans fall outside of ERISA oversight and protection.
Who Can Teachers Trust?
Instead of having access to a financial advisor who is a fiduciary, someone who exclusively – and always -must have the client’s best interests in mind, teachers are often presented with salespeople from insurance brokers who earn commissions for recommending certain products. As one teacher recounted in part two of the NYT series: “From the teacher’s standpoint, they really miss out getting quality advice,” said Mr. Bergeron, 27, who sold the plans for Axa Advisors’ retirement benefits group. “People who are in the schools pitching them and positioning themselves as retirement specialists are really there just to sell them one product.” (For more, see: An Investor’s Guide to the New Fiduciary Rule.)
Fee-only fiduciary advisors are advisors who only recommend investments that are the best for their clients, not ones that reward themselves. Fiduciary financial advisors aren’t trying to hit a quota or working for sales commissions on the products they recommend to you. Fiduciaries are committed to providing the best advice to investors – like teachers – looking to build a strong foundation. These advisors grow with you, not at your expense by profiting off the products they recommend to you.
Many of the millions of employees in this country have access to 401(k) plans through their employer that are approved and monitored by the employer in some way, ensuring at least some oversight of the plan itself. Unfortunately, public school teachers as well as some teachers working for nonprofits and religious institutions are easy prey for companies trying to sell high-cost products because their retirement plans often don’t have the same oversight. Given the loosely regulated industry, the insurance salespeople or “advisors” pitching to teachers can recommend investment products that best for their own pockets, not the plan owners’.
The Costs and Confusion
While 401(k) plans are not perfect either, as we have pointed out before, the majority of them offer more traditional investment options, such as mutual funds or stocks and bonds, making it easier to understand how your money is invested. In contrast, 403(b) plans are often held inside annuities, which can be confusing even for the most intelligent individual investors. Discussing Axa Advisors, a broker that often tries to sell annuities, The New York Times writes: “The most popular version of the Equi-Vest annuity has a total annual cost that can range from 1.81 to 2.63%, according to an analysis from Morningstar. In contrast, large 401(k) plans usually charge an annual fee of less than half a percent of assets, according to a May report by BrightScope using 2013 data.”
Even if teacher realizes that they are paying excessive costs for their retirement investments, they are often locked into these annuities and required to pay a penalty if they want to make changes. If a teacher wants to transfer their assets out of the Axa Equi-Vest annuity into their own IRA, for example, they would have to pay a 5% penalty on the portion of that withdrawal that had been contributed within the last six years.
One of — if not the biggest — advantage of many retirement plans is tax deferral, which allows these accounts to grow and compound over a long time horizon. That ability to grown and earn compound interest is obviously compromised when you are paying excessive fees year over year.
Teachers are one of our most important assets and deserve to be rewarded for their years of dedication to our country’s children, and therefore our country’s future. All too frequently, however, teachers not given access to solid, low-cost and efficient long-term investment options in their retirement plans. Nor are they given access to a financial advisor they can turn to with questions, knowing that they can trust the answers they are given.
We encourage teachers to spend some time finding out more about their 403(b) retirement fund managers. It’s vital to find out whether they are a fiduciary, how they make money (fee-based or fee-only), and how personalized their investment strategy is. (For more, see: 6 Questions to Ask a Financial Advisor.)
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.
Leaving one job for another to pursue your goals, follow your passion, or just make some interim changes? As you leave – taking with you new experiences, knowledge, and relationships – don’t forget one more important thing: your company 401(k) account.
In the midst of job – or life – changes, it’s all too easy to get distracted and forget to pay attention to a 401(k) from a previous employer. It could be because the plan stops sending statements, or it could just be that you’re focusing on what’s going on in your life right now. There may even be a few you’ve lost track as the years pass.
Consider too, that even if you have kept track of your old 401(k) accounts and know exactly what’s in each of them, you many not realize that you have other options besides just leaving the account and investments as is. (For related reading, see: 6 Questions to Ask a Financial Advisor.)
Know What You Have
Do you know what’s in each of your 401(k)s? A recent study in the Journal of Finance has found that conflicts of interest in 401(k) plans can lead to serious opportunity cost for individual investors. Your managers may be prioritizing the profits of their institution by investing your money in their own funds, even if that is not the best investment option for you. As John Oliver recently demonstrated, these conflicts of interest can cost millions over the course of a single retirement plan’s life. Awareness is key. Make sure you look at old 401(k) statements from past employers to determine if they are being managed properly according to your needs and situation.
What Are Your Options?
If you do determine that your 401(k) plan from a previous employer is not being managed properly, or as beneficially to you as it could be, the good news is that you have options. You can roll the funds into a new employer’s 401(k) plan or into an IRA account that you already hold. Rolling over a 401(k) into an IRA has potential benefits that could include:
Lower management and expense fees
A wider range of investment options
Consolidating multiple accounts into one retirement account
The option to work with a fiduciary financial advisor with whom you are comfortable and whose recommendations are in your your best interest at all times
Can’t Find Your 401(k) Statement?
If you have lost track of an old 401(k) account, don’t worry, there are ways to search for it. Here are a few suggestions:
Contact your old employer’s HR department: if they can’t help you, they may be able to direct you to someone who can.
Ask your financial advisor to help you track it down.
A well-managed 401(k) plan can be the gift that keeps on giving. But once you’ve left a company, take a good look at your plan and decide if it makes sense for you to leave the funds there, move them into a current plan, or move them into an IRA where you, and a Fee-Only fiduciary financial planner, can take advantage of a broader range of investment choices.
The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.
