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Ask The Expert

About Richard Barrington, CFA & MoneyRates.com Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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How should I choose a financial adviser?

October 10, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Couple meets financial adviser

Q: I am getting a very large settlement and want to stay away from typical money advisers. I don't know whom to trust. There are some local advisers at banks around here but they are always pushing their own products of loaded mutual funds and other crap. Do you have any suggestions? It is very hard to find an adviser that has my best interests in mind.

A: You not only should take care in selecting a financial adviser, but you should remain vigilant throughout your relationship with that adviser. Here are three key steps in the process:

Decide what services you need. Start by figuring out whether you need a comprehensive financial plan, covering things like tax advice and estate planning, or whether you have a plan in place and just need investment advice. If you are looking for comprehensive planning advice, you should look for someone with credentials like a Chartered Public Accountant (CPA) or a Certified Financial Planner (CFP). These are people who can provide a range of services, from figuring out how to structure your wealth to advising you on how to invest it.

If your needs are more narrowly defined within the realm of investment selections, mutual funds may be your best bet if you have less than half a million to invest, but above that amount a separately managed portfolio might be more efficient. In either case, an SEC Registered Investment Adviser may be a good choice to choose funds or individual stocks for you.

Know how your adviser is paid. As opposed to commissioned-based practitioners who make money on loads or transactions, someone who charges a flat percentage fee (ideally, 1 percent or below) should have fewer conflicts of interest. This fee should only be paid on actively managed portions of your assets -- if you want to keep some reserves in cash equivalents, you should be able to put it in savings accounts, money market accounts or something of that nature without paying an ongoing fee.

Keep the adviser honest. Choose advisers that are registered with a government agency that discloses the disciplinary history of its registrants, so you can check the background. Also, consider a bank custodian for your assets that is independent from your financial adviser, and do not grant your adviser authority to make withdrawals from your accounts. Finally, meet regularly and review the holdings on your statements, to make sure the money has been legitimately invested.

In short, the selection process is important, but it is just a start. Monitoring your adviser's actions and results should be a continuing process. For more information on selecting a financial adviser, check out the Consumer Financial Protection Bureau website for additional tips.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Should I consider a 5-year CD at age 80?

October 8, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Depositors at bank

Q: Is it reasonable for me to invest in a five-year CD at 2.20 percent? I am 80 years old. I am concerned about safety but I also want a fair interest rate.

A: At the heart of this question is the issue of how much someone should shorten their investment time horizon as they get older. People often go overboard in doing this, but depending on the details, a five-year CD is probably perfectly fine in your situation.

These are some key issues to consider when making this decision:

  1. Cash flow needs. Naturally, if you have a need for cash within the next five years that would require you to break into the principal of this CD, it might not be the most appropriate investment for you. However, if you can get by comfortably on the interest from this CD and your various other resources, then it may make sense to get a higher interest rate by choosing a five-year CD.
  2. Reliability of income. In assessing your cash flow needs as described above, you have to factor in whether your primary source of income is reliable. If you are comfortable it will continue to meet your needs, that is another argument for considering long-term investments.
  3. Competitiveness of the interest rate. Once you have decided that a five-year CD is appropriate, the next issue is whether the rate you are looking at is competitive. At the time your query was being reviewed, the average rate for a five-year CD was just 0.77 percent, and the 2.20 percent you mention would be among the best CD rates available.
  4. Safety. This entire discussion is based on the assumption that you are looking at an instrument from an FDIC-insured institution, and that the amount of your deposit falls within the $250,000 deposit insurance limit. Otherwise, you would not be getting the total safety you want.
  5. Sustainability. The best approach to your finances at any age is to set them up to be as sustainable as possible. Assuming you have no short-term cash flow needs that have not been accounted for, long-term investments can make your financial situation more sustainable.
  6. Other investments. Consider this decision in the context of your other investments. Would this CD be redundant, or would it complement what you already have?

The irony is that by gravitating toward short-term deposits like savings accounts, people are generally trying to avoid risk, but risk is exactly what bit depositors when short-term rates plummeted to nearly zero. Risk comes in a variety of forms, so assuming you have more money than is necessary for your immediate needs, it is never too late to seek a balance between short-term and long-term investments.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert box on the lower left.

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Is it better to break into a CD or a 401(k)?

September 25, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: I am facing a financial emergency where I need to get my hands on $10,000 in cash in a hurry. I have more than that in a CD, but it's not due for another two years. One option would be to pay the penalty to break into that CD. Another might be to borrow against my 401(k) balance, which is well in excess of $10,000. This might be a better option because there is no penalty involved. Which do you think would make the most sense?

A: Most likely, breaking into your CD is going to be the most cost-effective and straight-forward option, though of course that depends on the specific CD terms. First though, here are two reasons why borrowing against your 401(k) plan might not be the best course of action:

  1. Loss of tax-deferred earnings. Between the time you borrow from the plan and when you repay the money, the loan balance will be out of the plan. This means that you will miss out on some investment earnings during that period, which is especially damaging since those earnings are tax-deferred.
  2. Repayment requirement. Loans from a 401(k) plan must be repaid within five years, so you have to ask yourself: If your need for immediate cash is so great, will you have the liquidity to meet that repayment schedule?

You would need to make sure that your 401(k) plan allows loans, and if so under what terms. If you do borrow against your 401(k) balance, it is very important that you do this pursuant to a formal, written agreement. Otherwise, your receipt of the money might be deemed a taxable distribution. That could mean that you would have to pay income tax on the amount of the loan, and possibly a 10 percent penalty.

In contrast, the penalty for early withdrawal from a CD is often just a matter of three to six months of interest. The best CD rates these days are just above 2 percent, so suppose you have a CD with a 2 percent rate and face a six-month interest penalty. Effectively, it would cost you about 1 percent to get out of your CD. If you have had the CD for a while, the penalty might be even less, because some CD penalties diminish over time.

Be sure to check the specifics of your CD before making a decision, but if you really need the cash, a 1 percent penalty may well be a more cost-effective solution than disrupting your long-term retirement program. This is also a good reminder of the benefit of keeping an emergency reserve in savings accounts or money market accounts, which will make your money more accessible in situations like this.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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How much down payment does a first-time buyer need?

September 22, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: I am looking to buy a house for the first time and I want to know what to plan for, and I know lenders are tight these days. How big a down payment should I expect to have to make?

A: Low down payments are not as common as they were a few years ago, but they are hardly an endangered species. What you need as a down payment on a mortgage depends somewhat on your circumstances, and also on what you want to accomplish.

While mortgage lenders are not as welcoming as they were during the last decade's housing boom, current mortgage rates remain very low, and low down payments are common enough to make this a decent market for qualified first-time buyers.

The National Association of Realtors reports that as of mid-2014, 66 percent of first-time home buyers were making down payments of 6 percent or less. Back in 2009, 74 percent of first-time home buyers were making down payments of 6 percent or less, so low down payments are somewhat less common than they used to be. Even so, with nearly two-thirds of first-time home buyers still in this category, low down payments remain the norm.

The catch is that this partly depends on your credit history. Lenders have gotten much more cautious after being burned by the sub-prime crisis, so if there are some bad marks on your credit, you may well be facing a down payment in the 20 percent range -- if you can get approved for a mortgage at all.

While some buyers are forced by their credit histories to make larger down payments, others actually choose to put more money into the house up front. Why? For one thing, low-down-payment loans for first-time buyers usually come via programs like FHA mortgages that require the borrower to pay mortgage insurance, and the higher the loan-to-value ratio, the bigger the mortgage insurance premium (MIP). A bigger down payment lowers the ratio of the loan to the value of the property, and thus by making a bigger down payment with good credit, you can save money on the MIP.

With current mortgage rates being so low, there is one argument to be made against a larger down payment, however. If it will take you a long time to save for a bigger down payment, you might miss out on those low mortgage rates. So, if you have the money handy, a larger down payment may make sense. If you are starting saving from scratch though, you might want to opt for a smaller one that will allow you to get a loan sooner.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Best bank for a jumbo deposit?

September 12, 2014

| MoneyRates.com Senior Financial Analyst, CFA

Q: What's the best bank for depositing a million dollars?

A: You should break this decision process into three parts:

  1. Figuring out how best to protect your money.
  2. Figuring out what products or services you need.
  3. Finding the best banks for those products or services.

Here are some details on what you should cover with each step.

1. Protecting your money

A key advantage of depositing money in a U.S. bank is that it can be insured by the FDIC. However, there are limits to that insurance.

The basic insurance limit is $250,000 per depositor at each bank. You can have more money insured at one bank if you have a joint account, or if the money is in separate accounts belonging to different legal entities. So, for example, if you and your spouse had a joint account, it could be insured for up to $500,000. Also, if you have some of the money in a taxable personal account and some in an IRA, each of those accounts could be insured up to $250,000.

If you cannot cover the full million in this fashion, the best thing to do would be to split it among multiple banks, since each depositor is entitled to $250,000 in insurance at each bank.

2. Selecting a product

Before you choose a bank, you should narrow down exactly what you need. If you have to keep all or most of the money fully liquid at all times, you should be looking for savings accounts or money market accounts. If you want to invest conservatively but can lock up the money for a few years, you might consider a certificate of deposit.

If you are investing for the very long-term, you may want to put some of that money in growth investments like stocks, but of course those products will not have the security of FDIC insurance.

3. Choosing a bank

Once you decide what you are looking for, you can start comparing banks to see which one offers the best rates for the products you need. Your amount would be considered a "jumbo" deposit, so you may be eligible for rates that depositors with smaller amounts cannot get. MoneyRates.com lists updated rates from banks from around the country -- including rates for jumbo savings accounts and jumbo CDs -- so you can easily shop for the best yields.

But there are two things to watch for in that process: First, since you will probably be opening some fairly large accounts, make sure that the rates you find are not subject to deposit limits -- it's no good finding a great rate if it does not apply to most of your account. Second, ignore teaser rates, since these usually expire after a short period of time.

Having to find a home for a million dollars is a nice problem to have. However, it is also a big responsibility, so a careful, step-by-step approach is the answer.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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