Ask The Expert
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.
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November 23, 2015
Q: What's the best way to invest $12,000? I am 46 years old.
A: The mid-40s is a tricky age for investing because you might find yourself torn between short-term and long-term goals. There is no way to responsibly give you a definitive answer without knowing the specifics of your situation, but there are some key questions that will help guide you to the right decisions.
Here are three questions that should help, discussed in the context of an investor in your age group:
1. What are you trying to accomplish?
In your mid-40s, you are far enough along in your career that you should definitely be building up a retirement nest egg, but you might also be facing shorter-term financial obligations like mortgage payments or sending kids to college. These goals require very different investment approaches. If you are just focused on retirement, at your age you should have a long-term time frame and thus be invested primarily for growth.
As growth investments can be volatile, diversification is important, but generally speaking with 20 or so years to retirement, a stock-bond mix with an emphasis primarily on stocks would be appropriate. However, if home payments or college create more immediate demands, you may need to be much more conservative. For those needs, try to match certificate of deposit terms with when those payments are coming due, and get the best CD rates you can within those terms.
2. Where does this money fit?
In deciding how to invest this money, you need to look at what other assets you have. For example, you may be juggling short and long-term goals, but already have money allocated to more immediate needs. That would allow you to take a longer-term approach with this $12,000.
Conversely, if you have a solid pension plan to look after your retirement needs, you might want to invest this money in CDs, savings or money market accounts where it can be more available for short-term needs. If you want to pursue both retirement saving and shorter-term goals, it would clarify things if you divide this $12,000 between the two and invest those two pools separately, rather than try to take a middle-of-the-road approach that serves neither goal properly.
3. What is your personal comfort level with risk?
On paper, it is likely that someone your age should own stocks, but that also depends on whether you have the risk tolerance for the possibility of losing money. Just keep in mind that at the other end of the spectrum, deposit vehicles like savings accounts have had trouble keeping up with inflation in recent years, and that loss of purchasing power is also a form of risk.
People your age are usually close to their peak earnings years. That also means that these should be your peak years for saving money. So, beyond the question of what to do with this $12,000, you should be asking yourself what you are doing to continually save money and add to that $12,000.
Comment: Are you in your 40s and have investments? What are you putting your funds toward?
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November 6, 2015
Q: What account can I set up where the money is directly deposited so I don't see the money?
A: Most checking accounts will accept direct deposits, and so will many savings accounts. You also need to talk to your employer to make sure their payroll system is set up to handle payments in this way. If it is a large employer, or at least an employer using a large payroll processing firm, chances are they routinely handle direct deposits. With a small employer handling payroll manually, it is not necessarily a given.
If you have access to direct deposit, it is both a great convenience and a potentially effective budgeting tool. Here are five tips for using direct deposit to your advantage:
1. Direct deposit into a checking account can qualify you for a fee waiver
Most checking accounts these days charge a monthly maintenance fee, which tend to be quite expensive. The most recent MoneyRates.com checking account fee survey found the average checking account fee totals $157.08 a year. Some banks offer to waive those fees under certain conditions, such as maintaining a certain minimum balance, but sometimes they involve having regular direct deposits made into the account.
Banks like the idea of money flowing automatically into your account, plus automated transactions help save them money, as opposed to you coming into a branch to deposit your paycheck. Since you want to set up direct deposit anyway, see if you can get a fee waiver out of the deal.
2. Consider splitting direct deposit between checking and savings
Having money directly deposited into a checking account is a convenience, but having at least some of your paycheck deposited into savings will help encourage saving money regularly. The idea is to have only enough to cover your budgeted expenses go into checking, so you are less tempted to spend outside of your budget. See whether your payroll provider can split direct deposits, and if not, consider having your full payroll deposit go into savings and then just periodically transfer a budgeted amount from savings to checking.
3. Find out how quickly your bank processes deposits
To avoid overdrafts, know when direct deposits are actually available for your use. You might get paid on Friday, but the deposit may not be on the books until the following Monday.
4. Use online tools to help monitor deposit activity
If your bank offers online statements or mobile notifications, tools like these can help you monitor when your automated deposits hit your account.
5. Don't neglect your 401(k) as part of your payroll directions
If your employer offers a 401(k) plan, consider directing some of your payroll towards that plan. This not only encourages saving, but it can also earn you tax advantages and the benefits of employer matching contributions if offered.
It is definitely worth talking to your employer about getting direct deposit set up because once you make that first step, it will make your life easier paycheck after paycheck.
Comment: Do you have direct deposit set up for your paychecks?
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November 3, 2015
Q: I keep hearing that bank fees are going up, but on the other hand, I keep seeing free offers from banks - a $100 bonus for starting a new account from one, 0 percent interest on credit card transfers from another, etc. Would it make sense for me to keep jumping from bank to bank to take advantage of these offers, or is there a catch?
A: Banks in recent years have been looking for more ways to squeeze fee income out of their customers, but they know that first they have to get those customers in the door, which is why they run special promotions.
The question is, to what extent can you take advantage of those promotions without paying extra fees or interest charges? That depends on steering clear of two things:
Hidden fees and penalties
What banks promote as "free" might come at a cost. For example, 0 percent balance transfer deals may waive credit card interest for a period of time, but they might cause you to incur a balance transfer fee. That fee might come from the new credit card or the one from which the balance is transferring. In either case, on a card with a 12 percent interest rate, three months of free interest will save you the equivalent of 3 percent. If you incur a 3 percent balance transfer fee in the process, you really haven't gained anything.
Another example is if the special offer subjects you to a penalty if you don't meet certain commitments. For example, a $100 incentive to open a checking account might require you to keep the account in place for a full year, or else pay a termination penalty. If the monthly fee on that checking account is $15, then over the course of a year, it would cost you $180 to earn that $100 incentive.
Even if there isn't a direct cost associated with special bank offers, what the banks are counting on is a certain amount of inertia from customers - that once in the door, they won't be quick to change banks even after they are no longer benefiting from the special offer. For example, if you take advantage of a free balance transfer offer but pay a higher interest rate in the long run, unless you switch again after a few months, you will soon be paying more on your existing balance and new purchases than you would have otherwise.
With checking accounts, if you switch to an account with higher fees just to earn an incentive, before long you will probably be paying more in extra fees than you received for starting the account, unless you switch again. Banks count on most customers not doing that, and in most cases they are right.
Considering the pluses and minuses of bank offers, the best advice is to be selective. Don't jump at every offer you see, but if you see a good incentive from a bank that you could live with for a while anyway, go for it.
Add your comment: Are free checking accounts and credit card offers worth it or do they come with a price?
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October 14, 2015
Q: Our employer has what seems like a fairly good 401(k) plan - they match the first 4 percent of our salary that goes into the plan. However, I'm concerned because you can't participate in the plan after you leave the company. Does that mean I lose what I put into it, or have to pay a tax penalty for taking money out before I reach retirement age?
A: You can leave an employer-sponsored 401(k) retirement savings plan without incurring a tax penalty, but you should be aware of possible consequences if you switch your job or leave your employer. Overall, 401(k) participation is probably a good deal for you.
Retirement savings accounts like 401(k) plans allow you to delay paying taxes on any portion of your salary put into the plan until after retirement. You also don't pay taxes on investment gains until then. This allows your investments to compound earnings prior to taxation. In many cases, people are in lower tax brackets when they retire than they were in their peak earning years.
An even bigger advantage is when there is an employer match. This provides an instant return on your money, and with a dollar-for-dollar match on the first 4 percent of your salary that you contribute, your employer is offering a return that could take you years to accumulate through stock market investments, and is exponentially higher than today's tiny savings and money market rates. So, between the tax benefits and a generous employer match, there are clear incentives for you to participate in your employer's 401(k) plan.
Potential consequences for 401(k) retirement savings after leaving employer
As for the consequences of leaving your current company, leaving the 401(k) plan does not mean leaving behind what you put into the plan, nor does it require incurring tax penalties. If you promptly roll the proceeds over into a qualified retirement plan like a traditional IRA, you do not incur the usual 10 percent penalty for early withdrawals from a retirement plan, and you will continue to defer normal income taxes until retirement.
However, there may be adverse consequences to leaving with respect to the employer match. Some plans require employees to remain for a specified number of years before they become vested in the amounts the employer has contributed to the plan on their behalf. If you leave before the required number of years, you may have to leave behind some or all of the amount your employer contributed.
It's a good idea to check for a vesting requirement when you first sign up for the plan, rather than potentially raise red flags by looking into it if you are thinking of leaving a few years down the road.
Still, even if there is a vesting requirement, you have more to gain than to lose from 401(k) participation. Depending the plan design and how soon you leave the employer, you might have to sacrifice some of those matching dollars, but that is money you would not have in the first place if you did not participate in the plan.
Do you have a 401(k) retirement savings plan through your employer?
Got a financial 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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October 2, 2015
Q: My biggest financial concern is inflation. I think I have enough saved for retirement, but that all depends on prices not rising faster than the value of my investments. How should I invest if I am concerned about retirement?
A: Inflation has been generally tame over the past couple decades, and particularly quiet over the past year, at just 0.2 percent. Still, it is not a good idea to get complacent about inflation remaining mild. A reversal in the direction of oil prices or perhaps a rise of protectionist sentiment in the course of the next presidential election could easily fire inflation back up again.
Inflation should be a consideration in any long-term investment approach, and it is a particular concern in retirement because you no longer have wages that can help your income adapt to the inflation environment.
Savings vs. CDs accounts for retirement accounts
As benign as the inflation threat has been in recent years, this is still a tricky investment environment for defending against inflation. A big reason is because interest rates are so low.
Traditionally, keeping money in short-term liquid vehicles like savings accounts has allowed people to keep pace with inflation reasonably well. The reason is that with interest rates on short-term vehicles able to adjust at any time, if inflation rises, they tend to rise soon afterward.
Unfortunately, Federal Reserve policy has resulted in unusually low short-term rates, so savings accounts have fallen behind inflation. Even though inflation over the past 12 months has been just 0.2 percent, the average savings account rate has been even lower, at 0.06 percent.
Since retirees need to keep some investments in stable and relatively liquid investments, one alternative would be to shop for a long-term CD with a good interest rate and a relatively mild penalty for early withdrawal. The best CD rates are up around 2 percent, which would put you ahead of the recent inflation rate, and as long as the penalty was not too severe, you could cash out of the CD early if rising inflation pushed interest rates higher.
Even once you retire, you should also keep some of your portfolio in stocks as a defense against inflation. Companies may adjust their business strategies to changing inflation trends, so while inflation can be damaging to stocks in the short-term, over the long-term, they are typically able to adapt to it. In particular, if there is an area of inflation that concerns you as far as your retirement expenses are concerned - health care inflation, for example - you could somewhat counteract it by investing in stocks in that sector.
The bottom line is that inflation, investment returns and life span are the big three uncertainties when it comes to retirement planning. Since there is no perfect investment approach to hedging against those uncertainties, the best response is to build in as big a cushion as possible in your retirement assumptions. You can do this by saving more before retirement, and spending less than you think you could afford after retirement.
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