How Much Are You Paying?

May 20 2015

Unlike most consumer purchases, figuring out the cost of financial advice and investing can be like an Indiana Jones expedition. Do we really know how much we pay?

Some advisers quote a fixed price for the job desired. Suppose you want a comprehensive financial plan that considers savings, investments, retirement, insurances, taxes, and estate planning issues. That might be $3000 for example. The price varies based on the job’s complexity. Or you may be stated an hourly charge and told it will take 8 hours.

Some places charge a percentage based on assets under management, e.g. 1%. It is common for the percentage to decrease as asset amounts increase. Think volume discount.

Commissions may be charged by your adviser. This is a sales charge applied to each transaction like a buy or a sell. This could be a favorable payment method if you don’t expect to have many transactions. For instance, you buy an Exchange Traded Fund through your on-line broker for $8. A full-service broker will charge more but you get extra service for the extra cost.

Some investments and products charge an up-front sales charge; called a ‘sales load.’ This up-front charge is applied by the company who offers the product not your financial adviser. Say you buy a mutual fund in your account. An up-front sales charge may be applied by the mutual fund company and not your adviser.

There are also back-end or surrender charges applied by companies offering products. If you buy a mutual fund or an annuity for example and later sell all or part of it, you are charged a fee to get out of the product.

Your investment or insurance product charges fees to own or hold the product. Mutual funds have annual management fees. Insurance products have administrative and insurance fees. In the mutual fund business these include annual management fees, 12b1 services (marketing fee) and possibly other miscellaneous fees. Insurance products include the insurance charge (called M&E or COI fees), surrender fees, option/rider charges, and management fees within the mutual funds within the insurance product.

This is an abbreviated primer. There could be other charges. Most likely, you are paying several layers of these fees. Example; you could pay 1% of assets under management, an up-front sales charge and costly mutual fund annual management/12b1 fees. Hopefully not. Insurance products in IRAs can get expensive.

All of this is spelled out in the fine print of your account contracts and prospectuses. Your fees should best match your planning objectives.

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Life Insurance Considerations

May 08 2015

Published by under Insurance

Financial issues can get complicated easily. And when they do, the added complexity and stress can cause us grief.

Let’s talk insurance. It’s pretty simple on the surface. Insurance is protection against a risk you can’t or don’t want to afford. Car gets totaled; it’s money for a new one. House burns down; ditto. Need home health care; there’s long term care insurance. You probably wouldn’t buy the insurance if you could afford to cover these costs out of pocket.

After death, your family needs assets to continue a life style or pay taxes and fees to settle an estate. Where will these assets come from? Maybe you have assets on hand. Perhaps a spouse has personal means. You may have family ready to step in. Or you have life insurance.

Warren Buffett has a way of explaining the complex in simple terms. He states that when it comes to financial situations, risk comes from not understanding what you are doing. Life insurance products can be very confusing to people. It’s important to understand what you are doing.

Who isn’t confused? There are so many types and names of life insurance; term, annual renewable term, level-term, decreasing term, whole life, permanent life, universal life, variable universal life, variable life… On top of this, life insurance can be used for more than just a death benefit. Plus beyond life insurance there are annuity products with insurance features. It’s so complicated.

After conducting an investment class, people usually hang around to talk about investment issues. During the discussion I realize their “investment” is a life insurance product. I mention this to them and ask what was their reason for purchasing a life insurance product as their investment program? It is not unusual that they are not aware of the insurance situation or that they can’t explain why or that they can’t explain the investment benefits of the insurance product they bought.

Don’t get me wrong, I’m not implying there is a problem with the life insurance product above. There could be valid reasons for the insurance product as their investment vehicle. My point is complexity and risk come from not understanding the tool, why you have the tool and how it works to achieve your objective.

To keep your financial life simple and prevent complications, understand your financial objectives. Manage by objectives. Separate your financial life into your objectives; liquid emergency savings, insurance issues, long-term investments, retirement, college, etc. Pick the tools that best address your separate objectives in the simplest and most cost efficient manner possible.

Hey check out MOAA life insurance options here if you are a MOAA member or call (800) 247-2192.

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TSP/401k or IRA. Which is best for you?

Apr 22 2015

The advice is all over the map when discussing which type of retirement account is best for accumulating your retirement wealth.

One common pearl of wisdom I hear is:
“Contribute to your 401k/TSP to get the company match money but that’s all. Contribute the rest of your money to your Individual Retirement Account (IRA).”

Generally, when you hear advice, follow the money. Ask whose getting paid by following the advice so you understand the source of their advice.

Just so you know we have no conflict of interest in this debate. We are not a financial service firm. We don’t sell investment products nor do we provide any types of accounts. We don’t have clients so we are not trying to recruit you. We are counselors and educators. We don’t care where you go for help or what you purchase. Our desire is to help you be a better investor and make the wisest consumer selections for your needs.

Below is a breakdown of various account features. I suggest a winner for each feature. Follow along and see how your situation fits in the discussions below.

Contribution amounts: 401k/TSP wins.

The maximum contribution for a 401k/TSP is $18,000 (or $24,000 for age 50 and older).

Traditional IRAs only allow contributions up to $5500 ($6500 for age 50(+)).

Roth IRAs are the same as Traditional IRAs until you start hitting the annual income restrictions. The income restrictions are $116-131k for single tax filers and $183-193k for married tax payers filing jointly. The income restrictions slowly decrease the maximum contribution amount until contributions are prohibited after exceeding the highest amount in the income range.

Granted the income restrictions on the Roth IRA are not hit by most folks but there are still limits. Neither version of 401k/TSP has income restrictions. On the other hand, anyone can contribute the maximum amount to either version of 401k/TSP regardless of income.

There are a few IRA-type company retirement plans and self-employed plans that allow more than $5500/6500 but they are still less than $18/24,000. One only accepts employer’s contributions.

Employer matching funds; the icing on the cake. If your employer matches, you have an immediate positive return on your money and you are compounding larger amounts over time—think of a snow ball rolling down a mountainside. Be aware of your employer’s vesting schedule. A vesting schedule determines how much of the company’s matching amount you get to keep if you leave the firm. The amount you keep goes up the longer you are employed.

Tax advantages: 401k/TSP wins.

Roth: People who contribute to a Roth want their tax advantage in retirement; not now.

You get a greater future tax advantage contributing to a Roth 401k/TSP with the $18/24k maximum contribution amount and no income restrictions like a Roth IRA as explained above. Given the ability to contribute over 3-times more to a Roth 401k/TSP per year (almost 4-times as much if you are age 50 or older) than an IRA, the compounded tax advantage in retirement is remarkable.

Roth 401k/TSPs do have mandatory Required Minimum Distributions (RMD) at age 70½. Do a direct transfer of your Roth 401k/TSP to a Roth IRA and the tax benefit can go on for life since Roth IRAs have no RMD.

Traditional: People who contribute to a Traditional plan want their tax advantage now; not later.

A Traditional 401k/TSP gives you the full deduction off your current taxable income up to the $18/$24k maximum contribution unlike a Traditional IRA.

Traditional IRA contributions can be deducted off your income taxes up to the $5500/$6500 maximum but there’s a catch. First neither you nor your spouse can be covered by an employer retirement plan to get the full deduction. If you or your spouse is covered by an employer retirement plan, your deduction decreases based on your income amount. Single tax filers start to lose their IRA deduction starting at $61k in income and after $71k you lose your deduction for IRA contributions. For married filing jointly the income range limit starts at $98k and after $118k you cannot deduct your contributions.

You can still contribute up to the $5500/$6500 maximums but the contributions aren’t fully deductible or they cease. In this case, your non-deductible contributions will not be taxed at withdrawal in retirement. Any gains from the non-deductible contributions are taxable.

Investment options: IRA wins.

I’m basing this IRA win on the assumption that you have the right IRA. Your IRA should have access to all possible investment options even though you won’t use all the options. We know the TSP is limited to six options (C, S, I, F, G, and L) so in this competitive category a TSP should be easy to beat.

If you have a CD IRA (a CD in an IRA wrapper), this isn’t a win for your IRA. Neither is an IRA linked to one or a few mutual funds. If your IRA is in a life insurance or annuity product (why would you do this?), it depends on the options made available to you in your insurance plan.

Costs: TSP wins hands down.

The TSP is so inexpensive it’s practically free.

If you don’t have a TSP, things can get competitive between 401ks and IRAs. It depends on your IRA primarily.

Your 401k expenses depend on your program and how much your employer makes you pay to cover the administrative fees. You don’t control these costs. These expenses can be all over the map. If your 401k is with an insurance company, you are probably paying more. This is why I believe the IRA comes in second after the TSP.

You can control your IRA expenses by opening the right IRA. While the right IRA will be a bit more expensive than a TSP, it will still be very inexpensive.

Ease of management: IRA wins.

Again I have to make the assumption you have the right IRA. The right IRA is easily managed on-line. The account set-up, investment transactions, money transfers are all at the touch of a few key strokes.

401k/TSP can be easy in some ways because many functions are on-line but you also have the administration involved with the employer’s policies and the plan documents.

Required Minimum Distributions: Roth IRA wins.

Every retirement account other than a Roth IRA has a RMD obligation at age 70½.

If you have a Roth 401k/TSP, you can manage around the Roth 401k/TSP RMD by directly transferring the Roth 401k/TSP to a Roth IRA prior to age 70½ and thereby eliminating the RMD requirement.

Wealth building potential: 401k/TSP win.

No question here. Up to $18/24k compounding each year or $5500/6500 compounding each year. Roth IRAs contributions will be restricted even further by the by the income restrictions noted above.

• $5500 a year by 20 years at 7% return equals $225,500.
• $18k a year by 20 years at 7% return equals $738,000.

The final tally.

The bottom line for me is that you max-out your 401k/TSP each year before you contribute to an IRA. Because most employees can’t max-out 401k/TSP contributions each year, you should have a plan to get there eventually. Every cost-of-living-increase, promotion, raise, job change, anytime you have an income increase, increase the amount of your 401k/TSP contribution until you are able to max-out your program.

That’s it. Where do you stand? Are you questioning whether you have the proper IRA for your needs?

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MOAA’s Benefits and Financial Services—the Value to You

Apr 01 2015

We believe a little explanation is warranted to clear up what we do for you at MOAA concerning our benefits and financial services. Here’s how we help you…

First off, our counseling services are a paid member benefit—Premium and Life members.

We are counselors and educators. We offer information, education, insight and consumer savvy advice about your financial situation and your military, veteran, and corporate employee benefits.

Our members appreciate the ability to discuss their issues with a real person and not a phone tree. They talk to someone who understands and can explain what’s going on in their life. If we can’t explain or help, we will find the answer and get back with you—responsiveness is another value to you.

We give unbiased, comprehensive advice because we have no conflicts of interest with what you ultimately do or who you go to for help. We are your source of objective information and counsel; an impartial second opinion.

The feedback we receive indicates people appreciate the ability to discuss their issues without the pressure or concern of being sold something or being recruited as a client.

We answer your questions and discuss your current situations and objectives to help you formulate your options and courses of action. Then we can explain how to find and shop for the people who can help.

We clarify how programs work; for example, the Reserve/Guard Survivor Benefit Program, Tricare at age 65, concurrent receipt, the pharmacy process, or Social Security and Medicare.

We help you manage the confusion of transition from the military or during life’s many transitions on any military, veteran or financial issue you face.

On the financial side, we can talk about your investments, savings, insurances, or other financial issues in general. We can discuss various options, share thoughts, educate and provide consumer advice.

Now here’s what we don’t do. MOAA does not provide commercial financial planning services. We are not licensed to do business as a financial firm or as staff members. That’s why we have financial partners in Pentagon Federal Credit Union, U.S.A.A. and Mercer Consumer for insurance.

While we can’t develop a financial game plan for you, you will walk away with a sense of comfort or discomfort but with an idea of the actions you need to take to make things right. If you need help, you can be empowered to implement a plan of action with confidence.

We are also not case workers. If you have an issue with a firm or bureaucracy, MOAA does not have legal authority to conduct business or make inquiries on your behalf.

For a little in dues, you gain a valued wingman.

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Mar 17 2015

 The biggest obstacle to investing success is our own Human Nature.

 Have you ever walked in an unfamiliar area when suddenly your pulse quickens, adrenalin courses through your body and you become hyper-vigilant?   You didn’t notice anything but your subconscious sensed danger and hit the panic button.  It is foolish to ignore these feelings.

But in the stock market, your gut feelings will lead you astray.

The first rule of investing is “buy low, sell high.”  Yet most investors are enthusiastic buyers at market tops and dispirited sellers at the bottom.  The S&P 500 has tripled since 2009 yet stock funds are experiencing massive cash inflows (the opposite of six years ago), margin debt is near all-time highs and sentiment indicators are lopsidedly bullish.  Bears are now an endangered species.

This enthusiasm is unjustified by (inflated) stock values, (declining) earnings estimates, the (less-than-robust) economy, or (deteriorating) geopolitics.  Alan Greenspan famously used the term “irrational exuberance” to explain this.

Why would stock investors pay such high prices?  They probably expect to sell to future speculators at even higher prices.  So far they have been right.

Ask a buyer to explain behavior that seems at odds with prudent investing and you will hear “I have a feeling…I’m hoping…my gut tells me….”  This suggests the desire for a share of seemingly assured stock profits came first.  The reasons will come later…if ever.

Someday, somewhere near the next bear market bottom, today’s buyers will morph into exhausted sellers, shattered by losses and driven by the powerful instinct to avoid more pain.  Selling will generate permanent losses but they won’t care.  Some will justify one more illogical act by promising to come back when “there is less uncertainty.” But by the time it “feels” safe again, prices will be much higher. A year after the 2009 bottom, the market was up 50%.

This is classic human behavior and don’t think you won’t be influenced by instincts hard-wired into our DNA by millennia of human evolution.   We need a “reality check” to keep us from going off the rails.

Your advisor could be that reality check.  So could a written investment plan that keeps you below your risk tolerance – provided you have the self-discipline to actually follow it.  Without a reality check you are more likely to be a casualty of the next market cycle.

Your instinct will be wrong…but it will feel so right.

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