Socially responsible investing

A friend of mine at work asked about our SRI (socially responsible investment) fund available from our 403b provider. I did a little digging in the prospectus' and here is what I found. The equity index fund had fees of 0.23% and the "Balanced" SRI fund costs 0.91% annually. The balanced fund is weighted 60% Stocks 40% Bonds. The Equity index fund is 100% stocks. They where a little vague in their descriptions of SRI criteria and they can redefine them at will without notice to shareholders. Here is an example of the wording.

The Portfolios seek to invest in companies that:

• Take positive steps to improve environmental management and performance, advance sustainable development, or provide innovative and effective solutions to environmental problems through their products and services.
  
• Maintain positive diversity, labor relations, and employee health and safety practices, including inclusive and robust diversity policies, programs and training, and disclosure of workforce diversity data; have strong labor codes ideally consistent with
  the International Labor Organization (“ILO”) core standards, comprehensive benefits and training opportunities, and sound employee relations, as well as strong employee health and safety policies, safety management systems and training, and positive safety performance records.
  
• Observe appropriate international human rights standards in operations in all countries.
  
• Respect Indigenous Peoples and their lands, cultures, knowledge, environment, and livelihoods.
  
• Produce or market products and services that are safe and enhance the health or quality of life of consumers.
  
• Contribute to the quality of life in the communities where they operate, such as through stakeholder engagement with local communities, corporate philanthropy and employee volunteerism.
  
• Uphold sound corporate governance and business ethics policies and practices, including independent and diverse boards, and respect for shareholder rights; align executive compensation with corporate performance, maintain sound legal and regulatory compliance records, and disclose environmental, social and governance information.
• Develop good attitudes towards puppies.*

If BeePee was offering Environmentally friendly gas for 10 cents more per gallon would it sell?

Here is my take on socially responsible investing. I prefer maximizing my investing results by keeping my costs down. This frees me to give to charities that I pick and value. This is an indirect relationship though. When wealth is created I feel more free to be more generous with my giving even though it is not coming directly from My 403b. By choosing an SRI  you put that choice in an insurance/financial companies hands. The extra 0.68% buys you a fund manager that is hopefully benevolent and probably keeps you out of tobacco and maybe oil but who knows. Seems like too much work to keep up with what your SRI is invested in. 

I ran some numbers on bankrate.com. If you invest 3k a year in your 401k/403b for 10 years the extra 0.68% costs you $1575.00 over the ten year period. $9000.00 over a twenty year period. This calculation assumes a 6% annual return. The power of compounding can work against you too!

One good thing about this fund is that you would be more balanced in your investment types but there are cheaper ways to be diversified.  

If it is a matter of morals. i.e. dirty money. I feel that all money is dirty. Root of all evil! But that is a question only you can answer for yourself.

Happy investing!

*made this up

Big Fish, Big Pond

There has been some noise about Billionaire's dumping their US Stock holdings. That this is a sign of the end times for the US Stock market. Just buy their book and they will tell you how to "Save" your finances from the coming calamity.

Let's  apply a little logic shall we. It seems that the election is currently leaning towards a Democratic victory in the fall. This will mean higher taxes in the future (so does a Republican win btw, they just won't say it out loud). Especially capital gains taxes (Taxes on investment income). The stock market has rallied quite well since the 2008 debacle. The potential for a huge upswing in stock prices seems low in the near term. When you have low potential for profits and a high potential for more taxes you get one result. SELL!

Warren Buffet and George Soros are just practicing tax efficiency. Or in this case presumptive tax efficiency. What does this mean to the average investor? Nothing. If most of your savings are in an IRA/ROTH, 401k/403b retirement account, You are already tax efficient. Just make sure you are well diversified. We are always just around the corner from the next financial calamity. The key is to be prepared. Timing the market is a fools errand. 

The one exception would be an IRA to ROTH IRA conversion. If you can afford to do the conversion this year you may save some presumptive tax dollars. More on IRA conversions soon!

Who has your financial best interests at heart?

Some of my friends and coworkers have been surprised to hear that I write a Personal Finance blog. I admit it's a little out of character for me. Like when I bought and drove a Volvo. But I thought I'd share why I got into this.

In 1999 I got a 8-5 full-time Job plus some freelance weekend work. This left me with a little extra cash. I was not used to this so I sought a way to invest it so I wouldn't spend it on stupid crap. Which was my modus operandi at the time (More on Sam's club later). I got an advert from American Express Financial and decided it was time to talk to someone.

I met with Adam. A young fresh suit who was there to help. He talked me into a "Whole life" plan. Which was an insurance product that "grows" tax free but the fees for these accounts can run from 2%-6%. It's hard to tell because financial insurance products are not regulated by anyone. Not even  the SEC. So they do not have to explicitly disclose all of the fees associated with a fund. They are most often buried deep in the fine print.

I met with my accountant a few months later to do my taxes and informed him of WHAT I HAD DONE! He smirked and told me to get out and get out fast. He asked me how much I was into this scheme. About a thousand bucks, I replied. Kiss it goodbye, he said. It's like a band-aid, Just rip it off. You will do nothing but bleed cash to these people if you stay there. So I fired Adam the next week, forfeited one thousand bucks, and have never been happier. Adam was shocked and when he demanded to know why I was getting out, All I had for the guy was "My accountant told me to run".  Stay away from insurance products unless you know what you're doing they have a very small niche that 99.9% of do not need.

This financial waste made me ask myself - Who has your best financial interests at heart? YOU DO!. Well you better get financially literate quick. So that's it. I have been interested in it as a serious hobby for 10 or 11 years now.

So feel free to ask a question. I learn as much or more from the process. You can email me and ask for your question to be anonymous. I will strip out any ID details. Don't get ripped off like I did!

thefettler@yahoo.com

Nominal

I think one of the reasons I enjoy financial management is that I can relate to it in my work-life. As a sound person you try to balance everything that you hear so that they are just the right level for listening. This is also true in asset allocation. Re-balancing is a lot like setting everything to nominal or equalizing. When a particular asset does really well. Small caps, for instance have been doing quite well over the past few years. When I re-balance I take the profit and reinvest it in my portfolio in a "cash" equivalent account. After I have culled the winners I decide who, what, and if I should buy into other sectors.

I regret not taking profit more than I regret being low in a certain asset class. Example? Europe, my asset allocation lists 2% but I have 0% currently. I will stick with cash for that 2% until I see some Euro zone cooperation. I used to have 4% in Europe but I moved 2% to Scandinavia and 2% to "cash". I don't think I will put more than 2% in Europe ever again but who knows.


I'm sorry I am on such a re-balance kick but it's probably the most important part of being your own financial manager. After the last month I sure am glad I rebalanced in May!

Visualize Frugality

I find it helps to visualize life without stuff or services. Pick one thing at a time. It does not matter if it is a necessity or superfluous. I like to go through this mental exercise to see where I can save money. What would life be like without cable TV? What would life be like without the house I am living in now? Without certain members of my family? Without pets? Without the car I drive? What if we were a one car family? Or a no car family? I know this seems a little gloomy but in the end you will think of savings that you would not have thought of in your current state of mind. Even if it is an incremental decrease in your spending, It all adds up. Collectively this will save you quite a bit of cash. Here is a list of things I have come up with to save more.

Trade in your smartphone for an ipod touch and a prepaid cell phone. This trick saves me $40-$50 a month. Dump your cable for watching shows online. Cut out those coffees at Starbucks and make your own. Pack a lunch. Stay away from the snack machines by having your own healthy snacks in your desk/bag. Try to buy used by going to garage sales, thrift stores, craigslist, the reuse center, and estate sales. Keep your car longer. Trade down to more basic transport. Or dump your car for bus and bike. Is your car worth enough to maintain full insurance coverage.


I would love to hear what you all do to be more frugal. Just leave a post in the comments section of my blog. which can be found at http://fettlersfinancial.blogspot.com/ 


Feel free to recommend this blog to your friends and family. Encourage them to read the first set of posts so they will have a firm foundation in personal finance. The more the merrier!

Rebalancing tips

So, I'm in the middle of a rebalance and thought of a couple things to share. I like to rebalance twice a year. Once in May and once in October. I find that there is calendar volatility related to summer. Maybe folks take there hands off the proverbial tiller for a summer vacation. I used to use my birthday but since it came in the summer I always seemed late to party when it came to the "protection" that rebalancing provides.

My online brokerage that services my Roth/IRAs has different monthly pricing structures. Ranging from [No monthly fee for $4 purchases & $9.95 sales. Or $12 monthly fee for 12-$1 purchases & $7.95 sales] I always chose the "Free" account except for the months that I rebalance. That saves me $80 a year!

I only purchase 1 investment per month when it comes to my monthly autopilot ROTH IRA savings. This keeps my normal monthly fee down to $4. I purchase my way towards balance by changing what that one investment is depending on my portfolios needs.

Remember to Rebalance across all of your accounts!

22. When to pay for professional help.

22. When to pay for professional help.

This can be a tricky decision. You may always feel that you need professional help. If you understood most of "Anyone's financial plan" you can manage your own portfolio. Where that breaks down for me is during retirement. Later in life I might not have the mental capacity, logic skills, or brain power to manage my portfolio. I will probably enlist a Certified Financial Planner (They must be certified!) to maintain my Bond/CD ladders and implement my retirement plan. I'll handle it for 5-10 years and then hand it over to the CFP Probably around age 70. There will be a lot of vetting and I will be very involved until I physically can not attend meetings.

Since I will probably be paying 1% of my portfolio for this service, the later in life I start using a CFP the cheaper it will be. I want that 1% to compound and grow for as long as possible. Don't wait too long though. You may lose the capacity to communicate your plan or develop a relationship with your CFP.

There are different types of CFPs.

• Fee only CFP - paid by the hour. Good for a check up but may not fit the bill for long term management.
• CFP on retainer - Good for ongoing help. 
• CFP that takes a regular percentage of your portfolio. Sometimes these folks have a conflict of interest. The more money they make you (and expose you to risk) the more he or she makes. 

Watch out for the CFPs that push products. They probably get a financial incentive to sell certain products. Those products are rarely good for the investor. Never use an insurance agent or anyone pushing "Whole life" plans or Annuities. Insurance agents are not regulated and do not have to disclose their fees. Which can be as high as 6%. Be sure to run your potential CFP though  the following sites.

http://www.napfa.org/
http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/
http://www.cfp.net/
http://www.nasaa.org/
http://www.naic.org/
http://www.sec.gov/

The WSJ had a great article on picking a CFP.
http://guides.wsj.com/personal-finance/managing-your-money/how-to-choose-a-financial-planner/

That's it for my "Anyone's financial plan" series. I hope you found the information useful and easily digested. Refer back to the series as needed and refer your friends and relatives to the blog. Insist they start from the beginning. From here on my blog will be more topical and probably have shorter posts more often. I have been stock piling ideas for posts but have had to hold off until the foundation of financial planning was done. I felt that until we had that foundation in place, my posts would have no context.

Source
http://www.getrichslowly.org/blog/2007/04/24/when-and-how-do-you-hire-a-financial-planner/

21. Mandatory distributions at age 70.5

21. Mandatory distributions at age 70.5

With a traditional IRA or ANY type of 401k/403b you must take "Required minimum distributions"or RMDs annually. You have until April 1 of the year that follows the year you turn 70.5 to start taking RMDs. If you do not take your RMD you will pay a 50% penalty. That's losing half of your RMD to the IRS. DON'T DO IT! To calculate your own RMD the following link and find the section labeled "How is the amount of the RMD calculated?"

The money you have saved in your Roth IRA is exempt from this rule. This is where Roth IRAs really shine. The money in your Roth IRA can grow tax differed your whole life. This helps make your portfolio last longer and hopefully leaving more money to your heirs. If you have a Roth 401k/403b you should roll it into a Roth IRA before you hit 70.5. This will shelter that portion from RMDs.

There is one way to keep your RMD from pushing you into a higher tax bracket. You can have your RMD transferred directly to a charity. This then becomes a tax deduction negating your extra income. If you are still working you do not have to take an RMD from your 401k/403b. You will still have to take RMDs from a traditional IRA while still working. You do not have to spend it though. You can just reinvest the money in a taxable account.


From the IRS website-
       When a retirement plan account owner or IRA owner dies before RMDs have begun, different RMD rules apply to the beneficiary of the account or IRA. Generally, the entire amount of the owner’s benefit must be distributed to the beneficiary who is an individual either (1) within 5 years of the owner’s death, or (2) over the life of the beneficiary starting no later than one year following the owner’s death.
 
Sources
http://www.bankrate.com/brm/itax/tips/20030325a1.asp
http://www.irs.gov/retirement/article/0,,id=96989,00.html

19/20. Converting your nest egg into income.

19/20. Converting your nest egg into income./4% withdraw rate.


So you have spent most of your working life (Hopefully) accumulating retirement savings. Now you need to turn this nest egg into a stream of income. You will need a budget (See post # 3 make a budget) so you can determine how much income you will need in retirement. You will also need to know how much you will receive monthly in Social Security and Pension income. Subtract the SSI and Pension total from your budget and that is your goal minimum. Ideally you would be able to meet that goal with an interest stream coming from your portfolio. I will discuss how to do this below. You may also have to withdraw some of the principle in your portfolio if you can not meet your monthly goal from SSI, pension, and investment interest alone. 


The conventional wisdom says you should not withdraw more than 4% of your portfolio a year. 4% plus an annual adjustment for inflation should allow you to retire at a ripe old age and not run out of money. In my opinion 3% is a safer rate and it allows you some leeway if medical bills or emergency home repairs rear their ugly heads.


To maintain tax efficiency you want to tap your taxable accounts first.
This allows the tax sheltered accounts to grow unfettered. Next you should tap your traditional IRA/401k so your Roth has a greater chance for tax free growth. If you are retiring early keep in mind that 401k/403b's can be tapped at age 55 and Roth/IRA's at age 59.5. This is one of the only reasons not to consolidate your accounts to Roth/IRAs to get lower fees. If you are danger of being bumped into a higher tax bracket you may want to tap your Roth IRA to keep your income below that bracket.


Let's get into making adjustments so you can start living on your retirement portfolio.


Bond ladders - A bond ladder is a collection of bonds that mature at a regular pace. To make a ladder divide your money by 5 and put the first 5th in a bond that matures in 5 years . The second 5th in a 4 year bond. The third 5th in a 3 year and so on. When the 1 year bond comes due put that money in a new 5 year bond. When the 2 year bond comes due put that money in a new 5 year bond and so on. After 5 years of this you will have five 5 year bonds. This is a bit of an oversimplification. You will most likely buy a basket of bonds. You can also spread the ladder over ten years if the yields work out better. The interest from this ladder should dump into another account such as a checking or money market account.


CD ladders - You can apply the same laddering technique to CD's. A CD ladder would be a little safer. So I might mix the two types to manage risk.


Annuities - There are so many types of annuities out there. Most of them are way too expensive and are a bad fit for 99% of investors. That said there may be room in your portfolio for an Immediate Annuity. Basically you give an insurer a lump sum and they pay you a monthly income for life. The fees from annuities can range from 1.5-6% which breaks my 1% rule. Plus annuities are insurance products so they are not currently regulated. So you will probably never know how much you are actually paying. If the insurer goes out of business you will loose your monthly check and the lump sum you already parted with. Too many downsides for me.


You will want to change your reinvestment settings. When you are working you should have any dividends reinvested into the same stock, ETF, or mutual fund to help compound your growth. In retirement you can redirect this dividend stream to another account such as a checking or money market account. The key is liquidity or immediate access. 


To wrap this up, your income in retirement will come from the following sources.

1.  Social Security 
2.  Pensions
3.  Interest stream from investments and ladders
4.  3% of your total portfolio  

          a. Taxable investments 

b. Traditional IRA/401k/403b

c. Roth IRA/401k/403b

In that order. If you do not need to tap #3 or #4a-c you will be able to retire comfortably and pass on your nest egg!  But if you do you tap all of the above you still have very good chance of retiring comfortably.




Sources
http://www.investopedia.com/terms/f/four-percent-rule.asp#axzz1sp3P7gff

www.ssa.gov

18. When to take Social security.

18. When to take Social security.


You basically have three choices. Take it early. Take it at "full retirement age". Wait until you're 70. The general rule is to wait as long as possible. That way you get the largest total benefit over the coarse of your life. But if you have a hard time making your bills without the benefits, Are in poor health, or you are the lower earning spouse and your spouse can wait for a higher benefit. Then you are a good candidate for early benefits. You should probably wait if you are still working, In good health with longevity running in your family, Or are the higher earning spouse and want to leave the largest possible benefit for your spouse. Here is a chart showing who is eligible when.

If you were born in ...	Your full retirement age is ...
1937 or earlier	65
1938	65 and 2 months
1939	65 and 4 months
1940	65 and 6 months
1941	65 and 8 months
1942	65 and 10 months
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 or later	67

The earliest you can start receiving Social Security retirement benefits is age 62. If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30 percent.

• 63 is about 25 percent;
• 64 is about 20 percent;
• 65 is about 13.3 percent; and
• 66 is about 6.7 percent. 

If you delay taking Social Security benefits beyond the full retirement age they are increased by a certain percentage (depending on date of birth). The benefit increase no longer applies once you reach age 70.

Year of Birth*	Yearly Rate of Increase	Monthly Rate of Increase
1933-1934	5.5%	11/24 of 1%
1935-1936	6.0%	1/2 of 1%
1937-1938	6.5%	13/24 of 1%
1939-1940	7.0%	7/12 of 1%
1941-1942	7.5%	5/8 of 1%
1943 or later	8.0%	2/3 of 1%
Note: If you were born on January 1st, you should refer to the rate of increase for the previous year. *

This chart helps you visualize the different retirement age scenarios,



^


The different types of Social Security claims are

• Personal benefits are when you receive SSI benefits based on your work record. 

• Spousal benefits are when your receive benefits up to 50% of your Spouses work record. If both spouses are enrolled in the SSA system you can take either your benefit or up to 50% of your spouses benefit. Whichever is greater. Taking a Spousal benefit does not affect what the higher earning Spouse will receive under their own Personal benefit. Divorce complicates things some. Under certain conditions you can apply for 50% of an Ex-Spouses benefits. Please check with http://ssa.gov for more info.

• Disability benefits can be applied for anytime you become disabled for longer than 12 months and can no longer work. You must be "insured" meaning that you have worked and contributed to your SSI for a certain minimum amount of time. These are on a case by case basis so again I need to refer you to http://ssa.gov for more info.

• Death benefit - A surviving widow or widower may be eligible to receive a special death benefit payment of $255.00 on the worker's record. This payment can be made only once to a spouse or minor children who meet certain requirements.
  

• Survivor benefits is most commonly when you receive your deceased spouses benefits because it is larger than yours. Again, So many options and permutations. Please visit http://ssa.gov for more info.

62/70 split - There are ways to maximize your benefits as a married couple. Here is one example. Let's say that a retired couple are both 62 and only the man worked enough to qualify for SSA personal benefits. They both apply for benefits but then the husband suspends his payments. This allows for a larger check for him the longer he waits. This also qualifies his wife for up to a 50% Spousal benefit since he is now in the system. She gets the largest possible benefit she could get and by waiting until 70 he gets the his largest total benefit possible. If the man waits to apply for SSA benefits until 70 his wife can not receive benefits until then due to her lack of a work record.

It's little known that your medicare premiums part B&D and taxes are withheld from your gross amount. So the amount you see on your SSA statement might not be what you actually get. If you take your benefits early thinking that you can make it on the reduced amount you may be in for a big surprise at age 65 when Medicare kicks in.


When you take your SSI benefits you have a year to change your mind. You will need to repay all of your benefits to reset your benefit calculations. You can only change your mind once though. Another option is to just suspend your benefits. Your payment amount will grow as long as you wait.

Sources
 * http://ssa.gov
 
^ http://www.schwab.com/public/schwab/resource_center/expert_insight/retirement_strategies/planning/when_should_you_take_social_security.html 

 http://www.cbsnews.com/8301-505146_162-51396960/when-to-take-social-security-benefits/

17. Challenges of retiring early.

17. Challenges of retiring early.

Let's say you have saved $600,000 by age 55 and you are thinking about retiring early. Let's discuss the challenges of this approach.  

Savings Calculator - This should be your first step. Run your numbers through a couple of online retirement calculators to see if they think you can retire early. CNN/Money has a great one. AARP and Fidelity are good as well. Run them all and get a good concensus.

Health insurance - This is a biggie. If you can not wrangle your Health insurance, retiring early will be a huge challenge. You are not eligible for Medicare until age 65 (currently). So that leaves 9.5 years that you need to cover your own health coverage. Consider using a high deductible health plan paired with a tax differed HSA to get you through this period. If you are self employed you are already familiar with these challenges. Ironically it may be easier to pull the trigger and retire early if you are self employed.


Less Tax sheltering - If you stop working and have no earned income you can not participate in an Roth/IRA. The US government considers earned income as Wages, Salary, Tips, Union strike benefits, Long term disability, and Net earnings from self employment. This means your tax differed accounts must carry themselves with growth and dividends alone. Obviously you will no longer be able to participate in your 401k/403b once you retire. This means your only tax shelters left are tax exempt bonds and annuities. I hate annuities. They are an insurance product so they are not regulated by the SEC and have no guarantee either. If the insurance company goes out of business kiss your money goodbye! More on the evils of annuities in a future post.

4% withdraw rate - The rule of thumb for a withdraw rate retiring at age 65 is 4%. This should allow you to make it to age 100 without running out of money. If you retire early this percentage has to drop. If you can live on 2%-3% of your portfolio at age 55 then you might be a good candidate for early retirement.

Social Security - Currently you can start receiving (reduced) SS benefits at age 62. This will probably be increased to 63 or 64 very soon. If you want to make sure you get your full benefits you currently have to wait until age 65-66 depending on the year you were born. Can you live on only your money for 9.5 years?

You are not eligible to withdraw from your Roth/IRA - Until you hit age 59.5 you can not touch your Roth/IRA accounts. If you do you will be hit with ordinary income taxes plus a 10% penalty. That leaves you 4.5 years before you should take any money from your Roth/IRA accounts. You can start withdrawing from your 401k/403b at age 55. This is one of the only arguments for waiting to roll-over your 401/403b into your IRA. Can you live on your regular savings/brokerage and 401k/403b accounts for 4.5 years? 


The exception - Internal revenue code 72(t)(2)(a)(iv) - There is a way to start tapping your Roth/IRA before age 59.5. You must take "substantially equal periodic payments." To be honest this option gets me a little nervous. If I were to employ the 72t option I would use my accountant to help me through the details. I have included some sites that do a better job explaining 72t than I ever could.


http://www.retireearlyhomepage.com/wdraw59.html
http://www.section72.com/html/72_t_.html
http://www.irs.gov/pub/irs-drop/rr-02-62.pdf

16. Adjust your asset allocation as you age.

16. Adjust your asset allocation as you age.

As you age you will need to adjust your asset allocation. When you get closer to retirement you want to ratchet down risk and build up your stable investments. If you experience a set back in your 20's you have plenty of time to recover. If you get hit in your 60's it will lower the income you have in retirement. You may even have to work longer. 

Since I have a slightly above average risk tolerance I set my stable investments to my age. I let it get a little equity heavy as I progress until I hit the 5th year of that tolerance level. I do this to add a little bit of risk tolerance to my portfolio. I am 41 years old and my current asset allocation is 60% Equities and 40% Stable investments. I will keep this allocation until I hit 45. 

At age 45-50 my asset allocation will be 55% Equities and 45% Stable.
At age 50-55 my asset allocation will be 50% Equities and 50% Stable.
At age 55-60 my asset allocation will be 45% Equities and 55% Stable. 
At age 60-65 my asset allocation will be 40% Equities and 60% Stable. 
At age 65-70 my asset allocation will be 35% Equities and 65% Stable. 
At age 70-75 my asset allocation will be 30% Equities and 70% Stable. 
At age 75-80 my asset allocation will be 25% Equities and 75% Stable. 
At age 80-85 my asset allocation will be 20% Equities and 80% Stable. 
At age 85-90 my asset allocation will be 15% Equities and 85% Stable. 
At age 90-95 my asset allocation will be 10% Equities and 90% Stable. 

When you re-balance your portfolio it's a great time to check your asset allocation and adjust for your increasing age. Your risk tolerance may change over time as well. The rule of thumb is to set your stable investments to match your age. If you have more risk tolerance you can subtract 10% from your age, If you are more pessimistic about equities you can add 10% to your age. These are extremes in risk tolerance. I would not in percentage exceed + or - 10 of your age. 

In your 50's you may want to start trading in bond funds for individual bonds. The reason for doing this is that individual bonds have a face value that you can count on. A bond fund can theoretically lose all of its value. Individual bonds add even more stability to your stable investments. Some financial advisers prefer individual bonds for life. While this would be ideal, the individual bonds would require more homework or an adviser who is adept at bond picking. More on using a financial adviser when nearing retirement in future posts.

15. Save for your goals.

15. Save for your goals. Down payment on a house. college fund for your kids. Vacation of a lifetime. etc....
 
Let's say you want to save for a down payment on a house and save for your child's college education. The college savings is a long term goal and the down payment is a short term goal.

Go to your companies payroll dept or person and ask to redo or update your direct deposit form. Have two predefined amounts deposited in two separate accounts. The Down payment savings should go to a liquid savings account that has as good of an interest rate as possible. I would use an online savings account for this. You should be able to find 2% out there. Check bankrate.com for the best interest rate. The college fund should go to a 529 tax exempt education savings plan. The 529 is tax advantaged so it's the obvious choice for educational goals. More on 529's in a later post. 

If your goal was more than 5 years out and not educational I would recommend using your online brokerage account. That way you could invest the money long term. 

For the self-employed. You need to treat these monthly savings goals as if they were bills. Put the monthly amount and the goal down in your budget. You can use an online bill pay service to set up regular monthly deposits. It's as close to auto-pilot as you can get while self-employed.

If you have a specific amount as a goal lets say $2000 in two years. Divide 2000 by the number of pay periods between now and then, in this case it's 52. That gives you $38.46 or $39 deducted from each paycheck. You can redirect multiple amounts to multiple accounts. You won't even notice it's gone. This is how I fund my wife's Roth IRA. The self-employed divide 2000 by 24 months which gives you $78. Pay $78 per month to your goal account as if it were a bill.

Looking at your goals totals can be overwhelming. Breaking them down to small monthly chunks makes it much easier. If you can save for those goals on auto-pilot, even better.

14. Open an online discount brokerage account.

14. Now that all of your tax shelters (Roth/IRA 401k/403b) are maxed out open an online discount brokerage account.


Once you are sufficiently saving for retirement by maxing out your tax shelters, It's time to open a taxable brokerage account. For convenience I have one at the same place I keep my Roth/IRA. This is a great place to invest money that would otherwise sit idle in a bank account (Not your emergency fund!). It's also a good place to put any found or sudden money. As always, Watch those fees!


Tax efficiency - There is another way to think about diversification when using a brokerage account. If you put tax advantaged investments in your taxable brokerage account you can free up potential in your non-taxable Roth/IRA or 401k/403b. Since Treasuries or Municipal bonds are already tax exempt you could hold these types of investments in a taxable brokerage account. 


I am not quite there yet but I do have a brokerage account just in case. My Roth IRA is maxed out but until my 403b is maxed out I won't touch the brokerage account. I am ready for any found money though!

13. Re-balance annually.

13. Re-balance annually. 


Every year you need to re-balance your investments. Don't forget to adjust your asset allocation as you age (See steps 12a-12c). Use this adjusted allocation as your goal. Your Birthday or the New year are great cues to remind you to re-balance. 

Re-balancing means selling issues that you are overweighted in. You then buy into investment classes that you are underweighted in. For a simple example let's say I set my Small Cap allocation to 5% of my portfolio. Last year that grew to 7%. I also set my international stock fund to 5%. Last year it fell to 3%. To keep my investments in line with my asset allocation I should sell 2% of the Small Cap fund and buy 2% of the international fund. This forces you to sell high and buy low.


Keep in mind the 1% rule of expenses. If it would cost more than 1% to re-balance don't bother. This happens in the beginning of your investment life. Values are so small it doesn't make sense to sell. In this case you want to buy into balance. This is done by monthly buying into the class you are lowest in until you hit your allocation in that class. Then move on to the next lowest class. 

Here is an example of a 50 year old with a little over 100k invested. With a $4.00 transaction fee you can move up to $400.00 at a time. If you are out of balance by less than that, It is not worth the fee to re-balance that class.

Age 50 Mortgage 90% payed off	Old total	Sell	Buy	Fee	New total	Goal
7% Large Cap stock fund	6,500.00		500.00	4.00	7,000.00	7,000.00
6% Mid Cap stock fund	7,256.00	1,256.00		4.00	6,000.00	6,000.00
6% Small Cap stock fund	8,400.00	2,400.00		4.00	6,000.00	6,000.00
10% International stock fund	7,400.00		2,600.00	4.00	10,000.00	10,000.00
6% Growth stock fund	6,050.00				6,050.00	6,000.00
7% Value stock fund	6,223.00		756.00	4.00	6,979.00	7,000.00
8% Emerging market stock fund	8,500.00	500.00		4.00	8,000.00	8,000.00
5% US bond fund	4,100.00		900.00	4.00	5,000.00	5,000.00
10% TIPS bond fund	11,700.00	1,700.00		4.00	10,000.00	10,000.00
7.5% International bond fund	6,400.00		1,100.00	4.00	7,500.00	7,500.00
7.5% Corporate bond fund	7,300.00				7,300.00	7,500.00
5% Cash in a Money market	5,025.00				5,025.00	5,000.00
5% CD's	4,000.00				5,000.00	5,000.00
10% Real estate value	10,000.00				10,000.00	10,000.00

I have an asset allocation excel spread sheet starter I can email you if you like. You plug in your numbers and it will do the math for you. Just drop me a line at thefettler@yahoo.com

HSA Health Savings Account question

 A reader asked me this question. "I am considering a high deductible health plan that qualifies me to fund an HSA. What happens to my HSA if I get employer based coverage and am no longer HSA eligible?"

Money in your HSA is your property the moment it is deposited. If you no longer have an HSA eligible policy you can no longer make deposits to your HSA account,  The funds remaining in your HSA are still available for qualified medical expenses regardless of your coverage type.  


An interesting HSA fact. You can roll over one years worth of HSA deposits from an IRA ($3100.00 for 2012). I would not recommend doing this unless you are in a medical/financial bind. You can only rollover funds once in your life and you can't roll funds back to the IRA. 


When comparison shopping for HSA providers try to compare expense ratios. Lower fees will help you get a better return on the investments in your HSA. This may be harder than checking stock or bond expense ratios. Insurance companies are not legally required to be forthcoming with their fee schedule (yet!). But ask the rep. when you call anyway. 


Make sure to keep detailed records of your medical expenses. That will save you a bunch of time and heartache at tax time.

12c. Create an asset allocation. Part C - Equities

In Part C we will discuss different types of Stocks or "Equities".


There are two types of stocks Common and Preferred. With both types, face value is market determined. Common stocks are the most popular. They come with voting rights and the dividend can be adjusted or eliminated at will. Preferred stocks offer a permanent dividend level set at purchase and can be "Called" or bought back by the company (at a premium). In bankruptcy they are payed back before the common stock is. But the downside to Preferred stocks is no voting rights. We will be dealing with common stock in this blog.


As we discussed in part B there is a huge difference in homework between buying individual issues and funds. I do not, nor do I recommend buying individual stocks. Even professional fund managers have a hard time beating the market. From here on out we will be discussing the different types of stock (equity) funds.


Large Cap funds
Or large market capitalization are funds holding stocks of US companies that have 10 billion or more dollars of market capital. You get this number by multiplying the number of outstanding shares by the price per share. GE, Google, and Apple are examples of large cap companies.


Mid Cap funds
Or middle market capitalization are funds holding stocks of US companies that have 2-10 billion dollars of market capital. They tend to be a little more volatile than the large cap companies. Monster Beverage corp, Del monte, and American building maintenance, are examples of  Mid cap companies.


Small Cap funds
Or small market capitalization are funds holding stocks of US companies that have 300 million - 2 billion dollars of market capital. They tend to be more volatile than the large or mid cap companies. The reason there can be such an upside to small cap funds is that you beat out institutional investors that have market cap minimums. Buffalo wild wings, Playboy, and Spherion, are examples of Small cap companies.
 
International stock funds
Funds that invest in companies outside the USA. They can invest by country, region, continent, or everything but the US.


Growth stock funds
Funds that invest in companies that are considered to have above average earning potential. Most technology companies are growth companies. You make your money when the company grows and the stock value increases. Growth stocks rarely pay out dividends due to reinvestment of the profits into the company.


Value stock funds
Funds that invest in stocks that are undervalued compared to their peers. They usually have a high dividend to attract investors.


Emerging markets stock funds
Funds that invest in companies that reside in countries that are financially progressing. The country must have a unified currency, stock exchange, and some sort of regulatory agency. The potential for for large growth is tempered by high risk.


Dividend stock funds
Funds that invest in companies that pay out high dividends. You make your money from the dividend stream not as much from growth.


There are plenty of other types of funds out there. I feel that most of them tend to be niche funds. This works against diversification. It is a lot like buying individual stocks which is a fools errand.


The biggest thing to consider when choosing funds is expenses. Low fees are a great indicator of a well run financial institution. You should never pay more than 1% per year in annual expenses (preferably under 0.6%!). If the fund is part of a 401k/403b you can accept up to 1.5%. To find a funds total annual expenses find the expense ratio in the funds prospectus. You may have to add all of the various fees listed. I have a short list of 5 companies that I buy funds from for my Roth IRA. They are Vangaurd, Ishares, Global X, Fidelity, and Morgan Stanley. You will have less choices in your 401k/403b.


Here are a few ways to buy into these types of funds.


Mutual funds
A mutual fund is a basket of funds that are actively managed by a fund manager. There is usually a minimum amount that must be invested at a time (5k is common). They have a higher expense ratio due to management costs. Mutual funds tends to cost more in capital gains and taxes. This is due to the amount of trading the fund undergoes.


Index funds

An index fund is a basket of funds that "index", follow or mimic a certain market. Index funds are cheaper because they do not require active managing. Software re-balances the fund to keep it in line with what it's indexing. Since there is much less trading in an index fund the capital gains costs are very low. 

ETFs
Or exchange traded funds are index funds that are traded like stocks. There are no minimums and the low cost and tax efficiency makes them my personal favorite flavor of fund. Their only drawback (or benefit if you invest a larger sum) is that you pay the same brokerage fee if you buy 1 share or 1000. Just make sure your purchasing fees do not exceed 1%.


Here are some examples of diversification of all of your investments with an average risk tolerance. 
Age 20 renter    
10% Large Cap stock fund  
10% Mid Cap stock fund  
10% Small Cap stock fund  
10% International stock fund  
10% Growth stock fund  
10% Value stock fund  
10% Emerging market stock fund  
10% REIT fund*

5% US bond fund

5% TIPS bond fund

10% Cash in a Money market account

Age 30 new home owner

8% Large Cap stock fund

8% Mid Cap stock fund

8% Small Cap stock fund

10% International stock fund

8% Growth stock fund

8% Value stock fund

10% Emerging market stock fund

10% REIT fund*

5% US bond fund

5% TIPS bond fund

5% International bond fund

5% Corporate bond fund

5% Cash in a Money market account

5% CD's

I left the International and Emerging funds alone. This helps keep your foreign exposure balanced.

Age 40 Mortgage 60% payed off.

8% Large Cap stock fund

8% Mid Cap stock fund

8% Small Cap stock fund

10% International stock fund

8% Growth stock fund

8% Value stock fund

10% Emerging market stock fund

5% US bond fund

5% TIPS bond fund

5% International bond fund

5% Corporate bond fund

5% Cash in a Money market account

5% CD's 

10% Real estate value 

As your home equity is established you can pull back on your REIT fund holdings. If you do not own real estate you can keep 10% in a REIT fund perpetuity.

Age 50 Mortgage 90% payed off

7% Large Cap stock fund

6% Mid Cap stock fund

6% Small Cap stock fund

10% International stock fund

6% Growth stock fund

7% Value stock fund

8% Emerging market stock fund

5% US bond fund

10% TIPS bond fund

7.5% International bond fund

7.5% Corporate bond fund

5% Cash in a Money market account

5% CD's 

10% Real estate value 

 

Age 60 House paid off

5% Large Cap stock fund

5% Mid Cap stock fund

4% Small Cap stock fund

10% International stock fund

5% Growth stock fund

5% Value stock fund

6% Emerging market stock fund

10% US bond fund

10% TIPS bond fund

10% International bond fund

10% Corporate bond fund

5% Cash in a Money market account

5% CD's 

10% Real estate value 

Remember to factor in all of your investment vehicles in your asset allocation. 401k/403b, Roth/IRA, Brokerage account, and Bank holdings (CD's Savings etc...) Your 401k/403b may have less choices. This may cause you to pick up the slack with your Roth/IRA. Remember, This is not an exact science. The goal is to not let any one investment class get too big.


*REIT or Real Estate Investment Trust are funds that hold investment grade mortgage backed securities (Commercial and or Residential). Don't be scared of these funds. If you buy from a quality issuer they are safe enough and a good stand in for home equity.

12b. Create an asset allocation. Part B stable investments

In Part B we will discuss the different types of  "Stable" investments. 

Lets start off with bonds. Bonds are generally less risky than stocks because they have a face value that is guaranteed by the issuer. They are less susceptible to the swings of the stock market and pay out a fixed interest rate that is promised by the issuer. Stocks in comparison can lose all of their face value and dividends can be suspended at will.

Treasuries-
are considered the safest type of bond since they are backed by the full faith and credit of the U.S.government. This safety comes at a price though. You will get some of the lowest interest rates available. They are tax exempt so they are great for non tax sheltered accounts. This year the Treasury will stop selling paper bonds. You can buy them directly from http://www.treasurydirect.gov/ You can also research the different types of bonds available from the Treasury there. I will discuss the different types in more detail in future posts.


State issued bonds-
are different for each state. Usually the state will offer taxable and tax exempt bonds. Every state has there own website for purchasing state bonds. If you live in the State that the bond is issued you will generally not be taxed (Fed. or state). If you live in a state where there is no income tax you can purchase bonds from any state tax free. There  are many variables. So you must do your homework.


Municipal Bonds-
Are issued by a city or other government agency. These can be county's, utilities, school districts, airports etc... As in state issued bonds Municipal bonds are tax free (Fed. and state) as long as you are an in state resident.

Corporate Bonds-
are issued by corporations to expand their business. They are generally more risky than government issued bonds. You need to research companies the same way you would for a stock purchase. They can be a great diversification tool to keep your bonds from all moving together. 


Junk bonds-
Or High yield bonds are below investment grade. Because of their high risk you get a much higher yield. You should never hold more than 5% of these in your portfolio.


International Bonds-
Are debt investments issued by countries outside of the USA and are issued in that countries domestic currency. They are a good way to diversify your bond holdings. They will not move in lock step with the US economy. Pay close attention to the ratings of these types of bonds. Currently Greek and Italian bonds offer high interest rates but are way too risky. A balance of risk and return is key here.


Buying individual bonds is the cheapest way to buy bonds. It is also the most complicated. You need to do your homework for each bond. I do not buy individual bonds yet. I have a full-time job already. When I retire I may dive into that world. Bond funds are much simpler. You can find high quality, low fee bond funds that you can use to diversify. I have four funds I use to mix my bond holdings. A US bond fund, TIPS bond fund, Corporate bond fund, and in an International fund.

Cash - Your liquid savings. This includes Savings accounts, Money markets, and Cash on hand.

Real estate - Your home equity minus your total mortgage. Include 2nd homes, REIT funds, Land, or Condos.


CDs -or Certificates of deposit are issued by financial institutions such as banks and credit unions. These "Time deposits" offer a fixed interest rate if the CD is held to maturity. They come in terms as short as a month and as long as 7 years. Generally speaking the longer the term the better the interest rate but don't get trapped in a long term while rates are in an upswing. Due to higher risk the smaller the financial institution the better the rate. They are insured by the FDIC or NCUA just like most bank or Credit union accounts. There are penalties for early withdrawal. Ask about the penalties before buying as they are different for each term and each different financial institution.


Here are some examples of diversification of your "Stable" investments with an average risk tolerance.

Age 20 renter  
80% Stocks
5% US bond fund
5% TIPS bond fund
10% Cash in a Money market account


Age 30 new home owner
70% Stocks
5% US bond fund
5% TIPS bond fund
5% International bond fund
5% Corporate bond fund
5% Cash in a Money market account
5% CD's

Age 40 Mortgage 60% payed off.
60% Stocks
5% US bond fund
5% TIPS bond fund
5% International bond fund
5% Corporate bond fund
5% Cash in a Money market account
5% CD's 
10% Real estate value 


Age 50 Mortgage 90% payed off
50% Stocks

5% US bond fund
10% TIPS bond fund
7.5% International bond fund
7.5% Corporate bond fund
5% Cash in a Money market account
5% CD's 
10% Real estate value 
 
Age 60 House paid off
40% Stocks
10% US bond fund
10% TIPS bond fund
10% International bond fund
10% Corporate bond fund
5% Cash in a Money market account
5% CD's 
10% Real estate value 

You may notice that the real estate value stayed at 10% throughout my examples. This is because as home equity increases so does your other investments. If you end up heavily weighted in real estate near the end of your mortgage that's OK as long as your other investments start to eclipse that value as you progress. Some folks don't like to include the real estate value because you have to live somewhere and homes are not liquid. I personally like to run the numbers both ways.

Extension of Social Security payroll cuts

So Congress seems set to continue to provide 2% of tax relief for all of us workers. I see this as a political football that will further jeopardize the solvency of the SSA. If the government is not willing to save for my retirement I guess I will have to pick up the slack. The day we got the 2% reduction I went to my HR dept. and asked  to up my 403b contributions by 2%. I did not notice the change and I now have control of more retirement money and the government has less. This could work out in your favor if you don't spend that tax break.

I will be back on track with Anyone's financial plan in a day or two. I thought this timely topic needed addressing right away. Thanks for reading!

Brandon thefettler

A question

I got this question the other day and thought I would share.

I have a question not directly related to retirement: do you have any advice on saving a decent amount towards a future expense? i.e. preschool in a year or two for your toddler

Go to your companies payroll dept or person and ask to redo or update your direct deposit form. Have a predefined amount deposited in a "high" interest savings account biweekly.

If you have a specific amount as a goal lets say $2000 in two years. Divide 2000 by the number of pay periods between now and then, in this case it's 52. That gives you $38.46 or $39 deducted from each paycheck. You can redirect multiple amounts to multiple accounts. You won't even notice it's gone. This is how I fund my wife's Roth IRA.

If you had a five years or more before you needed the money I would recommend an online brokerage account. That way you could invest the money a little more long term.

For your current time window I would use an online savings account or start up a CD ladder (watch your time horizon on CDs). You should be able to find 2% out there. Check bankrate.com for the best interest rate.

12. Create an asset allocation. Part A

12. Create an asset allocation based on you risk tolerance. This is easier than you think.

Simply put, an asset allocation is just how you divide up your savings and investments. Matching your more stable assets (Bonds/Cash/Real estate) to your age is the basic rule of thumb. i.e. if you are 40 you should hold 40% in stable assets and 60% in stocks. If you feel that you would need or like a more aggressive portfolio you could subtract 10% from your age. Or if you think the stock market is too unstable you can add 10% to your age. Make this as simple or as complex as you like. Here are some examples of basic asset allocations. In part B and C I will break down different types funds so you can see more detailed portfolio examples.


Age 20, single, renter
90% Stocks
10% Cash


Your young and can easily recover from set backs. Go with a broad based stock market index fund and just use cash for the safe 10%. A simple and aggressive portfolio is very appropriate.


Age 30, Just married, no children, new home owner
70% Stocks
30% Bonds/Cash


Just starting out in life land maybe a family. An average portfolio is probably the ticket.


Age 40, Married, two children, renter
60% Stocks
40% Bonds/Cash


Average


Age 50, Married, 2 kids in college, 10 years left on mortgage, Health issues
40% Stocks
60% Bonds/Cash/Home equity


With all of your obligations (Tuition, Mortgage, Health care) you should be more conservative with your portfolio.


Age 60, Single, No children, House paid off, Healthy, Not much saved
50% Stocks
50% Bonds/Cash


You don't have a lot of obligations but you don't have a lot saved. An aggressive portfolio may be quite helpful in this situation just remember to always reference your age.




This is completely a judgment call on your part. A financial pros and cons list. Account for all the variables that only you can know and get feel for your risk tolerance. If you just don't know what to do then go with your age.