Ask the Expert!
Question 13:
CD coming due
Hey Zach,
I have a CD coming due here in November and it looks like the rate is going to be pretty low...maybe even under 1%. Are there any investments out there that are safe like a CD that...
Expert Answer:
Better rates than CD's
Very good question—one which I wish more people would ask. Lately, we have had an influx of people interested in what we can offer comparable to a CD because rates have been so low. The answer to your question is it depends. If you are looking for a guarantee on that money with no risk (other than reinvestment risk) a CD is the way to go. If you don’t need a guarantee and can afford minimal risk, we certainly have some alternative investments that have solid yields in the 2-5% range and the ability to provide capital appreciation (thus enhancing your total return). Some of these investments have not lost money on an annualized basis in the last 10 years—including 2008 and 2009. That certainly doesn’t mean it isn’t going to happen—it just hasn’t happened recently.
Depending on your circumstances, we may suggest investments like Maine/Puerto Rico bonds (double-tax free for Maine residents) or bond mutual funds. One thing to keep in mind if investing in bond mutual funds is to keep the duration (a mix of interest rate sensitivity and time until cash flow is received) under four years. The reason for this is because the Fed will most likely raise interest rates after 2012 and when interest rates rise, bond prices fall. You may consider longer-terms for individual bonds if you are prepared to hold them to maturity.
If you are interested in seeing the historical performance figures of some of these investments, feel free to call, email or come in and see me. There is absolutely no obligation and I am happy to share my knowledge.
Past performance is no indication of future results. With investments that aren't insured, such as stocks, bonds, and mutual funds, you face the risk that you might lose money.
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Question 12:
Investing
Recently I came into a little bit of money. I would like to invest it. Any suggestions on how I might invest only a few thousand dollars. What is the advantage of using a broker vs. doing it myself?
Expert Answer:
Advantage using a professional
Thank you for your question.
It is hard to make a blanket suggestion for investing a few thousand dollars but I certainly think I provide advice. Most likely, in order to diversify your portfolio, you would want to look into investing into 1 or 2 mutual funds that meet your investment objectives. Mutual funds give you a better ability to diversify versus investing in just 1 or 2 equity positions. For example, $5000 would only buy you around 15 shares of Apple. By putting $5000 into a mutual fund, you could own a few shares of Apple and 50 or more other positions.
In terms of the advantages of using a broker/financial advisor, I have to admit, I may be a bit biased. However, I can provide you with some very strong reasons to rely on someone in my profession. Here are a few:
• We get to know you and your financial situation. We use this to help determine a risk tolerance and an appropriate investment allocation. Many times, when sitting with potential clients, we find that their risk tolerance and objectives differ significantly from what they actually hold in their portfolio.
• We help you develop, implement and stick to a financial plan. Many times, emotion gets in the way of making rational decisions. We answer questions and offer guidance during volatile market periods.
• Educate. There are a maze of investments options out there today. Our aim is to help you understand your options you and determine the best path for you. This will help you avoid costly mistakes from rules and regulations you may be unaware of.
• Expertise. We are involved in the markets every day and investing is what we do. For example, I could do my taxes myself but I would rather rely on a professional to help me understand the tax codes and ensure I get the best tax return I possibly can.
• Proactive management. We use our knowledge to make informed decisions as to when to buy and when to sell.
While you may be able to save a few dollars doing it yourself, paying a little extra for quality guidance and advice will likely have a major impact over the long term.
--Zach Means
Question 11:
Account minimums?
I have an investment account locally worth about $65,000. Recently, the firm I was working with decided that if accounts didn't meet a certain value, they would be serviced out of state. Do you...
Expert Answer:
Account Minimums
Thank you for your question. It's been a while since our last one--please keep them coming!
As far as account minimums go, the answer to that question is no. That said, I would suggest a good starting account balance for an individual, joint or rollover account would be $25,000. However, on the retirement side, if clients want to set-up a Traditional or Roth IRA and fund it with $5,000 every year, that would be great as well. $65,000 is certainly a substantial amount of money and we would be happy to service you and your family.
-Zach Means
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Question 10:
I am 76 years old and living in a nursing home. Over time, I have built a nice nest egg for me and my family. I am looking for ways to reduce my estate so my estate doesn’t have to pay a large...
Expert Answer:
Suggestions for reducing estate...
One of the easiest and most simple ways to reduce your estate is through gifting. If you can afford it, it is a great thing to do around the holidays. In addition to gifting to loved ones, you can also gift to non-profits. Any assets not gifted to families or charities during your lifetime may be subject to estate tax. This year, you can provide gifts up to $13,000 as an individual or, as spouses, you may gift up to $26,000. If you put money in a college investment account, like a 529 plan (see question below for a description), you can actually put 5 years worth of contributions-- $65,000--in at once.
Estate planning can be quite involved and may require the services of a qualified attorney. Give us a call for a more detailed discussion.
-Zach Means
Question 9:
Converting traditional IRA to Roth IRA
I have tried to do an analysis whether this makes sense for me. I have tried various calculators on the internet financial sites. and in the end, some say its a good idea for me, and some so not....
Expert Answer:
Should you convert your Traditional to a Roth
Great question! For those of you who are unaware, now, in 2010, everyone can convert their Traditional IRAs to Roth IRAs without regard to previous income limits (There are tax consequences for conversions).
Deciding whether or not to convert can be a complicated process. The various calculators may make different assumptions about the time value of money and tax rates in retirement. Generally, the longer you have until retirement, the more it makes sense.
Another important question to ask is: Will your tax rate increase in retirement? If the answer is yes, it may be better for you to pay your taxes now and convert to a Roth IRA. If the answer is no (your tax rate will be lower in retirement), a Traditional IRA might be the better choice.
For a good conversion calculator, please visit: http://www.meansinvestment.com/online_tools.php
If you are still unsure as to whether or not you should make the move, please come in and see us. We can go over the different options for you and help you decide the best move. We are located right near the mall at 802 Stillwater Avenue. Feel free to call as well: 207-947-6763.
-Zach Means
Question 8:
401k
I am currently receiving matching 401k benefits. I will be leaving my employment to finish up my degree and will not be working for a year. Any suggestions on what I should do with my 401k? Should...
Expert Answer:
Degree and your 401k
Like you, people should be concerned about what to do with their 401k should they leave their current employment. My first question to you would be: do you think you are going to work at the place you are leaving once you finish school? If the answer is yes and your plan allows it, then I would suggest you keep it there. You will be able to monitor your investments and shouldn’t incur any additional expense.
If you decide you will most likely change employers after you finish schooling, it still may be best to keep the plan with the current employer. Then, once hired by a new company, you will be able to roll it over into the new employer’s 401k plan at no cost. Please just make sure you like the platform and investment choices.
If you are unsure of your career path once you finish college or your next employer doesn’t offer a 401k, the IRA option is most likely the way to go. A brokerage IRA gives you ample investment choices and hopefully, more individualized service.
Please see the question below entitled, “Old 401k—What should I do” for a more information concerning your options.
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Question 7:
"Wash Sale"
What is a "wash sale" and how does it work? If I sell a stock to take a loss this year but I think the stock is going to go back up, how soon can I buy it back and not have the loss disallowed?
Expert Answer:
Wash Sale
A "wash sale" occurs when one sells a security (stock, bond, etc.) at a loss and then
repurchases that same security soon after.
If you are an investor who has generated capital gains in 2010, you may offset these gains by selling other securities that generate a capital loss. If your capital losses exceed your capital gains, you may deduct your net loss dollar-for-dollar against ordinary income up to $3,000. Any excess capital losses may be carried forward indefinitely to future tax years.
Remember, however, that the wash rule states that you may not take a loss if, within a period beginning 30 day before you sell your security and ending 30 days after that date (a period covering 61 days), you have acquired the same or substantially identical securities. This is a "wash sale" and if it occurs, your basis in the newly acquired stock is increased by the amount of any disallowed loss on the original stock. The loss would then be deferred until there is a sale or other disposition of the newly acquired stock. If you think the stock within 30 days could sell at a higher price than it currently trades, an alternative strategy would be to double up your stock position at least 31 days prior to our anticipated sale of stock and sell the original shares for a loss 31 days later.
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Question 6:
Bond prices...why do they move?
I have owned bonds in the past and plan on owning more in the future. One thing I never understood is why the prices on my bonds move...can you explain this to me?
Expert Answer:
Bond price changes...
Good question. While there are a number of factors that influence bond prices, generally they will move inversely (in the opposite direction) to interest rates.
Here’s why: Let’s say you buy 10 Maine highway bonds for $10,000 at issuance. Attached to those bonds is an interest rate or “coupon.” Let’s say the interest rate is 3%. This means you will get $300 (3% of $10,000) paid to you over the course of each year until the bonds mature. This interest rate never changes. Well, what happens if you want to sell but interest rates have risen so similar bonds are paying 4% at issue? Nobody is going to pay you $10,000 for bonds that are paying a lower interest rate than they can get now in the open market, right? You can’t change the interest rate so your only option is to change the price of that bond so the payment ($300) is equal to new bond’s interest rate of 4%. In order to sell your bonds and provide the 4% equivalent rate, the total of the bonds prices will need to drop to $7,500. Now, a $300 payment on $7,500 is 4%.On the other hand, if interest rates drop, your bond prices will go up. Why? Because now, it is harder to get that 3%...so people pay a premium.Important to note: Maine bonds provide income that is both state and federally tax-free! For example, a couple living in Maine and filing jointly falls in the 28% federal tax bracket. If that couple were to purchase a municipal Maine bond paying 5% tax-exempt, they would have to receive 6.94% taxable yield to equal this.
Question 5:
Where to start?
My wife and I are both 35 years old and we have a 5 year old and 7 year old, a mortgage etc.We both work and I know we should be saving for retirement but there never seems to be any money left at...
Expert Answer:
Starting to Save...
Pay yourself first. You must treat savings as a necessary expense, just like groceries and the mortgage. The best way I have found to do this is to automate it. Have a set amount deducted from your paychecks and deposited to a separate account that you dedicate for the purpose of establishing financial independence. Start small and increase by small amounts on a regular basis. You will quickly adjust your spending habits and not really miss the saved funds. The next step is to question all of your spending. Write down every purchase for a week. A large coffee from the donut place every weekday for each of you will add up to over $7,000 in five years! Now use your saved funds to pay off any high interest debt such as credit cards. Next you need to have an emergency fund of 3 – 6 months living expenses in a secure account such as a bank savings account. This will help you to avoid borrowing for unexpected emergencies. Now you can look at retirement savings. Start with your employer – do they offer a plan with a match? If not make it a goal to fully fund a Roth IRA for each of you each year.
This will not happen overnight, but it will not happen at all if you don’t start. Start now, start small, pay yourself first and make it a habit. Once you have a little momentum it will become easier and soon you will see real results!
--John Dudley
Question 4:
Old 401k--What should I do?
I recently changed jobs and still have about $100k in a 401k with my previous employer. What should I do with this plan? Keep it there? Move it to the new employer? I am open to suggestions.
Expert Answer:
Old 401k: What you should consider
This is a great questio--one we get all the time.
I am very glad you are not considering taking this money and putting it into cash. That is a mistake many people make and it is the wrong choice (unless you absolutely need the $$). If you do take a premature distribution (taking the money prior to turning 59 1/2), you are going to be hit with a 10% penalty (a few exceptions: you pass-away, become disabled, have medical expenses in excess of 7.5% your adjusted gross income) other than the IRS, who wants that?
One option I generally do not recommend is keeping it at your previous employer. This is your money and you should be serviced appropriately. Many times, clients tell us that after they left the company, they never heard from an investment advisor or plan provider again. If you are not a financial expert, you want to make sure someone other than yourself is looking out for you--both now and in the future.
Another option is to roll over your existing plan to your new employer's plan (most plans accept rollovers, however some do not). If you do decide this is the right move for you, make sure you look at the plan offerings and that they have a lot of flexibility and the fees are reasonable. Some benefits to staying in a 401k are that you can start withdrawing your money earlier (55 vs. 59 1/2 provided you are separated from employment) and, many times, since you are involved in a plan, you have increased buying power which can reduce fees and expenses. However, many plans have limited investment choices and/or high fees making it difficult to fit an individual's needs appropriately. Also keep in mind that once you move into this plan, typically, you lose the option to move out until you terminate service or retire.
A third option is to roll over your 401k balance into a brokerage Individual Retirement Account (IRA). There are 2 major advantages to this: flexibility and service. These accounts provide a VAST array of investment choices. Stocks, mutual funds, CD's, ETF's...definitely options for every investor. Additionally, through a brokerage IRA, you are able to work one on one with an investment professional who will sit down with you, discuss your retirement needs and provide suggestions to help meet those goals. They will meet with you periodically to review your portfolio and make adjustments as your circumstances and objectives dictate. This type of service, particularly over the last 2 years, has been invaluable.
If you have more questions or would like to discuss your options in greater depth, please feel free to call us.
--Zach Means
Question 3:
Retirement?
I recently graduated from college and I am 125k in debt with student loans. My company offers a matching 401k. Should I invest in the 401k or work to pay off my student loans?
Expert Answer:
401k participation vs. paying down college debt
The answer to this question depends on many different factors and criteria. Things one should consider when analyzing situations like this are: salary (ability to pay the debt), current debt load (credit cards, etc.), interest rate on the college loan itself and your employers match. However, here are some general thoughts:
$125k is a significant amount of debt and paying it off as quickly as you can is a great goal to have. That being said, I think your first priority should be taking advantage of any FREE matching money you can get from your employer.
If your employer offers something like a 50% match on the 1st 6% you contribute (so you get 3% from them for contributing your 6%) then that +50% return right off the bat is too good to pass up.
I'd find out what the minimum amount would be to contribute to your 401k plan that would get the maximum in "free" match money, do that, and then put any additional monies towards that student loan debt. If your student loan debt is at a fixed and VERY low interest rate I might increase the 401k contributions slightly higher (say 10% of your pay) and have a little less going towards the debt.
Please call or come in and see us if you have any more questions. We would be happy to run the numbers for you.
--Don Mitchell
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Question 2:
College Savings Plan?
I am thinking about opening a 529 plan to save for my daughter's education. What happens if she decides not to go to college?
Expert Answer:
529 Savings not used for college
Good question. For those of you who don't know, 529 plans are a great way for parents or grandparents to help save for a child's education since minors generally can't open investment accounts themselves. These types of plans also have significant benefits. The contributions to the accounts are not tax-deductible at the federal level but Maine does offer a deduction of up to $250 per beneficiary as long as your income is less than $100,000 (single filer) or $200,000 (joint filer). Another main benefit is that the earnings on the principal are tax-free as long as they are withdrawn for qualified education expenses. We open these accounts frequently and if anyone would like to know more, please feel free to stop in or call us.
To answer your question directly, if she does not use the money for college, you have a few different options:
• You may leave the money in the account for the original beneficiary to use in case she decides to pursue college at a later time.
• You may change the beneficiary to another person as long as the new beneficiary is a member of the family of the original beneficiary.
• You may withdraw funds from the account, understanding that there will be a 10% penalty on the earnings and the earnings will be taxed at your tax rate.
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Question 1:
Picking an Investment Advisor?
I am relatively new to investing. I just turned 30 and want to start doing more. However, I am nervous about picking an investment advisor. Do you have any suggestions or tips as to what I should...
Expert Answer:
Helping you find the proper investment advisor
Great question. The best tip I can give to you is do your due diligence. It may take some time but in the end, you and your family will be happy you did. Just walking into a shop on the corner and handing them a check is not the way to go. First thing I would suggest you do is ask friends and family for an advisor or company that has a strong reputation. After you get some suggestions, go online or research the advisors/companies yourself. Do your best to find out if their investment outlook aligns with yours.
After that, interview prospective advisors. Remember, you are the boss here. You are hiring this person to work for you. If a perspective employee's objectives didn't align with you or your companies, would you hire them? Chances are you would not. The same should hold true when picking an advisor. Ask lots of questions and hopefully, the advisor will ask you many questions as well. In order for them to develop the proper investment plan for you, they need to know as much as possible about you.
Do your research and it will pay off for you emotionally and financially. If we can help any more, please don't hesitate to call or come in and see us.
-Paul Means
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