Not everyone is knowledgeable about money and finances, however, it’s a learning process. Keep in mind you don’t know what you don’t know until you know it and we’re here to help. Gaining financial knowledge comes with time and some help. Let us help educate you on a wide range of topics from financial planning, 401k rollovers, and even investing. Let’s get started today to work towards expanding your financial knowledge. We’ll work with you through every step of the way. Give us a call to set up an appointment.
We thought it appropriate to give you 5 Financial Tips for Graduates because we know when you’re just beginning to gain your independence in the world, the thought of managing your finances is a terrifying. For most of us, our parents were there to help us along the way with paying bills, rent, and college tuition. But when graduation rolls around, the reality and panic begins to set in that you’re officially an adult. Although this is an especially difficult time for young adults, it also can be stressful on parents as you completely let go and allow your child to enter the real world. For these reasons, we thought it would be helpful to discuss 5 financial tips for graduates and their parents to feel comfortable during this life transition.
5 Financial Tips for Graduates:
- Create a Budget
Although this may seem obvious, it is extremely important, and RARELY done! This is probably the first time in your life that a large, steady paycheck is being deposited into your bank account. For this reason it can be very tempting to impulsively spend, but this is when a well-organized budget comes into play. It’s okay to treat yourself occasionally, but just remember to budget for those guilty pleasures. Even though, creating a budget may seem like a burden, there are countless resources, such as financial smart apps, to help you easily manage your budget. Using a budget now will create healthy financial habits down the road making life much easier for you.
- Start Saving for an Emergency Fund
Saving is the key to financial success, so why not get a jump-start on this at a young age? Saving is a habit and the earlier you develop this habit the better, especially due to the volatile state of our current economy. Life throws you curve balls, so it’s important to have an emergency fund. You never know when you may be laid off, are involved in a car accident, or have costly medical expenses. We suggest saving six to nine months worth of expenses into your emergency fund, so you can be prepared in the event of one of these worst-case scenarios.
- Begin Funding a Retirement Plan
You just graduated college and retirement is probably the last thing on your mind. Numerous studies show that it’s crucial to start contributing to your retirement fund as early as possible. This is definitely not the most glamorous way to use your paycheck, but it will be beneficial for you in the long run. Many employers match a portion of what you contribute to your 401k. This is an exceptional perk that employer’s offer and if yours does then take advantage of it! If you can swing it, contribute the maximum amount that they match. It’s pretty much like getting free money. You’ll be thankful you did many years down the road. If your company does not have a retirement plan, then don’t worry, you’ll just have to start an IRA.
- Start Paying off Student Loans
After four years of college, most of us will likely accrue some student loan debt. While we are of the belief that this would be considered “good” debt, if there is arguably such a thing, it’s important to understand how paying this down consistently benefits you in the long-run. We know you’ve seen them…the countless ads on your Facebook feed about student loan consolidation help and other various debt programs out there. We’ll get to the bottom of these in future posts but know that a simple phone call to your loan servicer (the company that mails you the statement) is all you’ll likely need to consolidate all of your student loans. No need to pay another company to consolidate your federal loans into private loans. There are countless options to consolidate with various terms – all designed to fit your lifestyle. How awesome is that?! Keep in mind that different loan types have varying consolidation opportunities and rules. We suggest you do whatever you can to choose a fixed rate repayment plan and make it a line-item in your budget. Try to automate the payment each month too that way you’ll help your credit score by showing consistently on-time payments. The other benefit to federal student loan debt is the debt forgiveness in the event of your death – your spouse or family won’t be liable; basically the debt will die with you.
- Protect your Credit Score
It can be tempting to swipe the credit card whenever you get the desire to make a purchase, but take caution! Be sure to pay all bills on time because even if you miss one payment your credit score could take a plunge. There are many dangers associated with poor credit that can make it difficult to get a good job or approval for an apartment lease, not to mention paying higher interest rates for years to come just because you missed a payment. To avoid these problems and to ensure a high credit score, set up automatic payments for your regular expenses, such as rent and insurance. If you can swing it, choose to use a software solution like Credit Karma to help you monitor your score and to ensure items reported to your report are accurate.
During this monumental time of your life, we want to help guide you towards financial independence. We’re a Johns Island Financial Advisor that specializes in financial planning and investment advice. We’re also pretty laid back and genuinely fun to be around, ha! Let us help you get off to the right start as you begin the next chapter of your life. Contact us today to set up a complimentary appointment.
Image Credit: Ian Norman
There’s been a reoccurring theme in the financial services industries surrounding a 401k rollover. A simple Google search of the topic loads thousands of results. Many of the big investment firms spend millions of marketing dollars to rank for the “401k rollover” search term just so they can convince you to perform a 401k rollover to their management platform. And I know what you’re thinking…”aren’t you an investment firm also interested in my 401k rollover?” And the answer is “yes, I am…but only when it’s in your best interests.” Recall that we are a fiduciary and must always recommend what is best for you, even if it means not doing business with us. And there are times when a 401k rollover is not the best option for you just as there are times when it is. The Department of Labor is finally catching on to this long-running practice and is proposing that all advisors on 401k plans act as a fiduciary in their approach, especially when recommending a 401k rollover to a client. The details of their plan are far from being solidified but the good news is that this fiduciary standard is designed to protect you and your hard-earned dollars and we fully support the DOL’s efforts. Can you believe there are advisors who do not have to do what is in your best interests? We can’t either.
The story these investment firms tell to convince you to do a 401k rollover is that of greater investment options, control of your money, continued tax-deferred growth, and unlimited portability. And while these are all true, most of these same benefits are also available inside your existing plan.
I’ll refrain from defining a 401k in this post as you likely understand what a 401k is and how it benefits your retirement plan. What you may not fully understand is what happens to your 401k when you no longer work for that employer. And this unknown is manipulated into uncertainty by investment firms when they market “don’t leave your 401k behind” as if to subconsciously suggest that your 401k would be in jeopardy if you no longer work for the company. This couldn’t be further from the truth. The money you earned and contributed pre-tax to the plan is, and always will be, yours no matter what happens to the company. Depending on the plan structure and vesting schedule, even the matching contributions that you are legally entitled to will be yours no matter what happens to the company. So don’t be misled by this fake fear.
Now that you know your money is safe, as in, not in jeopardy of being consumed by the company in the event of insolvency or similar, in the old 401k plan, let’s outline your possible options and when each may fit your best interests. Please note, if your money is invested in the stock and bond markets, it is still subject to loss of principal and the risks associated with being invested.
401k Rollover Option 1: Transfer the Money into your New 401k
If you’ve moved onto another job that offers a 401k plan, you can combine your old 401k with your new one when you become eligible to contribute to it. Your plan sponsor will be able to give you all of the details and paperwork to accomplish this simple transfer. And here’s why this option may benefit you:
- If you’re a younger employee, combining small balances into one account helps you keep everything all together as you build a dollar cost averaging plan into your payroll deductions.
- The IRS allows you to borrow against 401k money and set up a payroll deducted loan payment back to yourself versus having to take a straight withdraw from an IRA and possibly incurring taxes and penalties. This rule difference may make sense if you know you might be or are inclined to be in a financial pickle in the future.
- Tax deferred growth continues and the transfer is considered tax-free (meaning no taxes are due when you combine the two accounts).
- If the expense ratios of the investment options inside of the new plan are cheaper than your old 401k, you may achieve cost savings by combining the accounts.
- A higher balance 401k may offer you better incentives when seeking advice from your plan sponsor.
- Ability to gain access to additional investment options, if available.
Why combining with your new 401k may not make sense:
- Investment selection is more restrictive and/or more expensive than your current plan.
- You’re giving up access to a reputable investment firm who you may feel comfortable with.
- Your new plan doesn’t allow transfers (this would be rare in our experience).
- You lose certain guaranteed benefits when transferring –especially when your 401k is a variable annuity with enhanced living benefit riders (these riders traditionally have expenses associated with them, so it’s important to analyze their value as well).
Most important items to consider:
- Fees – always consider both management fees, plan fees, and fund expense ratios. Just because a fund is cheap doesn’t mean it’s the best value for you and the same is true for more expensive funds.
- Range of investment options – more options tend to give you greater flexibility to adjust your allocation if the economy dictates, but too many investment options can become overwhelming to new investors.
- Loss of benefits or gain of new benefits – comparing the “all-in” costs versus value relationship is a must.
- Your new employer won’t make matching contributions to your transferred balance, so don’t think you can game the system, smarty pants.
401k Rollover Option 2: Leave the Money in your Old 401k
I think we’ve made it pretty straight forward in your ability to know that you don’t have to rollover your 401k. Just as you analyzed the option to combine the 401k with your new one above, it may well make sense to simply leave the account alone. The only considerations not mentioned above are:
- If you believe your old company has an executive inability (incompetent plan administrators) to adequately manage the investment choices going forward, it may make sense to remove your hard-earned money from their oversight.
- If your balance is below a certain level as directed by the plan documents, you may be forced to move your account. We’ve seen minimum balances as high as $5,000 for non-participant, former employees.
401k Rollover Option 3: Cash it out (take a Lump Sum Distribution)
This option is the one that will likely hurt the most when the tax man comes in April. If you’re under age 59.5, you’ll pay ordinary income taxes plus a 10% early withdraw penalty. High income earners could see close to half of their retirement savings wiped away by choosing this option. In addition to giving large sums of money to the IRS, you lose out on future tax-deferred earnings benefiting from compound interest growth. In our experience, no matter how you look at it, this option rarely makes sense. Even if you are in severe debt and the taxes you’d pay are better than whatever situation you’re in, you could still avoid the 10% penalty by rolling the account to an IRA and then set up what’s called a 72t distribution. There is a lengthy list of rules regarding this specific IRS rule so please give us a call if you think this may make sense for you. We’ll work with your accountant to develop a plan that fits you.
401k Rollover Option 4: Rollover to an IRA
Let’s say that you’ve determined that the other 401k rollover options aren’t that attractive. Now it would be time to analyze rolling over your 401k to an IRA. This is where you’ll want to look at various companies and what they may propose. Just as you reviewed your new 401k, you’ll want to consider:
- Fees – management fees, expense ratios, trading costs, commissions, mortality & expense charges, loaded funds, etc. Some or all may apply depending on who you’re speaking with. If the fees are significantly higher in one company versus another, ask why. Do your research before committing and don’t be afraid to ask – all advisors must disclose how they are compensated and what your “all-in” fees will be. If they don’t tell you or it’s still vague, run far and fast. Stick to the old adage: if it sounds too good to be true, it usually is.
- Management approach – how will your account be managed? Passive, top down, bottom up, active, cyclical, etc. When will trades occur and how often? How often will review meetings occur and what can you expect during those meetings? Will the account be managed on a discretionary basis or will they need permission to make adjustments each time?
- Investment allocation – what mix of stocks and bonds, sectors, styles, and approaches will you take? Will alternative asset classes and commodities (rarely offered in 401k plans) be a major component of the mix? How about structured products and limited partnerships? IRAs have the ability to invest in many types of asset classes that can’t be found inside of typical 401ks. Even investing in hard assets like real estate and physical metals such as gold and silver can be accomplished given the right, qualified custodian. Keep in mind the more non-traditional your selection, the more rules there tend to be.
- Value added services – if fees are higher, are additional services included to justify the increased costs? Is a financial plan, budget guidance, or debt management included? How often advice is rendered – unlimited or certain number of times per year? Is the management approach the reason for higher fees? It can often make perfect sense to pay higher fees when the value of services offered is considered. Having an advisor that you can trust to help you manage your financial life can be a huge relief to the burden this may cause.
- Type of advisor – not all financial advisors are the same. Some earn commissions on trading activity while others are fee-only. Some tend to be a hybrid of both types and how they operate at different capacities can be vague (think of the DOL rule we talked about earlier in this post). Not to tout ourselves, but we believe it’s best to work with a fiduciary; a person who must keep your best interests at the forefront of every decision they make.
- Special tax considerations – if you own the stock of the employer you work for, you may want to consider leaving the stock in the 401k. There are special tax considerations to analyze with a qualified CPA that allows this type of stock to be taxed when withdrawn at a rate lower than ordinary income taxes. We’ll help you work with your accountant in analyzing if this fits your situation.
The decision you make with your 401k rollover is very important and shouldn’t be taken lightly. Don’t assume that because it seems like everyone rolls over their 401ks to an IRA, that it’s the best option for you. Your situation is drastically different than your friends and family. You are unique and so too should your money management plan. Outside of your personal home, your 401k is most likely the largest asset you own and will naturally become the cornerstone to your retirement income. We want to be your trusted financial partner to help you determine which option is best given your unique circumstances. We are a Johns Island Financial Advisor who builds financial plans and investment strategies for our clients. Anywhere you want to go; we’re here to help guide you along the way. Let’s start a conversation today.
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Discussing money with family quite often becomes uncomfortable for most people especially when helping parents with finances. If you think about your life, you probably realize that it wasn’t always that way. As a child and teenager, you were completely comfortable asking Mom and Dad for a few dollars every now and then. Perhaps even into your early 20s as you began your first job outside of college, asking for a little financial help wasn’t out of the norm.
At some point, it became expected of you to be self-sufficient. The age at which this occurs differs from one person to the next. But we can’t deny that we all need some help at different points throughout our lives. This is especially true for your Mom and Dad and you may find yourself helping parents with finances. We at Coastal Wealth Advisors understand that this can become a challenging task since your parents will likely resist your efforts. With this challenge in mind, we thought it was appropriate to pass on some advice to help you approach the subject with them.
Question: Why do we suggest you approach the subject of helping parents with finances?
Answer: We suggest you approach the subject of helping parents with finances because they won’t approach you. For your entire life, they’ve been your support system without fail, even when you no longer needed them to be. And for them to do otherwise goes against their natural parental instincts. There’s no denying that as our body ages, our minds also age. And with that, we can sometimes start to forget things and make poor judgement calls. It begins with simple tasks and can quickly progress to major things. Add to this vulnerability the numerous financial scams that unfortunately plague our society and your parents can find themselves a victim of fraudsters. So approaching your parents about helping them with finances is a proactive measure to prevent negative financial events from happening.
Three Fears of Helping Parents with Finances:
- Fear of Losing Control
As we age, loss of independence and control is a realistic fear that every individual will experience in their lifetime. Even though we all know that our life on Earth is limited, it’s a tough pill to swallow. It hurts to see our loved ones who were always so strong become the opposite. Your parents won’t give up control of their finances without a fight and we believe that they don’t have to give up control. There are specific ways to ease into helping parents with finances. A simple conversation about the subject in a non-intrusive manner can lighten the subject and allow your parents to open up. We suggest beginning with something like this:
“Mom and Dad, I was reading an online article at Coastal Wealth Advisors dot com about preparing for an unexpected death and it suggested that children have a conversation with their parents about what would happen in the event of an untimely death or injury to one of them. It talked about how oftentimes one parent doesn’t know where the financial information is since the other parent commonly took care of that. Do you guys have a simple file somewhere where all of your accounts and insurance documents are kept so that either of you know what to do if something were to happen?”
This type of question by itself won’t get you far since the answer is either yes or no. But following up with this question in response helps the process even further:
“Ok, that’s great that you have one. What happens, though, if something happens to the both of you at the same time? The article suggested having a trusted person, typically an adult child, be knowledgeable in that area of their life so that if something happened to both, another person would be able to handle the finances.”
By approaching it this way, you are easing into the conversation from the perspective of helping, not taking over. We’ve found that adult children who are aware of their parent’s financial situation are able to intervene during times of crisis much faster than those who aren’t; and timing can make all the difference into the severity of the crisis.
- Fear of Disclosing Finances
Money is a traditionally touchy subject that is not usually discussed between parents and their children. This is what we’re trying to change. As a parent, disclosing your finances to your child can open a Pandora’s box of problems. If your Mom and Dad’s financial situation is less than ideal (or what they perceive to be less than ideal) it may result in their embarrassment. On the flip side, if the parents are financially secure, the adult child can become inclined to ask for financial support. Feeling obligated to help their child; the parents could put their financial future in jeopardy by unnecessarily sacrificing their savings for their adult children. To help you address this fear, consider bringing it up in conversation.
“Mom and Dad, I know discussing your financial situation with me probably goes against what you stand for and you may feel either embarrassed by it or perhaps concerned that I’ll ask for help. That’s not my goal; I just want you to know that I’m here to offer my help when/if you need it. The article I was reading made reference to the fact that families who talk openly about money tend to be more fiscally sound and financially responsible than those that don’t. In fact, 6 out of 10 families have discussed their plans in details with their children. I’m not interested in every detail, but rather to know that you are secure before something were to happen to you. I’d rather be able to help you out now while you are willing and able rather than after a crisis when you aren’t.”
Disclosing every detail of their financial life is not as important as you being aware of a general feeling of their security. You don’t need to know how many shares of General Motors stock they own, what price they bought it at, and what it’s worth. But you should know that they have approximately X amount in retirement funds, Y amount in debt, have consistent and predictable income sources, adequate medical insurance coverage, up-to-date WILL, power of attorney, and health care directive, among other necessary items.
- Fear of Asking for Help
As we mentioned before, if you don’t start the conversation, there’s a good chance it won’t ever happen. Asking for help can make your parents feel vulnerable to judgement and make them feel like they are no longer capable of doing something that they’ve been doing for so long. The simple fact is that you don’t know what you don’t know until you know it. Ultimately, everyone needs a helping hand every once in a while and it’s important to remind your parents that you’re there to help them just as they did a phenomenal job helping you. Start the conversation this way:
“Mom and Dad, remember how you helped me with my first place after college and all of the times you gave me money when I asked you for help? I want you to know that your generosity over the years has become a major inspiration in the way I live my life…and I want you to know that I’m here to help you guys out as well. We all know that life is too short and all we want is for our loved ones to be physically, mentally, and financially healthy. Please know that you don’t have to fear asking me for help every now and then. Usually, more minds are stronger together than apart; you’re not going to be a burden. You’re mom and dad and I love you.”
When helping parents with finances, it’s important to remember that open communication is the key. Approaching these fears will be difficult, no doubt, but when you consider the advice we’ve given you and approach each with care and understanding of your parent’s position, you may find your conversations to go a lot smoother than you’d think. We’re here to sit down with you and your family to discuss the best financial plan for your family’s future. Contact us today to set up an appointment, so we can help you create a financial plan that fits best for you and your family.
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You’re going somewhere, but is ‘somewhere’ really where you want to be? Life is a journey and managing your money effectively helps it become magnificent. Effective financial planning is the means by which you craft a journey towards a known destination and then make adjustments along the way. We know it can be challenging. We’re a Charleston Financial Planner and we want to help you define your ‘somewhere’ and then chart a course to get there. Let’s talk today!