Tag Archives: 401k

How Rebalancing Your Investments during a Bear Market Works for Your Retirement

If you ask me, rebalancing has to be one of the Wonders of the World.  Ok, well maybe at least one of the Wonders of the Investing World.  The term “rebalancing” (or “optimizing” as we call it at blooom) gets loosely tossed around and often even taken for granted, but I hope to explain its elegance and how rebalancing investments can go such a long way to improving an investor’s long term rate of return.  More specifically, by leveraging the power of optimizing, especially in down markets, it is entirely possible to build more wealth in your investment portfolio over time.  

Now that I have your attention, let’s look under the hood at how this whole optimizing thing really works!

 

Take Emotion Out of It 

By far, one of the biggest enemies of the average individual investor is their own emotions.  Generally speaking, mixing high levels of emotions into financial decision making will generally turn out disastrous, regardless of how good the underlying intentions might have been. Emotions will lead us astray whether it is greed commonly experienced in periods of very strong growth in the stock market, or fear often experienced in periods of steep declines in the stock market.

The most effective way to counter the potential damage that managing your investments based on emotion can cause, is to just simply have a plan. Then, once you have a plan, to the extent possible, you should try to implement a strategy that “automates” decision making so that you minimize the chances that emotions can creep into your decision making. In fact, some of the best laid plans when it comes to investing are ones in which you have to make as few decisions as possible!

Let me explain.

 

3 Things You Should Do With Your Investments Right Now

When it comes to your retirement savings – either inside of your employer sponsored retirement account (401k, 403b) or your IRA – you need to commit to a well thought out strategy that has been battle tested not over the course of just the past few years, but over the past many decades.  When it comes to your retirement savings, because of the inherent long term time horizon that you should have, there are really just a few key things to get right.

  1. Make sure you have an appropriate mix of stocks and bonds given your time horizon to retirement and your risk tolerance.  With this, there is no “one right answer” but it is definitely possible to get this dead wrong.  (Example: 30 year old who wants to retire at age 60 with 90% invested in bonds)
  2. Make sure this mix of stocks and bonds is routinely adjusted to move slightly more conservative as you move closer and closer to retirement.
  3. Make sure you have enough diversification across your stock and bond exposure.  In other words, make sure you don’t have “too many eggs in too few baskets!”


Then, Don’t Touch It

Once you have this established, I can tell you confidently that you shouldn’t be tinkering too much with this set up.  In other words – get this dialed in and there is virtually  no need to be fiddling with it based on the inevitable ups and downs of the stock market.  This is where investment rebalancing comes in and starts to really shine.

An Example Portfolio

For ease of explanation, let’s assume that based on your age, time horizon to retirement and risk tolerance, you have the following allocation in your retirement account:

$100,000 Portfolio

Stocks: 70% Target allocation = $70,000 

Bonds: 30% Target allocation = $30,000

Now let’s assume that the stock market gets absolutely clobbered, down roughly 30%.  Which by the way, is about the average decline the stock market has experienced in the past dozen or so Bear Markets since WWII.  Remember, Bear Markets are a totally normal and expected event that inevitably comes around from time to time either due to economic cycles, bubbles, or significant external events like what we are currently experiencing with the global pandemic.

In our example here, let’s also assume that while stocks were getting clobbered, the bond side of your portfolio largely held its value.  In this case, your allocation could then look like this:

Stocks: $50,000 – 62.5%

Bonds: $30,000 = 37.5%

Often times, investors are inclined to make emotional decisions out of fear (in this case) and might actually consider SELLING OUT of stocks after this big decline. BUT, this is where optimizing can swoop in and save the day.

If you are following a regular, recurring strategy of rebalancing your investments let me show you INSTEAD what would take place

Now that your portfolio has dropped in value to $80,000 and stocks now make up just 62.5% of the portfolio as opposed to the original target allocation of 70% that you originally established.  To then properly rebalance your account back to the original Target allocation into stocks you would need to SELL some of your bonds that had held their ground and BUY more stocks at these depressed levels.  PRECISELY WHAT INVESTORS SHOULD BE DOING!  It is amazing how in times where the stock market is chugging along making new highs, most investors jubilantly pour more and more money into their portfolios and then conversely, when the stock market goes “on sale” many investors’ emotions kick in and then all rational thought goes flying out the window and fear takes over.

But when you allow the power of an automated optimizing strategy to just do its thing, it prevents emotions from creeping in and taking over.  You are not having to make decisions at all during these times.  The automated optimizing process handles all the heavy lifting and by just doing math, it automates the process of proper decision making over and over and over, throughout the course of your investing career.  

Oh, and conversely – an automated optimizing strategy also works quite well in times of growth in the stock market.  As stocks and the stock market are making new highs, automated optimizing will trim some of the profits in stocks and add to bonds, or other kinds of stocks in your portfolio that have fallen a bit behind.  Again, just letting mathematics handle the decision making process in your portfolio.

 

See “Buy Low, Sell High” in Practice

What I love most about utilizing an automated optimizing strategy is that by default, it forces investors to follow that age-old practice of buying low and selling high.  Slowly and surely, over time, portions of your retirement portfolio are shifted from the investments or asset classes that have performed well over to the investments or asset classes that haven’t done as well.  Little by little over a long period of time this adds up to extra return in your account and most importantly, gets you out of your own way when it comes to emotional decision making.

 

Reap the Benefits of Rebalancing Your Investments with Blooom

Now that you have read why rebalancing your investments is important, consider optimizing your portfolio with blooom! Our goal is to give you a solid chance to improve the allocation of your account and maximize your portfolio. Sign up today for a free analysis and see how rebalancing your investments with blooom is a no brainer!

Read More

Pam Krueger | CEO of Wealthramp

Welcome to our first installment of… (drumroll please)… Blooom Brain Pickers!  We’re picking the brains of the best in the biz to inform, entertain, and most of all, educate you when it comes to making personal finance decisions. Pam Krueger

Pam Krueger is the creator of the award-winning MoneyTrack investor education television series that ran nationally on over 250 PBS stations.  She is the recipient of two Gracie Awards, educating the public about personal investing, and finding the right financial advice.  In 2017, Pam rolled out a one-hour special, MoneyTrack: Money for Life on PBS stations to explain what the fiduciary standard means to consumers.

Pam launched Wealthramp.com, the largest network of expertly vetted, fee-only fiduciary advisors to help consumers looking for qualified financial advisors who are independent and not commission-driven sales reps. Wealthramp is available to both individuals and employers who offer the service as a financial wellness benefit. Wealthramp uses an eHarmony style algorithm to match individual investors to the best-fit advisors and is available to consumers at no cost.

Pam has served on the board of directors of the California Jump$tart Coalition, an organization dedicated to increasing financial literacy among children and teens. She received the Financial Educator of the Year Award from the Financial Literacy Institute.

 

What is the best and/or worst financial advice you have ever received personally?

Without a doubt, the worst advice I ever got came from a very dear friend many years ago who really wanted me to invest in private mortgages ten minutes before the housing bubble burst. I never did take his advice but he did lose his shirt (or two). I just don’t consider myself wealthy enough to invest in alternative investments. I’m like a granny, I stay in my lane, and I stick to the boring basics. Best advice? Diversification wins all battles because… well… it does.

 

What are your thoughts on the future of financial advice and the direction of the industry in the coming decades?

I see the best possible combination is robo + human. The trick is finding the best available of both the robo-world and the human side. Let’s face it, we are emotional creatures and sometimes we really do need a living, breathing advisor to collaborate or to work through problems. Perhaps not now, but probably later. That’s the beauty of having robust online tools to help you manage on your own. I don’t see the future of advice as robo instead of human advisor, I see it as in addition to human advice. The older we get, the more complex our financial lives become and you may want someone to guide you one-on-one. But here’s the real challenge: human advisors are not created equal so the key is tapping the true talent, not settling for ‘just okay’ advice— especially if you’re about to retire!

The idea of combining technology + financial advisors also contributed to the creation of my company, Wealthramp. A viewer from our TV series, MoneyTrack on PBS. She was frustrated because after the financial crisis she felt she needed an advisor and she’d just fired her broker. She asked me point blank: why do I hate financial advisors? I told her I really don’t hate all of them. I love 5% of them. Given that so few are truly competent and put their clients’ interests first. That’s when the lightbulb went off and I had to ask myself why am I being so negative about the bad advisors when all I have to do is identify the excellent advisors and create a network of them across the country and let people come to me so I can match them to the best-fit advice that’s truly fiduciary. That’s how Wealthramp was born and it took me no less than four years to curate my network of fee-only advisors. I wanted to make sure that when a retiree worried about running out of money needs an experienced retirement income strategy, that person can turn to me. When someone comes to me and has a special needs family member to support, for example, I needed to make sure I’d be able to tap into my network and introduce that consumer to the best advisor possible for special needs planning. Or when a young software engineer at a late stage start up needs to understand his stock compensation and has only 90 days to make a life-changing decision, he knows I have the experts in private stock options and no one is going to sell them anything.

 

What is the one thing you wish more people knew about, given your experience in the industry?

As children we should have been taught the basics about how capitalism works, the economy, credit, practical money skills and an introduction to investing. These are life skills and if we’d gotten that baseline education, I probably would not be in business today. 🙂 All kidding aside, people deserve to feel more confident about their own personal finances, and too many feel embarrassed. That’s just wrong and it creates a lot of financial stress.

Read More

Blooom’s Year-End Financial Planning Checklist (Updated For 2019)

The end of the year is a great time to reflect on your financial goals, the progress you’ve made, and plan ahead for the upcoming year. Read our financial planning checklist below for things you may want to consider:

1. Update wills/trusts and beneficiaries.

Get married this year? Have kids? Get divorced? Big life events mean it’s time to make sure legal docs like your will or trust, powers of attorney, life insurance policies, and account beneficiaries are all up-to-date. Forgetting to make these updates can be disastrous for families at some of the worst possible moments in their lives. Get in the habit of reviewing these things annually so nothing is missed.

2. Get a handle on your debt and plan ahead for the next holiday shopping season.

Lay it all out there to get ready to tackle debt in the new year. If you’re like most Americans, you probably racked up some credit card debt you aren’t proud of this holiday season. What can you learn from that going into next year? Figure out how much of a holiday spending budget you need to plan for, divide that by 10 or 11 months and automate your savings into a savings account dedicated to holiday spending.

3. Use any potential raise you may receive (and possibly your bonus) to increase your 401k contributions.

Starting this year, get into the habit of taking a portion of any raise you receive and dedicating it to your 401k. For example, if you get a 5% raise, consider bumping up your contributions by 1% or more. Your paycheck still goes up, but your 401k also gets a boost. This habit can help you work toward maximizing your contributions over time while having no real impact on your cash flow or budget. Also, see if your employer will allow you to contribute all or part of any year-end bonus you may receive, toward your 401k. This can help reduce your taxable income come tax season and it also means you avoid the extra tax withholding on bonuses for that money.

4. If your employer’s health plan is changing in the coming year, evaluate the potential range of costs for each option, before choosing.

Health-related costs are often hard to plan for, but can cause serious unexpected damage to any financial plan that doesn’t adequately account for them. To get an idea of what your total health care costs might be under any specific plan in the coming year, take the monthly insurance premium and multiply it by 12. This will give you your minimum cost of healthcare for the coming year. Next, look up your insurance plan’s out-of-pocket maximum.

This can help indicate the most you can expect to pay, should you or someone in your family face a serious medical expense, or several, in the coming year. Once you understand the potential costs you could face and select the plan you’re most comfortable with, it’s important to then revisit things like HSA (Health Savings Account) contributions (if you have a high-deductible plan) and exactly how much you may want to maintain in the cash portion of your account for easy access, before investing.

5. Don’t forget about RMDs (for those over 70.5)

Required minimum distributions (RMDs) can be a nightmare tax situation for those over age 70, if not planned for and handled appropriately. The key thing to be aware of is that once most individuals reach 70.5 yrs old, there is a specific minimum amount the IRS will require them to withdraw from most retirement accounts, including 401ks and IRAs. Failing to withdraw the required minimum by Dec 31st of each year, may lead to a 50% tax penalty on the amount, which is one of the harshest tax penalties around.

Not even close to 70.5 yrs old just yet? Consider passing this reminder on to any family members that are. They’ll likely thank you later.

6. Set aside time for a year-end financial review

Look back on the year and take note of what you were able to accomplish financially and what setbacks you may have had. Use this past year as an opportunity to continue making smart financial decisions in the new year and learn from any of the times you may have stumbled. If you have a family, talk about upcoming trips, savings goals, and any other things you need to focus on next year. Set goals and even plan to celebrate financial accomplishments as a family throughout the year. Make money fun and before you know it, you’ll feel the freedom that comes along with financial security and eventually, financial independence!

Automate your long-term investments, like your 401k management!

Blooom is here to make your life easier in the coming year. Now that you’ve read our financial planning checklist for 2019, link your account with us today for a free analysis to see just how much you could save in hidden fees with a managed 401k via Blooom. Contact us today for further questions!

Read More

3 Ways to Screw Up Your 401k (And How To Avoid Them)

Your 401(k) offers a pretty effortless way to build up enough money for a comfy retirement at home, out of state, or maybe on a beautiful island somewhere.

The money comes off the top of your paycheck before you even see it, you often get free money from the boss (thanks to an employer match), and there are tax benefits. Taxes are put on hold until you withdraw the money in retirement, when you’ll likely be in a lower bracket.

But retirement accounts aren’t foolproof. It’s easy to get snagged by pitfalls that could wind up costing you thousands of dollars in penalties and lost earnings.

Avoid these common and potentially very costly 401(k) flubs.

1. Not contributing enough

To receive the maximum benefit from your retirement account — the fattest possible nest egg,  grown through investments — you want to put the maximum amount into your account each year.

The 2019 limit on 401(k) contributions is $19,000, or $25,000 if you’re 50 or older. (That additional $6,000 is called a catch-up contribution, designed to help those who missed out on saving more when they were younger.)

At the bare minimum, you should be kicking in as much as it takes to get the full matching amount from your employer. Your company will likely put as much money into your 401(k) as you do, up to a certain percentage of your salary.

It’s not any kind of a requirement, but employers often do it — and not just because it’s good karma. It helps them hire and hold onto talented people (like you!), they have to keep up with competitors who match, and it gets them tax breaks.

On average, companies in 2019 are matching employee contributions to a record 4.7% of salaries, according to Fidelity Investments. Put another way, workers with 401(k)s received an average $1,780 extra from the boss during the first three months of the year — so this is one time that being all matchy-matchy would indeed be considered very fashionable.

2. Contributing too much

Funding your 401(k) is like the bidding on “The Price Is Right”: You want to hit your contribution limit without going over.

If you exceed the threshold, it can be almost as bad as going home from a game show empty-handed — without a new dinette set or billiard table.

IRS rules state that if your contributions go beyond the limit in any year, you have to remove the excess amount from your account by April 15 of the following year. The overage becomes part of your taxable income for the year when you went breezing past the boundary. Any investment earnings on that money become part of your taxable income for the year when you make the withdrawal.

But at least you won’t get dinged with the usual stiff penalty for withdrawing money from your 401(k) too early. More on that in a moment.

If you don’t pull the offending amount out of your account by the April 15 deadline, that money will be subject to double taxation — which is just as ugly as it sounds. The excess is considered part of your taxable income at the time the contribution was made, and then again whenever you eventually do make that withdrawal. Ouch, and ouch.

So, know the limit, and be careful that you don’t break through it.

 

3. Touching the money too early

This is one that snags far too many retirement savers. Raiding your 401(k) too soon gets very expensive, because you can owe federal and state taxes on the withdrawal plus a 10% IRS early withdrawal penalty.

What do they mean by “early”? You’ll get slapped if you touch the money before you turn age 59 ½. (How’s that for an odd birthday?)

Research shows that a third of account holders do cash out early, and that includes most younger workers between ages 18 and 34. People often do it when they change jobs, find themselves out of work, or are suddenly facing a huge car repair bill or other financial emergency.

This is why it’s so important to have emergency savings (enough to cover three to six months of living expenses), in addition to retirement savings. It’s tough, but it’s just part of the whole “adulting” thing.

Note that there are several exceptions to the 401(k) early withdrawal penalty. You might not have to pay it if:

  • You’re disabled.
  • You have high out-of-pocket medical expenses.
  • You lose or leave your job when you’re 55 or older.
  • You want to use the money for higher education.
  • You’re buying your first home.

But, in other cases, think very, very carefully about whether it would be worth it to tap your 401(k), no matter how badly you think you need the money. The consequences can be costly.

 

About the Author

Doug Whiteman is the editor-in-chief and analyst for Wise Publishing, Inc., and its flagship personal finance website MoneyWise.com. Previously, he was an analyst and editor covering mortgages, insurance and related topics for Bankrate.com, and was the consumer news reporter for Associated Press Radio. He has been quoted by The Wall Street Journal, USA Today and CNBC.com, and has appeared on ABC Radio, Fox Business and the syndicated TV show “First Business,” among other outlets.

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

Read More

5 Ways to Save for Retirement When You Have Student Loan Debt

Graduation caps have landed, tassels have been switched to the other side, and mom has all the pictures she could ever want. Graduation day is one of the most memorable occasions in a person’s lifetime, but as seventy percent of new grads know, it also starts the countdown to one of life’s most-dreaded evils: paying back student loans. Recent research suggests millennials are now spending one fifth of their annual salaries on student loans alone, and now expect to be making payments well into their forties. At the same time, most millennials know they need to start saving for retirement in their twenties – from their first day at their first job if possible – but when Sallie Mae comes knocking it can seem impossible to both pay back debt and save for retirement on an entry level salary.

 

So how can you manage your student loan debt and also make sure you have enough to retire comfortably?

 

Here are a few tips to get started:

1. Create a budget

Your first step should be to come up with a plan outlining your long-term financial priorities, including everything from paying off student loans and contributing to retirement to having immediate funds for an emergency. You can’t focus on realizing long term goals when you’re trapped lurching from one immediate crisis to the next. Take some time to breathe and focus on the future.

 

2. Manage your payment plans

While getting out of debt can seem like a more urgent priority, make sure you are on track to meet your retirement goals before accelerating your student loan debt payoff date. According to a Morningstar report, every dollar of student loan debt creates a 35 cent decrease in retirement savings. Try to put at least 10-20 percent of your income throughout your working years aside for retirement. This enables you to take advantage of compounding interest and the time value of money, so you’ll actually end up with more money by the time you retire. Automation makes managing this process easier, so you don’t need to think twice about it!

 

3. Take advantage of employer matching policies

Does your employer match contributions or participate in a pre-tax retirement saving plan? You could be earning a higher rate of return by making sure you’re participating in and capitalizing on those policies. New company, new plan? No problem! Look into rolling over your 401(k) to maximize your benefits. Sometimes money does grow on trees.

 

4. Refinance your existing debt

If you have good to excellent credit and a steady cash flow you’re a prime candidate for loan refinancing. Look for a new loan with a lower interest rate, and make sure you use all the money from the new loan to pay off the old one. Some banks and loan providers also offer loyalty and automation discounts, so you should also make sure you’re familiar with all the options available to you before you sign on the dotted line.

 

5. Keep an eye on pesky fees

Three in four Americans have no idea what they’re paying in 401(k) fees, and nearly 40 percent believe they’re not paying any fees at all. When’s the last time you checked what you’re paying in fees? It’s not enough to just save money if you end up losing thousands of dollars in fees you don’t even know you’re paying. Signing up for Blooom’s 401(k) robo-advisor to manage your 401(k) and minimize those pesky fees costs a flat fee of $10 per month, no matter how much you have saved. No small print, no tricks.

 

Still feel like you’re drowning in debt? Check out blooom’s free 401(k) checkup tool to see how you’re doing with your retirement savings plan.

Read More
1 2 3