403(b) Plans: The Flaws Teachers Should Know

Teachers 403b

It’s no secret that many teachers are underpaid, in spite of the vitally important work they do. I know first hand: my mother was a public school teacher and a single mom. While some teachers may have other assets and savings they can draw on, a great number of teachers will rely on the retirement plans commonly used by teachers, known as 403(b) plans, as a source of income once they retire.

This Is Money Teachers Will Need

In a recent series, The New York Times detailed many issues with the 403(b) plans so critical to a comfortable retirement for teachers. Their first piece, “Think Your Retirement Plan Is Bad? Talk to a Teacher” makes many of the same points we touched on previously in Teachers: Who is Managing Your 403(b)?

As the Times correctly points out: “Teachers in about a dozen states may not qualify for Social Security. And while public school teachers often are offered decent pensions, many of them do not work for the decades required to qualify for a full payout. And pension formulas are becoming less generous for newer recruits.”

Unlike 401(k) plans that are overseen and regulated by federal law based on the Employee Retirement Income Security Act (ERISA) of 1974, many 403(b) plans fall outside of ERISA oversight and protection.

Who Can Teachers Trust?

Instead of having access to a financial advisor who is a fiduciary, someone who exclusively – and always -must have the client’s best interests in mind, teachers are often presented with salespeople from insurance brokers who earn commissions for recommending certain products. As one teacher recounted in part two of the NYT series: “From the teacher’s standpoint, they really miss out getting quality advice,” said Mr. Bergeron, 27, who sold the plans for Axa Advisors’ retirement benefits group. “People who are in the schools pitching them and positioning themselves as retirement specialists are really there just to sell them one product.” (For more, see: An Investor’s Guide to the New Fiduciary Rule.)

Fee-only fiduciary advisors are advisors who only recommend investments that are the best for their clients, not ones that reward themselves. Fiduciary financial advisors aren’t trying to hit a quota or working for sales commissions on the products they recommend to you. Fiduciaries are committed to providing the best advice to investors – like teachers – looking to build a strong foundation. These advisors grow with you, not at your expense by profiting off the products they recommend to you.

Many of the millions of employees in this country have access to 401(k) plans through their employer that are approved and monitored by the employer in some way, ensuring at least some oversight of the plan itself. Unfortunately, public school teachers as well as some teachers working for nonprofits and religious institutions are easy prey for companies trying to sell high-cost products because their retirement plans often don’t have the same oversight. Given the loosely regulated industry, the insurance salespeople or “advisors” pitching to teachers can recommend investment products that best for their own pockets, not the plan owners’.

The Costs and Confusion

While 401(k) plans are not perfect either, as we have pointed out before, the majority of them offer more traditional investment options, such as mutual funds or stocks and bonds, making it easier to understand how your money is invested. In contrast, 403(b) plans are often held inside annuities, which can be confusing even for the most intelligent individual investors. Discussing Axa Advisors, a broker that often tries to sell annuities, The New York Times writes: “The most popular version of the Equi-Vest annuity has a total annual cost that can range from 1.81 to 2.63%, according to an analysis from Morningstar. In contrast, large 401(k) plans usually charge an annual fee of less than half a percent of assets, according to a May report by BrightScope using 2013 data.”

Even if teacher realizes that they are paying excessive costs for their retirement investments, they are often locked into these annuities and required to pay a penalty if they want to make changes. If a teacher wants to transfer their assets out of the Axa Equi-Vest annuity into their own IRA, for example, they would have to pay a 5% penalty on the portion of that withdrawal that had been contributed within the last six years.

One of — if not the biggest — advantage of many retirement plans is tax deferral, which allows these accounts to grow and compound over a long time horizon. That ability to grown and earn compound interest is obviously compromised when you are paying excessive fees year over year.

Teachers are one of our most important assets and deserve to be rewarded for their years of dedication to our country’s children, and therefore our country’s future. All too frequently, however, teachers not given access to solid, low-cost and efficient long-term investment options in their retirement plans. Nor are they given access to a financial advisor they can turn to with questions, knowing that they can trust the answers they are given.

We encourage teachers to spend some time finding out more about their 403(b) retirement fund managers. It’s vital to find out whether they are a fiduciary, how they make money (fee-based or fee-only), and how personalized their investment strategy is.  (For more, see: 6 Questions to Ask a Financial Advisor.)

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Options for Your 401(k) When You Change Jobs

401k

Leaving one job for another to pursue your goals, follow your passion, or just make some interim changes? As you leave – taking with you new experiences, knowledge, and relationships – don’t forget one more important thing: your company 401(k) account.

In the midst of job – or life – changes, it’s all too easy to get distracted and forget to pay attention to a 401(k) from a previous employer. It could be because the plan stops sending statements, or it could just be that you’re focusing on what’s going on in your life right now. There may even be a few you’ve lost track as the years pass.

Consider too, that even if you have kept track of your old 401(k) accounts and know exactly what’s in each of them, you many not realize that you have other options besides just leaving the account and investments as is. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

Know What You Have

Do you know what’s in each of your 401(k)s? A recent study in the Journal of Finance has found that conflicts of interest in 401(k) plans can lead to serious opportunity cost for individual investors. Your managers may be prioritizing the profits of their institution by investing your money in their own funds, even if that is not the best investment option for you. As John Oliver recently demonstrated, these conflicts of interest can cost millions over the course of a single retirement plan’s life. Awareness is key. Make sure you look at old 401(k) statements from past employers to determine if they are being managed properly according to your needs and situation.

What Are Your Options?

If you do determine that your 401(k) plan from a previous employer is not being managed properly, or as beneficially to you as it could be, the good news is that you have options. You can roll the funds into a new employer’s 401(k) plan or into an IRA account that you already hold. Rolling over a 401(k) into an IRA has potential benefits that could include:

  • Lower management and expense fees
  • A wider range of investment options
  • Consolidating multiple accounts into one retirement account
  • The option to work with a fiduciary financial advisor with whom you are comfortable and whose recommendations are in your your best interest at all times

Can’t Find Your 401(k) Statement?

If you have lost track of an old 401(k) account, don’t worry, there are ways to search for it. Here are a few suggestions:

  • Contact your old employer’s HR department: if they can’t help you, they may be able to direct you to someone who can.
  • Search The National Registry of Unclaimed Retirement Benefits to see if your account is listed.
  • Ask your financial advisor to help you track it down.

A well-managed 401(k) plan can be the gift that keeps on giving. But once you’ve left a company, take a good look at your plan and decide if it makes sense for you to leave the funds there, move them into a current plan, or move them into an IRA where you, and a Fee-Only fiduciary financial planner, can take advantage of a broader range of investment choices.

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Don’t Let Emotions Get in the Way of Your Investing Goals

discussing personal finance 1280×720 (1)

We all love to see quick results. Whether it’s career progress, a workout plan, or an investment portfolio, it’s exciting to see fast results. And it can be frustrating when progress doesn’t come quickly: when you’re not learning those guitar chords fast enough or your portfolio isn’t shooting ahead of the Dow.

Achieving real progress and real gains usually takes time in spite of tantalizing offers to get rock-solid abs in seven days, learn to flip houses in two weeks, or a discover sure-fire stock that’s the next Apple.

Wanting to See Quick Results

It’s human nature to crave quick results but when it comes to investing, your emotions – or a desire for quick gratification – can get in your way of building a solid financial plan. (For more about Behavioral Finance, see: 8 Common Biases That Impact Investment Decisions.)

In a recent article for The Motley Fool, columnist Morgan Housel made some excellent points about how we limit our chances of seeing real progress by letting our emotions get the best of us.

Frustration

“Most investing mistakes and frustrations come from trying to run a marathon in an hour,” Housel writes about the difference between short and long-term investing. “Companies earn profits, and over a long period of time those profits accrue to shareholders. If you leave it at that – and you should – investing is such a basic game that doesn’t require much action.” (For more, see Why Investors Can Be Their Own Worst Enemy.)

If we stuck to that game plan and utilized a long investment horizon to really take advantage of compound interest, the progress you would see would be impossible to ignore. Compound interest is a great way to look back and see the progress of your investments over a long time horizon. We summarize it like this:

Compound interest is often compared to a snowball. If a two-inch snowball starts rolling, it picks up more snow, enough to cover its tiny circumference. As it keeps rolling, its surface grows, so it picks up more snow with each revolution. If you invest $1,000 in a fund that pays 8% annual interest compounded yearly, in 10 years you’ll have $2,158.93, in 20 years that will be $4,660.96, in 30 years it will be $10,062.66, and in 40 years it will be $21,724.52. All it takes is patience to turn $1,000 – the price of one ski weekend – into $21,724.52. 

A main problem many investors have is they fail to allow for this long time-horizon to play out. Housel’s next point builds on this when he says…

Progress Happens Too Slowly to Notice

“Progress happens too slowly to notice; setbacks happen too quickly to ignore.” This ties into the idea of prospect theory and Housel summarizes this concept well: “Pain hurts more than the same level of gain feels good.” This is similar to the concept of loss aversion where investors make emotional decisions that unfortunately lead to doing the exact opposite that one should do. Take 2008, for example, when the markets lost almost 40% in a short period of time. Those who made emotional decisions and exited the markets quickly not only locked in a significant loss but likely missed out on one of the biggest bull markets in history as the market tripled over the next six years.

So much of this is human psychology. Having a dollar that stays a dollar doesn’t feel like you’re losing money. And losing a dollar often hurts more than gaining a dollar feels good. It’s like sports — losing a close game generally makes people feel lower than winning a close game makes you feel good. That’s what makes our job so interesting — working with people to park their psychology at the door, not just today, but forever. Not easy, but when done correctly you can really start seeing that elusive “progress” word come into play. (For more, see: Why Playing It Safe Could Hurt Your Retirement.)

Avoiding Catastrophic Mistakes

“Most investing success boils down to avoiding catastrophic mistakes.” You don’t need to be the world’s greatest stock picker to benefit from investing. Far from it actually. As Housel puts it: “Few good decisions are needed to do well over time.” Instead, what we need to do is avoid making the catastrophic mistakes that typically come from making an emotional decision and not planning properly. Market corrections happen. They will happen again. Without proper planning, it is easy to fall victim to the pitfalls of prospect theory and end up making an emotional, short-term decision that can derail any progress that you have made.

To summarize, all of this boils down to a simple line of thinking. When it comes to investing, leave your emotions at the door. If you are uncomfortable with your investments, that is something you should take immediate action in. You may be invested in a portfolio that is too risky based on your goals, risk tolerance and needs. You may just not fully understand how you are invested which makes you nervous. Worst of all, you may have no plan what so ever. Start by reevaluating your goals, short, mid and long term. Create a plan and road map to accomplish those goals, and then stick to it. (For more, see: Which Investor Personality Best Describes You?)

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Got a Raise? Here’s How to Avoid Lifestyle Creep

lifestyle creep

We work with a lot of young professionals and because of that, we get the pleasure of seeing many of our clients progress up the ladder in their career. With this often comes more responsibility but also more money. A raise is something you should be proud of as it represents the payoff from the sacrifices you have made and the hard work you put in. This calls for a celebration, as it should!

At the same time, it is crucial to make sure you don’t fall victim to the dreaded lifestyle creep, famously coined by financial planner Michael Kitces. The basic concept of lifestyle creep is that as your discretionary income goes up (you get a raise), your standard of living goes up with it. For example, before you stuck to a dining budget where you only ate out on weekends, but now you are doing so two times a week.

We recently wrote about how a former NBA star filed for bankruptcy after earning more than $100 million on the court. Read below on some tips to help you avoid some of these mistakes.

Why Lifestyle Creep Is a Problem

Living above your means is a recipe for financial trouble. We constantly preach that it’s not about how much you make, but how much you save. By earning more money, you have the opportunity to save more. Take advantage of these opportunities by really thinking about what is a necessity vs. what is a luxury.

Read below on some tips to help you avoid some of these mistakes.

  • Write down and revisit your goals
  • Maybe your goals have changed, maybe they haven’t. By revisiting them, remind yourself what is important to you and you can then make sure that is what you are spending your money on.
  • One additional suggestion is to not make any purchases with the money you are receiving from your raise for the first month after receiving it. This gives you time to digest the news and will give you the ability to make more rational purchase decisions. If you still want to buy it after a month, then go for it.
  • Create and update your budget
  • If you don’t already have a budget, now is the perfect time to create one. If your boss gives you a $10,000 raise, that comes out to about $830 per month before taxes. With your goals in mind from tip No. 1, lay out all of your expenses and determine where the money should go each month. By having a set schedule, you reduce the urge to make impulse purchases because you see a large number in your checking account. (For related reading, see: The Conflicts of Interest Around 401(k)s.)
  • Set up automatic saving account deductions
  • Now that you have a defined list of goals and a budget to help you achieve them, it is time to put the plan into action. There are numerous banks that we recommend to our clients that give you the ability to create multiple savings accounts to bucket your savings based on your goals. Create accounts for each of your goals and set up automatic transfers to these accounts from each paycheck you receive.
  • In addition to your emergency fund account and other savings goals, make sure to give yourself a fun account that can be used to spend on celebrations such as getting a raise!
  • Increase or max out your retirement contribution
  • As part of your budget, look at how much you are contributing to your retirement account each month. If you have the opportunity to increase your contribution, that is a great option to consider. If you have an employer-sponsored retirement plan such as a 401(k), not only are you saving more for retirement, but you are also lowering your taxable income that just increased because of your raise. You may even qualify for an employer match, which makes these savings even greater!

After working so hard to get to where you are now, you should give yourself a chance to enjoy that success and celebrate. The important part is keeping an eye on the big picture and not letting your short-term emotions get in the way of achieving your true financial goals. By creating a plan that is realistic and one that you feel you can stick to, you dramatically increase your chances of success. (For related reading, see: How to Cut Back on Spending Like a Billionaire.)
This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

How to Cut Back on Spending Like a Billionaire

How to Cut Spending

Even the richest few people in the world maintain some financially cautious habits. Warren Buffett (who, by our math, is worth more than all of the NFL’s teams combined) famously still lives in the same Omaha house he bought for $31,500 in 1958. Many of the world’s wealthiest don’t indulge in extravagance, even with billions at their disposal (and when they do, it’s not always a happy ending.)

While this ranges in degrees of neuroticism from simply wanting to give most of the fortune to charity to an Indian tech mogul monitoring employees to track toilet paper usage and make sure they shut off the office lights, wealth is not accumulated by throwing money away. (For related reading, see: The Importance of Personal Finance Knowledge.)

Frugalities of the Rich

While of course most people don’t have $51 billion like Mark Zuckerberg, there are undoubtedly some lessons to extract from the financial behavior of the wealthy. All of them have certain habits where they save money. Dish Network chairman Charlie Ergen packs a brown-bag lunch from home every day and Zuckerberg reportedly drives a Volkswagen hatchback (although this could just be a Peter Gregory-style “Silicon Valley” mannerism).

At the same time, neither of these routines are specific requisites for financial success. But they do indicate the importance of planning expenditures and saving where possible. That’s where a financial advisor can be of help. We don’t believe in telling you to lose your favorite habits. If you enjoy a latte from Starbucks every morning, then by all means you should keep getting that latte. But good financial planning includes understanding trade-offs between keeping things you enjoy and cutting down on things you can live without. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

Planning cash flows goes a long way toward reaching this goal. It is impossible to know how much you need to trim (or have room to grow) without first taking stock of what’s coming in and what’s going out. If your different bank and credit card accounts are the canvas, the actual cash flows are the paint that makes up the picture of overall financial health.

A good financial planner shouldn’t act like a strict parent that never lets their kid eat dessert or play outside. Their goal should be to work with you to understand your financial situation, both in broad strokes and the details of monthly spending. That way, they can help you make decisions about where best to deploy your spending money. This isn’t always easy—sometimes trade-offs have to be made. But when even billionaires are bringing lunch from home, we all owe it to ourselves to thoroughly examine our spending habits. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

The Importance of Personal Finance Knowledge

Financial Knowlege

For years, the Financial Industry Regulatory Authority (FINRA) has tracked American personal finance knowledge through a survey about saving habits and basic financial principles. FINRA recently released the results of its 2015 survey, which includes the fact that only 37% of those who took the survey could answer four of the five questions on a basic financial literacy quiz. Four out of five is FINRA’s baseline for high financial literacy. Back in 2009, 42% of the respondents were considered to meet this level of financial literacy. (If you’re curious, you can take the quiz here.)

We’ve previously written about biases in financial habits and the desolate state of personal finance education in high school and college, and this study re-confirms our suspicions. Way less than half of the American population has a sufficient understanding of the basic ideas necessary for successful saving and financial planning! That is nearing crisis levels.

Make no mistake–an ignorance of personal finance, while probably unintentional, has serious consequences. Just over half of respondents said they are worried about running out of money in retirement, only one in five are willing to take risks when investing, and 57% say they set long-term financial goals. But, when taken together with those statistics, the most concerning part is that 76% have a high self-assessment of their financial literacy.

As finance writer Jeff Sommer points out in his recent column, this means that Americans don’t know very much about personal finance and saving, but think they do. The positive self-perception is also the only figure to have significantly increased since 2009.

Improving financial conditions can create a false sense of security for many savers who think their current status makes them recession-proof. This is a huge reason why I decided to start my own firm. I recognized the alarming lack of awareness about saving, spending and the markets, and noted many common bad habits that can lead to trouble in an economic downturn. (For related reading, see: Behavioral Finance: How Bias Can Hurt Investing.)

The lack of education is compounded by the unavailability of many big-name institutions who offer financial advice and wealth management services to many. Traditional wealth management practices often have high account minimums that make their financial advice unreachable for most people. Moreover, even if you can open an account with a wealth manager, they may not be required by law to act in only your best interest, which can lead to inefficient investments for you that pay them commissions.

The reality is that many people are scared by the thought of investing. Since many Americans are mostly in the dark, they may not know where to go or how to start. That’s why it’s important to use online resources and educate yourself on all aspects of personal finance. (For related reading, see: 6 Questions to Ask Your Financial Advisor.)

This article was originally published on Investopedia.com

***

The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Summer Interns: Time to Focus On Long-Term Gains

Summer Intern

The light at the end of the tunnel is nearing for America’s summer interns. Full-time offers will be tendered, sighs of relief exhaled and paychecks cashed. Interns who receive offers will be bright-eyed with lofty visions of moonshot careers at their new place of employment. As these interns begin to accept the end of college and pivot towards the start of the rest of their lives, we strongly encourage them to start considering a long-term financial plan.

Sure, it is tempting to put most of your extra cash earned this summer in your checking account for drinks, trips to visit friends or to buy yourself something nice. The decidedly less glamorous option is to put a chunk of that cash into a Roth or Traditional individual retirement account (IRA). But, almost certainly, that is the option for which your future self would pat you on the back. (For related reading, see: The Conflicts of Interest Around 401(k) Plans.)

Early Planning Is a Tough Sell

We know this is a tough sell for most college students. Salaries and long-term financial security aren’t big concerns for today’s generation as it has been before. Even on Wall Street, where compensation is high, interns seek other qualities in a company. For example, interns at investment bank Jefferies said they valued relatable leadership, a family atmosphere and inclusion. So we get that saving for retirement may not be where your mind is at—especially if you received an offer and want to celebrate. (Which, by all means, you should.)

We aren’t here to suggest you start living a life of austerity now that college is almost over. But you must consider that right now is the best time in your life to put a bit of money away for retirement. The power of compound interest means that the earlier you start saving, the greater your returns will be. It doesn’t matter how small the amount—money invested in the stock market can grow exponentially over time because it compounds year over year.

In our experience, many college-aged people don’t know where to start, even if they are interested in opening an IRA. The choice between, for example, a Roth or Traditional IRA can be opaque and intimidating. And then, once an account has been opened, where do you actually invest the money? How can it be monitored? (For related reading, see: 6 Questions to Ask a Financial Advisor.)

To pile on top of that, as you graduate and find a new pad, start work and are presented with options for employer-sponsored retirement plans, you might be forced to consider trade-offs. Should you work on paying off your student loans or invest that money into growing your retirement account? Or, you might ask yourself, why invest at all when I can just keep my earnings in cash?

All of this “adulting” can be overwhelming, and unfortunately often leads to poor financial decisions. (For some guidance, we highly recommend John Oliver’s take on saving and financial advice.) But one thing you can be confident of is that starting to save now has almost no downside. If you aren’t totally sure of your ability to open an account and invest on your own, follow John Oliver’s advice and contact a low-cost, fiduciary financial advisor who can work with you to grow your investment.

We recognize that putting a chunk of your income towards retirement at such a young age isn’t sexy. But it has enormous benefit and will set you on a path of financial wellness. It’s the right thing to do. (For related reading, see: Why Playing It Safe Could Hurt Your Retirement)

 

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Why Playing It Safe Could Hurt Your Retirement

playing it safe

A new survey from Bankrate indicates that many Americans hold quite a low view of the stock market. In answering what was the best way to invest money unneeded for at least 10 years, real estate (25%) and cash (23%) took the top spots, followed by the stock market and gold (16% each) in a tie for third. This comes on the heels of Bank of America finding that cash levels in portfolios are at their highest since November 2001.

In a time of volatility in the market, many Americans, particularly those who are young and/or without a huge amount of money to invest, are hesitant. They prefer the certainty of a house or even cash under the mattress to the unpredictability and seeming inaccessibility of the public markets. On the surface, this seems like the safer option, and we understand why many people feel this way. Loss aversion is countered by having a tangible stack of cash that will always be there.

Unfortunately, it’s wrong and can be dangerous in the long term.

What many cash-focused savers don’t realize is that because of inflation, the value of cash fluctuates over time—just like a stock. As Alex Gurevich, CIO of HonTE Investments, points out, that means that cash is subject to bubbles similar to tech in 2000 or the mortgage crisis. Moreover, saving only cash eliminates access to the market’s long-term returns; $10,000 invested in the S&P 500 in 1980 would yield $166,600 at year-end 2015, adjusted for inflation. Even with the ups and downs, in the long run the stock market remains the best place to invest for retirement. (For related reading, see: Why Investors Can Be Their Own Worst Enemy)

Saving cash is still important for short-term emergency funds. But if simply stockpiling cash is your long-term plan for retirement, you probably have no shot unless you’re very wealthy.

Many people may avoid the stock market out of a fear of the bad days when the market tumbles. Some people panic when the market dips (for example, in the event of a major world event like Brexit) and sell most or even all of their stock. Besides the fallacy of panic-selling at play here (you’d be selling low rather than buying low and selling high), by withdrawing from the stock market you miss out on the good days as the price of shielding yourself from the bad. Reporter Spencer Jakab points out in the Wall Street Journal that a couple good days a year produce the entire year’s returns, on average. (For related reading, see: Behavioral Finance: 8 Common Investor Biases That Impact Investment Decisions)

“Investors sit out on some really good days by trying to avoid bad ones,” Jakab writes. “Nearly all of those happen around scary episodes such as October 1929, October 1987 and in 2008 following the collapse of Lehman Brothers. Pretend, for example, that you took your money out of the market following the choppiest episodes over the last 20 years and wound up missing the epic rebounds that made up the 40 best days. You actually would lose money.”

The stock market can be threatening and, sometimes, punishing. But the solution isn’t total withdrawal; on the contrary, find an advisor you trust and create a plan that makes you more comfortable about investing. As Ben Carlson writes, “The alternative for stepping out into the unknown is the known of never building your wealth.”

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Financial Failings of NBA Legend Antoine Walker

Former NBA All-Star forward Antoine Walker possessed a varied skill-set that enabled him to play both inside and outside. A big man who also shot the three, Walker was notorious for his hilariously erratic shot selection and, later in his career, an aversion to running that led to lazy play.

The quality of financial advice Walker received throughout his career was evidently very close to the quality of his shot attempts, as he filed for bankruptcy in 2010, two years after he retired from the game. In a recent column in the Players’ Tribune, Walker writes a letter to his younger self detailing what went wrong and what he could have done better.

Surprisingly, there are a few money management lessons that anyone—NBA star or not—can apply. (For related reading, see: Do You Need to Change Your Financial Advisor?)

Actively Screen Advisors
Screen advisors before you hire them, and after you do, make sure you know where your money is going. Walker frames his letter with the importance and difficulty of saying “no,” whether to friends asking for money or, most crucially, a friend of a friend who asked for money to start a real estate venture.

The advisor, who Walker met at a dinner with NBA colleagues, started Walker Ventures with bank loans guaranteed by Walker’s personal portfolio, an incredibly risky move. Walker let the advisor have complete control of managing the properties since he was playing basketball nine months of the year. Ultimately, Walker Ventures was forced to close after the housing crash with $20 million of debt. The advisor went to jail, and Walker was forced to file for bankruptcy.

There were a couple ways this could have been prevented. First, Walker didn’t do much due diligence before making the deal. He could have run it by another advisor, who probably would have told him it was structured as an extremely risky venture. Second, because of his schedule, Walker did not adequately check up on the investments.

Many people, particularly young investors, share Walker’s desire to make some money outside of their main job, especially to save for retirement. Finding a financial advisor who is trustworthy, and right for your unique needs, is very important. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

The Upside of Having Someone Say No
Walker’s trouble with the real estate venture was compounded by his reckless spending. While he confesses that he spent lavishly on himself, including a $350,000 Maybach car, it appears that what took the biggest bite out of Walker’s wallet was his spending on family and friends. “I gave them whatever they wanted and spoiled them. You can’t do that,” Walker said in a CNN/Money interview. “It ended up being an open ATM throughout my career.”

While most of us don’t take our friends to a Gucci store and let them buy whatever they want—as Walker has said he did—spending without at least an idea of what is manageable is a problem many people encounter. For young professionals in particular, overspending can seriously hinder retirement saving.

A good financial advisor will do more than simply invest your money. They will incorporate periodic spending goals, major expenditures like vacations, and life events like a new home or wedding into your comprehensive financial plan. Sometimes, this could mean advising against a big purchase for the sake of a long-term goal.

Obviously, we don’t all have $110 million to blow like Antoine Walker. But lackadaisical spending control and being too busy to check on our investments or advisors are traps anyone could fall into. Ensuring that your money is in the right hands is a universally important objective. (For related reading, see: Which Investor Personality Best Describes You?)

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

4 Healthy Financial Habits to Develop Now

4 Healthy Financial Habits

Our habits play a crucial role in our ability to meet our goals and become who we want to be. Bad habits — whether it’s biting our nails, overeating, smoking or something else — create roadblocks on the path to becoming our best selves.

And it’s no different when it comes to our finances. Bad money habits can have damaging, long-term consequences for our financial security. But developing healthy financial habits can do wonders for helping us achieve our long-term goals like saving enough for retirement or paying for a child’s college education.

The earlier you develop healthy financial habits, the better your chances of successfully meeting your goals. Here are four financial habits you should start working on today:

1. Separate spending on ‘needs’ and ‘wants’

This is the first step in developing healthy habits. You need to understand where your money is going and then figure out where you need to allocate it to make the best use of it.

Sticking to a spending plan and avoiding impulse buying is crucial for building a healthy savings plan. Create a simple budget that shows you how much money you are bringing in and helps you understand your monthly spending. Add up all of your expenses that you would consider a need — this includes your monthly savings amount, rent, car payment, cable and internet bill, food, etc. (By including your savings amount in your need category, you create an automatic savings plan for yourself — more on that below.) Subtract that total from your income, and what is left over is your free cash flow.

The remaining money is the amount you have at your disposal for your “want” expenses. At the very least, make sure you are not spending more than that. At the end of the month, if you still have money left over, stick it in your savings or investment account. This removes the temptation to spend it and lets you start the next month fresh again. If you consistently have money left over, increase your savings amount.

2. Set up automatic savings

Creating a consistent savings mechanism will ensure you are saving a minimum amount each month or paycheck, making progress toward your longer-term goals. Whether you are saving into an investment account or your bank savings account, set up an automatic contribution from each of your paychecks so that the money is “out of sight, out of mind” and you won’t be tempted to spend it.

Why is this so important? Without having an automatic savings plan, you could be saving $500 one month and then $0 the next. Although this is better than not saving at all, it is not a good practice to adopt. And remember, you can start small. Even if it’s $100 a month, saving consistently will pay off immensely down the road. 

3. Participate in your employer-sponsored retirement plan

Saving for retirement is one of the most important financial habits you can build for yourself. The power of tax-deferred investment growth over your entire career can really add up. Another benefit with 401(k)s and other retirement plans is that the money you contribute is pretax, which effectively lowers your taxable income, reducing your tax liability today.

If your employer offers a matching contribution to your 401(k) based on your contribution level, it’s especially important to contribute enough to take advantage of this benefit. The employer is basically offering you free money that you would be turning down. For instance, an employer may offer a retirement savings plan to which you can contribute up to 5% of your salary and it will match up to 3% of that. If you don’t contribute at least 3%, you are in effect saying no to a 3% raise.

If your employer does not offer a retirement savings plan, look into opening a self-directed retirement account such as an IRA so you can benefit from tax-advantaged retirement saving.

4. Start investing now

Time is the greatest advantage investors have when it comes to saving and investing early and consistently. With the power of compound interest, even small amounts can really add up over the years. With compound interest, your interest amount is added to the principal, increasing the amount of interest you earn, even if the rate of return does not change. To take advantage of compound interest, the earlier you start saving, the better.

If you can boost your savings rate, you’ll be even better off in the event of a long period of low investment returns, according to Michael Batnick, director of research for investment firm Ritholtz Wealth Management. “Saving more money can offset lower returns because you’re compounding on top of compounding,” Batnick writes. He points to a comparison of two portfolios over a 20-year period, both starting with contributions of $5,000 a year. The portfolio earning an average of 4% annually, with contributions increased by 10% each year, will have $100,000 more in it compared with a portfolio earning 6% a year, with contributions raised by only 5% ($393,153 vs. $293,534).

Prioritize your goals

If you already have these good financial habits, that’s great. If not, the best time to start developing them is now. Everyone will have their own goals and needs, and, unfortunately, not all of those can be satisfied at the same time. You’ll have to prioritize your goals, but once you do, you can start building healthy habits that will allow you to reach them. Separating your needs from your wants, saving early and often, taking advantage of tax-favored retirement savings plans, and investing now can help you build a solid financial foundation and get you where you want to go.

This article was originally published on NerdWallet.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.