Money Sense on Fortune

jobreportIf you’ve been following me for a while now, then you might already know my take on target-date funds (TDFs). I’m a proponent — especially if you’re aiming to rebalance your portfolio — and need some help along the way. In this week’s column, I take you through what you need to know about TDFs when it comes to retirement.

FORTUNE – More than 51 million Americans have an active 401(k) retirement account, according to the Investment Company Institute.  And if recent statistics from Vanguard hold across the category – more than half have at least some of their money in a target-date fund. That’s a lot of dough and it’s growing fast.  According to BrightScope, target-date fund balances overall hit $500 billion in assets in 2012.  The company is estimating them to reach $2 trillion by 2020.

In many ways, that’s a good thing.  That shift has tempered the bi-polar tendencies of many 401(k) investors.   According to Vanguard, 10 years ago, 13% of their self-directed 401(k) investors held no stocks and 22% held only stocks.   No matter how you slice it, those investors were taking too little or too much risk.  Last year those numbers dropped to 10% and 13%, respectively – a result, at least in part, of making TDFs the default option on many retirement plans.

I’ve been a proponent of TDFs over the years.  I like the way they help humans who say they are going to rebalance their portfolios but never seem to get around to it stay at least in the vicinity of the track. Which is not to say I think they’re perfect.

For the full column, head over to

Mailbag Monday: IRA Income Requirements

retirementI want to open up an IRA, however I do not have any earned income from employment.  I am on disability. Could I qualify for an IRA?

– Dave

Hi Dave.  Generally, no.  There are a few exceptions — alimony and scholarships, for example.  But perhaps the biggest is spousal income.  If you have a spouse who works, you (and your spouse) can both make contributions based on that income.

Not being able to qualify for an IRA, however, doesn’t mean you shouldn’t save.  Invest your money in a discretionary account just as you would an IRA, based on your age and your risk tolerance – and let the time value of money work on your behalf.

You can open a discretionary account at any major brokerage.

Saving for the Future You

Merrill Edge has a new mobile app, Merrill Edge’s Face Retirement. In response to research from Stanford University that found that being able to see yourself older may encourage you to save more and focus on your retirement planning, the app (and coordinating web version) encourages you to “meet the future you” by aging a picture of yourself. See my aged photo below — while I can’t say the results made me want to save more, they did make me want to buy anti-aging cream.


Money Sense on Fortune

Simple InvestingGiven today’s longer lifespans, how much should people be socking away? I asked and answered in this week’s column.

FORTUNE — The most frightening billboard I saw in recent months ran along the Westside Highway in Manhattan.  From the good folks at Prudential, it read:  The First Person To Live To 150 Is Alive Today, with the subhead, Plan For A Longer Retirement.   A few weeks later, our sister publication, Time Magazine, followed in tandem, asking the question on its cover: Can Google Solve Death?

We get it.  From a financial (as well as, of course, a medical) perspective, longevity is very likely the issue of the century.   What can you do about that?  Saving more never hurts, the folks behind America Saves Week, which happens to be now, nudge us to remember on an annual basis.  (If you need help saving more, check out the resources here.)

But, the longer your time horizon, the more you may also want to think about socking away in stocks.  A new paper from Morningstar Head of Retirement Research David Blanchett along with Michael Finke of Texas Tech University and Wade Pfau of The American College looks at the issue of time diversification, defined as “the anomaly where equities become less risky longer investment periods.”  The researchers look at 113 years of data from 20 countries and found that, yes, the longer your time horizon, the more you may want to allocate your investments to equities.

For more, head over to Fortune.



Mailbag Monday: Finding the Value in an Old Stock Certificate

investingIn going through my 88-year-old father’s papers, I came across several capital stock certificates for 100 shares each for “Central Wyoming Oil and Uranium Corporation” dated 1954. I have tried Google searches to find out if they are indeed worth anything but have had no luck. Can you tell me if they are worth anything or what the process would be to find out? I tried the website to no avail. Thank you in advance for any help you can give me.

– Marie

Marie, you’re right — a google search of that company name turns very little up. But there are ways to research the value of paper stock certificates, which were common during your father’s time but are now largely a thing of the past.

First, you want to look at the certificate itself. Does it say cancelled on it, or contain punch holes through the paper? That likely means the certificate has already been cashed in. If you can’t find any signs of cancellation, check to see if your father’s name is on it it — if so, that’s a good start.

Often, though — as seems to be the case in this instance — the company issuing the stock no longer exists. This is common — companies frequently merge with other entities, are purchased, go out of business or end up bankrupt. But the certificate may be printed with the name of the transfer agent, which the SEC says is the best place to start your research. If no agent is listed, or that agency also no longer exists, you can contact the agency that incorporates businesses in the state where the company was located. In your case, that would be Wyoming, and the state has a handy guide to tracing old stock here. They may be able to tell you who the new transfer agent is.

There are also companies who will do this for you, though you should be aware that you’ll likely be charged a fee and you may be chasing something that has little or no value. The Wyoming document referenced above suggests a company called America West Archives, which has a subsidiary, They charge a research fee of $35 to $45 per company and claim a 95% success rate (keep in mind, that means they’ve turned up results — not necessarily of value — 95% of the time). If they come up with no information, you’ll receive a full refund.

Another option is, which researches, buys and sells original stock and bond certificates. They charge a flat research fee of $39.95 per company, and again, if no information is turned up, you won’t be charged.

Finally, if you have a brokerage account, you may be able to get your broker to research this for you.

Keep in mind that even if you find that these certificates hold value, if your father isn’t alive anymore, you’ll need to prove that you’re the legal heir to the security. And if the certificate doesn’t have cash value, it may still have collector value, based on condition, age, design, industry and other factors. One of the services above can help you determine if this might apply in your case.

Wednesday Welcome: Saving for Retirement When You’re Self-Employed

I’m excited to have John Schmoll as today’s guest poster. I met him when I spoke at FINCON — a financial bloggers conference — last year, and have enjoyed reading his blog Frugal Rules since. Today, he’s sharing his tips for saving for retirement when you’re self employed. 


John Profile PictureI have learned a lot about myself in the 18 months or so that I’ve been self-employed. I’ve learned about what truly motivates me, what I do in the face of a challenge, and how easy it can be to let things slide by.

One particular area that I’ve been guilty of letting slide by over the past year is actively saving for retirement. Gone is the 401k and the ability of getting that nice employer match – it all rests on my wife and I now. I’ve learned that even with the ups and downs of self-employment it is possible to have balance and put away money for retirement, though it takes action on your part.

Months Turn in to Years

If you run your own business, you know better than most that time is precious and there never seems to be enough of it in a day. As a result, time passes and things get delayed as you implement an “I’ll take care of it tomorrow” mindset.

The problem with this mindset, as it relates to retirement investing, is those days turn into months and thus you lose that precious time needed to grow your portfolio. This temptation to delay happens to the best of us and the best thing you can do is take the bull by the horns and actively engage with your retirement investing now.

Know Your Options

Many employers offer a solid framework you can use to save for retirement in a 401k. Often, entrepreneurs allow this lack of framework to hold them back from saving for retirement. If you’re self-employed, there are many retirement saving options you can use to create your own framework:

  • SEP IRAs
  • Solo 401ks

Most brokerages offer all of these options, but make sure you find the one that works best for you and has either no fees or low fees so you can have more of your money working for you.

One nice added feature is that you can invest in virtually anything in these retirement accounts vs. restrictions you might face in an employer-sponsored 401k. Thus, you have access to lower-fee index funds as opposed to being forced to choose between several higher-fee funds – which means more of your money can work for you.

Look at Your Priorities

The problem many face in their self-employment journey is fluctuating income. You could have a stellar month followed by one that is barely enough to get by. When dealing with this fluctuating income there are a number of things to look at:

  • What are you spending money on each month that can be cut?
  • What is your rolling average of income over a longer period of time?
  • Are you sitting on too much cash?

Taking a serious look at some of these things can not only reveal what your priorities are, but it can also show you that you do have money you could set aside each month or quarter for retirement. Of course you still want to be able to live life, but you don’t want to do it at the expense of sacrificing your future for the present.

Saving for retirement while running your own business does present some unique challenges, but it’s not impossible. Making it a priority and knowing your options will set you up to succeed in the long run.

About John: John Schmoll is the founder of Frugal Rules, a blog created to help people experience financial freedom through frugality. John is passionate about budgeting, saving and investing and enjoys sharing his knowledge and experience with others so they can avoid making some of the mistakes that he made. A veteran of the financial services industry, John has an MBA in Finance and experience as a licensed stockbroker. You can find John online at and follow him on Twitter at @frugalrules.

Ask Jean: Real Estate Edition

housingTracy: I love your newsletters Jean. Are you into real estate investing or know any one that is?

A: Thanks Tracy. (Note to anyone who isn’t a subscriber, my weekly newsletter is fun and free! You can sign up here.)  As for me, Tracy, I own real estate and have some in my portfolio, but other than telling you how to get the very best rate on a mortgage, it’s not my prime focus. Check out run by Joshua Dorkin. I met him at a recent conference and spent some time afterward chatting with him about his work. If you’re looking to buy properties relatively cheap, spruce them up, and either own or flip them, he’s built a vibrant community with a lot of information – some of which you can access for free.

Buck: I am considering taking money out of my 401(k) and paying off my mortgage. I am 60 and have no other debt. That would mean I would need significantly less income in retirement without a mortgage. Otherwise I have 15 more years on the mortgage. I will work for another 5-7 years so why shouldn’t I do this?

A: Buck, if you know me at all you know I like the idea of entering retirement mortgage-free. But I wouldn’t do this and here’s why: When you prepay a mortgage you have to weigh the return you get from making that prepayment (your mortgage rate minus the tax deduction) against the return you’d otherwise get on your money.  If you’ve got a diversified portfolio in that 401(k) earning even a conservative 6% a year (tax-deferred) and your mortgage is at, say 4%, or even 5% pre-deduction, it just doesn’t make sense. Plus, pulling money you don’t need to pull out of your 401(k) before you absolutely have to robs you of the ability to rack up even more of that tax-deferred growth. What I might consider is, while you’re working for the next 5 to 7 years, figuring out a schedule of pre-payments that would help you time the end of your loan to roughly the time you exit the workforce. Try to figure out a way to come up with that money without robbing your 401(k).

Mailbag Monday: Running the Numbers on Roth IRA Conversions

retirementCan I convert my non-deductible IRA contributions — not the earnings — to a Roth IRA without having to pay any additional taxes since those contributions were made with after-tax money?

– Cindy

That would be nice, but unfortunately that’s not how this works. You can’t convert just the contributions and not the earnings. All IRA money is considered one cup of money: Contributions and earnings are not kept separate, so you can’t convert one without the other.

You can, however, convert only a portion of your account, but you’ll still be taxed on the percentage that is considered earnings. One smart way to handle this is to convert only an amount on which you can afford to pay taxes. You want to be able to foot the tax bill out of money you have set aside that isn’t in retirement accounts, not from the proceeds of the conversion (otherwise, you’ll not only be pulling money away from retirement, but if you’re under age 59 1/2, you may penalized 10% for taking an early distribution). If you work with a tax advisor, he or she may also be able to help you settle on an amount to convert that will still allow you to keep your income within your current tax bracket. An advisor may suggest converting in small amounts over a few years, for example.

The benefit of a Roth IRA conversion comes if you think your tax rate will be higher in retirement than it is now — either because you expect taxes overall to increase or you think your individual tax rate will go up. Money in a Roth IRA grows tax free. It also isn’t subject to required minimum distributions, which means you can leave your money in a Roth indefinitely and use it as a tool to pass that money on to your heirs.

If you want to do the math and figure out how much tax you’ll actually be paying, there are several calculators on the web, including versions from Vanguard, and Charles Schwab.

Mailbag Monday: Saving for Retirement Without an Employer Match

iStock_000024738476SmallMy wife started a new job and will have access to a 401(k), but the company doesn’t offer matching funds. Should she contribute to the 401(k) anyway, or look for another option?

– Bill

Bill, your wife should definitely contribute to something. If you don’t get matching dollars from an employer sponsored 401(k), you have to compare other factors. How much can you afford to contribute a year? In a 401(k), you’re allowed to contribute $17,500 a year, plus another $5,500 if you’re 50 or older. An IRA – whether Roth or Traditional – caps your contributions at $5,500, or $6,500 over age 50. (These numbers are for 2013, but the IRS has announced that in 2014, contribution limits will remain the same).

Then you consider the plan itself. What do you think of the investment options and expenses associated with your 401(k)? IRAs tend to have a wider variety of investments. Do you want the ability to pull out money tax free in retirement? You might consider a Roth.

After you’ve weighed all of these options, you can contribute to a combination of plans. Maybe you start by maxing out a Roth IRA, if you’re eligible — in 2014, that means you have an adjusted gross income of less than $191,000 if you and your wife file jointly. Single filers will need to have an AGI of less than $129,000. (Note, however, that contribution limits start to decline if your AGI is over $181,000 for couples filing jointly and $114,000 for singles). If you’re not eligible for that Roth, you can contribute to a traditional IRA if you like the investment options and fees there better. Once you’ve maxed out your IRA contributions, you can move back to the 401(k) and contribute there, since the limits are higher.

For those lucky readers who do earn 401(k) matching dollars from an employer, you would reverse the system — contribute at least enough to the 401(k) to grab those, since it is literally free money. Then if you’d like you can look at maxing out a Roth or traditional IRA.

Finally, I want to leave you with my general rule of thumb for how you should prioritize your savings. My hierarchy of savings needs looks like this:

  • Emergency fund, with at least three to six months of expenses in cash reserves
  • Matched contributions, like those to a 401(k) as we discussed above
  • Tax-advantaged accounts, such as a Roth or traditional IRA and some 529 accounts (used for college savings)
  • Discretionary accounts, which aren’t tax-advantaged but allow you to invest for the future

Wednesday Welcome: A 403(b) Crash Course

When Dan Otter from reached out about contributing a guest post to the site, we were thrilled — as he mentions below, 403(b) plans aren’t as widely known — or understood — as 401(k) or IRA plans, and even those who have them may lack a clear understanding of how they work. Dan was able to break down some complicated information in a way we can all understand, and bring to light a warning about fees that is important for all investors. Read on for more.

DanOtterImagine you are at a retirement plan party. Not a retirement party — there are no gold watches being given out here. But a party attended by the various retirement plans. There’s the famous 401(k) and it’s quirky but increasingly popular sibling the Roth 401(k). There’s the modest IRA, with some of its cousins: the Roth IRA, the SEP IRA, and the Rollover IRA. Even the granddaddy of them all, Social Security, is in attendance. Then there’s this other plan. It’s kind of off by itself. You can’t quite place its name. Is it called the 401b? Or, wait, isn’t it called a tax sheltered something?

Close. The plan is actually called the 403(b). But it is commonly, and erroneously, referred to as a TSA or Tax Sheltered Annuity. Created in 1958, it predates the more famous 401(k) by twenty years, yet it remains a bit of a mystery. Why? Probably because the 403(b) covers a smaller subset of employees working in generally less glamorous positions: K-12 employees, college and university employees, pubic health care workers, and not-for-profit workers. Plus, public school teachers and administrators typically have pension plans, so for them the 403(b) is a supplemental plan.

Here’s what you need to know to make small talk with and about the 403(b):

The 403(b) works much like a 401(k):

  • Contributions are pre-tax
  • For 2013, participants may contribute up to $17,500 in regular contributions
  • Those who are age 50 at anytime during 2013 may contribute an additional $5,500
  • Able to invest directly into mutual funds

403(b) differences:

  • Participants cannot invest directly in individual stocks
  • Most plans offer annuity products (fixed and variable)
  • Not all plans offer direct investment in mutual fund products (instead they must be purchased as part of a variable annuity)
  • Most plans have multiple vendors which can lead to higher costs (vendors often employ a commission-based sales force in an effort to stand out from competition — can you imagine sales people from different financial companies pitching products in the lunchroom of Apple or GE?
  • Many of the variable products sold have onerous surrender charges, some lasting as long as 15 years

Why so similar yet so different? Two reasons:

  1. When the 403(b) began in 1958, participants could only invest in annuity products. This is why the plan is often referred to as a TSA, or Tax Sheltered Annuity. This is a misnomer, of course, and gives the false impression that participants can only invest in annuity products. The mutual fund option was added way back in 1974.
  2. Public sector 403(b) plans (like those for public school teachers) fall outside the rules of ERISA (Employee Retirement Income Security Act), meaning there is much less employer oversight. Furthermore, unlike the ERISA-based 401(k), there are no fee disclosure rules for public 403(b) plans. This can leave participants in the dark about fees.

Retirement plan researcher The Spectrem Group reports that of the approximately $882 billion in 403(b) plans, the majority of the money sits in annuity products (approximately 46% in fixed annuities; 31% in variable annuities; and just 23% in mutual funds). Why should this matter? Most fixed and variable annuities are sold through commission-based sales agents. While variable annuities do offer access to mutual funds, they average about 2.25% in fees. This contrasts with index mutual funds, which can cost as little as 0.10%. This stark fee disparity can have a huge impact on return. Consider the fate of three hypothetical investors. Each contributes $250 a month over 35 years. Each realizes an 8% average annual return. However, each contributes to a different product. The result?

  1. The hypothetical Variable Annuity investor pays 2.25% in fees and accumulates $336,320 in savings.
  2. The hypothetical Mutual Fund investor pays 1.40% in fees and accumulates $409,585 in savings.
  3. The hypothetical Index Mutual Fund investor pays 0.18% in fees and accumulates $548,750 in savings.

It doesn’t take a math teacher to realize it is better to accumulate more savings.

If you find yourself stuck in a bad 403(b) plan, lobby your employer. Show them this and other fee impact information. Point out that employers are also participants. Point out that it is in their interest to have the best possible plan. Rally co-workers to your side. It may take time, but change can happen. Now, if you find yourself stuck at a party with retirement plans, you need to get a new group of friends.

About Dan: Dan Otter is a writer and teacher who operates the 403(b) education and advocacy website In 2012 Money Magazine named him a Money Hero for his efforts to improve the financial well being of others.

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