Investing Through Life’s Stages

Generally speaking, how you allocate your investment portfolio among different types of investments will depend largely on your unique investment goals, time frame and tolerance for risk. Yet most investors will experience some common life events—getting married, buying a first home, starting a family, becoming an empty-nester and retiring—that will require them to reassess their investment situation and make adjustments as needed.

Getting Started

The first part of a lifelong investment strategy is establishing disciplined savings habits. Regardless of whether you are saving for retirement, a new house or just that extravagant dining room set, you will need to develop strict budgetary practices. Regular contributions to savings or investment accounts are often the most productive; and if you can automate them, even better.

Universal Factors That Affect Your Investment Decisions

Once you begin saving on a regular basis, you will soon have to decide how to invest the money you are saving. Regardless of what financial stage of life you are in, you will have to determine what your needs are and how comfortable you are with risk.

• Investment objectives. What do you need the money for? The answer to this question will help determine whether you want to put your savings into investment products that produce income for you, or that concentrate on growing the value of your investment. For instance, a retirement fund does not need to produce income until you retire, so your investing strategy should focus on growth until you are close to retirement. After you retire, you’ll want to draw income from your investment while keeping your principal intact to the extent possible.
• Time and risk tolerance. All investing involves a certain amount of risk. How well you tolerate price fluctuations in your investments will need to be balanced against your required rate of return in determining the amount of risk your investments should carry. An offsetting factor to risk is time. If you plan to hold an investment for a long time, you will probably tolerate more risk because you have the time to make up any losses you may experience early on. For a shorter-term investment, such as saving to buy a house, you may want to take on less risk and have more liquidity in your investments.

Investing—A Lifelong Journey

Although everyone’s attitude toward investing and money is different, most investors share some common situations throughout their lives. The following are some major life events and some investment decisions that you may want to consider:

When you get your first “real” job:

• Start a savings account to build a cash reserve.
• Start a retirement fund and make regular monthly contributions, no matter how small.

 When you get a raise:

•  Increase your contribution to your company-sponsored retirement plan.
• Increase your cash reserves.

 When you get married:

•  Determine your new investment contributions and allocations, taking into account your combined income and expenses.

 When you want to buy your first house:

• Invest some of your non-retirement savings in a short-term investment specifically for funding your down payment, closing and moving costs.

 When you have a baby:

• Increase your cash reserves.
• Increase your life insurance.
• Start a college fund.

 When you change jobs:

• Review your investment strategy and asset allocation to accommodate a new salary and a different benefits package.
• Consider your distribution options for your company’s retirement savings or pension plan. Discuss with an advisor if a roll over into a new plan or IRA is appropriate.

When your children have moved out of the house:

• Boost your retirement savings contributions.

 When you reach age 55:

• Review your retirement fund asset allocation to accommodate the shorter time frame for your investments.
• Continue saving for retirement.

 When you retire:

• Carefully study the options you may have for taking money from your company retirement plan. Discuss your alternatives with your financial advisor.
• Review your combined potential income after retirement. Reallocate your investments to provide the income you need while still providing for some growth in capital to help beat inflation and fund your later years.

 Discipline and a Financial Advisor Can Help

One of the hardest things about investing is disciplining yourself to save an appropriate portion of your income regularly so that you work towards your investment goals. And if you’re not fascinated with investing, it may be hard to force yourself to review your financial situation and investment strategy on a regular basis. Establishing a relationship with a trusted financial advisor can go a long way toward helping you practice smart money management over your entire lifetime.

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This article was prepared by Wealth Management Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth Management Systems Inc., nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content.

There is no assurance that the strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies. Investing involves risks including possible loss of principal. Asset allocation does not ensure a profit or protect against a loss.

The Economics of Borrowing from Your 401(k)

When times are tough, that pool of dollars sitting in your 401(k) plan account may start to look attractive. But before you decide to take a plan loan, be sure you understand the financial impact. It's not as simple as you think.

The basics of borrowing

A 401(k) plan will usually let you borrow as much as 50% of your vested account balance, up to $50,000. (Plans aren't required to let you borrow, and may impose various restrictions, so check with your plan administrator.) You pay the loan back, with interest, from your paycheck. Most plan loans carry a favorable interest rate, usually prime plus one or two percentage points. Generally, you have up to five years to repay your loan, longer if you use the loan to purchase your principal residence. Many plans let you apply for a loan online, making the process quick and easy.

You pay the interest to yourself, but…

When you make payments of principal and interest on the loan, the plan generally deposits those payments back into your individual plan account (in accordance with your latest investment direction). This means that you're not only receiving back your loan principal, but you're also paying the loan interest to yourself instead of to a financial institution. However, the benefits of paying interest to yourself are somewhat illusory. Here's why.

To pay interest on a plan loan, you first need to earn money and pay income tax on those earnings. With what's left over after taxes, you pay the interest on your loan. That interest is treated as taxable earnings in your 401(k) plan account. When you later withdraw those dollars from the plan (at retirement, for example), they're taxed again because plan distributions are treated as taxable income. In effect, you're paying income tax twice on the funds you use to pay interest on the loan. (If you're borrowing from a Roth 401(k) account, the interest won't be taxed when paid out if your distribution is "qualified"--i.e., it's been at least 5 years since you made your first Roth contribution to the plan, and you're 59½ or disabled.)

...consider the opportunity cost

When you take a loan from your 401(k) plan, the funds you borrow are removed from your plan account until you repay the loan. While removed from your account, the funds aren't continuing to grow tax deferred within the plan. So the economics of a plan loan depend in part on how much those borrowed funds would have earned if they were still inside the plan, compared to the amount of interest you're paying yourself. This is known as the opportunity cost of a plan loan, because by borrowing you may miss out on the opportunity for additional tax-deferred investment earnings.

Other factors

There are other factors to think about before borrowing from your 401(k) plan. If you take a loan, will you be able to afford to pay it back and continue to contribute to the plan at the same time? If not, borrowing may be a very bad idea in the long run, especially if you'll wind up losing your employer's matching contribution.

Also, if you leave your job, most plans provide that your loan becomes immediately payable. If you don't have the funds to pay it off, the outstanding balance will be taxed as if you received a distribution from the plan, and if you're not yet 55 years old, a 10% early payment penalty may also apply to the taxable portion of that "deemed distribution."

Still, plan loans may make sense in certain cases (for example, to pay off high-interest credit card debt or to purchase a home). But make sure you compare the cost of borrowing from your plan with other financing options, including loans from banks, credit unions, friends, and family. To do an adequate comparison, you should consider:

• Interest rates applicable to each alternative
• Whether the interest will be tax deductible (for example, interest paid on         home equity loans is usually deductible, but interest on plan loans usually isn't)
• The amount of investment earnings you may miss out on by removing funds from your 401(k) plan

Broadridge Investor Communication Solutions, Inc. does not provide legal, taxation, or investment advice. All the content provided by Broadridge Investor Communication Solutions is protected by copyright. Forefield claims no liability for any modifications to its content and/or information provided by other sources.
Copyright 2011 by Broadridge Investor Communication Solutions Inc.
All Rights Reserved.

A Clean Slate: Review and Rebalance Your Portfolio

There is no better time to take a fresh look at your investment strategies than the beginning of the new year. And while there is no one-size-fits-all approach to investing for the future, reviewing your goals annually can help you stay on track from month to month--and year to year.

Progress Check

The goal of an investment review is to make sure you’re in position to pursue important short- and long-term goals during the coming year. However, it is difficult to get a clear vision of the future without first reviewing whether you have managed to stay on track during the past year.

For example, ask yourself the following questions:

·         Are your savings and investing goals still realistic, or might you now need to accumulate more (or less) money than originally planned?

·         Has the time frame for any of your financial goals--such as your retirement date--changed in the past year?

·         Have you been contributing as much as possible to your tax-deferred retirement accounts? The 2013 and 2014 contribution limits are $17,500 for employer-sponsored retirement accounts, such as 401(k)s and 403(b)s, plus another $5,500 in catch-up contributions if you are over the age of 50. For traditional and Roth IRAs, the limits are $5,500 with another $1,000 in catch-up contributions.

Correcting for Asset Allocation “Drift”

You should also be aware that your asset mix, or asset allocation, is always subject to change.¹ That’s because investment performance could cause the value of some of your assets to rise (or fall) more than others. When an asset allocation shifts due to market performance, it is said to have “drifted” or become unbalanced.

To better appreciate how performance differences can affect a portfolio over time, consider what might have happened to a hypothetical portfolio of 70% U.S. stocks, 10% bonds, 10% foreign stocks and 10% cash equivalents if left untouched for the 20-year period ended December 31, 2012.
In this example, the original 70% allocation to domestic stocks would have grown to 79.4%, while all the other allocations would have shrunk, reducing their intended risk reduction role in the portfolio. As always, past performance is no guarantee of future results.²

Bonds haven’t been as volatile as stocks over long periods of time, but recent history shows that they too can experience performance patterns that may alter asset allocation over time. Consider the divergence of the stock and bond markets in 2008 and how that affected asset allocations. While the S&P 500 lost 37% during this period, long-term U.S. government bonds gained 23%. A portfolio composed of 50% of each at the start of the year would have shifted to an allocation of 34% stocks and 66% bonds at year’s end.³

Seeing the Whole Picture

If you have multiple investment accounts, determining whether to rebalance may involve several steps, beginning with a check of your overall allocation.⁴ This entails figuring how your money is divided among asset classes in each account and then across all accounts, whether in taxable brokerage, mutual fund or tax-deferred accounts.

How often should you rebalance, and what are some general guidelines? The usual answer is anytime your goals change; otherwise, at least once a year. However, to keep close tabs on your investment plan and make sure it doesn’t drift far from your objectives, you may prefer to set a percentage limit of variance, say 5% on either side of your intended target that would trigger a review and possible rebalancing.

How you go about rebalancing will depend on your particular circumstances. If you are making regular contributions to a retirement plan, the easiest way to adjust the makeup of your contributions is to build up underweighted assets. This avoids transaction costs and does not require liquidating and reinvesting assets, which can have tax consequences. In general, it’s a good idea to avoid liquidating existing assets unless the tax consequences work in your favor.

If you must rebalance assets outside of your retirement plan, try to do it in another tax-deferred account such as an IRA, again to avoid immediate tax consequences. And if you’re looking for new money to help rebalance your portfolio, consider using a lump-sum payment such as a bonus or tax refund.

This article is not intended to provide specific investment advice or recommendations for any individual.  Consult your financial advisor, or me, if you have any questions.

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¹Asset allocation does not assure a profit or protect against a loss.

²Source: Wealth Management Systems Inc. The performance shown is for illustrative purposes only and is not indicative of the performance of any specific investment. The hypothetical returns used do not reflect the deduction of fees and charges inherent to investing. Your results will vary. Example is for the 20 years ended December 31, 2012. Domestic stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays Aggregate Bond index. Money markets are represented by the total returns of the Barclays 3-Month Treasury Bills index. Non-U.S. stocks are represented by the total returns of the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE^®) index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.  

Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Foreign investments involve greater risks than U.S. investments, including political and economic risks and the risk of currency fluctuations, and may not be suitable for all investors. Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

³Source: Wealth Management Systems Inc. The performance shown is for illustrative purposes only and is not indicative of the performance of any specific investment. Your results will vary. Stocks are represented by the S&P 500, bonds by long-term U.S. government bonds, which are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value. Investors cannot invest directly in any index. Past performance does not guarantee future results.

⁴Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This article was prepared by Wealth Management Systems Inc., and is not intended to provide specific investment advice or recommendations for any individual. Please consult me if you have any questions.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth Management Systems Inc., nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscribers’ or others’ use of the content. Wealth Management Systems, Inc. and LPL Financial are not affiliated entities.

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