Keep Calm and Invest On

No doubt, there has been a great deal of drama on Wall Street lately. However, long-term investors need to stay focused on their objectives and try to avoid being influenced by their emotions. That being said, money you need soon should not be invested in the stock market. It’s too risky to expose that money to market fluctuations. If you do, the money may not be there when you need it. Instead, look for safer alternatives to park money for short-term goals and keep your long-term money invested appropriately for your risk tolerance, time-horizon and goals.

Retirees, on the other hand, may have a more challenging issue to deal with when they continue to withdraw money from their portfolio during downturns. If staying the course isn’t an option, consider reducing your withdrawals. This forbes article, 5 tips To Survive Stock Market Volatility in Retirement, gives great advice to retirees for dealing with this potential problem.

To provide additional perspective on the recent stock market volatility, here are some thoughts and smart advice from Bob Veres, owner of Inside Information and former Editor of Financial Planning Magazine:

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent drawdown is entirely normal. One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board. At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week. One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.

Will they? The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future. Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean. The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn. The best, sanest investors will once again watch the markets for entertainment purposes—or just change the channel.


4 Options for Your 401(k) When You Leave Your Job

The days of staying at the same job your entire working life are pretty much over. Also gone are the days when your company would finance your retirement with a comfortable pension. That responsibility now falls squarely on you. Subsequently, your 401(k) is a great way to build your retirement war chest.
So, what is the smartest thing to do with the money in that 401(k) when you leave for the next big thing, get laid off, or retire? You basically have four options. The best one for you will depend on your situation and your objectives.

OPTION 1: Take a Lump Sum Distribution

With this option the company closes your account and sends you a check for whatever you’ve accumulated minus taxes. You will be taxed at ordinary income tax rates and could potentially be bumped into the next tax bracket if the distribution is large enough. Also, if you are under age 59 1/2, you may be subject to a 10% early distribution penalty.

Who could this option be good for?

  • Someone who got laid off and really needs the money. They understand the tax ramifications but there is really no other option to keep the lights on until they find a new job. As a side note, this is a good reason to build an emergency fund.
  • If you have accumulated very little money (i.e. a few hundred dollars or so) because you just started contributing to your 401(k) and feel the hassle of selecting another option is not worth it, then you could take the distribution. It’s not the best thing to do, but it won’t really hurt you.

OPTION 2: Leave the Money Where it is

This option is self explanatory. You just leave the money within the existing 401(k) plan at your previous employer. There is a comfort factor here; you know the plan, most likely know how to use the online access, are familiar with their customer service and know the investment options inside the plan. The downside is that you can no longer add money to this plan, get the company match, or possibly take loans if needed. You are also limited to the investment options offered by the plan which could be good or bad depending on the quality of the investments offered inside the plan. Also, keep an eye on expenses. They can vary significantly from plan to plan. In some cases you may be getting a better deal on the mutual funds inside the plan, but in other cases you may pay more for those same funds outside the plan. Be sure to review the plan documents. One final note about leaving your 401(k) with your old employer. Over the years, if you don’t stay on top of things, you can easily accumulate several retirement accounts spread among your previous employers. For many people, it can be confusing to keep track of everything which could, ultimately, be detrimental to your wealth.

Who could this option be good for?

  • If you are age 55 or older and need to begin taking distributions from your 401(k) for retirement, this might be a good option for you. In an IRA, you must wait until age 59 1/2 to take a distribution without incurring the extra 10% early distribution penalty. But, with a 401(k), if you leave your job the year you turn age 55 or later, the IRS will allow you to begin withdrawals without incurring the extra penalty. (Here are the IRS rules)
  • If you land another job, like your new employer’s 401(k) and want to roll your money into the new plan, then leave your money in your old 401(k) until you can make the transfer. There is no need to roll it over to an IRA for a short period of time and roll it over again several months later.
  • If you just really like your old employer’s 401(k) plan and are a do-it-yourself-er who will keep track of the money, perform the necessary re-balancing and periodically review the investments, leave it there.

OPTION 3: Roll your old 401(k) into your new 401(k)

If your new employer’s plan allows it, you can roll your old 401(k) over into your new 401(k). Doing this will help keep all your 401(k) assets together and make it simpler to manage your entire retirement portfolio. Keep in mind, your money will now be subject to the rules and regulations of the new plan and can only be invested in the options available inside the new plan. However, there is a lot to be said for keeping things simple. One other potential benefit is that your money will be available for plan loans if needed.

Who could this option be good for?

  • This is a good option for staying organized. Having all your money in one account is much easier to keep track of.
  • This is also a good option for the do-it-yourself-er who stays on top of their investments and regularly re-balances their portfolio
  • If you are in a situation where it maybe necessary to to take a loan from your 401(k), then rolling your money into the new plan is an option. Although I do not recommend 401(k) loans, sometimes they may be the only option. The important thing to be aware of when taking a 401(k) loan is that when you leave the company the loan needs to be paid back in full or the balance of the loan will be treated as a distribution and taxed accordingly.
  • If you have serious debt concerns, keeping your money in a 401(k) rather than rolling it over into an IRA may be the better option. Some states offer greater creditor protection for a 401(k) then they do for an IRA.
  • If you will be working into your 70’s and do not yet want to begin withdrawing money, then keeping your money in a 401(k) is better than an IRA rollover. With an IRA you must take Required Minimum Distributions (RMDs) at age 70 1/2. Not so with a 401(k), as long as you are still working at the company maintaining the plan.

OPTION 4: Roll your old 401(k) into an IRA

The final option is to roll your old 401(k) into an IRA. Typically what happens is you open an IRA account and instruct your old employer to transfer the money directly into your IRA. Sometimes, however, your company will send a check directly to you which must be deposited into your IRA within 60 days or be subject to taxes at ordinary rates and possibly the 10% early withdrawal penalty (Here are the IRS Rules). One big benefit of rolling your 401(k) over into an IRA is that you will have more investment options.

Who could this option be good for?

  • Great for someone who changes jobs a lot. You can have one account that you roll your old 401(k) accounts into as your situation changes.
  • If you plan to work with a fiduciary advisor to help you manage your investments, this may be the best option.
  • If you are heading into retirement and want assistance creating a retirement income plan, an IRA rollover could be a good option for you.
  • If you are a do-it-yourself-er, this might be a good option.
  • If you need to pay for college, you may be able to withdraw money from your IRA and not incur the 10% penalty. You don’t have the ability to do this with a 401(k). You will, however, need to pay ordinary income tax on the withdrawal. In most cases, I do not recommend using IRA money to pay for college, however, it is a potential benefit of an IRA.
  • If you are a first time home-buyer you can take $10,000 out of an IRA for a down payment without incurring the 10% early withdrawal penalty. Taxes at ordinary income tax rates will still apply.
So, those are your four options. What’s best for you will depend on your situation and the type of assistance you want managing your money. For me, I always rolled over my old 401(k) accounts into an IRA. I prefer keeping my retirement assets together, manage my own money, and do not like being restricted by the investment options inside a 401(k).

For more financial planning tips download my free report: 8 Steps to Organize & Optimize Your Financial Life. It’s packed with helpful advice, useful tips and valuable resources.

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Top Money Posts: Week of January 18, 2016

Here are some articles I recommend checking out. I’ve also mixed in a few good one’s I shared previously in case you missed them.

From around the web:

  • With Powerball having reached record territory last week, I was asked by several friends (and my wife) what to do if they won all that money. For most of the people I work with, I’d give the same advice found in this NY Times piece that taking the annuity option is the best choice. However, this Money Magazine post makes a good counter argument for taking the lump sum. Wired magazine took an entirely different (and more fun) approach to answering this question with “How to Spend Your Powerball Winnings Like a Baller.” Regardless, even though it would have been great to be the winner, I agree with the Notorious B.I.G: “Mo Money, Mo Problems.”
  • The other big news has been the recent volatility in the stock market. Paul R. La Monica at says investors are overreacting. Nevertheless, it can be gut wrenching to watch the drops. Unfortunately, short term losses are the price we pay for the potential of long-term gains. If you need your money soon (12 months or less), you should avoid investing in the stock market.
  • As tax season approaches, tax scams will inevitably increase. Here are 7 Ways to Keep Your Tax Refund Safe From Thieves.
  • Microsoft has ended support for older versions of Explorer. Make sure you update your browser to help minimize the potential for viruses.
  • With high school seniors receiving acceptance letters over the past few weeks, many will need to take out student loans to pay for their dream college. But, how much is too much when it comes to taking out student loan debt?

Best Personal Finance Books of 2015

I often get asked for book recommendations, so I thought now would be a great time to pass along my favorite personal finance books of 2015. I’ve broken down my list into a few categories so you can find one right for you, but, truthfully, all of these are fascinating reads. As you’ll see, my favorites are those that manage to take complicated financial topics and explain them in an easy, approachable way.


Best for Parents:
The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.
by Ron Lieber

This was actually my personal favorite, probably because, being a parent, it had the most direct impact on my life. Any parent today can attest to how difficult it is to make our kids understand and appreciate all they have. Stuff is so easy to acquire these days that they often take for granted all they have. Lieber outlines many strategies for dealing with this modern parenting issue, however, his take on allowance was the most intriguing to me. The premise is in order to teach our kids about the value of money, give them a weekly allowance not tied to chores. The theory is if you want to teach your kids how to budget, save and value their money, give them a weekly allowance. If you are trying to teach your kids about discipline and the value of hard work then focus on their studies, extra curricular activities and sports programs. I had my doubts, but figured I it was worth testing out since my previous attempts at giving allowances to my 6 and 9 year olds fizzled out after a short period of time. Surprisingly, it worked for us. I started giving my boys $5 a week in April. My youngest son initially spent the money as soon as he got it. My oldest son decided he would save his money to buy a new Wii. Between his allowance, birthday gifts, and various holidays he accomplished that goal quicker than my wife and I expected. The deal is they can use the money for whatever they want. Toys, apps, video games, books, whatever, it’s their money. My youngest soon learned the value of saving and stopped spending his cash so quickly. The bonus for my wife and I was that the kids stopped asking for stuff all the time. After 4-6 months they realized they could get whatever they had enough money for (and mom and dad approved of). If they don’t have enough money they now know they need to save. What they haven’t totally figured out yet is that they could make more money if they started doing some work around the house! The author suggests paying the kids for tasks you might pay someone else for. I got my youngest son to do some weeding in the summer but so far I haven’t had much additional success. I’m not saying this will work for everyone but both my wife and I were very surprised at how quickly the kids learned to budget, save and learn the value of a dollar. Definitely worth a read.

Best For Planning:
The One-Page Financial Plan: A Simple Way to Be Smart About Your Money
by Carl Richards

I believe everyone should have a financial plan. The problem is if you don’t know where to start, are just beginning your career, or you are not working with a Certified Financial Planner, you probably haven’t created one. This book outlines how to focus on the big picture and create a simple, workable financial plan. It clears away all the noise that distracts most people from creating a plan and helps you stick to the important stuff and get you headed in the right direction.

Best For Everyone:
Happy Money: The Science of Happier Spending
by Elizabeth Dunn, Michael Norton

This is my second favorite book I read in 2015. Even though it was actually published in 2013 I kept in on my list because of how good it is. The idea behind it is that money CAN actually buy happiness… if you use it wisely. Their research revealed some fascinating things like luxury cars often do not provide more pleasure than economy cars, and that spending your money on experiences will give you more happiness bang for your buck than buying stuff. No doubt, after reading this book you will question where you are currently spending your money and if you are getting the most happiness you can out of those purchases.

Best For Pre-Retirees:
Get What’s Yours: The Secrets to Maxing Out Your Social Security
by Laurence J. Kotlikoff

Alright, admittedly this is the least exciting book on the list. I mean, who really wants to read a book about Social Security during their free time? Nevertheless, Social Security can be an incredibly confusing maze of options. Knowing which claiming strategy is best for your situation can be overwhelmingly difficult for most people without enlisting help. Choosing the wrong strategy can cost you tens of thousands of dollars over your lifetime. This book explains the options in plain english and uses real world examples to help it make sense. I strongly recommend this book for anyone trying to decide when to start claiming social security. One caveat, with file and suspend having recently been eliminated, some of the advice is no longer relevant.

Want some great financial planning tips? Download my free report: 8 Steps to Organize & Optimize Your Financial Life. It’s packed with helpful advice, useful tips and valuable resources.

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