Should you roll over your 401(k)?

Posted on May 23, 2012May 23, 2012 by Danielle

Congratulations! You just got a get-out-of-jail card, you’re shaking that company’s dust off your feet, etc., etc. Unlike most people, you’ve actually managed to save some money in the 401(k) and now you’re wondering what to do with it—leave it parked, or roll it over into an IRA. Double points if you actually understand what it’s invested in currently. So, I’m going to give you 4 reasons to roll it over, and 4 reasons to leave it where it is.

Yes, roll it over if…

Your current plan has bad choices, and a lot of them do. You may have been stuck with some stinker funds—high commissions, limited choices, high management fees—while you worked for the company, but no more. Move it to a no-load mutual fund company, and get some decent portfolio advice from a fee-only financial planner (that would be me, in case you’re wondering).
You might forget about it, move, or be hard to find in the future. Also, as we all know from the news, heads of companies go to jail, retire, or flee the company and if your 401(k) is with a small company, there’s some probability that you might have a little difficulty tracking it down in 10 or 15 or 30 years.
You’ve had multiple employers or have multiple accounts. Managing dribs and drabs into a consistent and reasonable asset allocation is a nightmare. The fewer the accounts, usually, the better the plan.
You have a new job with good investment choices in the 401(k). You can roll over the old one into the new, and keep your portfolio to a manageable number of accounts. If your new plan allows, you also might be able to borrow against it in an emergency.

No, don’t touch it if…

You intend to spend it. No, no, no, no. Don’t touch it and you might actually have a retirement instead of doddering in to work at 85 on your walker, like all those people who tell me they’re never going to retire. At least you’ll have enough money for an assistant to wheel you in.
You’re in a profession or conduct activities which give you a high probability of being sued. 401(k)s offer slightly more creditor protection—although you might want to address that by insurance.
You want to roll over a traditional IRA to a Roth. If you’re thinking about rolling a small IRA into a Roth, you might want to do so before you make it a big IRA. Even if you don’t roll over the entire amount, all IRAs will be taken into account by the IRS in figuring how much tax you owe. Also, I sometimes suggest that high income earners who are good savers consider contributing to a non-deductible IRA, then immediately converting it to a Roth. Can’t do it as easily if you have other IRA accounts. The details of this are too long to explain in this blog post, but I’d be happy to discuss them based on your specific situation.
You’re not going to pay any attention to the investments or learn anything about portfolio choices. May as well leave it where it is. At least you won’t stick it in CDs or leave the check sitting on your dresser for 61 days.

None of this is intended as specific investment advice because obviously it depends on your personal circumstances. The biggest problems I see with 401(k)s are that they’re too small (at least contribute enough to get the employer match, and preferably contribute the legal maximum), and the employee has made dumb choices. Typical conversation:

“Tell me how you selected this (absolutely horrendous) choice of funds.”

Choose one answer:

□ “The name sounded good”

□ “My brother-in-law told me it was hot”

□ “I saw their ad”

□ “(Some idiotic) TV money guru recommended it”

□ “I wanted my money to grow and this was called a growth fund”

□ “I wanted my money to be safe so I chose the government fund”

□ “Threw darts” (probably the best of all of these)

It’s your future, and I bet you worked hard enough to earn it. Take some time to think things through, do some reading, and get good advice.

Returning to work—items for your budget

Posted on May 3, 2012May 3, 2012 by Danielle

If you’ve been raising kids for the last ten or twenty years, you’ve been plenty busy but your focus has probably not been on the job marketplace. So let’s say that now you find yourself thinking about returning to work. It doesn’t really matter why—could be a good thing or a bad. Maybe the kids are headed off to college, or you’re getting a divorce, or you have a great idea for a business, or whatever—here are a few budget items that you should incorporate in your planning:

The cost of a professional wardrobe. No, that’s not the funky but style-y stuff you and the kids have snapped up at the resale shop. If you’re returning to work, starting a business, or looking for a job you need to radiate confidence, and unfortunately for your pocketbook you need to look as good as people who are already successful in the desired job. You need to purchase enough outfits to (at least) get you through several interviews (and more as soon as you land the job). If you’re starting a business, you may be able to schlep in jeans while you’re working from home, but you need enough outfits to carry you through meetings and networking events—five, maybe? If you’re a woman, check out this blog to get lessons in some creative wardrobe combining.
Deferred medical. While you’re busy hauling the kids in the family van to orthodonists, soccer and music lessons, my guess is you didn’t stop long enough at the doctor. If you need dental work, dermatology (you’d be amazed at what they can do), podiatry, or some de-stressing treatments, it’s legit. Get it done and you’ll be more ready to go out and slay dragons.
The real costs of starting a business. Many people who return to the work force in their forties or fifties quickly reach the conclusion that they might make more starting a business than getting someone to hire them—especially if they can do consulting or some sort of professional service. If you’re going to manufacture some product, it’s going to require serious number crunching. But if you’re thinking of a “cheaper to start” professional or consulting service, there are some unlooked-for expenses there, too. Don’t forget the cost of ongoing professional education (mandatory in some fields for accreditation or maintaining licensing), professional membership organizations (can be thousands of $$), at least one professional conference a year (and travel to it), workshops, and networking organizations like Chambers of Commerce or networking associations.
Computer equipment. If you’re starting the business, you’re going to need better than your teenager’s cast-offs. Also, software, a consultant to help you set it up, professional bookkeeping or bookkeeping software, reference materials, and file backup services.
Professional services. Besides your computer repair guru, you’ll need an accountant, an attorney, and maybe a financial advisor, a career counselor, and a psychologist. These people all cost, but can save you tons of time and money spent on mistakes and the learning curve.
Increased transportation. You may need another car. You may need to pay for parking. More gas. Even if you use public transportation, you may need a cab for late nights at the office. On the other hand, if you stop hauling the kids so much, this might actually go down, or you might be able to downsize the vehicle.

If you know of other expenses that came as a surprise, please do add them in the comments section below.

And…break a leg!

Budget busters: You won’t know what hit you

Posted on April 18, 2012April 18, 2012 by Danielle

225 (Photo credit: Wikipedia)

Worrying about money may be near, if not so dear, to our hearts but no matter how careful we are, there are always surprises. You can’t think of everything, but we all want to do what we can to avoid the black swans—the strange anomalies that we never see coming. Watch enough Star Trek and you’ll learn pretty quickly that even anomalies occur episodically. I mean, when will they figure out the shields won’t work, there’s an alien in the computer system, and someone has a worm in the brain? Every week. So here’s a list of budget “surprises” that are pretty predictable once you think about them:

College

If your child goes to a college that’s far enough away from home base that flying is in their future, you’re going to be shocked at how much airfare Junior is going to rack up. Think you’ll send your kid off in September and see him at Christmas? Think again. For a lot of places, there’s mid term break in October, Thanksgiving (the kid who never wanted to see the relatives is suddenly burning for your old traditional celebration); Christmas (often for a month); spring break; and back home again earlier in May than you imagined. With all those weeks off, it’s amazing how they can eat enough to justify those room and board charges, no? That totes up to 5 round-trips a year. Plan on visiting lil’ Amber on campus? Wait to you check out the costs of those cute little bed-and-breakfasts in college towns. Add $2-3,000 for flights home and one trip to campus for mom and/or dad.

Home renovation

If you’ve ever been through this, skip to the next section. I don’t want to cause you any more pain. But for anyone thinking that maybe they’ll re-do the bathroom (especially after they retire), take whatever you think would be the reasonable cost and double it. No exceptions. If you’ve already taken bids you’re already in shock, but take the highest one and add at least 25%. I’m on my third house renovation and let me assure you I’m being conservative.

Also, if you work at a job that depends on your own efforts (not salaried), take your income down at least 10% for the period of the renovation. Chasing contractors around will become your part time job, guaranteed.

Income tax

If you’ve been doing your own taxes, you are going to be very surprised by what CPAs charge. If your taxes are simple enough that you can do them yourself, CPAs are cheap. But if you actually need help for some slightly more complex matter, surprise! In retirement, your taxes can get a lot more complicated than they ever were when you were working. $1,200 to a CPA once a year is $100 per month more that you need in your retirement budget.

Retirement

Inflation may be the worst enemy here—not regular consumer price index inflation, but sectors that inflate much faster—like nursing home costs, property taxes, or supplementary health insurance costs. Your personal inflation rate may be quite different than the CPI.

Also, poor health or health crises (like a knee or hip replacement) can have a lot of “support” costs. For example, you may need someone to do more yard upkeep, have groceries delivered or meals prepared, manage bills or finances, or help you get to and fro. If you don’t already use these services, you will. If you already do, you’re probably going to need more. Finding assistance, even when you’re able to pay, can be time consuming and even expensive (if you need to secure a “care manager”).

One of the most common things any realtor can report is that as we age, we may be less able to keep up with updating and maintaining our homes. This deterioration of one of our biggest assets can really eat into equity. Think through whether it’s really so noble to hang on to that house until someone wheels you out, and what it’s costing you in wasting assets as well as out of pocket.

Long term care

If you haven’t looked into assisted living/homecare/nursing home care you are going to have a heart attack when you find out the price. Really, just call your local facility and check out the price for sharing a room that’s way smaller than Motel 6. Think you’ll stay home instead with some nice lady helping you? Try 3 nice ladies for ‘round the clock care, plus more for weekends, plus a backup emergency service for when your first string gets sick or has their own family emergency (at twice the price). Okay, I’m Dani Downer today but making like an ostrich doesn’t help.

But even at coronary-inducing prices of $7-8,000 a month in a facility, you’re not done yet. Those charges don’t reflect the costs for any non-Medicare incidentals you might need—mouthwash, aspirin, Depends—all charged at premium prices. In my experience, it’s very easy to incur extra monthly charges that will easily eat up an extra $1-2,000 PER MONTH.

Do you have a parent that might need your help? This can be not only a financial dent, but a tremendous consumer of time. The responsible adult child is going to take a big hit to his or her work life. If you have an elderly parent, better hoard that comp time now.

General daily living

Do you have a budget item for computer emergency repair? Thought not. Ever had a computer emergency? Thought so. Even if you have a 15 year old on-call, they’re probably trying to earn money for college and it’s amazing how much it costs to ferret out what’s wrong. I admit that it’s getting a little better now that our friends in India can take over our screens, but one good computer meltdown can cost you a lot. Last summer I operated for two weeks from my daughter’s computer, my phone, and my iPod touch while I waited 10 days for Dell to deliver (I’m too cheap to pay for overnight service), and another two weeks ironing out which software would still work, and which had to be upgraded. The software turned out to be the really expensive part—kinda like razors and razor blades. Putting in place a backup system ain’t cheap, either. And really, you don’t want to live with a teenager who can’t access her chats at a moment’s notice. Plan to replace your computer and your software every three years. And if you don’t have to, well, you’ve just gotten a get out of jail free card.

I’m sure there are many other blindsiders that I haven’t seen coming just yet, and I’d like to hear about them. But in the meantime, you can see why I recommend that everyone have a very substantial emergency fund. And that’s not called “credit cards”. These are the kind of things that can dig through prosperity and produce a financial avalanche. But one thing we can know for sure: plan for the certainty that unexpected financial emergencies will happen. And double check your force field.