New to forum - Some advice

[thisisanton]

I recently stumbled into this forum and I was wondering if some of you guys have some opinions on my situation. My fiance and I recently met with an financial adviser (From Trans America) to help us plan out future. First of all I am skeptical about them because I always feel like they're trying to sell you something.

Here's my situation, I am 32, I have about 130K in savings/CD/Checking. There is barely any interest from the bank and I'd like to invest in other ways. And I know it's just a waste for it to sit there. I have zero debt, would like to buy a house one day. But the cost of houses in Los Angeles is redicilous!

Here is his suggestion.

1. Stop my 401K, because my employer doesn't match.

2. Start a ROTH IRA with Jackson Annuity, and transfer my 401K money into that. Max out the ROTH every year.

3. Invest in mutual funds (Franklin Templeton) He suggested in putting 100k because his words:" Emergency fund / liquid (functions similar to a savings account, but with a much better return than banks offer)" I'm not comfortable in putting that much money in something like that.

4. And getting an IUL. Pacific Life Indexed Universal Life. This is the part I do not like. His words "Tax-free vehicle that builds cash value. Can serve as savings for kid's college funds, supplemental retirement, provides a death benefit, etc." He suggested in putting in $400 that would have gone to my 401K plus an extra $300 each month. To me that seems like a lot of money to be putting in an IUL. The initial payment was $650 and an extra $250 monthly premium...

My questions: Should I keep my 401K even if my employer doesn't match? I like the idea of a ROTH IRA and I want to max it out each year. Mutual funds sound like a good idea. How much would one put into mutual funds to see a nice return? And I am skeptical with the IUL, what are your thoughts on this one? Also any other types of IRA's out there?

Thanks in advance and sorry for the long first post.

[JustBill]

Welcome to the boards!

Run away from the T/A "adviser".

If possible maximize all tax advantaged investing space. For those under 50 years of age 401k annual contributions are 17,500, Roth IRAs are 5,500. Since your employer doesn't match, it likely is best to contribute to the Roth first, then your 401k. If you're a high income earner, it may be necessary for you to contribute to 401k in order to reduce your MAGI to a level that enables Roth contributions. Your accountant can help you with that.

Be aware of sales charges, adviser portfolio management fees, and mutual fund expense ratios. I looked at Franklin/Templeton "Balanced Fund" expense ratio prior to this response, and found they state a 1.16% ER, an initial sales load of 5.75%, and a 12b-1 exit fee of .30%. This may not be the exact Franklin fund in the discussion, but ARE THEY KIDDING ME with this? I suggest you look at Vanguard or Fidelity fund families for long-term low-cost ER investing.

Read. Specifically The Bogleheads Guide To Investing, Common Sense On Mutual Funds, The Four Pillars Of Investing, All About Index Investing, to get started.

As for insurance, buy level term insurance. Do your investing in investment instruments, not in an insurance policy.

Best of luck on your journey.

[Petunia 100]

I recently stumbled into this forum and I was wondering if some of you guys have some opinions on my situation. My fiance and I recently met with an financial adviser (From Trans America) to help us plan out future. First of all I am skeptical about them because I always feel like they're trying to sell you something.

Here's my situation, I am 32, I have about 130K in savings/CD/Checking. There is barely any interest from the bank and I'd like to invest in other ways. And I know it's just a waste for it to sit there. I have zero debt, would like to buy a house one day. But the cost of houses in Los Angeles is redicilous!

Here is his suggestion.

1. Stop my 401K, because my employer doesn't match.

2. Start a ROTH IRA with Jackson Annuity, and transfer my 401K money into that. Max out the ROTH every year.

3. Invest in mutual funds (Franklin Templeton) He suggested in putting 100k because his words:" Emergency fund / liquid (functions similar to a savings account, but with a much better return than banks offer)" I'm not comfortable in putting that much money in something like that.

4. And getting an IUL. Pacific Life Indexed Universal Life. This is the part I do not like. His words "Tax-free vehicle that builds cash value. Can serve as savings for kid's college funds, supplemental retirement, provides a death benefit, etc." He suggested in putting in $400 that would have gone to my 401K plus an extra $300 each month. To me that seems like a lot of money to be putting in an IUL. The initial payment was $650 and an extra $250 monthly premium...

My questions: Should I keep my 401K even if my employer doesn't match? I like the idea of a ROTH IRA and I want to max it out each year. Mutual funds sound like a good idea. How much would one put into mutual funds to see a nice return? And I am skeptical with the IUL, what are your thoughts on this one? Also any other types of IRA's out there?

Thanks in advance and sorry for the long first post.

A "financial advisor" who suggests an annuity for your IRA is either financially illiterate or is more concerned with his/her own best interest than yours. If a "financial advisor" suggested such a thing to me, that would be THE END of our relationship.

Your questions:

Should you keep the 401k with no match? Probably yes. The tax-deferral is valuable, and you can always roll it into your own traditional IRA later. However, some 401k plans have such high fees, that they are just not worth it. Find out what yours costs.

Roth IRAs and mutual funds are great ideas. Buying load funds is not. Buying load funds inside of insurance products is even worse. Instead, choose a quality, low-cost custodian. Think Vanguard, Fidelity, or T. Rowe Price.

Your instinct on IUL is absolutely correct. Salespeople love to push these as "tax-free" vehicles. They are not. What is true is this....loans are tax-free. So you can "borrow" your own money and not pay tax. What is also true...the return of your own capital is tax-free. So, if you give them $5 today and they give it back to you 20 years later, you owe no tax. Neither "benefit" is very appealing.

If you really want to work with a "financial advisor", then choose one with a real credential. You want a fee-only Certified Financial Planner (CFP). You can find one in your area by searching on napfa.org, or on garrettplanningnetwork.com. The "financial advisor" you are seeing now is an insurance salesperson. The reason s/he suggest insurance products is...those are the only sort of products s/he is licensed to sell.

[Petunia 100]

Be aware of sales charges, adviser portfolio management fees, and mutual fund expense ratios. I looked at Franklin/Templeton "Balanced Fund" expense ratio prior to this response, and found they state a 1.16% ER, an initial sales load of 5.75%, and a 12b-1 exit fee of .30%. This may not be the exact Franklin fund in the discussion, but ARE THEY KIDDING ME with this? I suggest you look at Vanguard or Fidelity fund families for long-term low-cost ER investing.

Yes, and that's before the additional M & E fees charged by the insurance product wrap, which are typically quite steep.

[disneysteve]

I find it incredibly disturbing that no action has yet to be taken to prevent unsuspecting people from being swindled like this. There is absolutely no reason for this type of fraud to be legal in this country.

OP, stay away from this company and this sleazy salesperson. Ask your questions here and you will get good, solid investment advice for free that will save you thousands of dollars if not tens of thousands over the course of your life.

An annuity in a Roth? Really? That is among the stupidest bits of financial advice ever.

[feh]

Just another person here supporting what other respondents have said. Educate yourself - join bogleheads.org forums and read.

In general, this should be the order in which you fund things:

• emergency fund
• near-horizon (ie. < 5 years) big purchases (house down payment, car purchases, etc)
• matched 401K
• Roth IRA
• unmatched 401K
• taxable account

Some people may put saving for big purchases further down the list; that's a personal decision.

[Esozh]

This advisor is looking at his own bottom line. He's seeing you walk in, uneducated in investments, and asking advice. The products he's charging you for is like paying for a McLaren F1 and getting a 1988 Honda Civic. Vanguard and Fidelity funds are going to be your bread and butter. Anyone who tries to get you to pay over roughly 0.5% in total fees is ripping you off. Very few funds will be that expensive and be worth the price. Most Vanguard funds are in the 0.3% and under range. This 5% front load business is 15x the price you should pay.

Having no debt is a huge instrument in creating wealth. Good job on that.
If you're able to contribute to a Roth, do so. Do that before the 401K.
After the Roths are maxed out, then do the 401K. The 401K at $17,500 lowers your MAGI more now, but the growth is taxed. A Roth does nothing for your MAGI now, but the growth is tax free, and therefore is a better investment vehicle from a retirement planning point of view.

The advisor is accurate in that you can put $100,000 into what is called a cash management or money market fund. Over the long term, the advisor is correct that these are as "safe" as it gets in investing - the prices really don't fluctuate, but they generally pay better rates of return than what the bank will give you. The problem right now, the expense ratio (cost) is higher than the yield. In other words, you'd be paying an investor to hold onto your money.

The other option he may be alluding to is that you can invest your money and most brokerage houses today have plans that will allow you to use your invesment account like a bank account, complete with a debit card and check writing abilities. Yes, because we all want to invest so we can turn around and spend it on the debit card. Kind of a self defeating principal, but it allows these con artist salesmen to sell the schtick that it's an "emergency fund".

Never, ever buy a IUL. It's akin to shooting yourself in the foot with both barrels. If you want life insurance, buy term life insurance. Whole life insurance has gotten a bad name after the Dave Ramsey movement. Now those guys are switching to "Universal Life" and the IUL, which is the same prodcut as whole life insurance. A rose by any other name does not change the thorns.

Don't pay front loads. Don't buy insurance products as investment vehicles. Don't invest in annuities. Stay away from municipal bonds.

DO look for all the tax advantages you can find. You first want accounts that are taxed up front, but then not on the back end, like a Roth. When you retire, if that Roth has $1M in it, that's all yours, Uncle Sam can't get his grubby little fingers on it. A 401K - Uncle Sam won't touch it now, because he knows he's getting a bigger slice of a bigger pie later. It will lower your tax bracket, maybe, now - and certainly lowers your tax liability. However, lets suppose you have 30 years growth. You're going to be in the 33% tax bracket, and at a higher amount. That's when you'll get kicked in the shins on taxes.

[Petunia 100]

I find it incredibly disturbing that no action has yet to be taken to prevent unsuspecting people from being swindled like this. There is absolutely no reason for this type of fraud to be legal in this country.

If tax-deferred vehicles are capped (as Obama has recently suggested to Congress), this sort of thing is only going to increase.

I agree, it is sickening. In my opinion, it should be illegal to place an annuity or any other insurance product inside a tax-advantaged account. They are of no advantage whatsoever to the consumer, and therefore should not be allowed.

[thisisanton]

Thanks everyone for responding! It seems everyone here has the same opinion, which is to not take his advice and run away. I'm a novice when it comes to investing, and even I knew something felt wrong when he was giving the speech of how "My job is to make people rich, and how I want your money to work for you". I knew he would suggest a ROTH IRA with Jackson Annuity, he was wearing a Jackson polo shirt. An annuity in a Roth? I don't even know what hat means. Must not be good, since everyone is against it.

This is what I'm thinking for now:
1. Do not buy into an IUL! I knew it was a bad suggestion to begin with.
2. Continue my 401K plan a 7%. It is unfortunate that my employer doesn't match. I've heard rumors that might change.
3. Start a Roth IRA with Vanguard or Fidelity and max it out each year. Every one here has good things to say about either one. I guess it would be my preference.
4. Read some of the books recommended.


I guess I'd have to figure out if I setup a ROTH with Vanguard, can I also invest in mutual funds with them? Here's a dumb question, can one have 2 ROTH IRA accounts with different companies?

I'm sure I'll have many more questions.

[disneysteve]

An annuity in a Roth? I don't even know what hat means. Must not be good, since everyone is against it.

Annuities grow tax-free. Assets in a Roth account are already tax-free. So there is absolutely no point to an investor like yourself buying an annuity within the Roth. Why put a tax-free investment in an account that is tax-free anyway? It makes no sense. But the sleazy salesperson makes a huge commission when you buy an annuity which is why they recommend them.

I guess I'd have to figure out if I setup a ROTH with Vanguard, can I also invest in mutual funds with them? Here's a dumb question, can one have 2 ROTH IRA accounts with different companies?

Lesson one: A Roth is a type of account. It is not a type of investment. Think of the Roth as an empty basket. You can choose to fill that basket in many different ways - with stocks, bonds, mutual funds, ETFs, REITs, commodities, even real estate. So yes, if you open a Roth with Vanguard, you can then choose to invest in mutual funds within that Roth account.

And yes, you can have more than 1 Roth account with different companies but your annual contribution limit doesn't change. For 2013, it is $5,500 if you are under 50. So you could open a Vanguard account with as little as $1,000 and if for some reason you also wanted to put money elsewhere, you could do that too as long as your total investment doesn't exceed $5,500.

No dumb questions here.

[snafu]

Santon, You've been offered good solid advice and I'm delighted you will follow up. Should that salesperson call you, ask to be added to their Do Not Call, Do Not Mail, Do Not Contact list.

I suggest you get more information about your employer's 401K, what are you holding and what are the fees? This helps with allocation decisions. As mentioned, insurance is insurance, retirement plans/savings are for retirement, emergency fund is for emergencies, savings for long term goals like down payment on a house is a separate entity and just now traditional savings accounts are not even keeping up with inflation.

What is your fiance's financial picture? Is she on the same page as you? Does she participate in employer's retirement program? Does she carry CC debt month to month, car loan etc?

[thisisanton]

I'll have to look into what I'm Holding and what the fees are. At the moment I have the Vanguard Target Ret. 2040 plan and putting in 7%. For now that's what easiest for me, because I do not know much about the market to invest in certain stocks/bonds, etc. myself.

My fiance has the same goals as me. We would like to retire and live comfortably. She does have a 401K, and she contributes 6%, and her employer matches 100% up to 6% (Lucky her!) She is also debt free and no credit card debt. Other than the small purchases here and there, but it's usually paid off in full when she gets the statement.

Our monthly bills are: Rent, gas, food, phone, internet, cable. The usual stuff. This year isn't the best year for saving as we are planning a wedding. But we are paying for everything in cash so we will not have any debt after the wedding.

I think we're both in the right track, but I would like to learn more so I can invest my money wisely.

[scfr]

I'll have to look into what I'm Holding and what the fees are. At the moment I have the Vanguard Target Ret. 2040 plan and putting in 7%. For now that's what easiest for me, because I do not know much about the market to invest in certain stocks/bonds, etc. myself.

My fiance has the same goals as me. We would like to retire and live comfortably. She does have a 401K, and she contributes 6%, and her employer matches 100% up to 6% (Lucky her!) She is also debt free and no credit card debt. Other than the small purchases here and there, but it's usually paid off in full when she gets the statement.

Our monthly bills are: Rent, gas, food, phone, internet, cable. The usual stuff. This year isn't the best year for saving as we are planning a wedding. But we are paying for everything in cash so we will not have any debt after the wedding.

I think we're both in the right track, but I would like to learn more so I can invest my money wisely.

Whether or not to contribute to a 401K when there is no employer match depends on what your investment choices are. But since you have options with Vanguard, by all means, continue to contribute! Nothing wrong with staying with the Target Retirement Fund for now.

Since you and your fiance are on the same page when it comes to finances (so very happy to hear that), have some fun coming up with creative ways to work together to have a fabulous wedding while keeping costs down.

[~bs]

Can't see how he's going to move his money out of the 401k unless it's from previous jobs. Did this "adviser" also suggest quitting his job so he could actually make the transfer? Obvious he's only in it for himself, and not the benefit of the OP.

FWIW, I do contribute to my 401k even though there is no company match at all. As I mentioned elsewhere, the 401k does have better asset protection than an IRA when it comes to bankruptcy & lawsuits. My 401k offers pretty good low fee vanguard funds and has NO administration cost to participants. (Administrative plan costs are a sneaky type of fee because often it's not disclosed or disclosure isn't clear. These fees can amount to 1% or more on top of the mutual fund fees, which can add up to A LOT over time.) So say I wanted to invest 100% in the vanguard institutional s&p500 fund. It would mean that all of my assets would simply be subject to the 0.04% fund fee, and nothing else. Also has a roth 401k component. So I'm pretty happy with it, despite the lack of a match.

If your 401k choices aren't too good, then I would consider parking your money elsewhere. But if your 401k is decent, then it will beat dumping the money into a taxable account. I'd make sure that the roth ira can be maxed first, then dump money into the 401k.