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Investing columnist Matthew Amster-Burton has been answering questions from the Mint.com Facebook page and Twitter. This week: questions about which funds to choose in your retirement plan.
Josh asks: I just received my 401(k) packet from my job; it has a lot of selections for my retirement. I don’t want to just pick any plan. Would my financial institution be able to sit down with me and instruct me on the best plan for my retirement?
Ah, what could be more fun than sitting by the fireplace with your significant other, a glass of wine, and a six-page printout of the mutual funds offered by your new 401(k)? Other than taking an icepick to your spleen, that is.
It’s hard to find intelligent, unbiased advice on how to choose investments for your retirement. Here’s why:
Most 401(k)s offer investment advice and, by law, the advice can’t be driven by what will make the advisor or your employer the most money. However, when I say “most” 401(k)s, I mean about 60% of them. Most workers don’t bother to take advantage of the advice, and who can blame them? There’s no reason to believe the advice will actually be unbiased or, more to the point, good.
Professional financial advisors charge professional-grade fees, typically a percentage of your assets or several hundred dollars an hour, depending on their fee model. Some advisors make money by selling commissioned products, but they’re not going to give you free 401(k) advice, because they can’t make any money on it. Instead, they’re going to encourage you to put less money into your 401(k) and more into their commissioned products.
I’m not bashing all financial advisors, by any means. If you’re looking to build a relationship with a trusted financial advisor, that’s fine–just be prepared to pay what they’re worth.
But if you just want some 401(k) help and most of the advice out there is bad, expensive, or both, where should you turn? Is it possible to get inexpensive, quality advice that will apply to your 401(k) and your financial goals? Yes.
First, go ahead and sign up for the 401(k) and direct your contributions to the money market or stable value fund while you decide what to do next. This is a low-risk and low-return fund, like a savings account—a good place to get the employer match and park your money while you get educated:
You can read a short book on investing that will help you get started. It’s called Elements of Investing, by Malkiel and Ellis. It’s inexpensive, jargon-free, and to the point. Your public library probably has it.
Your 401(k) might be supported by FutureAdvisor, a free investment advice service I wrote about recently. Their recommended portfolios are pretty good and they’re adding more 401(k) support all the time.
The smartest investors on the net hang out at a site called Bogleheads, named for Vanguard founder John C. Bogle. Post your 401(k) options on the “Help with Personal Investments” forum and you’ll get solid, unbiased recommendations, most likely within an hour.
Diego asks: I’m 29 and got my first job while finishing my PhD. I have a 401(k) but don’t know how to distribute my contributions.
With current low interest rates, low capital gains taxes, baby boomers retiring, and technology companies moving abroad, US stocks don’t seem a good option in the long run.
U.S. bonds are too safe, giving barely to enough gains to compensate for inflation and international stock options are all in Europe, which seems rather unstable. Should I just stop contributing?
Diego, I like your outlook. Not because I particularly agree or disagree, but because it reminds me of the famous 1979 Business Week cover story called, “The Death of Equities.”
In 1979, a lot of people argued that the U.S. economy was toast. Recession? Check. Inflation? Obscenely high. Regular investors were getting out of the market in disgust. It all added up to an obvious conclusion: the U.S. stock market was poised for years of disappointing returns—perhaps a permanent bear market.
Over the next twenty years, U.S. stocks had their biggest, longest sustained bull market ever. By 2000, it looked like you couldn’t possibly lose money in stocks. Oops.
My point is: your market analysis could be correct. But the fact that everything looks bleak doesn’t mean it’s a bad time to invest. It could turn out to be a terrific time—or not.
Nobody can predict future market returns, least of all me, but you can always find an excuse not to invest. There’s no good excuse for giving up the instant tax break you get by contributing to your 401(k).
Jon asks: Is it pointless to invest in two target date retirement funds (of the same target year) at the same time?
Hmm, those last two answers were pretty long-winded. Let me see if I can rein it in for Jon’s sake. Here goes:
It doesn’t provide any diversification benefit. But if you have a good (meaning “cheap”) target-date fund in your 401(k) and another good one in your IRA, it’s fine. Go for it.
Do you have a burning personal finance question for Matthew Amster-Burton? Visit the Mint.com Facebook fan page and ask away!
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
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Typically, most people automatically assume they should roll over their old 401(k) into a traditional IRA. However, a lot of people have been asking about another option lately – and that’s whether you can roll your 401(k) over into a Roth IRA instead.
Fortunately, the definitive answer is “yes.” You can roll your existing 401(k) into a Roth IRA instead of a traditional IRA. Choosing to do so just adds a few additional steps to the process.
Whenever you leave your job, you have a decision to make with your 401k plan. Most people don’t want to let an old 401(k) sit idle with an old employer, and could benefit immensely by moving those funds somewhere that could benefit them more in the long run. Let’s see if I can help you make “cents” of the situation.
But first, let’s look at the rules behind the strategy of rolling over your 401k into a Roth IRA.
Table of Contents
Need to open a Roth IRA?
My favorite online broker is Ally Invest but you can check out our recap on the best places to open a Roth IRA and the best online stock broker sign-up bonuses. There are many good options out there, but I have had the best overall experience with Ally Invest. No matter which option you choose the most important thing with any investment is to get started.
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Roth IRA Rollover Rules From 401k
As a reminder, you must generally be separated from your employer to roll your 401k into a Roth IRA. However, some employers do permit an in-service rollover, where you can do the rollover while still employed. It’s permitted by the IRS, but not all employers participate.
Before January 1, 2008, you weren’t able to roll your 401(k) into a Roth IRA directly at all. If you wanted to do so you had to complete a two-step process. (Keep in mind that this would also apply to old Simple IRA’s, SEP IRA’s and 403b’s, 457, and qualified pensions, too)
Open a Traditional IRA.
Convert the Traditional IRA to a Roth IRA.
However, the law changed shortly after and this option became available. Still, just because the law has made this option available doesn’t mean you can definitely roll your old 401(k) into a Roth IRA no matter what. Unfortunately, it all depends on your plan administrator.
For example, recently I had two clients who intended to roll their old retirement plans into a Roth IRA.
One client had an old military retirement plan- Thrift Savings Plan (TSP) – and the other had an old state retirement plan. After helping each of them complete the required paperwork, I came across an interesting discovery.
The TSP rollover paperwork had a box you could mark if you wanted to roll over the plan into a Roth IRA (the instructions had been added to make sure you had a Roth IRA already established). However, the state retirement plan did not give that option.
The only option was to open a traditional IRA to accept the rollover and then immediately convert it to a Roth IRA. That certainly seemed like a hassle at the time, and it definitely was.
However, this man’s state retirement plan is not the only one I’ve encountered with these extra “rules.” Many 401(k)’s and 403(b)’s come with the same “No-Roth IRA Rollover” option. This option was supposed to be mandatory in 2010, but some still do it on a voluntary basis.
At the end of the day, this means you should explore this option thoroughly before automatically assuming it would work in your case. Ask questions, consult your financial advisor, and read through all of your rollover paperwork carefully before you begin moving in this direction.
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Recap on Roth IRA Conversion Rule
These days, nearly anyone can take all of their traditional IRAs and old retirement plans and convert them to a Roth IRA. The amount you convert will be taxed, but it still can be an attractive move for those that feel that taxes are going nowhere but up.
How Do I Rollover if I Receive the Check?
If you receive a distribution check from your 401(k) rollover to a Roth IRA, then chances are good they will hold around 20% for taxes. If you want a direct 401(k) rollover to a Roth IRA, you may want to send that check back to your employer 401(k) provider and ask to be sent all of your eligible retirement distribution directly to your new Rollover IRA account (not as a check, or they will just give you 80% again).
You have 60 days upon receiving the check to get the money into the Roth IRA- no exceptions! So don’t procrastinate on this one.
What About the Roth 401k?
If your employer offers a Roth 401k and you were savvy enough to take part, the path to a rollover will be much easier. When you’re converting one Roth product to another, there is simply no need for conversion. You would simply roll the Roth 401(k) directly into the Roth IRA with the help of your plan provider.
Roll Your 401(k) by Following These Steps
You have to have a Roth IRA open/established before you can do any of this.
Ask your plan provider about the paperwork required to roll your plan over, then complete the paperwork in a timely manner.
Enjoy the tax-free growth of your Roth IRA!
4 Signs It Makes Sense to Roll Your 401(k) into a Roth IRA
If you’re thinking of rolling your 401(k) into a Roth IRA instead of a traditional IRA, you have plenty of reasons to do so. Not only do Roth IRAs let you invest your dollars in the same investments as traditional IRAs, but they offer additional perks that can help you save money down the line. Here are four signs that a Roth IRA might actually be your best bet.
1. You expect to pay higher taxes in the future.
Since Roth IRAs use after-tax dollars, you’ll have to pay taxes upfront on any funds you roll over. However, you won’t have to pay taxes on your distributions, which could be extremely beneficial if you’re taxed at a higher rate when you reach retirement. You’ll pay taxes either way – now or later. But with a Roth IRA, you can rest assured your withdrawals will be tax-free.
2. You want to take withdrawals when you’re ready, and not a minute before.
While traditional IRAs force you to begin taking withdrawals at age 70 ½, Roth IRAs do not have this stipulation. Because of this, you can squirrel your Roth IRA funds away until you’re ready to use them.
3. You expect to earn more money in the future.
If you plan to earn lots of money in the future – or earn a high income now – you should consider rolling your funds into a Roth IRA instead of a traditional IRA. For single filers in 2023, the maximum income allowable for contributions to a Roth IRA starts at $138,000 and ends at $153,000. Learn more about Roth IRA rules and contribution limits here.
For married filers, on the other hand, the ability to contribute to a Roth IRA begins phasing out at $218,000 and halts completely at $228,000 for 2023. The more you earn in the future, the harder it will become to contribute to a Roth IRA and secure the benefits that come with it.
4. You want to increase your tax diversification.
Contributions to traditional IRAs are tax-advantaged, meaning you won’t pay taxes on your invested funds until you begin taking withdrawals at retirement. Roth IRAs, on the other hand, are taxed up front but offer tax-free withdrawals after age 59 ½.
If you’re unsure how your tax and income situation might pan out in the future, having both types of accounts – a traditional IRA and a Roth IRA – is a smart move in terms of diversifying your future tax exposure.
401k to Roth IRA Rollover Rules
Details
Eligibility
You can roll over a 401k to a Roth IRA if you have left the employer sponsoring the 401k and are no longer contributing to the plan. Some plans also allow in-service rollovers, but it’s best to check with your plan administrator for details.
Taxes
When you roll over a 401k to a Roth IRA, you will owe income taxes on the amount you convert. This is because contributions to a 401k are made with pre-tax dollars, while contributions to a Roth IRA are made with after-tax dollars.
Conversion Limitations
There is no limit on the amount you can convert from a 401k to a Roth IRA. However, the amount you convert will be added to your taxable income for the year in which you make the conversion, which could have tax implications.
Timing
You can convert a 401k to a Roth IRA at any time, but it’s important to consider the timing of the conversion carefully. If you convert when your income is higher, you will owe more in taxes.
Penalty-Free
If you are 59 ½ or older, you can convert a 401k to a Roth IRA penalty-free. If you are younger than 59 ½, you may be subject to a 10% early withdrawal penalty on the amount you convert.
The Bottom Line – Rolling Over 401k into a Roth IRA
Rolling your 401(k) into a Roth IRA is a smart decision for many investors, but it may not be right for everyone.
Some financial advisors may suggest rolling over your 401k into a Roth IRA to take advantage of the tax-free growth the account offers. While this can be a great option for some, it’s important to consider if you’ll be able to afford to pay the taxes on your contributions and earnings when you eventually withdraw them.
Before you pull the trigger, make sure to investigate all of your options and consider speaking with a tax professional. When it comes to complex investment vehicles and taxes, what you don’t know can hurt you
FAQs on Rollover 401k to Roth IRA
Can you roll over 401k to Roth IRA without penalty?
Yes, you can roll over funds from a 401(k) to a Roth IRA without incurring any penalties, but there are some important rules and restrictions to be aware of.
First, you’ll need to meet the eligibility requirements for a Roth IRA, which include having earned income and not exceeding certain income limits. If you’re eligible, you can roll over funds from your 401(k) to a Roth IRA by asking your 401(k) plan administrator to transfer the funds directly to your Roth IRA account. This is known as a “direct rollover” and it allows you to avoid paying any taxes or penalties on the funds.
However, there are limits on how much you can contribute to a Roth IRA each year, and there may be tax consequences if you exceed those limits. It’s important to consult with a financial advisor or tax professional before making any decisions about rolling over funds from a 401(k) to a Roth IRA. They can help you understand the rules and restrictions and determine if a rollover is the right move for your financial situation.
What are the disadvantages of rolling over a 401k to a Roth IRA?
There are a few potential disadvantages to rolling over funds from a 401(k) to a Roth IRA. These include:
1. Tax implications: When you roll over funds from a 401(k) to a Roth IRA, you’ll have to pay taxes on the amount you roll over. This can be a disadvantage if you’re in a high tax bracket and don’t have other funds available to pay the taxes.
2. Loss of employer matching: If your employer offers matching contributions to your 401(k), you’ll lose out on those contributions if you roll over your funds to a Roth IRA.
3. Loss of certain benefits: 401(k) plans may offer certain benefits, such as loan provisions and hardship withdrawals, that are not available with a Roth IRA. If you roll over your funds to a Roth IRA, you’ll lose access to these benefits.
Overall, rolling over funds from a 401(k) to a Roth IRA can be a good move for some people, but it’s important to carefully consider the potential disadvantages and consult with a financial advisor before making any decisions.
What is the tax penalty for rolling 401k to Roth IRA?
If you roll over funds from a 401(k) to a Roth IRA, you’ll have to pay taxes on the amount you roll over. This is because funds in a 401(k) are pre-tax, meaning you don’t have to pay taxes on them until you withdraw the funds. When you roll over the funds to a Roth IRA, you’re essentially withdrawing the funds and then depositing them into the Roth IRA, so you’ll have to claim that amount of reportable income.
Since you’re “rolling over” and not taking a distribution you won’t have to pay the 10% early withdrawal penalty if you’re under the age 59 1/2. If you do choose to this be prepared to pay the taxes on the rollover out of pocket. Otherwise if you use your 401k money to pay the taxes you will be penalized on that amount.
What is the Roth five year rule?
The Roth 5 year rule is a requirement for certain tax-free withdrawals from a Roth IRA. In order for a withdrawal from a Roth IRA to be tax-free, the account must have been open for at least 5 years and the withdrawal must be made after the age of 59 1/2. If these conditions are not met, the withdrawal may be subject to taxes and penalties.
The Roth 5 year rule applies to both contributions and earnings in a Roth IRA. For example, if you make a contribution to a Roth IRA and then withdraw it within 5 years, the withdrawal will be subject to taxes and penalties unless it meets one of the exceptions to the rule. The same is true for earnings on your contributions – if you withdraw earnings from a Roth IRA within 5 years, they will be subject to taxes and penalties unless an exception applies.
There are a few exceptions to the Roth 5 year rule, including:
-Withdrawals made to pay for qualified higher education expenses -Withdrawals made to pay for qualified first-time homebuyer expenses -Withdrawals made due to the account holder’s disability -Withdrawals made by a beneficiary of the account after the account holder’s death
It’s important to understand the Roth 5 year rule and the exceptions to it before making any withdrawals from a Roth IRA. If you’re not sure whether a withdrawal will be subject to taxes and penalties, it’s a good idea to consult with a tax professional.
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With Fidelity and Vanguard, investors can access traditional, full-service investment platforms that allow you to individually manage your own account. Robinhood, by comparison, offers a very different experience geared towards mobile users. Here’s how they stack up. If you prefer hands-on investing advice, a financial advisor could help you create a financial plan for your investment goals.
Overview: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard both offer standard, full-service platforms that support most mainstream financial products. They are individual trading platforms, meaning that you trade your own assets and manage your own portfolio. Fidelity tends to distinguish itself through its advisor services. With a brand that has long centered around its retail financial advisories, this platform offers particularly strong educational and advisor resources.
Vanguard, on the other hand, has long been associated with the firm’s mutual funds. It continues to build its identity around these long-term assets, offering more no-fee funds than most competitors and charging low fees for funds not on that list.
Robinhood offers an distinctly different product that is designed primarily for mobile and online trading users. Investors using the platform should be self-sufficient and tech savvy, since users will get limited information about financial products.
Fees: Robinhood vs. Fidelity vs. Vanguard
All three of these brokerages offer no-fee trading and require no minimum balances. This means that you don’t pay anything to sign up, don’t have to carry any amount of money in your account and can trade most of the platform’s assets for free.
Robinhood
Robinhood, on the other hand, charges nothing for most of its services. There are no fees or commissions on each trade. Nor does Robinhood charge inactivity fees or other transaction fees for the most common activities such as depositing or withdrawing money. The main fee that Robinhood charges is $5 per month to subscribe to Robinhood Gold, which allows margin trading at 7.5% interest rate and – as of April 2023 – 4.4% APY on idle cash.
Fidelity
Fidelity lets customers trade stocks, ETFs and bonds free of charge. There are several thousand no-fee mutual funds. Fidelity charges $49.95 to trade funds that aren’t on its no-fee list. Options trading costs $0.65 per contract. There is a zero expense ratio for four Fidelity funds. The Depository Foreign Trust Company foreign settlement fee is $50 per trade.
Vanguard
When trading Vanguard mutual funds and ETFs, you won’t face any commission fees on those trades. You also avoid commission charges on 1,800 non-Vanguard ETFs and mutual funds when you buy online. Trading individual stocks on Vanguard, which charges a $20 annual account service, will cost you $7 per trade. Minimum balances for mutual funds range from $1,000 to $100,000. The firm recently lowered the minimum investment on many low-cost Admiral Shares index mutual funds, from $10,000 to $3,000.
Services & Features: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard both offer broadly similar products when it comes to services and features. These are, as noted above, full-service trading platforms. This means that you manage your own account and can personally buy and sell most mainstream financial products.
Both of these platforms support stocks, ETFs, bonds, mutual funds and options contracts, and neither allows you to trade futures contracts or forex. Both also provide a full suite of technical indicators, ranging from basic information like pricing and volatility indicators to more complex data sets. This makes either platform generally a good choice for long-term investors and short-term traders. However, neither offer some of the more specialized features, like high-speed transactions, that active day traders prefer.
Vanguard distinguishes itself somewhat for wealthier and passive investors. It offers better prices on both mutual funds and options contracts to investors who have at least $1 million invested in their Vanguard account, and it has a better selection of mutual funds for investors to choose from. Most investors won’t find much advantage in a large selection of mutual funds, since the average investor will only pursue a small number of funds that meet their personal risk criteria anyway. However, sophisticated investors may prefer this kind of selection.
Fidelity distinguishes itself with its education and advising services. The brokerage offers an impressive array of educational materials for new investors, and that’s particularly useful when it comes to understanding complex products and the range of technical data you can access. Relatively new investors will find this useful.
Robinhood, on the other hand, is focused around its app experience and the company’s design philosophy is to allow people to trade stocks at great convenience. They have achieved this, building an app that lets you buy and sell stocks and options contracts with a swipe.
You should note, however, that Robinhood offers very few tools for understanding your investments. Their technical data is minimal, with little more than basic information about pricing and trading history. This makes Robinhood far more accessible than any other trading platform, but investors should be self-sufficient in researching investments and the risks that come with trading equities and options.
Online & Mobile: Robinhood vs. Fidelity vs. Vanguard
Fidelity and Vanguard are both clearly designed for their website experience.
This is common among full-service trading platforms. Making investments requires a lot of data, and sophisticated investors will want even more. This can simply require a lot of screen space.
In that regard, both services are solid choices for an investor. Both have well designed interfaces that allow you to access your portfolio at a glance, and which let you find both financial assets and technical information relatively easily. As with their services and features, Vanguard’s site is a little more complex than Fidelity’s and will generally serve more sophisticated investors better, while new investors will generally prefer Fidelity’s web experience.
Both have apps that are generally well regarded as companions to the platform’s full-service web experience. The Fidelity app has high ratings on the Apple App Store (4.8 rating) and Google Play (4.2 rating). The Vanguard app also has a high rating on the Apple App Store (4.7 rating) but only a 2.0 rating on Google Play.
However, with both platforms, the apps do not offer the complete range of data and technical indicators that you can get through the web platform, and they are best considered useful add-ons for checking your portfolio.
Robinhood has the opposite design philosophy, with a 4.2 rating on the Apple App Store and a 3.9 rating on Google Play. This trading platform has a sleek, minimalist approach that works extremely well for users to access their portfolios quickly, and find and trade assets with ease. The platform also has a website-based interface, but it sacrifices much of the app’s clean design.
Which Should You Use? Robinhood vs. Fidelity vs. Vanguard
Both Fidelity and Vanguard are good choices for individual investors who want to manage their own portfolios. If you have a relationship with either company, you would be well served by using their platform.
Otherwise, new investors may find a small advantage with Fidelity because of the company’s generally excellent educational materials and access to the network of Fidelity financial advisors. Sophisticated investors may prefer Vanguard, as they will be better able to take advantage of the small, but important, differences among the platform’s many mutual funds.
Investors who are tech savvy and self-sufficient to research opportunities and risks for their investments could benefit from the convenience of Robinhood.
Bottom Line
Vanguard and Fidelity are full-service platforms that allow you to trade most mainstream financial assets. While they are largely comparable in terms of price and features, Vanguard has a slight edge for more sophisticated investors and Fidelity may be more useful for newcomers who are still learning about the market. Robinhood, on the other hand, offers a sleek, minimalist experience that requires investors to be more knowledgable about investments.
Tips for Investing
A financial advisor can help you develop an investment strategy that works for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
It’s important to know where your investments will stand over time. SmartAsset’s free investment calculator can help you get an estimate to keep your goals on track.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
How Often Should You Rebalance Your Portfolio? – SmartAsset
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Choosing the right asset allocation matters for achieving your investment goals. But it isn’t just set-it-and-forget-it. Rebalancing your portfolio from time to time is necessary to ensure that you have the right mix of investments, based on your goals and risk tolerance. The question is, when do you need to rebalance? Knowing how often to rebalance portfolio allocation is a basic – yet important – investing lesson to learn. A financial advisor can offer valuable insights as you rebalance your portfolio.
What Is Portfolio Rebalancing and Why Is It Important?
Portfolio rebalancing simply means adjusting the weightings of different assets in your portfolio. This is achieved by buying and/or selling securities to bring your asset allocation back in line with your goals.
For example, say you prefer to hold 80% of your investments in stocks and 20% in bonds. But higher-than-expected returns have pushed the stock portion of your portfolio to 90%. To get back to your ideal 80/20 mix, you’d have to sell off some of your stocks or purchase more bonds to act as a counterweight.
Portfolio rebalancing matters for maintaining the appropriate level of risk in your portfolio. Say you’re more risk-averse and prefer to hold a higher proportion of bonds. If you don’t rebalance, you could expose yourself to more risk than you’re comfortable with if the stock portion of your portfolio grows.
On the other hand, failing to rebalance could mean you’re not taking enough risk to achieve your investment goals. You could end up with too much of your money in bonds or fixed-income investments, which could limit your portfolio’s growth potential.
Rebalancing regularly can help with maintaining a diversified portfolio. It’s also an opportunity to take a closer look at what you own to decide if those investments still match up with your needs and objectives.
How Often to Rebalance Portfolio?
Deciding how often to rebalance your portfolio is entirely a personal decision. You could do it monthly, quarterly, biannually or once a year. The advantage of using a time-based approach is that it’s easier to get into a habit of rebalancing, so you don’t forget to do it. And while you’re rebalancing, you may tackle other tasks as well, such as reviewing expense ratios for the mutual funds or exchange-traded funds you hold or commissions you’re paying to your brokerage.
You can also choose to rebalance once your asset allocation reaches a specific tipping point. So again, say you’re focused on investing 80% of your portfolio in stocks and 20% in bonds. You may set a rule for yourself to rebalance any time the stock portion of your portfolio grows to 85%. This is a fairly standard rule of thumb to follow, though you may choose a different percentage instead. For example, you may decide to rebalance if your asset allocation changes by 10% or 15%.
The advantage of rebalancing this way is that it allows you to avoid having your portfolio allocation be off-kilter for extended periods of time. If you were to only rebalance once a year, for example, it’s possible that you could go most or all of the year with an asset allocation that doesn’t match up to your goals or risk tolerance.
The key with either approach is to avoid overdoing it. Say you follow a set calendar for rebalancing quarterly. Rebalancing just because it’s time to rebalance may be counterproductive if your asset allocation hasn’t shifted course in a major way. Likewise, rebalancing once your asset allocation moves beyond a set percentage range could be problematic if it means paying more fees to your brokerage.
While many brokerages have adopted $0 commission trades for U.S. stocks and ETFs, fees may still apply to trade mutual funds or bonds. So even though rebalancing could help you to keep your portfolio in line, it may mean paying higher fees.
How to Rebalance Your Portfolio
If you want to rebalance your portfolio, the first step is to take an inventory of your current holdings. Specifically, you’ll want to break down what percentage of your portfolio is dedicated to different asset classes, i.e. stocks, bonds, cash and cash equivalents, real estate, etc. You can also drill down even further by looking at your allocation to domestic versus international investments and by market sector.
So if 80% of your portfolio is made up of stocks, for example, consider:
How much of that is U.S. stocks
How much is international stocks
Which stock sectors you own (i.e. healthcare, financials, utilities, etc.)
Whether you own more large-caps, mid-caps or small-caps
How much of your investments are in growth vs. value stocks
Digging deeper into your holdings can help you quantify which type of investments you need and want to have in your portfolio, based on your preferred investing strategy. If you set your asset allocation by age, for example, then your ideal allocation should reflect the level of risk that a person in your age range would typically be comfortable with.
Once you know what you own and what your ideal asset allocation should be, you can rebalance by buying or selling securities as needed. You may also want to consider asset location along with allocation. Asset location means where you keep your investments.
So you might have money invested in a taxable brokerage account, a 401(k) plan at work and an individual retirement account (IRA). All three have different tax profiles and all three may offer a different range of investments or charge different fees. When rebalancing, it’s important to consider the entirety of your portfolio across all investment accounts to decide where to keep which assets.
For example, your 401(k) may include target-date funds. These funds base their asset allocation on your target retirement date, then rebalance themselves automatically as you get nearer to that date. If the majority of your 401(k) is invested in a target-date fund then you may not need to do much to rebalance. But you’d still want to look at the fund’s underlying holdings and compare them to the funds you hold in your IRA or brokerage account. This way, you can avoid becoming accidentally overweighted.
Also, consider whether it makes sense to let an algorithm rebalance for you if you’re investing with a robo-advisor. Some, though not all, robo-advisory platforms include automatic rebalancing as an account feature. The pro is that you don’t have to do any heavy lifting to rebalance. The con, of course, is that rebalancing decisions are guided by an algorithm rather than a human perspective. So that’s one reason you may still want to talk to a financial advisor about the right way to rebalance.
The Bottom Line
There’s no single answer for how often to rebalance a portfolio. At a minimum, it can be helpful to review your portfolio and rebalance as needed at least once a year. The important thing when deciding how often to rebalance is to choose a frequency that fits your overall investing style.
Tips for Investing
If you’re considering a robo-advisor for automatic rebalancing, remember to weigh the costs as well as the other features that may be included. Robo-advisors typically charge an annual management fee which may or may not be tiered based on your account balance. So you might pay a management fee of 0.25% or 0.30%, which is lower than the 1% typically charged by human advisors. But think about what you’re getting in return, aside from automatic rebalancing. Is tax-loss harvesting included? Do you have the opportunity to speak to a human advisor if needed? Asking those kinds of questions can help you decide if a robo-advisor is right for you.
Consider talking to a financial advisor about the ins and outs of portfolio rebalancing and why it’s important. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Sometimes, these decisions are made instinctually – without much thought. While instinctual decisions might turn out to be the right ones, they can also be the wrong ones.
Every once in a while, it’s a good idea to take a step back and examine our financial decisions. Are they smart? Are they generous? How do we make smart and generous financial decisions? These are important questions to ask.
Take a few moments to think through these questions.
How to Make Smart Financial Decisions
For some reason, high schools don’t seem to teach students how to make smart financial decisions. I certainly didn’t grow up learning how to make smart moves with my money. I had to go to college for that . . . and I still had a lot to learn over the years.
Let me give you a few shortcuts regarding how to make smart financial decisions.
1. Don’t make big decisions quickly.
I once had a client tell me that they wanted to take an enormously large chunk of money out of their retirement account because they wanted to buy a truck. Uh, bad decision.
I doubt that my client had given this idea much thought, because if they had, they would have chosen to keep the money in the retirement account.
Don’t make big decisions quickly. It might cost you.
2. Take educated risks.
It’s okay to take risks. But if you’re going to take them, make sure they are educated ones.
For example, it’s reasonable to diversify your investments for retirement throughout the stock market. Is it a risk? Yes. Is it an educated one? You bet. This kind of risk is reasonable because you’re nearly betting on the entire stock market. Unless armageddon happens, you’re probably going to do fine over the long-term.
Some people are afraid to take even educated risks. Too bad for them, they’ll most likely lose out on a lot of opportunities.
For example, I took the educated risk of spending time and money on creating a blog and made over a million dollars from it. It was a risk in that it could have been a waste of time and money and turned out to be a flop, but it worked out!
3. Get the advice of many.
Before you sign up for that variable annuity, it might be best to talk with more financial advisors to see if it makes sense.
I remember a woman who paid over $3,500 in variable annuity fees and didn’t even know it. Had she sought my input and advice before she signed on the dotted line, she probably would wouldn’t have paid those fees because she would’ve known the details about that crummy financial product.
If you would get the opinion of another doctor, why wouldn’t you get the opinion of another financial advisor?
Make smart financial decisions.
How to Make Generous Financial Decisions
It’s easy to think about me, me, me. But what about the we, we, we?
Our financial decisions not only affect ourselves, but they also affect the people around us.
Here are some ways to make generous financial decisions.
1. Define your purpose in life.
Many people are living day to day. Sometimes, they’re working dead-end jobs that don’t accomplish their life goals.
Sometimes, they don’t even have life goals!
Don’t let this be you. Define your purpose in life.
Here are some questions that can help you define your purpose in life:
“How would you like to leave the world a better place?”
“What influence do you want to have on others?”
“Why are you doing what you’re currently doing in life?”
2. Focus on your needs.
The challenge for all of us is to not live in surplus. This is difficult to accomplish, but it’s the most generous way.
By focusing on our needs and meeting those, we can find ourselves more willing to give our surplus to others. The truth of the matter is, stuff only makes us happy for a short period of time. True happiness, friends, is found elsewhere.
3. Educate yourself about others’ needs.
Once we’re willing and able to be generous, it’s important to educate ourselves about others’ needs.
If you’re going to give to the homeless, find the best organizations to give to that are focused on helping the needy instead of their own wallets. This is just one example.
Make generous financial decisions.
How American Century Investments Represents a Smart and Generous Investing Option
Every once in a while, you might run across a great company. American Century Investments is one of those companies.
I believe that investing with them is not only a smart choice, but it’s also a generous one. Here’s how.
More than 40 percent of American Century Investments profits have been distributed to the Stowers Institute for Medical Research, a non-profit basic biomedical research organization. The Institute is the controlling owner of American Century Investments and has received dividend payments totaling over $1 billion since 2000. This institute is a 550-person, basic biomedical research organization focused on improving their understanding of fundamental biological processes.
I don’t know about you, but when you can accomplish a higher purpose while investing at the same time, that makes me feel good. Asset management companies that donate to worthy causes get the “thumbs up” from me.
Now, did this company come up out of nowhere? Of course not. It was due to the generosity of a couple: James Stowers Jr. and his wife, Virginia. Both cancer survivors, they understood the need for medical research and founded the Stowers Institute for Medical Research in 1994.
Here’s what they said about it:
Virginia and I are both cancer survivors and we know first-hand the fear and loneliness that come with the diagnosis of a life-threatening disease. So it was natural to think about how we might offer help and hope to others facing cancer and other diseases.
This couple is an inspiration. Instead of hoarding all their wealth, they actually dedicated their personal assets to create the Stowers Institute for Medical Research. What a powerful example.
Health and finances seem to affect each other. My dad, for instance, had so much debt that it stressed him out – which I believe was a contributing factor in his declining health and death. Therefore, a campaign to better both the financial and medical health of people is, in my view, a worthwhile and meaningful campaign.
Not only is American Century Investments a worthy asset management company because of their distributions to the Stowers Institute for Medical Research, but they have some unique characteristics as an investment company.
For example, investment management is their sole business focus. They have had performance focus for more than 55 years and have the goal of delivering superior, long-term, risk-adjusted performance.
Concluding Thoughts
You can make smart and generous financial decisions. And you know what? Those decisions will affect every other area of your life.
The truth of the matter is that our health affects our finances, our finances affect our relationships, our relationships affect our job performance, and so on and so forth.
Aim to improve your finances. Other areas of your life are sure to benefit as well.
Interest Rate for Series I Savings Bonds Falls to 4.3%. Here’s What it Means
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Gone are the days of series I savings bonds paying almost 7% in interest. The U.S. Treasury announced Friday that the inflation-protected bonds would start paying investors 4.3% on May 1, down from the 6.89% that they’ve paid out over the last six months.
Since they were first introduced in 1998, series I savings bonds – also known as I bonds – have helped investors keep pace with inflation. They’ve especially come in handy in recent years, as inflation has reached levels not seen since the early-1980s. Here’s what you need to know about I bonds and Friday’s interest rate adjustment.
A financial advisor can help you determine whether I bonds or other inflation-protected securities are right for your portfolio. Find an advisor today.
About I Bond Interest Rates
An I bond’s interest rate is calculated using two separate rates – a fixed rate and an inflation rate. While the former stays the same for the duration of the bond, the inflation rate changes every six months. That’s because the latter is linked to the Consumer Price Index for all Urban Consumers (CPI-U).
As a result, when inflation increases, like it has in recent years, I bonds pay out more interest. When inflation falls, they pay out less.
On Friday, the Treasury raised the fixed interest rate for I bonds from 0.40% to 0.90% but dropped the semiannual inflation rate to 1.69%. This resulted in a combined interest rate of 4.3% for newly issued bonds.
Keep in mind that an I bond’s combined rate is calculated in two steps. First, the fixed rate is added to double the semiannual inflation rate. Next, the fixed rate gets multiplied by the semi-annual inflation rate. The two sums are then added together, resulting in the combined interest rate of an I bond. Here’s the formula:
[Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
What Falling Rates Mean
As inflation has climbed in recent years – peaking at 9.1% in summer 2022 – so did I bond interest rates. But as inflation continues to fall, the same will happen for I bond yields.
Friday’s rate adjustment comes one year after I bonds were paying investors a whopping 9.62%. In November, the Treasury raised the fixed rate from 0% to 0.40% but lowered the inflation rate to 3.24%. That brought the combined rate down to 6.89%.
While Friday’s adjustment results in lower overall interest rates, the fixed rate is now at its highest point since November 2007 (1.20%). Keep in mind that if the inflation rate increases again in another six months, those who purchase I bonds now will stand to benefit because their bonds will continue to pay out 0.90% in fixed interest plus the higher interest rate.
Bottom Line
Series I savings bonds or I bonds are inflation-protected debt securities issued by the U.S. Treasury. The bonds, which were previously paying 6.89%, will begin paying out 4.3% on May 1, the Treasury announced Friday. However, those who buy I bonds now will lock in a 0.90% fixed rate – the highest it’s been since 2007.
Tips for Managing Inflation
Treasury Inflation-Protected Securities (TIPS) are another low-risk investment that can help soften the blow of inflation. Instead of the interest rate rising and falling with inflation, the principal of a TIPS bond increases with inflation. This differentiates TIPS from I bonds, whose interest rate is linked to inflation.
A financial advisor can help you invest in I bonds, TIPS and other assets to protect your portfolio from rampant inflation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Patrick Villanova, CEPF®
Patrick Villanova is a writer for SmartAsset, covering a variety of personal finance topics, including retirement and investing. Before joining SmartAsset, Patrick worked as an editor at The Jersey Journal. His work has also appeared on NJ.com and in The Star-Ledger. Patrick is a graduate of the University of New Hampshire, where he studied English and developed his love of writing. In his free time, he enjoys hiking, trying out new recipes in the kitchen and watching his beloved New York sports teams. A New Jersey native, he currently lives in Jersey City.
I thought that I would switch it up a little bit on the blog today and share one of the videos that I did for my other site Soldier of Finance. You did know that I another site, right? Consider yourself informed. Here’s one of the many videos I’ve done. Enjoy…..
Today I want to talk a little bit about failure. A lot of people are afraid of failure. They are just terrified of it. They are afraid of trying something new. They’re scared of attempting to change something about their life so they just don’t do it at all. As much as I talk about success, whether that be on the Soldier of Finance blog or my Good Financial Cents blog, the one thing I am not afraid to admit is that I have failed. I have failed many times.
I wanted to give just few different examples of how I have failed, but more importantly what I’ve learned from it. It’s one thing to fail, but what you learn from that experience, what you take away from it and how apply it to your life going forward is the most important part. Failure is almost a necessity to success just so you can learn how to tweak and change the things that you are trying to accomplish and how you can improve those.
Example of Failure
One of the first things in my life that I failed at, which just shocked the crap out of me, was in basic training. Our very first PT test, that was our physical training test and we had to do max pushups, max sit-ups and a two-mile run. The first time that I took the PT test in basic training I failed the run. I think our cut off was somewhere in the 16-minute mark for a two-mile run, and I ran it in the high 18s. I was 21 years of age and to fail a two-mile run when I was working out, I thought I was in decent shape, it was a truly eye-opening experience and really a gut-wrenching feeling because in basic training that is not the place where you want to fail, especially around your peers, around your drill sergeants, etc.
My take away from that was don’t have this false sense of accomplishment, thinking that maybe your all good when in all actuality you need to work and to change and to improve on some of those skills. What I did was just kept doing the PT, kept doing the running, kept trying to improve on myself and my PT score and sure enough by the time basic training ended I was running it in that 14-minute mark. Still not excelling of all the other guys, but I have never been a runner in my life so just the fact that I passed and passed with a decent score I was pretty well content.
It’s Not a Pyramid Scheme….
Let me give you another example of how I failed. One thing you’ll learn about me is that I love to try new things, whether that be going out and trying new restaurants, going out and visiting new locations, or in my business life I love trying new business ventures. One area of my life where I failed not just once but twice was multi-level marketing. If you’ve heard about multi-level marketing a lot of people refer to those as pyramid schemes. I tried two different multi-level marketing businesses and both of them failed.
The take away that I got from those two experiences, those two failures was that if you’re going to start a business no matter what it is, make sure it is something you’re passionate about. Make sure it is something you believe in 100,000%. With these multi-level marketing businesses that I went through, I was sold on this dream, this vision of passive income and having all this extra money coming in. I was more focused on the money then the actual business, the actual passion that was presented in front of me. It sounded like a good idea, but I wasn’t in it for the right reasons. That was my biggest take away. I don’t mean to down all multi-level marketing businesses. I am sure there are some that have a decent business model, but the ones that I was a part of, I didn’t believe it, and I couldn’t sell something I didn’t believe in.
Now with my financial planning business, with my blog with Soldier of Finance these are all things that I believe, I’m passionate about. I want to give everything I’ve got into this hoping that I can help people, whether that’s changing their life financially or give them the sense of encouragement and accomplishment they need to succeed in their own lives.
So you’re probably thinking, “Wow, these are some pretty big failures.” And they are. These are things that I had to learn from. It was an eye-opening experience on both those occasions. These are just two examples. I promise you I have several other examples of where I have failed, but the take away, as I said earlier is what I learned from them. That is the most important part because you have to learn.
Just Like Riding a Bike
Whenever you were riding your bike for the first time, unless you were just a bike-riding animal most likely you fell. I remember I fell hard my first time, scrapped up my knee. My grandmother and my dad were there to support me and pick me back up and I was scared. I didn’t want to get back on. After getting on again, I think I fell a second and third time, but I kept trying and kept trying and learned from those experiences. Next thing you know I am riding my bike like every other kid was. You have to fall every once in a while, but don’t get discouraged. Pick yourself up, dust yourself off and learn from it and then apply it. You’ll move on and get on to the next step.
Thanks for stopping by. Be sure to check out the blog, soldieroffinance.com and we’ll see you next time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
What Is the Real Return of an Investment? – SmartAsset
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When measuring investment performance, it’s helpful to understand its real return. The real return on investment is what you earn after returns are adjusted for inflation and taxes. Nominal returns, on the other hand, don’t account for those deductions. Understanding the real return on investment matters, as it can tell you more accurately how much purchasing power it’s likely to yield.
You can talk to a financial advisor about how to create a strategic investment plan.
How Is Real Return Calculated?
Finding an investment’s real rate of return involves a fairly simple formula. Here’s an example:
To find the real rate of return on investment, you need to know the nominal rate and the inflation rate. The nominal rate is the stated interest rate or return that you can expect to earn on an investment. The inflation rate measures changes to the prices of consumer goods and services over time.
As a general rule of thumb, nominal rates are always higher than real return rates. That makes sense since the nominal rate doesn’t account for inflation or taxes. The nominal rate and the real rate of return may align more closely when inflation is close to or at zero, or the economy is experiencing a period of deflation, both of which are rarities.
Real Return Example
It’s easy to gauge the effects of real return, even if you’re not doing a step-by-step calculation. For example, let’s say that you deposit $20,000 into a CD. The bank is offering a 5% APY, which represents the nominal rate you could earn on your money. Over a 12-month period, you’d earn $1,000 in interest.
But what if the inflation rate is 2.5%? That cuts the purchasing power of the $1,000 in interest you earned in half. So now, that money is technically worth $500, which represents your real return.
That just accounts for the impact of inflation on your CD earnings. CD interest is considered taxable income by the internal revenue service (IRS), along with interest earned on other types of savings accounts. Once you factor in what you might owe in taxes on the interest, that can shrink your real return even further.
Are There Any Flaws With Real Return?
Calculating the real rate of return requires you to factor in taxes and inflation. That’s a good thing, as again, it can give you a more realistic picture of how much spending power a particular investment is generating.
There is, however, one thing that real return doesn’t account for. This formula doesn’t incorporate the fees you might pay to own an investment, and that can include:
Managing investment fees is important as those additional costs can detract from the total returns that you get to keep. Choosing tax-efficient investments, such as low-cost index funds or exchange-traded funds (ETFs) with a low asset turnover ratio, can help to minimize your fee expenses.
It’s also important to keep in mind that every investor’s tax situation is different and that inflation is not static. Even small changes to the tax code or slight increases in prices for consumer goods and services can have a significant impact on real return calculations.
How to Maximize Real Return
Getting the most return possible for your money is challenging, as certain factors may be outside of your control. While there are things you can do to pay less in fees for your investments, there’s not a whole lot that you can do directly to control inflation or changes to the tax code.
What you can manage is how you deal with the impact of both on your investments. With regard to inflation, that can mean choosing investments that tend to offer a higher rate of return overall. Stocks, for instance, can outperform certificates of deposit (CD) rates or money market funds. However, investing in stocks does carry more risk.
You can also choose investments that move with inflation or are otherwise inflation-proof. Real estate is a great example. Property tends to appreciate in value over time and when inflation goes up, rental prices can increase in tandem. If you’re renting a property out, then you can ride with the tide so to speak when it comes to how much you charge.
Minimizing the Effects of Taxation
In terms of taxation, there are a few strategies you can use to minimize the effects. Some of the best ways to save on taxes as an investor include:
Choosing longer-term investments, which are subject to the more favorable long-term capital gains tax rate.
Contributing to tax-advantaged accounts, such as 401(k) or individual retirement accounts (IRAs).
Allocating less tax-efficient assets, such as traditional mutual funds, to an IRA or 401(k).
Harvesting tax losses to offset capital gains.
Claiming all eligible deductions in order to shift into a lower tax bracket.
Bottom Line
Understanding real return is important when deciding how to invest money. The more purchasing power you have, the further your dollars can go. If you’re just looking at nominal returns, you can end up with a skewed sense of how much your investment might be worth. For example, say that you’re eyeing an investment that has delivered a 15% rate of return to investors over the last 10 years.
That sounds good but it doesn’t tell you how inflationary changes or updates to the tax code may have affected the earnings investors actually got to keep over that same period. It’s possible that once inflation rates and taxes are factored in, the net return is negative or zero. That’s something you’d like to know before you invest. Talking to a financial advisor can help you come up with a plan for managing taxes on investments so that you can get the best real return possible for your money.
Investing Tips
If you need help calculating the real return on investment, consider talking to a financial advisor. A financial advisor can walk you through the numbers when deciding what to include in your portfolio. And finding one doesn’t have to be difficult. SmartAsset’s financial advisor matching tool makes it easy to connect with three vetted financial advisors who serve your area. It takes just a few minutes to get your personalized advisor recommendations online. Get started now.
Many investors confuse an investment’s returns with its yield. You never have to make that mistake again, though. Learn the difference between these two key concepts, along with how a combination of strong yields and steady returns can help you meet your financial goals.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
Dental Savings Plan vs. Insurance: Pros and Cons – SmartAsset
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Health insurance doesn’t cover your teeth. Your teeth can cause pain, get infected and need treatment, just like any other part of the body. But when it comes to actually getting treatment the standard health insurance doesn’t cover it. Instead, you need specialized coverage to pay for a trip to the dentist’s office.
The specialized coverage comes in two main forms. The first is dental insurance. This is standard insurance that covers most of the cost of treatment in exchange for a monthly premium and co-payments. The second is a dental savings plan. This is a discount program that gives you a percent off your bill in exchange for an annual membership fee. We’ll discuss how it works.
A financial advisor can help you plan for future healthcare expenses.
What Is Dental Insurance?
Dental insurance works like standard health insurance. It is accepted at dentists’ offices, including specialists like orthodontists and endodontists, although depending on their range of services, some medical practices might accept it as well if they have dentists on staff. It pays for care that involves your teeth and gums.
With dental insurance, the insurance provider pays for a portion of each treatment. The exact amounts range based on the nature of the treatment and the nature of your insurance plan. For example, many if not most plans will pay for 100% of preventative treatment like routine cleanings and checkups, while the same plans might not pay for any part of a cosmetic procedure like teeth whitening.
What Do You Have to Pay?
You have to pay any amount that your insurance doesn’t cover, which are out-of-pocket expenses. For example, if your insurance covers 50% of a $700 treatment, that means the plan would pay $350 and you would pay the remaining $350.
Like other forms of health insurance, dental insurance is structured around three main forms of payment from the customer:
Premiums – Monthly payments that you make for the plan
Co-payments – Payments that you make when receiving any given service
Deductibles – The amount you pay before your insurance covers costs
Premiums are fixed. You pay the same amount each month for a given plan. Co-payments and deductibles will change based on the nature of the treatment that you get. Your insurance plan will have different co-payments for any given treatment and will apply different rules about deductibles.
Types of Dental Insurance
Like with other forms of medical insurance, there are different major categories of dental insurance. The three main types of dental insurance are:
Dental Health Maintenance Organizations – this offers lower premiums. But it has more restricted coverage options.
Dental Preferred Provider Organizations – Midrange premiums and more treatment options, but fewer providers.
Dental Indemnity Insurance – Higher premiums, but more options and coverage.
Pros and Cons of Dental Insurance
Pros
The main advantage to dental insurance is coverage. This works the same way as all other forms of medical insurance, in that your insurance company pays for a portion of your treatments. They will pay for dental services in whole or part, and your spending for covered services is capped each year.
That doesn’t mean your out of pocket expenses wont’ be high. Dental insurance isn’t subject to many of the same rules as health insurance, so if you need specialty services like braces, a retainer or a root canal you can still expect to spend thousands of dollars out of pocket. That’s still far less than you would spend without insurance or with a dental savings plan though. It’s also far more likely that any given dentist will accept your insurance, as fewer providers accept dental savings plans compared with insurance.
Cons
The main disadvantage to dental insurance is the costs involved when you don’t need treatment. Dental insurance isn’t nearly as expensive as health insurance, but this will still cost a lot more than something like a dental savings plan. Depending on how much coverage you need and how many people are in your household, you can expect to spend anywhere from $20 to $200 per month on dental insurance.
An individual looking for decent, but not comprehensive, coverage should expect to spend at least $50 per month.
Another way of looking at it is this: Dental insurance is better if and when you need treatment. You will spend less money and find care more easily. A dental savings plan is better when you don’t need treatment because it will cost you less.
What Are Dental Savings Plans?
A dental savings plan, otherwise known as a “dental discount plan” is different than health insurance. Instead, it could be thought of as a membership. With a dental savings plan, you pay an annual fee, typically $150 or less for a family, to enroll. In exchange, you receive a discount on services at participating dental providers.
For example, you might receive 40% off a routine cleaning or 25% off the cost of filling a cavity. Unlike insurance, the savings plan doesn’t pay for these costs. Instead, they are negotiated discounts for plan members.
You are responsible for paying for the rest of the costs of any given service. For example, if you have a $1,000 procedure and your dental savings plan gives you a 20% discount, you will pay the remaining $800.
The details of a dental savings plan can vary widely. Every program will have different dentists who participate, different costs for membership and will offer different discounts for services. Generally, fewer dentists accept a savings plan membership than insurance, so you will usually have a smaller provider network to choose from.
Who Should Consider a Dental Savings Plan
There are several situations in which it makes sense to consider a dental savings plan.
If you’re on Medicare. Such plans don’t cover most dental care (including procedures and supplies like cleanings, fillings, tooth extractions, dentures, dental plates or other dental devices). Original Medicare may pay for some dental services that are closely related to other covered medical services. Medicare Part A will also pay for certain dental services that you get when you’re in a hospital.
If you’re unemployed. These plans are relatively inexpensive and, unlike many dental insurance plans, you can access the benefits in two or three days.
If your teeth are in great shape. People who consistently floss, brush and gargle several times a day and have a history of zero cavities, may not need coverage.
Pros and Cons of a Dental Savings Plan
Pros
The main advantage of a dental savings plan is the up-front cost. Typically one of these programs will cost several hundred dollars per year in membership fees. By contrast, dental insurance can cost several hundred dollars per month (if not more) in premiums.
You also have no coverage caps with a standard dental savings plan, meaning you don’t have maximums or deductibles. And you simply receive the set discounts for any given service.
Cons
However, the downside here is that you will almost always pay more for the actual services. Despite co-pays and deductibles, insurance will typically cover more costs when it comes to receiving treatment, so you can expect a savings plan to cost more out of pocket.
The result is that a dental savings plan can often fill a role similar to catastrophic insurance. If you are healthy enough that you only need the occasional cleaning and checkup, this might be a good option. If you will need real treatment, this may end up costing you more in the long run.
Bottom Line
Dental insurance is health insurance that applies to your teeth. In exchange for premiums and a co-pay, the insurance plan pays for the rest of your treatment. A dental savings plan is a discount program, in exchange for an annual payment, that gets you a negotiated percentage off your treatment at the dentist’s office.
Tips for Managing Your Healthcare Costs
Just as you would consult a healthcare professional to assess your well-being, be sure to consult a financial professional to assess your fiscal well-being. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with three vetted financial advisors who serve your area. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Considering alternatives to health insurance is important for maintaining a healthy budget. A comprehensive budget calculator can help you understand which option is the best for you.
Eric Reed
Eric Reed is a freelance journalist who specializes in economics, policy and global issues, with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of abstract issues, emphasizing analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, with datelines that include Sao Paolo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist Eric worked in securities litigation and white collar criminal defense with a pro bono specialty in human trafficking issues. He graduated from the University of Michigan Law School and can be found any given Saturday in the fall cheering on his Wolverines.
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The earlier you begin investing, the better off you’re likely to be in the long term. Here’s how you can get started if you’re still in your 20s. It’s never too early to start investing—as long as you do so wisely. It’s important to make a proper plan so that your investments actually help you reach your goals. Here are six tips you can implement if you want to start investing in your 20s. A financial advisor can help you manage your investment portfolio.
1. Focus on Retirement
Your first investment move should be to use tax-advantaged accounts to save for retirement. Many employers offer 401(k) plans with matching. If you can afford to, max out the match to capture the greatest retirement savings. So if your employer will match 50% of your 401(k) contributions up to 6% of your paycheck, contribute at least 6% to get the full employer match.
If you don’t have retirement savings options through your employer, there are some tax-advantaged options outside of a job. If you’re self-employed, you can set up a solo 401(k) plan. You can also set up a traditional or Roth IRA on your own and contribute up to $6,500 in 2023.
While retirement savings aren’t the sexiest investment option and you won’t normally be able to access the money without a hefty penalty until the age of 59 ½, they are still the best place to start. You can set yourself up for a secure retirement by starting to build your nest egg now. Being able to take advantage of employer matches and saving on your taxes is the icing on the cake.
2. Build Liquid Savings
While investing for the future is important, it’s still wise to have some liquid savings that you can access quickly if needed. Say you lose your job unexpectedly. If your savings are locked up in a CD for another year, you’ll have to pull them out and lose some or all of the interest you had earned.
While this isn’t the end of the world, it does set you back on your investing goals. The same is true if your money is tied up in stocks—you may have to cash out at an inopportune time from an investment perspective, losing earnings.
So after you’ve set up your retirement accounts, start building an emergency fund. A good goal is to save up enough money to cover your expenses for six months. So if you need $3,000 each month for rent, utilities, transportation, food and other necessities, aim to keep $18,000 in liquid savings.
This money should sit in an account where it’s earning interest. Take a look at high-yield savings accounts, money market accounts and money market funds where your funds can generate interest while still remaining instantly accessible.
3. Start Investing With a Brokerage Account
Once you have retirement funds and an emergency savings account, you can start investing in the market. It’s time for you to set up your own brokerage account so you can buy and sell stocks, bonds, exchange-traded funds (ETFs) and mutual funds.
Many brokerage accounts can be set up and managed completely online. Shop around and see which one is right for you. Some important things to consider are whether they require a minimum initial investment, what their fees and commissions may be and whether they offer helpful tools for analyzing investments.
You might start by investing in mutual funds and ETFs, which bundle different kinds of stocks and bonds. Make sure the operating expense ratio of a fund is not excessive, such as more than 1%. You can also buy stocks and bonds directly—but first research the companies you’re considering to see if they’re a solid investment. For example, government bonds are generally a safe investment, but some corporate bonds can be quite risky. And it’s possible for a company’s stock to crash, taking your money with it.
4. Understand the Risk/Reward Trade-Off
For any investor, diversification is the name of the game. Even if you think you’ve found the most profitable stock of all time, you shouldn’t put all your eggs in the same basket. By diversifying the things you invest in, you can set yourself up for lower risk overall.
A strong understanding of risk can help you avoid meme stocks and other unwise investment maneuvers. The younger you are the higher the portion of your portfolio should be in equities, which are riskier than fixed-income securities like bonds. For example, if you’re in your 20s an 80/20 (equities/bonds) allocation might be a reasonable option for you. Use an asset allocation calculator to help you create a diversified portfolio that matches your risk tolerance.
5. Work With an Expert
If tax planning and the other complications of investing leave you with a lot of questions, you might consider working with a financial advisor to get expert advice. While there are plenty of resources out there for a beginning investor, sometimes talking to someone with deep financial knowledge can quickly pay for itself.
6. Let Your Investment Plan Grow and Evolve with You
As you age, your financial needs will change too. Generally speaking, younger investors are advised to take more aggressive and riskier financial positions because they have time to ride out the highs and lows before they’ll need to cash out. On the other hand, older investors are nearing retirement and have less time for their investments to recover if there’s a market downturn.
As you get older, you might have different financial goals than you had at 20. You might be thinking about buying a home, starting a family or starting your own business—any of which would likely change your investment strategy. Take a look at your investment portfolio at least once a year to make sure your strategy is still working for you.
The Bottom Line
Young investors can start by building retirement savings, creating an emergency fund and opening a brokerage account. Savvy investors will understand the risk/reward relationship, revise their investment strategies as their financial needs and goals change and work with a financial advisor when they need expert advice.
Tips on Investing
As you build a portfolio, you might benefit from working with a financial advisor, who can offer both investment insights and tax advice. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Success in investing is partly about your portfolio’s asset allocation. SmartAsset has an asset allocation calculator that will assist you in picking the right asset allocation for you.