The post Passive Investing: 6 Advantages to the Hands-Off Approach appeared first on NewRetirement.
]]>Below, we’ll outline the concepts of active and passive management as well as 6 reasons why adopting a passive investment philosophy would be the preferred choice.
There are fundamentally two styles of investing: active management and passive management.
Active management is a hands-on investing approach consisting of investors who are looking to beat a specific market index (or benchmark) through targeted investing, timing the market, and any number of strategies that seek higher than average returns.
As an active investor, you may have a lot of individual common stocks or actively managed mutual funds or active Exchange-Traded Funds (although to a lesser extent) within your investment portfolio. Actively managed funds are funds with portfolio managers that select investments that seek to outperform a benchmark. You may also utilize more alternative investments, like private equity and hedge funds.
Through active management, investors have a strong belief that skillful portfolio managers can outperform the market by leveraging price movements, market conditions and events (more on how that plays out later!).
While an active management approach is looking to outperform a specific segment of the market, a passive management philosophy consists of investors who are just trying to capture the returns of the market while keeping investment costs low.
The investment portfolio of a passive investor may consist of index funds and/or passively managed ETFs.
A passive investor isn’t concerned as much about capitalizing on short-term market movements or particular market events (i.e. market timing) and instead believes in the long-term potential of an investment over an extended period (i.e. a buy and hold strategy). This is reflected by replicating the investment results of a target index by holding all or a representative sample of the securities in the index.
A passive investment strategy operates under the assumption that market efficiency over the long term will produce optimal results.
If you’re an avid user of the NewRetirement Planner, you very well may be a DIY investor who fully understands the benefits of a passive investment strategy.
However, if you’re still undecided about your beliefs on investing or looking for more insights, below are 5 reasons why many investors are opting for a passive approach over active management.
As the names imply, an active investor is attempting to beat the stock market whereas a passive investor believes markets are efficient and is trying to capture the returns of a specific sector of the market. Passive funds don’t have human managers making decisions in order to try to beat the stock market. With no managers to pay, passive funds generally have very low expense ratios.
Although fees for actively managed funds have decreased over time, index funds and passive ETFs are still the winners here according to the Investment Company Institute 2023 Investment Company Factbook. In 2022:
Although the gap between .66% and .05% may seem insignificant at first glance, it can add up over time.
Let’s take a look at an example:
In regards to investing, it pays to be passive!
For many investors who don’t have a strong investment philosophy already, active management may seem like a promising approach. After all, who wouldn’t want to invest in the top-performing funds and steer clear of the under performers?
However, attempts to time the market, select individual stocks, or put together the perfect mix of actively managed mutual funds often fall short of delivering the desired investment results. Most of the professional fund managers who engage in active trading of stocks or bonds are often unsuccessful at generating returns that are better than the index they are trying to beat.
Since its initial release in 2002, the SPIVA Scorecard has been the go-to scorekeeper of the long-standing active versus passive debate. Below are some stats from the scorecard:
While active managers can indeed outperform the market from time to time, these periods of higher returns are often brief. This makes it challenging not only to identify the top-performing managers but also to find those who consistently outperform over time. Plus, the leading managers can change over time as well.
Life can certainly have its stressful moments. Your investment strategy shouldn’t add to that pressure.
Passive investing, with its set-it-and-forget-it approach, offers a profound reduction in stress and an increase in financial confidence for investors. Once you’ve selected a few index funds or ETFs and are comfortable with your asset allocation, most of the hard work is done. With a long-term perspective, minimal intervention and oversight is needed going forward.
By relinquishing the constant need to monitor market fluctuations and make frequent trading decisions, passive investors can enjoy a sense of calm and stability in their investment journey. Rather than being consumed by the anxiety of timing the market or reacting to short-term volatility, passive investors can focus on their long-term financial goals with a clear mind.
By embracing that markets are efficient, you recognize that a long-term, globally diversified, and low-cost passive portfolio offers a more relaxed and zen approach to investing.
Taxes play a role in so many areas of your finances, including your investments. When it comes to investing in taxable accounts, the tax efficiency of a fund can significantly impact the after-tax performance of your investment portfolio.
Actively managed mutual funds often come with a high turnover rate due to frequent portfolio management decisions. A turnover rate is the percentage of a fund’s holdings that have been replaced in the previous year, leading to taxable capital gains. For instance, a fund with a 100% turnover rate would essentially have an average holding period of less than one year.
Meanwhile, a passive investment strategy of index mutual funds and ETFs with built-in tax efficiency can minimize the tax drag on your returns. These funds are often more tax-efficient than active funds because they typically have lower turnover rates. An index fund’s buy-and-hold style leads to fewer taxable events and often minimal, if any, capital gains distributions. ETFs may offer an additional tax advantage: The ETF redemption process sometimes allows ETF managers to adjust for market changes without directly selling portfolio securities (saving on capital gains taxes).
As an investor, you should strive to reduce these tax costs and performance drags wherever you can. Utilize the NewRetirement Planner to review your potential federal and state tax burden in all future years and get ideas for minimizing this expense.
Time is your most precious asset, as it’s limited and irreplaceable. Given its value, it’s important to use it wisely. Investing can be as simple or as complicated as you want it to be. It can save you time or it can take away a lot of your time, depending on your investment strategy.
Pursuing an active investing philosophy can come with considerable opportunity costs. There can be significant time and effort put into your actively managed portfolio with many questions to ponder such as:
As you can see, these types of questions can weigh on you not only from a time perspective, but can take an emotional toll as well. Along with this, you also have to do the research on hundreds (if not thousands) of mutual funds and individual common stocks, which is a big time commitment in and of itself.
Meanwhile, with passive investing, you can essentially pick 1 to 3 index funds or ETFs and set it and forget it, with some rebalancing along the way. One of the few key decisions you have to make as a passive investor is determining the right mix of stocks and bonds (e.g. 60% stocks and 40% bonds) to align with your financial goals and risk tolerance. It’s a lot less time-consuming than the buy-sell, market timing questions and decisions that often come with investing in actively managed mutual funds, private equity, and hedge funds.
NOTE: Spend less time managing your investments by adopting a passive investment philosophy and focus more on planning your future retirement with the NewRetirement Planner.
Diversification is an essential element of a comprehensive investment strategy.
Since passive strategies often focus on index funds or ETFs, you’re usually investing in hundreds, if not thousands, of stocks and bonds. This allows for easy diversification and reduces the risk that a single investment performing very poorly will significantly impact your entire investment portfolio.
Just 2 or 3 index funds or ETFs can provide you with a low-cost, globally diversified portfolio that can meet your retirement savings goals.
On the other hand, if you’re handling active investing on your own without proper diversification, a few poor stick picks or actively managed funds could erase significant gains in your investment portfolio. Building a globally diversified portfolio through active management can be both time-consuming and expensive, requiring a lot of effort and potentially high fees.
While investing is a very important component of building long-term wealth, it isn’t the only consideration.
Utilize the NewRetirement Planner to build, track, and manage all aspects of your comprehensive financial picture: investments, recurring expenses, medical costs, long-term care, real estate and more. The tool can play a vital role in helping you make informed decisions about your strategies and their impact on your financial security now and in the future.
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]]>The post Financial Problems and Stress: Understand if You Have a “Leaky Ceiling” or a “Muddy Puddle” and Make Better Decisions appeared first on NewRetirement.
]]>Clear wrote:
“I split problems into two groups: muddy puddles and leaky ceilings.
Some problems are like muddy puddles. The way to clear a muddy puddle is to leave it alone. The more you mess with it, the muddier it becomes. Many of the problems I dream up when I’m overthinking or worrying or ruminating fall into this category. Is life really falling apart or am I just in a sour mood? Is this as hard as I’m making it or do I just need to go workout? Drink some water. Go for a walk. Get some sleep. Go do something else and give the puddle time to turn clear.
Other problems are like a leaky ceiling. Ignore a small leak and it will always widen. Relationship tension that goes unaddressed. Overspending that becomes a habit. One missed workout drifting into months of inactivity. Some problems multiply when left unattended. You need to intervene now.
Are you dealing with a leak or a puddle?”
Some financial stressors resemble muddy puddles: the more you try to intervene, the more complicated they become. These problems require a hands-off approach, allowing time and natural processes to resolve them.
Let’s explore some common examples of muddy puddle financial problems, understand why they defy conventional intervention, and discover strategies for their resolution.
Constantly monitoring market fluctuations and attempting to time the market can lead to emotional decision-making and impulsive trading. This behavior often results in sub-optimal investment outcomes and may even amplify losses during periods of volatility.
How to fix: Embrace a long-term investment approach based on asset allocation and diversification. Resist the urge to react impulsively to short-term market movements. Instead, focus on fundamental principles of investing, such as staying invested through market cycles and maintaining a balanced portfolio. Consider periodic rebalancing to realign investments with long-term goals and risk tolerance.
Remember, attempting to micromanage investments in response to market volatility typically leads to muddy waters rather than clear solutions.
A few additional resources:
Focusing on chasing the latest investment fads or hot trends can lead to speculative behavior and heightened risk exposure. Such actions often result in poor investment decisions driven by emotions rather than fundamentals, ultimately leading to disappointment and financial losses.
How to fix: Develop a disciplined investment strategy based on sound financial principles and long-term goals. Avoid succumbing to the allure of short-term market trends or speculative opportunities. Instead, focus on building a diversified portfolio tailored to individual risk tolerance and investment objectives. Conduct thorough research and due diligence before making investment decisions, prioritizing fundamentals over short-term hype.
Remember, chasing hot investment trends typically leads to muddy waters rather than sustainable financial success.
Unlike muddy puddle financial problems, leaky ceiling financial stressors are issues that require action. You need to do something to fix the problem. The longer you ignore leaky ceiling financial problems, the worse they get. These problems demand proactive attention and swift action to prevent further deterioration.
Let’s delve into some common examples of leaky ceiling financial problems, understand why they fit this description, and explore effective strategies for resolution.
High-interest debt, such as credit card debt or payday loans, accrues interest rapidly, compounding the financial burden over time. Ignoring it only amplifies the amount owed.
How to fix: Create a repayment plan by prioritizing high-interest debts first while making minimum payments on others. Consider consolidation or negotiation with creditors to lower interest rates. Budget rigorously to allocate more funds toward debt repayment. Here are some additional resources:
Unexpected expenses are inevitable, ranging from medical emergencies to car repairs. Without an emergency fund, individuals may resort to borrowing or depleting retirement savings, exacerbating financial stress.
How to fix: Establish an emergency fund equivalent to three to six months’ worth of living expenses. Automate contributions to this fund from each paycheck. Consider reallocating discretionary spending or exploring additional income streams to bolster savings.
Transitioning into retirement without a comprehensive financial plan in place can lead to various pitfalls and uncertainties. Without a clear roadmap, retirees may face challenges such as outliving their savings, unexpected expenses, or inadequate income to sustain their desired lifestyle.
Failing to have a written holistic financial plan leaves retirees vulnerable to financial instability and anxiety during what should be a fulfilling stage of life.
How to fix it: Use the NewRetirement Planner to take full control over your financial wealth and security. Begin by assessing current financial status, retirement goals, and anticipated expenses during retirement.
Use the tool to think through spending, income, savings, investments, insurance coverage, estate planning, and tax strategies. Establish a realistic retirement budget that accounts for essential expenses, discretionary spending, and potential healthcare costs. Consider strategies to optimize Social Security benefits, pension payouts, and other sources of retirement income. Implement a diversified investment portfolio aligned with retirement goals and risk tolerance.
Review and update the financial plan regularly to adapt to changing circumstances and priorities.
A well-defined financial plan serves as a roadmap to achieve financial security and enjoy a fulfilling retirement lifestyle.
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]]>The post The Behavioral Finance Revolution: How Daniel Kahneman Redefined Personal Financial Decision-Making appeared first on NewRetirement.
]]>One of Kahneman’s most influential contributions to personal finance lies in his exploration of cognitive biases and heuristics – mental shortcuts that often lead to irrational decision-making. In his seminal work with Amos Tversky, Kahneman identified various cognitive biases such as loss aversion, overconfidence, and the endowment effect, which profoundly influence how individuals approach financial decisions. These biases explain why people often deviate from rational economic models in their investment choices, leading to suboptimal outcomes.
By shedding light on these biases, Kahneman challenged the traditional economic assumption of Homo economicus – the rational, self-interested decision-maker – and introduced the concept of Homo sapiens, recognizing the human tendency towards irrationality and emotional decision-making.
This shift in perspective has prompted financial professionals to reassess traditional investment strategies and develop approaches that account for the psychological factors driving investor behavior.
Kahneman’s insights have catalyzed the emergence of behavioral finance, a field that integrates psychological principles into financial theory and practice. Behavioral finance acknowledges that investors are not always rational actors and seeks to understand how cognitive biases impact financial decisions.
In personal finance, this approach has led to the development of tools and strategies aimed at mitigating the effects of cognitive biases. For example, automatic enrollment and escalation features in retirement savings plans leverage the inertia bias to encourage individuals to save more consistently. Similarly, the use of dollar-cost averaging helps investors overcome the tendency to time the market by spreading investments over time, reducing the impact of emotional decision-making.
Moreover, Kahneman’s work has underscored the importance of financial education and awareness in empowering individuals to make informed decisions. By understanding their cognitive biases and psychological tendencies, individuals can adopt strategies that align with their long-term financial goals and avoid common pitfalls.
Check out: Behavioral finance, 16 ways to outsmart your brain for more wealth and security
Financial advisors embraced Kahneman’s insights to enhance their practice and better serve their clients. Recognizing the role of emotions in financial decision-making, advisors now prioritize empathetic communication and behavioral coaching to help clients navigate turbulent markets and stay disciplined during periods of volatility.
Furthermore, Kahneman’s prospect theory has influenced the way advisors frame investment options and communicate risk to clients. By presenting information in a manner that acknowledges individuals’ aversion to losses, advisors can help clients make decisions that are more in line with their risk tolerance and overall financial objectives.
At NewRetirement, we firmly believe in a rational approach to managing your financial life while also acknowledging that emotions and values can impact your decision making.
We endeavor to make our tools be educational and to empower better and more informed decisions. The NewRetirement Planner is designed to help you envision your future and to be able to compare your financial options and keep track of progress toward your goals.
Kahneman’s thinking has been an influence on our approach to helping people do better with their money.
Many of the most popular NewRetirement podcast guests have referenced the thinking of Kahneman:
And, we have written about Kahneman’s ideas quite a lot over the years:
Kahneman’s contributions to the understanding of human behavior and decision-making have had a profound impact on personal finance practices and philosophies. By illuminating the cognitive biases that influence financial decisions, Kahneman has catalyzed a shift towards more holistic and psychologically informed approaches to wealth management.
As individuals, investors, and financial professionals continue to grapple with the complexities of the financial landscape, Kahneman’s work serves as a guiding light, reminding us to acknowledge the human element in finance and strive for greater self-awareness and rationality in our financial endeavors.
Join us on the private NewRetirement Facebook group to discuss how Kahneman’s ideas have impacted your life.
It has always seemed to me that Kahneman must have had a lovely sense of humor. Here are a few notable quotes from the thinker:
It is a wonderful thing to be optimistic. It keeps you healthy and it keeps you resilient.
Nothing in life is as important as you think it is while you are thinking about it.
We’re blind to our blindness. We have very little idea of how little we know. We’re not designed to know how little we know.
We believe in reasons because we’ve already made the decision.
If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It’s the worst possible thing you can do, because people are so sensitive to short-term losses. If you count your money every day, you’ll be miserable.
We’re generally overconfident in our opinions and our impressions and judgements.
Your emotional state has a lot to do with what you’re thinking about and what you are paying attention to.
An investment said to have an 80% chance of success sounds far more attractive than one wiht a 20% chance of failure. The mind can’t easily recognize that they are the same.
Happiness is determined by factors like your health, your family relationships and friendships, and above all by feeling that you are in control of how you spend your time.
When you analyze happiness, it turns out that the way you spend your time is extremely important.
The planning fallacy is that you make a plan, which is usually a best-case scenario. Then you assume that the outcome will follow your plan, even when you should know better.
The average investor’s return is significantly lower than market indices due primarily to market timing.
Hindsight bias makes surprises vanish.
There are domains in which expertise is not possible. Stock picking is a good example. It’s been shown that experts are just not better than a dice-throwing monkey.
Courage is willingness to take the risk once you know the odds. Optimistic overconfidence means you are taking the risk because you don’t know the odds. It’s a big difference.
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]]>The post Retirement Crisis? Maybe, But the Reality is that Most People Will Retire Happily and Be Just Fine appeared first on NewRetirement.
]]>First the bad news, the retirement crisis is real.
While the retirement crisis is real, it doesn’t necessarily apply to your your own finances? In fact:
So, what should you do?
Sometimes the best way to solve a problem is to find a solution. Other times, you are better off reframing the problem. That is what many happy retirees are doing.
Here are 6 ideas for rethinking retirement, what it means and whether you are ready for it or not.
There may be a retirement crisis, but it is not negatively impacting people who take the plunge and retire. According to a Merrill Lynch Study, Beyond the Bucket List, of all times in our life, we are happiest and most content between the ages of 65 and 74.
With all of our financial woes, how can this be?
Researchers suggest that while we may not have the right monetary assets, retirement gives us an abundance of time and it is this sense of freedom and possibility that gives us true happiness. Maybe the problem is not that we have too little money in our lives. Maybe the real problem is that we don’t have enough leisure time.
The study’s authors write:
As retirees move from work into retirement, nine out of ten (92%) say retirement gives them greater freedom and flexibility to do whatever they want—and on their own terms. Leaving full-time work behind, retirees say they are able to create their own schedules, open a business, sleep in, exercise more, get to know their grandchildren better, fall in love again, travel, read more, unplug, volunteer, learn a new skill, and try lots of things that they could previously only dream about.
And, nearly all retirees tell us that freedom and flexibility increase, regardless of how much money they have.
Retirement does not have to mean giving up work entirely.
More and more of today’s successful retirees are leaving inflexible jobs that they don’t really enjoy in pursuit of full or even part time work doing something they really love doing.
Work does not have to mean nose to the grindstone forever.
Use the NewRetirement Planner and see what happens to your retirement plan if you phase out of work or work part time or seasonally for 5-10 years.
We are living much longer and much healthier lives. There is no reason to think that it is time to wind down when you turn 65.
You have probably envisioned retiring at around 65 for most of your life, but times have changed. Odds are that you are healthier than your parents were at this age. The data also suggests that you will live longer than them.
You should not retire at 65 simply because you reach that milestone. You should retire when you are ready and prepared for the next chapter of your life. Retire because you have something you want to do — not just because you want to stop working.
Figuring out how much money you need for a secure retirement is a top priority if you are considering retirement. However, it is important to remember that this number does not need to be dependent on what you have been spending over the last 10 or 20 years of your life.
Retirement is a whole new chapter of your life. You can rethink where you live and what you spend money on. And, you can plan for different phases of retirement — with different spending levels for each phase.
The NewRetirement Retirement Planner let’s you set different spending levels for any time period you can imagine.
Rethinking your retirement budget can dramatically lower how much you need overall and make you feel better about your retirement prospects.
For everyone who hasn’t saved enough, there may be someone who has saved too much. Yep. Many people over save for retirement and lose years of freedom because they are worried about running out of money, even though they have lots.
When people talk about how much you need for retirement, they are usually talking about how much you should have saved and how that money is invested.
However, the greatest source of wealth for most retirees is in your home. Your home is likely worth more than all of your savings combined.
So, what if you downsize and use some of your home equity to help fund retirement?
The NewRetirement Planner lets you model these scenarios. After setting up your plan, you can see where you stand and try out different ideas for improving your retirement finances. See how all aspects of your plan are impacted if you decide to – for example – downsize and can release $100,000 in equity.
No matter who you are or how much you have saved, it is worthwhile to document a detailed retirement plan. While most people hear retirement plan and think 401ks and IRAs, retirement planning means a lot more than just having a savings account.
Retirement planning includes thinking about budgets when you will start Social Security, what kind of supplemental Medicare coverage you will carry, where you will live, whether or not you’ll use home equity, if you will work during retirement, potential inflation rates, investment returns and much more…
Planning does not need to be scary or complicated. The NewRetirement Planner makes it easy. Take two minutes to enter some initial information, then see where you stand today. Next, start adding more details and changing some of your information. Discover meaningful ways you can improve your retirement finances.
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]]>The post Low Cost Investing: 7 Ways to Slash Your Investment Expenses appeared first on NewRetirement.
]]>
Below, we’ll outline 7 ways to keep your investment costs low as you build and preserve your wealth throughout your lifetime.
When a passive vs. active investment philosophy is discussed, you may be thinking, “why wouldn’t I want to actively engage in my investment strategy?!” Well, in most cases, it’s more expensive to go all-in on an active management investment philosophy.
An active investor is attempting to beat the stock market whereas a passive investor believes markets are efficient and is trying to capture the returns of a specific sector of the market. If you’re an active investor, your expense ratio (the cost of owning a mutual fund or ETF) will likely be higher since fund managers constantly shift around their stock and bond holdings to try boosting returns.
Meanwhile, a passive investment philosophy consists of:
A low-cost, tax-efficient (more on that later), investment strategy that you don’t have to fret about year-to-year? Sign me up!
Don’t forget to review the Coach Suggestions in the NewRetirement Planner, where you will receive alerts on specific topics, such as determining if you are an active or passive investor (and why passive is the way to go!).
NOTE: Tune in to this podcast to learn more about the benefits of index investing.
For those of us who are still working, your employer-sponsored retirement plan, such as a 401(k) or a 403(b), is likely one of your primary investment vehicles for retirement savings.
With an employer-sponsored retirement plan, you’re generally limited to the investment options available to you within the plan. For many plans, there are low-cost investment options, like index funds with low expense ratios. However, you still may not want to have to worry about picking the right funds, or choosing the right mix of stocks and bonds, or remembering to rebalance your account from time-to-time.
When you invest in a target-date fund, you don’t need to worry about determining the perfect mix of stocks and bonds or adjusting that allocation over time. The fund will automatically take care of these allocations for you. Also, in most cases, target-date funds are low-cost investment options.
Let’s take a look at an example of a popular target-date fund: Vanguard Target Retirement 2055 (VFFVX).
If you’re considering retirement around the year 2055, you might opt for that as your target date. As you can see, this one fund is well-diversified with a mix of U.S. stocks, international stocks, some bonds (fixed income) and cash. As you begin to approach 2055, the fund will increase its exposure to bond funds and decrease its exposure to stock funds, becoming more conservative the closer you are to your retirement.
Just as important, this fund has a very low expense ratio of only 0.08%! So, a target-date fund can be a great hands-off, low-cost investment within your employer-sponsored retirement plan, as you don’t have to worry about strategically picking multiple investments or rebalancing on an on-going basis (as this is done for you when investing in a target-date fund).
It is important to note that not all target-date retirement funds are created equally. There can be more costly funds in this category, so be sure to pay attention to the expense ratio before investing into a fund. If there are only expensive target-date funds within your plan (think a 0.30% or higher expense ratio), you may be better off picking a couple of low-cost index funds and taking a more hands-on approach.
In addition to the fees associated with the particular investments, it’s important to be mindful of any fees associated with the types of accounts in which you’re invested.
This is especially important when you are considering what to do with your 401(k) from a former employer. You essentially have three options:
When considering whether to leave your 401(k) with your former employer or roll it into your current employer’s plan, it’s essential to assess the investment options and fees within both plans.
Upon leaving a 401(k) account with your former employer, you may encounter administrative charges that were previously covered by your employer during your employment but are no longer covered as a former employee. These could include charges such as bookkeeping, service, and legal fees to manage the account that could reduce your return potential. You should contact your plan administrator or 401(k) provider to determine if these charges would be applicable if you are considering leaving your 401(k) at your former employer.
If you have better investment options in your current plan (think low-cost index funds or target-date funds), then you may be better off rolling that old retirement plan over.
Meanwhile, it may be a better decision from a total cost standpoint to roll over your 401(k) to an IRA. In an IRA, usually the only costs are those of the investments you hold and you have a lot more options than just through your employer-sponsored retirement plan. If your account is small enough or you insist on paper statements, some custodians may charge you a small annual fee.
NOTE: If you make backdoor Roth IRA contributions, you may want to think twice before you roll your old 401(k) into a Traditional IRA due to the pro-rata rule.
Keep track of all of your different types of investment accounts, including former 401(k)s, by ensuring they are all entered and titled correctly in the NewRetirement Planner.
At a certain point in your investing journey, especially with more wealth accumulated in your later career years, it may be tempting to invest in something a little more “exciting” than low-cost index funds or ETFs. This may include more “exotic” investments such as private equity, venture capital and hedge funds.
You may be able to afford to invest in these types of investments, but you don’t necessarily need to. What’s even more exciting than investing in these exotic funds, though, is keeping your investment costs low so you can get more out of your investment returns. And these more alternative types of investments are not going to allow you to do so.
Both hedge funds and private equity tend to be more expensive than a typical index mutual fund or ETF. Hedge fund managers typically charge an asset management fee based on the fund’s net assets (generally between 1 and 2%), along with a performance-based fee structured as a share of the fund’s capital appreciation (generally between 15 and 20%, historically). Private equity funds have a similar fee structure consisting of a management fee and a performance fee.
Adding complexity to your investment strategy doesn’t guarantee anything, other than typically higher costs. Keep it simple!
You may be saving money by not utilizing a financial advisor to assist with your investments, but there are also fees to watch out for as a DIY investor.
Full-service, or traditional, brokerages often charge fees to maintain your accounts. For example, Edward Jones charges an annual account fee of $75 for a Traditional or Roth IRA. You may want to stick with major online brokerages – such as Charles Schwab or Fidelity, as examples – which typically don’t charge account maintenance fees.
There isn’t a standardized system for trading commissions or additional fees imposed by brokerage firms and other investment institutions. Certain firms may impose substantial fees per trade, whereas others have minimal charges, often reflecting the extent of services offered.
Consider investing your money with a firm that charges no commissions or fees for stock and ETF trades.
Of course, if you follow a passive, buy-and-hold investment strategy, frequent trading won’t be a concern anyway!
Along with the actual investment fees and expenses, taxes are also a cost to consider when investing. Let’s take a look at some ways in which you can lower your investment taxes.
If you are investing in a taxable brokerage account, a passive investment strategy of index mutual funds and ETFs with built-in tax efficiency can minimize the tax drag on your returns.
These funds are tax-efficient because they have a low turnover ratio, which is the percentage of a fund’s holdings that have been replaced in the previous year, leading to taxable capital gains. ETFs may offer an additional tax advantage: The ETF redemption process sometimes allows ETF managers to adjust for market changes without directly selling portfolio securities (saving on capital gains taxes).
Along with picking the most tax-efficient investments to lower your investment costs, you also want to choose the right types of accounts to hold your investments.
Asset location involves distributing specific assets between taxable, tax-deferred and tax-exempt accounts to minimize taxes and maximize your portfolio’s after-tax returns.
Learn more about asset location as an additional tool to reduce your overall investment costs.
Tax-loss harvesting is a possible tax-minimization strategy also relating to investments within a taxable brokerage account.
It involves selling investments that have decreased in value or are underperforming, thereby realizing a capital loss, and replacing the investment with a highly correlated alternative. You would then use that loss to offset any realized capital gains from selling other investments, with the goal of reducing your overall tax liability.
If there are no realized capital gains to offset, up to $3,000 per year in investment losses can be used to offset your wages, taxable retirement income and other ordinary income (for married individuals filing separately, the deduction is $1,500).
With the NewRetirement Planner, you can review your potential tax burden in all future years and get ideas for minimizing this expense.
If you’re less of a DIY investor and prefer to get some professional guidance on your investment strategy, you can still manage to do so without paying high fees.
Today, it’s still common for most financial advisors to be paid a fee based on a percentage of the assets they manage for you. This is referred to as an Assets Under Management (AUM) fee agreement.
This is likely one of the more expensive ways to work with a financial advisor. The typical AUM fee will average around 1% per year. So, if you have $500,000 invested with an advisor under an AUM arrangement, you are paying $5,000, and this fee could increase as your assets grow (although there can be tiered fees, depending on the advisor arrangement).
That’s a significant amount of money taken out of your investment returns each and every year, which can be avoided.
In order to avoid the high costs of receiving professional financial and investment advice under an AUM fee arrangement, you may want to consider a flat fee financial advisor.
By working with a flat fee financial planner, you will pay an agreed upon flat fee and be given an investment strategy that you can implement on your own. The advisor will typically help you with establishing an asset allocation based on your risk tolerance, even going as far as suggesting specific investments, but you would continue to have control over your investments and make the trades yourself.
In most cases, working with a flat fee financial advisor saves you a lot more money over the long-term vs. working with an AUM advisor.
Considering engaging a flat fee advisor? Partner with a CFP® professional from NewRetirement Advisors to define and reach your financial and investment goals. Book a FREE discovery session today.
Just as John Bogle championed low-cost investing, we at NewRetirement are dedicated to simplifying and making retirement planning more accessible and cost-effective for you.
Start or run a scenario in your NewRetirement Plan today.
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]]>The post Stoic Wisdom: 6 Key Insights to Make You Happier Today and Wealthier in the Future appeared first on NewRetirement.
]]>Here’s a little background on Stoicism and six lessons from this ancient philosophy that can pave the way to a wealthier and more secure financial future.
Everyone from Silicon Valley entrepreneurs and Wall Street investors to college kids have recently turned to Stoic wisdom as a guide for navigating the complexities of life, including financial matters. A description of Nancy Sherman’s book, Stoic Wisdom: Ancient Lessons for Modern Resilience, says: “Stoicism has become the new Zen, and a mega-industry for consumers seeking self-help.”
Stoicism originated in ancient Greece around the 3rd century BCE and found its most prominent proponents in thinkers like Seneca, Epictetus, and Marcus Aurelius.
The philosophy focuses on achieving inner peace and resilience. It teaches individuals to recognize the distinction between what is within their control and what is not, emphasizing the importance of cultivating virtues such as wisdom, courage, self-discipline, and justice. Stoicism encourages accepting inevitable hardships with equanimity, and finding contentment in one’s own character and actions rather than external circumstances.
Ultimately, Stoicism offers a practical framework for leading a life of purpose, tranquility, and moral integrity, irrespective of the challenges encountered along the way.
It does not matter how many books you have, but how good are the books which you have. – Seneca
It is the nature of the wise to resist pleasures, but the foolish to be a slave to them. – Epicetus
Extravagance is its own destroyer. – Zeno
Stoic wisdom advocates for living simply and in accordance with nature. Applying this principle to finances means embracing frugality and moderation in spending. However, frugality in modern life does not necessarily mean living without the things that are important to you. It means prioritizing how you want and need to spend your money and time and letting go of all the extras.
By distinguishing between wants and needs, you can allocate your resources more efficiently, ensuring financial stability and resilience while focusing on what makes you happy and satisfied with life.
The more we value things outside our control, the less control we have. – Marcus Aurelius
One of the central tenets of Stoicism is the dichotomy of control – distinguishing between what is within our control and what is not.
When it comes to finances, this means focusing on factors like budgeting, saving, and investment decisions, while accepting external market forces beyond our influence.
Building and maintaining a holistic financial plan using a tool like the NewRetirement Planner empowers you to focus on what is within your control amidst the uncertainties of life. By strategizing and allocating your resources, you can prioritize saving, investing, and budgeting—actions directly influenced by personal choices.
This proactive approach enables you to mitigate risks, seize opportunities, and adapt to changing circumstances with greater confidence and resilience. Rather than being overwhelmed by external forces, a comprehensive financial plan serves as a guiding framework, aligning aspirations with achievable goals and providing a sense of purpose and direction in navigating financial decisions.
Log in or create an account for the NewRetirement Planner. Evaluating your holistic financial plan monthly or at least quarterly can help give you this sense of control.
If you wish to be rich, do not add to your money, but subtract from your desire. – Epicetus
No great thing is created suddenly. – Epicetus
For both your finances and your health, it is important to understand that the decisions you make today have a huge impact on your future. Being able to make choices that are satisfying in the moment while also being good for your future is a skill that sets you up for long term financial security.
Stoicism teaches the importance of delaying immediate gratification for long-term benefits. Applying this to finance entails disciplined saving and investing, prioritizing future financial security over short-term indulgences.
How ridiculous and how strange to be surprised at anything which happens in life. – Marcus Aurelius
You have power over your mind – not outside events. Realize this, and you will find strength. – Marcus Aurelius
Stoics recognize the inevitability of change and volatility in life. Similarly, financial markets are characterized by fluctuations and unpredictability. By cultivating adaptability and resilience, you can navigate market turbulence and capitalize on opportunities that arise amidst uncertainty.
You can’t predict the future. Things are not going to happen exactly the way you think they are. Planning for your future and having back up plans for how to maintain your peace of mind and quality of life when things go awry is key to feeling a sense of confidence about your future financial security. Use the NewRetirement Planner to create your plan and back up plans.
And, here are some resources to help you plan for potential volatility:
We are more often frightened than hurt; and we suffer more from imagination than from reality. – Seneca
Emotions are not rational thoughts. And, when it comes to financial decisions, it is usually advantageous to seek a rational decision rather than one based on feelings.
Stoicism emphasizes maintaining emotional equilibrium in the face of adversity. In the realm of finance, this can translate to avoiding impulsive decisions driven by fear or greed.
Fear and greed are the two emotions that often cause irrational decision making when confronted with highs and lows in the financial markets. For example: Fear can make people sell as a stock is tumbling downward. Greed can cause someone to hold onto an investment and not enjoy gains.
By cultivating a rational and composed mindset, investors can make more objective and sound financial choices.
Learn more:
When you arise in the morning, think of what a precious privilege it is to be alive – to breathe, to think, to enjoy, to love. – Marcus Aurelius
Stoicism encourages cultivating gratitude for what one has – especially those things that give meaning and purpose to life – and maintaining perspective amidst challenges.
In financial terms, this means appreciating wealth as a means to live a fulfilling life rather than an end in itself. By aligning financial goals with personal values and priorities, individuals can find greater satisfaction and contentment regardless of their net worth.
As the world grapples with challenges and uncertainties, the timeless wisdom of Stoic wisdom offers a guiding light for navigating life’s complexities, including financial matters. By embracing principles of virtue, resilience, and rationality, individuals can cultivate a wealthier and more secure financial future while finding deeper fulfillment and meaning along the way.
In a world marked by constant change, Stoicism reminds us that true wealth lies not in external possessions but in the tranquility of a well-ordered mind. And, a well-ordered financial plan enables a well-ordered mind. Check in on yours today with the NewRetirement Planner.
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]]>The post 24 Ways to Cut Costs for Retirement appeared first on NewRetirement.
]]>Living more frugally can be done no matter your income bracket. And while the idea of a more modest lifestyle may not appeal to you, it may be necessary – and not as bad as you expect.
A survey on NewRetirement found that 48% of NewRetirement Planner users cut costs when inflation first hit .
Here are 24 ways for managing your budget for a secure retirement:
It’s easy to fritter away both time and money. You can save more of both by knowing:
It seems like everyone is looking to cut costs as inflation takes hold. However, we probably aren’t all cutting the same things and that is great.
Spending is a way of expressing what is important to you and you get to decide what that is. If you want (and can afford) an $8 coffee, don’t let anyone make you feel bad about it. Just be sure that you are cutting things that are less critical to your own well-being.
You might not want to cut everything on this list and you shouldn’t. Just cut what you personally can do without.
Prioritize, don’t just economize.
It is a lot easier to spend less when you know how much you are spending on what.
In order to reduce expenses, it is best to get a very clear understanding of exactly how you are spending your money. Try keeping a record – in a notebook, a spreadsheet, a software program or on your phone – of EVERY dollar you spend.
Many people are actually really surprised to learn how much little things add up over the course of a month.
And, if that is surprising to you, go ahead and calculate what that monthly amount means over an entire year! For example: if you are spending $100 a week on a service, that’s $400 a month — which is a lot. But if you think about that over an entire year, it becomes a more significant sum — $4,800.
Here is a guide to 14 ways to budget.
Projecting your retirement spending is a good way to determine how much savings you really need to fund your retirement.
While accurately estimating your expenses for the rest of your life is a daunting prospect, the right tools and advice can make it easy. And, you’ll likely find huge opportunities for cutting costs.
The NewRetirement Planner allows you to document current and future expenses for everything! Housing and medical are likely your biggest expenses, but there are over 75 categories to consider. And, the tool gives you the ability to specify the amounts you “would like to spend” vs. how much you “really need to spend.”
As you are doing this budgeting, it is easy to consider cost cutting opportunities.
Some retirees spend more in their lifetime on out-of-pocket healthcare costs than they earn in lifetime Social Security payments.
You can do a lot to cut medical costs by staying healthy and choosing your Medicare coverage carefully. There are many choices and the timing of those choices can be very important. If you have questions about Medicare coverage, consider talking with an unbiased expert who can explain your options.
Here are some tricks for reducing retirement health care costs.
A low deductible may sound appealing when you think about a costly claim down the line, but you may pay much more in higher premiums.
For car insurance, according to the Insurance Information Institute, raising your deductible from $200 to $500 can reduce the cost of your comprehensive and collision coverage by 15 to 30 percent. Worried you won’t be able to come up with the higher deductible in the event of an accident? Put the amount you’re saving in premiums every month into an interest-bearing account and save it for a rainy day. Chances are, the balance in the account will be greater than your deductible long before you’re in an accident.
The same principle holds true for health insurance. A plan with a high deductible will cost you less on a monthly basis. And, it can make you eligible to save money to cover health expenditures in a Health Savings Account which is one of the most tax efficient ways to save money.
Auto insurance and homeowners insurance are highly competitive industries. As such you may be able shop around and find a less expensive option than your current provider.
Some services may be able to help you find a less expensive option. Compare Auto Insurance and Homeowners Insurance rates.
You might not think of these consumables as scams — but they can be dumb ways to spend money.
Sodas, lunch out, lottery tickets, daily paper, and other low cost items are everyday expenses for millions of retirees. However, these items are not necessary. And even though the daily costs are small, the total expense over a year could represent a significant savings.
Smoking especially. And, smoking costs a lot more than the price of a pack of cigarettes. The average cost of a pack of cigarettes in the U.S. is $8 but the health-related costs per pack are about $35 according to the American Cancer Society. Over the course of a year, that adds up to over $15,000 for a pack-a-day habit.
Think you’re in the clear if you smoke electronic cigarettes? Think again. Although the average cost of e-cigs is less than a pack of cigarettes, the aerosols these products produce contain a variety of chemicals, some known to be toxic or cause cancer. Now that the FDA is going to start regulating e-cigarettes, we can expect more research on their long-term health effects.
A bottle of water might cost you $1 or $2 a day for something that is essentially free and fancy coffee could be $8 or more for each cup. If you have any of these vices, cut it out and save more for retirement.
When you are retired, you are usually rich in time – which could mean that you can now tackle household maintenance items that you used to hire someone to do.
BONUS: In addition to cost savings, research indicates that people who keep busy doing physical tasks live longer and healthier lives.
So many people have travel as a primary goal for what they want to do in retirement. Traveling in the off season and grouping multiple small trips into one bigger trip is possible when you are setting your own schedule. These tactics can mean big savings. Here are:
When living in retirement on a fixed-income, you will not have more money tomorrow to pay off the debt than you do today. It is usually best to eliminate any debt as fast as possible to save money.
For example:
Reducing your debt represents a huge opportunity to reduce your expenses in the long run. If you have savings, you might consider using those assets to pay off your debt. Refinancing your mortgage is another way to access cash – as well as potentially reduce monthly payments.
Here is information on the averages for retirement debt and 13 ways to manage the debt for retirement.
These fees can really add up. The first step for reducing banking and investment fees is to figure out exactly what you are paying – it is rarely obvious.
You might start by looking at your statements and calling each company. Ask them to explain to you how much you are paying to maintain each account.
Check out this guide to low cost investing.
Housing costs are usually by far the single biggest expenditure for any household. As such, your mortgage or rent represents a significant opportunity to reduce your retirement costs.
How? Consider these opportunities:
A study by the Center for Retirement Research at Boston College found that it is unlikely that many retired households will be able to earn a return on risk-free investments such as bank certificates of deposit, Treasury bills, and Treasury bonds that will exceed the cost of their mortgage.
Liquidity considerations aside, households holding such assets will generally be better off using them to pay down their mortgage. If your money is in stocks and earning a higher return than your mortgage interest rate then you need to weigh the risks inherent in stocks and the sure thing of being mortgage free.
Finding a lower cost home or a lower cost community in the United States or abroad can pretty dramatically improve your monthly retirement budget. Depending on your interests and goals for retirement, downsizing can also represent a significant opportunity to improve your lifestyle.
Some of us spend without thinking. My problem? I often plop fresh raspberries into my shopping basket. And, I have done it so many times, it is almost a habit. I am a sucker for those clamshell packages with pink juicy (expensive) treats. What makes the splurge really bad? They go moldy more often than not.
It is awfully easy to buy extra things that you don’t really need or even want – raspberries, a glass (or bottle) of wine at dinner, play an extra round of golf, or new work gloves when you are at the nursery or home improvement emporium. And, there is nothing wrong with any of those things. However, it is a good idea to take a moment to think about the money you are spending.
Be mindful whenever you are in a situation where you could spend money. And, ask yourself if you really need and want each item or experience.
You might start by benchmarking your gas and electric expenditures. Call your service provider and ask them to compare your spending to other households in your area. Your service provider can also probably provide ideas for how you could reduce your usage.
Raising your thermostat in summer and lowering it in the winter, turning off lights, using energy efficient light bulbs and unplugging devices when not in use are easy ways to reduce your bill.
Or, if you are thinking about relocating for retirement, maybe you should consider a more temperate climate. And, have you considered alternative energies? The cost of solar power is getting lower and lower.
Again, benchmark your household against others in your area by consulting your water provider. And ask the utility for cost cutting tips.
Low flow toilets, fixing leaks, reducing the need to water plants with efficient landscaping are a few considerations.
How we use phones and how we consume media at home is dramatically changing and you may find some opportunities for reducing these expenses.
Transportation expenses are actually the second biggest spending category for most households (after housing). According to data from the Bureau of Labor Statistics, households spent an average of $12,295 on transportation in 2022. For adults age 65 and older, transportation costs represent 16% of retirement costs — even more than healthcare which represents 13.4% of average retirement expenditures.
If you want to get rid of your car, look at the walkability of your neighborhood, public transportation options and the availability of taxis, uber and car sharing services (zipcar, getaround and Hertz on demand) in your community.
However, if you must drive, hopefully you don’t need to replace your car right now. If you do, consider this:
In addition to traditional coupons found in newspapers, flyers and magazines, there are myriad of web sites that enable you to find the latest coupons for all kinds of stores.
Most of these sites are searchable and are well worth a visit before you make any kind of purchase. Just try doing a google search for “coupon” and the store where you would like to shop or the product you would like to buy. You are almost guaranteed to find some kind of savings.
Or, try going directly to some of these sites:
Coupons.com
Coupon Cabin
RetailMeNot
Your local library can be a tremendous source of free entertainment. Books as well as movies can be borrowed without any cost at all.
Perhaps the best way to get inspired to spend a little less each month is to look at what a more frugal budget will mean to your lifelong retirement finances. The Retirement Planner makes it easy to do this analysis.
Start by entering some basic information and get some initial feedback on where you stand. Then you can add a lot more detail and try an infinite number of scenarios. See how much longer your retirement savings last if you cut retirement costs – spend 2% or 30% less.
In some countries, haggling is considered an art form and expected as a part of any transaction. Not so much in the U.S. where the idea of negotiation intimidates most people. We’ve been trained to pay the sticker price without question.
Chances are, you could be paying less for almost any product or service. All you have to do is ask. A polite and easy way to ask is, “Is this the best price you can offer me?” You may also be able to get a discount for paying with cash since typical merchant companies charge up to five percent of everything the retailer earns through credit card transactions.
You may not always succeed at getting a lower price, but even saving 5 or 10 percent here and there can really add up to big savings over time. The worse thing that can happen? They say no.
You are entitled to spend your money however you like. If you want the Maserati, go for it. If you have wanted the Birkin Bag since you were in your twenties and still want it now, okay. Dinner out?? Why not.
Just remember that luxuries may not be the wisest way to spend your money. But, we all do it to some extent. Research from Deutsche Bank found that spending on luxury goods is done by the richest as well as the poorest:
Now, it is important to point out that what is considered a luxury by the wealthy may be vastly different than what is considered a luxury by someone with fewer resources. It is important to note that the researchers counted dinner at McDonald’s as a luxury in some cases.
The author of the study clarified that they defined luxuries as “goods or services consumed in greater proportions as a person’s income increases.”
So, of course, you are going to spend more if your income increases. And, if you were to just stick to the bare necessities, life would be pretty dismal.
But, consider splurges carefully (And, maybe focus your spending on what will really make you happy).
What you spend is one of three important levers for your short and long term financial health and security.
Spending, saving, and earning make up your financial wellness. When you create and maintain a detailed and holistic financial plan using the NewRetirement Planner you gain a sense of control and know how about your money.
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]]>The post Money Dysmorphia: How to Trade Uncertainty with Financial Confidence appeared first on NewRetirement.
]]>Money dysmorphia, also known as financial dysmorphia or wealth dysmorphia, is a psychological condition characterized by an unhealthy and distorted perception of one’s financial situation. Similar to body dysmorphia, individuals with money dysmorphia may perceive themselves as either having significantly less or significantly more wealth than they actually possess.
There is a disconnect between financial reality and perception.
And, this distorted perception can lead to detrimental financial behaviors and emotional distress.
New research from Credit Karma has found that money dysmorphia is prevalent in younger generations. Roughly 43% of Gen Z and 41% of millennials struggle with comparisons to others and feel behind financially.
And yes, many young people are behind financially, the feelings they have about how far behind are worse than the reality.
According to the study, many of the people who say that they feel behind also report that they are financially stable. There is a distortion between their perception and the reality of their situation.
Money dysmorphia can affect individuals across all ages and socioeconomic backgrounds. It doesn’t discriminate based on age, wealth, or income level. The Credit Karma research found that 29% of all Americans have money dysmorphia with 25% of Gen X and 14% of respondents above age 59 experiencing perception problems related to money.
However, we probably all have blind spots related to how we think about money, it may just manifest itself in different ways.
The Wealthy
Even individuals with considerable wealth can experience money dysmorphia. They may feel constantly anxious about losing their wealth, perceive themselves as financially insecure, or engage in excessive hoarding behaviors.
It is very common for people with significant retirement savings to be highly fearful of spending their nest egg. This anxiety could be considered a form of money dysphoria.
Some of the most popular articles on the NewRetirement web site address these types of concerns. Check out:
In some ways, money dysphoria is a more scientific way of expressing concept of “keeping up with the Jones’s.” People in the middle-income bracket may compare themselves to those who seem to have more, leading to feelings of inadequacy and financial insecurity.
The reality is that it is almost impossible to really know the financial situation of your peers. Appearances can be very deceiving and it is best to focus on making good financial decisions for yourself and your family.
Those who struggle financially may develop money dysmorphia by idealizing wealth and believing it to be the solution to all their problems. This can lead to unrealistic financial decisions, such as taking on high-interest loans or engaging in risky investments.
The study suggests that the rise in money dysmorphia could be attributed to people’s obsession with wealth at a time when getting ahead feels increasingly out of reach.
Whereas research from the CFPB on financial wellness suggests that financial well being is a relatively simple formula. It is achieved not through getting rich but by:
Recognizing and addressing money dysmorphia is crucial for improving financial well-being and overall mental health. Here are some steps individuals can take:
Start by reflecting on your attitudes and beliefs about money. Ask yourself whether your perceptions align with reality or if they are influenced by societal pressures or personal insecurities.
Here are a couple of articles to help you assess your financial beliefs:
Money dysmorphia is the disconnect between reality and feelings. When you take control over your finances, then it is easier to accept the reality (and take action to do better if necessary).
The NewRetirement Planner puts you in control of your money and builds financial confidence. You can:
It may seem new-agey, but being grateful is actually a scientifically proven panacea to many emotional woes, including money dysmorphia.
When you cultivate a sense of gratitude for what you have, rather than focusing on what you lack you are embracing abundance and inviting positivity into your life . Take time to appreciate your material goods as well as the non-material aspects of your life, such as relationships, experiences, and personal accomplishments.
Set achievable financial goals based on your individual circumstances and values. Avoid comparing yourself to others, as this can perpetuate feelings of inadequacy and dissatisfaction.
Do you really want a yacht, designer purse, etc…? Focus on setting goals that express your true priorities in life.
If money dysmorphia is a real problem you may want to be more mindful of media and advertising that promote unrealistic standards of wealth and success. Limiting exposure to these triggers can help reduce feelings of inadequacy and dissatisfaction.
Money dysmorphia is a complex psychological condition that can have profound effects on an individual’s financial well-being and overall quality of life. By recognizing the signs of money dysmorphia and taking proactive steps to address it, you can regain control over you finances and cultivate a healthier relationship with money.
Remember, true wealth lies not in material possessions, but in a sense of contentment and fulfillment derived from living in alignment with your values and priorities.
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]]>The post Fees and Expenses on Mutual Funds and ETFs: A Complete Guide to the Often Misunderstood and Hidden Costs of Investments appeared first on NewRetirement.
]]>Below, we’ll explore the common fees associated with actively managed and passive funds as well as ETFs – the expenses to watch out for with each type of investment.
We’ll also discuss how your investment platform can have an impact on the costs too.
Whether you are self-managing your investments through a platform like Vanguard or seeking guidance from a robo-advisor or financial advisor, it’s important to be mindful of the more common kinds of investment expenses and fees.
Below are the relatively well understood fees that that are typically associated with investing in mutual funds and ETFs.
When you are investing on your own, there are some additional administrative costs you’d benefit from understanding before trading your investments.
These includes expenses such as:
When you invest with a custodian like Vanguard or Fidelity, you’ll want to be aware of any additional expenses, like transaction costs and account maintenance fees, even if minor.
Transaction costs will vary depending on where you do your investing, what you invest in, and how often securities are bought and sold. Account maintenance fees may be waived as well depending on the minimum requirements.
For example, Fidelity charges no account fee while Vanguard may charge a $20 fee for certain accounts, but this can be waived with $1,000,000 in Vanguard assets or through email delivery of statements.
It’s important to do your research when choosing a custodian as a DIY investor.
NOTE: If your primary investing is through your employer’s 401(k) plan, you’ll want to understand the fees involved through this platform as well.
Probably the biggest fee anyone pays when investing in mutual funds and ETFs are advisor fees. The amount you pay will depend on the type of advisor you use, how much money you are investing, and the type of fee structure the advisor charges.
Here is a quick summary:
RoboAdvisor Fees: If you are a DIYer but also prefer some additional investment guidance, you may be utilizing a robo-advisor. A robo-advisor is an automated online platform that provides algorithm-driven investment management services with minimal human interaction.
Most robo-advisors charge lower fees than traditional financial advisors because they invest your money in pre-established portfolios made up primarily of low-cost funds. NerdWallet maintains a list of the best robo-advisors based on certain criteria.
Advisor Fees: Meanwhile, if you prefer a completely hands-off investment approach and work with a financial advisor to manage your money, you’ll need to account for their fees as well. For the majority of advisors managing money today, an AUM (Assets Under Management) fee is still prevalent.
NOTE: If you work with an advisor under an AUM arrangement, you’ll want to factor in these costs when entering in your rates of returns for your investment accounts within the NewRetirement Planner.
It is also possible to work with an advisor who is fee-only, meaning they charge a pre set fee for agreed upon services. NewRetirement offers fee-only advice from a CERTIFIED FINANCIAL PLANNER professional. Services include investment guidance. Book a FREE discovery session.
Besides fees for advice and trading, there are a whole host of other fees that are associated with both actively managed funds and even passively managed funds and ETFs.
Explore these fees below.
An actively-managed mutual fund is managed by professional fund managers who are utilizing their deep expertise and research to hand-select stocks, bonds or other holdings for the fund. They actively trade the holdings in the fund and their ultimate goal is to outperform a specific benchmark or market index.
Active managers are looking to beat the market through targeted investing, timing the market and any number of strategies that seek higher than average returns.
Pros and cons of an actively managed fund: As with any investment, there are pros and cons. Here are some of the downsides:
Let’s explore the fees:
The management and marketing of actively-managed mutual funds result in expenses and costs that are often passed on to you as the investor. These annual ongoing fees can include management fees, 12b-1 or distribution (and/or service) fees, and other administrative and operational expenses.
These fees make up the expense ratio, which represents the total percentage of a fund’s assets. In the investment world, the expense ratio is also referred to as annual fund operating expenses. Each year, the fee is automatically taken from the fund’s gross return and transferred directly to the fund manager.
It’s essential to understand the components of an expense ratio because doing so provides a clearer picture of the fees you’ll incur when investing in an actively-managed mutual fund.
Management fee: Part of the expense ratio of your investment may include a management fee, which covers the salary of a portfolio manager and their staff to buy and sell the investments within the fund.
This fee will vary depending on the size of the fund and the strategy it pursues.
12b-1 fee: If you are invested in an actively-managed mutual fund, you may be paying what’s called a 12b-1 fee. Although, not all mutual funds have 12b-1 fees.
A 12b-1 fee is essentially the fee you are charged for someone selling you a mutual fund. 12b-1 fees are considered operational expenses and are included in the overall expense ratio for the investment fund. The fee is used to cover the expense of advertising, marketing, and distribution.
A 12b-1 fee can be as high as 1% annually for a mutual fund.
Other expenses associated with managed funds: Along with the management fee and 12b-1 fee, there may be “other expenses” as part of the expense ratio. Generally, these aren’t as transparent when looking up the expense ratio for an investment you may be researching.
Other expenses may include:
There are many actively-managed mutual funds that are sold with a sales load. These are fees that can be charged to you either at the time of purchase or at the time of redemption (or sale) of your mutual fund.
Load funds with varying sales charges are usually differentiated by their share classes:
Investments that are part of a passive management investment philosophy would include index funds and ETFs.
Where active managers are looking to beat the market, passive investors are just focused on trying to capture the returns of the market while keeping costs low.
However, there are still fees associated with these investments.
Index funds simply buy and hold the stocks (or bonds) in all or part of a specific market you are looking to capture as part of your investment. For example, by buying a share in a “total market” index fund, you acquire an ownership share in all the major businesses in the economy.
Index funds eliminate the guess-work (and increased anxiety levels) of trying to predict which individual stocks, bonds or mutual funds will beat the market. They are instead designed to keep pace with market returns.
Like mutual funds, Exchange-Traded Funds (ETFs) are investment funds made up of pools of securities. But unlike mutual funds, ETFs are bought and sold on stock market exchanges just like stocks. Since ETFs are traded on the exchange like stocks, they can be bought and sold at any time. You don’t have to wait for the market to close.
While there are some actively-managed ETFs, most are designed to track market indexes, just like index funds.
ETFs can also be more tax-efficient than mutual funds since they tend to distribute fewer (if any) capital gains.
NOTE: When you are adding your investment accounts into the NewRetirement Planner, you should be thinking about the mix of stocks, bonds and cash in each account in order to enter an appropriate rate of return assumption.
Just like with actively-managed mutual funds, you’ll want to pay attention to the expense ratio for index funds and ETFs as well. The expense ratio may look (significantly) lower than your typical actively-managed mutual fund.
In fact, according to the Investment Company Institute (ICI) 2022 report “Trends in the Expenses and Fees of Funds, 2022”, the average expense ratio for actively managed equity mutual funds was .66% in 2022 vs. the average expense ratio for index equity mutual funds of .05% and average equity ETF expense ratio of .16%.
Both index funds and passively-managed ETFs have low expense ratios due to the lack of a fund manager, often avoiding a lot of the fees making up the expense ratio of an actively-managed mutual fund, like a 12b-1 fee and other expenses.
Thankfully, not all investments have sales loads.
With no-load funds, you do not pay a commission to buy or sell shares. Instead, you as the investor are doing the research and filling out the forms to purchase the fund. So, if you’re looking to purchase $20,000 worth of a no-load mutual fund, all $20,000 will be invested into the fund.
The majority of index funds, ETFs and even some actively-managed funds don’t charge a load.
If you are invested in a mutual fund or an ETF – either actively or passively managed – you will have access to your fund’s prospectus.
Along with outlining the strategy and what it is invested in, a fund’s prospectus includes a full breakdown of the fees and expenses you can expect to pay. You will generally find the prospectus by visiting the fund’s website or calling the mutual fund directly.
In addition to your investment’s prospectus, there are other resources to determine the expenses of the funds you are invested in, like Morningstar or FINRA’s Fund Analyzer.
Let’s take a look at an actively-managed mutual fund, index fund, and an ETF to gain further insight into these different types of expenses.
DISCLOSURE: These are not investment recommendations.
This is an actively-managed mutual fund from American Funds with a sales load. Below is a page from the prospectus outlining expenses of the fund for the A share class:
Given it’s an A share class, you can see there is a 5.75% maximum sales charge (load) imposed on purchases. This sales charge will vary depending on the initial amount you invest. For example, if you invest $10,000, the initial charge will be 5.75% (or $575). Meanwhile, if you invest $50,000, the initial charge will be 4.5% (or $2,250).
The total annual fund operating expenses, or expense ratio, is 0.59%, which is made up of the 0.23% management fee, 0.25% 12b-1 fee, and 0.11% in other administrative expenses. That means it only takes 0.34% to run the mutual fund (pay staff, office space & equipment, and more). The other 0.25% goes to paying for ads and marketing the mutual fund to investors.
VTSAX is a popular index fund that is also considered a no-load fund. Below is a snapshot of expenses from its summary prospectus:
As you can see, there is no sales load and the total expense ratio is only 0.04%. The only shareholder fee consists of an account service fee of $20 per year, with specifications.
This fund represents an Exchange-Traded Fund, or ETF. The expenses page from the summary prospectus shows the following:
As you can see, this fund represents the lowest expense ratio (i.e. total annual fund operating expenses) out of the three examples, at only 0.03%.
While conducting your research on funds, be sure to review the prospectus as you can gain a lot of valuable information that will play a role in your investment decisions.
Expenses are one of the key drivers of the success of your financial plan.
Being mindful of not only your investment costs but also your day-to-day living expenses is essential for establishing a strong foundation for financial success in the future. Take advantage of the NewRetirement Planner today to ensure you’re accounting for all of your expenses as part of your retirement plan.
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]]>Becoming aware of these behavioral finance tips can help you do a better job planning and saving for your retirement. Below we also offer specific tricks for overcoming each of the misguided thought processes.
A study in the Journal of Consumer Research found that people who used the words “I don’t” versus “I can’t” – as in, “I don’t eat dessert” instead of “I can’t eat dessert” – were nearly twice as likely to resist the temptation of choosing unhealthy foods.
The researchers believe that using “I don’t” gives people greater “psychological empowerment” by removing the need to make a decision. “I don’t” gives the speaker control whereas “I can’t” denotes a sense of denial, regret and someone else being in control.
Think about all of the decisions you make with regards to your finances. A lot of those choices involve denying yourself something in the present so that you can have a more secure future. For example, you want a new mountain bike, but you could also be saving and investing that money. To help insure you make the “right” choice:
Use the NewRetirement Planner to find out how much money you will need for retirement and if you are saving enough now (maybe you really can buy the bike).
As “Nudge: Improving Decisions About Health, Wealth and Happiness” author Cass Sunstein, wrote, “a 5-cent tax on the use of a grocery bag is likely to have a much greater effect than a 5-cent bonus for bringing one’s own bag.”
Research indicates that people are far more stressed by the prospect of losing money than they are by gaining money. In fact, some studies have suggested that losses are twice as powerful, psychologically, as gains.
This can make investment management particularly tricky. Loss aversion is why too many people sell assets when prices are falling. Further, you need to be able to take appropriate risk and sustain the potentially temporary losses if you want to ultimately achieve positive rates of return.
Creating and maintaining an Investment Policy Statement can be one way to help you proactively make a plan for what to do in different economic scenarios, which can help you overcome the negative bias of loss aversion.
So, as explored above, most people are risk averse. But, not everyone.
The key to using behavioral finance to your advantage is to really understand your own motivations. Goals can be framed as gains or as losses. Which of these phrases is more appealing to you?
When setting goals, try phrasing them in different ways – emphasizing the loss or the gain. See which feels more motivating and focus on that!
In “Happy Money: The Science of Happier Spending,” authors Elizabeth Dunn and Dr. Michael Norton explore how money can make us happy. They report that you can use money to buy happiness by:
How to let money buy you retirement happiness
Retirement is actually a big life trade of money in exchange for time. And, the research indicates that retirement almost always results in happiness (except when it triggers depression due to losing purpose and vitality).
Learn more about how to use money to buy happiness.
Neurosis is the inability to tolerate ambiguity. – Sigmund Freud
The ambiguity effect reflects a tendency to avoid decisions or options where unknown information makes it hard to predict an outcome.
Examples: When planning your retirement, you need to “know” how long you will live, future inflation rates, investment returns and other factors that are actually unknowable. Not being able to “know” this information can make planning feel ambiguous and impossible and many many people just avoid it altogether.
You might also fall victim to the ambiguity effect with investments – you might opt for bonds where the returns are considered safe rather than stocks which are more volatile but are likely to have higher returns.
One way to use behavioral finance to overcome the ambiguity effect for retirement planning is to assign optimistic and pessimistic assumptions – based on historic norms – for the unknowables. Using best and worst case scenarios makes it a little easier to get your hands around the unknowables. The NewRetirement Retirement Planner lets you do exactly that.
For retirement investments, you might want to tailor your asset allocation strategy to your needs and wants – investing money for needs in conservative vehicles and money for wants more aggressively.
Get 13 other retirement investing tips from today’s financial geniuses.
In their book, “Decisive, How to Make Better Choices in Life and Work,” Chip and Dan Heath argue that there are four villains to good decision making:
Heath and Heath argue that you can combat bad decision making with what they call the WRAP method:
1) Widen your options
2) Reality test assumptions
3) Attain distance before deciding
4) Prepare to be wrong
Running scenarios in the NewRetirement Planner can help you with the wrap method. Instead of making a decision on a gut call, you can look at different options, see the impact of each scenario, and compare your opportunities.
Change your mind and you can change the world (or at least your future retirement.) – Norman Vincent Peale
Anchoring is the impulse to rely too heavily on one piece of information when making decisions.
Example: When planning for retirement, most people anchor on how much savings they need. However, savings is just one aspect – often not even the most valuable aspect – of your retirement security.
When you start Social Security, whether or not you’ll downsize, figuring out how to turn savings into retirement income and understanding your future spending needs are probably more important than (and certainly impact) how much savings you need.
Behavioral finance research suggests that educating yourself about all the factors that impact your retirement financial security is a good step to overcoming anchoring.
To start, you might want to explore all the different scenarios that impact your retirement plan and actually experiment with your own numbers in a detailed retirement planning calculator.
Birds of a feather flock together.
The bandwagon effect is a behavioral finance observation that you have the inclination to do things because many other people – particularly your friends and family – do them.
Example: Research shows that people who have friends who exercise and eat well are healthier themselves. The same is actually true of retirement planning. People who have friends who are knowledgeable and proactive with their finances are more likely to be financially stable themselves.
Unfortunately, the reverse is also true. And, because the vast majority of people in the United States have an extremely low financial IQ it may be that your friends aren’t doing you any favors when it comes to developing good financial habits.
Join groups of knowledgeable people who are interested in financial planning. There is are NewRetirement Facebook and Reddit discussion groups where you can ask questions or just learn from the conversations. NewRetirement also offers live Q&A sessions every week.
Maybe you could start a “retirement club?” A retirement club is kind of like a book club but you discuss retirement topics instead of novels. It can provide a friendly forum for learning about financial topics.
Beware of false knowledge; It is more dangerous than ignorance. – George Bernard Shaw
According to Wikipedia, choice supportive bias is the “tendency to remember one’s choices as better than they actually were.” Confirmation bias is similar in that we seem to be predisposed to focus on information that confirms our preconceptions.
Example: Choice supportive and confirmation biases seem to be particularly dangerous when it comes to investments. Imagine you get a stock tip. When you research that tip, you are likely to seek information that confirms the tip rather than get a more unbiased perspective.
There are a few ways to deal with these biases with regards to investments:
Risk comes from not knowing what you are doing. — Warren Buffet
The disposition effect is actually specific to investments. It is the tendency to sell an asset that has risen in value and resist selling an asset than has dropped in value. This is not actually the best strategy. It is just a bias.
Example: I am actually guilty of this. I am currently holding $3,000 of some small company that I bought years ago (like 30 years ago) at $7,000. All indications suggest that this company is headed for bankruptcy and won’t last long. However, I don’t really want to sell it. Sure, it’s small potatoes, but I still spend time thinking about it and tracking it and really I should just get rid of it.
On the other hand, I am tempted to take my short term gains whenever the market goes up – even though I am actually invested for the long term.
Avoiding any kind of emotional or irrational decision making is a good idea:
A bird in the hand is worth two in the bush.
The endowment effect is the phenomenon that people “demand much more to give up an object than they would be willing to pay to acquire it.” People think that things they already own – especially things with emotional meaning – are more valuable and tend to want to hang on to them.
Example: Homes are usually a person’s most valuable asset. However, the majority of retirees are somewhat wary of downsizing or tapping into that home equity – even if they might need or want the money.
Sometimes the reluctance is due to wanting to retain the asset for heirs, other times they want to stay where they have always lived (even if it is not suitable for their current needs). Whatever the reason, homes are an emotionally charged asset so the endowment effect is probably an extremely powerful force.
Being aware that your brain has this tendency to want to keep what it already has can probably help you behave more rationally. Making lists of the pros and cons of retaining an object or asset can also help you make a more informed and mindful decision.
Ask yourself questions: If you didn’t already own this, how much would you pay for it? How much effort would you put into acquiring it?
Continuing with the housing example, making a list of everything you could gain from selling your home — a better lifestyle, lower cost basis, earlier retirement or being closer to family — might help you get over the endowment effect.
Try out different what if strategies for tapping home equity when you use the NewRetirement Planner.
Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. – Sam Ewing
Money does not have intrinsic value. The value of money resides in how much it can purchase – which changes over time.
The money illusion is the tendency people have to think of the nominal value (the numerical amount) rather than the purchasing power of that money.
Buying power – how much you can buy – is more important than how much money you have. And, the purchasing power of your money in retirement is more important than the balance of your accounts.
Example: How much is $1 worth? Well, ten years ago, a dollar could buy a candy bar. And, it might seem like $1 would still buy a candy bar, but the reality is that the average price of a candy bar is more than a $2.00. Nevermind the fact that it cost 5 cents back when most of us were kids.
The money illusion can be really confusing to people, but it is critical to understand this concept – especially with regards to inflation and inflation’s potential impact on your retirement finances.
Think about your investments. If you are getting a 6% return on investments, but inflation is rising at 3.5%, then the real value of your ROI is only 2.5%.
When planning retirement, it is critical that you factor inflation into your calculations.
A good retirement planning calculator will project inflation rates and factor that into your results.
Present bias is the tendency we have to value the moments that are closer to the present than those farther in the future.
It is not in the stars to hold our destiny but in ourselves. – William Shakespeare
Example: It is a well documented phenomenon that you are more likely to spend money this month on something that gives you pleasure now rather than save that money for your future self. Present bias is one of the BIG reasons that saving for retirement is so difficult for so many people.
One way to overcome this bias is to imagine or even view a picture of what you might look like as an old person – even a really old person. Research indicates that if you can truly visualize yourself in the future, then you are more likely to save money, eat better, exercise and generally plan to take care of your future self.
In his book, “Upstream: The Quest to Solve Problems Before They Happen,” author Dan Heath tells a story commonly attributed to Irving Zola: “You and a friend are having a picnic by the side of a river. Suddenly you hear a shout from the direction of the water – a child is drowning. Without thinking, you both dive in, grab the child and swim to shore. Before you can recover, you hear another child cry for help. You jump back in the river to rescue her as well. Then another struggling child drifts into sight… and another… and another…
The two of you can barely keep up. Suddenly, you see your friend wading out of the water, seeming to leave you alone. “Where are you going?” you demand. Your friend answers, “I’m going upstream to tackle the guy who’s throwing all these kids in the water.”
The point of the story is that you can’t always act and react to the present, at some point, you need to get above the fray or into the future and solve the underlying causes of problems, not just the issues happening to you at any given moment.
You can’t have a secure retirement if you are always having to figure out how to pay for everything you need today. You need to get upstream of retirement by planning, saving, budgeting and investing.
The status quo bias is the impulse to keep things the same. It is more comfortable to keep going as you always have than to make any kind of big change. In fact, sometimes abandoning the status quo takes the proverbial leap of faith.
Life is traveling to the edge of knowledge, then a leap taken. – D.H. Lawrence
Example: While we are all pretty excited about retirement, it can be awfully hard to take the leap and actually stop working. Part of the difficulty can be attributed to our desire to just keep the status quo.
Here are a few tips from Coaching Positive Performance about overcoming the status quo bias:
James Clear writes in his book, “Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones” about how, when you want to make a change, it is more important to adopt very small changes rather than trying to fix everything all at once. He argues that tiny changes and marginal gains allow us to get rid of bad behavior and develop good habits.
So, you don’t need to become a millionaire this year, you just need to start saving – even saving small amounts.
Clear argues that goals are not as important as systems. He says that “goals show you the right direction, but systems are better for making progress.” A system is something you can enact day after day. A goal is something that takes a long time to achieve and the boost of achievement is just a one time event.
Instead of focusing on how much you need to save to achieve a secure retirement, break down the goal into daily actions — how much can you save each day and what mechanisms do you have for tracking and rewarding or acknowledging your daily achievements?
And, for planning, instead of meeting with your financial advisor once a year, create your own retirement plan and check in on it monthly or quarterly, making small adjustments for more wealth in your future!
The post Behavioral Finance: 16 Easy Ways to Outsmart Your Brain for More Wealth and Security appeared first on NewRetirement.
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