Financial planning advice is not always objective. Many financial planners are compensated for the sale of investment or insurance products, and someadvisors have more sales training than financial training. This lack of financial background can lead to some information being left off the table when you're considering investments and planning your future. Here are nine actions that financial advisors often overlook.
1. Open an HSA Account Along With Your IRA
An HSA or health savings account goes hand in hand with a high deductible insurance policy, so it isn't an option for everyone. But if you happen to have a high deductible policy, consider funding your HSAeach year along with your IRA.Why? Your money goes in tax-deferred and comes out tax-free for qualified medical expenses, and medical expenses are pretty mucha certainty in retirement. When you take IRA withdrawals, the money you take out is taxable.
2. Take Your Pension as an Annuity, Not a Lump Sum
It'snot too difficult to create a simple spreadsheet to helpyou see whether you should take your pension as a lump sum or in the form ofannuity payments. It can be difficult to generate the same amount of safe, lifelong income with a lump sum that the annuity choice might offer you.
You can compare the potential outcomes of both options over your life expectancy to make an objective decision. Each plan will vary,so there isn't any one-size-fits-all rule. You'llhave to do an analysis based on your available pension choices, age, and your marital status. Don't let anyone convince you that a lump sum is best until you've done the math.
3. Roth IRAs Deserve a Second Look
Roth IRAs might be the greatest investment known to man for numerous reasons. You can withdraw original contributions at any time without tax or penalty. Money inside a Roth grows tax-free. When you take withdrawals, Roth distributions do not count in other tax formulas, like the one that determines how much of your Social Security is taxable or the one that determines how much in Medicare Part B premiums you'll pay. Unlike regular IRAs, you're not required to take distributions from a Roth at age 70 1/2. Find out if you're eligible tocontribute to a Roth IRAabove and beyond the amount of any employer match you receive,or if your employer offers aRoth 401(k) option.
4. Use Index Funds
You might be surprised to find outthat there's one thing you can look at to find thebest-performing mutual funds consistently. It's the fund's expenses. Funds with low fees tend tooutperform their higher fee counterparts, andindex fundshave some of the lowest fees in the industry. Why pay more for the same basket of stocks or bonds when you could own them for less?
5. Cancel Your Life Insurance Policy
Life insurance is important ifsomeone is financially dependent on you. Still, your income and your spouse's future retirement income may be secure no matter what happens as you near retirement. You may notneedlife insuranceat this point unless you want toprovide for someone after your death. That's fine, but it's important to know why you're paying for something and to decide if it's worth spending money on objectively.
6. Buy I-Bonds, Not a Fixed Annuity
I bonds are a great alternative to CDs, money market funds, and savings accounts. You get tax-deferred, inflation-adjusted interest with complete liquidity after you've owned them for 12 months. I-bonds can't be purchased inside a brokerage account, so a financial advisor can't charge on them or make money selling them. That might be why you don't hear about them more often. Bottom line: I bonds are one of thebest safe investmentsyou can make.
7. Social Security Can Make More Money for You
Making a thoughtful and well-informed decision about when to start your Social Security benefits might add more "return" to your total retirement income than an investment advisor will. Spend more time onSocial Security planningand other forms of financial planning and less time on investment analysis, and you'll likely end up with more money.
8. Stocks Might Not Be Safe in the Long Run
Lots of graphs and charts show that stocks are less volatile over longerperiods. Thestock market might go up 40% or down 40% in a year, but the return is more likely to range from a low of zero to 2% to a high of 10 to 14% over 20-years. What these charts and graphs don't tell you is thatstocks might not have a higher return than safer alternativeseven over longer periods like 20 years. Maybe they won't loseyour money, but that doesn't mean they'll outperform less risky choices. People assume that stocks will always deliver higher returns if you own them long enough, but this assumption isn't true.
9. Rearrange Your Investments to Be More Tax-Efficient
Many financial advisors will manage one account for you rather than lookat all your investment accounts holistically. For example, you might have a 401(k) and an inherited, non-retirement investment account that's handled by an advisor. He might manage your non-retirement account without considering your 401(k), and you'll get IRS Form 1099 each year that reports the interest and investment income from this account.
But sometimes these investments can be structured to bemore tax-efficient. It might make more sense tax-wise to locate more bonds in your 401(k) account and more growth investments in your non-401(k). When you have multiple accounts such as an IRA, 401(k), and non-retirement savings, there are numerous reasons to look at your investment allocation holistically rather thanat each account on its own.
