Financial Advisors--A Must Have for Uncertain Times?

Question of the week: I've always been a do-it-yourselfer, but with the uncertainty of the market these days, I'm starting to think that I might need a financial advisor. What's your take on advisors? --Mac G. Dear Mac, In my opinion, financial advisors too often get pigeonholed as primarily investment advisors. Advisors can help you in several areas of your financial life, including insurance, estate planning, and even taxes and bill paying. So, it depends on your situation. If you're young and have settled into a long-term, common sense plan that you're comfortable with, I think you're perfectly capable of managing your portfolio yourself. For people who are closer to retirement, however, or who have more complex issues (for example, lump sum distributions or inheritances), or want someone to "coach" them through financial decisions, hiring a financial advisor can be a very wise move that will pay off handsomely. Over the years, the members of the Armchair Millionaire community have gotten a great deal from their relationships with their financial guardian angels. Here's what they think about advisors: To keep on track. "A good financial advisor helps you stay the course and not succumb to the crisis du jour. Their fee will pay for itself many times over when everything is said and done." --WK To decipher the rules. "You must use an advisor. There are simply too many rules and regulations for most people to keep straight, especially in the areas of tax planning and of maximizing tax deferred savings plans." --Larry C. For one-stop shopping. "I had a CPA who did my taxes for many years and when he became a CFP it was an easy move to solicit his advice on retirement and financial planning." --Steve To supplement what you know. "A basic understanding of how your money is working for you, coupled with the expertise of someone who can plan out your financial goals and work to achieve them is a great combination, and a necessary one for most people." --Michael R. If you do decide to go the financial advisor route, use my checklist to find the best one. The Armchair Millionaire Checklist for Choosing a Great Advisor Use referrals with caution. Be careful to distinguish between recommendations from people who like their advisors personally and those who are qualified to judge an advisor's skill and knowledge. Make sure to get recommendations for at least three different advisors and interview all three so you can see the range of possibilities. Do your homework. Any potential advisor should be prepared to meet you in an initial interview and explain their approach to investing and planning. Ask them who their ideal client is based on their expertise and background. There should be a match between you and their ideal client. Stick with fee-based. Your advisor should be compensated primarily through a fee structure you agree on in advance, and not by brokerage commissions. Advisors who work on commissions may be more likely to recommend frequent transactions in your portfolio, which has never been proven to increase investment returns. Get a written investment policy statement. This statement should provide specific guidelines about your asset allocation, target return, risk tolerance, time horizon, tax constraints and anticipated withdrawals or contributions. You should understand this document completely before moving forward. THE BOTTOM LINE: Your portfolio is more than just your stocks and bonds; it's your whole financial future. If you don't have the time or inclination to closely manage it, a well-chosen advisor can be a terrific ally in achieving long-term financial freedom.

Baby Makes Three

Question of the week: I've gotten married and had a baby all within one year. For the first time in my life, I'm thinking about all the people who depend on me. Do I really need life insurance? If so, what kind is best? —Brand New Mom Dear Brand New Mom, You've asked two important questions that stir up strong opinions among different people. Here's a sampling of the views about life insurance from the Armchair Millionaire community: Only get it if you need it. "I'm working my first job after graduating college and have no dependents, so I don't need life insurance at this point in my life." —Morgan S. Buy term and invest the rest. "Life insurance can be very expensive, so it should be used only for dependents. Buy term, then invest through IRAs and 401(k)s." —MW Pass up the investment. "I believe in term life insurance-just paying a basic fee for basic insurance coverage. I don't need or want my insurance company investing any money on my behalf or making promises to me about its ability to get great returns." —Roger My own approach to life insurance is simple: First, when do you need it? If you have dependents, you need it. If no one is depending on you for financial support, you don't need it. Second, how much do you need? You need enough to replace any income your family would lose if you weren't around earning a living—usually a lump sum that will be spent down during your children's growing-up years. Buy a plain-vanilla term life policy and keep it only as long as you have dependents. As a new parent, the coverage you need doesn't stop here. While it's important to protect your family with life insurance, it's just as important to have the insurance that will keep your financial life on track when you're faced with those relatively minor unexpected events, like a fender-bender or knee-crunching crash on the ski slopes. The key is to put together a package of insurance that includes the right types and amount of coverage for your situation at a price you can afford. My checklist covers some basic steps for doing exactly that. The Armchair Millionaire Checklist for Family Insurance Coverage Get disability. While too often overlooked, anyone who needs their paycheck to pay bills should consider disability insurance. This is especially important for anyone who is the sole breadwinner in the family. Shop around. You can save some money by comparison shopping, but cost should not be your only consideration. It is well worth it to spend a few extra dollars to buy your insurance from a highly rated company that provides fast, convenient claims processing. Raise the deductible. As long as you can cover your out-of-pocket costs, think about raising the deductible on your car, health and homeowner's insurance. A higher deductible basically means that you're taking on more of the risk yourself, so the insurance company gives you a break on your premium. Ignore the hype. There are a few types of insurance that are heavily marketed but often simply not worth the money, including mortgage life insurance and credit card insurance. These can cost far more than they're worth and you will usually have the same or similar coverage through your life and disability policies. The Bottom Line: Insurance is the only investment I know of where you hope you'll never see a return. However, when the unexpected does happen, your family will be able to focus on much more important matters if you've planned ahead and chosen the right package of insurance.

Rethinking Retirement

Question of the week: I'm 40-something, have been saving for retirement for about 15 years, and have always planned to retire by age 55. But over the last couple of years I've watched my retirement fund do nothing but drop and I'm starting to get really concerned about losing my dream of early retirement. What should I do? —Worried in LA

Dear Worried,

Your situation is certainly common these days. A recent survey done by the folks at Quicken showed that almost a third of respondents had lost more than a quarter of their retirement savings since the market hit its peak back in March 2000.

Even the savviest investors are feeling the pinch these days. But by committing to long-term, common sense plans, you'll be well prepared-both emotionally and financially-to deal with a down market. Here's some advice from the members of the Armchair Millionaire community on staying the course:

Take advantage of the down market. "Since I'm a couple decades away from retiring, I'm actually happy that the market downturn has taken place. It means that I'm buying more stock for less when I make my monthly 401(k) and 'pay myself first' investments." —Charlie P.

Get diversified. "I have only taken about a 15 percent hit on my portfolio because I have a well diversified set of funds and stocks and I'm sticking with them. You should take a good look at how long until you need the money, how much risk you are willing to take, and how much money you think you need." —A. Hamilton

My checklist will help you see your retirement investments safely through tough times.

The Armchair Millionaire Checklist for Keeping Your Retirement on Track

• Watch your costs. All investments have costs, too. Whether it's fees or commissions, these costs can make a big difference in the long run. My all-time favorite low-cost investment is index funds.
• Allocate and diversify. If you're allocated correctly it means you have the right balance between stocks and bonds, between small stocks and large stocks, international and domestic, and so on. If you're diversified properly it means you have a big enough selection of each of these allocations so poor performance of a few companies doesn't damage the whole portfolio.
• Consider bonds. After the years of fabulous returns in the stock market, many people have neglected bonds. Bonds will help diversify your portfolio and provide income. They can play an important role in your portfolio especially as you near retirement age. The easiest way for most individuals to invest in bonds is through bond mutual funds.
• Hold steady. If you've been investing regularly in a well-balanced portfolio, stick with it. Many people foolishly cash out when they see their portfolio values drop, but this only puts them in poor position to catch up once the market turns around.

The BOTTOM LINE: Financial markets have always had their winners and losers. The winners always have one thing in common: a long-term approach. Keep your plan on track and you'll get the gold.

The Math Behind Stashing Your Cash

Question of the week:  I'm finally working at a job that offers a 401(k) plan and I want to start saving for my retirement. My problem is I'm not making a lot of money and I seem to spend what I have. How much should I be saving? —LD Dear LD, Even with a modest salary, you can ensure a better retirement if start saving as soon as you have the opportunity. Unfortunately, most people squander their chance to make the most of the time and the savings tools available to them because they're afraid they won't be able to live with a smaller paycheck It's easy to underestimate the advantages of tax-deferred savings. But did you know that when you save in a tax-deferred account, such as a 401(k), a traditional IRA or other tax-advantaged savings plan, you get a big chunk of your money back in the form of tax savings? Depending on your income tax rate, stashing one dollar in a tax-deferred plan saves you anywhere from 10 to 40 cents in taxes. That's like getting a guaranteed 10 to 40 percent return on your money—something you sure won't get any other way. The members of the Armchair Millionaire community have discovered this little bit of math and now they love to stash their cash into their tax-advantaged savings plans. Here's how some members of the Armchair Millionaire community are going about it: Put it on autopilot. "My wife and I both contribute to 401(k)s, and our employers add a match. We find that the automatic payroll deduction works wonderfully to instill discipline." —Yorgos Max out your tax-deferred possibilities. "I save 15 percent of my gross income and my husband saves 20 percent of his. Both go into our 401(k)s, which save us taxes, and we both contribute the maximum allowable by law. On top of that, we fully fund our Roth IRAs every year." —Georgia P. Add on savings in taxable accounts. "Besides maxing out my 401(k), I save an additional 15 percent of my income in a diversified taxable mutual fund portfolio." —Tony G. Your timing is good because you can now put away more than ever in tax-deferred accounts. Worried that Americans aren't saving enough for retirement, Congress approved some changes last year in our retirement plan savings limits that are designed to help you take more control of your retirement planning and rely less on Social Security. Here's a look at the most important changes. The Armchair Millionaire Summary of New Retirement Rules Higher 401(k) limits. The pre-tax maximum you can put into your 401(k) goes up to $11,000 this year, and up by another $1,000 each year until it hits $15,000 in 2006. (Remember that, depending on your employer's plan, you might be subject to other limits. Be sure to check with your company's HR department for details.) Higher IRA limits. Starting this year you can put $3,000 a year into your Roth or traditional individual retirement account, up from the paltry $2,000 limit we've had for so many years. Even better, the annual cap rises to $4,000 in 2005 and $5,000 in 2008. Catch up provisions for both 401(k)s and IRAs. To help procrastinators catch up, there's a special rule for taxpayers 50 years of age and older. These folks can salt away an additional $1,000 a year in their 401(k)s for the next few years, and an extra $5,000 a year starting in 2006. For IRAs, the rules allow an extra $500 a year now with an additional $1,000 starting in 2006. The BOTTOM LINE: Combining the powerful effect of compounding returns over time with the benefits of tax deferral makes for a potent savings recipe. Apply a strong dose of common sense investment planning and you'll be on a smooth road to retirement.