Could your financial portfolio use a summer slimdown?
Perhaps a recent job change (or several) has left you with haphazard individual retirement accounts. Or maybe your successful on-line trading led to a substantial tax bite in April. You could even be fretting that higher interest rates are coming, with the potential to lower the value of your mutual funds and make your broker’s fees look astronomical. Just as you clip coupons to save on daily household expenses and count fat grams to ward off unwanted flab, it’s time to prune your portfolio, three women financial experts agreed.
For starters, Geri Hom is putting her money where her bread is buttered, to mix a couple of metaphors. Hom, manager of about $15 billion in index-fund assets for Charles Schwab & Co., invests all of her own money in such funds. Index funds are designed to track a portion or all of the overall stock market, and investors have been flocking to the low-cost investment vehicles because so few managers have been able to keep pace with the market in recent years.
“With an actively managed fund, your (brokerage) costs can overwhelm any gains,” Hom said, adding that her own index play is not for the faint of heart. “It’s a long-term investment strategy, and you need to be able to ride the ups and downs of the market for at least five years, but you eventually build a nice nest egg,” she said.
Of course, investors need to remember that the stock market goes both ways, and if it heads down, your money goes with it.
That’s why you need to keep about two months’ take-home pay in a readily accessible account such as a money market, said Kay Fulkerson, an independent Sun America Securities financial planner and Chicago-area native now working in Phoenix. Without that cushion, an emergency will cost you in tax penalties if you have to hit your retirement account, or in interest if you have to use credit cards, she said.
For many investors, she said, retirement accounts can provide cost-saving strategies. Self-employed women (and men) making less than $50,000, regardless of a spouse’s income, can protect at least $6,000 a year from taxes under a savings incentive match plan for employees, or SIMPLE. This is an individual retirement account for self-employed people or small businesses with up to 100 workers that allows for employer and employee contributions of up to $6,000 each.
If you’ve rung up a hefty tax bill because of all your telephone or on-line stock trading, it may be tempting to trade within your IRAs to avoid capital gains taxes, but there are some caveats to remember, said Martha Priddy Patterson, a compensation and benefits consultant for KPMG Peat Marwick in Washington, D.C. If your IRA sustains a loss, you can’t feed more money in to bring the account value up because of the pre-established limit on contributing, she said.
In fact, the whole practice of novice day-trading makes Patterson shudder.
“My biggest fear is people who think they can beat the market. This is an area where you can spend an awful lot of money tax-inefficiently,” she said.
Rather, she said, spend your time evaluating which IRA suits your situation best, allowing for the maximum annual savings contribution, and stick with it. Patterson learned this lesson the hard way, accumulating a number of small, separate IRAs over several years.
“For years I had a number of little IRAs, each charging $10 to $25 a year in administration fees,” she said.
By consolidating her money into a discount brokerage account, she had enough money in one pile to get her fee waived and saved herself headaches and paperwork at tax time.
If a job change is imminent and you want to take your retirement money with you, be sure to roll over the account in the name of your outside IRA, which avoids a check being made out to you personally. This keeps the funds from being taxed, though not all employers offer this option, said Patterson, author of “The New Working Woman’s Guide to Retirement Planning,” (University of Pennsylvania Press, $19.95) out this fall.
But the easiest way to avoid a sluggish portfolio is to exercise it sooner, Patterson said.
“The basic problem remains: Women don’t start saving early enough. It’s like waiting to start an exercise program until you can run 10 miles. That just doesn’t make sense. You need to take 2 percent of your paycheck and just save it.”
Also, don’t wait until the end of the year to contribute to your IRA, Patterson said.
“The time to fund your IRA is Jan. 1, because the money is all tax deferred. Over a career, you can save tens of thousands of dollars by funding as early as possible.”
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E-mail: kiddstew@msn.com
