Investment chat with CFP Dan Galli
Dan Galli is a Certified Financial Planner practitioner and principal of Daniel J. Galli & Associates in Norwell, Mass. Galli specializes in retirement planning for professionals, small business owners, teachers, and other individuals; designing qualified retirement plans, maximizing savings and managing assets. He is a registered representative of Ameritas Investment Corp. and can be reached at dan@djgalli.com.
On Feb. 12, 2007, Galli chatted about investing for the future in an uncertain world, saving for college, and what he would have done differently in his 20s.
joe: Is there such thing as saving too much for retirement? All you hear is about people not having enough, yet if I'm on a solid plan for retirement, isn't it better to save some for kids' college or other more immediate things? After all, I can't take my "millions" with me after I pass.
Dan_Galli: Joe, Yes, it's possible to save too much for retirement but in twenty years, I haven't seen too many people accomplish that feat. However, your point is well made. We often have to juggle our goals: saving for retirement, educating our kids, etc. As a planner, I always suggest that you get your retirement savings taken care of first, then worry about educating your kids. Some combination of both is a good idea. Once you figure out how much money you reasonably should have for your retirement and achieve that level of assets, then you can worry about what to do with the surplus.
hey: What's a prudent rule of thumb for the following: suppose my current salary is x dollars. How many times x should I save up for retirement?
Dan_Galli: One way to estimate how much income you will need during retirement is to base it on a percentage of your income, just before retirement. The general "rule of thumb" is 80 percent. That means that if your income were $50,000 just before retirement, you could plan your retirement savings to provide for $40,000 per year. Some of that would come from Social Security, some possibly from an employer pension, and the rest would have to come from your retirement savings. The general rule of thumb for how much to save is based on your age. If you start saving between the ages of 25-35, you should be saving 10-13 percent of your pay. If you start between ages 35-45, you will need to save 13-20 percent while starting between ages 45-55 will require saving from 20-40 percent of you compensation. The early you can start the better. And remember, these are only "Rules of Thumb."
Homer: Is an annual administrative fee on my investments of .12 percent reasonable?
Dan_Galli: Homer, yes, it's very cheap if that's the total expense cost of your assets. However, that may be a part of the overall "Total Operating Expenses" or "Expense Ratio." Both of these categories are often broken down into sub-sections such as "Management Fees," Administrative Fees," "12-b-1 fees," etc. Regardless of what they are called, it’s the total that counts as that is what you are paying for the bundle of services. The average open end mutual fund investing in domestic stocks has a total expense ratio approaching 1.4 percent. That's pretty pricey unless the fund is consistently delivering returns in excess of the appropriate benchmark. However, there are some managed funds with good track records that carry total expense ratios in the .60 percent to .75 percent range. You can invest in an index fund for .20 percent or less and even consider ETF's which are cheaper but have costs to buy and sell. I tend to concentrate on the overall cost of the investment, taking into consideration what I am getting for that cost. Good management, consistent returns, and lower volatility are all considerations that I add into the mix when reviewing expenses. There is a difference between price and value. Good luck.
DollaBill: When setting retirement goals for the year 2030, investment in stocks is preferred over bonds. What about concerns that unique events like growing worldwide demand for oil and the coming depletion of oil reserves, or the massive US trade imbalance? Couldn't these cause huge drops in the stock market that will need a lot longer than 25 years to recover?
Dan_Galli: I agree with the concept that if you're investing for a 25 year period of time, you should be concentrating your assets in stocks. As for the concern about oil and trade imbalance, I just don't worry about those things as much as I would if I were investing over a short period of time. I certainly can't guarantee how the markets will perform but historically, they have managed to produce returns in excess of cash and bonds over most ten-year periods of time. This despite presidential assassinations, riots, terrorist acts, world wars, oil crisis, current crisis, worldwide depressions....well, you get the picture. It's helpful to remember that the stock market ultimately is based on the value of companies. As long as companies find a way to be profitable, their stock value will reflect that. Certainly the oil companies have benefited in recent years and their stock has shown that. But companies can eventually adjust to changing conditions and prosper. And this will be reflected in the performance of your investment account, provided that you stay invested in the markets. If you're using mutual funds, the fund managers will be adjusting to changing conditions. I can't promise anything but I am confident that companies can find a way to be profitable, eventually, in all circumstances.
Homer: Thank you. Just a quick follow-up: Can I deduct this fee as "investment expense" on my personal income taxes?
Dan_Galli: Homer, I don’t think so. I believe that you have to pay the expense directly but this is not my area of expertise. Check with your tax preparer or the IRS at www.irs.gov. Good Luck.
Charles: I've switched jobs a couple of times. Is there any particularly good reason to roll my old 403(b) into a current 401(k)?
Dan_Galli: Usually, the reason for consolidating your old 403(b) to a new plan is to reduce the number of accounts that you have to keep track of and the number of statements that you are receiving. You would also want to look at the new employer's plan. Does is have a good array of investment choices? Are the fees and expenses reasonable? Also, you can borrow from the employer plan but not from an old 403(b). However, you can withdraw assets from your 403(b), although they will be taxable and perhaps subject to a 10 percent penalty if you're under age 59 1/2. Normally, if the investment choices are good and the expenses reasonable and you want to simplify your life, consider rolling the 403(b) into the new plan. If you want to invest the 403(b) money on your own, you can roll it to an IRA and then manage the investments in whatever fashion you wish instead of being limited to the mix in your new plan. One last thing, if your 403(b) account had any employer contributions, it may have some protection from creditors or judgments. If that's an issue for you, consult an attorney to find out more about that. Good luck.
ccbmom: Please explain which is the best tuition deduction to take - Hope Credit or Lifetime Learning.
Dan_Galli: Generally, the Hope Credit may be better...but...you really have to check the three options and see which one works out the best: The Hope Credit, the Lifetime Learning Credit, and the deduction for tuition. The Hope Credit is only available for the first two years of school, but remember, we're talking calendar (tax) years, not school years. Assuming your student starts college in September, the Hope Credit can be used for the first September semester and the two semesters of the next year...and that's it. Calculate all three options (or have someone do it for you) before you decide which way to go. Good Luck.
Marina: Hi Dan, I am trying to save for college for my son, who is 15. Some time ago I opened a custodial account for him and put about $100 a month there. I am planning on using this account as leverage for good grades. Is this a bad strategy?
Dan_Galli: Marina, I am not sure what you mean by using the account as leverage, but if you are thinking that you can either give him the money if he does well or keep it or take it back if he doesn't, that won't work. As a custodial account, the money belongs to him as soon as you put it in. You just take care of it for him until he achieves the age of majority. However, if you're saying that you will either add money or not to the account based on his performance, that's doable. I'm just not sure how effective that would be. You might want to check with a chat that deals with child behavior issues. On that, I am certainly no expert. Thanks.
Marina: I didn't express myself very clearly. I am using several strategies to save for college - 529, equity in the house and also this custodial account. I know there are drawbacks associated with custodial accounts related to financial aid calculation for example. Are these drawbacks so great that I should reconsider investing into this account?
Dan_Galli: Marina, yes, that helps clarify things a bit. When college time comes, you will most likely be looking to see what financial aid options exist. Not my strongest expertise but I believe that when financial aid decisions are made, money in the child's name is counted much more strongly than money in a parent's name, the assumption being that any money in the child's name should all be used for college expenses, whereas, only a portion of the parent's accounts may be used. If true, this makes the 529 plan assets, which are considered as parental assets, more beneficial than custodial accounts which are considered assets of the child. If you're fairly confident that you child is going to college, I would look at the 529 before the custodial account. However, be careful, at age 15, of investment risk. Keep the investment option fairly conservative if you are within three years of spending any of the money. I hope that was clearer. Best of Luck.
Tam: Two years ago, I put money into a mutual fund. My question is: should I continue to leave it there, or what should I do with it?
Dan_Galli: Tam, My answer is going to depend on what type of fund you used and what you need the money for. Mutual funds generally offer the potential for great returns but also carry risk with them. The shorter the time period before you might need to take money out of the fund to spend it, the less risk you can afford to take. Risky funds invest in stocks, to varying degrees. Stocks of small companies may be riskier than stocks of large companies, but this is just a general rule. A balanced mutual fund could spread your money over a mix of cash, bonds and stocks which is not as risky as having all of the assets in stocks. You really need to consider your time frame. Less than three years, mutual funds are probably not the best place. You can read up a bit on this on the web and then look at your account. Hope that helps.
dflys800: Dan, What would you have done differently when you were in your mid-twenties when it comes to finance?
Dan_Galli: Wow! What a great question. Aside from investing in little known companies like Microsoft, I would have staring saving 10 percent of pay, automatically, from my pay, using some automated form of savings like a 401(k) or 403(b). If I didn't have access to one of them, I would have set up an automatic withdrawal from my checking account to an IRA. Today, the Roth option is available and I would consider that during my twenties and perhaps my thirties. At least until my income caused me to want to reduce my taxes, then I would switch to a pre-tax form of saving. And, I would invest all in a diversified mix of stocks, either through a managed fund that I liked or an index fund. I would split 20 percent to foreign stocks and keep the rest domestic. And I would review the account each year but not much more often than that. Yeah….that's what I would have done. If only we knew as much then as we know now. Thanks.
401kfan: As a small business owner can I deposit more than the annual contribution limit ($44,000 for 2006) to my plan?
Dan_Galli: Well, it depends on what type of plan you have. If you're talking about 2006 and had a profit sharing plan set up before the end of the year, you can deposit up approximately 20 percent of your business income, tax deducible, for last year. I know the books will often say 25 percent but if you're self employed, the calculation is made differently so use the 20 percent after deducting half your FICA. If you didn't have a plan set up before the end of the year, you still can set up a SEP-IRA any time before tax filing and do the same thing. However in all cases you may have to include a contribution for eligible employees. That's the general limit on contributions that can be made as an employer. The highest level of income that the tax code recognizes for tax purposes for 2006 was $220,000. Note that 20 percent of that amount is $44,000.
Dan_Galli: However, there are other plans that might allow you to add up to $15,000 in salary deferrals on top of any employer contributions. Unlike the employer contributions which can be made any time up until tax filing, including extensions, the salary deferrals are supposed to be made as you go along during the year. At the end of the year once taxes have been filed, there is a test that is done to confirm that no more than 100 percent of your compensation or $44,000 was made to your account for the year from employer contributions, employee contributions, or forfeitures. However, if you were age 50 or older during the year, you were allowed to defer an extra $5,000 in salary deferrals as a catch up election. That catch up election is not considered when calculating the $44,000 max. So if it happened, it would be allowed on top of the $44,000. This brings the potential maximum that can go into a plan in 2006, $49,000. However, you would have had to contribute the maximum $15,000 in salary deferrals plus $5,000 catch up (if age 50 or older) during the year. It's probably too late for 2006 if you didn't do that, but there's always 2007. The short answer is: Yes, you can put $44,000 into your plan if your income was over $220,000. If your income was lower, think about 20 percent but have someone calculate it for you as you need to adjust for FICA. Lots of technicalities, but worth it if you can do it. Good Luck.
sk: I have been with my wife since 1995 but we have never done a wedding, she wants its badly, we got married at the justice in 1997. We have two kids, 5 years and 3 years, and one the way. She still wants the wedding ceremony. Is it a worthy investment?
Dan_Galli: Well, I've been married for over thirty years and I figured out long ago that there are questions that can be answered based simply on the numbers and then there are questions that need to be answered based on the relationship. I see this one as a relationship answer. Good Luck and Congratulations.
Dan_Galli: My time appears to be up but I thank all of you for your great questions and hope the answers were helpful. This was fun and I hope you enjoyed it also.
