Today, Rick looks at 8 financial opportunities for you to consider in the current financial climate.
Also, Rick answers some listener emails.
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I'm Rick Bloom and welcome to Rick Bloom Talks Money, dedicated to making sure you make better decisions with your money. The goal of our podcast is always to make sure you have more money in your pocket because I believe it looks better in your pocket than it does anywhere else.
I'm recording this on Thursday before Memorial Day and we've had a nice little run in the market, and we'll talk about that. But I also want to let you know what's going to happen on the podcast today. I'm going to be talking about eight opportunities that you can take advantage of because of change in laws and change in circumstances. So we'll be talking about that today. I’m also, taking your questions, something we're going to do on every one of my podcasts is take your questions. If you have questions or comments on the show, please feel free to email me -- Rick@rickbloomtalksmoney.com, that's Rick@rickbloomtalksmoney.com. I appreciate your comments, appreciate any suggestions you have because I want to make the show is interactive and I want to make sure it's relevant to you. So any questions you have, comments, I certainly would love to hear from you.
One thing that's happened over the last week, we've seen a nice little run in the market as America, and the rest of the world starts reopening and there's a sense of optimism that things are going to get back to normal. However, it's important that we take a step back and realize that there are still many challenges ahead of us. And even though markets have recovered somewhat, it’s always important to remember that markets recover before the economy. So there's lots of issues with the economy today that we still have to be concerned about. If nothing more, look at the retail environment; it was announced today that Mall of America has missed two payments, and we've seen a number of retailers close their shops and go into bankruptcy. So there are challenges ahead of us, so it's important that you just don't rush into something, that you make sure it fits your individual situation.
And what I believe is moving the markets right now, I believe it's a few things. One, I think it's where we stand with the vaccinations and the whole treatment of the COVID-19. It seems that when we get good news on the vaccine, markets go up; bad news, markets go down. Also, what's moving the market right now is the Federal Reserve fiscal policy. The Federal Reserve has been very active to provide liquidity in the markets, and I think that's also what's driving the market. The reopening of the economy, and how's it going; that's something that everyone is looking to as more and more states start opening up.Are people going to restaurants, are people getting out and spending money again? Always remember, our economy is based upon consumer spending, and that's what's so important as people's behaviors.
Valuations are also important; where we stand with earnings and something that's becoming even more important in moving the market right now, I believe is China/U.S. trade tensions.It seems that there are some difficult conversations we have to have with China, and China's not going to sit there and take it from us, and they're going to retaliate. So it's going to be a difficult time for China/U S trade. And let's remember, the United States, we're the number one economy in the world; China is number two. So whenever you have the number one, number two, economy in the world have issues, it's going to affect the markets. And so those are the things that I believe are moving the markets right now, and that will move them for the near term.
In looking at our environment today, there has been all sorts of changes in laws and rules because of the COVID-19, and as a result of that, there creates opportunities for you and I. Not all these opportunities are for everyone; there may be one or two that affect you that you can really save some money. And the first one I want to talk about is the changes that affect employer healthcare plans and flexible spending plans. As strange as this may sound, the IRS has eased the rules and have become more flexible. Typically, when you have an employer sponsored healthcare plan or a flexible spending account, you can make adjustments in those accounts once a year, and typically that's done in the fall. So if you have a flex spending account, what that means is that you have to decide how much you want to put into that a year ahead of time. And the same thing applies with your healthcare. You have to make those decisions, and you're bound by him for the next year. Well, because of what's happened with the economy, people losing their jobs, the IRS has decided to ease the rules. And so for this year only you can make changes mid-year in your employer sponsored healthcare plan or your flex spending plan.And really this can make a huge difference for someone. Take on your healthcare plan, you can add a family member, subtract a member out, or you can even switch plans, and this is important, particularly, if you have a spouse or a significant other that you're on their healthcare plan and they've lost their job, you may find that you have now lost your healthcare. Well, you can now go back to your employer and sign up for it. So you have that option. And the other thing is the flex spending accounts. And so what a flex spending account is it allows you to put money away pretax and use it for healthcare or typically childcare. And you do that a year ahead of time. The caveat is if you don't spend the money, you lose the money. You can only carry over $500 into the next year. So it happens all the time; people lose money in their flex spending accounts cause they don't spend it.
Well, one of the issues now is childcare. A lot of the child daycare centers have been shut down; there's no afterschool programs. So money people have put into this and they're not using it. Well, you could stop that money going into a flex spending plan. You can increase your contributions, you could stop your contributions, you can adjust them any way you choose. And particularly for parents with a childcare expenses, they have put money away, this is going to be a very good savings for you. And of course, there is one caveat, like everything in our laws your employer must approve these plan changes. In other words, the employer has to agree to these changes. I would envision that most employers would, but a lot of small employers don't want to go through the cost.But if you work for a small company, even the large company, you should never hesitate to talk to your employer about making these changes because they make a difference and it's significant during these times.
The second opportunity I see is for those of you with student loans. You may not have heard this, but there now is a moratorium for federal student loans. You don't have to make payments through September 30th and in addition, the interest on all those loans have been reduced to zero for that timeframe. So the general rule is if you don't have to make payments, don't make payments. However, that may not be the case. I think there's great opportunities for people who want to reduce their student loan to continue to make payments. Because think about this. What happens if you have zero percent interest and you keep making payments?It means 100 percent of your money is going to reduce the principal. So for a lot of you, you should continue making your student loan payments even though you don't have to. My rule that I would look at if you should continue making your payment is 1) you have to be stable financially; 2) you have to have security in your job. you're secure in your job; 3) you don't have any high interest rate debt or high interest rate charge cards; and 4) you have an emergency fund of money. And typically, I say three to six months of living expenses is what you need as your emergency fund. If you meet those criteria, then it pays to continue to make your student loan payments because what you're going to do is you're going to reduce your principal balance and there's nothing wrong with that. Again, another strategy that you used with student loans-- sometimes you refinance those loans and you consolidate those loans, and a lot of times it makes sense. It doesn't make sense right now because we have zero percent interest.
The third opportunity I think many of you should consider for those of you who own homes and have mortgages is to look at refinancing. Interest rates have continued to drop so there's opportunities. If you're in the four percent area, it may make sense to refinance. However, there are a few things about refinancing you need to keep in mind. First of all, costs do matter. So many of these mortgage companies, they don't want to talk costs and fees. That should be the first part of your conversation to find out what it's going to cost you. Because a lot of times it doesn't pay to refinance if you have to pay these outrageous fees and costs. My general rule, if you can recoup your fees and costs within two years because you have lower monthly payments, then it makes sense to refinance. If not, it doesn't. But also, one of the mistakes people make when they refinance, they tend to, if they had a 30-year mortgage they refinanced or another 30-year mortgage. Well, you don't necessarily have to do that. Think about it, if you have a 30-year mortgage and you've already paid five years on it, why refinance for 30 years and add five more years? You could refinance with a 20-year, a 25-year, even a 15-year mortgage. In fact, one strategy a lot of people may find works for them is they can refinance using a 15-year mortgage and they'll find that their monthly payment isn't going up that much, and as a result, they can cut out 10/15 years on your mortgage. So I think refinancing makes sense for lots of people, but the key is to shop around and get competitive bids. And the other thing, and for some reason people don't think they can do this, but you can negotiate the costs and fees. You'd be surprised once you start negotiating how much they will come down. And also one last note about refinancing, don't get fooled by the gimmicky rates you see on the TV because not everyone gets that rate. Get it in writing, shop around and get competitive bids.
The fourth opportunity I believe exists for people is for those of you are retired and you're taking distributions, whether they're monthly or quarterly from your portfolio, you may find over the last few months, you're spending less money. Why are you spending less money? Because you're not going to restaurants, you're not going out for entertainment, you're not taking vacations. So the question is, do you still need to take the monthly distribution or quarterly distribution that you're taking? You may find you can cut back on those distributions and where that will help you is years down the road.
And so one thing you should do, particularly if you're taking income from your portfolio, you need to relook at your expenses and to see what is your expenses today. And if you could find that you can shut down some of your distributions it will help you later in life. Because one thing I'm always concerned about is the future.And I can guarantee you in the future it will cost more to live. And that's why you want to have more money in the future than you do today. So, if you have the opportunity to cut back on your distributions, it's a wonderful thing to do.
Another opportunity --my fifth opportunity, and I've talked about this in the past, is tax harvesting.Now, first of all, let me tell you this, what I think about taxes. I always tell people, your goal is not to lower your taxes. Your goal is to have more money in your pocket. Lowering your taxes doesn't necessarily mean you're going to have more money in your pocket. And so, the goal when we talk about tax harvesting is yes, to save on taxes, but also to make a good financial move, because ultimately that's what it's about, increasing our net worth. So, what the strategy is now is because we've seen some losses in our portfolios, you may go through your portfolio and say, I have a large cap U.S. growth fund and I have a loss. Well, I'll sell that so I can recognize the loss. Now the problem is we have something that is called wash sales rules. If you sell an investment, you can't buy the same investment back within 30 days. So in today's world where you may not want to be out of the market for 30 days. The solution to that is you just buy a fund that is similar. So if you bought a fund through Fidelity, that's a large cap growth fund, you buy one through Vanguard, and so you don't violate the wash sales rules, you're not out of the market, and you then can write off your losses for tax purposes. To me, that's a winning strategy because you've recognized losses for tax purposes and you still made a good economic move. And so, you should go through your portfolio and look at where you could do some tax harvesting.
Now, always remember this, you don't do tax harvesting on an IRA or a 401k plan because there's no tax consequences. You do it with your non-qualified money. But tax harvesting, even though we've had a good run up in the market, still makes sense for many investors.
My sixth opportunity that I think exists today is Roth IRAs, and to convert existing traditional IRAs into Roth IRAs. I've always said that one of the great reasons you want to go into Roth IRAs is because you could convert money that is growing tax deferred to tax free money. You never pay the income for a Roth IRA. That's what the beauty is. And also, it's not subject to the 72 rules, which means that at age 72 you have to start taking out of your 401k, you have to start taking out of your IRA. You don't have to do that in a Roth IRA. You can let money grow tax free for as long as you choose. And where the opportunity is is because you may have found that you've lost your job, your income is lower, so your taxes are lower. And the reason for that is when you convert an existing IRA into a Roth IRA, there is a tax consequence. The money you are converting, you are paying taxes on. So if you're in a lower bracket, you're converting money that you would always have to pay taxes on anyways, but in a lower tax bracket. So that's where it creates a good opportunity. So the way I look at it is each of the rules that I look at in determining whether someone should convert an existing IRA into a Roth IRA, 1) you have to have the money to pay the taxes without touching the money that you're converting. So if you converted $10,000 it may mean your tax are going up $2,500 and you have to have that $2,500 to pay the taxes; 2) by converting the money it's not going to put you into a higher tax bracket, and that is really just the number crunching to look at where you stand with taxes and how much room you have in the brackets.
Now, one thing that seniors need to be cautious of is Medicare B. Medicare B is the premium you pay usually comes out of your social security is based upon your income. For certain taxpayers, if they did a Roth conversion, it may throw them into a higher bracket where their premiums are going to go up substantially. And we don't want that. So when you look at a Roth conversion, if you're collecting Medicare, look at the consequences as to the Medicare B premium. But I think it's a great strategy, to take advantage of it you can convert money from tax deferred to tax free, and because of if your income is lower now, you're converting it and paying taxes at a much lower tax bracket.
And there is another benefit of a Roth IRA, and that is when someone passes away in a traditional IRA, your beneficiary has to pay income tax on that money. Not in a Roth IRA. When someone passes away and they're the beneficiary of a Roth IRA, that money goes to them income tax free. So lots of benefits of a Roth IRAs.
And also, as you know, I mentioned this before, that there are no minimum required distributions this year. The IRS has waived those. However, it doesn't mean you can't take money out of your retirement account. So for a lot of people who've never been able to put money into a Roth IRA, the fact that there are no minimum required distributions this year means that you may be able to get money into a Roth.
And remember, for those of you who are now over 72, you can convert no problems, but you could only convert above and beyond your minimum required distribution. You can't convert your minimum required distribution. However, and this year, there is no minimum required distribution. That's where the opportunity lies.
The seventh opportunity, I think, deals with what's happening with the banks and online banking. You could be a person that just likes to hold cash. You know, you don't want to invest it, you're nervous and it just makes you comfortable to hold cash. Well, if that's the case, you should look for ways where you can increase your return and there's opportunities to do that today. Interest rates at the banks have dropped on savings account. It's not unusual to get 0.1 0.2 percent. However, if you shop around online, you can get a thousand percent greater than that. You can get over one perent return. So it does pay to take advantage of online banking and it's never been easier than it is now.
There are lots of websites. The one I use is bank rate.com -- bank rate.com. You can go on that site and look at all the federally insured institutions and see what the rates are. And as far as I'm concerned, when it comes to shopping rates, if you have a federally insured institution, it's simple. You'll look for the highest rates. And of course, some of these banks charge fees.; you got to be aware of that. Most of them don't. And it's very easy to deal with online banks. And I think we've all had to deal with more technology than we've ever dealt with and so shouldn't be as frightening to use an online bank as it may have been in the past.
So I'd recommend for those of you who are sitting on cash, you're not going to, you know, invest t, you want to keep it in cash and CDs, shop it around. Look at these online banks because the online banks are paying considerably much higher rates of return than you're going to get at our traditional banks.
The eighth and last opportunity obviously is the stock market. The market is on sale and it's still on sale. Even though over the last a couple months, we've seen about a 30 percent run in the market. There is still lots of opportunities to invest in the market. So, if you're sitting on cash, why wouldn't you look at investing now? I always say this, the stock market is the only market I know of that people run away from it when it's on sale. No, I don't think the stock market's place to get rich fast. You're not going to make money that way. But if you're a long-term investor, you should look at taking advantage of the markets as they exist today, because there are great opportunitiesAnd for those of you who are working, don't stop your 401k contributions. Now's the time to keep putting that money in because you're buying the market at a much lower cost.
And one question I always get when it comes to the markets is, Rick, what sector of the economy should I be investing in? I don't traditionally pick sectors because it's so difficult and so many things change and it's hard to know what's a sector and what's not in a sector these days. I remember used to be high tech and now technology is mainstream, so I'm always cautious about picking sectors. I think you pick investments that fit into your portfolio. You want to have an overall game plan or overall strategy, and that's the key. That's what makes someone successful. I always tell investors that if you don't have a game plan, you're not going to be successful.
And I think that's one of the reasons why a lot of people use professional financial advisors is to make sure they have a game plan. If you don't have a game plan, you're not going to be very successful in the markets and your game plan should be based on your individual situation and what risk you want to take. But saying that, there are opportunities in the market, if you're sitting on cash, you're looking long term, this is a great time to get involved and if you're a little nervous and you don't want to invest it all at once. Do a little dollar cost averaging strategy. Dollar cost averaging means that you put the same amount in at a set period of time. So you say, I'm going to invest 10 percent of my money every month at the first of the month, and you do it. Then it's a way that you lessen the volatility in the market. But I think there's great opportunities in the market that people should take advantage of.
Well, those are the eight opportunities that I think that you should be looking at taking advantage of because if you can make a few extra dollars on your money, why not? And whenever you can be more efficient with your money, the money looks better in your pocket than it does anywhere else.
As I mentioned at the top of the show, I always want to make sure that we have time for questions and I want to go through some of the questions that I received this week and also to remind you, for those of you with questions, we'd love to hear from you.My email address is firstname.lastname@example.org. That's email@example.com.
So, the first question is from John, and John wanted to know if the NASDAQ market was a leading or lagging indicator of how the economy is doing. Well, John, I think it's a leading indicator, but I think most markets are leading indicators because if you look at the NASDAQ or even the Dow, the markets are always looking forward and that's why I think there are leading indicators.
Lagging indicators are things like the unemployment numbers, the inflation numbers. They tell us where the economy has been; the markets are telling us where the economy is going. So, I believe, John, when you look at it, I would look at NASDAQ market as a leading indicator.
This is from Jim. Rick, what do you think of Fidelity's target 2034 fund? With the possibility of higher interest rates and higher taxes is this the right space to be in? All the pros on TV seem to be selecting stock picking now and getting out of general funds. Thank you. Well, Jim, let me tell you, I'm not a great fan of target funds and what target funds are is there usually set up by a mutual fund, and this one by Fidelity, and Fidelity has one of the better target mutual funds and they invest in a variety of Fidelity funds. So one you don't, you get diversification within the categories, but you don't get diversification within the companies. Some mutual fund companies always have a bias. They may be more growth oriented or more value oriented. So when you go into a target fund, you're getting one company, so you don't get a lot of the diversification that I think in strategy that I think is important.
Also, one of my problems with target funds is that they make the assumption that life ends when you retire, and that's a problem that I have. When someone says that they're going to retire in 2034 that doesn't mean that, they still don't need a rising income the rest of their life because they do. And so if someone had a few dollars and they were in a 401k plan, I would use a target fund; I don't have a problem. But if you start accumulating money, I think you could do much better by selecting the individual funds within the portfolio that is offered in the 401k plan so you can have a better portfolio geared for you. And the other thing about target funds, not all target funds are the same. Some have very high hidden costs in them. And also, some of their allocations are, to me, way off. So, I think Fidelity has good target funds, but I would prefer that if you looked elsewhere, Jim, look at the other funds in the 401k options that you could build a better portfolio for yourself. And one of the things that where target funds have gotten more popular is just the default option on 401k plans. In other words, if someone you know has put into a 401k plan and they don't select funds, it goes into a target date fund. And one thing I always want to caution people about is you need to make sure you have arising income the rest of your life. Life doesn't end at retirement; it's round two. If someone retires at 65, I can guarantee you by the time that they're 75 and 85 their cost of living is going to go up. Target funds sometimes are based upon the theory that once you hit retirement, you don't need a rising income. To me, nothing could be further from the truth.
Just look at over the last 10 years, look at food just over the last five years, how expensive it has gotten. So, I'm not a fan of target funds particularly the more money you have in a portfolio, I think you do much better.
From Bernadette – Hello, I love your program. Thanks for taking time to share your insights. It's really appreciated. I'm a senior, not really planning to use funds I hold in my Roth IRA. If I need money, my Roth IRA will probably be the last fund I use because they have no tax consequences. Are there best funds to use in a Roth IRA, and do you have any suggestions? Thanks, Bernadette.
Well, first Bernadette, thank you for the kind comments and I love the fact that you're using a Roth IRA.As a strategy standpoint a lot of times in a Roth IRA, I want to have the income portion, the income producing portion of my portfolio that's producing ordinary income. And the reason for that is ordinary income is tax that my highest bracket. So since Roth IRAs are tax free, I want to put into a Roth IRA, the investments that are going to have the highest tax consequences, and that's typically income producing funds. In addition, you have some mutual funds that have some sort of aggressive strategy and they produce a lot of ordinary income. Those are good funds for going into a Roth IRA as well because there's no tax consequences. I think that the Roth should be part of the overall portfolio, but again, use it mostly, particularly Bernadette, in your situation where you don't need the income, you can let the money reinvest. I think that makes sense.
If you're looking for some low-cost funds, and one company I would look at would be Vanguard. Vanguard has some great funds and an income producing fund that I like at Vanguard, you can look at the Vanguard Wellesley income. It's been a fund that I've liked for years and it's just done great over the long term.
And again, for those of you who haven't put money into a Roth IRA, look for opportunities because I'm telling you, Roth IRAs can be a great opportunity to let money grow tax free and never have to be subject to the minimum required distributions.
Well, our time for today show is just about up. I want to, first of all, remind you about our email, firstname.lastname@example.org. Any comments you have for the show, any questions that you want me to answer, we'd love to hear from you. Also want to remind you that as the economy opens up, as the states open up, that doesn't mean that we're out of danger. You still have to protect yourself and take precautions. Because we're not out of the crisis yet, and it's important that you protect yourself.
On that note, thanks so much for the company this afternoon. I enjoyed it. Hope you did, too. Thanks to Jennifer and John behind the scenes for all their help. Hope you join me again. Bye now.
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