August 26, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Debra in Fairfield: My husband doesn’t trust the stock market, so about 90% of our money is currently in cash. We’re still a few years from retirement, and I’m just wondering if we’ll be OK with this kind of strategy?
Answer: First off, your husband isn’t alone. Many people like the idea of having cash because it’s tangible – you can hold it in your hand, which is something you can’t do with stocks and bonds. Plus, there’s a ‘peace of mind’ factor since there’s a notion you can’t lose your principal with cash.
But here’s the thing: while you might not lose your principal by holding cash, you’re opening yourself up to a different risk; the risk of ‘going broke safely.’
What do we mean by this? Cash is susceptible to losing its buying power due to inflation. It’s why something that costs $10,000 today will cost just over $16,000 in 20 years, assuming an average annual inflation rate of 2.5 percent. So, in most cases, your goal should be to have an investment mix that beats inflation. This helps protect your buying power. Otherwise, while you might find comfort in all that cash you have on hand, over the long run, you’re actually losing money because you can’t buy as much.
Here’s an example: According to GoBankingRates.com, the average annual interest rate on a savings account is currently 0.08 percent (online banks usually have a higher yield, with some currently offering around 1.85 percent). Assuming these low rates stick around for a while, $10,000 earning 0.08 percent a year for 20 years will make you about $160. You’re definitely not beating inflation with those kinds of returns! On the other hand, $10,000 in an investment(s) earning seven percent per year (after fees) will see about $28,500 in gains over 20 years.
The Simply Money Point is that while cash might feel like a ‘safe’ investment, it’s important to realize that it comes with its own set of risks. But of course, everyone’s situation is different. For some people, having a high percentage of cash as part of their financial plan might make sense. The best way to figure out how much risk you should be taking as you approach retirement is to work with a trusted financial advisor, such as a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®.
J.S. in Fort Thomas: I’m going through a divorce and I’m wondering what’s going to happen with my 401(k) - my husband doesn’t have one, so how do we split mine up?
Answer: Perhaps surprisingly, 401(k)s do not receive any kind of special protection in divorce court. Retirement plans are marital assets treated much the same as bank accounts or equity in a home. That is, 401(k)s can be – and regularly are – divided between divorcing spouses.
And perhaps unsurprisingly, 401(k)s can be a source of intense disagreement. According to a 2016 survey by the American Academy of Matrimonial Lawyers, the division of retirement accounts is the second-most contentious issue during a divorce, right behind alimony. The key to maintaining the peace when 401(k)s and/or pension plans are involved is something called a “qualified domestic relations order,” or QDRO.
Once you have your divorce decree in place, you and your attorney should draw up the QDRO (a separate document based on this decree). This tells the 401(k) plan administrator how to divide the 401(k) to be in compliance with both ERISA (Employee Retirement Income Security Act) laws and the divorce decree. The QDRO must also detail the method in which your ex-spouse will collect the money. A judge must approve the QDRO, along with the 401(k) plan administrator. If you’ll be splitting multiple retirement accounts, a separate QDRO is needed for each.
Typically, divorcing couples are allowed to split the accounts(s) as they see fit. If the two of you can’t come to an agreement, however, the court will decide for you based on state law.
Here’s The Simply Money Point: To help proceedings go as smoothly as possible, make sure your divorce lawyer has experience dealing with QDROs. Otherwise, details can slip through the cracks. Also, it’s a good idea to keep your financial advisor in the loop.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email@example.com.