March 24, 2019
This Spring, Simply Money Advisors is becoming Allworth Financial. As we expand our services to better meet your retirement planning needs, we needed a name that encompasses all that we are. Don’t worry. We’ll still deliver our same no-nonsense money advice every week in the Simply Money column, presented by Allworth Financial.
Paul in Florence: How do I choose the best investments for my 401(k)?
Answer: We’re going to answer this question in a way you might not expect – explaining what you shouldn’t do.
It can be very tempting to look at your fund selection, pick a few that have performed the best over the last few years, then call it a day. But we want to reiterate a phrase that’s included in pretty much every single financial disclaimer: past performance is not indicative of future results. Just because a fund has done well over the last year or so doesn’t mean it’s destined to do well again.
You also don’t want to look at your 401(k) as a silo. Any decisions need to be made within the greater context of your financial goals. This includes the types of funds you pick as well as your investment mix of stocks and bonds. Every investment comes with some kind of risk. You want to be able to meet your financial goals while also being able to sleep at night.
With all that said, in general, we prefer index funds to individual stocks or actively-traded funds. Look for funds that provide broad U.S. exposure. And to stay diversified, some international exposure can be beneficial as well. And don’t forget about bonds – these can act like ‘shock absorbers’ when the market is down.
If you’re completely overwhelmed, see if your 401(k) plan offers a Target Date Fund. This is a fund that ‘glides’ towards your retirement year. The closer you get to that date, the less risk it will take (in theory). But while a Target Date Fund is a good starting point, we don’t recommend this kind of fund if you’re within five to 10 years of retirement – by this point, you should seek out customized retirement advice for your particular situation.
The Simply Money Point: Don’t get overwhelmed with your 401(k) investment options. Keep it simple and view it as just one part of your overall financial plan.
Julie in Hebron: I’m thinking of buying a brand-new car. I have enough money to pay for it outright, but not sure if that’s the right thing to do. Should I use that money or finance it?
Answer: The anticipation and excitement of owning a new car (No scratches or dings! The perfectly clean interior! That ‘new car’ smell!) can make some people blind to the financial considerations, so we’re glad you’re taking the time to figure out the best route to take.
You say you “have enough money” to pay for the car in cash. But where is this money? Is it liquid, perhaps sitting in a savings account? Or are you counting money that’s in a traditional IRA or 401(k)? Because there’s a big difference between withdrawing money penalty-free from a savings account versus withdrawing it from a retirement account – you’ll pay taxes, and depending on your age, a penalty on the latter. However, also keep in mind that depleting an account that serves as an emergency fund for the sole purpose of buying a new car is not recommended.
But let’s say you have the money sitting in a savings account and you won’t be jeopardizing your financial situation by making the withdrawal. The upside of using cash is avoiding interest payments. Let’s say you buy a $30,000 car and put 20 percent down ($6,000). A 48-month loan for $24,000 at 4.68 percent interest (the latest average according to Bankrate.com) will ultimately cost you $26,363. This means that car really costs $32,363 thanks to the extra $2,363 in interest payments. So, yes, while financing uses someone else’s money (like a bank’s) to free up your money for other needs, you’re paying for that ‘luxury.’ Paying in cash also better allows you to stick to a budget – it’s way too easy to keep inflating your monthly payment when financing, thus increasing the total amount you’re paying for the car.
And it’s important to note the two main distinctions between a mortgage and a car loan. Unlike a home (in most cases), a car is a depreciating asset meaning it loses value the second you drive it off the lot. If you finance, it’s easy to owe more than the car is worth right from the get-go. Plus, also unlike a mortgage, a car loan doesn’t come with a tax break.
Here’s The Simply Money Point: Unless you can find a zero percent financing deal, it might make sense in your particular situation to pay in cash. But you need to run the numbers to be sure. A perk of working with a financial advisor is that he or she can help you make ‘everyday’ money decisions like this one by analyzing the ‘opportunity cost.’
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 his team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.