Richard London CFP

April 2016 Newsletter

Reasons to Avoid 401(k) Loans

april 1Many 401(k) plans offer the option to take a loan against a portion of your 401(k) balance. This might seem like an easy source of funds to tap for various reasons, but with exception of a dire emergency you should think twice about borrowing from your 401(k) plan.

Leaving your job can trigger the requirement for an immediate repayment of the loan. If you can’t make this repayment you will trigger taxable distribution for that portion of your balance that also comes with a penalty if you are under 59 ½.

  •  If the stock market increases, you lose out on potential gains
  • There are costs involved with these loans
  • The interest on the loan is not tax deductible.
  • There is no flexibility in the repayment terms if you run into financial difficulties.
  • You will likely have less saved at retirement.

These loans are even more dangerous for those of you who:

  • Are near retirement. You may find yourself unable to pay the money back prior to retirement resulting in both an extra tax liability and a lower retirement nest egg.
  • Are planning to change jobs in the near future.
  • Feel that your job security is in question.

If you have questions about the financial impact of taking a 401(k) loan, contact our office to schedule a meeting so we can help you take a look at your options.

“Two-Step” Your Way to Paying Off Debt

If you have credit card debt each month and have decided to do something about it this year, this article is for you!  While credit serves a purpose, carrying debt through months (or years) is a sign that you’re not getting ahead.  Credit card companies hope you only make the “minimum” payment in order to stretch out the length of your balance.  Take note of the fine print under your minimum payment notification if you only pay the minimum.  It shows you how much that debt really will cost!  What if you’re not in a position to make more than the monthly minimum payments?

Try the “two-step” method if you have good credit and this fits your situation:

april 2Step #1.  Look for a zero interest rate introductory credit card.  These are offered to you by a competitor company of a card you currently have.  Most of these cards offer 12-18 months of no interest.  They may have a transfer fee to transfer balances from another card; try to negotiate no fee or a lower transfer fee.  Transfer all or as much of your debt as you can to this type of offer.  Then cut up the old card with the higher interest rate and do not accumulate anymore debt on the new one.

 

Step #2.  Divide balance by the number of months of no interest and develop a plan to pay the credit card debt off by the last month of the zero interest deadline.  If you can do this, you’re winning at this debt game!  If you can only do the minimum each month, you’ll still be ahead because you’ve dropped the balance of the debt.

Making a plan to pay off your credit card debt this year will allow you to save more for long term goals in the future.

Are Pension Buyout Offers a Good Deal for You?

In recent years many large employers have offered former employees who are not yet at retirement age the option to take a pension buyout. These offers usually offer several options

  • april 3Take the value of your pension as a lump-sum payment which can be rolled over to an IRA. The advantage is the ability to manage this money   yourself and perhaps allow it to grow to level that would provide a greater benefit than taking your payments on a monthly basis.
  • Take a monthly payout now (earlier than your normal retirement age).
  •  Do nothing and take your original pension payment (or a lump-sum if offered) at your normal retirement age.

Factors to consider:

  • Will taking one of the buyout options put you in a better financial position than doing nothing and waiting until your normal retirement age?
  • Are you comfortable managing a lump-sum or do you have a financial advisor you trust who can help?
  •  Is your financial and/or health situation such that taking the monthly payments now would make sense?

These types of offers are likely to continue due to the increasing costs of administering pension plans and the desire to get the liabilities associated with the pension payments for former employees off the books.

If you receive a pension buyout offer give us a call. We can help you evaluate the offer and make the best choice for your personal situation.

5 Common Investment Scams

april 4Investment scams aren’t something new; unfortunately they have been around for hundreds of years.  What is new is the way that scammers try to get to you with more complex offerings.  Be aware of these common scams:

 

 

Private Event with ‘Free Lunch’- These are an invitation only event, where you are invited to find out about an exclusive investment only offered to those in attendance.  Generally these are offered as a “get rich quick” opportunity while being fed a meal, and target retirement age investors.  Many times the invitation is from someone you don’t even know.

Unregistered Investments- Just because the investment sounds good and the documents look real, doesn’t mean that they have been approved for sale to the public through regulatory agencies (ex. Securities Exchange Commission).  These are typically sold through someone who isn’t a state registered representative of any state registered firm.  If you have any question on the investment representative or firm, contact your state insurance department.

Investing in Precious Metals and Mines- The mining company or metals that you own may not exist.  Scammers know you may never visit the mine you supposedly own because they are located outside of the United States.

Ponzi Schemes- This is the number one type of scam, which can go on for decades if no one needs distributions that are larger than the amount of money the scammer has.  Unfortunately these usually involve friends and family, since the investor unknowingly pulls them in through introduction to the scammer.

Loans, Private Bank Scams, or Private Placements- These are investments that seem like they are part of a private bank and reserved only for the ‘wealthy’ to participate in.  Often, there is no real bank that is registered with the state and monitored by banking regulatory agencies.  These investments are presented to you as an opportunity of being ‘lucky to participate’, and promise excessive returns that sound real because of their exclusivity.

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