Is investing in these mutual funds with this planner a good call?
January 17, 2015 12:42 PM Subscribe
I visited with the financial planner of my local bank last week and want to know if his advice is generally considered good, since I know he's a fiduciary but also that he does still earn money off his recommendations. Plus I'm a novice at this.
I am a single 28 year old, have approximately $14K in graduate student debt at 6.5% interest, just started retirement savings for the first time ever in August 2014 with 5% of my salary plus 5% employer-matched into a 401K, and have now saved what feels like enough to me in my emergency fund/savings account (about $8K) which earns .03% interest to begin thinking about better ways to store the income that so far I have been adding to the savings account pot.
I met with this financial planner and he suggested I begin putting $100-$200 per month directly out of my paycheck into American mutual funds. The cost to me is a 5.75% one-time fee and then annually .7 to 1.07%. (When I asked how he makes money, he said part of those fees kick back to him.) He said I shouldn't plan on touching this money for at least 5 years to make the investment a better plan than leaving it in savings/putting it toward student loans (which I believe I can do, barring catastrophe).
He also said at the current interest rate I should just pay the minimum toward my student loans. I have mostly been doing that already so as to accrue what felt like enough in my savings, but I recently tossed $2K at them a few weeks before meeting with the planner. I'd love to eliminate them completely in the next few years, but he's right that if I can earn more in mutual funds I should just deal with the slight discomfort knowing I have debt out there for longer brings, right?
I am a single 28 year old, have approximately $14K in graduate student debt at 6.5% interest, just started retirement savings for the first time ever in August 2014 with 5% of my salary plus 5% employer-matched into a 401K, and have now saved what feels like enough to me in my emergency fund/savings account (about $8K) which earns .03% interest to begin thinking about better ways to store the income that so far I have been adding to the savings account pot.
I met with this financial planner and he suggested I begin putting $100-$200 per month directly out of my paycheck into American mutual funds. The cost to me is a 5.75% one-time fee and then annually .7 to 1.07%. (When I asked how he makes money, he said part of those fees kick back to him.) He said I shouldn't plan on touching this money for at least 5 years to make the investment a better plan than leaving it in savings/putting it toward student loans (which I believe I can do, barring catastrophe).
He also said at the current interest rate I should just pay the minimum toward my student loans. I have mostly been doing that already so as to accrue what felt like enough in my savings, but I recently tossed $2K at them a few weeks before meeting with the planner. I'd love to eliminate them completely in the next few years, but he's right that if I can earn more in mutual funds I should just deal with the slight discomfort knowing I have debt out there for longer brings, right?
No. Just no. I work in active management for a living and those fees are way too high
posted by JPD at 12:53 PM on January 17, 2015 [11 favorites]
posted by JPD at 12:53 PM on January 17, 2015 [11 favorites]
You should never work with a financial planner who makes a commission. Find a fee based planner. You can afford it.
Personally, I would say that you should put the money into a vanguard fund (almost no fees, and outperforms almost everything else).
If you're maxing out your 401k contributions, personally, I would save the excess for a down payment on a house if you don't already own one.
posted by empath at 1:01 PM on January 17, 2015 [3 favorites]
Personally, I would say that you should put the money into a vanguard fund (almost no fees, and outperforms almost everything else).
If you're maxing out your 401k contributions, personally, I would save the excess for a down payment on a house if you don't already own one.
posted by empath at 1:01 PM on January 17, 2015 [3 favorites]
Also, you should just leave the 8k in your savings account. That's a pretty good amount for a rainy day fund, putting that into the market might be better long term, but in the short term, there's a very real risk you could lose some of it when you need it.
posted by empath at 1:04 PM on January 17, 2015 [1 favorite]
posted by empath at 1:04 PM on January 17, 2015 [1 favorite]
Best answer: what feels like enough to me in my emergency fund/savings account (about $8K) which earns .03% interest
The following is not a commonly held opinion: I believe that there's no reason to put emergency funds/savings into low-interest checking accounts. Proponents of that belief point out that checking accounts allow you quick access to the money. However, I've never seen a case where you absolutely need quick access to money from a checking account. In cases where you need quick access, you can generally use a credit card, and then pay off the credit card bill later from some other savings account. I keep my emergency fund/savings account in a mixture of bond funds and mutual funds. I'm willing to tolerate having slightly slower access to my funds in exchange for the (much) greater return.
The cost to me is a 5.75% one-time fee and then annually .7 to 1.07%
That is seriously absolutely horrible. Stop talking to this guy now. The only thing he's interested in doing is maximizing his kickback, which is not to your interest. There are many alternatives - Vanguard is commonly cited, but I'm also a fan of Fidelity's low-cost funds.
he's right that if I can earn more in mutual funds I should just deal with the slight discomfort
If your expected rate of return from your mutual funds (after taxes) exceeds the interest from your student debt, it is beneficial to you to invest rather than paying off debt. However, you should be able to quantify that to yourself - you should be able to value (with a dollar amount) how much you like not having to pay student loans and how much you expect to get as returns from your mutual funds. You can then do the calculation yourself which is more valuable to you.
posted by saeculorum at 1:04 PM on January 17, 2015 [7 favorites]
The following is not a commonly held opinion: I believe that there's no reason to put emergency funds/savings into low-interest checking accounts. Proponents of that belief point out that checking accounts allow you quick access to the money. However, I've never seen a case where you absolutely need quick access to money from a checking account. In cases where you need quick access, you can generally use a credit card, and then pay off the credit card bill later from some other savings account. I keep my emergency fund/savings account in a mixture of bond funds and mutual funds. I'm willing to tolerate having slightly slower access to my funds in exchange for the (much) greater return.
The cost to me is a 5.75% one-time fee and then annually .7 to 1.07%
That is seriously absolutely horrible. Stop talking to this guy now. The only thing he's interested in doing is maximizing his kickback, which is not to your interest. There are many alternatives - Vanguard is commonly cited, but I'm also a fan of Fidelity's low-cost funds.
he's right that if I can earn more in mutual funds I should just deal with the slight discomfort
If your expected rate of return from your mutual funds (after taxes) exceeds the interest from your student debt, it is beneficial to you to invest rather than paying off debt. However, you should be able to quantify that to yourself - you should be able to value (with a dollar amount) how much you like not having to pay student loans and how much you expect to get as returns from your mutual funds. You can then do the calculation yourself which is more valuable to you.
posted by saeculorum at 1:04 PM on January 17, 2015 [7 favorites]
He said I shouldn't plan on touching this money for at least 5 years to make the investment a better plan
For him, yeah. For you, not so much. You can invest in a Vanguard or similar low-fee whole-market fund without hand-holding.
I recommend paying down your student loans above the minimums, as 6.5% is a high enough interest rate that paying them off faster makes a difference.
With the caveat that student loan interest can be deductible, and an extended history of on-time student loan payments might be useful on your credit record if you want a mortgage at some point in the future. In that situation, the bigger the downpayment, the better.
posted by holgate at 1:06 PM on January 17, 2015 [1 favorite]
For him, yeah. For you, not so much. You can invest in a Vanguard or similar low-fee whole-market fund without hand-holding.
I recommend paying down your student loans above the minimums, as 6.5% is a high enough interest rate that paying them off faster makes a difference.
With the caveat that student loan interest can be deductible, and an extended history of on-time student loan payments might be useful on your credit record if you want a mortgage at some point in the future. In that situation, the bigger the downpayment, the better.
posted by holgate at 1:06 PM on January 17, 2015 [1 favorite]
That advice is so bad that it ought to be illegal. When today's savings interest rates are so low you should be paying down your student loan as fast as possible, not as slowly. And for a mutual fund you should pay no more than 0.1% to 0.6% annually with zero upfront fee. But you can't get that via a bank because banks charge obscenely high fees. To get those low fees you have to open an account directly at Vanguard or perhaps Fidelity. And you should be investing only in broad-based index funds. Lots of excellent advice at the Bogleheads forum. Do yourself a favor and spend a few hours there reading some basic info .
posted by mono blanco at 1:08 PM on January 17, 2015 [3 favorites]
posted by mono blanco at 1:08 PM on January 17, 2015 [3 favorites]
Yeah, the fees he's presenting are ridiculous.
Now, the part of his advice about automatically investing out of your paycheck is perfectly good advice. That's exactly how I have my Vanguard account set up -- a specified amount of money is pulled out of my checking on a specified day of the month and automatically invested into low-fee index funds that I've chosen.
posted by Blue Jello Elf at 1:09 PM on January 17, 2015 [2 favorites]
Now, the part of his advice about automatically investing out of your paycheck is perfectly good advice. That's exactly how I have my Vanguard account set up -- a specified amount of money is pulled out of my checking on a specified day of the month and automatically invested into low-fee index funds that I've chosen.
posted by Blue Jello Elf at 1:09 PM on January 17, 2015 [2 favorites]
Right. And by the way you are already doing really well managing your own money. Only $14k in student debt and you contribute to your 401(k) up to your employer's full match. You're quite capable of making your own investment decisions. You don't need that guy or anybody else to tell you what to do.
posted by mono blanco at 1:14 PM on January 17, 2015 [5 favorites]
posted by mono blanco at 1:14 PM on January 17, 2015 [5 favorites]
If you have $3k to invest, you can put it in VFINX (tracks the S&P 500) with a .17% expense ratio. Once it grows to $10k, you can transfer it to VFIAX, which is the Admiral version of VFINX (tracks the same, but has a lower expense ratio). The rate there is .05%. If you don't like the S&P500, pick any other index tracking fund.
The expense ratio differences are hugely important though. Just to show how much they can cost you, consider comparing rates of 0.7% and 0.15%. Assume a $3,000 investment and buying an additional $100 per month, in two funds that both average a 6% return. Over 30 years, the 0.7% will cost you roughly $14k in fees, the 0.15% will cost you only $3k in fees.
I used http://www.begintoinvest.com/expense-ratio-calculator/ for my calculations.
posted by tz at 1:21 PM on January 17, 2015 [2 favorites]
The expense ratio differences are hugely important though. Just to show how much they can cost you, consider comparing rates of 0.7% and 0.15%. Assume a $3,000 investment and buying an additional $100 per month, in two funds that both average a 6% return. Over 30 years, the 0.7% will cost you roughly $14k in fees, the 0.15% will cost you only $3k in fees.
I used http://www.begintoinvest.com/expense-ratio-calculator/ for my calculations.
posted by tz at 1:21 PM on January 17, 2015 [2 favorites]
Response by poster: Wow, unanimous feedback on the financial planner front. I will not call this guy back to move forward with his plan. Thank you all for sharing your expertise and advice.
What are you saving for?
I'm not saving for anything in particular; ideally looking for a way to save and earn higher interest than my current .03% but not have the money so locked down or be penalized for withdrawals that I can't access it in the mid future for life needs/wants like (and these are just examples, some way more likely than others ) travel/car trouble/new car/house/covering job loss/medical bills and eventual retirement with whatever's accrued by that point.
And by the way you are already doing really well managing your own money.
I feel behind and not knowledgeable enough (the latter pretty much confirmed by the avalanche of no in this thread). Many of my friends began 401(k) accounts straight out of college and have higher incomes to boot, while I only started this year and have a lower middle class salary with very little opportunity for growth (but I absolutely love my job). I clearly have a lot of reading to do on Vanguard, Fidelity, expense ratios, and all of the rest of the advice in this thread. Any additional advice is still very welcome and really appreciated.
posted by vegartanipla at 1:41 PM on January 17, 2015
What are you saving for?
I'm not saving for anything in particular; ideally looking for a way to save and earn higher interest than my current .03% but not have the money so locked down or be penalized for withdrawals that I can't access it in the mid future for life needs/wants like (and these are just examples, some way more likely than others ) travel/car trouble/new car/house/covering job loss/medical bills and eventual retirement with whatever's accrued by that point.
And by the way you are already doing really well managing your own money.
I feel behind and not knowledgeable enough (the latter pretty much confirmed by the avalanche of no in this thread). Many of my friends began 401(k) accounts straight out of college and have higher incomes to boot, while I only started this year and have a lower middle class salary with very little opportunity for growth (but I absolutely love my job). I clearly have a lot of reading to do on Vanguard, Fidelity, expense ratios, and all of the rest of the advice in this thread. Any additional advice is still very welcome and really appreciated.
posted by vegartanipla at 1:41 PM on January 17, 2015
Best answer: I'll nth the Vanguard funds and doing a bit of reading. The other thing not mentioned in this thread is that IF you're comfortable with doing any other retirement savings beyond your employer match, you should do so into a Roth IRA if you're eligible for it. I know you said in your update that you'd like the funds to be accessible, but it's another "getting on top of financial planning in the U.S. 101" recommendation that's worth being aware of, for now or in the near to intermediate future.
Also, since expense ratios are a newish concept to you: once you do a bit of reading you may want to go back and look at the fund(s) that your 401(k) is invested in. You'll have fewer options over there, and with the match it's always an worthwhile choice even if the expense ratio is crappy, but it's worth minimizing the fees that your retirement account is charged, as well.
posted by deludingmyself at 2:01 PM on January 17, 2015 [1 favorite]
Also, since expense ratios are a newish concept to you: once you do a bit of reading you may want to go back and look at the fund(s) that your 401(k) is invested in. You'll have fewer options over there, and with the match it's always an worthwhile choice even if the expense ratio is crappy, but it's worth minimizing the fees that your retirement account is charged, as well.
posted by deludingmyself at 2:01 PM on January 17, 2015 [1 favorite]
I'm a financial planner at a trust company. I don't think his advice is terrible re investments: American funds are very well known and generally seen as pretty darn good. Like a lot of people here, I think low fee ETFs are optimal, but I don't think advising that one go into American funds is so crazy. (Although the upfront fee is pretty bonkers. There's gotta be another class in the same fund with less fees)
I do disagree on the student loans. 6.5% is high enough to repay them. You can get more than that in the market, but you take on risk to do it. Paying down the student loans, OTOH, is a guaranteed 6.5% return, and that's tough to beat. You'd have to get a junk bond or long duration bond to do that, and those aren't risk free either.
posted by jpe at 2:32 PM on January 17, 2015 [1 favorite]
I do disagree on the student loans. 6.5% is high enough to repay them. You can get more than that in the market, but you take on risk to do it. Paying down the student loans, OTOH, is a guaranteed 6.5% return, and that's tough to beat. You'd have to get a junk bond or long duration bond to do that, and those aren't risk free either.
posted by jpe at 2:32 PM on January 17, 2015 [1 favorite]
One more person agreeing that those fees are way too high.
Just to provide an example comparison, the fees of the Schwab Total Stock Market Index (SWTSX) are 0.09%. The fees of the Fidelity Spartan Total Market Idx Inv (FSTMX) are 0.10%. (If you click on the links and scroll down, you'll see the net expense ratios on the right.) The fee difference may not seem like much, but consider what you're paying over a 30-50 year time frame.
No doubt the difference is that these funds are not actively managed. They just do what the stock market is doing. And the generally accepted consensus these days is that actively managed funds don't do better on the whole over time than the overall stock market.
Which brings me to volatility and risk. Will you be able to sleep at night if the stock market drops a percent or two in a day? Two or three days in a row? Because if there is ANY chance that you would panic and sell, then you are over-invested in the stock market. (People who say they lost a significant amount of their 401K savings in the great recession are in fact telling you that they panicked and sold low, because since then the market has come roaring back.) Rather, what you want to be able to remind yourself is that your investment horizon is about 30 years, plus however long you live after you retire. Which means that a big drop (or gain) today will be a tiny blip on the graph decades from now.
Finally, I agree with the advice above that if you can afford to increase your 401K savings rate, you should, on the understanding that you will NEVER touch it, come hell or high water. Because then in your forties and fifties and sixties you will personally witness the fiscal miracle that is compounding.
You're in a great place and at a good age. Kudos to you to be thinking about this now.
posted by Short Attention Sp at 3:24 PM on January 17, 2015
Just to provide an example comparison, the fees of the Schwab Total Stock Market Index (SWTSX) are 0.09%. The fees of the Fidelity Spartan Total Market Idx Inv (FSTMX) are 0.10%. (If you click on the links and scroll down, you'll see the net expense ratios on the right.) The fee difference may not seem like much, but consider what you're paying over a 30-50 year time frame.
No doubt the difference is that these funds are not actively managed. They just do what the stock market is doing. And the generally accepted consensus these days is that actively managed funds don't do better on the whole over time than the overall stock market.
Which brings me to volatility and risk. Will you be able to sleep at night if the stock market drops a percent or two in a day? Two or three days in a row? Because if there is ANY chance that you would panic and sell, then you are over-invested in the stock market. (People who say they lost a significant amount of their 401K savings in the great recession are in fact telling you that they panicked and sold low, because since then the market has come roaring back.) Rather, what you want to be able to remind yourself is that your investment horizon is about 30 years, plus however long you live after you retire. Which means that a big drop (or gain) today will be a tiny blip on the graph decades from now.
Finally, I agree with the advice above that if you can afford to increase your 401K savings rate, you should, on the understanding that you will NEVER touch it, come hell or high water. Because then in your forties and fifties and sixties you will personally witness the fiscal miracle that is compounding.
You're in a great place and at a good age. Kudos to you to be thinking about this now.
posted by Short Attention Sp at 3:24 PM on January 17, 2015
if you're looking for some down-to-earth realtalk about making your money work for you, may i suggest Mr Money Mustache? he has a million articles on his blog that i found really easy to read and also interesting, and it taught me SO MUCH about investing and about not wasting my money. it is written in a way that i find funny and compelling, and until this week when i discovered him, i was ALLERGIC to all talk of investing. now i'm all pumped up about it.
I recommend you start with the "popular posts" section, and also, this one.
posted by andreapandrea at 3:52 PM on January 17, 2015 [1 favorite]
I recommend you start with the "popular posts" section, and also, this one.
posted by andreapandrea at 3:52 PM on January 17, 2015 [1 favorite]
At a lower middle class income, the most important skill to learn is how to save money and not get into debt. That you have money AT ALL to save puts you way ahead of most people in your income bracket.
posted by empath at 4:45 PM on January 17, 2015
posted by empath at 4:45 PM on January 17, 2015
Just agreeing with a couple of points - especially the one from jpe. Regarding the student loan interest rate there are two considerations:
1. How does the interest rate compare to the rate of inflation? Generally speaking, if your loans are at an interest rate less than the inflation rate, you should pay them off as slowly as possible, to maximize the value of your money. Inflation rates in the US for the past 10 years have generally been between 1% and 4%, so this means if you have any debt at an interest rate of greater than 4%, you probably should be paying it off.
2. How does the rate of interest you could be earning on an alternate investment compare? If you were going to put the money into a savings account earning .03% otherwise, then DEFINITELY pay the loans off, because 6.5% return on your dollar is way better than 0.03%! If you were otherwise going to put the money into the stock market where it might make 5-10%, then the stock market might be a better place for it, but you have to weigh the odds of beating 6.5% on the stock market, because obviously you can lose money on stocks too. Odds of beating 6.5% are decent at the moment, but still, 6.5% guaranteed looks better than the possibility of 10% with a lot of risk, so I think most people would still opt to pay the loans.
Regarding your emergency fund - find another alternative place to stash it. 0.03% is probably not the best you can do if you're going to let $8K sit there. Local credit unions often have better rates - you can also search online for top savings account interest rates (or rewards checking if you don't mind the stipulations on the accounts) and find other options for it.
And obviously I agree with the crowd that you were smart not to invest with the financial advisor you met. My retirement savings are mostly in Vanguard 500 Index and other Vanguard index funds, like others here.
posted by treehorn+bunny at 4:56 PM on January 17, 2015
1. How does the interest rate compare to the rate of inflation? Generally speaking, if your loans are at an interest rate less than the inflation rate, you should pay them off as slowly as possible, to maximize the value of your money. Inflation rates in the US for the past 10 years have generally been between 1% and 4%, so this means if you have any debt at an interest rate of greater than 4%, you probably should be paying it off.
2. How does the rate of interest you could be earning on an alternate investment compare? If you were going to put the money into a savings account earning .03% otherwise, then DEFINITELY pay the loans off, because 6.5% return on your dollar is way better than 0.03%! If you were otherwise going to put the money into the stock market where it might make 5-10%, then the stock market might be a better place for it, but you have to weigh the odds of beating 6.5% on the stock market, because obviously you can lose money on stocks too. Odds of beating 6.5% are decent at the moment, but still, 6.5% guaranteed looks better than the possibility of 10% with a lot of risk, so I think most people would still opt to pay the loans.
Regarding your emergency fund - find another alternative place to stash it. 0.03% is probably not the best you can do if you're going to let $8K sit there. Local credit unions often have better rates - you can also search online for top savings account interest rates (or rewards checking if you don't mind the stipulations on the accounts) and find other options for it.
And obviously I agree with the crowd that you were smart not to invest with the financial advisor you met. My retirement savings are mostly in Vanguard 500 Index and other Vanguard index funds, like others here.
posted by treehorn+bunny at 4:56 PM on January 17, 2015
And by the way you might be behind your friends investment wise, but by investing in retirement now you are ahead of the majority of people in your age group!
I recommend you also look into Roth IRAs.
posted by treehorn+bunny at 5:03 PM on January 17, 2015
I recommend you also look into Roth IRAs.
posted by treehorn+bunny at 5:03 PM on January 17, 2015
Best answer: There is absolutely no reason to ever buy American funds when you have a lower cost alternative like Vanguard. All American fund share classes have loads, front or back, of some sort plus high annual expenses. This is because they are sold by advisers and the advisers get commissions.
Since you are concerned about access to your funds, after contributing the amount to your 401(k) to get your company match, the next place you can put your investments is in a Roth IRA. You can withdraw your contributions (but not earnings) tax free if you need them. If you don't need them, then your investments remain tax free for the rest of your life.
Having access to your money before retirement is one of the advantages of a Roth over a traditional IRA or 401(k). For that reason, a Roth can be a good place for part of your emergency fund if you can wait a few days to access. A bond fund in your Roth is tax free, while a savings account is practically zero after taxes.
posted by JackFlash at 5:13 PM on January 17, 2015 [2 favorites]
Since you are concerned about access to your funds, after contributing the amount to your 401(k) to get your company match, the next place you can put your investments is in a Roth IRA. You can withdraw your contributions (but not earnings) tax free if you need them. If you don't need them, then your investments remain tax free for the rest of your life.
Having access to your money before retirement is one of the advantages of a Roth over a traditional IRA or 401(k). For that reason, a Roth can be a good place for part of your emergency fund if you can wait a few days to access. A bond fund in your Roth is tax free, while a savings account is practically zero after taxes.
posted by JackFlash at 5:13 PM on January 17, 2015 [2 favorites]
There are high(er)-interest savings accounts... better than 0.03%, anyway. Online banks rates are about 1% right now. I think that's roughly current US inflation so at least you'd be treading water.
posted by BungaDunga at 7:51 PM on January 17, 2015
posted by BungaDunga at 7:51 PM on January 17, 2015
"Investing" in paying down your student loan more quickly is functionally identical to investing in a financial product with a guaranteed 6.5% return (which doesn't exist).
Once you've paid off the student loan, put your money in a Vanguard index fund. Actively managed funds are a scam.
posted by ewiar at 10:16 AM on January 18, 2015
Once you've paid off the student loan, put your money in a Vanguard index fund. Actively managed funds are a scam.
posted by ewiar at 10:16 AM on January 18, 2015
This thread is closed to new comments.
You might be able to earn more in the funds, if your planner wasn't taking a 5.75% skim off the front and then possibly over 1% annually. Vanguard is the company that is famous for offering low-cost mutual funds. If that's what you want, you should go with them or someone like them.
What are you saving for? If you have a good budget with some excess cash, I recommend paying down your student loans above the minimums, as 6.5% is a high enough interest rate that paying them off faster makes a difference.
posted by the man of twists and turns at 12:52 PM on January 17, 2015 [4 favorites]