Stocks

Stocks are an investment in a company and are very common in the financial world. If you own a stock, you are a part owner of the business. Stocks are more volatile than bonds, meaning there typically is more risk, but the returns are frequently greater.

The value of stocks fluctuate, meaning at any point, your original investment could be more or less than the stock is worth. In theory, the goal of buying stocks is to sell them at a higher price than you bought them, but doing so is easier said than done. There are many different strategies as to when to buy or sell stocks. A fiduciary can help you develop an investment strategy based on your risk tolerance.

Another way to make money from stocks is by receiving dividends, which are a share of the company’s profits. Not all stocks provide dividends.

Stocks are purchased inside a brokerage account, which is an account that allows you to deposit money that is used by your broker to acquire different investments and stocks. Stocks are sold in whole numbers of shares from one to hundreds of thousands of shares.

Bonds

One of the biggest differences between stocks, bonds, and mutual funds is how each of them allows you to invest your money. For example, bonds are actually a loan to a company or the government.

Each bond has a maturity date, which is when a bond is redeemed at its par or face value. At the time of maturity, you—the bondholder— will receive the original amount of money you invested back plus interest. Though less volatile than stocks, bondholders can lose money if the value of their bonds decrease. This can happen due to higher interest rates or if the credit quality—a criteria that informs investors of the risk of default—of the bond decreases prior to maturity.

Unlike stocks, the commission to buy a bond is hidden inside the price of the bond. Typically, a bond purchaser pays a 2% commission to buy and another 2% to sell a bond. One way to minimize this cost is to buy a bond that you expect to hold to maturity, which is the date the bond officially ends. There is no commission to get your money back when the bond matures.

Mutual Funds

A mutual fund is made up of a pool of money collected from many different investors for the purpose of investing in stocks, bonds, real estate, or money market accounts.

A mutual fund can be a passive investment, meaning that those who invest do not have an active strategy for buying and selling the investments in the fund. Instead, they try to imitate an index, which is the number that refers to the value of the investments. Passive investors follow the stock market indexes to help model their mutual funds. Dow Jones Industrial Average, S&P 500 Index, and Russell 2000 Index are great examples of stock market indexes.

Another kind of mutual fund is referred to as an active fund. Active funds are controlled by a manager who actively strategizes and makes all the buy, hold, and sell decisions. The manager of a mutual fund will design and maintain the fund to match its investment goals as stated in the fund’s prospectus, a legal document that outlines details about the investments. Always read the prospectus before buying a fund.

Some funds are loaded, meaning there is a sales charge to the broker who sold you the fund, and some funds are no-load. Loaded funds do not necessarily perform better than no-load funds, so always take the time to review your options. Funds also have an annual expense ratio that reduces the investor’s return. An annual expense ratio of 0.05% is extremely low and an expense ratio of 1.5% is very high.

We hope this explanation of the difference between stocks, bonds, and mutual funds were able to give you a better idea of the many investment opportunities available to you. Lorenz Financial is happy to sit down and talk with you about your options.

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

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The Basics

Your Individual Retirement Account (IRA) is a savings account where you keep stocks, bonds, mutual funds, and other assets. There are several types of IRAs: Traditional IRA, Rollover IRA, Simple IRA, SEP-IRA, and Roth IRA. When you opened your IRA, you received great tax benefits and invested in your future: a secure, enjoyable retirement. While you will ideally wait until you’re at least 59 ½ years old to withdraw from your IRA, there may be situations where you need to withdraw early. That said, a penalty may apply.

The Penalty

If you withdraw early from your IRA before you’re 59 ½, you may have to pay a 10 percent tax penalty. Congress put this penalty in place to encourage individuals to save their investment capital for the future, rather than spending it on short-term problems. The good news is that there are exceptions to this rule if you must make an early withdrawal from your IRA.

The Exceptions

That 10 percent tax penalty sounds scary, but it doesn’t have to be. You might even avoid that fee for early withdrawal from your IRA if you’re:

1. Buying a Home for the First Time

If you’re a qualified, first-time homebuyer, that 10 percent tax penalty is waived on up to $10,000 of IRA withdrawals. You can use these funds to buy, build, or remodel a first home for yourself, your spouse, a child or grandchild, or a parent or grandparent. You can see if you meet the IRS definition of a first-time home buyer here.

2. Covering Higher Education Costs

If you’re paying for yourself, your spouse, your kids, or your grandchildren to receive higher education, that money doesn’t grow on trees. But, it has been growing in your retirement account, and an early withdrawal from your IRA will not be penalized if you’re doing so to fund schooling. You can thank the Higher Education Act of 1965 for this exception that allows IRA distributions to cover certain expenses for colleges, universities, and vocational schools.

3. Suddenly and Permanently Disabled

If you become permanently disabled—either physically or mentally—and are no longer capable of working to support yourself, you may make a penalty-free early withdrawal from your IRA. Your doctor must certify that you’re no longer able to work and that your disability will either last a significant amount of time or eventually lead to your death. And, if you do unfortunately pass away before age 59 ½, your beneficiaries can inherit your retirement funds without penalty.

4. Inheriting IRA Assets

If you’re the beneficiary of a parent, grandparent, or other non-spouse who has passed away, you won’t have to pay the tax penalty for early withdrawal from your benefactor’s IRA. There are a few more technicalities when it comes to inheriting an IRA from your deceased spouse. If you treat your inherited IRA as your own, then any amount you withdraw will be subject to the tax penalty. However, if you title this as an “Inherited IRA,” then you will have to pay the 10 percent tax penalty.

5. Going into Active Duty

If you are a military reserve who is called to active duty, you will not be subject to the tax penalty for early withdrawal from your IRA. In this case, your withdrawal is a “qualified reservist distribution” when you meet the following requirements:

• You were called to active duty before September 11, 2001;
• You were called to active duty for a period longer than 179 days, or for an indefinite period of time; and
• The distribution was made after the date you were called to active duty and before the period of active duty ended.

6. Paying Your Medical Insurance Premium

If you lose your job or suddenly must pay your own medical insurance premiums, you can make an early withdrawal from your IRA without paying the tax penalty. Keep in mind that this exception only applies if you’ve been on unemployment for more than 12 weeks. Also, if you become re-employed, you cannot receive your withdrawal more than 60 days after your new employment begins.

7. Paying for Steep Medical Expenses

If you or your children are seriously ill or injured, those medical costs can add up quickly. If they exceed 10 percent of your adjusted gross income, you can make an early withdrawal from your IRA without paying the tax penalty. If you qualify for this exception, make sure that you pay your medical expenses the same calendar year that you are withdrawing those IRA funds.

These exceptions can be confusing, and they might differ depending on which type of IRA you have. That’s why it’s smart to consult with a qualified financial advisor who has your best interests in mind. This will help you understand the ins and outs of early withdrawal from your IRA, giving you peace of mind and security about your financial decisions.

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

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Here are some questions to ask your company financial advisor.

1. What is your job title, education level, and specialty?

It’s important to know an advisor’s specialty so you can understand the benefits he/she can offer you. Some advisors develop specialties based on their education or past experience. Retirement, taxes, estate planning, and insurance are a few examples of specialties.

2. How do you handle communication with employees?

Communication is an underrated factor in investing. How often would you see yourself talking to your company’s financial advisor? Every year? Every month? There is no wrong answer; your relationship with your advisor is completely dependent on you. But, no matter how often you want to contact your advisor, it’s a good idea to establish contact information, like an email address, for later inquiries. This is one of the first questions to ask your company financial advisor in your initial meeting.

3. Are you paid on commission?

You don’t need to ask for a dollar amount or percentage; the information you’re looking for is simply whether the advisor’s pay is commission-based or not. This is important because it determines whose interests the advisor is serving. If the advisor gets commission pay, that could mean that he/she gets money for selling a specific product or service, whether it’s a good investment for you or not.

4. Can you personalize my investments?

There are several types of work retirement plans. Some operate like a mutual fund, meaning the employee’s contributions are a large pool of investments managed by the sponsor. Other work retirement plans offer each employee an individual account, which can be customized to the employee’s specifications. If your employer offers options, speak to your personal financial advisor, and he/she can help you decide which plan is right for you.  

5. Is there a fee to use your services?

Some company-based financial advisors can charge fees for various services. Be sure to find out if there are fees for setting up meetings or requesting reports.

6. What is the diversification and performance of each investment option?

What investments has the advisor made for your company? Start by discussing the cost of your potential investment, the accounts’ diversification—what different types of investments are included—and the performance of the different investment options.

If you don’t understand the data presented to you, don’t worry. Take the information to your personal financial advisor, and he/she can break the data down for you.

7. What advice do you have for my savings?

Once you get to know your advisor, it’s time to find out what his/her advice is for your portfolio. Many advisors will perform a risk tolerance assessment to determine which types of investments are favorable for you. You can run the advice you receive by your personal financial advisor and see how the strategies compare.

8. Can we meet again after I talk with my financial advisor?

It’s important to make sure that your retirement plan coincides with your financial plan. To do this, you need to communicate with both of your advisors.

After you’ve spoken with your company financial advisor, ask to set up another meeting. In the follow up meeting, you can compare recommendations between your personal financial advisor and ensure everyone is on the same page. If you keep communication constant between both parties, you’ll have a better chance to meet your financial goals. At Lorenz Financial, we’re happy to work with your work-based advisor to help meet your needs.

Your personal financial advisor and your company financial advisor shouldn’t be viewed as two competitors. Using your company financial advisor for your company retirement plan is a good way to take full advantage of the retirement benefits offered to you by your company.

That said, depending solely on your company’s advisor to help you plan for your financial future isn’t wise. This advisor strictly looks at your company retirement plan, not other aspects of your finances (insurance, assets, savings, etc.). Working with a personal financial advisor, on the other hand, is a great way to make sure that all aspects of your finances are working together to help you reach your dream retirement.   

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

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What type of retirement plan does your company offer?

There are several ways to classify your company’s retirement plan. Your human resources representative or financial officer should be able to tell you which of the following plans the company offers.

Defined Benefit Pension Plan

You, the employee, don’t make any contributions to this plan. Upon retirement, you will receive a monthly benefit, which is determined by your length of employment and income.  

401(k)/Roth 401(k), 403(b), and 457 Plan

A 401(k), Roth 401(k), 403(b), and 457 Plan are all very similar. In these plans, you contribute a portion of your paycheck to your own retirement account. Often, your employer will match a certain percentage of your investment as an incentive.

The Roth 401(k) is not tax-deductible, which means you get taxed when you put money in the account but not when you retire and begin to withdraw.

The 403(b) plan is the same as a 401(k) but for employees of nonprofit organizations.

A 457 plan is also very similar to a 401(k) but for state and government employees.

In 2017, the maximum yearly contribution for each of these plans is $18,000. This includes contributions made by an employer.  

Savings Incentive Match Plan for Employees (SIMPLE)

This plan is an IRA (Individual Retirement Account) usually utilized by smaller companies. You can contribute up to 3% of your income and an employer contribution is required.

Simplified Employee Pension (SEP)

The SEP Plan is another IRA employee retirement plan. It has many of the same benefits of a traditional IRA but the employee can contribute much more money to the account annually.

Does the employer have a matching incentive?

A match means your employer will match a small percentage of the contribution you make to your company retirement account. For example, let’s say your company matches your contribution up to 3%. That means if you contribute 10% of your income to your retirement, your employer will contribute another 3% from the company.

What happens when you leave your job?

What happens when you leave your job or retire? Though each plan differs slightly, most plans allow you to move your money without much trouble. Almost all retirement accounts will penalize you if you try to withdraw before retirement age. However, if you change jobs, you can usually roll your old company retirement plan into another retirement account without a penalty. The details of such an event can be discussed with your financial advisor.

Can you meet with your work-based financial advisor?

Most company retirement savings plans are managed by an advisor. If you’re contributing to your company retirement plan, look into meeting with your company advisor so you can hear his/her strategy for your money. Although your work-based advisor likely has a lot of clients, he/she should be able to set up a time for the two of you to meet and talk about your retirement account and investment options. No matter how your company is set up, it would be unusual for your employer-based financial advisor to decline a meeting with an employee.

Everyone could use more savings. Saving for retirement now will ensure you have a secure future. Use this information about company retirement plans to your advantage by continuing to do research. The more knowledgeable you are about your finances, the better investment decisions you can make. Since you’re reading this blog, you’re already on the right path!

Lorenz Financial Services, LLC is a Lafayette, Indiana fiduciary who offers financial planning and portfolio management services. If you have questions about who we are or our services, please contact us at (765) 532-3295 or email us.

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