LIZ WESTON: 4 financial “experts” who could cheat on you [Column] | Business
None of us know everything we need to know about money, so we can turn to the experts for help. But some money professionals who offer advice are not qualified to do so – nor are they required to put our best interests before theirs.
Be careful when accepting advice from the following sources.
THE DEALER FOR THE DURATION OF YOUR AUTOMOTIVE LOAN
The dealership wants to sell you a car. To make payments more affordable, you may be offered a loan that lasts six, seven, or even eight years.
Longer loans may allow you to pay lower monthly payments, but they cost more overall because you will be paying more interest. You will also likely spend several years “upside down”, or owe more than your vehicle’s value. As the car ages, you could easily face large repair bills while making payments. If you were to sell the car, you had to find the money to pay off the loan. Alternatively, you can build the negative equity into your next car purchase, but that would make your next loan even more expensive.
A BETTER APPROACH: Limit your auto loans to a maximum of five years for new cars or three years for used cars. A 20% down payment can also help you avoid negative equity. Consider getting pre-approved for a loan from your local credit union or bank or from an online lender. This can help you resist the dealer trying to push you into expensive financing.
PROS OF THE MORTGAGE ON HOW MANY HOUSES YOU CAN PAY YOURSELF
Good mortgage brokers or loan officers can be invaluable in helping you navigate a complicated process and understand the guidelines lenders use to determine how much of a loan you may qualify for. But they can’t tell you how much of a loan you can comfortably afford. Neither does your real estate agent, for that matter.
True affordability will depend on many factors that are not factored into your application, including when you want to retire and how much you want to save for other goals such as a child’s education.
There is also your comfort level. Some people don’t hesitate to borrow as much as they can because they think their finances will only get better. Others prefer to borrow more cautiously.
A BETTER APPROACH: Use online calculators to estimate how much to save for retirement and other goals. Then include those numbers in your monthly expenses when using a mortgage affordability calculator. Or consult a fiduciary advisor, such as a certified financial planner, certified financial advisor, or certified financial coach. “Trustee” means the obligation to put your interests first. Most financial advisers are not trustees, so be sure to ask.
BROKERS WORTH RETURNING YOUR 401 (K)
A stock broker can tell you that moving from your old 401 (k) account to an individual retirement account gives you plenty of other investment options, and that’s usually true. But IRAs can cost you more, and 401 (k) offer better consumer protection.
Brokers want to sell you investments that earn them commissions. Generally, they have no responsibility to ensure that these investments are in your best interest. In contrast, a 401 (k) administrator is a trustee, so they are required to put your interests first and provide good investment options at a reasonable cost. Many 401 (k) provide access to very low cost institutional funds that are not available in an IRA.
Plus, your entire 401 (k) balance is protected from creditors. In contrast, your protections with an IRA depend on state law. Many states only waive an amount “reasonably necessary for child support” – meaning that in some cases, creditors could potentially get everything.
A BETTER APPROACH: Leave the money where it is if you like the old 401 (k) investment options, or build it into a new employer’s plan if allowed. Otherwise, roll the money into an IRA at a discount brokerage house. If you need help figuring out how to invest it, consult a fiduciary advisor.
SOCIAL SECURITY WHEN TO APPLY FOR BENEFITS
You can collect Social Security from the age of 62, but your monthly allowance increases the longer you delay applying until it peaks at 70. Many studies have shown that most people will earn more in their lifetime if they delay filing. It is especially important for the higher income of a married couple to delay, as this benefit determines what the survivor will receive after the first spouse dies.
Unfortunately, Social Security Administration employees sometimes advise people to start early, even though Social Security employees are not supposed to give advice.
Claimants have been told, for example, that it does not matter when they start receiving benefits because the amounts paid over their lifetime will be the same. This is a misinterpretation of Social Security’s attempt to be “actuarially neutral” or to charge the system the same amount in total, regardless of when people claim benefits.
A BETTER APPROACH: A Social Security claim calculator can help you determine when to start benefits. AARP has one free, while more sophisticated versions are available starting at $ 20 at Social Security Solutions or $ 40 at Maximize My Social Security.