Tuesday, February 12, 2013

Your Money Questions Answered

Commonsense solutions to your financial concerns
By Lea Ann Knight, CFP

Few Americans are without money woes—whether it’s planning for retirement, deciding what to do with a windfall or debating a switch to an online bank. Here, certified financial planner Lea Ann Knight, author of the weekly blog
 Financially Fit After 40 and owner of Garrison/Knight Financial Planning in Bedford, Mass., takes a stab at some frequently asked financial questions. 

Make the Most of Extra Cash

Q. I received a raise a few months ago and have been using the extra cash to pay down my new mortgage. Should I be doing something else with the money instead?

A. Because mortgage rates have been at historic lows recently, consider putting those extra dollars to work somewhere else. The average return in the stock market has been around 8%, so one good alternative is to invest what’s left over from your paycheck each month in a basic stock-index mutual fund at a low-cost brokerage house. Or you could add the money to your retirement savings. But if you feel like you’re on track financially and you have surplus cash, then paying down debt with a low interest rate can be a smart move.

Maximize Your Retirement Savings

Q. My company is now offering a Roth 401(k) in addition to the traditional 401(k) plan. What would be the financial benefits of switching my 401(k) contributions to the Roth version?

A. The advantage of contributing to a Roth 401(k) is that, although you can’t take an annual tax deduction now, you will be able to withdraw your money tax-free in retirement. If you think you might be in a higher tax bracket when you’re older, a Roth 401(k) is a good idea. But if you like having that pretax deduction each year, you might prefer to keep your money where it is. Alternatively, as long as you are single and earn less than $110,000 yearly (or your combined annual income if married is less than $173,000), you may continue your traditional 401(k) plan at work and contribute up to $5,000 per year to a Roth IRA as well. Having both types of accounts in retirement will give you more flexibility with withdrawals and help you minimize taxes in your golden years.

Decide if an Elderly Parent Still Needs Life Insurance

Q. My dad has retired but is still paying premiums for a large life insurance policy. His house is paid for, and all his children are independent. Does he still need this insurance?
Insurance (Photo credit: Christopher S. Penn)

A. Assuming there will be no financial obligations for his estate to meet in the event of his death, your father might no longer need to keep paying for the insurance policy. If that’s the case and his is a term life insurance policy—which provides coverage for a set amount of time—with no cash value, he can simply stop paying the premiums to end his coverage. If, on the other hand, it is permanent life insurance, the policy might have a cash surrender value, meaning he could cash it in (and pay income tax on the proceeds) or use the cash value to start paying for his premiums. The latter option is appealing if he wants to keep enough value in the policy to help pay for his burial expenses or wishes to leave the death benefit to his heirs. Before he acts, however, he should review his choices with a financial planner to determine which option makes the most sense for him.

Consider Additional Disability Coverage

Q. My company benefits plan includes some disability coverage, but not at my full salary. Should I supplement with private disability insurance?

A. Many employers offer long-term disability plans that cover 60% to 70% of your salary if you become unable to work. Private policies can be pricey, so decide how much of your paycheck you need to meet your monthly expenses in such an event. If it’s within the employer-covered amount, you likely don’t need a private disability plan, but if you’re the sole breadwinner with young kids and a big mortgage, it might be a good bet. Also consider how close you are to age 65, when many such policies terminate anyway.

Weigh the Pros and Cons of Online Banking

Q. I’ve heard that online banks offer great interest rates, but I’m not sure if they’re safe. Are there any other drawbacks?

A. Before you switch, confirm that your account will be FDIC-insured, meaning your money will have the same protection as it would at a brick-and-mortar institution should the bank fail. And recognize that although many online banks can offer a higher interest rate because they don’t have the same overhead as traditional banks, it will take longer to get your hands on your money in an emergency and—if you must make deposits by mail—for checks to post to your account. Also think about how often you need services such as certified checks—which might not be as easy to obtain online. Consider two accounts: your local bank for day-to-day needs and an online one for savings. That way you’ll still have easy access to some of your money but will earn higher interest on what you don’t need today.

Adapted from the Aug. 24, 2012 issue of
 All You. © 2012 Time Inc. All rights reserved.
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