American families face many challenges today, from paying the bills and saving for retirement to caring for both children and aging parents. With so much going on in your lives, figuring out the best financial products to buy to protect your family and help lay the groundwork for a secure retirement might seem like an impossible task. WalletPop consulted with experts in saving, investing and retirement planning to put together a road map for readers who want the best for their family's financial future but don't know where to begin.
Pick This: Term Life Insurance
Not That: Whole Life (aka "Cash Value") Insurance
The experts to whom WalletPop spoke all recommended getting life insurance for yourself and your spouse once you start a family. If you're offered life insurance through your job, check out the coverage levels to make sure they're high enough: Ideally, our experts say, you should carry 10 times your annual salary, which ensures that your family will be financially secure in the event of your death. When you're young or middle-aged, the cost of term life insurance is much lower than whole life insurance. "If you run the math, you're better off buying term when you start your family, and save and invest the difference yourself," says Don Chambers, author of Money Basics For Young Adults.Whole life insurance is a better bet for senior citizens, because at that age, the price of term insurance climbs stratospherically, says Gary Gilgen, a financial adviser and director of the financial planning department at Rehmann, a wealth and financial advisory firm. For middle-aged people with a family, whole life insurance is pitched as a savings and investment vehicle, but Gilgen agrees with Chambers and says a better course of action is to pay the lower rate for term life insurance, then put the balance of what you would have paid for whole life insurance into more conventional investment vehicles, such as an IRA.
When it comes to other types of insurance products, more bells and whistles don't necessarily equal better coverage. "A couple of things that are being sold out there that I think are way overrated," says Gilgen. For instance, he says, some companies pitch mortgage insurance, which purports to pay your mortgage payments if you die or become disabled. In reality, you'd be better off investing in adequate life insurance, he says. Another iffy pick, Gilgen says, is accidental death insurance. "I see this pitched all the time, but the odds of ever collecting are one-tenth of 1 percent," he says. These policies only pay out in the event of an accident, so death from much more common causes like cancer or heart disease aren't covered.
Pick This: A 529 Plan
Not That: Life insurance for Your Kids
Experts recommend life insurance for anyone in the family who earns income; some go a step further and recommend that stay-at-home spouses responsible for the primary childcare duties also have life insurance, since their death would mean the surviving spouse would have to pay someone else to take over that task. Children, however, don't need life insurance since they're unlikely to be contributing to the family budget.
What experts recommend instead is that parents start a college savings fund, also called a 529 Plan, which provides tax incentives for parents to sock away money for their child's college tuition. These plans are offered at the state level and let parents (or grandparents) put money into investments that will grow until the child reaches college age. Like some retirement plans, some are even designed to shift funds into more conservative investments as the time until withdrawal grows near.
Pick This: A Bank- or Credit Union-Affiliated Credit Card for Emergencies
Not That: A Wallet Full of Store Credit Cards
As we've pointed out before, the initial promise of 10% or 15% off a day's purchase might seem like an attractive reason to open a store credit card, but these retail cards come with drawbacks: low credit limits, high interest rates and limited use in the case of an emergency. Think about it: If your furnace blows, what are you going to do with that card from a trendy fashion chain? Buy more sweaters? What's more, if you have too many store cards, they could drag down your credit score to the level where you couldn't get an emergency credit line if you needed it.
If you haven't already applied for a basic credit card with a low interest rate and no annual fee, look into it. As you grow older and add home ownership, parenthood and other big responsibilities to your life, it's important to have something you can fall back on that won't send you into a spiral of debt.
Pick This: A 401(k) or IRA
Not That: A Checking Account for Long-Term Savings
It's good to build an emergency fund and keep it in an account you can access quickly and without penalty, but by this stage in your life, you should also be investing for retirement. Many companies have eliminated the pension plans our parents grew up relying on, and the age minimum for collecting Social Security benefits has been creeping up, so it's up to you to take a more active role in your financial future.
When it comes to accumulating money, choose no-load mutual funds with low expenses, advises Steve Vernon, a retirement educator and president of Rest-of-Life Communications. When it comes to fund administrative fees, Vernon says, "I think anything over one percent is too high. That would be my rule of thumb." He, along with other experts to whom WalletPop spoke, recommended big brokerage firms like Vanguard, Fidelity and T. Rowe Price as good places to start if you're considering opening an IRA.
There are three basic kinds of IRAs, and for many people, Gary Gilgen says a Roth IRA is a good fit because it's simple to understand and manage. "People like to hear you can grow and take out the money tax-free [when they retire]," he says.
Pick This: A Portfolio With a Mix of Conservative and Aggressive Investments
Not That: A Portfolio Consisting of All the Funds That Did Well Last Year, or Only a Single Type of Investment
When it comes to what specific investments to choose, Vernon says a lot depends on your individual appetite for risk, but you should go with a mix of bond and equity (stock) funds. Avoid ones that are actively managed, he advises. "Lots of studies show that active management doesn't outperform passive management," Vernon asserts, and actively managed products tend to have much higher administrative costs.
Adam Mesh, CEO of Adam Mesh Trading Group, says too many people are swayed by a fund's recent performance. Don't look at the best-case scenario, he advises. Instead, see how the fund weathered 2008, when the market took a steep nose dive. When the market is rising, it's easy for even a lackluster investment to make money; a better test is seeing how an investment vehicle fares when the chips are down, Mesh says.
How do you decide how much risk is right for you? To a large degree, that's a personal decision, but experts cite the following rule of thumb: Start with 100 and subtract your age. The remaining number should be the percentage of your investments in stocks, as opposed to cash or bonds. In other words, if you're 40, 60% of your portfolio should be in stock funds to keep your nest egg growing fast enough for retirement.
Pick This: A Financial Adviser Who Charges By the Hour
Not That: A Broker Who Earns Commissions Selling Financial Products
Not everybody needs a financial adviser. Many of us will do just fine with a well-funded 401(k) offered through our workplace. But some of us have special situations. Maybe you inherited a lot of money at a young age, or maybe you want to maximize your investments so you can retire early. If you decide to enlist the services of a professional, it's critical to make sure he or she has your best interests first. It might sound counter intuitive, but choose someone whose time you're going to pay for out of your own pocket. It might cost a little more upfront, but you have the assurance that they're choosing investments that are the best choice for you, not best for their commission.
Conversely, if you take your investing advice from someone who doesn't charge a flat fee, you might not be getting the best picks for your needs. This is because brokers, as opposed to financial advisers, are paid commissions by the companies that manage the products they sell. And if they get twice as much for selling Product A as Product B, which one do you think they're going to recommend for you, regardless of how well it fits your needs? Adam Mesh suggests sticking with larger or more established financial firms in general, since they have the size and reach to offer a greater variety of products and services to clients.
If you're a young adult and not yet at the "working family" stage of life, see our earlier article in this series about which financial products are good picks and which ones should be avoided.
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