Financial Plan, Inc.
James (Jamie) Twining is the founder of Financial Plan, Inc., and a CERTIFIED FINANCIAL PLANNER™ practitioner who works with an exclusive high net worth client base. Jamie has a niche advising BP Cherry Point refinery employees.
A graduate of the University of Southern California and a devoted husband and father, Jamie enjoys spending time with his family, leading the choir at Sacred Heart Church and outdoor sports including mountain biking, scuba diving, and an annual surfing trip to Mexico.
His favorite pastime on a rainy winter’s night is to sit down with his son Gabriel, open a bottle of fine Pinot Noir and play a game of chess.
To be consistently profitable, my advice is to be an investor, not a day-trader.
Day traders make money by trading securities based upon their forecasts of future price movement. The trouble is that no one can predict future price movements. Day trading is quite akin to gambling, including the "house odds", which for the day trader are the costs of trading. Most day traders lose money over time, just as most gamblers do.
An investor does not make money by trading, but rather by owning profitable companies. A widely diversified portfolio of equity securities held over long time periods is almost certain to increase in value.
If you decide to day trade, I would do it as entertainment. For me, it is not so entertaining to throw money away on day trading schemes or slot machines.
I agree with your advisor that a lump sum is advisable.
If the objective is to reduce risk, dollar cost averaging is a temporary solution: once the periodic purchases are made, you will be fully invested anyway. A better way to reduce risk is simply to revise the equity exposure downward to perhaps 40% or even 30% equities. However, the 50% equity exposure is already more conservative than I would like to see for someone who is just now retiring.
Don't let the all time highs scare you: the market is often at all time highs, and when it is, statistically, it is higher after one year's time. (About 73% of the time, historically).
Disclaimer: obviously, if the market falls during the period of time over which you are averaging, you would be better off than if you had invested the lump sum at once; but no one can predict the future direction of the market. Because of the upward bias in the market, your odds are better simply investing all at once.
Great Question! It illustrates the mental anguish that so many go through when attempting to forecast future market prices. I encourage you to study the Efficient Market Hypothesis and the work of Eugene Fama and Kenneth French.
For now, I will give you the Executive Summary: The prices of publicly traded securities reflect all publicly known information and all expectations for the future. The market prices of securities, and by extension entire markets, is the best indication of fair value.
In other words, GDP growth, earnings, QE, interest rates, and hundreds of other factors are already baked into current prices. The current price is a consensus price, arrived at an auction with millions of participants. What moves prices are future, unknown events. By definition, they are unknowable and unpredictable. At every moment, 50% of market participants believe a security is undervalued, and 50% believe it is overvalued. The moment that a future positive event causes more than 50% of market participants to believe that a security is undervalued, it will appreciate to the point that the opinion is split 50/50 once more. This happens in the blink of an eye, and cannot be effectively exploited by investors. The moment a negative event causes more than 50% to believe that a security is overvalued, it will depreciate.
An entire industry has been built around the notion that future prices can be predicted. A newsletter author is not going to sell copies if he agrees with me. Pundits and commentators who don't make forecasts are boring and will not command an audience. Mutual fund managers who admit that they can't beat a monkey with a dartboard are out of a job in a hurry. Yet the reality is that prices of securities and markets cannot be predicted, period. The clear over-performance of index funds is solid evidence of this.
There are facts that we can prove and rely upon regarding securities and markets that are helpful to us as investors. For example, markets have an upward bias. Certain types of securities tend to appreciate more than others. But unfortunately, predicting future prices is a fool's game, and in my opinion should be avoided.
As a student employee, I am assuming that 1) you are single and quite young, 2) the 401k has a small balance (under $10,000) and 3) that later in life you will have higher earnings and a higher income tax bracket than you do currently. Under those assumptions, I can give you this general advice, although keep in mind that you may have unique circumstance of which I am unaware that would cause me to advise you differently:
1) Save as much as you can. Only you know how much you can save without causing undue stress on your cash flow, but it easier for a young single person to save aggressively now, before you potentially get married and have children. Your rate of savings will have a larger impact upon your ultimate success than any other decision you will make, so get into the habit right away and be persistent with it.
2) Roll and convert the 401k into a Roth IRA. This will cause you to pay tax now, rather than paying it later in a likely higher tax bracket.
3) Do not start a separate traditional IRA. A traditional IRA may negatively impact your ability to fund your Roth through conversions later if you earn over the allowable income amount to qualify for normal contributions.
4) If your 401k has a Roth option for contributions, use that instead of traditional before tax contributions.
It is apparent that you are taking your finances seriously, and I am optimistic that through your awareness and discipline you will succeed. All the best to you!
In short: no, it is not a good idea, and an insurance agent is not able to give objective advice, as they have an obvious conflict of interest here.
Insurance works best for events that are 1) unlikely to occur, and 2) catastrophic if they do occur.
The need for short term care is not unlikely to occur, nor is it catastrophic if it does. I would estimate that one in three retirees will require short term care at some point in their lives, and the cost in today’s dollars if we assume a one year need at $8,000 per month is approximately $100,000. Anyone for whom a $100,000 expense is catastrophic is likely going to run out of money in retirement regardless of whether a short term need for care arises or not. For retirees of limited means, it is quite easy to become “insurance poor” ; paying premiums for all sorts of insurance, and suffering financially as a result even if none of the insured events takes place.
Other examples of inappropriate insurance include vision and dental insurance. Neither of these costs is unlikely, nor catastrophic. Rather than reducing risk, these policies tend to simply funnel expenses through the insurance carrier, while adding on the costs of administration and the insurance company profits. It is better to simply pay the expenses directly.
Examples of appropriate insurance include life insurance for a dependent spouse beneficiary, fire insurance on a home, catastrophic medical insurance, and auto liability insurance. These insure against events that are unlikely to occur, but they can cause catastrophic financial loss if they do. Because the events are unlikely, the insurance issuers need not pay out claims very often. This serves to lower the premiums, and spread the costs over a larger group of people, while paying out large claims to those who suffer the unlikely event.
In regard to the short term care insurance question, I would go a bit further and say that the advisability of even long term care insurance is questionable. A long term care need is not terribly unlikely, nor is it necessarily financially catastrophic. Consider that if someone requires long term care, it is likely a permanent situation. Thus, the home can be sold to pay the costs. Often the equity in the home is sufficient to pay for many years of coverage. In recent years, the claims experience of long term care issuers has been dreadful, causing them to raise premiums and lower benefits. In certain situations it can be appropriate, but in my opinion it is often better to “self insure” if assets are available to sell to raise the funds. Of course if a primary objective is to pass on assets to heirs, this will color the decision in favor of the long term care insurance purchase.
I hope that this is of some help in your decision making process. All the best to you!