Liz Weston: 4 financial ‘experts’ who could steer you wrong
None of us knows everything we need to know about money, so we may turn to experts for help. But some money professionals who offer advice are not qualified to do so – nor are they required to put our interests ahead of theirs.
Be cautious when accepting advice from the following sources.
Dealerships and auto loans
The dealership wants to sell you a car. To make the payments more affordable, you may be offered a loan that lasts six, seven or even eight years.
Longer loans can get you smaller monthly payments, but they cost more overall, since you’ll pay more interest. You’ll also likely spend several years “upside down,” or owing more than your vehicle is worth. As the car ages, you could easily face big repair bills while still making payments. If you needed to sell the car, you would have to come up with money to pay off the loan.
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 help you avoid negative equity, as well. Consider getting pre-approved for a loan from your local credit union or bank or an online lender. That can help you withstand the dealership trying to pressure you into expensive financing.
Mortgage pros and home loans
Good mortgage brokers or loan officers can be invaluable in helping you navigate a complicated process and understand the guidelines that lenders use to determine how big of a loan you can qualify for. But they can’t tell you how big of a loan you can comfortably afford. Neither can your real estate agent, for that matter.
True affordability will depend on a lot of factors that aren’t captured in 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’s also your comfort level. Some people are fine borrowing the maximum, because they believe their finances will only get better. Others prefer to borrow more conservatively.
A better approach: Use online calculators to estimate how much to save for retirement and other goals. Then include those figures in your monthly expenses when using a mortgage affordability calculator. Or consult a fiduciary adviser, such as a certified financial planner, accredited financial counselor or accredited financial coach.
Stockbrokers and 401(K) rollovers
A stockbroker may tell you that rolling your old 401(k) account into an individual retirement account gives you many more investment options, and that’s typically true. But IRAs can cost you more, and 401(k)s have better consumer protections.
Stockbrokers want to sell you investments that earn them commissions. Typically, they have no responsibility to make sure those investments are in your best interest. By contrast, a 401(k) administrator is a fiduciary, so it’s required to put your interests first and provide good investment options at a reasonable cost. Many 401(k)s offer access to ultra-low-cost institutional funds that aren’t available in an IRA.
In addition, your entire 401(k) balance is protected from creditors. By contrast, your protections with an IRA depend on state law. Many states exempt only an amount “reasonably necessary for support” – which means in some cases, creditors potentially could get it all.
A Better Approach: Leave the money where it is if you like the old 401(k)’s investment options, or roll it into a new employer’s plan if that’s allowed. Otherwise, roll the money into an IRA at a discount brokerage. If you need help with how to invest it, consult a fiduciary adviser.
Social Security and benefits
You can collect Social Security as early as age 62, but your monthly benefit increases the longer you delay applying until it maxes out at age 70. Multiple studies have shown that most people will collect more over their lifetimes if they delay filing. It’s particularly important for the higher earner in a married couple to delay, because that benefit determines what the survivor will get once the first spouse dies.
Unfortunately, Social Security Administration employees sometimes advise people to start early – even though Social Security employees aren’t supposed to give advice.
Applicants have been told, for example, that it doesn’t matter when they start benefits because the amounts paid out over their lifetimes will be the same. That’s a misinterpretation of Social Security’s attempt to be “actuarially neutral,” or have the system pay out the same amount in total regardless of when people claim benefits.
A Better Approach: A Social Security claiming calculator can help you figure out when to start benefits. AARP has a free one, while more sophisticated versions are available starting at $20 at Social Security Solutions or $40 at Maximize My Social Security.