TrustCore Investments financial planner Randy Lee offers sound advice

Whether you’re just entering the workforce or you’re on your way to retirement, investing can be a daunting task. In today’s economy, it can be utterly terrifying.
 
Randy Lee, a financial planner with TrustCore Investments Inc., believes you should not only start saving as young as you can, but that you should look at your financial portfolio comprehensively.
 
After receiving his bachelor’s degree in mechanical engineering from Vanderbilt University, Lee found that what he looked forward to the most at the end of the day was going home and working on his personal finances. He decided to go back to school, earning a master’s in finance from Golden Gate University. After two years at an independent financial planning firm in San Francisco, Lee returned to the Nashville area in 2001 and joined TrustCore — where he has been ever since.
 
Lee says his approach over the years has not changed at all, but the industry definitely has. He says it has become more confusing in terms of who does what, and he has seen a lot of people who pose as financial planners but in reality turn out to be an insurance agent or banker.
 
“Consumers have to be a little careful and ask better questions when it comes to picking a financial planner,” Lee says.
 
With clients all over the country, Lee takes a thorough approach with their personal financial lives, addressing everything from retirement planning to how to diversify a portfolio.
 
How much should I contribute to my 401(k) if my company has limited matching?
 
If there is a match you want to do as much as you can, because if a company is offering a match that’s 100 percent return on your money. Employees need to fully understand what their company offers, and sometimes it can be a little confusing so you have to ask questions and really understand what’s out there.
 
You also have to look at it from a tax perspective, because the money you put into a 401(k) reduces your income. Some people will benefit from tax breaks. So ask yourself “How much do I think I need to retire?” And that should really be the driving force.
 
The important thing to remember is the power of compound interest. This is incredibly crucial for younger employees — if they can start saving in their 20s and 30s, it’s much less of a burden then when you’re in your 40s and 50s. It literally amounts to millions of dollars if people start saving in their 20s and 30s.
 
How would you handle rolling over a 401(k) when you leave a company? What are the tax implications?
 
If you roll it directly into another retirement plan there is no tax impact. As long as you don’t personally touch the money in that 401(k) and you simply transfer it, then the money is not taxed. And this is where I see a lot of young people make mistakes. They’ll take it out and pay for a vacation or a new car because there’s not that much money so they think it’s not a big deal. As we’ve seen through the years, people are switching jobs more frequently — changing every four or five years — and if you’re job hopping and cleaning out that 401(k) every time you move, it really effects your nest egg. No matter how small it seems, it’s important to keep that 401(k) and let it continue to grow.
 
How much can you/should you start planning for a child’s college education?
 
My main philosophy there is it’s just like being on an aircraft, and the flight attendant says you have to put your mask on first before securing your child’s mask. First, focus on your retirement nest egg. The family should do what they need to do for themselves first, and then think about what level of expense the child will likely have. Will that child be going to a top-notch university like Vanderbilt where the all-in cost is about $50,000 a year, an out-of-state public university which is closer to $30,000, or an in-state public where you’re looking at something like $15,000? This gives you a broad idea of what the total bill is going to be. The best time to save is as soon as the child is born. Again, it comes down to compound interest so the earlier you start saving the better.
 
The inflation rate on tuition is astronomical. So you have to make sure your investment remains greater than the inflation rate. If you can start early, you can get that growth when the child is very young, and as they get older you can back off and take less risk.
 
Another good idea for college savings is to get the grandparents involved. They can set up 529 plans for the grandkids, which they often find attractive.
 
When choosing between an IRA, a Roth IRA and your child’s college education fund, which one takes priority?
 
The IRA takes priority because you have to take care of your own retirement first. A traditional IRA versus a Roth comes down to tax planning. With a Roth you pay tax on the money that goes into it and then, theoretically, it’s never taxed again — I say theoretically because the government could change the rules on that, but as it stands now you won’t be taxed on that money again.
 
With a traditional IRA, you get a tax deduction for what goes in, and there’s no tax on it while it grows, and then you pay tax on the money when it comes out. A Roth IRA is good if you’re in low tax bracket now and feel you’re going to be in a higher tax bracket when you get older. Tax rates are going to go up, and you could face higher tax rates in retirement. So you have to forecast what your tax rate is going to be in retirement to see which one works best for you.
 
What’s the best way to approach life insurance for someone under 40? Over 40?
 
Life insurance is meant to replace income that people would have through earnings. It can be a tool to help pay for estate taxes among other things. You have to look at someone’s entire financial plan to see if life insurance is even necessary, because someone may have enough wealth that they may not need life insurance. It depends how complicated someone’s financial portfolio is. For someone who is extremely wealthy it can be used as a tax tool. You need to look at the impact of someone passing away.
 
I don’t know if there’s much of a difference for those under 40 and over 40. You’re going to lose their income but you’re also going to lose their expenses. A couple has to decide: If one spouse were to die, what would the other do? If one is not working but is then willing to go to work if their spouse dies, then your life insurance is different then if they wanted to stay home with the kids. The family has to decide what sort of changes will be made in the event of a death. You have to really understand the family and not generalize it. You really have to crunch through the numbers, because there’s a lot to sort through.
 
The one difference between under 40 and over 40 is insurability becomes an issue. Insurance rates go up with age and any sort of health conditions, so that has to be taken into consideration. I also think it’s helpful to have private insurance so you’re not dependent upon the employer in case you lose your job.
 
Where are there tax savings for someone who doesn’t make $200K/year?
 
The IRS has really whittled down the knobs you can turn for tax savings. If you are just an employee and all of your interest comes from your company there’s not a lot you can do. But the things you can do is you can contribute to your 401(k), open a side business — there’s a lot more flexibility in the tax code for someone who owns a business and you can get some deductions there. Or if you own rental property, there are tax advantages from being a landlord.
 
Also, families or individuals who make changes to their home for energy reasons can receive tax credits, which is dollar for dollar savings. You have to be aware of what’s going on in the tax world and know what those special circumstances are. For example, we put geothermal in our house this year, and we’ll get a huge tax break for that. The other way to achieve some tax breaks is through charitable gifting. If you itemize those gifts, you can deduct it if they’re large enough.
 
What should you be looking for in a mutual fund?
 
I think that the more important question is what is your overall portfolio strategy versus looking at individual mutual funds. Asset allocation is more important than the individual components. Asset allocation refers to the components of a portfolio and how they work together to provide an overall rate of return and also the risk or volatility experienced to achieve that rate of return.  The broadest asset classes that make up the asset allocation are stocks, bonds and cash. The overall asset allocation has more impact on an investor’s return and risk than trying to pick between one large U.S. value fund versus another U.S. large value fund.
 
The first thing is to have an objective for a portfolio. For the financial planning that I do, the objective of the portfolio is to support the written financial plan. For my clients, we’ll look at what rate of return we need to be successful, and that’s when we can tell if the portfolio is doing what it needs to do. We need a written plan and we come up with an asset allocation for the portfolio, and then we look at the individual funds to support that in this environment. I think the economy is going to continue to struggle, and we’re in a period of low returns looking at the past, so expenses matter, and the yield matters on your funds in an environment like this.
 
On an investment the only thing guaranteed is the expense. In today’s environment, you have to look at an investment with low expenses. And if we’re in an economy that requires patience, then you might as well make some money while you wait. You get paid by having investments that have high dividends and interest.
 
How much risk should you be taking in today’s economy?
 
It depends on the investor and what their appetite for risk is. It depends on how much risk they can personally stomach and what their timeline is for needing the money. Someone who could take more risk is someone who is a long way from retirement and can stand the volatility of the market.
 
With the crash three years ago, everyone has a better understanding of their risk tolerance. For someone just starting out it’s better to be more cautious and gain some experience, because it’s always easier to crank up the risk once you have some experience rather than going in too hot and getting burned and then trying to back off.
 
I have some clients who are younger that went through the crash and tolerated it just fine. I have others who went through retirement and really want to protect what they have, so they go for more predictable versus higher rates of return.
 
How should younger generations looking to save for retirement plan for their futures compared to those who are closer to retirement age?
 
I’ve read that there are some younger people that are very disenchanted with the stock market and want to avoid it because of how it’s performed over the last 10 years. I don’t think they should let the recent performance taint them on investing, because if we look at the stock market over a long period of time, it does perform well. I suggest that they don’t let the recent performance dissuade them. They should start saving as much as they can as soon as they can and find some sort of financial mentor — whether that be a professional, a family member, someone they respect who can give them feedback and help give them the confidence to save and put money aside toward retirement.
 
I also suggest being careful with debt so they don’t get in over their heads — primarily with credit card debt. Never carry a balance over on a credit card, and always pay it off in full no matter how hard it is. It’s also important to have an emergency fund to avoid any problems in the future so they don’t tap into their 401(k) or IRA prematurely.
 
How much should I be saving a year?
 
Use some sort of a tool or work with an  adviser so you know what the right number is. The figure I use is you should save 10 percent of your money as a fall back if you can’t do anything else. If you do that young enough in life, then in most cases you’ll beOK. That works for someone who is younger and just starting out, but it’s not going to work necessarily if you’re in your 40s and 50s.
 
What is the best advice you can give to new investors?
 
Have a portfolio where you don’t feel like you have to react to the headlines. Have a portfolio that’s deliberate and that you consciously put together so that when you talk to someone at a party you don’t think, “Oh my gosh I have to go make a change!”

Reprinted with permission from NashvillePost.com.