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Six Financial Tips for 20-somethings From Financial Planner Cliff Caplan

Cliff CaplanIt’s tempting to think that journalists who write about money for a living have all the answers. (Ugh. You should see my checkbook.) By way of analogy, I’d like to suggest a different way of thinking.

We all know Steven Spielberg ranks as one of the all-time great film directors. But when Spielberg needs fabulous special effects, what does he do? He calls his buddy George Lucas. Why? Because the “Star Wars” director is the undisputed king of special effects. It’s an area Spielberg appreciates, but doesn’t know nearly as well as his colleague.

It’s that way with money as well: We get wiser (and richer) when we learn to lean on the wisdom of the financial sages around us. This week, I introduce you to a pro ideally situated to give you some great advice, because he has three kids in their twenties.

Cliff Caplan is founder and president of Neponset Valley Financial Partners in Norwood, Mass. With more than 30 years experience as a financial planning practitioner and 20 years as a Certified Financial Planner, Caplan has proved an invaluable source as I’ve worked personal finance stories for Reuters Money. Where many in the money world talk jargon and nonsense, Cliff speaks from common sense and sound knowledge.

In reaching out to Caplan, I asked him to think not just of the advice he’d give Money Under 30 readers, but also his three adult children (two of whom work in the financial services industry). Here’s what he had to share with us:

1. Get disability insurance

It’s easy to think that when you’re in your 20s or 30s, disaster can’t strike. But by some measures, as many as one in three employees will at one time or another experience some form of disability. Even if your employer provides some form of disability coverage, chances are it’s partial and will only cover about 60 percent of your salary. “For a single person, it’s important, and I would strongly urge them to buy long-term disability insurance,” Caplan says. “Working for a company for 30 to 35 years doesn’t happen any more, and when you move from job to job, you can’t take [employer-provided] disability with you.”

2. Look at life insurance

The topic of life insurance among 20-somethings often has all the appeal of math homework for a grade schooler. But if you want to pass the financial savvy test with flying colors, Caplan says you need to study this building block.

Here, we need to make an important distinction between term life insurance and permanent life insurance. Term life insurance only lasts for a fixed period that expires and can provide for your depedents in the event you die during the term. Term insurance is relatively inexpensive. Permanent life insurance accrues a cash value over time that’s paid out at the end of the policy. Caplan recommends the latter.

“Buying a life insurance policy is a good start,” Caplan says. “[Y]our health changes, and I’ve had this pay off over the years. But it has to be permanent insurance; what we’re talking about hereis future planning.”

3. Match that retirement contribution at work

For too many young workers who sign on with an employer, the retirement account is just a nice perk — something you don’t have to think about because retirement is decades away. But as any financial pro will tell you, the magic of building wealth through a retirement account starts with compound interest. And that account explodes in value later on when you front load it over time with lots of money — especially free money.

Did someone say free money? You heard right: Many employers will match your retirement contribution provided that it reaches a certain threshold. But it’s amazing how many young workers don’t know about this valuable benefit. “Matching a 401(k) is free money,” Caplan says. “Take it and run.”

4. With 401(k) accounts, think Roth

A 401(k) is a 401(k), right? No. In the world of retirement accounts, you have the traditional 401(k) and — at an increasing number of employers — the Roth 401(k). With the former, contributions aren’t subject to federal and state income taxes for the year during which you make the contributions; you pay when you withdraw your accumulated contributions plus investment earnings in retirement. In a Roth, it’s the other way around; you pay federal and state income taxes the year you make the contributions, but not in retirement. So if you expect your income tax rates to rise over time — often the case with younger workers — a Roth sets you up for major riches in retirement.

“If you’re 25 years old, you’ve got 40 years for it to grow tax free,” Caplan says. “I’m a big fan of it. You’re setting yourself up for a huge bonanza. Here’s the key: If you have the cash to pay the taxes up front, it makes sense.”

5. When you invest, use dollar-cost averaging

Here we’re going to explain a term that many of you might not know. It’s simple once you hear the definition: Dollar-cost averaging involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The theory behind it is that while share prices may fluctuate over a a year — sometimes wildly — you’re building an investment up over time, regardless of short-term turbulence.

“A few hundred hundred bucks a month can result in a few hundred thousand dollars over 10 or 15 years,” Caplan says. “But make sure to max out your Roth IRA first.” Currently, the Roth contribution limits are $5,500 annually.

6. Establish credit as soon as possible

Though the two things may be equal in some folks’ minds, establishing credit isn’t the same as getting a few credit cards and going on a shopping spree. It means responsibly proving to the three reporting credit bureaus that you can pay utility bills, loans and credit card statements on time, every time. Even if you have to start with a higher-interest credit card, you can establish good credit (and avoid pesky finance charges) if you pay off the full balance every month.

“Establish credit immediately, but monitor your credit report and stay current,” Caplan says. “If they have misinformation there, it’s very hard to get it corrected. It’s a lot more imperative that you stay current, especially since 2008. Credit standards are much more stringent. But remember that some credit history is better than no credit history.”

Imagine getting fabulous advice and direction like this on a regular basis. One way to do that, of course, is to keep reading the work of my Money Under 30 colleagues. Another is to find yourself your own financial mentor. In future columns, I’ll write about how to find a money mentor to teach you the fine arts of building wealth and managing your finances, and the items to put on your checklist when searching for a financial advisor.

What do you think of Cliff’s advice? Are you six for six?

About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. I’m curious to know why he would recommend permanent life insurance over term. If you’re financially responsible, the likelihood of you needing life insurance once your kids are out on their own is very low. Permanent insurance is much more expensive, meaning you either won’t get enough insurance or you’ll be dedicating your money to a product that has much lower returns than other investment options. Plus, almost any term policy you get can be converted into whole life at some point if need be. I’d be surprised if he’s advising people in their 20s and 30s to use permanent insurance as a way to prepare for possible estate taxes. That’s a high lifetime cost for something that more likely than not will not be relevant for the vast majority of us.

    • Lou Carlozo says:

      I’m replying up high because I believe that while Matt’s comments show what I believe to be good intentions, they’re misguided, unfair and inaccurate.

      I admire the spunk it takes for a reader to look up Neponset’s documents, but look again. Chances are Matt (and most of the readers of Money Under 30) don’t qualify for the income threshold needed to be a Neponset client. So I doubt Mr. Caplan is trying to make a few extra nickels and dimes by recommending products that he himself has little to no chance of selling you.

      Also, the 3% figure is inaccurate. Check again and you’ll see that Mr. Caplan’s management fees are more in the range of a 1.25% maximum and below.

      When journalists are inaccurate, we do a great disservice to readers and need to print corrections as a matter of public service. My lament here is that a reader who was inaccurate isn’t held to the same standards, especially after taking up an inordinate amount of space in our comments section so as to almost negate the wisdom that a financial expert shared with us so graciously.

      This is not personal at all. (If it were, I’d have to say I love the photo of Matt holding up his baby!) But it is about fairness, and I zealously defend the integrity of my sources as much as I defend my own. And I have an issue with comments such as “I would be wary of your sources when getting financial advice. Always know where the incentive is.”

      And what would that “incentive” be, exactly? Can Matt or anyone tell us? I think I can, since I conducted the interview: I asked Cliff Caplan to share with me the advice he’d give his own kids under 30. Period. So I think the “incentive” was for Mr. Caplan–a trusted source I’ve used for many personal finance articles–to give us his best.

      Likewise, I do my best every week to give you my best. I may not always hit a bullseye with my content. But I think part of giving you my best is to ensure a spirit of civility and fairness in this space–to make sure that when we disagree, that we don’t overstep the bounds of playing fair.

      Matt and others may not agree with Cliff Caplan’s views. That’s their right. But I can assure you he can crunch the numbers to defend his points of view. Further, it’s quite the shot across the bow to suggest, both passively and directly, that Caplan has an ulterior motive at work.

      This is the hallmark of incendiary opinion that lacks solid evidence and a well-reasoned argument–which comes not from Personal Finance 101, but Journalism 101.

      So please, let’s be nice and play fair.

      • My intention was not to call into question the journalistic integrity of either the Money Under 30 site or Lou Carlozo in particular. My intention was to counter what I felt was questionable advice from the author, Cliff Caplan. I believe that we all have every right to express our opinions, and others have the exact same right to question those opinions. Further, while Mr. Carlozo appears to feel that I am not being held to high standards, I beg to differ based on both his and Mr. Caplan’s ability to dispute my opinion. I welcome the discourse and feel it is only fair that I have the opportunity to be questioned just as they were. Please see my reply to Mr. Caplan below for further discussion on the actual topics at hand.

  2. Taking a quick look at Neponset Valley’s website and regulatory documents, it actually makes a lot of sense that he would recommend permanent life insurance. His company sells life insurance, and commissions are much higher for permanent than for term.

    I can also see that his firm charges extremely high fees to their clients with assets under management. Up to 3% of a client’s assets per year, plus between $20 and $30 for each transaction within a clients account, above and beyond the transaction fees charged by the broker who actually makes the transaction.

    Most the advice here is common sense, but as always I would be wary of your sources when getting financial advice. Always know where the incentive is.

    • Ah, that’s why he recommends dollar cost averaging, which results in a higher number of trades, and thus higher commissions… In reality lump sum investing has shown to pay off higher than DCA.

      • Very good point about the DCA recommendation. I can certainly understand recommending DCA in certain situations if it helps a novice investor psychologically. Much better to help them stick with investing than to try and squeeze out every last ounce of expected return. But you’re absolutely right that the recommendation gets put in a whole new light when those trading fees are factored in.

  3. David E. Weliver says:

    Thanks for your observations. If you’ve been reading MU30 for a while, you’ll know that our stance is to always recommend term life insurance over whole but I feel it’s valuable to have different views represented. Editing this piece I resisted omitting that or adding an editor’s note, because I figured it would get picked up in the comments.

    Aside from that, I don’t know that there’s anything necessarily self-motivated in an advisor advocating DCA.It depends on the investor. As Matt points out, DCA can be useful for new investors to get in the habit of investing — and if done in direct mutual funds or commission-free ETFs, doesn’t have to cost more. Obviously, however, telling somebody to pay a $10 trade commission to invest $50 every month makes no sense.

  4. You guys already hit this, but permanent life insurance stinks. When I was looking for life insurance I looked into it but I couldn’t find a policy that didn’t eat you alive with fees while giving lousy returns.

  5. Unfortunately, it has been my experience that many critics who offer opinions on recommendations often don’t have sufficient experience to make a cogent argument against a position or simply are misinformed. In the case of my “bias” towards permanent life insurance, Mr. Becker should be aware of several points. First, I don’t favor permanent life insurance over term insurance. In fact, I recommend more term insurance than permanent life insurance. But for young professionals looking to plan for the future and who have the financial resources and good health to qualify and afford it, permanent life insurance provides a great launching pad. I don’t have the space to provide you with numerous instances in my 35 years of experience where it made an enormous difference for a client but I would be more than happy to discuss this situation with Mr. Becker personally if he so desires. Second, my business is 85-90% money management with the vast majority being fee based and life insurance being relegated to a rather small percentage of revenues. My number one priority for a client is for them and their families to be adequately protected at an affordable cost.

    Unfortunately, Mr. Becker is misinformed about my management fees for my investment advisory services. I have no idea where he came up with 3% as the standard but let me be very clear – my management fees range from .75%-1.25% annually. I am very interested to know where and how Mr. Becker arrived at the 3% figure he quoted in his comment.

    Finally, the issue of the transaction costs for dollar cost averaging is simply wrong. While the majority of my clients are retirees or near retirees, the younger clients who have opted for systematic investment plans pay no transaction costs. If Mr. Becker or Sam are paying $10 for every $50 investment as stated in a systematic investment plan, I would strongly recommend that they search for a financial adviser who can offer you a no transaction fee method to implement dollar cost averaging. I promise that you will have no problem locating a multitude of qualified investment advisers who would be more than happy to accommodate you.

    • Mr. Caplan, first of all I would like to apologize for the accusatory tone of my previous comments. That tone was unfair and uncalled for. I hope that what follows can be a level-headed discussion.

      With that said, there are certain parts of my comments that both you and Mr. Carlozo have called into question that I would like to clarify here.

      First, I would certainly welcome a conversation either here or offline on the merits of permanent life insurance for the typical 20-30 year old. I have not yet seen evidence of permanent life insurance being a good idea, except in a very small minority of situations. But again, I am open to hear your arguments and am certainly interested to see if there is a compelling case to be made.

      However, while in your comment you state “I don’t favor permanent life insurance over term insurance”, your post actually reads “Buying a life insurance policy is a good start…But it has to be permanent insurance”. I cannot speak for certain about your true opinion, but your post clearly emphasizes permanent insurance over term. Now, in your comment, you qualify the permanent insurance recommendation by saying that it’s for people “who have the financial resources”. This is a qualification that, while I still may not agree, was completely absent from the original post in favor of a blanket recommendation. It is my opinion that the correct course for most young people is term insurance, which is why I took issue with the wording in your post.

      Now, as for disputing my facts, I can tell you that my numbers are coming from the documents submitted to the SEC by your company. For the other readers, you can go to the site http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx and search for yourself. If you search for Mr. Caplan, you find that he is registered with a company called Commonwealth Financial Network. So you can look up that organization and follow the links to its SEC registration information. It’s under the “Part 2 Brochures” link where you can find information on fees.

      If you scroll to page 11 of this brochure, you can see that the company’s fees for assets under management start at 3%. This is not a made up number. It is right there in their brochure. Now, it is true that the fees start to decrease as assets grow, but in no case does the fee drop below 1.5%. And it’s still true that you may be paying that higher fee on at least some of the money under management. If the true management fees range from 0.75-1.25% annually, as Mr. Caplan states here, that may in fact be the case but it is in direct conflict with their regulatory documents.

      Finally, on the topic of transaction costs, if you scroll to page 13 of that same brochure, you can see the transaction fees that the company charges. These range from $20-30, just as stated in my comment. This doesn’t even include what’s stated as a “$4 transaction fee” for certain transactions. And it’s very clear that these fees are in addition to the typical broker fees assessed. So the point about DCA was that it’s at least possible that one could advise a strategy because it brought them more revenue, rather than because it’s best for the client. I am not saying that this is necessarily the case here, but I do think it’s important for people to understand all potential conflicts of interest and to make their own decisions. As I said in my comment, I believe that DCA has great value for many individuals, but I think any recommendation needs to be taken with an understanding of all the facts behind it.

      Again, I welcome any and all discussion on these topics. I look forward to hearing from you.

  6. FYI, for those of us who might get knocked up in our 20s/30s, disability insurance can save your butt.

  7. Mr. Becker,

    I would be more than happy to discuss these various points with you. I don’t believe that a discussion of some very dry regulatory requirements on this public forum would be of much interest to the readers. Why don’t you email me with some dates and times when we can talk so that I can clarify these issues with you.

  8. Longtime reader, first time poster. Not sure this question fits exactly here, but it’s a recent thread so I’ll give it a go in hopes of a response:

    I know you cannot contribute more than you earn to a Roth IRA. I’m stuck on how to figure out what counts toward that income total. My wife is a full-time grad student with a small paying side job, who applied a Segal AmeriCorps Education Award to pay-off a student loan in 2012. Does that AmeriCorps Award count as “earned income,” thereby pushing her earned income past the max IRA contribution limit of $5,000 for last year? If so, this means we can max out her contribution for 2012 with some inherited money to start her Roth IRA before tax day, yes?

    • Joe, if you were married last year and are filing a joint tax return, all that matters is that you have enough combined income to cover both yours and your wife’s IRA contributions. According to the IRS’s website:

      “If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation.” (See: http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits)

      As to whether the education award counts as earned income, I have no idea. I hope the information I provided helps!

    • I think Denise gave you the best answer for your situation – that is, that if your individual earned income is above $10k you can max out a Roth IRA for yourself and one for your wife.

      But I wrote a blog post a while back that may be helpful to you should you ever really need to know what is and isn’t earned income, specifically for graduate students: http://www.evolvingpf.com/2012/03/earned-income/. The key point is how your wife’s award was reported for her taxes – 1099 MISC box 3, I suspect.