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What Is an Index Fund?
What Is an Index Fund?
You may be familiar with popular stock market indexes such as the Dow Jones Industrial Average (DJIA) or the S&P 500. But there are many indexes that comprise groupings of assets or investments other than stocks, such as bonds, commodities or real estate. Currently, however, we’ll focus on stock indexes.
Index funds are investments that hold a representative sample of securities that aims to mirror the performance of the index. As the prices of the stocks rise and fall, so does the index — and the value of the fund associated with it. Index funds are passively vs. actively managed, meaning a fund manager isn’t actively making trades into and out of the fund based on market conditions or economic forecasts, and this passive strategy generally results in lower fees and usually lower taxes too.
DJIA and S&P are just two of the many stock indexes that have funds associated with them. Others include the Russell 2000 and the Wilshire 5000, and there are some index funds that track technology, health care, energy and other sectors.
When you invest in an index fund, you can make fewer individual investment decisions. This can be desirable for those who are new to investing or who don’t have the time or inclination to make lots of investment decisions. And because index funds hold shares of many different stocks, your investment is automatically somewhat diversified, which can help reduce risk.
However, spreading out risk over all the investments in an index fund can also dilute the potential for profit. One of the stocks in the fund may be a breakout star, but its effect on the overall average will be lessened by any underperforming stocks. There’s also a lack of flexibility to take advantage of moves in the market. The fund manager is obligated to follow the index, even if that index is falling or projected to fall. The manager can’t sell off underperforming stocks in an attempt to increase returns.
Unlike a target date fund, which lowers the amount of risk in a portfolio as retirement timelines near, index funds don’t adjust. The passive investment approach could lull you into complacency if you don’t periodically adjust your overall asset allocation strategy to help mitigate risk as your investment time horizon approaches or market conditions change. A poorly timed market downturn can put your retirement timeline at risk.
If you want to invest in a particular sector or market and don’t have the time or expertise to research individual stocks, index funds can be a good way to put your money to work. Instead of trying the “beat the street,” an index fund will match the market. From 2013 to 2022, the average annual return was 10.4% for the S&P 500, an index tracked by many funds, although it’s important to note that historical market performance does not guarantee future returns.
You can talk to a financial professional about whether index funds are appropriate for your investment or retirement planning strategy and personal risk tolerance. How you use them depends on your unique financial situation, your goals and how many years you have left before retirement.
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Getting Ready to Transition to Medicare? Then It’s Time to Re-Visit Your ABCs … and LMNs
Getting Ready to Transition to Medicare? Then It’s Time to Re-Visit Your ABCs … and LMNs
Transitioning from an employer-provided plan to Medicare, the federal health insurance program for those 65 and older and certain younger people with disabilities, can provide a tremendous sense of security — though it can also feel a little daunting. But demystifying this vital benefit doesn’t have to be an impossible task. In fact, it can be as easy as (re)learning your ABCs. Here’s a quick rundown on the basics of Medicare and its various parts if you’re about to become eligible.
The ABCs and Ds of Medicare
Unlike the private insurance you may be accustomed to, Medicare coverage is composed of four main parts, each labeled with a letter:
Part A (Hospital Insurance): Covers inpatient hospital care, skilled nursing facility care, hospice care and some limited home health care services. Most individuals’ premiums are covered by the Medicare taxes either they or their spouse have paid.
Part B (Medical Insurance): Covers medically necessary services, such as doctor visits, outpatient care, medical supplies and many preventive services. Part B requires a monthly premium, which is usually deducted from Social Security benefits.
Part C (Medicare Advantage): Offered by private Medicare-approved insurers, these plans combine Part A and Part B benefits and can include additional services like vision, dental and prescription drug coverage. They often have lower out-of-pocket costs but can come with network restrictions and requirements regarding your health care.
Part D (Prescription Drug Coverage): Covers prescription medications and is available as a stand-alone plan or as part of Medicare Advantage. The monthly premiums and drugs covered can vary by plan, so it's crucial to choose a plan that suits your needs.
Don’t Fall into the Gap (plus a few more letters to consider)
Just as your private insurance may have had limitations, restrictions or exclusions, it’s important to get the lay of the land regarding what is — and isn’t — covered by Medicare. Luckily, though, you have some flexibility when it comes to dealing with any coverage shortfalls. Medigap policies, also known as Medicare Supplement Insurance, are offered by private insurance companies and can help cover costs that Original Medicare does not, including copayments, coinsurance and deductibles (filling coverage “gaps”). There are 10 standardized Medigap plans available, each named with a letter (A, B, C, D, F, G, K, L, M and N) and offering different levels of coverage. Not all plans, however, are offered in every state, and they’re not compatible with Medicare Advantage. Carefully compare Medigap plans and choose the one that best aligns with your health care needs and budget.
Important Enrollment Periods
When you’re getting ready to change from private health insurance over to Medicare, there are specific periods for enrollment that you need to observe to avoid costly penalties and coverage gaps:
Initial Enrollment Period (IEP): A seven-month enrollment window begins three months before you turn 65, includes your birth month and ends three months afterward.
General Enrollment Period (GEP): If you miss your IEP, you can still sign up for Part A and/or Part B between January 1 and March 31, with coverage starting on July 1. However, you want to avoid this as you may face lifetime late-enrollment penalties.
Open Enrollment Period (OEP): Between October 15 and December 7 each year, you can make changes to your Medicare coverage, such as switching from Original Medicare to a Medicare Advantage plan.
Maximize Medicare Benefits by Choosing Wisely
Selecting the right Medicare coverage is essential to maximize benefits and minimize your out-of-pocket costs. Carefully evaluate your health care needs, budget and lifestyle as well as any program costs, covered services and restrictions when making your decision. How you handle your initial enrollment can have long-term consequences, so consider consulting a qualified Medicare consultant if you’re unsure what to do. They can help guide you through the important decisions you’ll face during the enrollment process and answer additional questions you may have as you make this important transition in your health care coverage.
Sources
https://www.medicare.gov/basics/get-started-with-medicare
https://www.medicare.gov/basics/get-started-with-medicare/get-more-coverage/buying-a-medigap-policy
https://www.medicare.gov/health-drug-plans/medigap/basics
Prevent Online Shopping from Busting Your Budget
Prevent Online Shopping from Busting Your Budget
From cat food to cars, commodities of all kinds are available to purchase online. And when clicking the “buy now” button is the only thing between you and a hefty credit card charge, it can be easy to overspend. Add online marketing algorithms to the equation, where “you might also like” items are served up at every turn, and your shopping cart can quickly fill up with things you didn’t intend to buy — and don’t need.
If you find yourself choosing “click to purchase” increasingly often, you are not alone. According to Forbes, more than 20% of retail purchases are expected to be made online in 2023. So how do you rein in spending when shopping from the comfort of your couch has become so convenient?
Savvy shopping. Price comparison shopping has never been so easy. Online tools such as Google Shopping and PriceGrabber enable you to sort by many criteria including brand, customer rating and price, helping you make better, more informed buying decisions. Look at which retailers offer the product you’re looking for and determine which one offers the best fit for your needs and budget. But stay focused on your intended purchase, and don’t get lured into spending more than you intended by flash sales, pop-up ads and limited time offers. Also, avoid using online shopping as “retail therapy,” which can quickly lead to overspending and bloated credit card bills.
Fee fiascos. Take shipping, processing and delivery fees into account when calculating your total price. Look for free shipping options but keep a close eye on the minimum price requirement. Sometimes free shipping can be a lure to get you to spend more than you’d bargained for. Did you throw that cat hammock in your cart at the last minute just to score free shipping? Keep an eye on total costs – and don’t lose the forest for the trees.
Trustworthy transactions. Online reviews can help guide shoppers toward quality purchases from reliable sellers. Consider checking independent review sites such as Yelp, Trip Advisor and Consumer Reports. Doing a little homework up front can help you avoid costly, time-consuming problems with disreputable dealers, such as poor product quality, failed delivery, or lack of warranty. Search through reviews to see how users who have made returns rate the seller’s customer support. You may also want to use a credit card that offers purchase protection in case something goes awry with your transaction.
Digital discounts. Use online coupon apps and tools to help score deals, such as Coupons.com or RetailMeNot. Beyond offering discounts, these sites make shopping even more convenient by listing a variety of deals in one place. You can find coupons for everything — but don’t get swayed into buying a can crusher or sweater nub shaver you don’t really need just because of the 20% coupon you found online.
Buying boundaries. To help minimize impulse buys, always make a shopping list. You may not use it to navigate the aisles of a supermarket or big box retailer, but a list can still help you stay on target with your spending by helping prevent wandering eyes when shopping at your favorite online retailer. The bottom line: If it’s not on your list, keep it out of your cart. When you visit a brick-and-mortar store with cash, there’s an automatic limit on what you can spend. But online shopping by default is done by credit card, so you must impose your own limits.
Final Words of Wisdom
And a few final quick tips before hitting the cybermall: opt out of online sales notifications, use ad blockers to avoid seeing ads targeted to your purchasing preferences and set time limits when perusing products online. Because when there’s no limit to how much your shopping cart can hold and the store never closes, you can easily shop ‘till you drop … too much of your hard-earned money.
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Overcoming Financial Anxiety
Overcoming Financial Anxiety
If you go by the numbers, financial anxiety is becoming something of an epidemic. Heading into 2023, more than half of Americans said they’ve faced financial challenges over the last year, according to a recent study — nearly a 20% increase over the year prior. But did you know those money woes could be taking a toll on your mental and physical health — in addition to your pocketbook? And while some levels of stress can be motivating, too much can be paralyzing.
But don’t lose hope. Here are five ways to combat your cash concerns and take control of your finances.
1. Face Your Financial Fears
Fear of the unknown can be a powerful force — and this is certainly true when it comes to your finances. It’s often more stressful to be in the dark about your situation than to face reality. So take a financial inventory. Write down your income, expenses, assets, debts, savings and retirement account balances — and more. If you know where you stand, you won’t add to your stress by playing out worst-case scenarios in your mind.
2. Make a Written Plan With Actionable Steps
Once you know your situation, creating a written financial plan can help further lower financial anxiety. Your plan should include a budget you can stick to, a strategy to pay down debt and specific action steps to help meet your goals. You could start saving a certain percentage or dollar amount from each paycheck by upping your 401(k) contributions, cutting certain discretionary expenses or picking up a side hustle.
3. Create an Emergency Fund
Having an emergency fund means you’re less likely to drain retirement savings or take on additional debt to cover unanticipated expenses like car repairs and medical bills. A good guideline to aim for is to keep at least three to six months of your regular expenses in a highly liquid savings or money market account (but not under the mattress). Knowing you can cover an emergency can give you greater peace of mind and help alleviate the kinds of worries that might be keeping you up at night.
4. Practice Self-care
Coping with economic fears isn’t just about adjusting your finances. It’s also important to make sure you’re practicing good self-care and maintaining the types of habits that support your overall physical and mental health. Getting enough sleep and exercise, maintaining a healthy diet and practicing stress management techniques such as meditation can help you process your financial fears in a healthier way.
5. Seek Support
Simply knowing that you're not alone can help. But seeking support from trusted friends and family, as well as expert help from a financial professional or licensed therapist, can be instrumental in putting financial anxiety in the rearview mirror. Some companies offer employee assistance programs that can be a valuable resource — check with your HR department to see if yours does. And if your employer offers a financial wellness program, you may have access to online tools and resources, group education or even one-on-one sessions to get the information you need.
Tackle Financial Fears Head-on
Financial stressors are a part of life that we can’t always avoid, but we can control how we deal with them. Creating a systematic plan and developing skills and tools to shore up your finances and improve your financial health is achievable no matter what your current situation is. Overcoming fears and regaining financial control can bring a sense of empowerment, reduce stress and pave the way for a brighter financial future.
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You’re Behind on Your Retirement Savings — Now What?
You’re Behind on Your Retirement Savings — Now What?
Are you looking to secure a comfortable retirement but dealing with a 401(k) balance that’s behind schedule? Whether you’re just starting out or have been steadily contributing without hitting your savings goals, there are ways to give your balance a boost — even if you’re nearing retirement age. With some smart strategies, you can fortify your 401(k) and make steady progress on securing a sound financial future.
Crank up Contributions
In 2023, you can contribute up to $22,500 to your 401(k). For those 50 and older, the maximum allowance increases to $30,000 — that’s an additional $7,500 for “catch-up” contributions, which can help older workers fill any retirement fund gaps. But if maxing out all at once isn’t in your budget, increase contributions annually by 1% until you hit your limit. And if your employer provides a match, try to increase your contributions to qualify for the maximum match as quickly as you can.
Supplement Your Savings
Amplifying your savings by funding some additional types of accounts can provide an extra cushion to help you retire comfortably. A health savings account (HSA), for example, can be a great way to supplement your retirement savings because it comes with a triple tax advantage: Contributions are made on a pre-tax basis, the interest and earnings are not taxed and withdrawals for qualified medical expenses are also tax-free. For additional retirement funds beyond annual 401(k) limits, you can also consider opening a traditional or Roth IRA — especially if you have a side hustle or part-time job to help fund contributions.
Ferret out Found Money
If you’ve changed jobs and left your 401(k) behind, tracking down those funds and rolling them into your current plan could give you a more complete picture of your retirement savings. Even if you don’t have contact information for your old plan sponsor, you still may be in luck. The Secure Act 2.0 of 2022 establishes plans for a future government-maintained “lost and found” database for retirement plans to help workers find and access their old accounts.
Rethink Your Retirement Residence
If you’re significantly behind on retirement savings, you may need to rethink your plans a little. Maybe a waterfront beach house isn’t in the cards, but a cozy condo that’s a short drive to the boardwalk may still be within reach. It might be necessary to adjust your goals and expectations a bit to align with your current financial situation. But if you’re dead set on your destination, you could also plan to work a little longer or bring in some extra income to make your retirement dreams a reality.
Plan for Tomorrow, but Remember to Enjoy Today
Regardless of how you try to increase your savings, it’s important that your strategy is something you can stick with — and appropriate for your retirement time horizon. Avoid making excessively risky investments in an attempt to make up for a late start or insufficient contributions. Also, keep quality of life in mind — you’re trying to retire comfortably, but enjoying life now matters too. Pick areas in your budget to pull back, but don’t cut back on all the things you like doing.
A trusted financial professional can help you home in on a personalized approach that works for you and your goals. Your golden years will be here before you know it, so get your retirement plan on track today.
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