Money march2016

12 WAYS TO CUT YOUR TAXES P. 23

M A R C H 2 0 1 6 • MONEY.COM

STOCKS: WHERE THE BARGAINS ARE NOW P. 43

SLASH YOUR DRUG COSTS BY 40%— OR MORE P. 76

GET GREAT CELLPHONE SERVICE FOR LESS P. 17

THE ULTIMATE GUIDE TO

LAUNCHING A BUSINESS STARTS ON P. 48

BECAUSE SOMEDAY

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MARCH 2016 VOLUME 45, NUMBER 2

Contents F E AT U R E S

COVER STORY

48

The Ultimate Guide to Flying Solo If you dream of being your own boss, be sure to follow these steps before you blast off.

by Elaine Pofeldt Plus: How four aspiring entrepreneurs turned their passions into new businesses.

Page 58. by Kerry Hannon

WA R D R O B E S T Y L I N G , H A I R , A N D M A K E U P B Y L I S A B E L L

66

Buy, Sell, or Hold?

The outlook for 10 of the most widely held stocks and fundsâ&#x20AC;&#x201D; and what to do if you own them.

by Carolyn Bigda and Taylor Tepper

76 MEGAN GIBSON PACKAGING JARS OF HER PB&JAMS

Rx for Your Drug Cost Pain Strategies to save up to 40% on out-of-pocket prescription bills.

by Kara Brandeisky

Photograph by dav e

l au r i d s e n

MARCH 2016

m o n e y. c o m

5

Progressive Casualty Ins. Co. & affiliates. Business insurance may be placed through Progressive Specialty Insurance Agency, Inc. with select insurers, which are not affiliated with Progressive, are solely responsible for servicing and claims, and pay the agency commission for policies sold. Prices, coverages, privacy policies and commission rates vary among these insurers.

MARCH 2016 VOLUME 45, NUMBER 2

Plan

SPRING IN PEBBLE BEACH —FOR 32% OFF

23 / AVOID TAX SLIPUPS Maximize your savings by dodging these trouble spots.

29 / ASK THE EXPERT Can your deceased father still be an identity theft victim?

32 / BARGAIN BASEMENTS Revamping the cellar can cost half of what you’d pay to renovate upstairs.

34 / COLLEGE THROUGH

20

THE SIDE DOOR Special admissions programs can be the ticket to a dream school, and save on tuition too.

Retire FIRST 15 / THE BIG NUMBER 16 / FAST TAKES 17 / TECH 18 / THE STATS 19 / SOCIAL CURRENCY

P H O T O G R A P H B Y M A R K E D WA R D H A R R I S

20 / TRAVEL

IN THIS ISSUE

8 / Money.com 10 / Editor’s Note 12 / Letters & Comments 84 / The Numbers

37 / DIVIDE, BUT 30 FA M I LY M O N E Y

Stop Ducking “the Talk” Your parents may hate discussing their money, but you need to have the conversation now. by Alexa von Tobel

CONQUER

40

88

RETIREMENT PLANNING

MONEY WELL SPENT

Finances Made Simple

Park Perks

Tips from the author who put all you need to know about money on an index card.

by Penelope Wang

Cover photograph by THE VOORHES

A cost-conscious dad chucks frugality and takes his 16-year-old daughter on the ride of her life.

by Rick Watson

Late-in-life divorce doesn’t mean you have to lose your entire nest egg.

Invest 43 / THE VALUE HUNT Sifting for bargains in an unsteady market.

46 / A CONTINENTAL INVESTMENT DIVIDE Where you’ll find golden opportunities in Europe.

MONEY (ISSN 0149-4653) is published monthly (except one in January/February) by Time Inc. PRINCIPAL OFFICE: 225 Liberty Street, New York, N.Y. 10281-1008. Periodicals postage paid at New York, N.Y. and additional mailing oices.

POSTMASTER: Send all UAA to CFS. (See DMM 507.1.5.2). NON-POSTAL AND MILITARY FACILITIES: Send address corrections to MONEY Magazine, P.O. Box 62120, Tampa, FL 33662-2120. Canada Post Publications Mail Agreement No. 40110178.

Return undeliverable Canadian addresses to: Postal Station A, P.O. Box 4326, Toronto, Ontario M5W 3H4. GST No. 888381621RT0001. © 2016 Time Inc. All rights reserved. Reproduction in whole or in part without written permission is prohibited. MONEY is a registered trademark of Time Inc. U.S. subscriptions: $15 for one year. SUBSCRIBERS: If the Postal Service alerts us that your magazine is undeliverable, we have no further obligation unless we receive a corrected address within two years. Your bank may provide updates to the card information we have on file. You may opt out of this service at any time. CUSTOMER SERVICE AND SUBSCRIPTIONS: For 24/7 service, go to MONEY.COM/CUSTOMERSERVICE. You can also call 800-633-9970; write MONEY, P.O. Box 62120, Tampa, FL, 33662-2120; or email help@money.customersvc.com. MAILING LIST: We make a portion of our mailing list available to reputable firms. If you would prefer that we not include your name, please call or write us. PRINTED IN THE U.S.

MARCH 2016

m o n e y. c o m

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MARCH 2016 VOLUME 45, NUMBER 2

Money.com

Find the latest at money.com/getdigital.

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Everything you want to know about money but may have been afraid to ask, from whether you can use torn currency (yes, if more than half is still intact) to what happens to your debts when you die (it depends on the type). Our experts tackle the most-searched money queries. money.com/burningquestions

MORE GREAT SECOND ACTS After you read about the career changers on page 58, get more insights and practical advice from people who have managed to turn their passions into professions.

MONEY IN YOUR IN-BOX! Sign up for our weekly newsletters: Ask the Expert, Retire With Money, and our latest, the MONEY College Planner. money.com/newsletters

COLUMNIST

money.com/secondacts

SOCIAL SECURITY SECRETS

Pick the right school for your studentâ&#x20AC;&#x201D;and your wallet.

The guys who wrote the book on getting the most from Social Security share their best tips for maxing out your benefits.

money.com/colleges

money.com/socialsecurity

MONEY COLLEGE PLANNER

8

m o n e y. c o m

MARCH 2016

PENELOPE WANG offers wisdom on retirement planning and investing so your money lasts as long as you do. @pennywriter

P H O T O G R A P H S B Y ( C L O C K W I S E F R O M T O P ) G E T T Y I M A G E S , C H A D G R I F F I T H , J E S S E B U R K E , L E A H FA ST E N

YOUR BURNING QUESTIONS ANSWERED

NEED FOR ADVICE

COLLABORATIVE INSIGHTS

OVERWHELMING CHOICES

WHEN CHOICE IS EVERYWHERE, WHO SHOULD YOU TRUST? The world of investing is complex. With so many views on the markets and potential investment approaches, you need a partner that is skilled across all asset classes and who is committed to your success. That’s why, at State Street Global Advisors, we start by asking the right questions and collaborate with you to find the best asset allocation approach to achieve your client’s goals. From SPDR ETFs to actively managed funds, we have the breadth of oferings and the experience necessary to help meet your clients’ financial objectives.

Bring us your investment challenges. We will find the opportunity.

Visit yourssga.com

ETFs trade like stocks, fl uctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.

The SPDR Dow Jones Industrial Average ETF is an exchange traded fund designed to generally correspond to the price and yield performance of the Dow Jones Industrial AverageSM, an index comprised of the 30 U.S. Blue Chip stocks.

SPDR ® is a registered trademark of Standard & Poor’s Financial Services LLC (S&P) and has been licensed for use by State Street Corporation. State Street Corporation’s fi nancial products are not sponsored, endorsed, sold or promoted by S&P, S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their respective affi liates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.

ALPS Distributors, Inc. is distributor for the SPDR DJIA Trust, a unit investment trust. ALPS Distributors, Inc. is not affiliated with State Street Global Markets, LLC.

Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call 1.866.787.2257 or visit www.spdrs.com. Read it carefully.

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Write the Editor: editor@moneymail.com

EDITOR’S NOTE

Time to Panic? Not Yet

A

10

m o n e y. c o m

MARCH 2016

not, long-term investors well know.

But not panicking doesn’t mean not doing anything, as staf writer Taylor Tepper and contributor Carolyn Bigda point out in their smart take on the market on page 66. Just as pilots fiddle with their controls during a stormy flight, the writers note, so you should make prudent adjustments to your portfolio. Their story looks at prospects for 10 of the most widely held stocks and funds and offers advice about whether you should buy, sell, or hold now. Then on page 43, for the intrepid among you, writer Ian Salisbury looks at whether the recent sellof created any good bargains. Hint: not as many as you might think.

DIANE HARRIS EDITOR twitter.com/dianeharris

G E T T Y I M A G E S ( W O M A N ) , S H U T T E R ST O C K ( G R A P H )

S JANUARY GOES, so goes the year, according to a Wall Street adage. And by that measure, we may be in for a rough ride.

Stocks, after all, started 2016 with the worst first 10 days in history, and ended the month of 5%. Being in the last year of a two-term President’s run doesn’t help: Since 1940 these have tended to be down years (average loss: 8.3%). Add in the stuf that really counts—we’re in the seventh year of a bull market, the U.S. economy is slowing, China is shaky, oil is tanking—and the outlook seems dim at best, grim at worst.

Time to sell your stocks and hunker down in cash? Of course

As this turbulent year unfolds, we’ll continue to provide insight into your best moves, in the magazine as well as online at Money.com.

There you’ll get our timeliest market coverage, overseen and often written by assistant managing editor Paul J. Lim, the smartest guy on investing I know. (His “3 Reasons Wall Street Is Panicking, and 3 Reasons You Shouldn’t,” posted a day after the Dow fell 400 points, is a classic.)

In this issue and online, I hope you’ll also check out MONEY’s expanding coverage of entrepreneurship, including this month’s cover story, “The Ultimate Guide to Flying Solo,” on page 48. Launching your own business is a common dream— I’ve mentally mapped out the venture I’ll pursue if this journalism thing doesn’t work out. Our goal: to provide practical advice and inspiring real-life examples that show how you can turn that fantasy into a profitable reality.

Enjoy the issue. And please check us out at Money.com as well.

Just because you don’t see it, doesn’t mean it isn’t there.

Introducing the newly redesigned Volkswagen Passat with Blind Spot Monitor, one of seven available Driver Assistance features.* Passat. Where family happens.

vw.com

When equipped with optional Front Assist

Simulated image. *Driver Assistance features are not substitutes for attentive driving. See Owner’s Manual for further details and important limitations. For more information, visit www.iihs.org. ©2016 Volkswagen of America, Inc.

LETTERS & COMMENTS

Write to MONEY: letters@moneymail.com

ONLINE COMMENTS ABOUT RECENT MONEY STORIES

RE: 10 THINGS EVERY INVESTOR MUST KNOW NOW [JANUARY/FEBRUARY]

“Has Inflation Gone Away for Good?” as you ask in your cover story package. Maybe that’s not the real story. The real story is that inflation is increasing dramatically each year, but it is being hidden by reducing product size. If a $2 loaf of bread three years ago is still $2 today, but now it’s half the size, isn’t that still inflation? al scillitani, Cary, N.C.

A DEMENTIA RESOURCE

IS THAT DEAL FOR REAL?

I could have used Donna Rosato’s “Coping With Aging’s Costliest Challenge” [December] when my mother began showing the first signs of dementia. I want to add that the Department of Veterans Affairs also offers long-term-care benefits to the widows and widowers of service members who served during wartime. beverly j. orth

In “Where to Go in 2016” [January/ February] you wrote that rates at the new Westin Downtown are $279 a month. I’m selling my house and moving to Austin! kevin ekerson

Kingston, N.Y.

Portland, Ore.

Although you are a recognized financialadvice publication, I believe that you were off base in your advice about creating a home gym in “The Price of Keeping Fit” [January/ February]. What dumbbell would pay $150 for “free” weights? william newhouse

O U R FA V O R I T E C O M M E N T

I just grabbed the latest issue of MONEY magazine from my end table to begin reading it. I was surprised by how heavy it was. Then I noticed it was your double issue. So my dream came true: I finally held in my hand a lot of MONEY. ron adams, Rochester, N.Y.

Jacksonville, Ore.

Editor’s note: We love a good bargain, but you’re right—this one was too good to be true.

That was the rate per night.

LIFTING FOR LESS

Newbury Park, Calif.

12

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MARCH 2016

@pensburgh34 Re: “What You Should Do If You Win the $1.5 Billion Powerball Jackpot” Tried this with an ex.

Lesson learned.

Never date a spendthrift. tom mcmorrow Re: “How to Finally Stop Fighting About Money”

Saving too much is better than too little though, right? @tatiana_2period Re: “When Good Personal Finance Habits Go Too Far” They’re gonna find out I’m old somehow. joe soja Re: “Employers Can’t Ask These Questions During a Job Interview”

Can I make the Guinness Book for never having a credit card? @citizenassange Re: “This Man Has 1,497 Credit Cards (and a Near-Perfect Credit Score)”

P H OTO G R A P H BY T H E VO O R H E S

PUBLIC SALARY INTEL I just finished “Get a Big Raise Now” [January/ February], and I wanted to note that some companies have formal job titles with corresponding pay ranges, and this information is available from human resources.

That’s especially helpful because it avoids the need to “discreetly” find out what other individuals are making. jonathan craine

Start looking for a security guard.

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THE BIG NUMBER + FAST TAKES + TECH + THE STATS + SOCIAL CURRENCY + TRAVEL

MARCH 2 0 1 6

HOW TO CUT YOUR NUT

Projected annual rise in HELOC costs Now that the Federal Reserve has finally raised interest rates— and signaled future increases—payments on variable-rate homeequity lines of credit are poised to edge up too. The average HELOC, now at 4.69%, requires a minimum payment of $516 a month on a typical balance of $132,000. If the rate hits 5.3% by year’s end, as Bankrate predicts, the bill will jump to $583. Tips to limit the pain:

Photograph by darren

brau n

COLLECT QUOTES Rates vary widely, so hunt for the best deal. You might also shave a half percentage point of the average rate or eliminate appraisal or other fees by moving all your banking business to your HELOC lender, says HSH.com vice president Keith Gumbinger.

REFINANCE Have a HELOC and worry about rising rates?

Roll your debt into a refinanced mortgage or convert it to a fixed-rate home-equity loan, says Daren Blomquist, VP of RealtyTrac. In fact, some fixed-rate home loans cost only about 0.35 percentage points more than a HELOC. UNDER-BORROW Higher home values mean you can borrow more against your equity, but just because you can doesn’t mean you should. Experts suggest holding your total housing debt—including your mortgage and HELOC—below 70% of the property value, even if lenders say you can aford 80%. —BETH BRAVERMAN MARCH 2016

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FIRST Looking for a new bank? Check out MONEY’s “Best Banks in America 2015–16” at money.com/bestbanks.

FAST TAKES

ONE REASON TO CHOOSE A CREDIT UNION over a bank has typically been lower fees. But when it comes to overdraft charges, that advantage has largely disappeared.

According to research firm Moebs Services, the median bank overdraft fee last year was $30, the same as it has been since 2010. The median credit union overdraft fee: a very banklike $29, up from $25 in 2011.

Overdraft fees have become increasingly important to financial institutions ever since recession-era legislation restricted other sources of income, such as overthe-limit fees on credit cards. In total, Moebs found that, as of the end of the third quarter of 2015, financial institutions had pulled in $32.2 billion in overdraft fees on an annualized basis.

To protect yourself from getting hit, set an online alert that notifies you via text or email if your account dips below a certain level. Also, if you overdraw your account once in a blue moon, call the bank and ask it to waive the fee. In most cases, it will. —MARTHA C. WHITE

BANKING

Going Up: Credit Union Overdraft Fees

Average overdraft fees: the disappearing credit union advantage Credit union

Bank

$25

2011

$30 $29 $30

2015

SOURCE: Moebs Services Survey

THE BEST JOBS IN AMERICA RIGHT NOW

16

skills, and how easily you can advance in your field.

By those measures, Glassdoor’s

m o n e y. c o m

Illustration by m at t

Here is the top 10 list: (1) data scientist, (2) tax manager, (3) solutions architect, (4) engagement manager, (5) mobile developer, (6) HR manager, (7) physician assistant, (8) product manager, (9) software engineer, and (10) audit manager. —M.C.W.

h a r r i s o n c l ough

QUOTED

“Wealthy people don’t watch a lot of TV.” Tom Corley, author of Change Your Habits, Change Your Life, on how even the smallest behavioral adjustments can boost your net worth

P H OTO G R A P H S B Y G E T T Y I M AG E S ( 2 )

What makes a job not just good but great? According to Glassdoor.com, it’s a combination of how much you make, the demand for your

2016 best job in America is data scientist, with a median base salary of nearly $117,000 and more than 1,700 openings right now. Technology jobs in general have a robust presence on the list, as do finance jobs.

FIRST

TECH

Slash Your Cellphone Bill

The “Big Four” (AT&T, Sprint, T-Mobile, and Verizon) have mostly dropped those pricey, two-year smartphone contracts, but service still comes at a premium. Most individual users pay $50 to $100 a month, and family plans easily top $150. Want to cut your costs without sacrificing coverage? Check out these smaller carriers.

But before you switch, ask yourself a few questions about the trade-offs. —RICK BROIDA BEST FOR HOME AND OFFICE

BEST FOR DATA MISERS

Do you have frequent access to Wi-Fi?

BEST FOR SPORADIC USERS

Wanna pay just for what you use?

Are you on a budget?

Of course.

Yep

Try Republic Wireless

D E N I S CA R R I E R ; E M OJ I A RT SU P P L I E D BY E M OJ I O N E .CO M

Republic uses Wi-Fi to transmit calls and texts, which keeps prices low.

(It automatically switches to cellular when you’re out of Wi-Fi range.) You get a refund for unused data.

Sounds great! But how much?

Average Refund Plan bill: $13.82 a month Not bad! Any caveats?

You need a Republiccompatible phone; the cheapest models run about $150.

For more of MONEY’s technology coverage, go to money.com/tech.

Yessssssssss! Some weeks I barely touch my !!

Look into Ting Ting tallies your calls, texts, and data each month and charges accordingly. This pay-as-you-go model works with most unlocked AT&T, Sprint, and T-Mobile phones.

Awesome, what’s it cost?

The median, multi-line bill is $32 a month.

What if I talk a lot one month?

Ting’s rates aren’t the lowest (1GB of data alone adds $19), so you could end up paying a Big Four–size bill.

Consider RingPlus The Michelangelo Plan gets you 1,000 voice minutes , 1,000 text messages , and 500MB of 4G LTE data a month at no charge. You maintain a $10 balance to cover overages and pay 4¢ for every pictureor video-message (MMS) you send.

Any other charges?

If you need more data, there are competitively priced options.

Cool, but what’s the catch?

You need an of-contract Sprint phone ($100 and up) or another unlocked, compatible model.

MARCH 2016

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FIRST Next month’s question: How much do you spend to maintain your yard and garden? Cast your vote at money.com.

THE STATS

MONEY READERS WEIGH IN POLL: How often have you called in

sick just because you were tired?

38%

NEVER

The Financial Side of Sleep 30%

HIGHEST 1. West Virginia 37% 2. Kentucky 34.9% 3. Tennessee 31.4%

11%

20%

Spring

$1,580

Foam

$1,610 $2,104

Air

MOST DOWNLOADED SLEEP-AID APPS White Noise Free Sleep Sounds Free Sleep Cycle Alarm Clock $1.99 Relax Melodies: Sleep Zen Sounds & White Noise Free Vibrating Massager 99¢

THE MORE SLEEP YOU GET, THE LOWER YOUR ANNUAL MEDICAL COSTS “Good” sleepers Insomnia symptoms Insomnia syndrome

Home sleepmonitoring device

Sleep apnea dental device

CPAP breathing machine

Corrective medical procedures

$600

$826

$1,500

$10,219

$1,587 $2,035

LOWEST 1. North Dakota 22.9% 2. Oregon 23.6% 3. South Dakota 23.9%

AMERICANS WHO TAKE SLEEP AIDS (OTC OR PRESCRIPTION) AVERAGE AMBIEN SCRIPT: $8

$3,676

TOTAL

$13,145

MOST POPULAR (GENERICS COMBINED WITH BRANDS) Ambien Restoril Lunesta Halcion

NOTES: Money.com poll conducted in December 2015, 1,797 votes. Employer sleep resources from a survey of 696 North American HR professionals across industries. Mattress prices based on averages for all sizes within a category. Annual medical costs represent average total cost per person. Ambien price, for 30-day supply of 10 mg tablets, is cash amount without insurance. SOURCES: Ceridian

Corp.; the Better Sleep Council; UC–San Diego; Williams College; Centers for Disease Control and Prevention; sleeplikethedead.com; AppCrawlr; SLEEP Journal; CostHelper Inc.; Philips; Good Rx

I L L U ST R AT I O N B Y T H E W O R K S

AVERAGE COST TO TREAT SLEEP APNEA (BEFORE INSURANCE)

PCT. OF RESIDENTS WHO SAY THEY’RE SLEEP-DEPRIVED

$500+

A RESTED DEVELOPMENT: MATTRESS COSTS

18

ANNUAL SALARY PREMIUM FOR PEOPLE WHO SLEEP ONE HOUR MORE A WEEK THAN THEIR (TIRED) PEERS

21%

$100 to $499

11%

ONCE

$10 to $49

37%

$50 to $99

AT LEAST ONCE A YEAR

Employers with on-site nap rooms

HOW MUCH WOULD YOU PAY FOR AN EXTRA HOUR OF REST? Less than $10

19%

16%

9%

Employers who provide sleep-health coaching

NAPPING ON THE JOB

27%

OCCASIONALLY

FIRST Join the conversation: twitter.com/money facebook.com/moneymagazine • pinterest.com/moneymagazine

SOCIAL CURRENCY

READERS TO THE RESCUE

“A customer overpaid for an order, and my employer told me to not point it out to him. What can I do?”

SEE OUR “BE Y OSS” B N W O ) E 48 (PA G

FACEBOOK QUESTION OF THE MONTH

IF YOU COULD START YOUR OWN BUSINESS, WHAT WOULD IT BE?

“An online privateinvestigator service, because everyone needs one these days.” —dino vrbanec “A financial adviser in a coffee shop where the employees wear jeans, and it’s casual: couches, lounge chairs, caffeine.” —nico valerio

“A bakery. I’d call it Grandma’s House and make items from your childhood.” —karen lawrence “Social media management. The business has very little overhead and doesn’t require much capital to start up.” —joseph perez “A cat café. Bonus: People could rescue one if they fell in love over coffee.” —erin inman

G E T T Y I M AG ES ( 2 )

“A health or wellness retreat for children who are ill or of special needs.” —lisa sharp “I’ve always wanted to start a strip club.

However, my wife frowns upon this.”

—cesar loya

Good intentions aside, you put yourself at risk if you try to help the customer. Instead, document what you were told to do by your employer in case the customer discovers the problem later and complains.

they know that they’re on the record.

terry hill

sean mahoney

Centreville, Va.

Lancaster, Calif.

Get out a résumé as quickly as possible. If your boss is screwing his customers, you can expect to be next in line.

boots rykiel West Fenwick Island, Del.

gordy cummings Spokane

If you live in an area with few job opportunities, then you have no option but to say nothing. Sad to say, but sometimes the “right” thing is not always the “best” thing for your future.

john white Riverside, Calif.

Go to your company’s ethics department, if it has such a department.

If not, I would ask the boss to put his instructions in writing. People are less likely to act unscrupulously when

it and say that they noticed it themselves.

Call the customer and tell them about it. Ask them to keep you out of

I might not do anything to risk my job now, but I’d start looking for another job working for more ethical people.

When you get a new job nailed down, I’d tell the current employer why I felt compelled to leave.

eve hershkowitz Brielle, N.J.

THE EXPERT SAYS

Say to your boss, “This isn’t our normal business practice” or “I’m uncomfortable with this”—that’s the nicest way of saying it. You could get fired, but I’ve never seen that happen.

Usually the unethical person says they’ll take care of the problem. kathi elster Management consultant and co-founder, K Squared Enterprises New York City

Want solutions to a financial dilemma in your life? Email your question to social@moneymail.com. To join our reader panel, go to moneymatterspanel.com.

MARCH 2016

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SAVINGS

33% WHISTLING STRAITS, WIS. Located along two miles of windswept terrain on Lake Michigan, Whistling Straits played host to the 2015 PGA Championship and will be the home of the 2020 Ryder Cup.

The Dye-Abolical package, named after designer Pete Dye, includes three nights of accommodations, four rounds of golf, cart, caddie fees, and more.

Rates start at $1,165 per person through May 8,

compared with $1,735 a person come June. For a one-night, tworound getaway, the Golf Escape package starts at $635 per person through May 10.

In the heart of the summer the price jumps to $813.

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The Family Explorers Package includes hotel, the par-three Peter Hay Golf Course, tennis, and more for kids 12 and under. (The 18-hole courses are extra.)

Cost: $495 per night before April 1, when the price jumps to $670.

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PA P E R S C U L P T U R E B Y D A N I E L S E A N M U R P H Y

Avoid These Tax Slipups TO MAXIMIZE YOUR TA T X SEASON SAVINGS, STEER CLEAR OF THESE TROUBLE SPOTS.

by Ingrid Case

Photograph by c l air e

benoist

TALK ABOUT A SPRING AWAKENING: If you haven’t been paying close attention to receipts and files since the last time tax day rolled around, you’ve now got until mid-April to wrestle your taxes into shape. You don’t want to pay more than you need to, of course. Yet there are more than 350 possible deductions on your federal return alone, says TurboTax CPA Lisa Greene-Lewis, and even professionals don’t always take the right ones. A 2014 Government Accountability Oice study tested 19 randomly selected tax preparers and found that only two managed to calculate the correct refund.

MARCH 2016

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Plan

TAX PREP | ASK THE EXPERT | FAMILY MONEY | HOME | COLLEGE

MONEY asked experts to identify some of the areas that cause the most trouble. Make sure you’re not stumbling into any of these traps.

MISSING A SALES TAX UPGRADE Late last year, Congress made the sales tax deduction permanent, which is good news for residents of states with no or nearly no state income tax—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. (You can deduct sales tax or state income tax but not both.)

You can use a formula on your federal form to take a deduction for sales tax paid; you don’t even need receipts.

But you can increase your deduction by adding the sales tax you paid on major purchases: Car sales, for instance, hit a record in 2015, and rack up a big tax bill (see chart at right). Hefty outlays for home improvements can tip the scales as well, says Dave Stolz, a CPA in Tacoma.

OVERLOOKING INVESTMENT LOSSES Last year’s volatile market left some investors underwater. If you sold at a loss during August’s slide, you can deduct up to $3,000 from ordinary income after you’ve offset capital gains. You can carry forward any additional losses to offset income in future tax years.

ments, disability-related home or car modifications, addiction treatment, lead paint removal, a guide dog.

(Jean-Luc Bourdon, a CPA in Santa Barbara, remembers a client who successfully deducted clarinet lessons prescribed to treat a speech impediment.)

In the ballpark but not quite over the plate? Try to reduce your adjusted gross income with an extra IRA or HSA contribution. And check to see if your state has a lower threshold that lets you deduct medical expenses on your state return; several do, including Arizona and New Jersey.

TAKING THE WRONG COLLEGE WRITE-OFF Paying a dependent’s college costs?

You can benefit from the American

Pick a Deduction In states with no income tax, sales tax is a valuable write-off, especially if you made a big purchase. Otherwise, deducting state income tax is usually better.

IRS formula

Car sales tax

SEATTLE (no state income tax) Take this

Sales tax

$1,622

$2,400

$4,022

IGNORING MEDICAL EXPENSES Medical costs are deductible on your federal return, but only to the extent they exceed 10% of your adjusted gross income, or AGI (7.5% if you or your spouse is at least 65). If you had big out-of-pocket expenses last year, add up your bills: You can deduct nearly any out-of-pocket medical or dental cost—drugs and doctor bills but also mileage traveled to appoint-

24

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Opportunity Tax Credit of up to $2,500, the $2,000 lifetime learning credit, or a $4,000 tuition and fees deduction—but you can’t take them all in the same year. Tax credits tend to be worth more than deductions, because they directly reduce the amount you pay, so the AOTC may be the way to go, if your income qualifies. You can also take the credit per student, not per return, so it’s especially valuable if you had more than one kid in college.

Run your scenario with each of the three choices and pick the one that benefits you most. Keep in mind that the deduction would reduce your family’s AGI, which might get you more need-based aid this fall.

NOT ADDING UP CHILD CARE If you need a babysitter in order to work, look for work, or attend school, take a tax credit that’s worth 20% to 35% (depending on your income) of up to $3,000 in expenses for one child or up to $6,000 for two or more.

The cost of day camp counts, though not sleepaway camp. If you’ve set aside pretax dollars in an FSA for child care, you must use that money first, but you can still take a credit for additional expenses up to the limit once you’ve exhausted the account.

There’s no income restriction, but the benefit disappears when Junior turns 13. Also, your caregiver must have a Social Security number or tax ID.

NEW HAVEN

PICKING THE WRONG WORK-RELATED EXPENSES

Sales tax

$1,048 $1,588

$2,636 Take this

Income tax

$4,508

NOTES: Assumes $100,000 AGI, married couple filing jointly, $25,000 car purchase. SOURCES: IRS.gov, CT.gov

Unless you’re self-employed, there are few legitimate job-related deductions—though a lot of people try to stretch the definition, say accountants. One likely trouble spot: Work clothing doesn’t count, unless it’s a uniform or other specialized

gear. “If you can use it outside work, you can’t deduct it,” says Cari Weston, taxation director for the American Institute of Certified Public Accountants. “The Armani suit is not deductible. The race-car suit is.” Commuting costs are not deductible—but miles you drive on the job are fair game, if you don’t get reimbursed (and only to the extent they and other miscellaneous deductions top 2% of AGI).

Same goes for miles you drive to look for a new job. Teachers can take a $250 deduction for classroom supplies—a write-off that Congress just made permanent.

DEDUCTING YOUR KIDS’ STUDENT LOAN INTEREST Paying off student loans? If they’re yours, great; you can deduct the interest even if you don’t itemize, as long as your AGI is no more than $80,000 (if single) or $160,000 (married filing jointly). But parents beware: If you’re making your kid’s loan payments, that’s a gift, and the interest isn’t deductible.

FAILING TO DOCUMENT CHARITABLE EXPENSES You can write off not only checks written and goods donated, but also supplies for charitable work.

Equipment purchased and mileage driven are deductible (although the value of your time and the services you donate are not). But keep careful records, and get acknowledgment from the charity for any gift worth $250 or more.

“You need the receipt before you file your return, because the IRS won’t let you go back and ask for a receipt once an audit begins,” says Stephen R. Allen, a CPA in Lexington, Ky.

far back you can amend past years’ state returns.

IF YOU CAN USE IT OUTSIDE WORK, YOU CAN’T DEDUCT IT. THE ARMANI SUIT IS NOT DEDUCTIBLE. THE RACE-CAR SUIT IS.” —CARI WESTON, CPA

MISSING SELF-EMPLOYMENT DEDUCTIONS Self-employed people can claim a long list of deductions, including business expenses, retirement plan contributions, 50% of selfemployment tax, and workspace.

People are afraid that claiming a home oice will trigger an audit, says Jode Beauvais, a CPA in Tacoma. “If you follow the rules, there is no reason to be afraid to put it on your tax return.”

The same goes for car usage, she says. “Keep accurate records.

If you do that, there is nothing to be afraid of.” Health insurance premiums for you and your spouse and dependents are also deductible if you’re self-employed.

NOT REVISITING PAST RETURNS Same-sex married couples in states that didn’t recognize those unions before the Supreme Court legalized gay marriage nationwide may find their state tax burden has actually increased, says Bourdon. (Thank you, marriage penalty.) But if your newly recognized marriage does cut your state tax, check to see how

LETTING A LOSER ROTH CONVERSION STAND If you owe big taxes on a 2015 Roth conversion that’s lost significant value, you can get a do-over by recharacterizing it before Oct. 17, 2016. “Let’s say that you converted an IRA to a Roth when the account had assets worth $50,000,” says Troy Lewis, a CPA in Draper, Utah. “In the 25% tax bracket, you would owe $12,500 in taxes.” But if market turmoil has slashed those assets to just $40,000, you can transfer them back to your IRA to undo the move. Then—if you’ve already filed for 2015—put in an amended return to get back the tax you paid on those gains.

Once the assets are back in an IRA, you can reconvert them into a Roth after 30 days if that’s still to your advantage. “This gives you a chance to reset the value and convert it again,” Lewis says.

OVERLOOKING HEALTH PLAN PAPERWORK If you bought insurance on an Obamacare marketplace, you’ll get a new form this year. You don’t need to file the 1095-A, but don’t overlook it: You’ll use it to make sure you’re taking all the credits you’re allowed—if, for example, your income dropped after you first signed up—or are paying any penalties for lack of coverage.

One more filing note: The tax deadline is April 18 this year, because of a Washington, D.C., holiday. In Massachusetts and Maine, because of Patriots’ Day, the deadline is April 19.

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TAX PREP | ASK THE EXPERT | FAMILY MONEY | HOME | COLLEGE

Q A

Plan

RETIREMENT

Q

What’s the best thing to do with my HSA when I go on Medicare?

TA X E S

Can I deduct campaign contributions on my taxes?

—corky bradley, Fort Collins, Colo.

You don’t have to spend down your health savings account once you become a Medicare user, says Paul Fronstin, research director at the Employee Benefit Research Institute. And funds in an HSA, which people with high-deductible plans use to stash pretax money for health costs, keep growing tax-free.

But you can’t make new HSA contributions once you leave the highdeductible plan. And you should spend down the balance by the end of your life or a surviving spouse’s. Non-spouse beneficiaries don’t inherit the HSA’s tax benefits.

The best use of funds is for medical expenses— including Medicare premiums—since you won’t pay income tax on distributions, says Fronstin.

Take money for nonmedical costs and you’ll pay income tax on the withdrawals, plus a 20% penalty if you’re under 65.

You’ll pay tax and perhaps a 20% penalty if you don’t use your HSA for medical costs. Here’s how far $1,000 could go.

VALUE OF $1,000 HSA WITHDRAWAL

$1,000

Medical expenses Nonmedical expenses, age 65+ Nonmedical expenses, pre-65

$750

$550

NOTE: Assumes 25% federal tax bracket, no state income tax

Q

ID SECURITY

My dad passed away last month.

Should I worry about ID thieves taking his info? —patty, New Mexico

A

Nearly 800,000 deceased Americans’ identities are used by fraudsters each year, a study by riskmanagement firm ID Analytics found. This kind of ID theft has little financial consequence, but contesting it can be time consuming and emotionally draining, says Eva Velasquez, head of the Identity Theft Resource Center.

Make sure your dad’s credit file is closed and cannot be misused. First

Read more answers from Ask the Expert and submit your own question about personal finance at money.com/expert.

step: Pull his credit reports to see what accounts are open; you’ll need his Social Security number and other personal information.

Send Experian, Equifax, and TransUnion a hard copy of the death certificate; ask them to amend their files so new credit can’t be granted in his name. Then contact each creditor cited on the reports to tell it that your dad has died and his account needs to be closed.

A

The short answer is no. “Campaign contributions and gifts to political action committees are never deductible,” says Melissa Labant, a CPA at the American Institute of Certified Public Accountants.

You also can’t deduct gifts to nonprofits with clear political agendas or lobbying activities: Everytown for Gun Safety, for example, or the NRA. These tend to be 501(c)(4) organizations, not 501(c)(3) charities.

To support the democratic process more generally, earmark $3 toward presidential candidates on your federal tax return; it won’t change your overall tax bill. Don’t expect an immediate effect, however: Recipients must agree to fundraising restrictions, so no major candidate has accepted the money since McCain in 2008, and the cash has rolled over for future use.

By Kerri Anne Renzulli and Ethan Wolff-Mann

MARCH 2016

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Plan

TAX PREP | ASK THE EXPERT | FAMILY MONEY | HOME | COLLEGE

Stop Ducking a Money Talk YOU AND YOUR PARENTS MAY HATE THE IDEA OF DISCUSSING FINANCES—MOST PEOPLE DO—BUT TO AVOID SURPRISES LATER ON, YOU NEED TO HAVE ONE CONVERSATION NOW.

by Alexa von Tobel MOST OF US grew up with parents who cared for us financially. So it can be jarring to begin to consider— or even take responsibility for— their fiscal well-being.

For most of us, it’s hard to know if we’ll ultimately need to pitch in; ill health and other surprises can derail even solid plans.

A 2013 Merrill Lynch study found nearly two in five fiftysomethings had aided parents, with contributions totaling $15,000 on average.

For your own financial and emotional health, you should know where your parents stand and how you may need to help them. The first step is to sit down and—diplomatically—open the conversation.

Here are a few questions to ask.

“Can we talk?” Don’t just raise the subject randomly. Money topics are notoriously taboo. If your parents have kept you in the

30

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dark till now, they may not be eager to open up. Or they might be assuming you’ll support them in the future, yet too nervous or embarrassed to admit it.

Set up the talk in advance, picking a time when you can be thoughtful and won’t be rushed.

If you have siblings, mention it to them first and include them. My own family had this discussion a few years ago. In our case, my brothers, both doctors, agreed to take responsibility for my mom’s health care needs, while I helped her gather her financial accounts.

“Do you feel prepared?” If your parents are still working, ask about their retirement expectations. Be sure to express interest, not judgment—which could push them into a defensive stance.

Find out whether they’ve determined how much money they’ll need and how they’ll support themselves once they stop working. Many big brokerages and fund companies offer online retirement

calculators; you can even help with the exercise, if they’re willing. And ask about their plans for long-term care, should it become necessary.

“Where is your paperwork?”

Your folks should have in place at least a will and documents naming people to make medical and financial decisions on their behalf, should they become unable to. Ask to digitize their paperwork. (I store my mom’s files securely online.)

Suggest that your parents assemble a list of accounts and emergency contacts for their advisers, accountants, and lawyers. Getting organized is key.

Depending on your relationship, your parents may even want to give you access to their accounts.

This won’t be the easiest talk you’ve had, but it’s essential—for both their financial security and your own peace of mind.

Columnist Alexa von Tobel is the founder of LearnVest. Catch more from her at Money.com.

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TAX PREP | ASK THE EXPERT | FAMILY MONEY | HOME | COLLEGE

4

A DOWNSTAIRS DO-OVER IS COST-EFFECTIVE

Sometimes the cure for an undersize house is right underneath you. Turning a little-used basement into a playroom, rec room, home theater, in-law apartment, oice, or gym may cost $40,000 to $90,000, says Highland Park, Ill., architect Christopher Turley—perhaps half the price of building an equivalent addition upstairs. Use high-quality construction techniques with finishes and fixtures that align with the rest of the house, and it won’t feel like a repurposed cellar.

2

YOU NEED TO DRY IT OUT FIRST

Tackle wet-basement problems, or you’ll end up with mold and rot. Solutions include repairing gutters ($200 to $1,000), sealing foundation cracks ($500), adding a sump pump ($2,000 to $3,000), and installing floor drainage ($3,000 to $5,000).

“Since mold grows on even damp organic material, avoid using wood or drywall,” adds Tom Matthews of Basement Systems. Look for a waterproof basement refinishing system.

32

m o n e y. c o m

BUDGET FOR MORE HEADSPACE

Building codes typically require ceilings about seven feet high (check with your building department for local requirements). That may mean relocating pipes or ducts farther up into the ceiling or away from the center of the room, which could cost anywhere from $500 to $2,000 depending on what you’re moving. In some cases you can get an exemption for something that would be cost prohibitive to move, such as a beam.

Things to Know About Finishing Your Basement 5

by Josh Garskof

3

IT’S SMART TO INVEST IN NOISE CONTROL

One nice thing about putting a playroom or rec room in the basement is that it cuts down on foot-traic noise in the living space. But you can still hear rowdy voices—and loud music and movies. So insulate the ceiling above the basement (using fiberglass or stone wool insulation without a moisture barrier), which might cost $500 to $1,000, says Woodcliff Lake, N.J., contractor Rob Wennersten.

MARCH 2016

SKIPPING A PERMIT CAN PROVE COSTLY

Homeowners often refinish a basement without a building permit. This is a mistake. If you get caught, the building department can force you to tear up the project, Wennersten says. And even if you don’t, future buyers may balk because you don’t have a certificate of occupancy.

Plus, tax assessors don’t count finished basements as full-fledged living spaces.

So in most cases the project won’t have a large effect on your tax bill.

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Plan

TAX PREP | ASK THE EXPERT | FAMILY MONEY | HOME | COLLEGE

Side Doors to Dream Colleges THESE SPECIAL ADMISSIONS PROGRAMS CAN SAVE YOU MONEY—OR RAISE YOUR BILL. by Kim Clark “WE ARE UNABLE to offer you admis-

sion … ” A heartbroken Brandon Giraldo was about to crumple up the rejection letter from his dream college, Cornell University, when his sister, who happened to be reading over his shoulder, pointed to its second paragraph.

Good thing. Today Giraldo is a junior at Cornell, on a generous scholarship.

The paragraph offered him what’s basically a second-chance or side-door admission option. These increasingly common but little-

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publicized programs can improve your odds of getting into your dream college. They can also make a significant difference in what you’ll pay— lowering costs in some cases, raising them in others.

More than half of all colleges have at least one type of alternative admissions program, according to a 2013 study. Each school has its own rules, but most programs fall into three general categories: making freshman admission conditional on your earning good grades in summer session or other special classes; guarantee-

ing you the right to transfer in as a sophomore or junior if you earn good grades in courses at other colleges; or delaying your first semester until the school’s second, or spring, term. (See the box at right for more details.)

At some schools, you could save tens of thousands of dollars. Giraldo, for example, was able to transfer from the Rochester Institute of Technology (RIT), where his net cost, after financial aid, was more than $15,000 a year, to Cornell, where it’s about $7,000. Fortunately for him, Cornell generally meets 100% of financial need, compared with RIT’s 87%. Other students save substantially by spending a year or two proving themselves at an inexpensive community college before transferring.

But students and parents should investigate any program thoroughly before pursuing it. Here are the questions to ask.

Are you a likely candidate? In general, alternative programs are aimed at borderline applicants who have demonstrated a very strong commitment to attend that school if they’re admitted. Susan K. Tree, director of college counseling at Westtown School, a private prep school in West Chester, Pa., recommends the programs to students who “are well qualified but maybe just didn’t have a hook or fit a special recruitment category.”

What does it take to get in?

Many programs have strict requirements, so be sure you understand them. Some schools will guarantee a transfer only if you attend certain colleges and get good grades in specified courses. Notre Dame’s Gateway program, for example, applies only to pre-approved students attending Holy Cross College

Illustration by

jo h n t o m ac

in Indiana. Some spring admission programs also have rules about what you do during the fall.

Middlebury, for example, encourages students to live at home and attend a local public college but discourages them from going to another residential college.

How much will it cost? Many colleges charge extra for their alternative admissions classes.

Tuition for the University of California at Berkeley’s alternative fall program for freshmen is more than $1,000 higher than standard tuition. Northeastern University’s fall study-abroad option for spring admits costs about $2,000 extra.

Will it affect financial aid?

Some colleges offer less aid or none at all to students entering through the side doors. At Elon University, for example, aid goes

first to students admitted for the fall term. Whatever’s left is divided among the spring admits, says Greg L. Zaiser, vice president of admissions and financial planning.

Other colleges, such as Texas A&M, however, say they award the same aid no matter how you get in.

Could you graduate on time?

If you’re considering spring admission, ask what effect it will have on meeting your course requirements, advises Jim O’Hara, director of guidance at Rye High School in New York. Math and science students, for example, often have to take classes in sequences that start in the fall. As a result, spring admits may need to pay for an extra semester or two.

Many programs are “by invitation only.” But if you are applying to a “reach” school and are

open to a late or provisional start, Tree says, there’s little downside to mentioning it when you apply.

Similarly, while successfully appealing a rejection is rare, if you’ve been turned down by your dream college, there’s no harm in asking if there’s any alternative available.

Bear in mind that side doors can require some work to pry open.

Giraldo says he spent his first year at RIT studying intensely and avoiding parties to get the grades he needed for Cornell. But he considers it well worth the effort.

His best advice to today’s high schoolers: “Read your rejection letter to the end.”

For more advice on applying to college—and paying for it—visit the MONEY College Planner at money.com/colleges.

If at First You Don’t Succeed, Try Another Path Even if your top-pick college turned you away initially, you may be able to get in through one of these programs.

TYPE OF PROGRAM

HOW IT WORKS

BEST FOR ...

MAJOR SCHOOLS THAT OFFER

POTENTIAL DOWNSIDES

CONDITIONAL ADMISSION

Students attend special summer or fall classes. If they meet GPA requirements in the prescribed courses, they’re in.

Students who show promise but lack some academic or language qualification needed for standard admission.

Marist College, New Mexico State, Penn State, Texas A&M, University of Idaho, Winthrop University.

The special courses often cost extra.

Plus, you might have to pay for summer housing.

2

GUARANTEED TRANSFER

The college promises secondor third-year admission if students perform well at a community college or another school.

Students with the discipline to excel at another college and who are willing to move on after one or two years.

Cornell University, Notre Dame, SUNY Binghamton, University of California at Irvine, University of Virginia.

Starting at a cheaper school saves money, but transferring can be disruptive socially.

3

SECONDSEMESTER ADMISSION

Freshmen don’t start on campus until the second semester, sometimes after a semester of study abroad.

Qualified students whose record isn’t strong enough to make them a shoo-in for regular fall admission.

Elon, Hamilton, Lehigh, Middlebury, University of Southern California.

The fall semesterabroad option, if ofered, can cost extra.

1

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1 A minimum of $2,000 is required to open a CD and must be deposited in a single transaction. A penalty may be imposed for early withdrawals. After maturity, if you choose to roll over your CD, you will earn the base rate of interest in effect at that time.

2 For High Yield Savings Accounts, rates are variable and subject to change any time without notice after the account is opened. A minimum of $30 is required to open an account and avoid a $5 monthly service charge.

3 National Average APYs based on specific product types of top 50 U.S. banks (ranked by total deposits) provided by Informa Research Services, Inc. as of 12/1/15. CD Rates: Average APYs are based on certificate of deposit accounts of $25,000. High Yield Savings Rates: Average APYs are based on high yield savings accounts for $10,000. Although the information provided by Informa Research Services, Inc. has been obtained from the various institutions, accuracy cannot be guaranteed. † FDIC Insurance up to $250,000 per depositor, per insured bank, for each ownership category. © 2016 Synchrony Bank 1,2

P R O P ST Y L I N G B Y S A R A F O L D E N A U E R

de

Staying Safe After a Split A LATE-IN-LIFE DIVORCE CAN SHRED YOUR RETIREMENT PLANS. HERE’S HOW TO KEEP THEM INTACT. by Carla Fried

Photograph by c l air e

benoist

AT ANY AGE, A DIVORCE can set you back financially, but ending a marriage later in life poses an extra threat: derailing a previously on-track retirement.

As is true with younger couples, a divorce is likely to leave you with higher living expenses, lower income, and less wealth. But if you’re fiftysomething or older, you’ll have a lot less time to amass more earnings to make up for what you’ve lost.

That challenge is on the rise. The divorce rate among couples 50 and older doubled from 1990 to 2010, while the overall rate stayed flat, according to a Bowling Green State University study.

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DIVORCE OVER 50 | PLANNING

Splitting up? Take these steps to protect your retirement finances.

Sell the house. After a post-50 divorce, household income, on average, drops 23% for men and nearly double that for women (see the chart). You’ll need to recalibrate your spending to match that.

A painful but powerful tactic is to move to less costly quarters.

Staying in the family homestead may furnish stability during a split’s upheaval, but you’ll lose a chance to boost your retirement income, says Jacqueline Roessler, a financial planner at Divorce Solutions in Southfield, Mich. If you cut your housing costs by $500 a month, for example, and get a 5% return on those savings over the next decade, you’ll have $77,000 more for retirement. You can also use the money from a sale to build a larger, income-generating diversified portfolio. (You’re at an age when, even if you were to stay married, you might downsize; sell now and you can split the sales costs with your ex.)

Use your extra cash to take advantage of catch-up contributions open to people 50 and older. You can put $24,000 a year in a 401(k) and $6,500 in an IRA. Focus on income. You and your spouse are free to negotiate your own divorce terms. The goal: an equitable distribution of assets based on factors such as work records, earnings power, and the length of your marriage. (If you can’t agree, a judge will decide. In 41 states, that equitable framework rules, while the rest tend to a 50-50 split.) With retirement so close, be single-minded about valuing financial assets in terms of the sustainable income they are likely to generate. Taxes count. A $500,000

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401(k), where 100% of withdrawals are taxed at ordinary income rates, is probably worth much less than $500,000 in a taxable investment account, where only the gains are taxed (at advantageous rates), notes Tracy B. Stewart, a CPA in College Station, Texas, who specializes in divorce cases.

Factor in Social Security too.

Once you’re at least 62, you can opt for a benefit that’s 50% of what your ex is due, if it’s greater than your full benefit. (Your marriage must have lasted at least a decade, among other conditions.) “If one spouse is going to have a Social Security benefit that is double the other spouse’s, that’s an argument

Divorces Up, Wealth Down While the overall divorce rate is steady, splits among older adults are rising. The cost can be large.

U.S. DIVORCE RATES, PER 1,000 1990

2010

19 17.9 6.9

13.1 1.8

Overall

Ages 50–64

4.8

Age 65+

DIVORCE’S IMPACT ON ADULTS 50-PLUS Men

Women

–23% –39% –41% Assets

–41% Household income

NOTE: Divorce rate is persons divorced annually per 1,000 marrieds. SOURCES: National Center for Family & Marriage Research, March 2013; GAO, 2012

for using another asset to offset the lower payment,” says Roessler.

Setting values on pensions, IRAs, insurance policies, and other assets—and figuring out your longterm financial needs—would be a mind-numbing challenge even if it weren’t arising at a time of heated emotions. So hire a financial planner along with a lawyer, advises Janice Green, a family law attorney and the author of Divorce After 50.

“Retirement planning and divorce negotiations go hand in hand when you are older,” says Green. Financial professionals specially trained to work with divorcing spouses can be found on the website of the Institute for Divorce Financial Analysts (institutedfa.com).

Do the division. Your divorce decree merely states who gets what. You still have to make sure you receive the assets you’re due.

Dawdling is dangerous. If you are owed part of your spouse’s 401(k), you can’t control how it is invested— or whether your ex borrows from it—until the money is moved.

For each 401(k) or privatesector pension of your ex’s that you have a claim on, you have to file a qualified domestic relations order (QDRO), a legal document that authorizes the transfer, which can run you $300 to $500 apiece. IRAs, public pensions, and military benefits each have specific paperwork.

Also, revisit estate documents and beneficiary designations.

Even if an investment account’s beneficiary does not change, says Green, you must “re-execute” those documents to reflect your divorce. Once that is done, you can focus on your new life knowing you’ve taken all the key steps to protect your retirement.

IF YOU’RE INVESTED,

WE ARE TOO. Whatever you’re building, it’s good to have someone who’s got your back.

So when you invest in a managed portfolio from Amerivest with a qualifying deposit, if in the next year that model portfolio experiences two consecutive quarters of negative performance, the advisory fees for both quarters will automatically be refunded. Because this isn’t just about building a great portfolio.

It’s about building your trust.

The best returns aren’t just measured in dollars.

Call an Investment Consultant at 800-440-8124 or go to tdameritrade.com/rebate for details.

DIVORCE OVER 50 | PLANNING

Quick Tips for a Safe Retirement THE PROF WHO FIT EVERYTHING YOU NEED TO KNOW ABOUT MONEY ON AN INDEX CARD HAS MORE TO SAY.

by Penelope Wang

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you own,” he says. “But many people hold a hodgepodge of funds, including a target-date fund, which defeats the purpose of owning one.” And some target funds are relatively high-cost, with annual fees of 1% or more.

With index funds, you give up a lot less of your return to fees, Pollack says, since many charge 0.10% or less, vs. 1% or more for actively managed funds. Index funds also make it easy to build a diversified portfolio, since they track particular asset classes. You just need to rebalance periodically, making sure your portfolio matches your capacity for risk and becomes more conservative as you age. If you don’t think you can do that on your own, says Pollack, a low-fee target-date fund might be a good choice.

Your financial adviser should truly be on your side. Choose a financial adviser who is a fiduciary, Pollack says—that is, someone who is required to work in your best interests. An adviser who is a fiduciary, he notes, “can’t just sell you high-cost funds that pay the biggest commission.”

Most financial advisers, however, follow a lesser standard, called the suitability standard. Under that guideline, your investments must be generally appropriate, but they don’t have to be the best deal for you. The U.S. Labor Department has a regulation in the works that would require retirement-plan advisers to meet a fiduciary standard.

“I’m hopeful that the rule will be enacted,” Pollack says. In the meantime, he says, “the best way to make sure your adviser is a fiduciary is to have them put it in writing.”

Editor-at-large Penelope Wang tweets about retirement at @PennyWriter.

P H O T O G R A P H B Y S H AY L A H U N T E R

BACK IN 2013, Harold Pollack, a University of Chicago social policy professor, wanted to make the point that Wall Street advice is too complicated. So he grabbed an index card and jotted down nine basic financial rules that he and his wife had been living by—all you needed to know, he thought, about how to manage your money.

That four-by-six-inch card, which went viral soon after Pollack posted it on his blog, has morphed into a 245-page book, The Index Card, co-written by Pollack and personal finance journalist Helaine Olen. Even though the book is a bit thicker than a card, it’s still an easy read—and full of helpful tips. Here are three rules that are especially important for retirement investors.

High earners need to be the biggest savers. The Index Card guideline is to put away 10% to 20% of your income for retirement, but Pollack recommends the full 20% for people with higher salaries. That’s because a smaller percentage of your income will be replaced by Social Security, so you

need to save more to avoid a decline in your living standard at retirement. If you can’t stash away 20% early on, try increasing your contribution by 1% a year. “The idea is to have a sustainable savings plan that’s reasonable for you,” says Pollack, “and to be more conscious about your spending.”

A handful of index funds is all you need. On his original card, Pollack recommended targetdate retirement funds, but he now has mixed feelings about them.

“A target-date fund is fine if you’re starting out and it’s the only fund

Retire

YOUR YOUTH WAS NO TIME TO BE SENSIBLE BUT NOW MIGHT BE.

Bet you never thought you’d get excited reading an ad about the joy of Municipal Bonds?

The Main Advantages of Municipal Bonds Investors are attracted to municipal bonds for three reasons, safety of principal, regular predictable income and the tax-free benefits. Together, these three elements can make a compelling case for including tax-free municipal bonds in your portfolio.

Potential Safety of Principal Many investors, particularly those nearing retirement or in retirement, are concerned about protecting their principal. In March of 2012, Moody’s published research that showed that rated investment grade municipal bonds had an average cumulative default rate of just 0.08% between 1970 and 2011.* That means while there is some risk of principal loss,

investing in rated investment-grade municipal bonds can be a cornerstone for safety of your principal.

Potential Regular Predictable Income Municipal bonds typically pay interest every six months unless they get called or default. That means that you can count on a regular, predictable income stream.

Because most bonds have call options, which means you get your principal back before the maturity date, subsequent municipal bonds you purchase can earn more or less interest than the called bond. According to Moody’s 2012 research,* default rates are historically low for the rated investment-grade bonds favored by Hennion & Walsh.

Potential Triple Tax-Free Income Income from municipal bonds is not subject

to federal income tax and, depending on where you live, may also be exempt from state and local taxes. Triple tax-free can be a big attraction for many investors in this time of looming tax increases.

About Hennion & Walsh Since 1990 Hennion & Walsh has specialized in investment grade taxfree municipal bonds.The company supervises over $2 billion in assets in over 15,000 accounts, providing individual investors with institutional quality service and personal attention.

Our FREE Gift To You We’re sure you’ll want to know more about the benefits of tax-free Municipal Bonds. So our experts have written a helpful Bond Guide for investors. It’s free and comes with no obligation whatsoever.

FREE Bond Guide Without cost or obligation

Call (800) 316-1837 © 2015 Hennion and Walsh. Securities offered through Hennion & Walsh Inc. Member of FINRA, SIPC. Investing in bonds involves risk including possible loss of principal.

Income may be subject to state, local or federal alternative minimum tax. When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. *Source: Moody’s Investor Service, March 7, 2012 “U.S. Municipal Bond Defaults and Recoveries. 1970–2011.” Past performance is not guarantee of future results.

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P R O P ST Y L I N G BY SA R A FO L D E N AU E R

de

Sifting for Real Values THE SELLOFF JOSTLED STOCKS BUT LEFT FEW DEALS. SO SEARCH FOR BARGAINS CAREFULLY. by Ian Salisbury

Photograph by c l air e

benoist

THE JANUARY MARKET SLIDE certainly marked down a lot of prices: Blue-chip stocks are of by about 10% from their 2015 highs, marking an oicial correction; small-company shares have lost more than 20%, which is technically a bear market; and oil prices have been cut in half, signifying a holy mess.

Just because something is discounted, though, doesn’t make it a great deal. As Warren Bufett likes to say, “Price is what you pay; value is what you get.” And despite how scary the pullback was—the Dow plunged nearly 2,000 points in three weeks—the price/earnings ratio of U.S. stocks is MARCH 2016

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SIFTING FOR REAL VALUES | THE INTELLIGENT INVESTOR

still 5% higher than the median since 1975, based on five years of averaged profits (see chart).

Historically, betting on beatendown equities has proved to be a smart move, as so-called value stocks have outpaced shares of faster-growing companies threefifths of the time since 1928.

But as seasoned investors like Bufett will tell you, bargain hunting requires finding shares that are genuinely undervalued relative to fundamentals such as earnings.

Then you must have the patience to reap the rewards. Here are four strategies to help navigate today’s cheap-looking but tricky market.

But the fund’s managers also give themselves the freedom to bet on stocks outside the classic value mold. These are companies like software giant Oracle, which despite fast growth trade at reasonable valuations. In a decade in which the average value-stock fund has returned 4.5% annually, Oakmark has returned 5.8%.

On Sale?

Yes, the January market slide has made equities cheaper …

S&P 500 PRICE CHANGE

ACTIVELY SEARCH FOR BARGAINS Simply buying the broad market after the pullback won’t ensure winning returns, says Daniel Hughes, vice president at Vaughan Nelson Investment Management.

Even value-stock indexes are trading at higher-than-historical valuations. “You can’t just look like your benchmark,” Hughes says.

One alternative is to seek out bargain-hunting fund managers who are willing to stray from the herd. A 2015 study from researchers at Notre Dame and Rutgers found that managers who took big index-deviating bets—and held their stocks for at least two years—beat the market by two percentage points a year.

A value-minded fund that fits the bill is Oakmark Select (OAKLX).

Oakmark’s team of managers, led

by William Nygren, certainly pays attention to value: Shares in the fund’s portfolio trade at an average P/E of about 15 based on forecasted 2016 profits, which is lower than for value stocks as a group.

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Dec. 31, 2015

Jan. 25, 2016

0

–4%

–8%

… but the broad market isn’t exactly a screaming bargain …

P/E RATIO OF U.S. STOCKS

23.3

1 year ago

20.1

19.0

Today

Median since 1975

… and worse still, value-oriented stocks aren’t attractively priced.

P/E RATIO OF U.S. VALUE STOCKS

16.1

1 year ago

18.5

Today

18.3

Historical avg.

NOTES: U.S. price/earnings ratios based on five years of

averaged profits. Value-stock P/E based on 12-month earnings. SOURCES: Ycharts.com, the Leuthold Group

ENERGIZE YOUR PORTFOLIO Common sense would tell you that the best way to find real bargains is to focus on the most-out-of-favor areas of the market. That certainly worked after the financial crisis, when beleaguered bank stocks rebounded—and trounced the broad market by 50 percentage points over the next seven years.

The problem, of course, was few investors were brave enough to bet on banks in 2009 while the mortgage crisis was still unfolding.

Today nothing is scarier than energy. It was only two years ago that crude oil was trading at more than $100 a barrel and energy companies were posting nearrecord profits. But those high prices drove innovation, and new developments such as fracking added to supplies just as demand from energy-thirsty emergingmarket economies such as China began to slow. That one-two punch pushed oil prices below $30, dragging energy stocks down 40%.

Oil may still be in for a bouncy ride in the coming months. But investing is about the long term— think decades, not years. Eventually prices will rebound, but you have to buy before they do.

Keep in mind that global demand for oil has merely slowed, not shrunk. Meanwhile, Americans are sopping up cheap gasoline: Last year, car sales set a record, with gas-guzzling pickups leading the way. This type of behavior will help suck up oversupply, says William Blair portfolio manager Brian Singer. “People will produce less oil and use more of it, and eventually prices will find an equilibrium,” says Singer, who puts oil at $45 in the next two to four years.

While you’re waiting, you can minimize risks in a couple of ways.

For starters, focus on low-cost sector funds, like iShares North American Natural Resources ETF (IGE).

This portfolio, which is on our MONEY 50 list of recommended mutual and exchange-traded funds, owns more than 90 energy stocks, ranging from drillers to oil-services firms to pipeline operators. This way, you don’t have to guess which group will recover the fastest.

A smart way to bet on oil’s recovery—with greater chance for growth—is not through a sector fund but with a regional portfolio.

So-called frontier-market funds invest in small but fast-growing economies, many of which are tied to oil production. For instance, iShares MSCI Frontier 100 ETF (FM) holds 24% of its assets in companies based in oil-rich Kuwait and another 14% in Nigeria. Overall, less than 10% of the fund is directly in energy. The bulk of the fund is invested in financial, telecom, and consumer companies whose customers will benefit from rising oil prices. The result: an average earnings growth rate of 16%, vs.

9% for energy funds.

The ride can still be wild.

Shares of this ETF are down more than 21% over the past year, vs. a 33% decline for the average energy stock sector fund. However, over the past three years, Frontier 100 has lost 3% annually, vs. the 16% decline for energy funds.

FOCUS ON QUALITY TOO Betting on beaten-down stocks is generally regarded as a conservative strategy, since it involves buying shares that are already down. But it’s not without risks.

PEOPLE WILL PRODUCE LESS OIL AND USE MORE OF IT, AND EVENTUALLY PRICES WILL FIND AN EQUILIBRIUM.” —BRIAN SINGER OF WILLIAM BLAIR, ON WHY OIL PRICES WILL REBOUND

For starters, there’s the market itself. While most economists don’t think the U.S. economy is headed for a recession this year, stock declines are often seen as a leading indicator of economic trouble. And at 74 months, this expansion is the third longest since World War II. If the economy is indeed slowing, bargain hunters may face another bout of pain. Recent research by Russell Investments found that value stocks typically lag in the 12 months prior to a recession’s trough. It’s only after the economy starts expanding that value tends to leap ahead.

So how do you ride out a possible storm while still adhering to this strategy? Go with undervalued shares of high-quality companies. Quality stocks—shares of businesses with attributes such as strong but steady profit growth and relatively little debt—tend to outperform in the long run with less of the volatility associated with lousy economies.

A good way to capture these stocks is through a fund such as PowerShares S&P 500 High Quality ETF (SPHQ), which is on the MONEY 50 list. Among the fund’s top holdings are Walmart and Union Pacific, whose shares are down more than 20% since 2015.

Over the past five years, SPHQ has

lost about 25% less than the market in months when stocks have fallen.

Yet during that same stretch, the fund has beaten 99% of its peers.

SEEK BARGAINS IN ANOTHER WAY If you embrace value investing, you have to be in it for the long haul.

While bargain hunting wins out over time, this strategy can lag for years. In fact, value stocks have trailed shares of fast-growing companies by two percentage points annually over the past decade.

This doesn’t mean you should turn your back on value, especially now that the strategy itself has been beaten down for so long. But you can make the wait more tolerable by trimming your investment fees, which are a drag on returns.

The average large value-stock fund charges 1.11% of assets in fees a year, according to Morningstar.

Yet in recent years there has been a profusion of low-cost index funds and ETFs that give you exposure to various aspects of value.

In the MONEY 50, a good example is PowerShares FTSE RAFI U.S. 1000 (PRF), which charges just 0.39% a year. It ofers exposure to the broad market but keeps larger stakes in value-oriented shares.

Over the past decade the ETF has returned 6.7% annually, which is 2.2 percentage points better than the typical value fund.

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Europe Glimmers, at Certain Angles DON’T BE FOOLED BY CHEAP PRICES. FOCUS ON POCKETS OF GROWTH—AND WAYS TO PRESERVE YOUR PROFITS.

by John Waggoner THERE ARE LOTS of things wrong with Europe: It has awful pop music. Many of its inhabitants don’t speak English no matter how loudly you shout at them.

And European stocks have gone nowhere over the past decade.

Many strategists say to look past the shortcomings as European shares trade at a 30% discount to U.S. equities, with a price/earnings ratio of just 14. But here’s the thing: These stocks are nearly always cheaper than U.S. shares. Europe “has a higher weighting of energy,

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commodities, and financials than the U.S.,” says Vincent Montemaggiore, manager of Fidelity Overseas.

Those stocks sport low P/E ratios whether in the U.S. or abroad— especially after the commodity meltdown of 2015 and 2016.

The best case for Europe is that it looks a lot like the U.S. did three years ago. The economy is finally emerging from a recession, aided by massive stimulus from its central bank. But with GDP growth still below 1%, play it safe.

PICK THE RIGHT SECTORS Look to those areas that rose in the U.S. when the Federal Reserve was pumping money into our

Illustration by taylor

callery

economy a few years ago: consumer stocks, tech, and health. Profit growth for these sectors is expected to exceed the 6% forecast for the broad European market.

Benjamin Segal, head of global equities at Neuberger Berman, also sees opportunities in financial stocks. “European banks in particular have shrunk their balance sheets, rebuilt capital, and are benefiting from the economic recovery and resulting demand for credit,” he says. T. Rowe Price European Stock Fund (PRESX) has bigger than average stakes in consumer, tech, and financial stocks—and has gained 5.1% a year over the past five years, vs. 2.6% for the average European fund.

PROTECT YOUR RETURNS Europe actually fared better than the U.S. in 2015. But the soaring dollar robbed Americans of most of those gains. In euros, the MSCI Europe index gained 2.2% last year, vs. a loss of 0.7% for the S&P 500. Translated back into dollars, though, European stocks fell 5.3%.

The dollar is expected to strengthen further this year, as the Fed’s December rate hike will boost demand for the buck. By contrast, the European Central Bank is sitting on rates to stimulate growth.

So diversify. With a portion of your Europe holdings, go with a fund that hedges its euro exposure.

WisdomTree Europe Hedged Equity Fund (HEDJ), which uses forward contracts to sell euros to offset its euro holdings, has beaten more than 85% of its peers over the past five years. And that includes periods of dollar strength and weakness.

Columnist John Waggoner is the author of three books on Wall Street and investing.

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AFTER A POST-RECESSION DROP-OFF, STARTUPS ARE ON THE RISE, AND A GROWING NUMBER OF AMERICANS SEE PROMISE IN LAUNCHING A BUSINESS. HEREâ&#x20AC;&#x2122;S HOW TO JOIN THAT CROWD.

BY ELAINE POFELDT PHOTOGRAPHS BY THE VOORHES

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MARCH 2016

L

eaving a desk job behind—and with it

the demands of a boss and the constrictions of the corporate world—is a dream for many Americans.

No wonder. Running your own business offers you a chance to call the shots, set your own schedule, and see your vision come to life. “It’s not necessarily about money,” says Sanjeev Sardana, who advises many entrepreneurs as CEO of BluePointe Capital Management. “It’s about saying, ‘I created something.’ ” That said, taking a leap can pay off financially too, freeing you from a cycle of measly raises and hard-fought promotions. “There are people who do very, very well if they execute right,” adds Sardana.

Today an increasing number of Americans are betting on their own business ideas, driving the percentage of the population involved in startup activity to 12%—up from less than 8% in 2010, according to the Global Entrepreneurship Monitor (GEM), a study by Babson College and other schools. And it’s not just millennial tech whizzes. The average entrepreneur is a mid-career college grad, the GEM reports.

Most of these folks are taking the leap because they have spotted an opportunity, not because they have no other options. They are people like Spencer X. Smith, a 39-year-old father of two in Madison who left a corporate sales job a year ago to start his own agency, where he’s already earning 60% of his former six-figure salary. “My goal is to take something

really hard—digital marketing—and explain it in plain English,” he says. Though he works weekends to get the business rolling, he says, “I absolutely love it.”

Entrepreneurs like Smith have finally reversed a troubling recession-era trend in which more small businesses were closing than opening. Business births now exceed the deaths, according to the Bureau of Labor Statistics.

Before you say “See ya!” to your boss, it pays to make sure your idea has legs and your finances can handle the risk. Given what goes into a launch, “sometimes the best money spent is on plans you end up walking away from,” says CPA Paul Gevertzman, a tax partner with the accounting firm Anchin Block & Anchin.

THE DREAM IS STRONG Americans who can see themselves starting a business 2015 2013

51% 42%

The biggest appeal?

51% Entrepreneurship Report

m o n e y. c o m

MARCH 2016

STEP 1

FIGURE OUT IF YOUR BRILLIANT IDEA IS A VIABLE BUSINESS

of 35- to 49-year-olds: “It’s being my own boss.”

SOURCE: 2015 Amway Global

50

At other times, though, there’s no walking away. You love your idea. You’re willing to work hard. You’re okay with the risk. All you need are the tools. You’ll find them in this five-part guide, which delivers expert advice and insider tips on how to get off the ground and—hopefully—see your business soar. Then in part two of MONEY’s cover package, starting on page 58, you’ll meet four entrepreneurs who have already taken their first steps—with promising results so far.

Nearly half of would-be entrepreneurs haven’t gotten their business past the idea phase because they’re not sure where to begin, a 2015

BE YOUR OWN BOSS

Gallup poll found. Here’s where to start: Put your idea to the test while you’re still collecting a steady paycheck.

TAKE THE MEASURE OF THE DEMAND. Even a great idea can flop if your target market is saturated.

The U.S. Small Business Administration offers a nifty tool called SizeUp (sba.gov/tools/sizeup) that lets you map out where potential customers, competitors, and suppliers are located— and pinpoint areas where there is high demand and little competition.

Say you are looking to open a women’s hair salon. You can use the tool to find out how many similar salons exist in a zip code and the total household expenditures on personal care services in that area—and compare those figures with nearby regions. The U.S. Census Bureau’s Business Builder tool (cbb.census.gov/sbe) also offers demographic insights to help you

TOP SOURCES OF FUNDING Where did you get the money to launch?

Savings

82% Bank loans

38% Credit cards

31% Friends and family

30% SOURCE: Gallup–Wells Fargo

Small Business Index 2014

choose the right locale for your business.

CURL UP WITH A GOOD REPORT. To get an idea of whether your business has staying power and isn’t simply capitalizing on a trend that’s likely to fizzle out quickly, read up. First check out the free Small Business Snapshots offered by SBDCNet, the National Information Clearinghouse serving the U.S. Small Business Administration (sbdcnet.org). They cover popular niches, from artisan breads to management consulting, looking at current industry conditions, the demographics of the customer base, and industry trends. If free materials don’t tell you enough, many market research firms and trade associations sell reports on niches, which can be very valuable in assessing market conditions. They can run more than $1,000, though.

GO BACK TO SCHOOL. Barbara Roberts, an entrepreneur in residence at Columbia Business School and a co-author of The Owner’s Journey, a study of closely held businesses, recommends taking the free Lean LaunchPad course at Udacity on how to build a startup. Taught

by Silicon Valley entrepreneur Steve Blank, the series of eight classes shows you how to rapidly develop and test ideas and create a prototype in the most eicient way possible.

MEET YOUR FUTURE CUSTOMERS. Developing a prototype can be costly—especially if you need to hire a product design firm or a developer.

“Don’t go too far too fast without doing your homework on what your customers want and making sure there is not already an easy solution for the problem you’re solving,” says Jack D. Beasley, managing director of the USC/ Columbia Technology Incubator and senior program manager at the Oice of Economic Engagement at the University of South Carolina.

First simply ask potential customers if your idea sounds appealing. Beasley advises doing in-person surveys of your target audience in a setting where you can find a bunch of them.

For instance, if you’ve dreamed up an app to help college students with time management, visit a campus and ask students about the need for your product, what problems they want solved by your app, what technology they already use, and what they might pay. No obvious place to go? Create a free survey on a site

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like SurveyMonkey and ask friends to share it.

MULTITASK FRUITFULLY. Don’t neglect your day job. But provided moonlighting doesn’t violate any agreements you’ve signed and you aren’t breaking any noncompete clauses, use this time to conduct market research with potential customers. That way you’ll be able to get feedback and make tweaks without putting your finances in jeopardy, says Steve King, partner in Emergent Research, a firm in Lafayette, Calif., that studies the freelance economy.

“Generate some customer understanding— and then quit your job,” advises King, whose research shows that entrepreneurs who do this are more successful.

NURTURE YOUR NETWORK. If you’re branching out within the same industry, your first customers are likely to be your current professional contacts, so build and tap those relationships now, says Gene Zaino, CEO of MBO Partners, a firm in the Washington, D.C., area that provides technology and other services to independent contractors. “The most important equity you have is your network,” he says. You don’t want to burn bridges, though, so don’t poach your employer’s clients or build your business on company time.

Doing customer research on the job is trickier if you’re venturing into a new area. Use time away from work—vacations, evenings, weekends—to interview small-business owners in the field, or the bankers and lawyers who serve them. Ask them what gaps exist in the marketplace, says CPA Lou Grassi, who advises many entrepreneurs as CEO and managing partner of Grassi & Co., an accounting firm in the New York City area. That way you can determine if your business is addressing an actual need or pain point. “People will be very candid with you if you interview them,” he says.

STEP 2

STARTUPS BOUNCING BACK

10% Growth rate of new entrepreneurs in 2015 BEST PLACES TO GO INTO BUSINESS Top towns for launching a local business NEW YORK BOSTON PROVIDENCE SAN FRANCISCO PORTLAND, ORE.

Best for startups that can make it big AUSTIN MIAMI SAN JOSE LOS ANGELES DENVER

THE TOUGH ROAD AHEAD Over time, your chances of making a go of it get tougher.

SURVIVAL RATE BY YEAR IN BUSINESS

4 5 6

As a new owner, you may have little idea of what to charge for your product or service. That’s another piece of crucial prelaunch legwork.

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69%

3

PUT SOME REAL NUMBERS ON YOUR IDEA

52

80%

2

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60% 52% 47%

NOTE: Survival rates based on

businesses launched in 2005.

SOURCES: The Kaufman Index: Main Street Entrepreneurship; The Kaufman Index: Startup Activity, 2015; Bureau of Labor Statistics

NAME THE RIGHT PRICE. If you’re staying within the same field, one shortcut is to ask whoever hires outside vendors for your company what the ballpark price range is for services similar to the one you plan to offer. “That will give you a sense of what the market rate is,” says Zaino.

Some trade organizations put out reports on the going rates in their industry.

The government’s General Services Administration website publishes rate schedules for businesses that contract with federal agencies.

Seeing what they charge takes digging, but it’s worth the effort. Go to gsaelibrary.gsa.gov.

Click on a subject area in the category guide, such as “oice solutions,” and then choose a product for a list of contractors and prices.

Finally, you can also simply go windowshopping. Put yourself in the role of a customer and ask for price quotes. “Looking at your competitors or similar products is the place to start,” says Columbia’s Roberts.

KNOW YOUR GOAL. Before you set your price, count your costs of doing business. “Whatever salary you want to earn the first year, you need to bill 1.5 times that,” says Zaino. If, say, you make $120,000 a year in your current job, you’ll need to bill about $180,000 to cover costs like health insurance, self-employment or employer taxes, insurance, and running an oice to maintain your lifestyle.

REACH OUT FOR A REALITY CHECK. Entrepreneurs are rightly known for their optimism.

The best way to determine if your enthusiasm is justified is to write a business plan, says CPA Gevertzman. This document typically includes a description of your product or service, your marketing plan, a market analysis, and financial projections. For help, use the SBA’s Business Plan Tool at sba.gov.

Then get feedback from a mentor or an accountant who serves other businesses in the field. (Remember the pros you interviewed about the market for your idea? Tap that pool for a mentor.) “The key is to figure out if all the things you expect are realistic,” Gevertzman says. “If not, you’ve got to give serious thought as to how to make it work. If it doesn’t work out on paper, it’s probably not going to work.”

LOOK INTO THE FUTURE. Another reason to do a business plan is that it can help you estimate what you’ll earn—year one and beyond. Your projections should be based on the business

BE YOUR OWN BOSS

HOW TO SKIP THE STARTUP AND BUY A BUSINESS INSTEAD

To be your own boss, you don’t have to start from scratch. Instead you can buy an existing business.

One upside: less uncertainty about whether the venture is viable.

Bank loans can be easier to come by, since the business has a track record. Plus, seller financing, which is typically even easier to qualify for than a bank loan, is common. “Probably two-thirds of firstgeneration businesses sell with some form of owner financing,” says Jack Gibson, author of How to Buy a Business Without Being Had. And as long as the business is sound, you should be able to draw a salary from day one.

Still, this is most likely a major investment— anywhere from tens of thousands of dollars to millions, depending on the size of the business and the industry. Don’t let your passion blur your view of the bottom line. Tread carefully and follow this plan instead.

SEARCH STRATEGICALLY You can get ideas at online exchanges, such as BizBuySell .com and BizQuest.com.

But the best way to search may be through word of mouth. Reach out to bankers, lawyers, and accountants in your area who may have clients poised to sell. If you have an industry in

you have already lined up, if any, or expect to line up soon, as well as market research that suggests how much more business you could realistically acquire in the next year or two.

Here’s where those $1,000-plus market research reports may come in handy.

STEP 3

PLOT OUT HOW TO FUND YOUR LAUNCH Technology has made it much cheaper to start a business than it was just a few years ago. You can use inexpensive cloud-based software programs to manage tasks that once required people on the payroll (see the box on page 56).

You can set up a website on your own. You can tackle credit card processing inexpensively on

mind, contact regional or national trade associations for leads.

KNOW WHO’S WHO A business broker can help narrow your search (again, local financial pros can ofer referrals). Just keep in mind that most brokers are paid by— and therefore represent—the seller. Unlike the case in real estate, buyer’s brokers are uncommon.

CONSIDER WHAT YOU CAN’T BUY The ideal acquisition is an established business in which you see opportunities to make

improvements. When to think twice: “A business that is highly personalized and associated with one person is risky,” says Gibson.

PAY FOR A SECOND OPINION There is no simple formula for putting a price tag on an established operation. Four times adjusted pretax earnings is “a pretty good average,” says Gibson, but a healthy, growing business may sell for seven or eight times earnings. Your lawyer and accountant can help, and an independent valuation by a business appraiser may also be a good investment. While the cost will depend on the size and complexity of the business, a few thousand dollars is typical.

You can find a pro at appraisers.org.

DON’T DISMISS A FRANCHISE “For someone who has a lot of big ideas, a franchise may not be a good thing,” says Joel Libava, author of Become a Franchise Owner! The Start-Up Guide to Lowering Risk, Making Money, and Owning What You Do. But if you’re looking to buy a proven brand and a blueprint for doing business, a franchise could be the way to go. The tradeof? In addition to a one-time franchise fee ($10,000 to $100,000) and startup costs— or an acquisition price if you buy an existing franchise—expect to pay ongoing royalties and other fees.

—Sarah Max

an iPad or a smartphone. And when you need project help, job-posting sites such as Upwork and Fiverr make finding contractors easy. “What used to cost you $1 million or $2 million to start, will now cost you less than $100,000,” says Sardana. Great, but a hundred grand is still serious seed money. Take these steps to tackle that nut.

SAVE UP TO PUT SKIN IN THE GAME. Don’t count on outside investors to bankroll your idea until you’ve built a track record. Self-funding is the most popular form of financing (see chart on page 51), so sock away as much as you can in advance. Roberts says it is “virtually impossible” to find an investor until you’ve put in at least $250,000 of your own sweat equity, or rounded up that much cash from friends and family. Even on Shark Tank, she notes, “if you watch who gets the money, it’s typically someone who has some revenues or has lined up customers.”

BE REALISTIC ABOUT CROWD SUPPORT. You can try pitching your idea on crowdfunding sites such as Kickstarter and Indiegogo; many inventors ask for donations to fund preorders of a product they want to create. But crowd-

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funding takes social media savvy. You generally need to have a decent-size presence—typically 6,000 or more followers—on social media to run a successful campaign, says Roberts. “If you’re talking about someone who ran social media for Pepsi or Coke, they could do this in their sleep,” she says. “If you’re talking about the CFO who doesn’t have a LinkedIn presence, then no.”

KNOW HOW MUCH TO SAVE. It usually takes small-business owners 12 to 18 months to generate steady cash, so you need a cushion that will allow both your family and your business to get through that period, says Rohit Arora, CEO of Biz2Credit, an online matchmaker for small businesses and lenders. “You should have 18 months of dry powder to survive,” he says.

With no other income to live on, Sardana goes even further, recommending putting aside at least two to three years’ worth of living expenses so that financial stress doesn’t force you to close shop prematurely. And even if you have already lined up customers, take into account potential dry spells. Cut your revenue projections in half and double your expenses, says Arora. “Then you’ll see if you can survive,” he says.

BUILD IN A BUFFER. What if you can’t come up with a couple hundred thousand dollars? Line up another source of income. If you need to quit a demanding corporate job to make time for your startup, that doesn’t mean you can’t take a part-time job or freelance consulting work to help pay the bills. Even renting a spare room on Airbnb can help.

WHO’S MAKING THE LEAP New business owners are increasingly likely to be male and over 45.

STEP 4

AGE

PROTECT YOUR OWN FINANCIAL FUTURE

1996

2014

24% 27%

26% 15%

With a burning desire to start a business, you may be tempted to wager your life savings.

After all, who better to bet on than yourself?

But that logic can leave you in a world of financial pain if your business doesn’t pan out.

MATCH YOUR RISK TAKING TO YOUR AGE. Once you hit midlife, a good rule of thumb is to limit your investment in a new business to no more than 30% of your savings, says Arora. That way you’ll still be able to recover if things don’t

45–54

55–64

GENDER

56%

63% 44%

Men

37%

Women

SOURCE: The Kaufman Index:

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work out. “A lot of times it makes sense to buy an existing Main Street business instead of starting one from scratch,” he says. “It’s more predictable, and getting outside financing is easier” (see the box on page 53).

Be careful which funds you tap. When you’re young, raiding retirement savings or guaranteeing a bank loan with your house is a reasonable risk, but those moves become more perilous later. “Anyone over 45 should think long and hard about risking their retirement money and their house,” says King. “If you’re under 40, you’ve got a long time to recover.”

MAKE IT LEGAL. Setting up an LLC or S corp right away will establish a legal separation between you and your business. “You don’t want to jeopardize your personal assets,” says Zaino.

Which to choose? Chat with your accountant.

Many entrepreneurs opt for LLCs because tax filing is very similar to how it is as a sole proprietor. S corp status offers other tax benefits, such as shielding income from self-employment tax.

GET COVERED. Zaino recommends both profes-

BE YOUR OWN BOSS

of money aside now can keep the ball rolling until you have more to save. Many experts recommend a solo 401(k) because you can tuck away the most money—up to $53,000 for 2016, depending on your income (plus catch-up contributions for those 50 and older).

STEP 5

MAKE THE MOST OF YEAR ONE

sional liability business insurance, to protect you from lawsuits in case you make an error, and general liability insurance, which will cover you in the case of personal or property damage to others. In a 2014 survey, Insureon, an online insurance agency for small businesses, found that a professional liability policy for a firm with 10 or fewer employees ran $575 a year on average. A general liability policy for the same size company was $985 a year on average.

LOOK FOR HEALTH SAVINGS. When you leave a corporate job, you should be able to keep your health insurance (on your dime) for 18 to 36 months. Also price out individual policies on the federal insurance marketplace Healthcare .gov, especially if you expect to earn little for now. You’ll qualify for a subsidized premium with an income up to $47,080 this year as an individual, $97,000 for a family of four. Open enrollment has closed for 2016, but you can sign up midyear if you quit your job or are let go.

REMEMBER RETIREMENT. It’s unlikely you’ll be able to sock away significant retirement savings at this time, but putting a small amount

WHAT HOLDS PEOPLE BACK What has played a role in your decision not to start a business?

84% Like security of steady income

68% Not enough savings

66% Worry odds of success are low

Reaching the one-year mark in a business often means mastering something that you won’t learn as a member of the steady-paycheck crowd: cash flow. “Running out of cash is one of the leading causes of small-business failure,” says King. That can happen even if you’re at breakeven or profitable. Staying afloat for a full year will let you make an educated decision about whether to soldier on or move on. Give yourself the best chance by taking these steps: MASTER THE EBB AND FLOW. Before you launch, ask others in the industry when you’ll typically be paid, and use that info to do a cash-flow projection, says Grassi. If you have to wait 90 days, for instance, you’ll need to have other funds for overhead. Grassi, who started out serving construction businesses, quickly realized that his income would be concentrated in five months of the year. To even out cash flow, he came up with subscription pricing, breaking annual bills into monthly retainers. “A lot of customers liked it,” he says.

SURROUND YOURSELF WITH SMARTS. On a tight beginner’s budget, you might be best off working from home. If you can free up the funds, though, you may find it helpful to rent an oice that puts you in contact with an advisory team experienced in guiding startups. Co-working spaces are hubs for free agents where you can rent a desk or a small oice. At an incubator or accelerator, which often provides office space as well as advisory services, you may be asked to pay rent or provide equity. All give you access to mentors and learning from your peers, says Beasley. “They have gone through the same things you have gone through and can help you avoid mistakes.”

SOURCE: Gallup poll, 2015

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BE YOUR OWN BOSS

SMART TOOLS

These free or low-cost services, software, and sites let even small operations think big.

FRESHBOOKS This accounting software lets you create invoices, track the average time your clients take to pay you, and make a profit and loss statement instantly. Price: A plan that lets you bill up to 25 clients is $19.95 a month.

GRASSHOPPER This virtual phone system routes calls from your business’s local and tollfree numbers to your cellphone, letting clients reach you wherever you are. You can add extensions as you build out. Price: $24 a month (for 500 minutes).

HAIKU DECK No in-house designer?

No problem. Make simple, professional presentations with this easy-to-use program. Upload your own photos or choose images that are recommended based on keywords in your text. Price: $10 a month.

EXPENSIFY This simple app makes it easy to track your business expenses, create digital images of receipts, and submit reports. You can reimburse your employees via payroll or even PayPal. Price: $5 a month per active user.

SCHEDULEONCE You can send business contacts a link to your calendar so they can see when you’re free and pick a meeting time. (But they can’t see what you are doing when you are not available.) Price: $5 to $49 a month.

GLOBAFY This service lets you set up conference calls without having to create an account.

Plus, your international clients can get a local number to call in to, while you use your domestic number. Price: free.

—S.M. and E.P.

FIRE MONEY-LOSING CLIENTS. When you first launch, you’re eager for any business. But after six months or so, you’ll figure out that some clients aren’t worth it. If they don’t pay you enough to cover your time and costs—or don’t have a marquee name you can use as a calling card to win other business—replace them.

TAP CREDIT CARDS SPARINGLY. Fund as much of your growth as you can out of revenue so that you don’t build up debt that you can’t handle if the business shuts down. The safest route is to pay overhead out of savings or cash flow and defer big purchases until you have the money in hand, even if that means turning down an order. With a small-business credit card, you will most likely have to offer a personal guarantee, so you could be stuck with the bill even if the business files for bankruptcy protection.

Making small purchases on your card and paying them off monthly, on the other hand, builds up business credit with less risk.

KEEP SPREADING THE WORD. Perhaps you are getting the bulk of your work

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TELL US YOUR BEST LAUNCH TIPS: letters@moneymail.com

through word of mouth. Still, you need a website so that your operation looks legitimate. A site doesn’t have to be fancy, but if it is going to be an important route to new business, invest in advertising on search engines. Google Adwords has the highest conversion rate. The average cost per click in the U.S. is $1 to $2, according to Wordstream, a provider of online advertising tools. Raise your profile on major social media, such as LinkedIn, Facebook, and Twitter, by posting regularly.

BE WILLING TO CUT YOUR LOSSES. The history of entrepreneurship is filled with inspiring stories of people who ignored the evidence that their business was failing and achieved great success. But for mere mortals, there often comes a point when it makes sense to pivot. Set benchmarks you plan to meet when you start, says Beasley, and review them with a team of advisers or mentors regularly.

Take the tax man into account too.

The IRS lets you deduct expenses from a business that is not turning a profit for only a few years—typically three, notes enrolled agent Crystal Stranger, president of 1st Tax in Honolulu and author of The Small Business Tax Guide.

“After about two years in business is usually when I tell clients it might be time to throw in the towel,” she says.

If your business is in the red past the typical point when startups in your field become profitable—and you don’t take significant action to change your business model by, say, hiring a consultant— the IRS could deem it a hobby, which can trigger a higher tax bill. Remember: Even if this business doesn’t work out, it doesn’t necessarily mean it’s your last.

FIND MORE LAUNCH TIPS ONLINE AT MONEY.COM • How Founders Can Stay Friends. How to prosper and preserve your relationship.

• How Much Should You Borrow? Learn in this guide to small-business financing.

• Video: Marcus Lemonis, host of CNBC’s The Profit, offers advice for your launch.

And more. Go to money.com/smallbiz.

NO BRANCHES = GREAT RATES. EQUALS STRESS-FREE SAVING. And that equals happy customers.

So instead of spending money on expensive branches, we pass the savings to you. Plus, your deposits are FDIC insured up to the maximum allowed by law, so you can save stress-free. allybank.com | 1-877-247-ALLY

©2009 - 2016 Ally Financial Inc.

BE YOUR OWN BOSS: SECOND ACTS

FROM

LEARN HOW FOUR ASPIRING ENTREPRENEURS TURNED THEIR INTERESTS INTO INNOVATIVE AND REWARDING SECOND-ACT BUSINESSES.

BY KERRY HANNON PHOTOGRAPHS BY DAVE LAURIDSEN

PASSION TO PROFIT

it’s a magical feeling to start a

business built on something about which you care deeply: the excitement of making an impact on the world, matching your efforts to your enthusiasms, and making money in the process.

But people who succeed at this challenge rely on something more than a desire to leave a mark, a commitment to providing something people want, and a belief that they’ve found a moneymaking opportunity.

Building a business with staying power requires hard work, good judgment, and sufficient financial resources.

Each of the entrepreneurs profiled in the

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following pages has grappled with a different set of challenges. Yet their stories reveal common threads. No one acted impulsively. They paused. They planned. They bypassed helterskelter approaches and pursued prudent, wellresearched business strategies. And when their plans didn’t work out as expected, they adapted to the new realities they faced.

These people had flexible time horizons for their respective ventures. They downsized and planned their financial lives so they could afford the cost of a startup without digging too deeply into their core savings.

Launching a business, even if it is one that you’re passionate about, can be scary. But as you will learn from these stories, it can also be one of the most satisfying risks you ever take.

A TASTE FOR PEANUT BUTTER STIRRED MEGAN GIBSON TO LAUNCH HER BUSINESS.

GIBSON LOVES SELLING NUT BUTTERS AND SANDWICHES AT LOCAL FARMERS’ MARKETS. THE ROVING CHEF

MEGAN GIBSON, 37 HOMETOWN: Philadelphia

BUSINESS: PB&Jams, a small-batch fresh nut-butter company

THE IDEA Megan Gibson jokes that the peanut-shaped birthmark on her wrist was the result of her mom’s pregnancy cravings. “She was obsessed with all things nut-related,” says Gibson, who inherited a taste for the household staple.

But it wasn’t until four years ago, when she first sampled some smoky, spiced Haitian peanut butter, that Gibson—a high school health and physical education teacher—started experimenting with nut blends and recipes at home. “I always stressed the importance of whole, natural foods to my students, so it was in line with what I preach,” she says.

After friends and family raved about her concoctions, Gibson got the idea of turning them into a business. The ultimate dream: peddling butters at farmers’ markets while jamming to classic funk and soul tunes (she had once worked as a DJ), promoting health and nutrition, and using the operation as a base for charitable work in her West Philadelphia community.

THE GROUNDWORK

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—MEGAN GIBSON

$13,000 the year before. To raise her profile in the community, she started selling wholesale to local cafés and markets. And, with great pride, she spent $10,000 on a food truck she could use to sell her butters, plus sandwiches, at markets and special events run by local nonprofits.

GROWING PAINS Returning, as planned, to teaching in the fall of 2014, Gibson continued to run PB&Jams at night and on weekends. One highlight of 2015 was contributing 200 jars of peanut butter to local food banks.

Her wholesale business, however, was a mixed blessing. Demand for her jars grew, but lower wholesale prices cut her profit margins.

And managing those sales wasn’t as enjoyable as feeding people face-to-face.

Last summer an equipment breakdown— an industrial food processor that could convert 30 pounds of nuts into butter in three minutes—slowed production, undercutting

T H I S PA G E A N D O P E N I N G S P R E A D : S T Y L I N G , H A I R , A N D M A K E U P B Y L I S A B E L L

In 2013, Gibson started hitting farmers’ markets and other local events to sell her Hot or Not Haitian-inspired peanut butter, along with other creations, like maple-walnut butter and dark-chocolate almond butter. Her first foray seemed almost too easy: She sold about 120 jars at up to $10 apiece. “Even the sample jars went,” she says. Encouraged by strong sales on subsequent weekends, Gibson decided to take a sabbatical from teaching during the 2013–14 school year to work toward a school guidance certification—and to see if her business, which she named PB&Jams, had legs.

Shifting production from her kitchen to a local nonprofit that provides space and services for minority entrepreneurs, Gibson grossed $40,000 in 2014 on sales of 6,700 jars, up from

I have to make decisions about what shape this business will take that allows me to have fun and to feed and help people.”

BE YOUR OWN BOSS: SECOND ACTS

THE GREEN TEAM

PAUL TASNER, 70 ELENA OLIVARI, 50 HOMETOWNS: Greenbrae, Calif., and San Francisco

BUSINESS: PulpWorks, a designer and manufacturer of eco-friendly packaging

THE IDEA

BY THE NUMBERS

Gibson started her business with $1,000 from personal savings, which went toward equipment and supplies.

Peak sales volume: 6,700 jars in 2014.

already thin margins on her jarred butters.

Now she has to manufacture in smaller batches and fill jars by hand rather than automatically. Ramping back up would mean a $25,000 investment in specialized equipment, but Gibson is reluctant to borrow. “Debt makes me uncomfortable,” she says.

A BIG DECISION Gibson—who still teaches full-time—has been approached about distributing to larger grocery chains, including Whole Foods, but has so far resisted. Last year’s equipment failure made her step back and evaluate priorities. “I have to make decisions about what shape this business will take that allows me to have fun and to feed and help people,” she says.

One option she’s considering is finding a partner to handle the wholesale business: “Interacting with people and seeing their reactions to my food, and going out to feed the homeless—that’s the stuff that makes me happy.”

Revenue grew from $13,000 in 2013 to $40,000 in 2014.

ADVICE FOR OTHERS

Ask lots of questions. “Other entrepreneurs are really willing to help and share their stories,” says Gibson. “It’s a great opportunity.

I got so much support.”

Be ready to change directions. “Snafus happen. Parts of your business take of that you didn’t plan for. Be nimble and shift your business model if need be.”

Six years ago Paul Tasner had some time on his hands. After a 35-year career managing supply chains at companies like Clorox and California Closets, he had recently lost his job at Method Products, which makes environmentally friendly soaps and household cleaners.

Then 64, Tasner despaired of finding another high-level full-time position. So he hatched a business idea, inspired in part by his stint at Method, where he had undergone a late-in-life conversion to environmentalism.

Says Tasner: “I felt a passion to make a difference for people and the planet.”

His other inspiration was his wife’s recent purchase of a pair of shears designed to get into those hard-to-open plastic packages in which many retail products are sold these days. Ironically, the scissors themselves were similarly packaged, and extricating them was a frustrating ordeal. “Ridiculous,” he says.

An engineer by training, Tasner set out to learn all he could about recycled, biodegradable—and easier-to-open—packaging.

THE GROUNDWORK While molding recycled goods into packaging isn’t new—egg cartons are a familiar example— Tasner knew that most marketers wouldn’t want to display their wares in something so drab. But his research led him to processes and materials that could be combined to turn paper, cardboard, and sugarcane fiber into a thin but sturdy, glossy-white packaging material.

Hoping to build a green manufacturing facility, he conducted another search—this time on LinkedIn—and connected with Elena Olivari, an architect committed to sustainability.

“I was looking for a new job that would give

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BE YOUR OWN BOSS: SECOND ACTS

TASNER AND OLIVARI SHOW OFF SAMPLES OF THEIR BIODEGRADABLE PACKAGING.

BY THE NUMBERS

me a stronger feeling of purpose,” she says.

“When Paul briefly explained why he was writing to me, my wishes were answered.”

Teaming up to form PulpWorks, they spent $25,000 to design and build a prototype package—a smooth and colorful alternative to plastic—then applied for a patent on the product they dubbed Karta-Pack.

A CHANGE OF DIRECTION

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Revenue: $1 million projected for 2016.

ADVICE FOR OTHERS

Be open to other age groups.

“Teaming up with someone younger doesn’t hurt when you’re a senior entrepreneur,” says Tasner.

“Clients seem to value the twogeneration pairing.”

Stay focused.

“You need a lot of knowledge, passion, and stamina,” says Olivari, “and you need to learn from every failure you have.”

funds “in slow drips” to develop prototypes, apply for a patent, and travel to trade shows and meetings with potential investors. They worked then (and still do) in home oices, meeting once or twice a week. And once it sunk in that they wouldn’t get their $17 million, they revised their business plan to one requiring little upfront cash. Instead of building a plant, they’d outsource production, licensing the design to other manufacturers.

The new approach worked, helping PulpWorks land contracts with companies including Burt’s Bees, LeapFrog Enterprises, and T-Mobile. A big help was the professional network that Tasner built up over decades in the same industry. “We don’t always have the perfect person to sit down with,” he says, “but we always have someone who can at least open the door to us and point us in the right direction.” Revenue is expected to hit $1 million in 2016, and the business carries no debt. Tasner and Olivari now each take salaries of about $5,000 a month.

“I’ve spent almost my entire life doing exactly what we’re doing here with PulpWorks,” Tasner says. “But I’ve done it for employers, not for myself. It’s an amazing feeling.”

ST Y L I N G B Y C A L L I S TA W I L S O N ; G R O O M I N G B Y A M Y L A W S O N

Tasner and Olivari spent nearly all of 2012 pitching venture capitalists in order to raise the $17 million they calculated they would need to build a Karta-Pack factory. They got nowhere. Tasner never imagined that investors wouldn’t want to do well by doing good.

“You’re never too old to be naive,” he jokes.

Their frugal ways—and support from their families—helped them carry on. (Tasner says his wife, a registered nurse with her own health care startup, “never blinked an eye about supporting PulpWorks.”) Each partner had contributed $50,000 in nonretirement savings at the get-go, investing the

Startup costs: $100,000 from Tasner’s and Olivari’s personal savings. $25,000 of that went toward building their prototype.

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BY THE NUMBERS

Launched in October 2010 with a $5,000 investment.

THE MATCHMAKER

DAVID LEWIS, 45 BUSINESS: Board Member Connect, a for-profit executive search firm that finds board members for nonprofit organizations

THE IDEA David Lewis began working for nonprofits in college and never wavered. He went from counseling foster children and assisting homeless families to fundraising for other organizations. “It becomes part of your fiber,” he says of the nonprofit world. “It’s really who I am.”

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ADVICE FOR OTHERS

A partner can help you reach customers. An agreement with BoardSource will increase Lewis’s visibility in the nonprofit world.

Be patient. “Building a business is not about doing everything fast, fast, fast,” says Lewis.

“This is a marathon, not a sprint.”

More than 20 years later, Lewis still loved his career, as well as his $100,000-a-year job as executive director of a community health education foundation. But with a mortgage to pay—and a stay-at-home wife and two children, now 9 and 7, to support—he also felt hemmed in by the limitations of his field. “No matter what effort I put in, I was going to get paid more or less the same,” he says. “And I always worked for someone else.”

Happily, he saw an opportunity to stay in the nonprofit world and gain more control over his financial and professional life. From his years in fundraising and development, Lewis knew that many nonprofits struggled to find qualified board members—people who are passionate about the mission; who bring expertise in, say, marketing or accounting, as well as connections to potential donors; and who, in some

ST Y L I N G B Y K R I S T I B R O O K S ; G R O O M I N G B Y D AW N M AT T O C K S

HOMETOWN: Murrieta, Calif.

Now pays himself $100,000 salary out of current revenue and prior business earnings.

LEWIS RAN HIS BUSINESS AT NIGHT AND ON WEEKENDS FOR FIVE YEARS BEFORE GOING FULL-TIME.

BE YOUR OWN BOSS: SECOND ACTS

cases, could themselves write five- or six-figure checks in support of the organization.

So seven years ago Lewis began envisioning a business that would solve this problem by matching charities with board members.

THE GROUNDWORK

I didn’t have the pressure to get paid or to close a deal in order to pay the mortgage.”

His first move was market research, starting with the websites of BoardnetUSA and BoardSource, two national nonprofit board sites. He saw that BoardnetUSA had a large database of candidates looking for positions, and nonprofits seeking board members. But it didn’t —DAVID LEWIS give either party the resources to determine whether they were a good match. Lewis also studied the groups’ member surveys, hoping to confirm his hunch that for nonprofits, filling their boards was a pain point. It was.

Next, Lewis sought advice from nonprofit executives he’d worked with in the past, and he sent web surveys to nonprofit CEOs across the country (many of whom he found via LinkedIn) asking if they needed the service he envisioned. “The overwhelming response I got was yes,” says Lewis.

Meanwhile, he paid $5,000 to a web designer to create a site where charities and prospective board members could, for free, fill out profiles.

But his research made it clear that, to make money, Lewis had to offer more than an online forum. He needed to be a true matchmaker, offering a hands-on service that identified and vetted suitable candidates.

A SOFT LAUNCH Even after identifying this opportunity, Lewis didn’t quit his job when he launched Board Member Connect (BMC) in 2010. “My wife was supportive but cautious,” he says. They agreed he wouldn’t leave the health foundation until BMC was established and he had built up a cash cushion—about six months’ earnings—and a reassuring number of clients in the pipeline.

So for five years Lewis ran the startup at night and on weekends.

Unwilling to sacrifice time with his family, he waited until the kids were in bed on weeknights to work on the business. On weekends, he got to work only when they were asleep or otherwise occupied. It wasn’t easy, Lewis concedes: “I was burning the candle at both ends.”

It also slowed the growth of BMC, says Lewis. But running the business as a sideline had benefits beyond the strictly financial. “I didn’t have the pressure to get paid or to close a deal in order to pay the mortgage,” he explains, “so I could try things out to see what would work, and I was able to gradually build relationships with nonprofit CEOs.” Those relationships proved crucial because Lewis had to create a market for a service that didn’t previously exist. In this case, he had to persuade nonprofits to pay a placement fee of between $1,200 and $25,000 (depending on the scope and level of the search) for something that had never been in their budgets before. The pitch: BMC could find them high-level business executives that the nonprofits couldn’t find on

SHARE YOUR SECOND-ACT STORY AT letters@moneymail.com.

their own—professionals with extensive business experience that could be applied to the organization, deep pockets, and extensive networks that could open doors to potential financial support and partnerships.

Keeping his expenses near zero by working at home and relying on LinkedIn for marketing, Lewis put most of his revenues in the bank.

And in November 2015—with suicient cash set aside to supplement BMC’s revenue to match his old salary, and with confidence the business was on the upswing—Lewis left his day job to run BMC full-time.

THE PATH TO GROWTH Over the years Board Member Connect has matched more than 1,000 individuals with some 200 organizations. Still, revenues were only $50,000 last year.

Lewis hopes additional personnel will help.

Last year he hired two part-time recruiters who are paid a percentage of the contracts on which they work. And several years ago, Lewis made contact with Anne Wallestad, CEO of BoardSource, which works with more than 100,000 nonprofit leaders on improving board effectiveness. That has resulted in a formal partnership in which BMC provides its services at a discount to BoardSource’s members. Lewis is already handling 20 times as many searches as a year ago and expects more business when BoardSource links to his website this spring.

“Things are moving so fast and furious that it’s a challenge to maintain a high level of service,” says Lewis. But it’s a problem he’s happy to have. “I’m tapping into everything I’ve learned over a 20-year career and staying true to my heart,” he says. “But instead of working for a single nonprofit, I’m helping a wide variety of nonprofits with great missions across the country, and I’m able to reward myself financially in a way I’ve never been able to do.”

FIND MORE ABOUT BEING YOUR OWN BOSS AT MONEY.COM See Philadelphia nut-butter entrepreneur Megan Gibson in action at money.com/videos.

MARCH 2016

m o n e y. c o m

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what to

now FIND OUT WHICH OF THE MOST WIDELY HELD STOCKS AND EQUITY FUNDS YOU SHOULD GRAB, HANG ON TO, OR LET GO OF IN THIS BLUSTERY MARKET.

BY CAROLYN BIGDA AND TAYLOR TEPPER ILLUSTRATIONS BY KEVIN WHIPPLE

MARCH 2016

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Y

how important it is not to panic in a market storm. Giving up on your investments when things look bleak often leads to seller’s remorse. But “not panicking” doesn’t mean you shouldn’t do anything.

Heading into turbulence, pilots will check their instruments and review their flight plans to make sure they’re still on track. Investors, faced with a tempestuous market, can do the same thing with their portfolios. At the very least, you’ll find out how well your stocks and funds are likely to fare if the market gusts again—and whether there’s still a strong case for staying the course.

To help you do that, MONEY assessed the prospects for five of the most popular actively managed equity funds and five of the most widely held U.S. stocks to determine if they still merit a place in your portfolio. (We left Apple and Alphabet off because we addressed them in recent issues. For an update, see page 71.) You may love these stocks and funds because they seem so rock-solid. But as financial planner Lewis Altfest says, “If you don’t soberly appraise those investments you’ve come to love, the market will do that for you.”

OU KNOW

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SOURCES: Bloomberg and Morningstar

BUY, SELL & HOLD

THE NEW FACE OF ADVERTISING

BUY The fund, which is in our MONEY 50 recommended list, has outpaced the S&P 500 by 2.4 points annually over the past 15 years, despite a rough stretch for value recently (see “Sifting for Real Values” on page 43).

“We try not to get distracted by short-term volatility or short-term issues in the market,” says Dodge & Cox chairman Charles Pohl.

shareholders. Though the fund has a terrific long-term record, you have to stomach stretches of underperformance, such as the past three years (see the chart).

The fund owns 63 stocks and has big stakes in tech and financials. In 2008 and 2011 the fund’s patience led to bigger-than-average losses.

But the managers hung on to names like Wells Fargo (see page 70) that have since gone on to beat the market.

Brace for more rockiness.

Pohl says the fund is engaging in “intensive research” to find attractive companies in the beleaguered energy and industrials sectors.

the risks

the verdict

A TEAM-RUN FUND THAT BUCKS THE MARKET AND GOES IT ALONE

dodge & cox stock

(DODGX)

EXPENSES:

AVERAGE P/E:

5-YR. ANN. RETURN:

O.52%

15.8

8.9%

the strategy

Five years ago Microsoft was a has-been—a PC relic in a mobile world. Dodge & Cox managers, though, saw a cheap cash generator and started buying. Today Microsoft is cool again (see page 71), having beaten the S&P 500 by 17 percentage points annually over the past three years. It’s also DODGX’s second-largest holding. “Their patience and contrarian value approach defines them,” says Morningstar analyst Laura Lallos.

And it pays of over time.

Going against the grain takes patience—not just from the fund’s 10 managers but from

GROWTH OF $10,000

$15,259

DODGX $14,821 S&P 500 ’13

’14

’15

If you’re near retirement and just need to play it safe, this fund may not be for you, as it is willing to lag for years until its stocks pay of. But if you’re investing for the next 20 years, you’d be hardpressed to find a better value fund. DODGX charges fees that are 40% lower than those of the typical actively managed stock fund. And because it’s team managed, you don’t have to worry if your star manager will leave over the next two decades.

facebook

(FB)

FORWARD P/E:

5-YR. PROFIT GROWTH:

5-YR. ANN. RETURN:

36.4

3O.3%

N.A.

GROWTH OF $10,000

$39,317 FB

$17,180 TECH STOCKS ’13

’14

’15

the strategy

Facebook shares have quadrupled in the past three years as the social media giant amassed 1.6 billion users who regularly share messages, status updates, and photos. Yet the company has only begun to really profit from this.

In the fourth quarter Facebook pulled in $5.6 billion in ads, up 57% from a year ago, mostly from mobile. Its 19% share of U.S. mobile ads is expected to grow in the next two years—while Alphabet’s is forecast to shrink—as Facebook works ads into Instagram, the photosharing app it bought in 2012, and WhatsApp, the mobile-texting service acquired in 2014. Facebook is also making a big push into video.

the risks

One of its rivals is Alphabet, which has deep pockets. Also, Facebook’s stock has a P/E above 30. At those prices the company has to deliver on profit expectations or investors will punish the stock.

In the past year alone the stock sank 9% or more on three separate occasions.

the verdict

Conservative investors—especially those in or near retirement—should steer clear of this or any stock trading

m o n e y. c o m

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A FUND THAT OFFERS MANY TAKES ON BARGAIN HUNTING

buy

vanguard windsor ii

facebook (FB) at a P/E above 30. But if you have decades to go, think about this: Facebook is tech’s last ultrafast horseman.

Its profits are rising at about twice the rate of Alphabet’s, but Facebook’s P/E is about 50% higher. And while Alphabet’s valuation has more than doubled in the past 2½ years, Facebook’s has fallen 20%. Strategically, the company dominates social media—Instagram alone has more users than Twitter.

Connor Browne, co-manager of Thornburg Value, says it won’t be long before Facebook’s ad revenues multiply and the profit outlook gets even brighter.

(VWNFX)

EXPENSES:

AVERAGE P/E:

5-YR. ANN. RETURN:

O.36%

13.9

8.8%

the strategy

Advisory teams from several diferent firms actually pick the stocks for this Vanguard fund. And those managers take diferent approaches to value investing. Some focus on dividend-paying shares, for instance, while others look for turnaround plays.

Collectively they’ve built an impressive record. In the past three, five, 10, and 15 years, the fund has trounced more than half its peers.

the risks

From a market perspective, value investing has lagged in recent years, and Windsor II hasn’t been immune— though the fund has outperformed its value peers.

Windsor II also experienced a recent management change. After more than 30 years with the fund, James Barrow—of Barrow, Hanley, Mewhinney & Strauss, the money manager that oversees about 60% of

Windsor II’s assets—retired.

However, Jef Fahrenbruch and David Ganucheau of the same firm, who have comanaged Windsor II alongside Barrow since 2013, have replaced him. Barrow is still executive director of his firm and can be turned to for advice, notes Morningstar analyst Alec Lucas.

the verdict If you have the patience to wait for value’s comeback, buy this low-cost fund.

Thanks to its unique structure, Windsor II is set up to succeed in a number of diferent markets. If January’s pullback was the start of a bigger decline, for instance, the dividend

A WALL STREET BANK THAT RELIES ON MAIN STREET RELATIONSHIPS

winning traits

Investors favor banks that are fiscally sound, especially if there are concerns about the health of the economy.

S&P CREDIT RATING

Wells Fargo

a

J.P. Morgan Chase

a-

Citigroup

Bank of America

bbb+

bbb+

Investors also demand profits, which Wells excels at too.

RETURN ON EQUITY

Wells Fargo

J.P. Morgan Chase

Citigroup

Bank of America

wells fargo

(WFC)

FORWARD P/E:

5-YR. PROFIT GROWTH:

5-YR. ANN. RETURN:

11.5

9.1%

1O.6%

the strategy

This bank does what most people think banks do: It takes in deposits, extends loans, and helps individuals manage money via mutual funds, IRAs, and the like.

Wall Street activities, such as investment banking and

securities trading, play a minor role. That’s fine. By focusing on individuals, the nation’s biggest retail bank can cross-sell more products easily—the typical Wells customer has more than six financial accounts or relationships with the company.

12.9% 10.2%

8.6%

GROWTH OF $10,000

7.0%

$17,262 WFC

NOTE: Return on equity measures how efficient a company is at generating profits. SOURCE: Bloomberg

$15,386 FINANCIAL STOCKS ’13

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’14

’15

BUY, SELL & HOLD

A PC-ERA DINOSAUR SURVIVING IN THE NEW TECH LANDSCAPE GROWTH OF $10,000

$15,259

microsoft FORWARD P/E:

S&P 500

18.8

(MSFT) 5-YR. PROFIT GROWTH:

5-YR. ANN. RETURN:

1O.1%

16.7%

$14,060

VWNFX

the strategy ’13

’14

’15

payers that Fahrenbruch and Ganucheau focus on ofer you some cushion.

On the other hand, if the market rallies from here, the downtrodden stocks that the team from Hotchkis & Wiley favors could rebound sharply.

Meanwhile, a big headwind for bargain hunting in general is that traditional

value stocks are frothier than they’ve been in the past, even after the recent slide. Windsor II has an advantage here too. The average stock in its portfolio boasts a projected P/E of 13.9, two percentage points less than the market.

On top of all of this, Windsor II charges lower fees than the average stock index fund.

That combo is hard to beat.

That makes it cheap for Wells to attract capital, explaining why the firm’s return on equity—a key measure of profitability—is higher than those of Bank of America, Citigroup, and J.P. Morgan.

housing collapse, Wells’ stock gained 2% on investor confidence in management, which still exists today (Wells’John Stumpf was just named CEO of the Year by Morningstar).

There’s also a good reason so many value investors like the stock: Despite outpacing its peers over the past five years, the stock’s P/E is lower than that of the average large financial institution. Why? Because Wells outearned its peers too.

the risks

As the nation’s largest private mortgage lender, Wells will see its prospects brighten as the housing market keeps recovering. But what if a recession is on the horizon? Wells is also a big lender to oil companies—to the tune of about $17 billion— and lost almost $120 million on defaulted loans in the last three months of 2015 as oil prices tanked.

the verdict

With most financials, economic troubles usually spell trouble. Not so with Wells.

When the market dropped 37% in 2008 because of the

Under Satya Nadella, who rose through the ranks to become CEO in 2014, Microsoft is finally shifting from slow-growth PCs to fast-growth cloud computing and mobile. Revenues for Azure—its cloud service that ofers access to programs over the Internet and is second only to Amazon—rose 140% last quarter.

Another hit is Office 365: Consumers pay $70 or more a year to access cloud-based Office applications across PCs, tablets, and phones.

Steve Jue, a senior research analyst at Rainier Investment Management, says this boosts business in part since users update annually, not after buying PCs. At the end of 2015, subscribers totaled 20.6 million, up from 15.2 million six months earlier.

“They have extracted more value and shored up the crown jewel,” Jue says.

the risks

The software giant still lacks buzz and isn’t totally shielded from declining PC sales. Licensing of Windows for new PCs and other products fell 5% last quarter. “The company is still in transition,” says Dan Skelly, head of the equity model portfolio team at Morgan Stanley Wealth Management.

GROWTH OF $10,000

$22,570 MSFT $17,180 TECH STOCKS ’13

’14

’15

the verdict

Microsoft may no longer be a hot tech stock, but it’s a durable one. Despite the PC drag, the company exceeded expectations in the latest quarter, unlike Amazon. The successful rollout last year of Windows 10 should help drive licensing sales for several years. And the stock, which yields a market-beating 2.7%, is cheaper than that of rivals such as Alphabet.“It has one of the best risk-adjusted profiles from here,” Skelly says.

If you’re worried about a downturn in the market, Microsoft has something else for you: $100 billion in cash. That war chest lets it minimize debt, invest in new ventures, and keep its triple-A credit rating, which only three S&P 500 stocks have. These “quality” traits are exactly what investors will covet in shaky times.

What About Alphabet and Apple?

In the January/February issue, MONEY warned that enthusiasm for Apple (AAPL) was waning as the smartphone business was maturing. Since then, investors have soured even more on the stock, which is down 8% so far this year.

Bargain hunters will appreciate Apple’s P/E of just 10 and that it yields almost as much as an S&P 500 index fund. But take Apple for what it is—a decent value investment and not

a hot growth stock. In December, MONEY also warned investors not to get too excited about Alphabet, whose shares jumped 46% last year. Google’s parent company, which in early February overtook Apple as the world’s most valuable enterprise, is certainly worth holding on to.

But new buyers will find the rising P/E (now at 23)—and the growing threat of Facebook—hard to overlook.

THE LAST ROCK-STAR STOCK FUND

HOLD THE BIG BANK THAT KNOWS IT MUST GET (A BIT) SMALLER

j.p. morgan chase

(JPM)

FORWARD P/E:

5-YR. PROFIT GROWTH:

5-YR. ANN. RETURN:

9.4

7.7%

7.5%

the strategy

One year ago a prominent Wall Street analyst argued that in this era of tougher government regulations on big banks, J.P. Morgan should split into several parts. The company chose to stay intact and wound up posting record profits, while its shares rose 8.2%.

Still, the firm achieved this by streamlining. The nation’s biggest commercial bank trimmed payroll, reduced legal fees, and cut its asset base by 9%. By doing that and raising capital, JPM is safer than a year ago.

the risks

Unlike Wells—which is predominantly reliant on the relatively healthy U.S. economy—J.P. Morgan is a global bank exposed to Asia and Europe, where the economy isn’t as rosy. Japan, for instance, has fallen back into recession, and China is slowing fast. Overseas exposure means global opportunities, “but also a global set of problems,” says Federated Investors’ Steve Chiavarone, who owns the stock.

Also, the collapse in oil is weighing on the company’s outlook. JPM set aside more

GROWTH OF $10,000

$16,277 FINANCIAL STOCKS

$15,386

JPM ’13

’14

’15

than $550 million in loss reserves last year to cover bad loans it made to nowstruggling energy firms.

The bank says it will allocate another $750 million if oil stays around $30 a barrel for another 18 months.

the verdict

If you already own this stock, there’s no reason to panic.

JPM’s earnings may not be growing as fast as some rivals’. But this is a well-managed bank.“Of all the diversified banks with a global scope, JPM is the highest quality,” says Chiavarone.

On the other hand, you can’t assume that J.P. Morgan will sail through another global slowdown as well as it navigated 2008’s financial crisis, when it was in a position to scoop up other banks. The company today— even after the recent downsizing—is still larger and growing slower than it was back then. And it faces more government regulations.

On the plus side, the stock trades at a P/E in the single digits, which means it may not be that vulnerable if the sellof continues. And while you’re waiting, investors are being paid a 3.2% yield.

fidelity contrafund AVERAGE P/E:

EXPENSES:

(FCNTX)

5-YR. ANN. RETURN:

O.64% 2O.9

11.O%

GROWTH OF $10,000

$15,647

FCNTX S&P 500 ’13

’14

$15,259 ’15

the strategy

Based on longevity and popularity, Fidelity Contrafund is the Rolling Stones of funds. Manager Will Danof has been at the helm since the George H.W. Bush administration, amassing more than $100 billion in assets. Only four other solo stock pickers have a tenure as long, and less than 1% of his peers have bested him in the past 15 years. After all that time, though, can he still paint it black?

Danof seeks out stocks “well positioned for growth at a reasonable price,” he says. Lately this has led to big stakes in financials—led by Berkshire Hathaway, which he first bought 13 years ago.

What sets his fund apart? “Danof is a flexible growth investor who likes to get out ahead of trends,” says Russel Kinnel, director of mutual fund research at Morningstar. He was an early investor in Facebook. His best skill, though, may be navigating troubled markets. In down months, Danof has lost roughly 25% less than the broad market over the past 15 years.

the risks

“The fund doesn’t defy gravity, though, and trailed its peers by six points in 2009,” Kinnel says. Indeed, in markets

BUY, SELL & HOLD

in which stocks have risen, the fund has underperformed the S&P 500 by 6% annually over the past 15 years.

what are the odds?

Not only is Contrafund’s Will Danoff among the longest-serving active fund managers …

the verdict

TENURE

If you already own the fund, you would be smart to hang on, especially if you’re worried about another stock pullback.

If you’re a new investor, though, you have to worry if time is on your side.

After all these years, Danof could easily run into a cold spell; “$100 billion is a lot of money to push around,” Danof concedes. The fund’s sheer size can hamstring even the best stock picker, holding back future returns.

Worse still, what if he leaves or retires within the next decade? “I’m not going anywhere,” insists Danof, who despite his tenure is only 55. But that means he has run Contrafund for nearly half his life. Let’s pray that Danof is true to his word and sticks around.

Will Danof:

ANNUAL TOTAL RETURN SINCE SEPTEMBER 1990

Avg. U.S. stock fund manager

9.5%

NOTE: Averages are based on actively managed U.S. stock funds led by a single manager. SOURCE: Morningstar

(PRGFX)

AVERAGE P/E:

5-YR. ANN. RETURN

O.68%

22.5

11.7%

Shares of companies that are industry game changers can be lucrative to own, and that thinking guides T. Rowe Price Growth Stock. Innovative disrupters such as Amazon.com and Alphabet— which have years of growth ahead of them—are among portfolio manager Joe Fath’s top holdings.

He also buys economically sensitive stocks “when the timing is right in the

12.7%

Will Danof

EXPENSES:

the strategy

8 years

… but his long-term track record is hard to beat (and possibly repeat).

A LONG-TERM WINNER THAT’S UNDER NEW MANAGEMENT

t. rowe price growth stock

Avg. U.S. stock fund manager:

25 years

economy,” he says. And with a small portion of the fund, he dabbles in stocks he thinks are poised for a rebound—say, because of a new product—along with up-and-comers that have yet to go public, such as vacation rental site Airbnb.

With this catchall approach, Fath hopes to capture the best growth opportunities, no matter what’s going on in the market. He did so successfully

in 2015, when the fund gained 10.9%, vs. just 3.6% for the average large-growth stock fund. In 2014, though, Fath trailed his peers.

GROWTH OF $10,000

$16,793

PRGFX

the risks

Growth Stock is the oldest and largest fund at T. Rowe Price, and it has beaten more than 80% of its peers over the past three, five, 10, and 15 years. Yet Fath has led the fund for just two.

And his bets on risky innovators can backfire when investors get spooked—as is happening in this aging bull market.

So far this year, for instance, Growth Stock has retreated 11%, compared with a 7% drop for both the Russell 1000 growth-stock index and the S&P 500 index.

S&P 500 ’13

’14

$15,259 ’15

the verdict

Without a track record, it’s hard to say how Fath will perform in an extended sellof. So wait for him to prove his worth before committing new money.

Fath is looking at industrial and transportation stocks now, which, he says, have been decimated but could “explode to the upside” if the U.S. economy is resilient. Let’s see if he’s right.

WHICH STOCKS OR FUNDS ARE YOU BUYING OR SELLING IN THIS MARKET? letters@moneymail.com

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73

hold A FUND SO BIG IT’S BEGINNING TO LOOK LIKE THE MARKET

american funds—the growth fund of america EXPENSES:

O.65%

AVERAGE P/E:

(AGTHX)

5-YR. ANN. RETURN:

21.1

9.6%

the strategy

Like its peers, Growth Fund of America buys shares of large companies that are expanding rapidly. But rather than put one manager in charge, it employs 12, each independently overseeing a slice of the portfolio. “You get diversification of thought that way,” says Andy Betts, a financial adviser in Lexington, Mass.

The benefits of this approach came to light, sadly, last year when James Rothenberg, a longtime manager and chairman of Capital Group Companies (which owns American Funds), passed away.

The other managers, because of the setup, were easily able to take over Rothenberg’s piece of the portfolio, says Alec Lucas of Morningstar.

the risks

Growth Fund is the largest actively managed U.S. stock fund, with $143.7 billion in assets. With so much money to deploy, the managers often have to limit their ideas to the largest or most widely held stocks.

The result: Growth Fund has fallen to the middle of the pack, having beaten only about half its peers over the past one, three, and five years.

Some advisers worry it resembles its benchmark, the Russell 1000 Growth stock index, too much. You’re paying for active management but getting something close to an index fund.

GROWTH OF $10,000

$15,408

AGTHX

$15,259

S&P 500

’13

’14

the verdict

’15

If you own Growth Fund of America through your 401(k) plan—as many do—there’s no reason to stop.

One way the fund deviates slightly from its peers is by favoring dividend payers, which can help smooth your ride in a bumpy market.“It usually keeps up with market rallies and holds up better during downturns,” Lucas says. The fund’s tilt to dividends also ensures that shares of the highest fliers, which have gotten expensive lately, don’t dominate this portfolio. As a result, the P/E for Growth Fund’s average holding is 21, slightly below that of its peers.

Outside of a retirement account, there’s no reason to start buying, as the fund charges a 5.75% load. Plus you have better options, like iShares Russell 1000 Growth ETF, which charges just 0.2% for tracking the very index Growth Fund resembles.

the bottom line

Amazon knows how to sell, but it has fallen short TRAILING 12 MONTHS (MILLIONS)

$107,006 $88,084

$11,408 $596 Amazon.com SOURCE: Morningstar

74

m o n e y. c o m

MARCH 2016

Microsoft

BUY, SELL & HOLD

SELL THE E-TAILER THAT DELIVERS EVERYTHING—BUT PROFITS

amazon.com FORWARD P/E:

5-YR. PROFIT GROWTH:

5-YR. ANN. RETURN:

58.9

41.9%

27.3%

the strategy when it comes to delivering real earnings.

KEY

Revenues

Net income

$71,763

$16,408

$17,928 $3,688

Alphabet

Facebook

(AMZN)

Despite generating $107 billion in annual revenue, this e-commerce giant is still able to grow its sales at a 20% annual clip. How? Amazon is the classic disrupter, upending retailing through low prices and hyperefficient delivery.

In the third week of December the e-tailer added more than 3 million new Prime members, who pay $99 a year for free two-day shipping and access to movies and music. A survey

by RBC Capital Markets found that Prime members spend higher amounts and shop more frequently at Amazon than nonmembers.

The company is disrupting computing too. Amazon Web Services is the leading cloud services provider to businesses and is becoming an increasingly profitable part of the company. AWS sales rose 70% in 2015, with

a profit margin of 23.6%, vs.

4.3% for Amazon.com.

the risks

Amazon knows how to make sales. Turning a profit? Not so much. Amazon is spending billions to grow. In 2015, expenses to fulfill orders rose 25%, and spending on technology and online content (such as new investments in the cloud and streaming video for Prime members) jumped 35%.

Over the past 12 months Amazon earned just $596 million on $107 billion

in sales—a relatively paltry sum (see the chart at left).

The company says profits will come in the long run— presumably after it has vanquished competitors.

Yet in this era of disruption, will that day ever come?

the verdict

“Although the long-term fundamentals are sound, it’s hard to invest new money at this level,” says Steve Jue of Rainier Investment Management. It’s also hard not to take profits of the table.

After soaring 118% last year, Amazon shares trade at 59 times estimated earnings. The risk, especially in a choppy market, is that investors will flee if disappointed.

Last quarter, Amazon earned $1 a share, short of the $1.61 expected. The stock dropped nearly 8% in a day.

GROWTH OF $10,000

$29,942 AMZN $17,180 TECH STOCKS ’13

’14

’15

PRESCRIPTION-DRUG PRICES ARE SPIKING, AND EVEN THE INSURED ARENâ&#x20AC;&#x2122;T IMMUNE TO HIGH OUT-OF-POCKET COSTS. THESE STRATEGIES COULD SAVE YOU 40% OR MORE ON THE MEDICINES YOU NEED.

By Kara Brandeisky ILLUSTRATIONS BY PETE RYAN

m o n e y. c o m

76

MARCH 2016

CHANGE YOUR MEDICATION

Y

OUR MEDICINE MAY COME with a new side efect: financial pain. Prescriptiondrug spending grew 12.2% in 2014—five times as fast as the year before—according to the Centers for Medicare & Medicaid Services. And the sickest Americans bear the biggest burden. Some 43% of those in fair or poor health say it’s somewhat or very diicult to aford their medications, and 37% say they’ve skipped out on filling a prescription because of cost, according to the Kaiser Family Foundation (KFF).

What has changed? Generic drugs, long an afordable alternative to namebrand medicines, have become part of the problem. The average price of the 50 most popular generic drugs increased 373% between 2010 and 2014, according to OptumRx, a pharmacy benefit management company. One culprit is consolidation: After a decade of mergers, three big companies now control 40% of the generics market, says Gerard Anderson, professor at the Johns Hopkins Bloomberg School of Public Health. Weaker competition means drug companies can charge your insurer more. Meanwhile, pricey new miracle drugs—like hepatitis C treatment Sovaldi ($1,000 per pill for

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MARCH 2016

an 84-pill course)—are also a key factor forcing up overall medication costs.

In response, insurers are making consumers pay more, and work harder, to get their prescriptions—if the drugs are even covered. “We’re seeing plans limit the choices of drugs that are available,” says Sandy Agelof, senior consultant with Willis Towers Watson.

Fortunately, there are plenty of ways for you to save. By making strategic changes in the medications you take (with your doctor’s okay, of course), the places you buy them, and the insurance plan you elect, you may be able to shave 40% or more of your total prescription-drug costs this year.

Here are the steps you need to take.

Ditch the name brand. First things first: If you haven’t already, ask your doctor if you can try any generic versions of your prescription meds.

Despite recent price increases, the savings can still be immense. On average, Americans on employer plans could have shelled out as much as 80% less in co-pays in 2015 by switching from a branded drug to a generic, according to KFF data. “The evidence is very strong that generics work just as well,” says American College of Physicians president Wayne J. Riley.

Get a twofer. If you are taking several medications for the same condition, ask your physician if there’s a single pill that would do the job. For example, your insurer could make you pay a combined $100 or more a month to get a brand-name beta-blocker and a brand-name thiazide diuretic to treat high blood pressure, Riley says.

But most people, he says, can sub in a generic combination pill containing both medications, which will probably have a co-pay of less than $15.

Alternatively, you might be able to save money by splitting some pills, Riley says. You’ll need to check with your physician, because not all doses can be divided safely—but once you’ve gotten the green light, ask for a prescription for half as many doublestrength pills. Then buy a pill splitter and cut the tablets in two.

Take the favorite. The list of medications that any given drug plan will cover—called a formulary—has gotten much more complicated. As little as 15 years ago, most plans had no more than two tiers, or price categories. The two-tier plans would charge you one co-pay for generics and a second, higher one for brand-name

CUT YOUR DRUG COSTS

drugs. By 2015, however, 81% of workers had three or more tiers in their prescription-drug benefits plan, and 23% had four or more, according to KFF. Obamacare and Medicare plans have multiple tiers too.

Generally, the higher the tier, the more you pay. While first-tier (usually generic) drug co-pays were just $11 on average in 2015, fourth-tier co-pays averaged $93 per prescription.

And co-insurance—in which you pay a fixed percentage of the price, rather than a set dollar amount— could push your out-of-pocket costs even higher. Among plans with three or more tiers, 40% required that patients pay co-insurance on pricier fourth-tier drugs, putting an average 32% of the cost on your shoulders.

“It can make for some confusion at the pharmacy counter,” says Sharon Frazee, vice president of research and education at the Pharmacy Benefit Management Institute (PBMI). “If you don’t know where the drug sits on the formulary, you don’t know how much you’re going to be charged.”

Plans use tiers to lower costs. Your insurer will save money if you switch to a cheaper, clinically equivalent drug. The plan may also have negotiated better prices with one manufacturer by promising to charge more for the competition.

Either way, many plans offer incentives to switch. Show your doctor your formulary list and ask if there’s another drug in a lower price tier that would work just as well for you.

Jump through the hoops. In 2015, almost 70% of employers required, for at least some drugs, that you try over-the-counter, generic, or lowercost versions before insurance would cover the pricier alternatives, according to a survey from PBMI. More than half of all employers required such “step therapy” for

Shifting Landscape As health plans have made drug pricing structures more complex, the share of employer plans with four or more tiers has soared over the past decade.

SHARE OF EMPLOYER PLANS BY TIER STRUCTURE 4-plus tiers

2% 8%

4%

3 tiers

1 tier

1% 9%

13%

2005 70%

2 tiers

Other

2010 65%

15%

1% 12%

23%

2015 58%

11%

Covered employees wind up paying more for drugs in the higher tiers.

AVERAGE CO-PAYS

TIER TIER 1

TIER 2

TIER 3

AVERAGE CO-INSURANCE SHARE

17%

$11

27%

$31 $54

TIER 4

43% $93

32%

NOTE: Market share data may not add up to 100% because of rounding. SOURCE: Kaiser Family Foundation, 2015

Get Financial Aid If you take a high-price brand-name drug and have exhausted other ways to reduce your costs, you may need extra help. Two options: CLIP COUPONS: Some drugmakers offer discounts directly to patients. If you take any brand medications, says health care consultant Martine Ehrenclou, check the manufacturer’s website for coupons. (Medicare beneficiaries are ineligible.)

ASK FOR HELP: Pharmaceutical companies also have patient-assistance programs to aid people who have a hard time affording their treatment. There may be income limits and other requirements. Check RxAssist.org, patientadvocate.org, and pparx.org to find programs for your medications.

7%

cholesterol-lowering drugs, for instance, up from 38% in 2010. This process can make it tricky for patients to get the expensive drugs their doctors have prescribed.

“A lot of health insurance companies are requiring that patients try three medications before they can get the one that their doctor originally recommended,” says health care consultant Martine Ehrenclou.

If your drug has such restrictions, you’ll get the bad news when you go to the pharmacy to fill your prescription.

Work with your doctor to try the alternatives; if you ignore the rules altogether, you could get stuck with the full bill for your medication.

What if you have already tried the treatments your insurer is pushing?

“You don’t have to start over,” says Katy Votava, founder of health insurance consulting firm Goodcare. Go to the drug section of your insurer’s website. You can send your doctor’s staf the necessary authorization forms or, in some cases, initiate the process yourself, says Votava. Your insurer should spell out the kind of documentation you’ll need.

Get an exception. Your plan might waive restrictions, pay for a drug that’s not on its list, or charge a lower co-pay if your doctor says a specific medication is necessary.

For example, when cholesterollowering drug Lipitor went generic, many plans refused to cover the brand-name version or charged a higher co-pay, says Tatiana Fassieux, board chair of California Health Advocates, a Medicare advocacy nonprofit. But some people couldn’t take the generic because they were allergic to the binding additive, so plans let them take branded Lipitor or pay the generic co-pay for the branded drug.

Ask explicitly for an exception: You again go to the drug section of your

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insurer’s website, but this time look for a medication exception request. Give it to your doctor’s oice to complete, says Riley of the American College of Physicians.

Request denied? You have the right to both internal and external reviews. Your plan’s explanation of benefits document will tell you whom to contact.

For all Medicare Part D plans, call your provider and ask to have the exception form sent to your doctor, Fassieux says. If your request is rejected, you can appeal.

CHANGE YOUR PHARMACY Go postal. If you don’t use mail order for common maintenance medications, you’re probably overpaying.

More than 90% of employers ofered the service in 2015, and almost a quarter of those required it for at least some drugs, PBMI says. Processing can take a week or more, so when you’re starting a new medication, ask your doctor for one 30-day prescription to fill locally plus a 90-day script

CUT YOUR DRUG COSTS

for mail order, Riley says. On average, you’ll save a third on co-pays for brand-name drugs when you buy through the mail (see chart below).

Dump your pharmacist. Almost three in 10 employers had a preferred network in 2015, meaning workers got a discount at certain drugstores, according to PBMI. Another 13% had a limited network, meaning insurance paid only for prescriptions filled at in-network chains. Medicare plans can also have preferred or limited networks. Preferred pharmacies generally offer good discounts, Frazee says: “The savings can be considerable, particularly if you’re on brand medications.”

Free to choose any pharmacy? Use the OneRx app to see which ones ofer the lowest prices. Take a photo of your insurance card, and the app will show estimated co-pays based on your plan. The app also shows cash prices, the amount you would pay without insurance; these can sometimes be less than your co-pay, says A.J. Loiacono, chief innovation oicer at Truveris, which created the app.

Just remember that if you bypass your insurance, the payments won’t count toward your deductible or outof-pocket maximum.

Scan for scammers. When looking at online drugstores, be cautious.

Many of the “Canadian pharmacies” you’ll find on the Internet are fraudulent, according to a 2013 Government Accountability Oice report—which also noted that some drugs ordered online contained “dangerous contaminants, such as toxic yellow highway paint, heavy metals, and rat poison.”

You can be sure a web pharmacy is safe if its domain name ends with “.pharmacy,” which means the site has been approved by the National Association of Boards of Pharmacy and meets all regulatory require-

ments. You can also search for the site’s name on LegitScript.com to confirm that it’s aboveboard.

CHANGE YOUR INSURANCE Vet the lists. To make the biggest dent in high drug costs, you may need to change your insurance. Employers usually let workers choose new health plans in the fall; Obamacare marketplaces are on a similar timetable. And seniors can choose new Medicare plans starting Oct. 15.

To compare plans, start by checking the formulary lists to ensure that medications you take are covered, Votava says. (These lists are often online, but in some cases you may need to request the document from a prospective insurer.) Identify which tiers your drugs are in, and then use each plan’s “summary of benefits and coverage” to see how much you would pay in each tier. “Get used to doing a little more homework,” Votava says.

Drug coverage is of particular concern for people on Obamacare plans, some of which have placed all the necessary drugs—even generics—for certain chronic conditions in the most

Signed, Sealed, Delivered … for Less Your out-of-pocket cost drops significantly if you use a mail-order pharmacy.

AVERAGE CO-PAYS

$176.18 $203.13

SPECIALTY DRUGS

$311.37

$120.88 $126.57

NONPREFERRED BRANDS

PREFERRED BRANDS

GENERICS

$177.78

$65.51 $71.20 $97.95

$20.76 $23.11 $31.32

NOTE: Assumes a four-tier drug plan. SOURCE: Pharmacy Benefit Management Institute, 2015

KEY One 90-day supply from a mail-order pharmacy One 90-day supply from a retail pharmacy Three 30-day supplies from a retail pharmacy

CUT YOUR DRUG COSTS

Side by Side Different health plan details could dramatically affect your costs for a hypothetical $1,000-a-month drug.

PLAN A

PLAN B

$325

DRUG DEDUCTIBLE

None

$2,000

OUT-OF-POCKET MAX

$3,000

NONPREFERRED TIER:

CO-PAY OR CO-INSURANCE

NONPREFERRED TIER:

$54 co-pay

$973

OUT-OF-POCKET COST PER YEAR

43% co-insurance

$3,000

NOTES: Plan A hits deductible in first month. Plan B hits out-of-pocket maximum in July. SOURCE: MONEY research

expensive tier. A 2014 study by the Pharmaceutical Research and Manufacturers of America identified higher drug costs for Obamacare enrollees with cancer, diabetes, rheumatoid arthritis, and even asthma. And a New England Journal of Medicine study found that HIV patients on plans with such “adverse tiering” owed $3,000 more than HIV patients on other plans, even after accounting for out-of-pocket maximums and premiums.

Trying to calculate what you’d owe? Get help. “Call the pharmacy help desk for your plan,” Votava says. “They are going to be your best shot.” Tell the rep the plan you’re considering and the medication you’re on, she says, and ask what price you would pay.

Check for gotchas. For many patients, drug co-pays kick in from the first day of coverage. But last year, KFF found, almost a quarter of

82

m o n e y. c o m

workers on high-deductible employer plans had to pay full price for prescription drugs until they met their overall deductible—more than $1,300 for individuals and over $2,600 for families. That could require a big outlay for people with high drug costs.

And 36% of employer plans in 2015 had a separate drug deductible, up sharply from 14% in 2014, according to PBMI. On average, drug deductibles are $325 for individuals and $960 for families. “You go to the drugstore more than you go to the doctor, so you’re more likely to feel it faster,” PBMI’s Frazee says.

At least one change has delivered a measure of relief. Under the Afordable Care Act, all new employer and marketplace plans must cap how much you’d pay for in-network care each year. In 2015 the average out-ofpocket max was $3,291 on individual PPO (preferred provider organization) plans, according to KFF. So if

you face high drug costs, you may be able to save by choosing a plan with higher premiums but a lower cap. To gauge your potential liability, add a given plan’s premiums to the out-ofpocket max, Votava says.

Price out Medicare options.

Part D beneficiaries have a somewhat diferent set of rules and concerns.

Unlike employer and marketplace plans, Medicare drug plans have no out-of-pocket maximums, so you can continue to hemorrhage cash if you’re taking expensive drugs.

Meanwhile, out-of-pocket costs can vary widely between plans, notes a KFF survey. For example, a drug called Spiriva, used to treat emphysema, costs a Medicare Part D beneficiary as much as $472 per month in 2016 on one plan—but as little as $33 on another. Diabetes treatment Lantus Solostar ranges from $29 to $172 a month; generic cholesterol drug atorvastatin costs $20 a month on one plan but is free on another.

You need to shop around every year; Fassieux says coverage lists change all the time. The Medicare Plan Finder at Medicare.gov makes it easy to search plans, however. Enter your medication information, including dosage and frequency. You can also enter the name of your favorite pharmacy in case some of the plans have preferred or limited pharmacy networks. The tool will show you your expected costs on both Medicare Part D and Medicare Advantage prescription-drug plans.

Again, remember that what was cheapest last year won’t necessarily be the right answer this year, even if your drug regimen hasn’t changed.

“We see people who didn’t look at their plans; they didn’t do anything,” Fassieux says. “Then they go to the pharmacy, and their co-pay has tripled.” Don’t be among them.

HOW HAVE YOU HANDLED DRUG COSTS? EMAIL: kara.brandeisky@moneymail.com

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THE NUMBERS

STOCKS & FUNDS BIGGEST MUTUAL FUNDS BY CATEGORY CATEGORY

TOTAL RETURN ONE YEAR

THREE YEARS1

EXPENSES (AS % OF ASSETS)

LARGE-CAP STOCKS Fidelity Contrafund (FCNTX) American Funds Growth Fund of America (AGTHX) Dodge & Cox Stock (DODGX) American Funds Investment Co. of America (AIVSX) American Funds Wash. Mutual Investors (AWSHX)

Oil’s Slide Hits Energy Stocks

–1.7% –4.2 –12.4 –9.0 –7.9

11.3% 9.9 7.9 8.8 8.8

0.64 0.65 0.52 0.59 0.58

–7.0 –10.6 –13.2 –13.1 –10.9

8.1 8.7 6.3 6.3 10.3

0.79 0.09 0.07 0.10 0.27

–12.6 –12.6 –10.8 –12.2 –13.0

6.3 6.6 2.8 6.9 5.4

0.09 0.36 0.96 0.09 0.09

–3.1 –5.5 –4.0 –6.4 –9.7

7.3 6.7 7.3 4.8 4.4

0.59 0.56 0.56 0.34 0.74

–15.0 –13.4 –12.0 –12.5 –12.2

–3.1 –2.6 0.5 –0.5 –0.8

0.22 0.75 0.83 0.34 0.83

–15.8 –23.3 –26.6 –20.4 –26.2

–4.2 –9.4 –11.5 –6.1 –11.4

1.04 1.24 0.15 1.07 1.51

0.4 1.0 0.3 0.4 1.8

1.6 1.4 1.1 1.2 0.7

0.45 0.65 0.88 0.75 0.80

–0.1 –0.1 –1.8 1.0 –0.5

1.8 1.7 1.6 1.5 1.3

0.07 0.10 0.44 0.10 0.59

–4.7 –11.2 –6.0 –6.5 –9.0

1.1 –2.4 2.4 0.3 –1.0

0.13 0.67 0.72 0.81 0.72

2.8 0.0 1.2 0.0 0.0

3.0 0.0 1.4 0.0 0.0

0.12 0.40 0.12 0.16 0.62

MIDCAP

CRUDE-OIL PRICES sank nearly 30% in the four weeks ended Jan. 20, to below $30 a barrel, raising fears that the global economy may be stalling out. As a result, economically sensitive sectors such as energy, financials, and basic materials all suffered double-digit losses.

S&P 500 RATIOS

Fidelity Low-Priced Stock (FLPSX) Vanguard Mid-Cap Index (VIMAX) Fidelity Spartan Extended Market Index (FSEVX) Vanguard Extended Market Index (VEXAX) Vanguard Strategic Equity Fund (VSEQX)

SMALL-CAP Vanguard Small-Cap Index (VSMAX) Vanguard Explorer (VEXRX) T. Rowe Price Small-Cap Value (PRSVX) Vanguard Small-Cap Value Index Fund (VSIAX) Vanguard Small-Cap Growth Index (VSGAX)

BALANCED P/E

American Funds American Balanced (ABALX) Fidelity Balanced (FBALX) Fidelity Puritan Fund (FPURX) Vanguard Star Fund (VGSTX) Oakmark Equity and Income Fund (OAKBX)

DIVIDEND YIELD

2.4%

20.0

CURRENT

2.3 19.0

ONEYEAR RANGE

17.9

18.0 CURRENT

2.37

2.2

INTERNATIONAL ONEYEAR RANGE

2.1

EMERGING MARKETS

2.0

American Funds New World (NEWFX) T. Rowe Price Emerging Markets Stock (PRMSX) Vanguard Emerging Markets Stock Index (VEMAX) Fidelity Emerging Markets (FEMKX) Russell Emerging Markets (REMSX)

1.9

17.0

BENCHMARKS INDEX

S&P 500 Nasdaq2 Russell 2000 Morgan Stanley EAFE Dow Jones industrial average Barclays U.S. aggregate bond index

U.S. GOVERNMENT BONDS

TOTAL RETURN ONE MONTH

ONE YEAR

THREE YEARS1

–7.2% –9.2 –10.7 –10.0 –7.8 0.8

–6.1% –3.9 –13.4 –11.9 –7.7 0.2

10.0% 12.6 5.2 –0.2 7.5 1.9

1.4 –0.4 –2.2 –5.0 –7.3 –8.2 –8.2 –10.2 –11.2 –11.4

–8.3 –1.9 –0.2 –3.4 –9.4 –2.3 4.3 –8.7 –19.7 –28.4

10.6 4.8 12.5 18.5 8.9 13.2 14.3 8.9 0.6 -9.3

SECTOR

Utilities Telecom services Consumer staples Health care Industrials Information technology Consumer discretionary Financials Basic materials Energy

NOTES AND SOURCES: Stock index data as of Jan. 20 from Lipper, New York; 877-955-4773.

Sector returns from Bloomberg. Bond index data from Barclays. Monthly S&P 500 ratios are from Standard & Poor’s. P/E ratios are based on previous four quarters of operating earnings.

Biggest funds ranked by total net assets. 1Annualized. 2Price change only.

84

m o n e y. c o m

MARCH 2016

Vanguard Total International Stock Index (VGTSX) Harbor International (HAINX) American Funds EuroPacific Growth (AEPGX) Vanguard International Growth Fund (VWILX) T. Rowe Price International Stock Fund (PRITX)

Fidelity Government Income (FGOVX) American Funds U.S. Government Securities (AMUSX) MFS Government Securities (MFGSX) J.P. Morgan Government Bond (OGGAX) Sit U.S. Government Securities (SNGVX)

INVESTMENT-GRADE Vanguard Total Bond Market Index (VBTLX) Vanguard Total Bond Market II Index (VTBIX) Dodge & Cox Income (DODIX) Vanguard Short-Term Investment-Grade (VFSUX) T. Rowe Price New Income (PRCIX)

HIGH YIELD Vanguard High-Yield Corporate (VWEAX) American Funds American High-Income Trust (AHITX) Fidelity Capital & Income (FAGIX) Northern High Yield Fixed Income (NHFIX) Fidelity High Income (SPHIX)

TAX-EXEMPT Vanguard Intermediate-Term Tax-Exempt (VWIUX) Fidelity Municipal Money Market (FTEXX) Vanguard Limited-Term Tax-Exempt (VMLUX) Vanguard Tax-Exempt Money Market (VMSXX) Schwab Municipal Money Fund (SWXXX)

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What You’ll Learn from his Free Report • he diferent types of annuities and the advantages and disadvantages of each • Why annuities can be complex to understand • What you need to ask an annuity salesman when evaluating his or her product • he inflation risk, tax implications, estate planning considerations and typical annuity fees

Stuck in An Annuity?

Because people oten regret their annuity decision, Fisher Investments has helped many investors extract themselves from annuities. In fact, if you have a portfolio of $500,000 or more, we may rebate some or all of your annuity surrender penalties.

Rebates average nearly $13,000.* Please call for details and to see if you might qualify.

About Fisher Investments Fisher Investments is a money management irm serving successful individuals as well as large institutional investors. Fisher Investments and its subsidiaries use proprietary research to manage over $63 billion** in client assets and have a 35-year performance history in bull and bear markets.

If you own an annuity or if someone is trying to sell you one, I urge you to call for your free report. Annuities can lock you into low returns, complicate your tax situation, tie up your wealth and hit you with high fees. If you have an annuity, my team can help you decide if it is right for you. And if it isn’t, we might be able to help you get out of it and even help you ofset some of the annuity surrender fees.* his free report could save you from making one of the biggest investment mistakes of your life.

And for owners of annuities, the free analysis could be a life saver.

Ken Fisher – Founder, CEO and Co-Chief Investment Oicer – Forbes “Portfolio Strategy” columnist for 30 years – Author of more than 10 inancial books, including 4 New York Times bestsellers

Please hurry! his ofer contains timely information.

Call today for your FREE report!

Toll-free 1-888-935-9654 Reference code AT80 when calling. ©2016 Fisher Investments. 5525 NW Fisher Creek Drive, Camas, WA 98607.

Investments in securities involve the risk of loss.

Past performance is no guarantee of future returns. * Rebates are for investors who liquidate an annuity with surrender penalties and fund a Private Client Group account. Average rebates from 8/1/2011 to 1/31/2015 were $12,795.14. Terms and conditions apply. Surrender costs will generally be reimbursed in the form of a credit to quarterly advisory fees, and payments will cease if the relationship is terminated before the end of the payment period. Payment periods can last over ten calendar quarters or longer.

See www.AnnuityAssist.com/Terms-and-Conditions for further information. **As of 12/31/2015.

®

THE NUMBERS

MONEY 50

TOTAL RETURN

Stocks Slide Into a Correction AN EPIC SELLOFF IN JANUARY RAISES FEARS THAT A BEAR MARKET MAY BE LURKING. EQUITIES ENDURED their worst start to a year in history, and MONEY’s recommended list of mutual and exchange-traded funds couldn’t escape the carnage.

Every equity fund in the MONEY 50 list lost at least 4% in the four weeks ended Jan. 20. And over the past 12 months, several funds and stock indexes were down more than 10%, defined as a “correction” in the market.

The panic was triggered by a series of worrisome developments: China’s economic slowdown; the crash in oil that fanned global economic fears; and the strengthening U.S. dollar, which hurt corporate profit growth.

Currency fluctuations were also a big reason that foreign funds fared so poorly. PowerShares International Dividend Achievers fell almost 13%. —TAYLOR TEPPER

HOW TO USE OUR RECOMMENDED LIST Building-block funds: For broad exposure to core asset classes Custom funds: Specialized investments that can tilt your strategy One-decision funds: If you want stocks and bonds in one portfolio

TOTAL RETURN ONE MONTH

FUND (TICKER)

ONE YEAR

EXPENSES (AS % OF ASSETS)

PHONE NUMBER (800)

9.9% 9.3

0.09 0.09

435-4000 435-4000

THREE YEARS 1

BUILDING-BLOCK FUNDS Large-Cap Schwab S&P 500 Index (SWPPX) Schwab Total Stock Market Index (SWTSX) Midcap/Small-Cap iShares Core S&P Mid-Cap (IJH) iShares Core S&P Small Cap (IJR) Foreign Fidelity Spartan International (FSIIX) Vanguard Total Intl. Stock (VGTSX) Vanguard FTSE A/W ex-U.S. Small (VFSVX) Vanguard Emerging Markets (VEIEX) Specialty Vanguard REIT Index Investor (VGSIX) Bond Vanguard Total Bond Market (VBMFX)

–7.1% –6.2% –7.7 –7.5 –8.6 –8.8

–10.7 –9.1

6.8 7.8

0.12 0.12

474-2737 474-2737

–9.2 –9.9 –9.9 –11.6

–11.6 –15.0 –11.0 –26.7

–0.2 –3.1 –1.5 –11.7

0.20 0.22 0.37 0.33

544-8544 662-7447 662-7447 662-7447

–5.3

–11.4

6.8

0.26

662-7447

0.8

–0.2

1.7

0.20

662-7447

FUND (TICKER) (VBISX) Vanguard Inflation-Protected (VIPSX) Vanguard Short-Term Infl.-Prot. (VTIP) Vanguard Total Intl. Bond Index (VTIBX)

ONE MONTH

ONE YEAR

THREE YEARS 1

0.6% 0.9% 1.0% 0.4 –3.0 –2.2 0.3 –0.4 –0.9 0.5 0.5 N.A.

EXPENSES (AS % OF ASSETS)

PHONE NUMBER (800)

0.20 0.20 0.10 0.23

662-7447 662-7447 662-7447 662-7447

CUSTOM FUNDS Large-Cap Dodge & Cox Stock (DODGX) PowerShares FTSE RAFI U.S. 1000 (PRF) Sound Shore (SSHFX) PowerShares S&P High Quality Port.(SPHQ) Primecap Odyssey Growth (POGRX) T. Rowe Price Blue Chip Growth (TRBCX) Midcap Ariel Appreciation (CAAPX) WisdomTree MidCap Dividend (DON) T. Rowe Price Div. Mid Cap Gro. (PRDMX) Small-Cap Royce Opportunity (RYPNX) Vanguard Small-Cap Value (VBR) WisdomTree SmallCap Dividend (DES) Wasatch Small Cap Growth (WAAEX) Specialty PowerShares Intl. Div. Achievers (PID) SPDR S&P Dividend (SDY) Cohen & Steers Realty Shares (CSRSX) SPDR Dow Jones Intl. Real Estate (RWX) iShares N. American Nat. Resources (IGE) Foreign Oakmark International (OAKIX) Vanguard International Growth (VWIGX) T. Rowe Price Emerging Markets (PRMSX) Bond Dodge & Cox Income (DODIX) Fidelity Total Bond (FTBFX) Vanguard Short-Term Inv. Grade (VFSTX) iShares iBoxx$ Inv.Grade Corp.Bond(LQD) Loomis Sayles Bond (LSBRX) Fidelity High Income (SPHIX) Vanguard Intm.-Term Tax-Ex. (VWITX) Vanguard Limited-Term Tax-Ex. (VMLTX) Templeton Global Bond (TPINX)3 Fidelity New Markets Income (FNMIX)

–9.3 –7.6 –8.5 –5.1 –9.0 –9.1

–12.4 –10.1 –12.5 –4.3 –3.5 0.8

7.9 8.4 8.6 11.5 12.4 13.9

0.52 0.39 0.92 0.29 0.63 0.72

621-3979 843-2639 551-1980 983-0903 729-2307 638-5660

–8.7 –6.5 –9.1

–13.8 –8.7 –7.4

7.0 9.6 9.2

1.12 0.38 0.89

292-7435 909-9473 2 638-5660

–11.7 –9.3 –10.2 –10.1

–20.3 –12.2 –14.3 –11.3

0.9 6.9 5.5 4.5

1.15 0.09 0.38 1.21

221-4268 662-7447 909-9473 2 551-1700

–12.8 –4.8 –5.3 –9.2 –13.7

–31.6 –8.3 –6.8 9.2 –8.8 8.2 –15.1 –1.2 –33.7 –14.3

0.55 0.35 0.97 0.59 0.47

983-0903 787-2257 2 437-9912 787-2257 2 474-2737

–10.9 –11.0 –11.3

–14.5 –12.6 –23.3

–0.6 –0.7 –9.4

0.95 0.47 1.24

625-6275 662-7447 638-5660

–0.6 –0.4 0.3 –0.4 –3.6 –3.1 1.2 0.7 –4.5 –3.3

–1.8 –1.9 0.9 –3.3 –10.8 –9.0 2.7 1.1 –8.6 –2.4

1.6 1.3 1.4 1.6 –1.2 –1.0 2.9 1.3 –2.0 –2.0

0.44 0.45 0.20 0.15 0.91 0.72 0.20 0.20 0.90 0.90

621-3979 544-8544 662-7447 474-2737 633-3330 544-8544 662-7447 662-7447 632-2301 544-8544

6.7 1.7 6.3

0.56 0.99 0.26

544-8544 544-8544 662-7447

2.5 4.2

0.58 0.66

638-5660 638-5660

4.6 5.0

0.15 0.15

662-7447 662-7447

ONE-DECISION FUNDS Balanced Fidelity Balanced (FBALX) –5.8 –5.5 Fidelity Global Balanced (FGBLX) –5.3 –6.6 Vanguard Wellington (VWELX) –4.7 –5.5 Target Date T. Rowe Price Retirement series (STOCK/BOND ALLOCATION) Example: 2005 Fund (45%/55%) (TRRFX) –3.3 –4.7 Example: 2020 Fund (68%/32%) (TRRBX) –5.5 –6.4 Vanguard Target Retirement series Example: 2025 Fund (70%/30%) (VTTVX) –5.5 –6.9 Example: 2035 Fund (84%/16%) (VTTHX) –6.9 –8.6

NOTES: As of Jan. 20, 2016. N.A.: Not available. Load funds are included for those

who prefer to use a broker. 1Annualized. 2Phone numbers are 866. 34.25% sales load.

SOURCES: Lipper, New York, 877-955-4773; the fund companies

86

m o n e y. c o m

MARCH 2016

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Getting Dizzy With My Daughter

by Rick Watson

W

HEN OUR KIDS TURN 16, my wife and I let them pick

a two-day trip anywhere in the world—as long as one parent accompanies them. My oldest daughter’s choice: to quench her thirst for roller coasters with Dad. (My stomach is a little stronger than my wife’s.)

Thanks to my frequent business travel around the country, our trip would be incredibly cheap. I used my miles for the airline tickets, the hotel stay was gratis from points, and the rental car was no cost owing to my gold-status awards. I didn’t even get charged for parking at the airport, thanks to a customer loyalty plan.

Then came the park tickets. I could have gone frugal here as well. Online specials would allow us access to the park for about $50 each.

88

m o n e y. c o m

MARCH 2016

But we had only one full day to play, and we chose Cedar Point in Ohio because it is home to more than a dozen coasters: wooden, steel, standing, upside down, and more. With two-hour lines for some rides, our roller-coaster binge could have easily been reduced to a bust.

So I researched and found that the park sold passes that let you skip the line at any ride. The catch: They cost $350 per person at the time. For a bargain-hunting, pointscollecting guy like me, that price made me break out in a light sweat.

But it was for my daughter on her sweet-16th birthday, so I forced myself to click the “purchase” button.

A pleasant summer morning greeted us at the park, along with the faint smell of fried foods and cotton candy. But we weren’t there to eat. I survived—and my daughter adored—every one of our 30 coaster trips. We rode the best ones four or five times, which would never have been possible if we’d had to wait in every line.

When it was all over, I surrendered to one more unfrugal choice.

Normally I don’t let my kids purchase souvenirs, which end up in the junk drawer a few months after the vacation. Especially not the overpriced photos—$10 each!— snapped of your coaster-terrified face speeding by.

Not this time. I shelled out $80 for shots of us screaming and mugging. It was a small price to pay to help me hold on to one more carefree day with my daughter before she transforms into a young woman.

Rick Watson is a medical executive who lives in Frisco, Texas.

Illustration by

dav e u r b a n

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Every T. Rowe Price Retirement Fund is designed to maximize your investment potential and give you the opportunity to best meet your retirement goals.

• 100% of T. Rowe Price Retirement Funds are low cost,* so your investment goes further • 100% of our Retirement Funds beat their 10-year Lipper average as of 12/31/15** • Retirement Funds are actively managed, and strategically allocated to and through your expected date of retirement

Results will vary for other time periods. Past performance cannot guarantee future results.

All funds are subject to market risk, including possible loss of principal.

Call our Retirement Specialists to consider rolling over your old 401(k).† troweprice.com/rollover | 800-541-5862

Request a prospectus or summary prospectus; each includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. The principal value of the Retirement Funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire (assumed to be age 65) and likely stop making new investments in the fund. If an investor plans to retire significantly earlier or later than age 65, the funds may not be an appropriate investment even if the investor is retiring on or near the target date. The funds’ allocations among a broad range of underlying T. Rowe Price stock and bond funds will change over time. The funds emphasize potential capital appreciation during the early phases of retirement asset accumulation, balance the need for appreciation with the need for income as retirement approaches, and focus on supporting an income stream over a long-term postretirement withdrawal horizon. The funds are not designed for a lump-sum redemption at the target date and do not guarantee a particular level of income. The funds maintain a substantial allocation to equities both prior to and after the target date, which can result in greater volatility over shorter time horizons.*Keep in mind that an IRA may be subject to an annual fee, and a fee may be assessed if the IRA is closed. Depending on your plan’s investment options, in some cases the investment management fees associated with your plan’s investment options may be lower than similar investment options offered outside the plan. **Based on cumulative total return, 34 of 36 (94%), 35 of 36 (97%), 35 of 36 (97%), and 20 of 20 of the Retirement Funds (including all share classes) outperformed their Lipper average for the 1-, 3-, 5-, and 10-year periods ended 12/31/15, respectively. Not all funds outperformed for all periods. (Source for data: Lipper Inc.) †Consider all available options, including remaining with your current retirement plan, rolling over into a new employer’s plan or IRA, or cashing out the account value.

T. Rowe Price Investment Services, Inc., Distributor.

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