Rome Wasn't Built in a Day

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

One of the stereotypical American traits is impatience. I want it, and I want it now! Sound familiar? This can be damaging from a financial standpoint…..not only from a spending perspective, but also from a planning perspective.

Financial planning is a process, or at least it should be. Some planning firms (mostly sales driven firms) operate as if the financial planning is event oriented. This means the planning is usually completed with the presentation of a hefty multi-page, disorienting, chart and graph filled report. While these plans are usually well done, they are missing one key component: the fact that life happens. A plan put into action today is usually obsolete tomorrow.

Life is constantly changing, and so should your financial planning. Every new job, home or car purchase, or a birth of a child can dramatically change a financial plan. Even smaller expenditures can throw a wrench in the mix. Ever had to pony up for a new HVAC unit? The ebb and flow of life can certainly be beautiful, but financial give and take is not conducive to a static financial plan.

As a comprehensive planner, I love the fact that my clients’ lives keep me on my toes. I love the challenges associated with the first time entrepreneur. Financial plans for entrepreneurs are always changing. I also love the challenges of a busy family with kids starting private school. Today’s education costs can certainly create a need for dynamic planning. The list of challenges goes on and on.

Developing a financial plan, implementing the plan, and then letting it go is dangerous. Financial planning is a process. Financial planning should be flexible. This is why I love my retainer business model. This allows me to assist my clients as their lives ebb and flow. Is your financial plan dynamic? Is it ever changing? The flexibility needs to come from your planner. If you don’t have the ability to be flexible, it may be time to search for a new advisor. Remember, life will not conform to your financial plan…..your plan needs to conform to life! Does yours?

10 Financial Tips for Newlyweds

By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/

My dear niece is getting married in March, 2011, to a wonderful young man. As I have been thinking of this wedding and the two wonderful people that will be starting a life together, I cannot help but think of the financial advice that I can offer them so they can have a prosperous life together.

Here are the top ten ways to keep financially sane, today and for the rest of your life together:

1. The power of compounding interest is truly a miraculous thing but it takes time. Start saving now when you have nothing but time ahead of you and your money will grow exponentially.
2. Always save 10% of your income—each and every year—no exceptions.
3. Go slow on large purchases and always consult with each other. Set a dollar limit that each can spend on his/her own.
4. Avoid credit card debt like the plague. Only charge what you can pay off when you get your monthly statement.
5. Have money set aside for emergencies and believe me, they will happen. A rule of thumb is approximately 3 months of your monthly earnings.
6. Be generous. Sit down together and decide what annual amounts you want to give your church or charities so that others can be blessed.
7. Contribute to your employer retirement plans so that you always get the match. If your employer has no plan or no match, consider contributing to an IRA or a Roth IRA. Remember… compounding interest is phenomenal.
8. Buy term life insurance only. Check with your employer about group term life, it is almost always the cheapest way to go.
9. If you are having trouble with more expenses than income, seriously look at cutting out the extras such as expensive cell phone plans, cable TV, eating out etc… Taking lunches to work saves a lot of money!

And, of course, number 10... Seek the wise counsel of your Aunt Judy. She knows what she is talking about!

Why Vision Matters!

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

Many of us business owners have spent time in thought contemplating business goals, but, while goal setting is certainly an important part of a successful business venture, vision is the glue needed to adhere our goals to the values in our lives. Goals are mile stones, and vision is the guiding purpose of our goals. A business without goals may be at risk of failure, but a goal without vision can destroy happiness. For example, simply setting a goal to find a job is not enough. Vision is needed to establish the purpose of employment.

So how does vision help my business? One needs vision to develop a proper plan, so, again, a plan without vision may not capture the values of the business owner. Let’s explore a little deeper. Let’s say a business owner has a goal to generate $100k in revenue. Is that enough? Maybe….but probably not. What is the vision of the owner? Does the goal incorporate this vision? Maybe the $100k goal is obtainable but at the expense of the owner’s family due to travel for business. A plan that includes vision can help ensure that a business will stay connected to the values of the owner and optimize a great work-life balance.

The best place to start is by asking yourself about the continuity between your business life and your personal life. Set the overall vision of your business. How does your work life balance look? Does your business involve employees? If so, how many and how would you like to treat them? These questions can help set the stage for vision creation. Once the vision is created the goals should be set and measured against the vision to make sure they are congruent.

Large and small companies write vision statements to guide the decision making process. If a decision is in opposition to the vision statement, the decision should be reconsidered. For example, a business owner has the following vision statement….To create the best widgets in the most ethical manner. So, if the business owner can outsource the widget production to a factory overseas with deplorable conditions but increase profits 10%, the decision flys directly in opposition to the vision statement.

Goals and vision work hand in glove to create a successful business, but one without the other can create a crack in the path to happiness. When creating a business plan don’t forget to include a vision statement. Do you have a vision statement? What are you doing with your business to create a great work-life balance?

Year End Financial Planning Tips

By Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

Roth Conversion
The income limitations on converting a traditional IRA to a Roth IRA have been eliminated and taxes due on a Roth conversion, processed in 2010, can be paid in 2011 and 2012.

Required Minimum Distribution
A required minimum distribution on your IRA and 401k/403b is required every year once you attain 70 ½.

Maximize your retirement contributions
Be sure to maximize your retirement plan contributions for 2010. Below are the maximum contributions for your 401k and IRA contributions for 2010. You have until April 15th to contribute to your IRA.

401k - $16,500 plus a $5,500 catch-up provision if you are over 50
IRA - $5,000 plus a $1,000 catch-up provision if you are over 50 (income limits apply)
Simple - $11,500 plus a $2,500 catch-up provision if you are over 50

Adjust retirement contributions for 2011
There is no change to 401k and IRA contribution limits between 2010 and 2011. However, if you have turned 50 you can make a catch-up contribution. A change in your income may also impact your ability to contribute to an IRA.

Harvest Tax Losses
If you have been thinking about selling some poor performing stocks or mutual funds, do so before the end of the year to take advantage of tax losses in 2010. However, if capital gains rates increase in 2011 it may be more advantageous to offset gains in 2011.

Charity Contributions
Go through your closets and garage before the end of the year and donate any unwanted items to get a nice deduction on your tax return. When you drop off your items be sure to get a receipt. When making a charitable contribution, consider donating appreciated stock rather than cash.

Take advantage of the annual gift allowance
In 2010 you can gift up to $13,000 per person without paying gift tax or impacting your estate tax exemption.

Make 529 Contributions
Contributions made to the Colorado 529 plan are deductible on your state tax return. Money can be contributed into the Colorado 529 plan for tuition that is payable in 2011.

Review your expenses and draft a new budget
Everyone should review their expenses and revise their budget at least once a year. December is a good time of year to review historical spending habits and make adjustments to your budget for the coming year. It is difficult to establish saving goals without a good understanding of what is available after your non-discretionary expenses.

Set financial goals for 2011
I recommend setting new personal and financial goals at the beginning of every year. Think of it as personal strategic planning. Set some long term goals for 3-5 years then identify some action plans for the next twelve months.

Adjust tax withholdings for 2011
Adjust your tax withholdings or estimated taxes for anticipated changes in income and deductions in 2011.

Organize 2010 tax documents
Year end is a good time to create a folder for all of the 2010 tax documents you will be receiving and to start organizing your expenses and receipts. You will have everything thing in one place when it comes time to complete your tax return.

Make adjustments for changes in family circumstances – birth, death, marriage, dependents, and retirement
Major changes in your life circumstances may result in numerous changes in your financial situation. For example a birth, marriage, or death will probably necessitate a change in your will and beneficiary designations. It also may impact your income tax withholdings. The birth of a child may result in significant tax benefits. With the birth of a child you also may want to consider starting a college fund and a change in life or disability insurance.

Spend FSA accounts
With many companies, flexible savings accounts cannot be carried over into the next year so be sure to spend the money in your FSA account this year, before you lose it.

Consider the impact of possible changes in the tax law
If the Bush tax cuts are not extended, there is a possibility that the capital gains rate will increase from 15% to 20%, that tax rates will increase, and that some tax deductions will disappear. These possibilities need to be considered in making your year end financial decisions.

Are You Asking the Right Financial Questions to Develop Wealth?

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

Recently, a prospective client walked into my office concerned about his portfolio and was seeking investment advice. The interesting fact was the investment question was not the right question. Investments were not the issue, and this is not uncommon.

While investments are the easy target for financial blame or success for that matter, investments are usually not the catalyst to wealth. Real wealth is created by managing financial elements that can be controlled, and the stock market certainly cannot be controlled. It’s more important to ask questions that will assist in wealth creation.

What questions should you be asking yourself?

1. Are you spending less than you earn?
This is the starting point for all looking to create wealth. If expenditures exceed income, financial success will not be attainable. Actually, it’s quite simple: most financial problems can be solved in one or two ways….earn more or spend less. Living within your means is the first step to financial freedom.

2. How much are you savings?
Spending less then you earn may not be enough. A good target is to save at least 10% of earnings. This financial tenet is the foundational footing in which all financial growth is built upon.

3. How much are you paying in taxes?
Taxes are the single largest recurring expense that most of us will have from now until the day we die…..and maybe even after death as well. While taxes are a requirement, maximizing tax savings strategies are the responsibility of the taxpayer, and most taxpayers simply fail to utilize available strategies. Whether the cause is laziness or a lack of tax knowledge, the end result of anemic tax management can cost thousands of dollars.

4. Do you have consumer debt?
Not all debt is bad, but consumer debt (credit card, car loans, revolving debt from furniture stores…etc) is detrimental to financial success. Most often, debt is incurred because of spending issues….spending more than you earn. Elimination of consumer debt is paramount for financial stability.

While poor investment returns may get the blame for the lack of financial growth, the usual suspects to poor financial growth can be attributed more often to one of the four areas above and not investment returns. Investments are an integral piece of the financial planning pie, but investments are not the holy grail to financial bliss.

Control the areas centered around the four questions above and then worry about investments. Spend less than you earn, save at least 10% of your earnings, reduce taxes, and eliminate consumer debt, and financial progress is just around the corner.

Can you honestly and successfully answer these four questions? Are you worried about investments when investments aren’t the true thorn in your side?

To Roth or Not to Roth

By Linda Leitz, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

Congress lifted the income ceiling in 2010 for conversion of a traditional IRA to a Roth IRA. So lots of people are wondering if a conversion is a good idea. The answer is – as it so often the case – that it depends.

What’s the difference between the two types of IRAs? Contributions to a traditional IRA might be partially or fully tax deductable, so this type of retirement account has some or all of the balance subject to tax when the money is withdrawn. Also, with a traditional IRA, you are required to withdraw a portion of the account every year beginning when you turn 70½ and those withdrawals are taxable. Contributions to a Roth IRA are never tax deductible, but withdrawals aren’t subject to tax. Also, you are never required to withdraw the money from a Roth. Both types of IRAs have a 10% penalty if you take money out prior to your age 59½, with a few exceptions.

Converting from traditional IRA to Roth means that the taxes need to be paid on the taxable portion of the traditional IRA, which sometimes means the entire amount. During 2010, that converted amount can be taxed partially in 2010 and partially in 2011. But unless you know you’re going to drop into a lower bracket in 2011 due to a life event – retirement, quitting a job to go to school full time, taking a big pay cut – spreading the tax over two years probably doesn’t make sense. We know the tax brackets in effect for 2010 and it’s likely that they’ll be higher in 2011.

It’s important to remember that you don’t have to convert your entire IRA. You could decide to convert just part of it. So if the top IRS tax bracket you are subject to is 28%, you could convert enough of your IRA to a Roth that you wouldn’t have income pushed into the next tax bracket and leave the rest in your traditional IRA in place. That Roth balance will now be available in your retirement years to be withdrawn only if you want to withdraw it and will be tax free if you do use it.

So who is a Roth conversion most appealing to? If you are in a lower tax bracket this year than normal, you might want to consider it. Maybe you just retired or you’ve been laid off or had a pay cut in your household. If you are ten or more years away from retirement and don’t expect your tax bracket to go down much when you leave the workforce, that’s another favorable thing. So if you’ll have a pension that will pay you when you stop working or your IRA is really large, you might want to look at a conversion. Ironically, the people who haven’t been eligible this year – high income earners – often have the hardest time justifying a conversion. I recommend doing a Roth conversion prior to age 59½ only if you have enough cash outside the IRA to pay the tax. So paying between 28% to 35% to the IRS (on top of any state income tax) to move into a tax free instrument is a difficult pill to swallow at just about any time. But to do it during a recession when it’s especially important to keep lots of funds liquid in case of a loss of income or another financial emergency is too aggressive for some of these folks. For people already in retirement, a low stock market can be a good time to do the conversion. If you account values are down, moving some money to the Roth will allow that money to grow tax free. Assuming growth on the account of 8%, it takes about three to five years to get back what was paid in taxes. From then on, all the growth I the Roth puts you ahead in the tax game on your retirement funds.

Still undecided? Make an appointment with a financial planner to see if your particular situation could make sense for a conversion. Your situation is unique and one of the factors that can’t be quantified is whether or not you’re comfortable with the transaction.

Living Dangerously in the World of Fixed Income

By Jane Young, CFP, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

It is important for us to stay diversified and keep a prudent amount of our portfolio in fixed income investments - but where? We can avoid interest rate risk and default risk with CDs; however, we may sacrifice on return. Currently most short term CDs are paying less than one percent. We can get a slightly better return for a longer term CD but does this make sense in such a low interest rate environment? With CDs, the biggest downfall is the lost opportunity for a higher return.

If you want a higher return and you are willing to take some additional risk, consider short term bond funds. A short term bond fund that invests primarily in treasuries and government agency bonds has a very low default risk. However, there is some interest rate risk. Interest rate risk is due to the cause and effect relationship between bonds and interest rates. When interest rates rise, after the purchase of a bond or a bond fund, the value of the bond will decrease. For example, you purchase a $20,000, 10 year bond that pays 3% interest. A few years later interest rates go up to 5% and you decide to sell your bond that only pays you 3%. When you try to sell your bond you can’t get $20,000 for it because it pays 2% less than the market rate. However, several buyers may be willing to buy your bond for a discounted value to make up for the lower than market interest rate. If you hold your bond until maturity it should sell for the full purchase value of $20,000. The inverse is also true, if interest rates go down your bond will be worth more than what you paid. The degree to which this occurs is magnified by the term or duration of the bond. Short term bonds have less interest rate risk than do long term bonds.

Default risk is the risk that the company or entity issuing the bond will be unable to pay you back. In essence a bond is a loan made to a company or a government entity for a specified interest rate over an agreed upon period of time. US Government bonds and bonds backed by the US Government have an extremely low risk of default. Corporations, Municipalities, and other governmental entities have varying degrees of risk depending on their financial stability. Most bond issuers are assigned a rating to help investors assess the potential default risk of a bond.

A mutual fund has less default risk than an individual bond because you are buying an ownership share in several different bonds. However, you have less control over interest rate risk. If you own an individual bond you can hold it until maturity. If you own a mutual fund, the fund manager may be forced to sell bonds at an inopportune time due to a high rate of withdrawals. If the fund manager could hold all of the bonds to maturity there would not be an actual drop in value. However, bond funds must reflect a share price based on the current value of the bonds held in the portfolio.

If you want a higher return you may want to consider intermediate term bonds but be prepared for a corresponding increase in the level of interest rate risk. If you want to maximize return you could consider high yield or junk bonds. However, be very careful in this arena because high yield bonds are subject to both interest rate risk and default risk. In the current environment, interest rate risk and default risk are very high. Unless you are an expert in high yield bonds, this is a lot of risk to take on the portion of your portfolio that is designed to be less risky and serve as a buffer against the stock market.

Most of my clients are best served by investing in a combination of CDs, high quality short term bonds, and some high quality intermediate term bond funds. Unfortunately, there are few really good options in the current fixed income market.

Does Your Retirement Plan Aswere These Three Questions?

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

It seems that with the market downturn in 2008-2009, there has been concern over folks ability to retire. One of the probing questions I receive from new clients is “When can I retire?” Sounds like a simple question, and for the most part (at least on my end) it is. The difficulty usually stems from a lack of preparation by the client or a non comprehensive view. Here are a few things that often get over looked from the client’s standpoint when performing retirement projections:

1. What will retirement look like for you?

Transitioning from a full time employee or business owner to the life of leisure is a big step. It’s also a step that fewer retirees are taking in today’s world. The old picture of retirement has changed for many Americans….and not necessarily for the worse. The new picture of retirement involves a higher degree of engagement in life’s activities, whether it be part-time employment/business ownership, volunteerism, increased family involvement, or simply a schedule of engaged activities. This new picture is farther from the rocker chair on the front porch.

Understanding what retirement may involve will help to ascertain the needed nest-egg to take you to the next stage in life. While the market’s tenuous past put a damper on many retirement dreams, it doesn’t have to. There are many options to transition into a new phase in life, but this requires a little forethought and is essential to proper retirement planning.

2. What about Health Care Costs?

Now I bet I have your attention. This thought certainly drives fear into most people, especially since the media and advertisers do a wonderful job of painting a dark picture. While Medicare and Medicare supplements (Medigap policies) can do an adequate job for those 65 and older, younger retirees face the road of individual coverage. While challenging, this should not be a deal breaker for most folks. There are cooperative plans, high deductible plans, and high deductible plans tied to health savings accounts that deliver options.

Health care costs are on the rise and should absolutely be considered when planning for retirement. Living a healthy lifestyle and proactively addressing health care needs should be a critical part of the any pre-retirement plan.

3. How much will you pay in taxes?

Taxes are the single largest recurring expense most people have in their lives. Properly managing taxes during the accumulation phase of life can get you to retirement ahead of schedule. Preparing and maximizing retirement taxation can be a real difference maker when it comes to the bottom line need for retirement. Tax efficient withdrawals can save big dollars, especially for those in lower tax brackets. For example, the current ability of those in the 10-15% tax bracket to utilize a 0% capital gain tax (up to the 15% tax bracket max) can save thousands of dollars in taxes. Through proper tax planning and strategies many retirees can drop into lower tax brackets during retirement….even after populating higher brackets during pre-retirement.

A retirement plan without a solid tax plan is a mistake waiting to happen. Simply estimating what tax bracket you may fall into is not enough. A comprehensive tax picture that takes into account maximizing withdrawals by efficiently juggling the taxable and retirement account ( IRA, Roth, or other qualified plans) can mean the difference in retiring sooner than later.

The days of our grandparent’s retirement picture are dwindling, and, hopefully, the days of improper retirement planning is, as well. The simple calculation of yearly need multiplied by years of retirement (mix in inflation) is not enough. Utilizing the standard withdrawal rate of 4% against your nest-egg is not the answer either. A true retirement plan incorporates a comprehensive view to include the above topics and more. By utilizing a comprehensive view to develop a tax-efficient retirement plan that incorporates a realistic retirement picture may show you that you are closer to retirement that you realize.

If you are struggling to paint your retirement picture, you may want to seek guidance from an advisor. An organization of advisors that does a wonderful job in this area can be found on the internet at http://www.acaplanners.org/. ACA is an organization of fee-only planners that specializes is holistic financial planning, and, yes, in full disclosure I am an ACA member!

Top Five Year End Tax Saving Strategies

By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/

We are only two and a half months away from 2011! Some families are realizing that they do not have a lot of time to enact some tax savings before the year is out. We're here to help! It appears that 2011 is headed for higher taxes, below are the top five ways to do some tax saving before the year is over:

1. Sell stock. A smart tax strategy is to sell some highly appreciated stock/stock funds before the end of the year and pay capital gains at the lower rates in 2010. Often, the tax bite can be mitigated by also selling some of your “losers” at the same time, thereby offsetting some of the gains with the losses.

2. Charitable giving. Charitable giving is always a great way to save on taxes and do some good! Gifting appreciated stocks to your favorite charity(s) is also a great tax savings tool. The charity gets the fair market value of the stock transferred and you get the tax deduction and it saves you the capital gains taxes.

3. Tax sheltered giving. Tax sheltered plans are one of the best gifts that Uncle Sam has ever given us. A person 50 and older can defer $22,000 into his/her 401k, 403b, and 457 plans for 2010 and everyone else can defer $16,500. This results in significant tax savings for you, the investor. Check your current pay slip and see how much you are on track to contribute for 2010. If you will not meet the above maximums, ask your HR department to increase the monthly amount so that you can take advantage of these limits and save BIG on taxes.

4. Invest in a Roth Conversion. Roth conversions are in the news this year. For the first time ever, folks making $100,000 or more can covert their traditional IRAs to Roths this year. Yes, taxes will be due on the converted money but Uncle Sam has also given us another nice gift. You can pay the taxes over a 2 year period. That really helps take the sting out of the tax bite. An interesting provision in the recently signed Small Business Bill is that employer tax sheltered plans can now allow their employees to do Roth Conversions of their 401k, 403b and 457 plans. If this is of interest to you, check with your HR department for the details.

5. 2010 Tax Energy Credits. The personal energy tax credits expire at the end of 2010. If you are planning on getting more energy efficient windows and/or doors or installing heating or cooling units, then please do so before the end of 2010 and get up to 30% of the purchase price as a tax credit for the year. Credit tops out at a generous $1500.

A Money Moment with Jane - A Few Financial Planning Suggestions for the Fall

By Jane M. Young, CFP, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

» Required Minimum Distributions were not required for 2009. However, if you are at least 70½ you will be required to take a distribution in 2010.

» If you are planning to convert some of your regular IRA to a Roth IRA, do so in 2010 to spread the taxes over 2011 and 2112.

» Have you maximized your Roth IRA and 401k contribution? The 2010 contribution limit for the Roth is $5,000 plus a $1,000 catch-up provision if you are 50 or older. The 2010 contribution limit for 401k plans is $16,500 plus a $5,500 catch-up provision if you are 50 or older.

» This is a good time to do some tax planning to make sure your withholdings or estimates are adequate to cover the taxes you will owe in April.

» Do you have any underperforming stocks or mutual funds that should be sold to take advantage of a tax loss in 2010?

» Now is the time to go through your home for items to be donated to charity. These can provide a nice deduction on your 2010 tax return.

» Start planning for Christmas now and save money by working to a plan.

The Multiplicative Power of Goals

By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/

We all know if we commit seriously enough to our goals to write them down, we’ll probably have a better chance of achieving them. But have you ever considered the multiplying and powerful effect of goals on our finances?

Mark and Cindy [names changed] came to us seeking financial advice. From the start it was clear they needed more than simply a review for their retirement and investment plan. Although they are halfway through their working lives and both earn good incomes, they had almost no savings. Each had significant credit card debt, as well as a crushing tax obligation that caused immense stress as they struggled to pay every April 15.

By their lack of progress you might think Mark and Cindy were not working together on their finances, but you would be wrong.

It’s true they never discussed money, their goals, or concerns. As a result, it was certainly the case that they didn’t work toward positive ends. However, they did work together. When one would splurge on a new computer, for example, the other partner would feel he or she had received “permission” to spend too.

In working with Mark and Cindy, we came up with clearly spelled-out realistic small goals on saving, debt payoff, and discretionary spending. One year later they not only had concrete goals they both bought into, they had made a significant start on building a cash reserve to eliminate the concern that money “isn’t available”; a few credit cards were paid off; and the tax situation was no longer a crisis because they had a jointly conceived plan in place for saving to pay them. More importantly, thanks to regularly scheduled meetings, Mark and Cindy began to have conversations about money for the first time in their marriage.

The positive attributes of goal setting are truly multiplicative. The simple act of writing down thoughtful and attainable goals, as well as action steps to achieve them, is much more than an exercise. Mark and Cindy’s financial position today is better by several times what it was a year ago, and several more times what it would have been had they remained stalled in their prior status quo. Their future outlook no longer is one of debt – though there is still some to deal with for some time yet. A successful financial future is now more than just a dream.

Consider also these side benefits of working on goals:

1.Real dialogue, based on facts not resentments or hidden agendas, leads to a mutual understanding of financial goals and less individual anxiety.

2.An outline of the steps to success provides ‘real’ measurements to show what will sabotage the plan. It doesn’t rule out the daily latte, but when the trade-offs between long-term financial success and short-term desires are clarified, bad habits are forced out because there is no longer room for them!

3.The satisfaction of meeting short-term goals successfully and knowing the long-term picture is on track motivates us to stick with positive financial habits.

Here are a few tips to help develop your written goals:

Focus on the short to mid term. Goals aimed at more than five years from now require actions too but may seem either overwhelming or too uncertain. Even small steps in the right direction rather than toward debt will snowball and lead the way to financial success.

Include target dates and amounts. If your goal is to start a cash reserve fund, answer these questions: What will you need in cash reserves? By when realistically can you have this accomplished? How much will you start saving on a periodic basis to get there?

List the next action steps. What is the next step you need to take to make your goal a reality? If it is a longer term goal, list what you need to do in the short term (e.g., retirement goals: continue to save 10% of income and review asset allocation regularly).

It’s important to revisit and revise your goals and action plan periodically, and not just feel good about creating them to put them on a shelf.

The preceding blog was originally published by the Financial Planning Association^®(FPA^®). To view the original blog please visit the FPA Web site.

Same Paycheck – More Retirement Savings

By Julie Lawrence, CFP®
Tampa, FL
http://www.lawrencefinancialplanning.com/

I am always amazed at the number of prospective clients who tell me they don’t contribute to their 401ks at work, often missing out on their company matching program. The first words out of my mouth are always, “if I can show you that your paycheck will stay about the same, will you contribute to your 401k?” Of course they usually say yes, and then I show them how this works.

For example let’s say your bi-weekly paycheck is $800 and your company matches up to 50% of your 401k contributions. If you are single, at this pay level you will fall in the 15% tax bracket. We’ll keep it simple and not worry about all the other deductions. I just want you to get the theory behind pre-tax deferrals to your 401k. This is you now:

Company Match $0
Pre-tax Deferral $0
Pay $800
Less federal taxes $104
Net Pay $696

Now let’s defer 1% of your pay into your 401k. This is $312 a year saved, but your paycheck only went down $182 a year.

Company Match $4
Pre-tax Deferral $8
Pay $792
Less federal taxes $103
Net Pay $689

Now let’s defer 3% of your pay into your 401k. This is $936 a year saved, but your paychecks only went down $520 a year; and look your taxes dropped too!

Company Match $12
Pre-tax Deferral $24
Pay $776
Less federal taxes $100
Net Pay $676

Now let’s defer 5% of your pay into your 401k. This is $1,560 a year saved, but your paychecks only went down $884 a year; and look your taxes dropped again!

Company Match $20
Pre-tax Deferral $40
Pay $760
Less federal taxes $98
Net Pay $662

I hope these examples encourage you to defer to your 401k and especially if you have a company matching program, do not walk away from free money!

Why I'm A Fee-Only Financial Planner

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

If you read my last blog post, you recall I discussed the different types of planners and how they are paid. Today, I will tell you why I am a firm believer in fee-only financial planning.

Fee-only financial planning is a wonderful way for clients to receive advice in a fiduciary manner. As a fiduciary, the planner puts the clients’ interest first. Fee-only planners receive their pay directly from the client, which virtually eliminates conflicts of interest. As a fee-only planner, I don’t sell anything, except maybe a good night’s sleep. I don’t receive any commissions, referral fees, or kickbacks, so, therefore, I don’t have a conflict with the advice I give to my clients. What I recommend to my clients is in their best interest….not mine.

Another wonderful aspect of fee-only planning is the ability to practice from a holistic viewpoint. This is my favorite part of my job. Financial planning is a process…not an event. Life changes, therefore I love having the flexibility to assist my clients as their lives change. It’s not about one particular piece of the planning puzzle: it’s about the entire puzzle and maximizing every piece. As a fee- only planner, my fees don’t change whether I am discussing investments or insurance, estate planning or cash flow, business planning, or tax planning. It’s all part of the big picture.

My business model allows me to serve my clients in a comprehensive fashion. With my simple retainer billing method, my clients pay me a fee, and I am their planner. I’m able to see the big picture and guide the client along life’s journey. This is why I am a fee-only planner, and I love my job.

What Is a Fee-Only Financial Advisor?

by Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

While the push for consumer education regarding financial planning has grown over the last ten years or so, many folks still are confused about how financial planners are paid. Essentially, there are three types of planners: commissioned, fee-only, and fee-based.

Commissioned Advisors receive their pay from products they sell. This type of business model can create a conflict of interest. The dilemma starts when an advisor makes a recommendation of a product that will benefit his or her personal earnings. Is the product offered in the client’s best interest or in the interest of the advisor’s back pocket? This model can be extremely confusing for the client due to the lack of transparency of what the advisor is truly earning for the services rendered.

A fee-based advisor is an advisor who receives some commissions and charges a fee for other services. For example, a fee-based advisor may charge a flat fee for a comprehensive financial plan but may receive commissions for investment products sold. This business model is not conflict free. Again, confusion over the total fees earned by the advisor can be created by this model.

Fee-only advisors offer the easiest model when it comes to understanding fees. What the client pays the advisor is what the advisor earns for services rendered. This creates a clean and understandable relationship between client and advisor when it comes to fees. The client can rest at ease that the advisor is making a recommendation that is in the client’s best interest and not the advisor’s pocketbook. This model also allows the advisor to make referrals to outside professionals with the client’s best interest in hand.

Fee-only advisors don’t sell products, period. This knocks down walls between the client and advisor and allows for a better understand from a transactional view. This means the client will always know where they stand with the advisor in terms of fees. This puts the advisor in a fiduciary position and allows advice to be delivered with the client’s best interest in hand.

The National Association of Personal Financial Advisors (NAPFA) is a champion of fee-only financial planning and is a great place to get more information regarding fee-only planning, as well as finding a planner in your area. WWW.NAPFA.org

Revisiting Your Divorce During the Recession

by Linda Leitz, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

When a divorce is final, the spouses or a third party like a judge or arbiter have made decisions about how assets, debts, and cash flow will be handled. It’s common to have requirements to sell a home and divide the proceeds, refinance debt to remove one spouse from a loan or credit card, or have alimony (also known as spousal maintenance) paid by the spouse who was the primary earner. I’ve said that there are few things in life as final as Final Orders in a divorce. But that’s not always the case.

These “final” decisions are based on many factors – how long a couple was married, what the financial resources are to both parties going forward, and what’s deemed fair in that particular state and courthouse. These factors usually incorporate what has happened historically in the economy, which is assumed to be a foundation for what will happen in the future.

In the midst of the worst recession since the Great Depression, some people are exploring reopening their financial settlement. Maybe the house that was to be sold when the kids moved out is now underwater. Maybe the credit card to be refinanced can’t be. Maybe one of the former spouses has lost a job or has had earnings reduced.

So when is it reasonable to restructure a divorce settlement from several years ago? Ethical, intelligent people in the family law arena struggle with how to address this in the current environment. Answers and outcomes vary widely. There is a long list of considerations, but here are a few.

- The first and biggest is whether or not the divorce decree allows for changes. If alimony was part of the settlement and specified as non-modifiable, that is probably not worth pursuing.

- If the reasons you want to revisit your settlement are factors that impact your ex as well as you, think carefully about why your divorce would be worth modifying after the fact. For instance, if your income is down, but your ex has also lost earnings, it might not make sense to revisit alimony.

- If the factors that negatively impact you are outside the control of your spouse, a judge might not rule in your favor. For instance, if the house was to be sold and proceeds divided, but more is owed on the house than it would sell for, forcing a sale won’t get either of you a great outcome. But if the house could be sold for less than originally anticipated and you’d each get some money and you’d now be off the mortgage, that’s worth approaching your ex about.

- If you want to make a change because you believe in your heart that your long term well being will always be the responsibility of your former spouse, think again. This is true in any economy. Unless you are disabled, it’s probably in the best interest of you, your ex, and your kids that you assume that you are responsible for making your financial future a good one. When people tie their futures to each other through a marriage, they agree to weather storms together. When they untie their futures through a divorce, they can each assume the autonomy to make their own choices and live with the consequences of their life decisions. Looking to someone else to solve your problems is seldom healthy emotionally or financially.

Variable Annuity Updates Are Not Always an Upgrade

by Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/

Recently, certain variable annuity customers of insurer The Hartford received correspondence from the company that they may hold an old contract which might benefit from replacement for a newer annuity product.

Angry financial advisors have pointed out that the company did not say specifically how customer specifically may benefit from exchanging their current product. Advisors are concerned that the newer products may in fact offer lesser benefits for a higher cost, and recent history shows they may be right.

With the market crash, many insurers found they had improperly priced their annuity products, placing their ability to pay the promised benefits at risk. As a result, product benefits were scaled back, and their costs increased. A vice president of marketing at an insurer recently wrote, "one response was to introduce 'simplified' products with fewer features and vanilla benefits. Companies are promoting these new simplified offerings as lower cost and more consumer-friendly; in reality, they often serve the interests of the provider and disproportionately reduce the value to the customer."

When I come into contact with advisory firms that use annuities, I often find the advisors and representatives sell their expertise in offering 'new' products. In fact, just like The Hartford, these representatives do not always take the time to understand your current product past the realization there is another product which may offer a feature which provides the advisor with a reason to place a sale. They frequently recommend 'upgrading' to new annuities every several years.

The catch is often that while the benefits of newer annuities may be less, they often sound more attractive to a prospective consumer who would not know better. Recent features that 'lock-in' market gains sounds attractive at first glance, however the income stream offered from a variable annuity product may be significantly less than traditional products or prior versions of the annuity. The 'benefit' of the new feature might mean significantly less income and higher fees not worth the cost to pursue.

Annuity owners need to independently compare all of the features and costs of their current product with any proposed change. It often is also in the financial advisors interests to sell a new product, since many products front-load commissions; when working with a new advisor, it almost always makes sense for the advisor to propose a sale since they aren't paid on your prior contract. However, when placing an annuity sale, the advisor is not only wearing the hat of your advisor, but they are also acting as a 'producer' for an insurance company.

For these reasons, don't count on an insurer or advisor to act only in your best interest when it comes to being sold an annuity product.

Young? Have Your Finances Under Control? You Might Benefit from Financial Advice Too

by Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/

Call it youth. We don’t think we need help with much. And according to a few articles I’ve come across recently, young people on the whole generally don’t perceive a need for professional financial advice.

Although age is just a number, let’s assume for purposes of seeking financial advice that being ‘young’ ranges from the early 20’s to mid-40’s. And as someone who would be considered a young client, I completely understand the hesitation. The interaction that many have up until they accumulate some wealth is typically a lack of service since you are not a big account, or being sold a product like home owners insurance. We may even have friends or acquaintances starting careers in the financial world who we can’t imagine paying for advice from.

But, just over the last week I found myself working with several younger clients on issues that covered a wide spectrum of financial planning areas. In speaking to more mature clients about whether they would have benefited from advice earlier in life, the response is always a resounding “Yes!”

I would imagine a few of the ways they would have benefited from engaging an advisor when starting out are as follows:

Having a professional guide who knows you well enough to help navigate problem areas you may not have anticipated.

Learning how to set realistic goals along with manageable steps to achieve them.

Being held accountable for “slips” so you may think twice about charging a major purchase on your credit card or cutting back on your savings plan if someone else will know about it.

If you have a spouse or significant other an advisor can help:

Facilitate conversations about finances. We all know the impact of money on relationships. An advisor can not make decisions for you, but they can create a dialogue between people with different personalities towards and histories with money.

Develop a mutually agreeable course. Often one person in a couple has a dominant financial personality. An advisor can be the independent voice that helps the two of you negotiate differences in your personalities to formulate and clarify the course.

Provide reassurance. Should a anything happen to either of you, you know someone familiar with your goals will be there to support the other spouse.

And since young people are just about always in the beginning stages of their financial life cycle: How about the value and satisfaction of starting out on the right path instead of stumbling along? In the long run, starting your finances on the right foot early can easily overcome the benefits of waiting until the day you earn a little more.

As a profession, advisors may not have the best track record of pursuing younger clients. But, the so-called ‘account size’ mentality is quickly becoming a thing of the past. There are many ways to engage a financial advisor today, whether it is on an hourly retainer, per project basis, or a ‘coaching’ relationship. One of the realizations advisory firms today are coming to is that individuals have different needs for the type and quantity of advice.

Financial planning is not just for people who need to prepare for retirement. Young adults have their own challenges, which can include saving to buy a first home (as well as questions on the amount and process of that purchase), tax planning, insurance needs, setting up a college fund for a new baby, and more. Finding an advisor to work with even before life gets “complicated enough” is well worth the effort to get started on the right path and move efficiently toward realizing your goals.

The preceding blog was originally published by the Financial Planning Association®(FPA®). To view the original blog please visit the FPA Web site.

Woah, Baby!

by Erin Baehr, CFP®, EA
Shawnee-on-Delaware, PA
http://www.baehrfinancial.com/

We are so thrilled to have welcomed our new grandson into the world, just a few days ago! All of us in the Baehr family are in new baby heaven. While his mommy and daddy are thinking about diapers and feedings, my mind wanders to the financial part of being a new parent. Because of my company's name, people often ask if my family members work in the business, and while they do from time to time, I explain that I included "Family" in the name because family is what I'm all about. One of my greatest joys is teaching young people about finances, especially when a blessed addition to the family suddenly makes things a whole lot more complicated financially.

So in the spirit of my recent letter to my son Andy, here is some advice for our new parents to think about- when the new baby fog lifts a bit of course.

No doubt right now you are buried (maybe literally) in diapers, toys, and feedings, so taking care of household paperwork is hardly a priority. But now that you have that precious little one, you're going to need to take care of a few things. First on your list is a will- especially naming a guardian should something happen to both of you. There’s a great book called Wear Clean Underwear by Alexis Martin Neely that can help you think it through. Alexis is an attorney and also has a website called www.KidsProtectionPlan.com, where you can print out a document to name your guardians. It is not a substitute for a properly drafted will, but a tool to guide you in the process.

Life insurance may be something you haven't thought about, but let's talk about getting some coverage, ideally a policy you own outright. If you are young and healthy, term coverage is a cheap way to give your family priceless protection, should something happen to you.

Most parents think of saving for college as something they should do right away. While I don’t discourage saving for college, your first priority should be to establish an emergency fund for your family, maximize your retirement savings, and then start saving for college. It’s the old “put your oxygen mask on first” theory. It’s much easier to draw from your own funds to pay for college than it is to use college funds to pay for a family emergency. That said, there's nothing wrong with suggesting family and friends contribute to a college account instead of buying toys for birthdays or holidays.

Think long term when it comes to how you define your child’s standard of living. What I mean by that is, will you be able to keep your child in the lifestyle to which she has become accustomed when he is a teenager? A parent of any teen will tell you, the cost of their “care and feeding” increases exponentially as they get older. Be careful what habits you (and their grandparents) instill; a dozen pair of toddler shoes costs a whole lot less than a dozen pair of Nikes.

Take advantage of flexible spending accounts at work if they are available. With these plans, because you are able to use pretax dollars for out of pocket medical expenses. The trick is you’ll have to choose an amount to defer to the account prior to the start of the new calendar year. It's a use it or lose it system, so it's better to estimate on the low side. These accounts are available for child care expenses also, and may save you more taxes than the child care tax credit; you'll want to check with your tax advisor (me!).

Please kiss that beautiful baby goodnight for me!

Affordable College: Don’t Pay Retail!

by Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/

Is college now only for the wealthy? The College Board announced that tuition and fees increased over 14% for public universities and 6% for private colleges in 2009. The posted prices for higher education have more than doubled over the last decade, a rate averaging over 7% a year, which far outpaces the general rate of inflation for that time period. Have we reached the point that only the wealthy can afford to send their children to college?

The New York Times reports that families earning $100,000 a year would have to save about $1,000 a month for 18 years in a 529 plan to send 2 children to a public college such as the University of Michigan ($51,000/year/per child for four years). That’s more than the parents are likely to be saving for their own retirement! Looking at the numbers can be disheartening, but the information I have outlined below for you will show how college can be within the reach of average American families.

It is interesting to speculate why tuition has risen so much so quickly. Critics point out that the answer may lie in the perceived importance of a college degree and the corresponding public and social policy of expecting, or even insisting, that children to go to college. As a result, colleges have increased their non-tuition sources of revenue from federal and state governments and from alumni contributions so that those sources now account for over 70% of college funding. The big secret is that over half of non-tuition funding is used to subsidize tuition expenses for students with more moxie than money.

You may conclude that colleges simply spend more as their funding increases. Having tenured faculty, building more buildings, and offering more courses are all huge status symbols in higher education. These involve costs that never do down, only up. So our culture's emphasis on the importance of college leads to open-ended support for higher education, which in turn ratchets up college costs.

It is important to keep college costs in perspective. More than half of the four-year colleges in this country cost less than $9,000 per year. This includes tuition and fees, but not the other components of college costs: room and board, personal spending, books, and transportation. Is a college degree worth it? There is no question that college graduates earn much more than their cohorts (it is estimated $1million more over a lifetime) who are high school graduates and don't go to college. College graduates are also half as likely to become unemployed as those with only a high school degree.

But there is increasing doubt whether ‘Ivy League’ schools are worth the price. Do Ivy League graduates earn that much more than graduates of other schools to justify shelling out $200,000 for a B.A. degree? The value of better schools is not just their faculty and facilities, but the other students. High-end colleges provide much stiffer competition, and that continuing challenge is ingrained in the experience, deepening student scholastic relationships. This results in very strong ties to the highest achievers in society; networking that can shape opportunities in later life.

Many parents ignore college options for their children because they look at only the ‘sticker price.’ In fact, the only parents who pay the full sticker price are the more affluent. There are huge amounts of grants, scholarships, loans, and other subsidies available to most students. The more modest the means of the parents, the more aid is available. Many of the most highly regarded colleges (Harvard, Yale, Princeton, etc.) have programs to pay 100% of a gifted student’s costs if their parents don’t have the means. Many schools have acceptance policies that are "need blind," meaning that the student's acceptance is not based on whether he or she can afford to pay the full tuition. (It's a good idea to ask the admissions office of a prospective school whether or not their acceptance policies are "need blind.")

With this in mind, I recommend that my clients consider the “1/3, 1/3, 1/3 College Strategy.” I am using this strategy to fund my seven grandchildren's education, and my clients have used it successfully in one form or another for the past 20 years. I call it the “1/3, 1/3, 1/3” plan because the funding comes from three sources:

1. The student must come up with one-third of the total college costs. This may be from savings, working, scholarships, grants, gifts, — it is the student’s obligation to chip in this part.

2. Student loans, not cosigned by the parent, should make up another one-third of the costs and it’s up to the student to research the options and get a good deal.

3. Finally, the parents chip in one-third. And, if/when the student graduates, the parents commit to making the payments on the student loans. Upon the parents’ death, the students can use their inheritance to pay off the loans, if any still remain unpaid.

The advantage of the “1/3, 1/3, 1/3” plan is that the students have ‘skin in the game’. They can go to whichever school they choose, but they have to come up with their third of the correspondingly higher cost. And if they drop out without finishing college, they are on the hook to pay off their own student loans.

The bottom line of this strategy is that the student will find out very quickly that the ‘sticker price’ of college is much less when educational aid is subtracted. Most of the other things needed (textbooks, room and board, transportation, etc.) are either discretionary or are available inexpensively, if researched. For example, used text books, and now electronic books, cut the cost of books dramatically.

So even if you can’t pay the full freight for college at retail prices, if your student wants it enough to learn to find the grants, scholarships, loans, and other subsidies, any college is available. The plus is that finding out how not to have to pay retail will be a life-long financial lesson he or she will have mastered!

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY

A Money Moment with Jane - What Are You Spending Today?

by Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

The first step to any solid financial plan is understanding your current situation. How much money is remaining after paying your non-discretionary expenses? If you don’t know, then you need to review your expenses over the last few months to better understand your spending habits. How much do you spend on non-discretionary items and how much do you spend on discretionary items. Are you happy with how you are spending your money? Are you saving as much as you could? Are you spending too much on frivolous items? Do your spending habits align with your goals? Have you set some financial goals?

Safe Investing

by Bridget Sullivan Mermel, CFP®, CPA
Chicago, IL
http://www.sullivanmermel.com/

Dear Bridget,

In the 70s, when I was in high school, I shared a Pinto with my sister. She bought the gas, I bought the oil. When the BP crisis hit, inspired by the exhilaration of getting the Pinto up to 60 mph with the windows open, I bought some shares. I know it's a risky investment.

I'm wondering what I can buy on the conservative side to balance my wild freewheeling. Maybe my angst is out of line, but I would like to buy something that will most assuredly maintain its value. I'm not impressed with the interest rates offered by FDIC-insured cash accounts. I've heard some gold talk, but it seems like a big step into the back-alleys of commissions and swindlers.

I am a regular reader and follow your advice closely to maintain some savings.

Dear Inspired,

I love your reasoning for buying BP!

Pretty much all researchers, including Nobel-prize winners, conclude that you can't "beat the market." In other words, no one can reliably pick stocks that will make more money than the market. Still, some people have an emotional desire to pick stocks, and there's nothing wrong with that. Just be smart.

I suggest that you hold your stocks in a separate "fun money" account. Don't let the account grow to over 10% of your total portfolio. When the value of your "fun money" grows to over 10% of your total portfolio, transfer some to your other accounts to bring it in line.

Never add money into your "fun money." If it runs out, then you're stock picking days are over. You're done.

For the other 90% of your money, design a well-diversified, tax-smart, low-cost portfolio.

Since you ask specifically about investments that are not risky, I suggest US Treasuries known as "strips" as part of your portfolio.

You can buy these through your broker (like Schwab or Fidelity) or from US Treasury Direct. Currently a buying a treasury strip that matures in 2026 costs approximately $5,470 and will pay $10,000 in 2026. That's a yield of around 4%.

Any financial professional who earns money based on commissions will discourage you from this strategy. They earn little if any commission on US Treasuries. "Oh, the yields are so low," is what I've heard. In fact, treasuries protect you against deflation, because even if prices on everything start dropping, in 2026, you'll get your $10,000.

Plus, the yields on treasuries always seem low. You're buying them because they're safe and earn more than a CD, not to try to out-earn BP. The yield seemed low when I bought US Treasury Strips in early 2008, but seemed brilliant a year later.

In fact, for clients and for myself, I build what is known as a treasury bond ladder for retirement. The ladder is designed to have a set amount of treasuries maturing each year. This creates what amounts to a guaranteed paycheck during retirement.

You also ask about gold. You don't invest in gold; you speculate on gold. Gold grows in value when someone else will speculate more wildly than you did when you bought it. Some people want gold in case all hell breaks loose. It makes them feel safe. They like the option of being able to make a run for it with their gold stash. I like feeling safe, too.

If you're in this camp, you could use 1-2% of your portfolio "fun money" to buy some gold. Take physical custody of it; put it in your safe at home. Buy enough to get you over the border, and remember the practicalities you are trying to plan for; small coins will probably work best. You don't want to be stuck trying to get change for $1000 gold bars when the banks have closed.

To take the next step down this road, add the following to your safe: guns, ammo, water, and copy of your favorite Mad Max movie. If you can't watch Mel Gibson anymore, I thought

The Book of Eli was okay and 2012 was even better. However, none of these movies feature a post- apocalyptic gold standard. According to them, if all hell breaks loose, you'll want guns, ammo, and perhaps a jet.

Tips for the Small Business Owner

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/

As a fee-only Advisor that works with small business owners, I constantly see issues with the management of prospective clients’ businesses. While every business has its own idiosyncrasies, there are several aspects of a business that should be similar regardless of the type of business. Bookkeeping is one example. A common mistake small business owners make is the improper tracking of income and expenses. Too often, I see owners commingling their business income with personal assets.

If you are a small business owner or thinking about starting a business, here are few tips.

1. Get a separate business checking account
A separate checking account is a great way to have a record of business income and expenses. If the business is audited or questioned by the IRS, only the business records may be needed. This could keep the personal assets out of the equation.

2. Track your income and expenses with software
There are several affordable software packages that are easy to use. Most packages these days will allow you to run reports which can help illuminate the true picture of the business. These reports can help set goals, establish budgets, as well as assist in tax preparation.

3. Set the business up for success
Run the business as a business! So often, small business owners “play” in their business. If you run the business as a hobby, it will probably remain a hobby. If you want to be a successful business owner, you must act like one. Study successful people and learn from their successes and failures.

4. Make sure to get a business license, if needed
Contact the local tax department and inquire about the proper licensing needed to operate the type of business you own. The last thing a business owner wants to learn is that proper licenses are not in place. Penalties and fines may follow suit, so it’s important to do the homework. For example, as a Financial Advisor in TN, I have to pay a $400 Professional Privilege tax every year. Failure to comply would result in penalties and eventually fines!

5. Keep Businesses separated
If you own more than one business, it’s imperative to keep all the business records and transactions separate. Again, this will make life much easier on several fronts. It’s make tax preparation and planning much easier, as well as projections involving business growth. If the business is to be sold, separate records are imperative.

These five tips will help to solidify the business side of the business. Don’t let your success be curtailed by bad business practices.

Keeping Good Records Reduces Stress at Tax Time

By Steve Martin, CFP®, RLP®
Fort Collins, CO
http://www.mwm3.com/

You may not be thinking about your tax return right now, but summer is a great time to start planning for next year and to make sure your records are organized. Maintaining good records now can make filing your return a lot easier and it will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you receive an IRS notice. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

•Bills
•Credit card and other receipts
•Invoices
•Mileage logs
•Canceled, imaged or substitute checks or any other proof of payment
•Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

•A home purchase or improvement
•Stocks and other investments
•Individual Retirement Arrangement transactions
•Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

•Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
•Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
•Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
•Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Divorce - Recession Style: The House

By Linda Leitz, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

Besides income and expenses, the house is another issue that sometimes has some aberrant circumstances in this recession. During a “normal” economy, it’s pretty common for divorcing families either sell the home or one of them continues to live in it. Seems pretty straightforward. If neither of the spouses wants to stay in the house or can afford it, the house is sold. Since the house is one of the biggest assets for the family, it can sometimes be tricky even in normal times.

But these are not normal times. Money stress seems to be bringing more people to seeking divorce as a solution. And for many of these families, their house is “underwater”, meaning they owe more than the house will currently sell for. Some people see their investment and retirement accounts worth less than they put in, but they don’t owe more than the account balance. So the house is treated more like a liability in the financial settlement.

I generally advise people going through divorce to make decisions they’ll be comfortable with going forward. It’s often difficult to see past the terrible pain (and sometimes anger) that drives what someone in the midst of a divorce thinks they want to do. So long term decisions are important.

In that vein, it’s difficult sometimes to avoid what is sometimes referred to as the “recency effect”. That’s acting as if everything will continue to be the way it has been recently. Even the doom sayers don’t assume the recession will go on forever. So it’s reasonable to expect that in the foreseeable future real estate markets will be better than they are now. Sometimes the answer is a temporary one that allows both spouses to move forward and offers as little disruption as possible to the children. One spouse stays in the house with the kids and pays the mortgage until the house has enough equity to make a sale at least a break even proposition.

Sometimes the spouse that doesn’t take the house feels like it’s a raw deal because the house will be worth so much more in the future. That’s true of any of the marital assets. An investment account may go up – or down – in value and the one who takes it has to have the patience (and in the case of the house, the funds) to wait and hope for better days.

In a worst case, the house might have to go into foreclosure or a short sale. This is an environment where some people will end up with this terrible situation that wouldn’t under normal circumstances. But that doesn’t mean it should be taken lightly. That is a negative impact that will be reflected on the credit of anyone on the mortgage for several years.

Take Control of Your Life with a Personal Strategic Plan

By Jane Young, CFP®, EA
Colorado Springs, CO
www.pinnaclefinancialconcepts.com/

At least once a year we need to step back from our daily routine to look at our lives from a broader perspective. We get so bogged down with daily responsibilities we lose track of where we are, and where we want to go. Take the time to do some personal strategic planning. Start by looking at what you are actually spending and saving. How much do you spend in a typical month, how much is necessary spending and how much is discretionary? How do your expenses compare to your income? How do your expenses and your savings line up with your goals?

Maybe you haven’t thought about your long range goals for awhile. I challenge you to make a list of 30–50 goals that you would like to accomplish over the next five years. I know… that’s a lot! Think of this as a brainstorming exercise. Don’t evaluate the importance of a goal, just write down what comes to mind. If you are having difficulty thinking of 30–50 goals, try thinking of goals in the following categories: friends and family, health, career, social and entertainment, money and finance, spiritual, education, and community. Once you have created your list, prioritize your goals by importance and timeframe. Develop an action plan for your high priority goals.

Now go back and review your expenses. Are your spending and saving habits congruent with your long term goals? Use the information you have pulled together to develop a spending and savings plan that supports your personal strategic plan. Once you have a clear picture of where you are and where you want to go, you can take control of your life.

“The future belongs to those who believe in the beauty of their dreams.” - Eleanor Roosevelt

Caution: Simple Reminders Can Improve Finances

By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/

Originally published 8/23/2010 at the Financial Planning Assocation® All Things Financial Planning Blog

My post this week is inspired by the book Remove Child Before Folding: The 101 Stupidest, Silliest, and Wackiest Warning Labels Ever by Bob Dorigo Jones. In his book Mr. Jones makes light of the use of labels in our society. Labels, the book proclaims, are often overused, unhelpful, and outright bizarre.
The title refers for a folding baby stroller which sports a label making sure parents don’t pack away the baby with the stroller. Other crazy label examples include a go-cart with warning “this product moves when used” and a heavy-duty washing machine that advises “do not put any person in this washer.”

One has to agree with the author when reading the above examples that the amount of labeling is often excessive and silly (does a lacrosse helmet need to let the user know they are participating in a rough sport?).

As I often do, I thought about how the topic could relate to personal finance. In my world I wonder if we haven’t missed the boat on the best use for labels – pointing out the inefficient and ineffective ways we sometimes treat our finances and planning.

For example, would clearer labels (or, reminders really) help us avoid behaviors we know are harmful in times our will or nerves are a little less than sturdy?

As I am not above tricks to help improve our clients finances, I pondered – should financial products or planning come with labels?

What if all credit cards came in a carrying sleeve with the reminder, ‘Warning – Earn Money before Spending.’

Or for those with their savings all on the sidelines in the bank savings account because of fear of investing in today’s markets… ‘Caution – Savings Accounts Do Not Increase At the Same Pace as Your Living Costs!’ (Of course, most banks will courteously let you know when they feel your accounts have too much cash they could invest for you so this reminder isn’t altogether missed).

My dream label however would be a scrolling reminder on the business news channel that the opinions of the guests were just that – opinions – and their ideas may not be useful for your personal investment plan, or a good predictor of the future of the economy. Their stories for the ‘Top Mutual Fund You Need to Own Today’ in my world would have the disclaimer, “The top mutual funds you need to own may not be suitable for your asset allocation, risk tolerance, or financial plan. Owning these funds may not be necessary to meet your dreams and financial goals.”

While my dreams of labeling our investment statements and financial products may not be practical (or I admit we may become used to seeing them and lose their effectiveness), there are tricks you can use as reminders for whatever your personal financial issues are.

In the past I have used a photo of a 3¢ postage stamp from the 1930s to remind clients about the nature of inflation and why sitting in cash was not helpful to their long-term ability to grow enough to help them meet future spending needs.

A few ideas for making the easy act of charging your purchases I’ve come across in the past include wrapping your cards in paper that you must open at the register in order to use, or creating a sleeve for your cards with your own reminder label about how this purchase may not be necessary. An extreme measure some have used is to freeze their cards in ice, requiring time to consider a purchase while the ice melts (though this method may cause damage to the actual card).

Don’t feel below reminders or tricks to help yourself make more prudent financial decisions. Just like forgetting to remove the baby from the stroller, financial mistakes cause actual harm. The difference being the harm isn’t always obvious or noticeable immediately so it is easier to rationalize or minimize.

Are there any tips you have for helping your finances through reminders or trickery? Feel free to add them to the comments below.

Prioritizing & Eliminating Debt

By Troy Von Haefen, CFP®

Nashville, TN
http://www.vhfinancialmanagement.com/

One of the many questions I receive from new clients involves the elimination of debt. Should I pay off my credit card or my mortgage first? Should I make extra payments towards my student loans? What about that nagging car payment? The answer lies in understanding the question of how to prioritize debt.

Essentially, there are two types of debt: good debt and bad debt. Understanding the difference between good and bad debt will allow for prioritization and systematic elimination of debt.

Good Debt
Good debt is debt that utilizes some type of positive leverage. Good debt also has a component of longevity. For example, borrowing to pay for a college education is certainly good debt because there are tax benefits to the student loan interest, as well as, the education will outlast the debt. That pizza you put on the credit card six months ago is long gone, while the debt may linger. Another example of good debt would be mortgage debt. A mortgage (especially a 30 year fixed rate) will allow for leverage while utilizing the tax benefits of the mortgage interest deduction.

Bad Debt
Bad debt can be categorized as consumer debt. This would include credit cards, revolving debt (store debt, such as a furniture purchase), auto loans, personal loans…etc. These debts offer no tax benefits and usually lead to negative financial momentum. For example, a consumer purchases an expensive car and borrows the money to do so. The payments put a strain on monthly cash flow requiring the consumer to use credit cards to purchase needed items such as food and clothing. The spiraling downturn can become overwhelming and eventually lead to financial ruin.

Attacking Debt
Once the debt is categorized, the picture becomes much clearer and debt elimination can begin. Focusing on bad debt should be the priority. List the debt balances, as well as the interest rates associated with each debt. While some so called “experts” recommend eliminating the smallest debt first, as a comprehensive planner I feel everyone has a unique situation and the debt elimination plan should be individualized. A holistic CFP® (Certified Financial Planner) specializing in cash flow and debt elimination can be a big help when it comes to mounting a charge against debt.

Debt Reduction Tips

1. Understand Cash Flow!
Debt is a by-product of poor cash flow management. Most folks don’t truly know where their money goes every month. It’s important to see in black and white the spending choices that are made. Tracking income and expenses will allow one to see where their money goes. It will also show what is left over at month’s end. What’s left over can be applied to debt, so it’s imperative to keep a close eye on cash flow.

2. Make a Commitment!
If married or in a committed relationship, it is important that all parties are working together to eliminate debt. If one spouse is savings and paying off debt while the other is frivolously spending, little or no progress will be made. Debt reduction requires thought and action, so commitment is essential.

3. Don’t Rush to Eliminate Good Debt!
The good debt discussed above can actually have financial benefits, so don’t rush to eliminate that debt, especially mortgage debt. For example, a 30 year fixed-rate mortgage is a debt I recommend to most of my clients. This mortgage creates a great inflationary hedge. A long term fixed debt will allow the homeowners to make tomorrow’s mortgage payments in today’s dollars, so don’t rush to eliminate this debt. There may be better use of your dollars.

4. Know How Much You Can Afford!
While good debt has benefits, it is important to utilize this debt properly and not overspend. This is especially true in purchasing a home. While I am an advocate of 30 year fixed rate mortgages, I am not an advocate of over-buying real estate. Knowing how much to buy is imperative. Creating an inflationary hedge and utilizing the tax breaks offered from a mortgage will do no good if the homeowner buys a house they cannot afford.

Debt usually stems from behavioral choices, so before any debt reduction can begin the behavioral issues need to be resolved. In essence, living within your means is the first step. Another key component to debt reduction is understanding personal finances from a big picture view. Financial planning is equivalent to a giant puzzle and all pieces should work together to meet the end result, so a synergistic approach should be taken. Taxes, cash flow, interest rates, type of debt, and other issues should all be considered before a debt reduction plan can be put to work. A qualified financial advisor may be needed to tackle debt reduction with a synergistic approach. The Alliance of Cambridge Advisors (ACA) is a great organization of comprehensive planners that can assist is debt reduction strategies. More information can be found at http://www.acaplanners.org/.

Thoughts from Atlanta

By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/

I am blogging from Atlanta while attending the NAPFA (National Assn Personal Financial Advisors) Core Competency Conference. This morning we had an excellent speaker from the Atlanta Federal Reserve named Michael Hammill. I will share with you some of the key ideas that I gleaned from his presentation:

We are in a period of moderate economic growth (about 2.5%) since the first quarter of 2010. While this is not a great number, at least we are moving in the right direction

Consumer confidence is fairly pessimistic which translates to weak consumer spending. Since consumer spending is 70% of GDP growth, you can see how this translates to the slow growth numbers cited above. Wages drive consumer spending and when you consider the number of people unemployed or underemployed, it makes perfectly good sense that people are not spending because they cannot spend. And the savings rate is up sharply. When we went into this recesssion, the savings rate was negative. It is now hovering around 7%. As a financial planner who preaches a 10% savings rate for people, this makes me very happy. Although the paradox is that we need people to spend in order to grow our economy.

Unemployment is around 9%. However when you factor in the number of people who are underemployed (working part time instead of full time) and the folks who are so discouraged that they have actively stopped looking for work, this number should be doubled. So, the TRUE unemployment rate is more like 18%. Ouch! We are adding about 100,000 jobs a month but when you consider that we were shedding more than 800,000 jobs a month during the recession (depression?), it will take us 5 more years to get back to pre-recession job growth.

Business inventory levels are growing --a good thing!

Housing market is very poor. It was propped up with the generous tax credits but those have all expired. The forecast is that housing market will remain very weak for the next four years. It will take until 2012 to work thru the short sales and foreclosures clogging the market. And until 2014 before housing prices start to rise. Bad news for people trying to sell their home. Hardest hit areas are Florida, Calif, Nevada and Phoenix--the sunshine states where the biggest bubbles were. No surprise there.

Inflation not expected to be an issue for several years--good news

Financial markets adjusting to a new normal--stricter credit --weak loan demand. Loan defaults (except for real estate) have peaked and are now declining.

Europe is working through their debt issues and not as much effect on US markets as expected.

Well, now you have the good, the bad and the ugly. My bottom line take is that we are in for a long and slow recovery but we will recover. I am committed to helping you navigate the road ahead. One of my colleagues said that he feels like Moses--leading his clients to the promised land of prosperity and recognizing that it may take the next 5 years to get there. Great analogy. Let me be your Moses!

Shopping Angst Revealed

By Bridget Sullivan Mermel, CFP®, CPA
Chicago, IL
http://www.sullivanmermel.com/

I've got a theory about stress: it's cumulative. In other words, stress isn't about the two big things that constantly worry you. You can handle the big problems if you're not constantly annoyed with the little ones.

One man who has studied the little stressors is Herb Sorensen, author of Inside the Mind of the Shopper: The Science of Retailing. This book instructs retailers how to get you to buy more. He describes two of the low-level shopping annoyances so retailers can avoid them.

That got me thinking; if we avoid retailers that strike up these annoyances, we'll reduce some of our low-level stress.

Here are the two:
Navigational angst: This is when you go to a store and can't find things. You have to search for an employee, interrupt what they're doing, and hope they'll be familiar with their workplace.

Stores design can help with this. Obviously clearly marked aisles help, but so does low shelving. If you can see the entire store, you'll have less navigational angst. This must be what CVS was thinking when they bought Osco and took down the high shelves.

Choice angst: This comes from having too many items to pick from. One study showed that shoppers bought ten times more when offered limited choice. People spend less time in the aisle scratching their heads and more time buying. This phenomenon can help explain the success of Trader Joes and Aldi. Less choice of one product = less stress.

Choice angst doesn't affect everyone, however. I have one client who loves researching major purchases. This was brought up by his wife, who reported that this tendency stressed her out. I have a friend who is such a thorough researcher that I want her to start her own newsletter. That way I can keep up on what she's buying and buy it too. (As Estelle Reiner said in When Harry Met Sally, "I'll have what she's having.")

The Really Important Things in Life

By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/

Yesterday my daughter and I attended a wedding in our old neighborhood. We moved away from that home and our dear neighbors next door some 24 years ago. The sweet daughter of that family was the beautiful bride yesterday. Even though many years and "much life" has passed in those 24 years, we felt like we were with family all day and we were so honored to be part of their special day. We even got to tour the backyard of the house that we lived in for 12 years. The house where my daughter lived for the first 4 years of her life. Lots of good memories made in our home and the home next door. And the time and distance between us was like it never happened. We felt loved and part of their circle.

So...why is my personal finance blog reminiscing about the good old days? Shouldn't I be talking about investments, rate of returns etc....? Because yesterday helped me reflect on what is truly important in life. For me, it's spending time with my family and dear friends, gazing at the amazing milky way in Borrego Springs with my husband, walking my dog at the beach, brushing my kitty (she is deliriously happy when I brush her), getting lost in a book for hours, going to Padres baseball games, planning our upcoming missions trip to Haiti, shopping for a bridal dress with my niece and family, cooking and planning healthy dinners. I could go on and on.

For my clients, I strive to help them figure out "how much is enough." So that they can spend their time on the things that are really important in their lives. Oh...and working with my clients... is one of the truly important and fulfilling things in my life.

New Financial Reform Bill: Progress or Not?

By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewart-financial.com/

If you have turned on the news, you probably have heard and re-heard reports on two events: the horrendous BP oil spill and the, newly passed, Financial Reform Bill. While I wish I had insight on how to fix the oil spill, I do have a few thoughts about the Reform Bill that was passed Thursday, July 15th.

So, what is in this Reform Bill?

Jill Schlesinger, author of "The Financial Decoder," and contributor to CBS' Moneywatch.com, wrote an article on June 25th, using with layman's terms, what the bill can and cannot do. She states, "the bill probably won't prevent the next crisis," but it will help consumers in some ways.

For example, there will be a new Consumer Financial Protection Bureau, which will help consumers by moderating the credit card and house mortgage industries. According to the Senate, the new Bureau will "finally [be] a watchdog to oversee financial products, giving Americans confidence that there is a system in place that works for them – not just big banks on Wall Street."

Schlesinger says in another article about the new Bureau, "The new rules will prohibit mortgage brokers from steering customers into more expensive loans for a commission and will ban no-documentation or "liar" loans. It will also make credit card statements more readable and transparent, allowing consumers to more easily compare products."

She also notes where the new Bureau will not protect consumers in all things, namely auto dealer supervision and addressing the fiduciary standard: "Although the new consumer rules are a step forward, there are some noticeable omissions. During negotiations, two important consumer measures were left out: the oversight of auto dealers and the fiduciary standard. I'm particularly upset about the later, which would have made it law for financial professionals to put their customers' interests first."

I agree with Schlesinger about these omissions, namely about the fiduciary standard. We work very hard at Stewart Financial Services to address our client's needs first. There are many planners and institutions out there who base their financial advice simply on what funds would give them the biggest commission, or return... regardless if it's a good fit for their client's financial goals or dreams.

The SEC has been delegated to take care of an umbrella fiduciary standard for all financial advisors. We hope to see progress on this front, hopefully, within 6 months from now.

If you have a question about what the fiduciary standard is, please click on the orange button below. Stewart Financial Services is proud to follow all these guidelines for our clients' financial well being.
 
Also, if you have further questions about the Financial Bill Reform, you can click here to view Senate.gov's complete copy of the bill, or, as always, feel free to ask me. I feel the Consumer Financial Protection Bureau is a good step in the right direction... let's just keep making these steps!

How Long Will My Money Last?

By Bert Whitehead, MBA, JD
Franklin, MI
http://www.bertwhitehead.com/

Dear Bert: I have read in various publications that the safe withdrawal rate from an investment portfolio during retirement is around 4% if you want your money to last. Could you please comment?

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While I recognize that the 4% withdrawal rate has become the standard wisdom in financial planning, I respectfully disagree. Keep in mind that most financial planners are actually investment managers, and so minimizing the withdrawal rate keeps more assets under management for them, and correspondingly higher fees.

It seems to me that a withdrawal rate must take into account the after-tax return to the client. This is highly individualized, so I don't think you can know this unless you are intimately knowledgeable about the client's tax situation. It also focuses attention on the actual tax efficiency of the portfolio. Because Functional Asset Allocation is very tax efficient, I am able to keep almost all my clients with under $3 million in their investment portfolio in a 15% marginal tax bracket. This obviously impacts their appropriate withdrawal rate.

Most financial planners figure that a balanced portfolio in retirement with 60% interest earning and 40% equities will earn ~7% over a 15-20 year period. This is historically true, and is the number I use. But then they assume an 'inflation rate' of 3% and in one way or another come to the 4% withdrawal number.

I disagree that the inflation rate is the driver in retirement. While inflation may occur in general, the overall rate has little relevance to the actual rate an individual client experiences. The CPI (Consumer Price Index) is heavily weighted by education, housing, and medical costs -- none of which are significant to most retired people (especially with health insurance which most of my clients have, even absent 'universal coverage'). CPI may be meaningful to individuals who live at a subsistence level, but most people who have a financial advisor are affluent to some degree. Just ask yourself: "When gas went to $4.00 a gallon, did that affect my living standard?"

The driver for most clients is not cost-of-living, but their "standard-of-living." During accumulation stages a client's standard-of-living generally increases at a higher rate than inflation, usually in tandem with increases in their earned income. So using CPI through the accumulation period grossly underestimates the amount a client actually spends. Upon retirement many financial planners say that clients only need 80% of their pre-retirement spending. I find that, at the beginning of retirement, clients need 100% of their pre-retirement spending.

Retirement spending normally remains flat for the first 10-20 years of retirement, as the standard-of-living stabilizes. It is critical that planners monitor client spending during the first few years of retirement. If standard-of-living increases at the same rate as when they were working, they will certainly end up living beyond their means. However, there is a selection bias I've noted with financial planning clients. They tend to be savers rather than spenders. Most often I find that a client needs permission to spend because they are so accustomed to being frugal and are afraid that they will run out of money during retirement.

Interestingly, the actual expenses needed to support a client’s standard of living starts dropping around their late 70's and early 80's. They have 'been there, done that, have the T-shirt.' They don't need to buy new cars, or to keep up with fashion demands. If we exclude gifts to charities and children, the amount they need decreases year by year, regardless of what the CPI does or how their portfolio performs. Recent studies published in the Journal of Financial Planning have corroborated this phenomenon.

Two other points about estimating withdrawal rates…

Many financial planners use software that depicts an inflated future as a single estimated percentage increase of past expenses. As you well know, I consider financial planning to be a process, not an event. Clients are generally very capable at adjusting their behavior. If there is a lean year in the stock market, they put off an expense until times get better. The software projections don’t show how smart clients can be!

Another point is that investment managers define their value as “return on investment.” However, clients tend to view supporting their lifestyle in terms of liquidity, or simply “will I have the money?”

As you know, our approach (Functional Asset Allocation) uses 15 year bond ladders with US Treasuries to assure that a client's pension, social security, and cash flow from the bond ladder is sufficient to meet their living expenses, including income taxes. This approach requires that we manage a client’s living expenses, preferably for 5+ years before they retire so we can determine the amount needed from the bond ladder. Note that Treasuries are not included in a portfolio to generate yield, but rather to provide guaranteed cash flow. "Safety Trumps Yield" is our mantra for this portion of the portfolio. We stress liquidity, not performance.

The 15-year span enables the stock market to fully cycle, so that the bond ladder can be replenished during prosperous years. It gives clients assurance that they will not have to change their life style for 15 years, so they don't fret over stock market down cycles and resist capitulating during severe market drops. Even over the past 'lost decade' we were able to rebuild client's bond ladders during the up years of the market cycle, e.g. 2003-2004 and 2009.

Finally, we also factor in savings of 10% of a client's income each year, which is reinvested in their portfolio. Obviously if clients save 10% each year (which they are accustomed to during their working years), they will by definition continue living within their means. This eliminates the need to estimate their life expectancy and makes Monte Carlo theory, which calculates the probability of future investment returns, largely irrelevant because they will never run out of money.

In summary, 'withdrawal rates' that are based on combating inflation are much too simplistic to determine a client's real annual cash flow requirements. The driver for income in retirement is not a ‘withdrawal rate‘ that depends on the Consumer Price Index, but rather changes in expenses needed to support their personal standard-of-living.