By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
The Roth conversion topic has certainly dominated headlines, articles, and blog posts in 2010, but part of the story may be missing. A Roth conversion may not be the wisest financial move for some. Most of the reports regarding this conversion have touted the benefits, and little has been written about the negative affects to a Roth conversion.
Roth Conversion and College Planning
An ill-timed Roth conversion can dampen financial aid prospects for some college bound students. The most important year for the financial aid process is the year the high school student is a junior. This is the base year for most financial aid formulas. If a parent converts during this year, the conversion can be viewed as income to the parent. The parent will then be viewed as having more income available to pay for college, and, since financial aid is based on the ability to pay, the parent can be seen as having the ability to fully pay the college bill. Depending on the level of assets and the amount of the conversion, a Roth conversion may be a deal breaker to receive financial aid for your college-bound teenager.
Conversion Income and Taxes
Tax planning is similar to college planning in that more income creates negative consequences. Taxes are a moving target for most people, and an unexpectedly large tax bill due to a Roth conversion would certainly be painful. Remember when an IRA is converted the amount converted is considered as income in the year of the conversion (although spreading out this income is possible). If a conversion is accomplished the year in which the taxpayer is in a high tax bracket, the converted amount will be taxed at that high tax rate. The marginal tax rate could actually increase due to the conversion as well. I generally don’t recommend Roth conversion for taxpayers who are in a high tax bracket.
Opportunity Costs
There are many calculators available that illuminate the tax savings generated by a Roth conversion, but these calculators fail to show opportunity cost lost to the tax due, which includes the cost of not having the money available for current needs. Ex. A conversion of a $100,000 IRA to a Roth will generate a $25,000 tax bill for someone in the 25% tax bracket. The opportunity cost of that $25,000 might be high. If the rationale of the conversion forces someone to eat rice and beans now so they can eat Fillet later, that rationale doesn’t fly with me. This will create financial dysfunction. This seems to be the case for younger couples. Younger couples implementing wise financial and tax strategies can leverage monies now when it is really needed. Most of the families I work with have children in private schools and college. They need money now and shouldn’t move backwards financially today to pay for their tomorrow.
Roth conversions can be a wonderful tax savings strategy, but these conversions should be carefully reviewed. By understanding the possible negative consequences, a mistake may be avoided. Just because Roth conversions are the topic de jour doesn’t make them right for everyone.
July 28, 2010
July 24, 2010
How to Spot and Stop Senior Financial Exploitation
By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewartfinancial.com/
I read a recent article in the Los Angeles Times and was reminded, even more, of why continual vigilance is needed for senior financial exploitation. This chord strikes close to me as I have an aging mother and do worry from time to time how she could be approached for senior financial abuse.
Senior financial abuse doesn't seem to make headlines on CNN, but it is very prevalent. I was surprised to see some of these statistics in a recent survey done by these organizations: the North American Securities Administrators Association (NASAA), Investor Protection Trust, and the National Adult Protective Services Association (NAPSA).
Here are some surprising statistics from their survey:
• Half of older Americans exhibit one or more of the warning signs of current financial victimization.
• Almost half of those aged 65 or over (44 percent) got at least two out of four questions wrong about basic investment knowledge.
• About one out of three older Americans (31 percent) says they are vulnerable in one or more ways to potential financial victimization.
• Only 5 percent of adult children in touch with their parents' doctors report "the healthcare providers ever mention[ing] any concerns about your parents handling of money or relayed any concern from your parent about handling money." Only 2 percent of Americans aged 65 or older say that their healthcare provider has ever asked about "how you are handling money issues or problems."
• Four out of 10 children of parents 65 or older are "very" or "somewhat" worried that their parents "have already become or will become less able to handle their personal finances over time."
Half of our seniors exhibit warning signs of financial exploitation? Sounds scary, doesn't it? I am relieved that there are some who have heeded the warning signs and are taking action. The NASAA, Investor Protection Trust, and the NAPSA, along with medical professionals and social workers, are banning together to create the Elder Investment Fraud and Financial Exploitation project, whose sole job is to stop a "rising tide of economic exploitation of the elderly." (Kristof, LA Times)
But what can the average person do right now to prevent senior financial exploitation? The California Society of CPA's recommends that the best defense is a good offense:
• Be aware – it can happen to your family
• Identify vulnerabilities
• Take action to safeguard your family
• Look for clues of abuse
• Take action if you suspect fraud
Sheryl Rowling of Advisors4Advisors further explains what that action can look like:
“Financial fraud can occur in small amounts over time. For seniors on a fixed income, even $10 here and $20 there can be devastating. The most common scams against seniors fall into three groups:
• Telemarketing scams: More than a third of telemarketing fraud victims are over 60 years old. The most common scams are free vacations packages, time shares, sweepstakes, phony charity fund raisers, and expensive 900 numbers.
• "Free" lunch investment seminars: Shady financial advisers often lure seniors to a free lunch or dinner, promising advice on “senior” issues such as living trusts or estate planning. Once there, seniors are pressured into purchasing dubious investments such as annuities or promissory notes. Although technically legal, these products are monumentally bad choices for retirees - illiquid, complicated and booby-trapped with high fees.
• Religious or social group fraud: Among con artists' favorite targets are members close knit religious or social groups. The con joins the group and then tries to sell fraudulent investment schemes to members.
One of the easiest - and most effective - ways to protect parents is to talk to them about the common financial scams. Tell them it's important they know what's happening - if for no other reason than to warn their friends.
Also, it's important that children know their parents' social circle. Are they mentioning a new name? Have they begun to talk about someone that has "a lot of good ideas" about money? Children should introduce themselves to new people entering their parents' life. Con artists are looking for easy marks, not people with family or friends looking out for them.
Theft committed by a caregiver, such as a nurse or aide, can be very difficult to uncover. There are warning signs of caregiver financial abuse. Watch for signs that a caregiver is trying to control the parents' actions or isolate them from family and friends. When hiring a professional caregiver, be sure to check their resume and references and pay for a professional credit and background check. Finally, note that more than half of all instances of caregiver fraud are committed by a family member.
Finally, children might want to get involved with managing their parents' money. Although this can be a delicate topic to suggest, keeping an eye on things can aid in noticing trouble early. Even simply looking over their phone bills or financial statements can uncover large ATM withdrawals or expensive calls to 900 numbers.”
If you suspect a parent or other aging family member or friend might be a victim in financial exploitation, there are ways to help. Contacting a financial advisor or counselor and getting them involved is a good way to provide expertise in a delicate and serious situation for your loved one.
Carlsbad, CA
http://www.stewartfinancial.com/
I read a recent article in the Los Angeles Times and was reminded, even more, of why continual vigilance is needed for senior financial exploitation. This chord strikes close to me as I have an aging mother and do worry from time to time how she could be approached for senior financial abuse.
Senior financial abuse doesn't seem to make headlines on CNN, but it is very prevalent. I was surprised to see some of these statistics in a recent survey done by these organizations: the North American Securities Administrators Association (NASAA), Investor Protection Trust, and the National Adult Protective Services Association (NAPSA).
Here are some surprising statistics from their survey:
• Half of older Americans exhibit one or more of the warning signs of current financial victimization.
• Almost half of those aged 65 or over (44 percent) got at least two out of four questions wrong about basic investment knowledge.
• About one out of three older Americans (31 percent) says they are vulnerable in one or more ways to potential financial victimization.
• Only 5 percent of adult children in touch with their parents' doctors report "the healthcare providers ever mention[ing] any concerns about your parents handling of money or relayed any concern from your parent about handling money." Only 2 percent of Americans aged 65 or older say that their healthcare provider has ever asked about "how you are handling money issues or problems."
• Four out of 10 children of parents 65 or older are "very" or "somewhat" worried that their parents "have already become or will become less able to handle their personal finances over time."
Half of our seniors exhibit warning signs of financial exploitation? Sounds scary, doesn't it? I am relieved that there are some who have heeded the warning signs and are taking action. The NASAA, Investor Protection Trust, and the NAPSA, along with medical professionals and social workers, are banning together to create the Elder Investment Fraud and Financial Exploitation project, whose sole job is to stop a "rising tide of economic exploitation of the elderly." (Kristof, LA Times)
But what can the average person do right now to prevent senior financial exploitation? The California Society of CPA's recommends that the best defense is a good offense:
• Be aware – it can happen to your family
• Identify vulnerabilities
• Take action to safeguard your family
• Look for clues of abuse
• Take action if you suspect fraud
Sheryl Rowling of Advisors4Advisors further explains what that action can look like:
“Financial fraud can occur in small amounts over time. For seniors on a fixed income, even $10 here and $20 there can be devastating. The most common scams against seniors fall into three groups:
• Telemarketing scams: More than a third of telemarketing fraud victims are over 60 years old. The most common scams are free vacations packages, time shares, sweepstakes, phony charity fund raisers, and expensive 900 numbers.
• "Free" lunch investment seminars: Shady financial advisers often lure seniors to a free lunch or dinner, promising advice on “senior” issues such as living trusts or estate planning. Once there, seniors are pressured into purchasing dubious investments such as annuities or promissory notes. Although technically legal, these products are monumentally bad choices for retirees - illiquid, complicated and booby-trapped with high fees.
• Religious or social group fraud: Among con artists' favorite targets are members close knit religious or social groups. The con joins the group and then tries to sell fraudulent investment schemes to members.
One of the easiest - and most effective - ways to protect parents is to talk to them about the common financial scams. Tell them it's important they know what's happening - if for no other reason than to warn their friends.
Also, it's important that children know their parents' social circle. Are they mentioning a new name? Have they begun to talk about someone that has "a lot of good ideas" about money? Children should introduce themselves to new people entering their parents' life. Con artists are looking for easy marks, not people with family or friends looking out for them.
Theft committed by a caregiver, such as a nurse or aide, can be very difficult to uncover. There are warning signs of caregiver financial abuse. Watch for signs that a caregiver is trying to control the parents' actions or isolate them from family and friends. When hiring a professional caregiver, be sure to check their resume and references and pay for a professional credit and background check. Finally, note that more than half of all instances of caregiver fraud are committed by a family member.
Finally, children might want to get involved with managing their parents' money. Although this can be a delicate topic to suggest, keeping an eye on things can aid in noticing trouble early. Even simply looking over their phone bills or financial statements can uncover large ATM withdrawals or expensive calls to 900 numbers.”
If you suspect a parent or other aging family member or friend might be a victim in financial exploitation, there are ways to help. Contacting a financial advisor or counselor and getting them involved is a good way to provide expertise in a delicate and serious situation for your loved one.
July 20, 2010
Two Strategies to Deal with the Unkown of When Interest Rates Will Rise
Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Despite collective wisdom that historically low rates will eventually rise, there no way of telling when. Because of low returns, we see individuals taking two approaches to their fixed-income investing.
The first is keeping money in low-yield savings accounts, with the belief that we can invest these funds when rates get back to ‘normal.’ Staying liquid however does not cover the risks of continued low-rates.
The second approach is to invest in higher-yielding bond mutual funds. This approach in a rising rate environment could result in lower returns as rates rise and the portfolio of bonds declines in value.
Below are two strategies to plan for rising rates, while also considering the chance of continued low-rates:
Bond / CD Ladder. A ladder allows you to receive higher average rates today, and participate in rate hikes along the way. Having 15-33% of your savings mature each year over several years allows you to earn a higher average rate today and allows you to participate in higher rates along the way. Each year as your CDs or bonds mature, you participate in rising rates by reinvesting at future rates.
Dollar-cost average. We recommend bond ladders for our retirees as a way to create a pension, and integrate their portfolio with cash needs. Instead of placing all of your money into a ladder today, average in over time. This strategy involves purchase bonds that mature over several years (we eventually like to see 15 years of a bond ladder). Next year, purchase more bonds with the same maturities. Should rates rise, the average rates of your bonds will be higher than going all in today.
The two approaches above allow for higher average rates today, and the opportunity to invest at higher rates in the future.
Franklin, MI
http://www.nfa1040.com/
Despite collective wisdom that historically low rates will eventually rise, there no way of telling when. Because of low returns, we see individuals taking two approaches to their fixed-income investing.
The first is keeping money in low-yield savings accounts, with the belief that we can invest these funds when rates get back to ‘normal.’ Staying liquid however does not cover the risks of continued low-rates.
The second approach is to invest in higher-yielding bond mutual funds. This approach in a rising rate environment could result in lower returns as rates rise and the portfolio of bonds declines in value.
Below are two strategies to plan for rising rates, while also considering the chance of continued low-rates:
Bond / CD Ladder. A ladder allows you to receive higher average rates today, and participate in rate hikes along the way. Having 15-33% of your savings mature each year over several years allows you to earn a higher average rate today and allows you to participate in higher rates along the way. Each year as your CDs or bonds mature, you participate in rising rates by reinvesting at future rates.
Dollar-cost average. We recommend bond ladders for our retirees as a way to create a pension, and integrate their portfolio with cash needs. Instead of placing all of your money into a ladder today, average in over time. This strategy involves purchase bonds that mature over several years (we eventually like to see 15 years of a bond ladder). Next year, purchase more bonds with the same maturities. Should rates rise, the average rates of your bonds will be higher than going all in today.
The two approaches above allow for higher average rates today, and the opportunity to invest at higher rates in the future.
July 16, 2010
Can You Answer These Questions?
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
As we move through life, we get bogged down with day to day activities and might find that small pieces of our financial puzzle get neglected. These neglected areas can have a negative impact on our ability to meet our goals. If you can positively answer the ten questions below, you are certainly putting your best financial foot forward.
1. Do you know where your money goes every month? Folks that understand their income and expenses have a better opportunity to make sound spending and saving decisions. I’ve heard many times from new clients that they are happy with their income but don’t know where their money goes every month. Creating a picture of income and expenses gives one clarity and opens the door to real financial growth.
2. What’s on your credit report? Knowing the contents of your credit report can help protect your financial backside! With the growth and ease of electronic communications today (email and internet) more and more people are at risk of financial fraud. Vigilant behavior is one the best offenses to defend against financial fraud. Another benefit of understanding your credit report is the ability to position yourself as a viable candidate for a loan if needed. Today, this is more important than ever with mortgage lenders ratcheting up lending standards. Mortgage rates are low and real estate prices are ripe for the picking, but a great credit score is needed to get the lowest mortgage rate.
3. Do you know where your important financial documents are and what they say? Your financial documents are vital to your success, but it’s not the documents themselves that are important. It’s what the documents state that is important. If you don’t know where they are, you probably don’t know enough about the information they contain. The exploration and discovery of your important financial docs will help illustrate your financial health. Once you find them, dust them off and read what they say.
4. Are your Estate Planning Documents up to date? Obviously, this question goes hand and glove with question #3. Estate Planning techniques and tax laws are constantly changing, so older legal documents may not serve the original purpose. The fiduciary appointments (executors, personal representatives, guardians, trustees…etc.) inside these documents may no longer be the appropriate choice. It’s important to review estate planning documents every 3-5 years or upon a major life event such as birth, marriage, death, or divorce.
5. Do you know how much you pay in taxes? While the exact answer to this question is not the purpose, the overall goal is to understand that taxes are usually the single largest recurring expenses for most folks. Understanding the magnitude of taxes on your overall financial health is vital, so maximizing tax efficiencies should be an integral part of holistic planning.
6. Are you living within your means and savings at least 10% of your income? This question is similar to question #1 but goes a step further. Knowing where your money goes is important, but doing the right thing with your money is crucial. Spending less than you earn and saving 10% of your income is pinnacle to spur financial growth.
7. Are you balanced financially between today and tomorrow? Are you eating rice and beans today so that you can eat filet tomorrow? Are you savings everything for retirement, or are you spending your earnings as quickly as it hits your pockets? A financial lifestyle based on a lop-sided view will lead to financial dysfunction. So, while saving all your nuts and berries for tomorrow may seem like a great idea, the reality is the mental dysfunction of hoarding may lead to less enjoyment of the nuts and berries later. Creating balances between today and tomorrow will help to balance life’s ups and downs, as well as establish a healthy approach to growing wealth.
8. Do you have an investment plan in place? Are you just throwing money at the market? Do you rebalance your portfolio at least annually? Is your portfolio properly allocated based on your personal risk profile? An investment plan will address the above questions and deliver guidance during turbulent market environments. A financial plan without an investment plan is like a ship without a rudder.
9. Do you have the proper amount of liquidity? Liquidity is the keystone of the financial foundation. Liquidity is the cash that delivers stability during an economic hardship (job loss, unemployment, or natural disaster) enabling one to withstand the hardship without irreparable financial damage. The old adage of 3-6 months of living expense may or may not be enough. Every situation is different and should be assessed individually.
10. Do you know what your insurance deductibles are? If a rock broke the windshield on your car, would you know if you are covered? If a tree fell on your roof, do you understand how the insurance company will determine the amount of your payout? Insurance deductibles are a great place to start when looking to understand your coverages. Is your insurance deductible right for you? Is it too high….Is it too low? Remember, lower deductibles increase premiums!
These ten questions are broad questions that point to the importance of a total financial plan (holistic planning). While there are other questions that may be important, this list is a good start to give yourself a quick check-up while searching for any missing financial puzzle pieces.
Nashville, TN
http://www.vhfinancialmanagement.com/
As we move through life, we get bogged down with day to day activities and might find that small pieces of our financial puzzle get neglected. These neglected areas can have a negative impact on our ability to meet our goals. If you can positively answer the ten questions below, you are certainly putting your best financial foot forward.
1. Do you know where your money goes every month? Folks that understand their income and expenses have a better opportunity to make sound spending and saving decisions. I’ve heard many times from new clients that they are happy with their income but don’t know where their money goes every month. Creating a picture of income and expenses gives one clarity and opens the door to real financial growth.
2. What’s on your credit report? Knowing the contents of your credit report can help protect your financial backside! With the growth and ease of electronic communications today (email and internet) more and more people are at risk of financial fraud. Vigilant behavior is one the best offenses to defend against financial fraud. Another benefit of understanding your credit report is the ability to position yourself as a viable candidate for a loan if needed. Today, this is more important than ever with mortgage lenders ratcheting up lending standards. Mortgage rates are low and real estate prices are ripe for the picking, but a great credit score is needed to get the lowest mortgage rate.
3. Do you know where your important financial documents are and what they say? Your financial documents are vital to your success, but it’s not the documents themselves that are important. It’s what the documents state that is important. If you don’t know where they are, you probably don’t know enough about the information they contain. The exploration and discovery of your important financial docs will help illustrate your financial health. Once you find them, dust them off and read what they say.
4. Are your Estate Planning Documents up to date? Obviously, this question goes hand and glove with question #3. Estate Planning techniques and tax laws are constantly changing, so older legal documents may not serve the original purpose. The fiduciary appointments (executors, personal representatives, guardians, trustees…etc.) inside these documents may no longer be the appropriate choice. It’s important to review estate planning documents every 3-5 years or upon a major life event such as birth, marriage, death, or divorce.
5. Do you know how much you pay in taxes? While the exact answer to this question is not the purpose, the overall goal is to understand that taxes are usually the single largest recurring expenses for most folks. Understanding the magnitude of taxes on your overall financial health is vital, so maximizing tax efficiencies should be an integral part of holistic planning.
6. Are you living within your means and savings at least 10% of your income? This question is similar to question #1 but goes a step further. Knowing where your money goes is important, but doing the right thing with your money is crucial. Spending less than you earn and saving 10% of your income is pinnacle to spur financial growth.
7. Are you balanced financially between today and tomorrow? Are you eating rice and beans today so that you can eat filet tomorrow? Are you savings everything for retirement, or are you spending your earnings as quickly as it hits your pockets? A financial lifestyle based on a lop-sided view will lead to financial dysfunction. So, while saving all your nuts and berries for tomorrow may seem like a great idea, the reality is the mental dysfunction of hoarding may lead to less enjoyment of the nuts and berries later. Creating balances between today and tomorrow will help to balance life’s ups and downs, as well as establish a healthy approach to growing wealth.
8. Do you have an investment plan in place? Are you just throwing money at the market? Do you rebalance your portfolio at least annually? Is your portfolio properly allocated based on your personal risk profile? An investment plan will address the above questions and deliver guidance during turbulent market environments. A financial plan without an investment plan is like a ship without a rudder.
9. Do you have the proper amount of liquidity? Liquidity is the keystone of the financial foundation. Liquidity is the cash that delivers stability during an economic hardship (job loss, unemployment, or natural disaster) enabling one to withstand the hardship without irreparable financial damage. The old adage of 3-6 months of living expense may or may not be enough. Every situation is different and should be assessed individually.
10. Do you know what your insurance deductibles are? If a rock broke the windshield on your car, would you know if you are covered? If a tree fell on your roof, do you understand how the insurance company will determine the amount of your payout? Insurance deductibles are a great place to start when looking to understand your coverages. Is your insurance deductible right for you? Is it too high….Is it too low? Remember, lower deductibles increase premiums!
These ten questions are broad questions that point to the importance of a total financial plan (holistic planning). While there are other questions that may be important, this list is a good start to give yourself a quick check-up while searching for any missing financial puzzle pieces.
July 12, 2010
What is a Fiduciary? And why is it Important to You?
By Judy Stewart, CFP®, MBA, EA
Carlsbad, CA
http://www.stewartfinancial.com/
The fiduciary standard is a code of conduct for registered investment advisors who are regulated under the Investment Advisors Act of 1940. I am a registered investment advisor so therefore I am held to the fiduciary code of conduct. This important standard requires me to:
Carlsbad, CA
http://www.stewartfinancial.com/
The fiduciary standard is a code of conduct for registered investment advisors who are regulated under the Investment Advisors Act of 1940. I am a registered investment advisor so therefore I am held to the fiduciary code of conduct. This important standard requires me to:
- always put your interest first
- act with prudence
- never mislead you
- provide full disclosure
- avoid conflicts of interest
- and fully disclose and fairly manage (in your interest) any unavoidable conflicts.
Brokers are not required to show conflicts of interest, details of his/her fee structure (which would be pretty shocking if disclosed) or to make sure that the product being sold or offered to the client is truly best for that client. And if a client is wronged by a broker, the burden of proof is on the client to show the damage. As a fiduciary, the burden on proof is for me to show that I am right or wrong.
So...who would you trust to manage your portfolio, make recommendations, help you to retire etc....? A broker or a true fiduciary who sits on the same side of the table as you!
The House-Senate Conference Committee is grappling with this issue right now and deciding whether all financial advisors should be held to the fiduciary standard. This is a no-brainer, in my opinion. We all should be fiduciaries. The brokerage and insurance industries are working hard to strike the fiduciary provision from the reform bill.
Let your voice be heard. Contact the committee members today and let them know that a Fiduciary Standard is the best thing we can do for financial reform.
July 8, 2010
Taking Stock of the Dow
By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Back in May we saw an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/
Back in May we saw an unprecedented day in the stock market. At one point the Dow Jones was down nearly 1,000 points (I can’t believe I am even writing that number).
I want to stress that the best thing to do is to remain focused on the things you can control, i.e. your savings rate, your asset allocation, your debt-to-income ratio, etc. You can not do anything about what the market does day to day, but you can do something about those things mentioned above. You are going to hear many “talking” heads on the radio and TV give various explanations for why things happened the way they did. However, the real question is how these events are going to affect you and the ones you love. We have a tendency to get lost in the stress of everyday life and we forget to make note of the blessings we have each day.
I am not telling you to be oblivious to what is going on in the world but that you need to work on the things you can do something about and let everything else take care of itself. It is important you do not overreact to short-term market events. During times like these it is important to remember the basics regarding your financial life:
- Live on less then you make
- Have $0 consumer debt
- Don’t buy more house then you can afford
- Pay as little in taxes as you are allowed
- Have proper cash and emergency reserves
- Save for the short-term and invest for the long-term
- Spend time with your family and those you love instead of watching the latest stock market charts.
July 4, 2010
Room for Optimism
By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 6/29/2010 at the Financial Planning Association®'s All Things Financial Planning Blog
As a watcher of many business pages, I’ve noticed over the past several years that today’s news carries a more negative tone than ever. The title of every story seems at times to shout at us, “Are you afraid of the next crisis, well, you should be!”
What do we fear next? Inflation, or deflation? Domestic or international investing? Missing out on a boom, or investing just before a bust?
Too often I speak with individuals who have formed financial opinions based on a snapshot from the media. And with all of the negativity, what impact does what we read / watch / hear have on our success as investors?
The markets are not ‘going to zero’. Even if a major company collapses, opportunities for others exist, and there will be growth for entrepreneurs who capitalize on them. I see it in my own industry, and work with many who see things developing all over the economy.
Franklin, MI
http://www.nfa1040.com/
Originally published 6/29/2010 at the Financial Planning Association®'s All Things Financial Planning Blog
As a watcher of many business pages, I’ve noticed over the past several years that today’s news carries a more negative tone than ever. The title of every story seems at times to shout at us, “Are you afraid of the next crisis, well, you should be!”
What do we fear next? Inflation, or deflation? Domestic or international investing? Missing out on a boom, or investing just before a bust?
Too often I speak with individuals who have formed financial opinions based on a snapshot from the media. And with all of the negativity, what impact does what we read / watch / hear have on our success as investors?
As an advisor and observer, it can be amazing the impact that a few seconds of a pessimistic ‘expert’ opinion can have on us. Many times I meet with state a fear of an economic collapse. Pressing further, the concern is a hyperinflation which would wreck the purchasing power of the dollar.
And while the concerns are real, the actions we want to take very often do not fit the concern. The instincts of many who state the above concern is often to dump their stocks and place their savings in fixed investments; not realizing by doing so they are guaranteeing to be hurt the most by inflation, and lose out on the chance of their assets increasing with inflation.
It’s interesting to witness that while humans are hardwired for cyclical thinking, we tend in the short-run to focus on extremes, believing the end result is the continuation to an severe degree of whatever the concern may be.
Despite the news today of countries defaulting, the market correction, and fears of a double-dip, there is plenty of room for optimism:
Many of our client portfolios have fully recovered from the 2008 crash due to saving and the market rebound in 2009.
Like Joe Pitzl’s recent post points out, we have choices for discretionary spending. We don’t have to upgrade to the 50-inch plasma.
Assets that have dropped like real estate are more accessible today to more buyers. Prices of these assets won’t drop to zero as more buyers enter the market.
The pace of technology has made our personal and work lives more productive.
The markets are not ‘going to zero’. Even if a major company collapses, opportunities for others exist, and there will be growth for entrepreneurs who capitalize on them. I see it in my own industry, and work with many who see things developing all over the economy.
Volatility is scary, but market volatility has worked in long-term investors favor as they buy stocks at a discount.
At a distance, with more information, the news is rarely as bad as seems in the moment. To avoid the trap of making constant changes to your plan based on negative news and emotion, try this exercise.
Keep track of your current opinions and concerns about the economy, and the actual outcomes. Answer the following, and repeat the exercise next year:
My three biggest economic concerns are?
- I am concerned about the economic picture of _______ (country).
- Over the next year the stock market will (rise / fall) ___percent.
- Interest rates over the next few years will (rise / fall) ___ percent.
Looking back, I am sure most of our short-term concerns in the long run do not carry the extreme consequences we fear. There is plenty of room for optimism today — and maybe it can best be found by not upgrading your news to view on a 50-inch plasma!
July 1, 2010
Goldilocks and the Three Tax Preparers
By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
Once upon a time there was a small business owner named Goldilocks. She owned a business in the woods. As a small business owner, she was subject to self employment tax and was required to make estimated payments.
One day an ill-informed tax preparer knocked on her door. The taxman told Goldilocks that she need not be concerned about making her estimated payments to the IRS. Goldilocks loved the idea and followed his advice to the letter. All year long, her business made money and grew, and all year Goldilocks neglected the pay- as –you-go tax system and lived happily spending the money she earned.
The pay-as –you-go tax system was established for those who are self employed. Each quarter the IRS requires an estimated tax payment for the tax due on income. Neglecting these payments may result in an underpayment penalty at tax time!
Goldilocks enjoyed the fruits of her labor throughout winter, but then spring arrived. Goldilocks was shocked when she learned that she had a huge tax bill due, including an underpayment penalty. Goldilocks thought her prior year’s tax planning was “too cold” and decided to revisit the estimated payment idea.
A few weeks later, an over-anxious tax preparer arrived at her door. This conservative preparer told Goldi to send big chunks of her income into the IRS. While Goldi slept a little better at night, her disposable income was negatively affected…..she didn’t have money to spend.
After a year of this method, Goldilocks completed her tax return and learned she was due a huge refund. While the idea of a large refund made her happy, she realized the money she paid to the IRS was being returned to her without any interest. She thought this method was “too hot!”
Any money paid into the IRS and then returned to the taxpayer will be returned without interest. In essence, overpayments are equivalent to an interest free loan to the government, so large refunds are not always the most efficient use of hard earned money.
Goldilocks was upset that she mishandled her taxes the last two tax years. She didn’t know what to do. While sitting and thinking about her options, a new tax preparer appeared at the door. This preparer sat down with Goldilocks and discussed her situation. They talked about her income and expenses and created a projection of her current year’s tax liability. This projection was used to determine the estimated tax payments Goldilocks needed to pay for her current tax year.
After a year of pro-active tax planning, Goldilocks was excited to see that at tax time her estimated payments were not “too hot” or “too cold”….they were “just right”!
Moral of the Story
It is important not to over or under pay estimated tax payments. Merely taking a guess can create a bad situation. Underpayment penalties really are easily resolved through proper planning. Overpayments are not the answer either, because no one wants to give the government a big interest free loan. Creating a balance between tax payments and retaining liquidity for current cash flow is truly the Goldilocks’ scenario in which tax planning is “just right.”
Nashville, TN
http://www.vhfinancialmanagement.com/
Once upon a time there was a small business owner named Goldilocks. She owned a business in the woods. As a small business owner, she was subject to self employment tax and was required to make estimated payments.
One day an ill-informed tax preparer knocked on her door. The taxman told Goldilocks that she need not be concerned about making her estimated payments to the IRS. Goldilocks loved the idea and followed his advice to the letter. All year long, her business made money and grew, and all year Goldilocks neglected the pay- as –you-go tax system and lived happily spending the money she earned.
The pay-as –you-go tax system was established for those who are self employed. Each quarter the IRS requires an estimated tax payment for the tax due on income. Neglecting these payments may result in an underpayment penalty at tax time!
Goldilocks enjoyed the fruits of her labor throughout winter, but then spring arrived. Goldilocks was shocked when she learned that she had a huge tax bill due, including an underpayment penalty. Goldilocks thought her prior year’s tax planning was “too cold” and decided to revisit the estimated payment idea.
A few weeks later, an over-anxious tax preparer arrived at her door. This conservative preparer told Goldi to send big chunks of her income into the IRS. While Goldi slept a little better at night, her disposable income was negatively affected…..she didn’t have money to spend.
After a year of this method, Goldilocks completed her tax return and learned she was due a huge refund. While the idea of a large refund made her happy, she realized the money she paid to the IRS was being returned to her without any interest. She thought this method was “too hot!”
Any money paid into the IRS and then returned to the taxpayer will be returned without interest. In essence, overpayments are equivalent to an interest free loan to the government, so large refunds are not always the most efficient use of hard earned money.
Goldilocks was upset that she mishandled her taxes the last two tax years. She didn’t know what to do. While sitting and thinking about her options, a new tax preparer appeared at the door. This preparer sat down with Goldilocks and discussed her situation. They talked about her income and expenses and created a projection of her current year’s tax liability. This projection was used to determine the estimated tax payments Goldilocks needed to pay for her current tax year.
After a year of pro-active tax planning, Goldilocks was excited to see that at tax time her estimated payments were not “too hot” or “too cold”….they were “just right”!
Moral of the Story
It is important not to over or under pay estimated tax payments. Merely taking a guess can create a bad situation. Underpayment penalties really are easily resolved through proper planning. Overpayments are not the answer either, because no one wants to give the government a big interest free loan. Creating a balance between tax payments and retaining liquidity for current cash flow is truly the Goldilocks’ scenario in which tax planning is “just right.”
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