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2011-04-01T20:29:00.001-04:00

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Three Ways to Reduce Your 2010 Tax Bill

2011-03-27T20:07:00.001-04:00

It’s that time of year again! Tax documents are arriving by mail and the race towards April 18th is on. While 2010 is over and gone, there are still things we can do to reduce our tax liability for last year. Here’s a list of a few things you can do now that might reduce your tax bill for 2010.

1. Take full advantage of available tax credits

The government offers taxpayers an array of credits for items and services purchased last year. Remember that credits are a dollar for dollar reduction in tax liability as compared to a tax deduction, which will reduce your taxable income. In short, tax credits are preferable to tax deductions. While some credits are phased out by income, such as the child tax credit, other credits are not phased out by income, such as the residential energy credit.

Below is a list of popular credits that often get overlooked:

Residential Energy Credit. Taxpayers can use this credit for improvements to a principle residence that creates an increase in energy efficiency: i.e. Installation of a tankless hot water heater.

Alternative Motor Vehicle Credit. The government may give you a tax credit if you purchased an alternative fuel vehicle, such as a hybrid automobile. Speak with your preparer about the applicable restrictions and rules.

First Time Homebuyers Credit. This credit certainly made the headlines last year. If you purchased a home in 2010, you may be eligible for a tax credit that could save you tax dollars.

American Education Opportunity Tax Credit. This credit extends the credit formerly known as the Hope credit. If you sent a child to college in 2010, this credit might be for you!

Dependent and Child Care Credit. This credit is available for working tax payers with dependents that require care during working hours. There are several requirements and regulations with this credit, but it is certainly worth the effort, if applicable.

The above list is only a portion of available credits. It is beyond the scope of this article to explore the entire list. It is important to discuss the applicability of tax credits with your tax professional for items applicable to your 2010 return. It could save you big bucks!

2. Maximize Retirement Contributions

Did you know that the government will subsidize your retirement? That’s right, through tax deductions the government effectively is subsidizing your retirement. Many personal retirement accounts allow contributions up until April 18th, and those contributions can apply to 2010.

Contributions into tax-deferred retirement accounts, such as IRAs, SEPs, and SIMPLE IRAs reduce current taxable income; therefore reducing tax liability. For example, a couple in the 25% tax bracket who can make an allowable Traditional IRA contribution of $10,000 could save $2500 or more. That’s a 25% return on investment before this money is even invested! Best of all, this contribution can be made as late as April 18th.

There are a multitude of rules and regulations regarding allowable retirement contributions and deadlines, so it’s imperative to speak with a tax professional before making a decision.

3. Review Itemized Deductions

Schedule A (Itemized Deductions) is a common area for mistakes and omissions. In my experience, I have seen mistakes and omissions on this form due to a lack of effort from the taxpayer. For example, many people leave tax dollars on the table when it comes to charitable deductions. Charitable deductions can help reduce taxable income and ultimately decrease your tax bill.

Here are a few other areas that are often overlooked.

Charitable Mileage. A deduction is allowable for qualifying charitable mileage. For example, if you drive to a local Goodwill to drop off items, the mileage to and from is deductible.

Sales Taxes. For your 2010 return, you may deduct sales taxes paid for automobile purchases. Depending on the state in which you live, this deduction can save you several hundred dollars or more. Let your tax preparer know if you purchased a vehicle in 2010.

Non-cash Charitable Contributions. Organizations such as Goodwill perform a great service to our communities. It’s important to properly substantiate non-cash contributions to maximize deductibility. Make sure to always get a receipt from the organization, create an itemized list of items being donated, and do not forget to properly value the items being donated to fully substantiate these types of donations. There are several documents available to assist taxpayers in determining the donated value of each item, including one on Goodwill’s website. It’s worth the additional effort.This is another area where a good tax preparer can come in handy. Don’t be afraid to ask for assistance from your preparer when it comes to properly valuing your donated items. Also, make sure to keep up with your mileage as well!

Utilize Miscellaneous Items Deductions. Miscellaneous itemized deductions are subject to a 2% floor of adjusted gross income. This means in order to get a deduction you must present allowable deductions greater than 2% of your adjusted gross income. The number of employees working from home has increased in the past few years. An office in the home of an employed taxpayer is a fine example of a miscellaneous itemized deduction. Tax preparation fees, financial planning, unreimbursed employee expenses, and investment expenses are a few more examples of miscellaneous itemized deductions.

Most Taxpayers don’t have the time and energy to fully understand all the available deductions, credits, and retirement contribution options available. The key to properly handling one of the largest recurring expenses (taxes) in anyone’s financial world is by implementing a proactive tax strategy. But, even with good tax planning, numbers can change and life can get in the way. When that occurs, the above options allow taxpayers another chance to reduce their tax liability.

I utilize integral tax planning for my clients. I feel this area is one of the most important (if not the most important) part of the financial planning puzzle. Taxes can touch and impact (both positively and negatively) many aspects of our financial world, so it’s important to manage our tax liability. It’s important that taxpayers work closely with tax preparers.

I am a firm believer in holistic financial planning, which includes proactive tax planning. If you are searching for a holistic financial planner in your area, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA advisors integrate taxes into financial planning, which is an enormous benefit to clients.

In full disclosure, Troy Von Haefen is a member of The Alliance of Cambridge Advisors.

Any of the above information is intended for informational purposes only and is not intended to be considered tax advice or implemented as such.

By Troy Von Haefen, CFP®

Claiming Homebuyer’s Credit on your 2010 Tax Return

2011-03-23T19:50:00.001-04:00

Question: I was wondering what documentation you are suggesting your clients submit to claim the $6,500 home-buyer’s tax credit.

Answer: Here is what I would do for a client:

Paper file return
Properly complete Form 5405
Copy of HUD Settlement Statement showing signature of buyer and seller
Copy of mortgage statements from the last 5 years you lived in your previous home

If you follow this guideline and your claim is legitimate, you should not have a problem receiving your refund. Keep in min you will probably need to wait 6-8 weeks to get your refund, so please be patient. For more information, please visit http://www.irs.gov/newsroom/article/0,,id=204671,00.html.

By Kevin Jacobs, CFP®

Rising Oil Prices and Falling Dictators

2011-03-19T19:54:00.003-04:00

The headlines and talk shows scream at us about the rising oil prices and Mideastern dictators falling like dominos. The stock market is scared and so the S&P500 has fallen 5% in the past week. Here we go again, you might say. Are we sliding back into another recession? These are very legitimate concerns but let’s look at the facts:

• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.

• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.

• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.

• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!

By Judy Stewart, CFP®, MBA, EA

Three Steps to a Solid Financial Decision

2011-03-15T20:04:00.000-04:00

I recently had a client call and ask my opinion about an extended warranty offer for his car. This was an interesting conversation which I thought may be helpful to share with others. Not so much in the sense of the viability of extended warranties for cars, but more so from the standpoint of learning how to make a well informed decision.

When it comes to decisions, I generally follow three steps to assist and guide clients. While some decisions may require more, these three steps are great starting points in the search for clarity.

1. Information

Information is golden when it comes to making a decision. The more information you can ascertain the easier the decision. The detail and fine print usually contain key points that often get over-looked but can be big factors in the decisions making process. Ex. Does the extended warranty require a deductible, and, if so, how much?

The point of gathering information is to ascertain black and white data and remove as much emotion as possible. While the salesman pushing the car warranty delivers the hard sell by emoting fear based on the possible financial liability of expensive repairs, the car owner needs to understand the true cost of the warranty. Sure, auto repairs can be expensive, but does the warranty truly cover those expensive repairs and for how much?

2. The Financial Bottom Line

This is the subjective area of the decision process. Where do you draw the line when it comes to cost? How much is too much to pay?

Let’s go back to the warranty example. The cost of the warranty was roughly $2000. The car was a Toyota with 30,000 miles. Using the information we gathered from the details of the proposed plan we learned this warranty would only be a viable option for the next 2-2 ½ years (due to mileage restrictions). I simply asked my client how many repairs $2000 would cover. He responded just as I thought, “quit a few!” After looking at what was actually covered and factoring the deductible and other limitations, the cost suddenly seemed pricey. My client drew the line and decided the cost was just too high.

3. Gut Check

We really need to listen to what our gut tells us when it comes to decisions. We also have to be careful not to rationalize a bad decision. This is why it’s important to follow steps 1 & 2, especially in regards to removing the emotion. If we can remove the emotion from the decision, the answer usually becomes clear.

While my client’s gut told him the warranty didn’t feel right (prompting his phone call to me), the salesman worked hard to play on emotions and cloud the decision making process. After removing the emotion my client’s gut proved to be right. The risk of possible repairs was a risk my client was willing to bear…and more importantly, one my client’s gut was willing to bear.

Most decisions get made without too much thought and deliberation, but the occasional difficult financial decision can be painful. Following the three steps above can help to clarify and remove some of the pain. While the simple example I used above may seem small to some, the three steps know no financial limit.

We have all made a few bad decisions along life’s journey, and, looking back on those decisions, we can usually agree that something was missing in the process. Take a look back at those decisions and see if one of the three points above was removed during your time of deliberation.

Have you experienced a difficult financial decision recently? How did you resolve the issue? What methods do you use to help you conquer a difficult decision?

By Troy Von Haefen, CFP®

Common “Do-It-Yourself” Tax Preparation Mistakes

2011-03-11T19:49:00.002-05:00

I find three of the most common “do-it-yourself” tax preparation mistakes include capital gains, business asset depreciation and rental home cost basis.

Many people do not know the difference between short-term (1 year or less) and long-term (1 year and 1 day+) capital gains tax treatment. I have met individuals who had to pay more in tax then necessary because they sold their asset within a day or two of it becoming a long-term asset. Knowing the difference between short-term and long-term capital gains can save you up to 20% or more on your federal return. If you receive an inherited asset, it is deemed to be a long-term capital gain and it receives a step-up in basis. This means your basis is what it was worth on the day the grantor died. If you have capital gains on your return and/ or your received an inherited asset, I strongly encourage you to seek out a professional and competent tax professional.

Moreover, another area worth significant tax savings on your return is calculating and planning your business asset deprecation correctly. I have had to amend many returns to correct their depreciation schedules. It is important you keep your purchase documentation for business assets and allow your tax professional to determine the best course of action in preparing your depreciation schedules. Many times, if I have a start-up business, it is more advantageous to depreciate business assets rather than taking a Section 179 expense deduction. If your business is showing a loss even before you have calculated depreciation, it is probably not in your best interest to expense the asset.

Finally, cost basis tracking on rental properties is another area where I see common mistakes. This is especially evident with converted personal to rental property. If you convert your home from a personal residence to a rental, your basis for depreciation is either the FMV (Fair Market Value) or adjusted basis at the time the property was converted. The adjusted basis is the original purchase price of the home in addition to many improvements and purchasing expenses. The basis for your rental property is the lower of these numbers (current FMV or adjusted cost basis).

Unless you have a very simple tax return, I strongly encourage you to seek out the advice of a competent professional. Tax preparation work is very tricky and can cost you in the long run if it is not done correctly. If you have capital gains, business depreciation or rental property on your return, I would consult with either a CPA or Enrolled Agent before filing your own return. The value of a good professional should far outweigh any fee they may charge.

By Kevin Jacobs, CFP®

Top Ten Things To Do During Tax Season (Apologies to David Letterman)

2011-03-07T19:43:00.002-05:00

10. Get your things organized and to your preparer as soon possible to avoid needing to file an extension.

9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.

8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.

7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.

6. Start your file now for 2011 tax data.

5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.

4. Start a mileage log with a section for charitable miles, medical miles, and business miles.

3. Keep track of all your out-of-pocket business expenses.

2. Keep organized on your other financial issues, not just taxes.

1. Reward your tax preparer with chocolate – especially if it’s me!

By Linda Leitz, CFP®, EA

You Get What You Pay For

2011-03-03T14:32:00.001-05:00

Several years ago, after the completion my CFP® coursework, I was searching for practical guidance in tax preparation. I enrolled in the H&R Block tax course. I was seeking a pencil to paper type experience after the high level learning in taxation from the CFP® tax course.

I breezed through the Block course and did walk away with the experience I desired. I was able to get comfortable with some of the more complex tax forms and put my CFP® knowledge to the test. Of course, after completion of the Block course, their recruiters tried to sink their claws into me, but I politely declined. I knew I didn’t want to participate in a “drive through” tax preparation system.

There are many choices in tax preparers, and choosing the right preparer is important. Making a poor choice can be an expensive decision. The preparer/client relationship is essential, and I certainly see evidence of disconnected relationships by the number of tax return mistakes I find on prospective client’s returns.

Most mistakes I find are due to a lack of communication. How does the client know what information the preparer needs if the preparer doesn’t ask for it? And, how does the preparer know what info is needed if he/she doesn’t know the client?

Building a good client/preparer relationship takes time, and, unfortunately, the “drive through” tax prep services seen in many forms across the country doesn’t allow for time. If you want a relationship, you will have to pay for it, but the price you pay will be worth the cost. A preparer who knows you and your situation is golden when it comes to seeking out additional deductions.

If your return is very simple, say just a w-2, one the many national chain type preparers would be fine to utilize. But, if your return has any hint of complexity, it’s worth the additional expense to find a preparer who will take the needed time to complete the return thoroughly.

If you are searching for a tax pro this season, ask questions and explore the potential relationship. How thoroughly will your return be prepared? Will you have the ability to ask questions and receive acceptable answers? Will you have the ability to build a relationship that will position you to save tax dollars now and in the future? Remember, the preparer you are looking for and need may not be the least expensive option.

By Troy Von Haefen, CFP®

Almost Whole

2011-02-27T14:29:00.001-05:00

I am continually surprised by questions from financial reporters who are still asking how my clients are faring after losing half of their retirement savings or by individual investors who are still fretting over losing half of their nest egg. If you followed our advice, as about 95% of our clients did, to stay the course and avoid selling during the drop in the market you would be close to break even now. If your risk tolerance precluded you from staying in the market, you may have realized a greater loss. This is a good reminder that we need to avoid acting on emotional reactions to the stock market. The stock market is cyclical and you can’t recover from a loss if you aren’t in the market. The stock market is counter intuitive – generally, the best time to buy is when you feel like selling and the best time to sell is when you feel like buying.

Here are some figures that will illustrate the actual change in the market over the last three or four years. The S&P 500 hit an all time high of around 1561 in October of 2007 and dropped about 56% to around 683 by March of 2009. Since March of 2009 the market increased by about 88% to 1286 on January 31, 2011. While it hasn’t reached the peak of 1561 it has returned to the 1200-1300 level where the market hovered throughout the summer of 2008 – before the significant drop in September 2008. The NASDAQ hit an all time high of around 2810 in October of 2007 and dropped about 54% to around 1293 by March of 2009. Since March of 2009 the NASDAQ has increased by about 109% to 2706 on January 31, 2011.

By Jane Young, CFP®, EA

The New Normal

2011-02-23T14:23:00.004-05:00

A number of clients have expressed alarm at the recent clamor of commentators who have been predicting a cataclysmic economic change worldwide. These pundits claim that we are facing an economic “New Normal” and express concern that the ‘old’ economic rules on which we rely no longer operate.

Their conclusions? Drastic changes are needed in our lives and investments to accommodate the “New Normal!”

Usually they question the viability of the U.S. dollar and offer the possibility that China, or perhaps a block of other nations, are somehow positioned to ‘take over’ the U.S. because they hold so many U.S. bonds. Another variation of this calamity centers on the recent collapse of the real estate market, the precipitous drop in the stock market, and extraordinarily low interest rates. Taken together, these developments presage the end of American prosperity for our children and ourselves.

Of course these apocalyptic pronouncements are more effective if they are tied to some political viewpoint, the more extreme the better. More often than not, far right political viewpoints proclaim that doomsday is the certain result of left-wing politics. Leftist views generally emphasize the inevitable revolution that suppression of the masses will cause.

(Note to “Investment Advice” file: Never let your politics drive your investments!)

It’s time to confront these ridiculous assertions. Yes, it is true that the investment and economic travails of the past decade have been severe and have impacted many people worldwide. Some of these changes have not occurred before during many of our lifetimes. It is enticing to point the finger of blame and shame at our financial, economic, investment and political leadership. But that is not the whole story.

The power of momentum in democratic economies is easily underestimated. Although dramatic from time to time, the impact of severe financial shifts must be kept in proportion and viewed within a broader historical perspective. We need to recognize that most extreme economic shifts are self-correcting.

Even with unemployment at over 9%, over 90% of our citizens are employed. Real estate crashes, weather-related disasters, stock market crashes, low interest rates, etc. have all happened before. Indeed the damage done by seismic economic shifts during the Great Depression, the severe stagflation in the 1970’s, and the collapse of S. & L.’s in the 1980’s were all worse than we have seen today…and all of these are relatively minor when compared to the disruption of the financial markets in the 19th century. And whatever happened to the “New Economy” theory that gave rise to the ‘dot-com’ frenzy of the 1990’s?

It is folly to fret about how much of our debt is owned by the China (interestingly, Japan owns nearly as much U.S. debt as China, even though that fact is not usually noted). What can the Chinese do with our debt? They can’t dump it on the White House lawn and demand to be paid off with gold. They can’t go on the world markets and exchange dollars for Euros or Yen, or even buy gold. Any of these moves would be self-defeating because dumping huge amounts of money in any market would decrease the value of their remaining dollars. Actually, their only realistic option is to spend it in the U.S.!

There is a concern that the U.S. dollar is at a “tipping point” and will soon lose its status as the world’s reserve currency. But no other currency is in a position to take its place. The Euro’s stability is much too questionable. The Yuan doesn’t have a long enough history to be relied upon, especially when a dictatorial government can arbitrarily determine its value. Neither these nor other ‘respectable’ currencies such as the Yen, the British Pound, the Swiss Franc, etc. have enough depth to support a global economy.

Those who espouse extreme economic outcomes are invariably selling something. Usually it is their newsletter or book, or some strategy to beat the market, or gold itself. The most eminent economists in the world have never been able to predict any economic cycle with a meaningful consensus. Why should you believe the extreme voices of charlatans who use their advanced marketing techniques to dupe the fearful?

What can you do? I suggest that you sit back and follow sensible advice. The Functional Asset Allocation model, which is used by nearly 200 fee-only members of ACA (Alliance of Cambridge Advisors), focuses on the basics.

Consider this…there are only three possible economic scenarios: we can have inflation, deflation, or prosperity. It is a waste of time to try to determine which is coming next. The prudent approach is to be prepared for all three possibilities. As the ancient wisdom of the Torah exhorts: “Invest a third in land, a third in business, and a third in reserves!”

Today, that translates into a balanced portfolio of real estate, equities (i.e. stocks in companies), and cash and bond reserves. Trying to market-time and pick the next ‘hot investment’ is foolhardy. If you allow the vagaries of global economics, i.e. exogenous factors, to be the focus of your attention, you risk making decisions based on emotion rather than rational thought. In truth, it is the ‘endogenous factors’ in your life that determine your financial future.

As Pogo once said, “We have met the enemy, and he is us!” Instead of dithering about what will happen in the Mideast, or where interest rates are headed, or when will real estate level off, look at the things in your life that make a difference. Are you saving at least 10% of your gross income? Are you living within your means? Do you have enough liquidity to ride out a financial setback? Do you have a long-term fixed rate mortgage to protect you from inflation? Do you have government bonds to weather another bout of deflation.

Obsessing about the various complexities and possible outcomes in today’s global economy inevitably leads to rash and unwise leaps. Keep an eye on the issues within your reach! It is the key to a confident journey and a serene financial future.

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

By Bert Whitehead, MBA, JD

How to Bullet-Proof Your Portfolio

2011-02-19T10:24:00.002-05:00

I read an interesting article this weekend in the Wall Street Journal that really got me thinking. The basis of the article was how to profit from the impending inflation that the media is telling us is right around the corner. While I don’t necessarily discount that fact that inflation may be headed our way, I do disagree with the idea of trying to time economic cycles.

If you’re a reader of my blog, you understand that as a holistic, big-picture, fee-only financial advisor I find market timing or economic timing to be a poor choice. If now is the time to sell long bonds due to the threat of inflation, when is the right time to buy? If now is the time to buy small cap stocks, when is the right time to sell? This is the market timer’s dilemma.

I find the best response to the threat of inflation, deflation, or economic prosperity (the only three economic cycles we can face) is to develop a portfolio to handle all three. The difference between my theory and the article is that my theory is designed to be permanently implemented into the portfolio….not a moving target that requires guess work and timing to accomplish the task. Here’s how to handle the three economic cycles.

Inflation – To ward off the effects of inflation there are a couple things investors can do. First, holding cash is a good inflationary hedge. While interest rates rise, the rate paid to you in your interest bearing type accounts will increase.

Secondly, a properly leveraged home (having the right size mortgage) will also provide a buffer against inflation. Imagine this….locking in a long term fixed rate mortgage will allow the owner to pay for tomorrow’s housing cost in today’s dollars. The mortgage payment will not increase while inflation pushes housing cost around you higher.

Economic Prosperity – We don’t want to hedge against economic prosperity; we want to participate. Therefore the best way to participate in an economic upswing is by holding equities. My choice is through low-cost mutual funds and ETFs. If everything is moving along swimmingly in the economic world, which unfortunately is not currently the case, then equities as a whole will rise.

Deflation- deflation is a portfolio killer. Deflation usually creeps up after a strong market cycle, so it often catches do-it-yourself investors holding a larger percentage of equities. The market then tumbles and the investor is devastated due to the large percentage of equity holdings.

The armor required to battle the effects of deflation can be found in two forms: US Treasury Strips and CDs. Both assets hedge against falling interest rates by carrying a locked in or guaranteed rate of return. While Treasury Strips are marketable and can be sold at market rates (meaning at a loss), the idea is to buy and hold until maturity, which guarantees the return. Certainly the same can be accomplished through corporate bond….but with one big disadvantage: security! Need I say more than Enron and Worldcom!

Holding a Treasury strip or CD to maturity may sound boring, but the theory is based on protecting the interest earning side of the portfolio and providing a basis of stability. Little or no risk should be taken on this side of the portfolio. Risk should be saved for the equity portion of the portfolio.

Some of the ideas presented above may lead to a bit of confusion or fog for the non- professional, but that’s okay. The most important fact to take away is to remember that the total portfolio, which includes the primary home, should be designed to participate in a thriving economy, while buffering against the effects of both inflation and deflation. The ideas discussed above are simple and can be effective, and the best part is they are not based on market timing. Timing the market or the economy is not a wise play.

I know it’s the boring approach. I know it won’t make you rich overnight, but it won’t make you broke overnight either! If you are not sure whether your portfolio is designed to handle the three economic environments, it would be wise to speak with an advisor. The Alliance of Cambridge Advisors is a great place to start your search.

By Troy Von Haefen, CFP

Happy Financial New Year!

2011-02-15T10:05:00.001-05:00

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

The economy still isn’t out of the woods. Many people still feel the pressure of a sluggish financial landscape. As the year beings, it’s good to get some financial goals in place. Basics are a good starting point.

Spending – Spend less than you make. If you need to make adjustments in your spending, buckle down and do it. Also, you’ll want to include in your budget the next three items.

Debt – If you have credit card or other unsecured personal debt, work on paying it down. Pay the biggest amount possible on the debt with the highest rate. If you’re working on spending, the debt won’t increase.

Emergency savings – Put money away for emergencies. You want to have some money that you can use to cover unexpected financial needs. If you have no emergency funds, work toward 5% of your pre-tax income.

Retirement savings – Things will get better in the financial world, so save toward not having to work to cover expenses. If your employer matches part of what you contribute, get to that level as quickly as possible.

If you’ve got these under control, get with a fee-only financial planner to work on some bigger goals. The financial world will get better. The faster we all get away from the behaviors that brought on the meltdown, the faster the economy will get better.

Ever Been Caught in the Rain?

2011-02-11T10:02:00.001-05:00

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

We’ve all been caught out in the rain, and as an avid golfer, I can honestly say I have played golf in weather bad enough to make passersby shoot me strange looks from inside their dry cars. While an all-weather suit is a plus, a good umbrella is a must to stay dry. Just as an umbrella is a necessity in any die-hard golfer’s bag, a financial umbrella policy is a wonderful tool to protect your family.

An excess liability coverage policy (A.K.A. umbrella policy) covers additional liabilities beyond the coverages of the underlying policies. An umbrella policy is a broad form of coverage that covers both automotive and general liabilities when purchased in addition to basic liability plans (home and auto). When the limits of the underlying policies max out, the umbrella policy kicks in.

Let’s go back to golf. If while playing golf in the rain a golf club slips out of my hands and injures a person, the underlying coverages of my homeowner’s policy will kick in first. If the damages were severe and beyond the limits of my homeowner’s policy, my umbrella policy will jump in and cover the excess up to the limit of the umbrella, which range from $1M to $5M plus.

The good news is the costs of umbrella policies are inexpensive: usually roughly $200for a $1,000,000 policy…..if you don’t have teenage drivers. Purchasing an umbrella policy will most often require an increase in underlying limits. This is most often seen in auto policies. While each state has its own minimum liability requirements for auto policies, most umbrella insurers require limits much higher than the minimum state limits. For example, the state of TN requires drivers to carry at least $25,000/$50,000/$10,000 in coverage. To learn more what these numbers mean check out my article about the importance of limits: http://bit.ly/dTMey3 . To obtain an umbrella policy the insurance company mayrequire the insured to carry limits somewhere in the $250,000/$500,000/$100,000 range. While this is a ten-fold increase in liability limits, it doesn’t mean the cost will increase by ten. The increase will be fairly small. Remember, we don’t want to risk a lot for a little! The purpose of insurance is for protection.

We also must understand the distinction between personal liabilities and commercial liabilities. A personal umbrella policy will not cover a liability created by a business liability. Commercial ventures require a separate business umbrella policy. Also, it’s important to make sure the underlying policies and limits are in place. For example, if a parent decides to reduce the limits on a teenage driver to the state minimums in an effort to save money, the underlying requirements of the umbrella policy will not be met. Therefore, if the teenage driver is involved in an at-fault accident, the umbrella policy will not pay out. The parents would be ripe for a law suit.

So just as I won’t risk playing a round of golf in the rain without an umbrella, it’s important to have proper liability protections in place to protect your financial assets. While not everyone requires an umbrella policy, most people do. Umbrella policies are an inexpensive way to give yourself peace of mind and help you sleep a little better at night. While my liability protection concerns are not something that will keep me awake at night, the weather forecast for my next round of golf might.

Ten Investment Resolutions for 2011

2011-02-07T09:58:00.001-05:00

By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/

It's that time of year when many of us establish one or more New Year's resolutions. This often means committing to improving one's lifestyle by losing weight, exercising more, or drinking less. Many investors could benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year's investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.

Most of us are creatures of habit and discover that making permanent changes in our behavior is surprisingly difficult. To make matters worse, our commitment to change is sometimes tested by examples of those who ignore prudent behavior to their apparent advantage and those who follow it to their apparent detriment. Winston Churchill lived to age 90, fortified by an ample supply of champagne and cigars, while author and jogging enthusiast Jim Fixx died of a heart attack at age 52. These isolated examples may test our faith but should not encourage us to abandon a proven set of prescriptions; continuing to apply them will still improve our odds.

So, for those who find making such promises useful, here are ten investment-related resolutions that will stack the deck on your favor for better long-term wealth:

1. I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.

2. I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.

3. I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.

4. I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).

5. I will continue to invest new capital and work my plan because it is time in the market—and not timing the market—that matters.

6. I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) rather than "unbalance" (i.e., buying more of what's hot).

7. I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.

8. I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.

9. I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.

10. I will keep my cost of investing reasonable.

Most of us find it hard to follow a sensible diet or a sensible investment strategy 100% of the time. If you must stray when managing your wealth or well-being, moderation is the key. Chocolate cake is OK, as long as it's not for dinner every night. Speculating on a stock or two is all right as well, as long as you don't do it with your investment capital.

Finally, just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can benefit from having a "financial coach" to remind them about their New Year's resolutions and keep them on track toward a more prosperous future.

Here's to good health and good wealth in 2011.

Cut Your Losses!

2011-02-03T09:53:00.005-05:00

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

When should you sell an investment if the value drops?

Investors agonize over this and often let themselves be guided by the old adage: “Buy low, sell high.” Based on this logic, they decide they will hold any investment they buy until they can at least break even. Once a client adopts this mantra, it is difficult to convince them to sell their holding at a loss, even when it keeps dropping in price.

There is a strategy of ‘averaging down’ when an investment drops in price. For example, suppose that you buy a mutual fund or stock when it is $20 a share and then it drops to $15 a share. If you had decided it was a good buy at $20 then, logically, you should buy more because it is even a better buy at $15. And if it drops to $10, then buy even more.

This is an aggressive strategy, and requires undaunting confidence in the investment. It can work out, but it often doesn’t. When it doesn’t, the results can be catastrophic. Employees who buy their company stock are particularly prone to make this mistake. I have seen situations where clients have stubbornly held on to Pan Am, GM, Chrysler, Enron, etc. and continued adding to their holdings only to end up losing it all. On the other hand, Ford shareholders have done well using this strategy over the past few years.

A more sound investment approach is to decide that, when you buy an investment, you will reevaluate it if it drops. You evaluate the losing investment with other investments, and then make a “keep or sell” decision. For example, let’s go back to your $20 per share stock. Rather than wait until it drops to $15 you could have decided that, if it drops 10% or 15% (i.e. to $18 or $17), you will reconsider the investment. If there are other investment options with better upside potential, sell your loser and reinvest in something with better prospects. This prevents you from blindly holding on to the shares hoping they will go back to $20.

For many people, selling a loser means they made a mistake, and they are adamant about not losing money on their investments. The blatant truth is that holding on to the stock means you still have a loss, you just haven’t ‘realized’ it yet.

One technique I have used with some success is to explain to clients that by selling the stock, they are ‘harvesting’ their losses for tax purposes. The tax loss will save them tax dollars by offsetting other gains, thereby reducing the capital gains tax. It often gives them an additional $3,000 deduction against other ordinary income, which can save them about $1,000 in taxes at the 33% tax bracket.

The beauty of this is that the client can buy the stock back after 31 days. If bought back sooner, the ‘wash sale rule’ precludes them from taking the tax loss. It’s interesting to note that, no matter how resistant the client was to selling the stock at a loss initially, once they sell it they never buy it back!

Of course we do not recommend ‘market timing.’ When managing clients’ portfolios we take into consideration other factors such as the overall balance of the portfolio, the amount of the single investment relative to the total portfolio, as well as tax issues and clients’ long term goals.

For example, we don’t sell stripped Treasuries in a client’s ladder just because the market value drops. The function of this investment is to assure that the maturity value provides the cash flow necessary for spending goals (usually in retirement), without fail. We know and expect that the market value will fluctuate in the meantime, but the ending value is government guaranteed.

On the other hand we don’t hesitate to sell a mutual fund that has underperformed its peers significantly for two or more quarters in a row. We also take losses in the Cambridge Index Portfolio when we can capture them as short-term, which are the most tax advantaged.

Cutting losses isn’t limited to securities like stocks, bonds, and mutual funds. A huge concern of many clients today is whether they should ‘dump’ their real estate in this depressed market or wait until they can ‘get their money back out.’ This issue is more complex, but here are some guidelines I consider.

If the home is your personal residence, and you like it and can afford the payments, keep the house unless you have to move (e.g. new job, changing neighborhood). If it is a vacant house or vacant property, it is generally better to sell (even at a loss) because the carrying costs of keeping vacant property and running the risk that the value will continue to drop generally makes this type of real estate a bad investment at this time. You may want to review my previous blog of April 29, 2010 titled “What To Do When Your House Is Underwater.”

The issue of when to “cut your losses” is also perplexing when applied to employment and other relationships, but my expertise in these areas is limited (though I have done a lot of research…). The best approach usually is to get a therapist!

In any situation, cutting your losses sooner rather than later is usually the better course of action. Not only does it minimize financial losses, but it also reduces stress. Continually dealing with these kinds of decisions is emotionally toxic.

So make a New Year’s resolution to cut your losses in three areas that have been plaguing you. Get the monkeys off your back, and get on with a rich fulfilling new year!

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

Auto Gap Insurance: Why you may need it!

2011-01-30T15:19:00.001-05:00

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

It seems that almost every other TV commercial during the holidays has a gesticulating car salesman telling why you need a new car. Of course, these dealers are trying to move stock by year end. “Hurry before the best deals of the year end,” is an often stated selling point. If you find yourself driving a new car, you may need to think about an auto gap policy for your new car. Gap policies are a useful policy addition that may save you money.

What is a Gap Policy?

A gap policy is a feature that can be added to the policy of a new car. The gap coverage will cover the difference between the auto’s value and the balance of the loan. While I am not an advocate for consumer debt (car loans), those who have new car loans need to be protected. New cars depreciate so rapidly the value of the car may be lower than the payoff of the loan.

Why does this matter?

If a new car owner is involved in an at-fault accident where the automobile is totaled, the insurance company will make payment to the owner. The problem occurs when the automobile is valued at a lower amount than the payoff of the loan. The owner will then be on the hook for the difference without the gap coverage.

Here’s an example: Let’s say Sam buys a $30,000 car and 3 months later is involved in an at-fault accident where his car is totaled. Sam has full coverage and expects to receive payment to cover the pay-off of his note, but, unfortunately, this may not be the case. New cars can depreciate as much a 20% immediately after purchase, so the value of Sam’s car may be as little as $24,000. Even if Sam put down 10% ($3000), his loan pay-off may be roughly $25,500. Sam may have to pay out of pocket to pay off the note, even after being paid by the insurance company.

Gap policies are inexpensive and should be discussed with you insurance carrier if you are a new car owner and have a highly leveraged auto loan. Remember the old insurance axiom: don’t risk a lot for a little. Without the gap policy you could have a potential liability of thousands of dollars.

What is a Diminished Value Claim?

2011-01-26T15:23:00.001-05:00

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

Recently, my wife was involved in a little fender bender in a parking lot. She was hit by a young driver who just wasn’t paying attention. The damage was not dramatic and no one was hurt. After gathering all the vital information and contacting our insurance company on the spot, both parties went on with their day.

With almost everything financially related, I strive to seek a nugget of education, and this insurance claim process was no different. The at-fault driver had coverage, and the insurance company was quick into action to set us up with a repair plan and a rental car. Within a little more than a week, we where made whole…..or as they say in the insurance industry: indemnified. But wait, were we really back to where we started? What about the true value or our automobile?

In today’s world of information sharing, insurance companies realize the picture is a bit broader. Even though our automobile was repaired to pre-accident standards, the true value of this asset had diminished. This can now be seen in a Carfax report that will show our car was involved in an accident. If a buyer is deciding between two similar vehicles with the exact same sales price, but one has a clean Carfax report and one shows involvement in an accident, the decision is clear. The buyer will always buy the vehicle with the clean Carfax report. Insurance companies now realize this and offer diminished value claims.

A diminished value claim is an effort to fully indemnify the claimant. In essence, cash is paid to the claimant to fill the gap between what the car was worth pre accident and post accident. Let’s go back to the example of the buyer looking at two similar cars. If the buyer decided the accident was minor and the damage was repaired properly, the buyer may make an offer commiserate to the diminished value…..say $500 less than the car with clean Carfax report. If the owner of the car received $500 from the insurance company as a diminished value claim, the owner was made whole.

The key to a diminished value claim is it must be requested. While the at-fault driver’s insurance was really great to work with, they didn’t offer this without my asking. On another note, the diminished value claim is a negotiable amount. I did not accept their initial offer and asked for what I felt was fair. They agreed.

If you find yourself in an auto accident, remember the true value of your auto may decline more than you realize due to access to information via Carfax reports. Speak to the insurance company about the claim, be patient and courteous, and don’t forget to request a diminished value claim.

Long Term Care Insurance - expect premium increases

2011-01-22T15:01:00.000-05:00

By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/

I've long been skeptical of long term care insurance (LTCI) being priced properly. A recent article in the New York Times noting MetLife's decision to stop issuing LTCI policies business gives a good example of my cause for concern.

The article states that, in addition to MetLife's LTCI problems

"The two leading players in the industry are trying to raise prices, too. Genworth Financial is seeking an 18 percent increase on older policies held by about 25 percent of its customers. And John Hancock has filed for permission to raise premiums for about 80 percent of its customers by an average of 40 percent. It has also temporarily stopped offering new long-term care insurance plans through employers while it tries to figure out what to charge."

The article goes on to say that 11 companies that were in the top 10 in market share at some point over the past decade have bailed out of the LTCI marketplace.

It hardly instills confidence that the two leading LTCI companies can't figure out what to charge for their insurance, and is no doubt unsettling for people who bought insurance from a company because of its high standing in the LTCI world to think that their premiums which are already not cheap might increase 20-40%.

The Theory and Reality of Emergency Funds

2011-01-18T15:17:00.000-05:00

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

Many times planners talk in terms of financial theory or possibilities, and while clients often heed the advice of their planner they implement the guidance based on theory. A good example of this is in regards to emergency funds. I feel most people understand the theory and importance of having a solid emergency fund, but until a true need for emergency funding is faced the peace of mind liquidity provides may not be fully appreciated.

I recently met with a client who told me a great story. My client had an ah-ha moment. My client had built a solid emergency fund. She understood, in theory, the importance of liquidity (cash), but she had not experienced firsthand the power of a sturdy safety net.

My client was struck with a spell of tough luck….she fell and injured her leg, her mother was in the hospital, and on top of that, her car’s transmission died. Between hobbling around on an injured leg and visits to the hospital, she found time to get her car repaired. The price tag for the transmission repair was lofty.

In the past, financial setbacks for my client would have been dealt with simply by pulling out the credit card and racking up debt, but this time was different. After a couple years of hard work, she had reached solid financial footing and was able to absorb the unexpected cost.

The best part of the story was not so much that my client was able to cover an unexpected expense. The golden moment came when she learned, first hand, the benefit of a fully funded emergency fund. Theory became reality for her.

The moral of the story is financial theories are only theories, but the wisdom behind the theory and advice is sage. When it comes to emergency funds and building a safety net, it’s not whether or not the need will arise to utilize the funds. It’s just a matter of time before Murphy’s law will come knocking on your door. A solid emergency fund is the foundational footing to a solid financial plan and one of the best ways to increase peace of mind. If a good night’s sleep is what you are seeking, propping up the emergency fund may be just what the doctor ordered.

Payroll Tax Relief and What it Means to YOU

2011-01-14T15:08:00.001-05:00

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

If you haven’t heard, President Obama signed a new tax bill last week. One of the items that will affect all employees is the 2% point reduction in an employee’s share of Social Security portion of the FICA Tax, from 6.2% to 4.2%. What exactly does that mean for you?

The table below illustrates the change and savings. FICA limits are currently adjusted for inflation and are currently set at $106,800. The tax savings is currently only available for 2011.

Pay               2010 Tax (6.2%)          2011 Tax (4.2%)    Savings
$30,000         $1,860                          $1,260                     $600

$50,000         $3,100                          $2,100                    $1,000

$80,000         $4,960                          $3,360                    $1,600

$100,000       $6,200                          $4,200                    $2,000

$106,800       $6,621                          $4,485                    $2,136

This is a huge opportunity for every employed person to increase their 401k contributions or contribute to an IRA or a Roth IRA in 2011. This is FREE money, folks. Using it for retirement is a very wise move.

Proactive Tax Planning Strategies

2011-01-10T15:04:00.002-05:00

By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/

Many people fail to plan when it comes to taxes. You can save significant amounts of money regarding your tax liability if you are willing to be plan. Below you will find some proactive tax planning strategies:

1. Learn the range for the marginal tax brackets. You can find these at http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm. With some planning, you may be able to reduce your taxable income so as to be taxed at a lower marginal rate.

2. Evaluate your investments and make sure you not only have them allocated appropriately, but also determine if they are in the most tax-efficient vehicle. See previous blog entry regarding asset location at http://stepbystepfinancialplanning.com/blog/2009/06/14/asset-location-an-often-overlooked-aspect-of-investing/

3. Fund your available retirement plans as much as possible. Don’t just contribute what the company gives you as a match!

4. Document the non-cash charitable contributions you make to organizations, such as Goodwill and Salvation Army. You give more than you realize.

5. Keep track of miles for business, unreimbursed employee expenses, charity and medical.

6. Use your investment losses in your non-retirement accounts to offset gains.

7. Be mindful of potential state tax deductions for contributions to 529 college savings plans.

8. Consider Donor Advised Funds for charitable purposes.

There are many other potential tax planning strategies so I encourage you to speak to your tax professional for ideas and suggestions. Tax preparation is nothing other than “documenting history.” Tax planning is where the real money is saved. I encourage you to take some time before the end of the year to see how you can proactively plan to reduce your 2010 tax liability.

Five Awful Investments to Avoid in 2011*

2011-01-06T15:14:00.001-05:00

By Bert Whitehead, M.B.A., J.D.
Franklin, MI
http://www.bertwhitehead.com/

1. Timeshares. This preposterous “investment” is based on the doubtful proposition that a $117,000 condo is really worth $585,000 because 50 chumps can be convinced to rent it one week a year for the rest of their natural lives, and pay most of the rent (totaling $11,700) in advance and the rest annually disguised as maintenance fees. These are always sold by very friendly people, usually named Joe, who cannot begin a sentence without grasping your forearms and saying, “Let me be honest with you.” In addition to a very fuzzy explanation of the investment potential, you will find out how you could get AIDS from hotel sheets (presumably not a danger at Vacation Ownership Resorts because they don’t have maid service).

a. A hint: If after reading this, you still can’t help yourself and simply must buy a timeshare, buy it on a the secondary market (i.e., look in the classified ads and buy one from some dummy who spent his kid’s college money for it last year and now is trying to dump it at half price). This is still twice what it is worth.

b. A better hint: Put your $11,700 in a well-balanced investment portfolio. Each year use the accrued earnings to rent a timeshare anywhere in the world. Then go job hunting while you’re there and write it off!

2. Lottery Tickets. Lotteries were designed by scheming Republicans as a patriotic way to entice poor people into voluntarily returning their welfare checks to the state coffers. They sort of work like variations of the old 50/50 church raffle except the church doesn’t tax your 50 percent and then pay you over 20 years. Assuming a tax bracket of 33 percent, and an annual present value of money at 8 percent instead of a return of 50 cents for every dollar bet, you actually “win” slightly less than 17 cents. This is not attractive, even compared to roulette tables in Las Vegas where they pay 95 cents for each dollar bet. Plus you get free drinks.

a. Hint: If you could borrow $7.7 million at 8 percent over 20 years and buy every single number on the Michigan lottery, you would be a sure winner if the jackpot was $22 million or more. (If you don’t have to split the pot with some bloke on the dole.)

3. Life Insurance Investments. These quaint arrangements were popular and considered by some to be relatively competitive in the Fabulous ‘50s. Then your only alternatives were U.S. Savings Bonds (which your elders still called “war bonds”), paying 4 percent, and savings accounts which aggressively paid 4.5 percent. Pseudo-tycoons had Christmas Club accounts, a scam whereby you gave money to the bank every week and then they gave it back to you at the end of the year. No interest, but no service charge either. Now, bank savings accounts pay virtually no interest which is dwarfed by service charges if you don’t have very much money and just let it sit there. The service charge compensates the tellers who take your money out for a walk every month until it all evaporates. But we digress: back to life investments. They are variously called whole life, variable life, universal life, permanent life, etc. They sport many supposed advantages none of which are exclusive to this investment vehicle. Despite reams of projections and lengthy enthusiastic explanations, these investments are bereft of S.E.C. scrutiny, and the investor thus usually is at the mercy of inscrutable policy language as explained by a hyperkinetic salesperson with a snappy patter but no prospectus to evaluate risk or disclose the sales commission. Moreover, these are inevitably touted as “Long-term Investments”. Long Term Investments in financial lingo refers to generally inferior investments that are impossible to fully understand on which salespeople earn very large commissions.

a. Hint: Continue to ask your insurance person A) exactly how much commission is paid for selling this to you and B) exactly how much of your money you get back if you bail out after two years. If you can get a straight answer, you will be amazed that the amount of money you will lose under B is uncannily close to the amount disclosed under A. If still in doubt, we will demonstrate how much better you will be buying term insurance and investing the difference in the S&P 500 Index mutual fund. NOTE: This does not mean you should cancel or cash-in existing policies.

4. Any Investment Sold Over the Phone. Legitimate investments are never sold over the phone. Period. If their investment was as good as they say it is, and then they wouldn’t be spending their time talking to strangers like you on the telephone. Actually we encourage clients to never buy anything over the phone because of the increased exposure to fraud. And also because it only encourages even more unsolicited telephone intrusions.

5. Any Investment Someone Comes to your House to Sell You. If you think it through: anytime someone comes out to see you , at your convenience, in the comfort of your own home, and you are under no obligation, you are going to get a very high pressure sales pitch for something you probably never before considered buying, at an outrageous price. The sales commission on these arrangements is usually 25-50 percent of your investment. This makes shopping at home very expensive.

* This article was originally written 20 years ago. Interest rates have changed, but the scams remain the same…

When Buying or Refinancing a Home You Should…

2011-01-02T14:03:00.001-05:00

By Troy Von Haefen, CFP®
Nashville, TN
http://www.vhfinancialmanagement.com/
Make sure you understand the fine print!

It’s a great time to buy or refinance a home. Interest rates are extremely low (recent 30 year fixed rates are as low as 4%!). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.

The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!

You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.

Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.

Rome Wasn't Built in a Day

2010-12-27T12:11:00.003-05:00

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

2010-12-23T13:58:00.000-05:00

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:

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.
Always save 10% of your income—each and every year—no exceptions.
Go slow on large purchases and always consult with each other. Set a dollar limit that each can spend on his/her own.
Avoid credit card debt like the plague. Only charge what you can pay off when you get your monthly statement.
Have money set aside for emergencies and believe me, they will happen. A rule of thumb is approximately 3 months of your monthly earnings.
Be generous. Sit down together and decide what annual amounts you want to give your church or charities so that others can be blessed.
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.
Buy term life insurance only. Check with your employer about group term life, it is almost always the cheapest way to go.
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!

2010-12-19T12:02:00.001-05:00

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

2010-12-11T13:50:00.001-05:00

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?

2010-12-07T11:59:00.001-05:00

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

2010-12-03T11:56:00.001-05:00

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

2010-11-29T12:34:00.000-05:00

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?

2010-11-25T12:13:00.000-05:00

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

2010-11-21T14:12:00.001-05:00

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

2010-11-17T12:32:00.000-05:00

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

2010-11-13T12:21:00.010-05:00

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

2010-11-09T12:08:00.000-05:00

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

2010-11-05T12:17:00.002-04:00

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?

2010-11-01T13:56:00.000-04:00

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

2010-10-28T14:26:00.002-04:00

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

2010-10-24T14:24:00.001-04:00

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

2010-10-20T14:21:00.001-04:00

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!

2010-10-16T14:15:00.001-04:00

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!

2010-10-12T14:10:00.003-04:00

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?

2010-10-08T14:05:00.002-04:00

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

2010-10-04T13:59:00.005-04:00

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

2010-10-01T14:33:00.003-04:00

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

2010-09-29T14:53:00.002-04:00

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

2010-09-25T14:49:00.001-04:00

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

2010-09-21T14:44:00.003-04:00

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

2010-09-17T14:37:00.003-04:00

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

2010-09-14T14:21:00.001-04:00

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

2010-09-11T14:12:00.002-04:00

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

2010-09-08T14:07:00.001-04:00

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

2010-09-01T14:33:00.001-04:00

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?

2010-08-29T14:29:00.001-04:00

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?

2010-08-26T14:25:00.001-04:00

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.

Your Financial Life Taking Off

2010-08-22T14:13:00.004-04:00

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

Originally published as 'Financial Beginnings - Taking Off' on 8/9/2010 at the Financial Planning Association's All Things Financial Planning blog.

This is the 3rd installation in a 3-part series.

This is the third and final blog in a series for those in the beginning stages their financial lives, and the pitfalls, learning, and strategies at each stage of starting out. Previously, I observed the potential for a lost generation of investors that I see mostly in those who have made it past the first few stages of their financial lives; mainly, those who have begun to amass significant savings, but do not have the fundamentals in place to maintain solid financial behaviors. It is this stage that my blog covers today.

This stage is when your financial life starts to get interesting! The fluctuations in accounts are more than you are able to save. Previously, the activity of saving muted the decline brought on by down markets. Now, a daily shift can feel like a week’s worth of pay has come or gone!

Planning and making the right moves becomes critical. In this time of rapid accumulation, it is important that your plan goes beyond the basics and incorporates your taxes, insurances, and estate plan. In order to continue to develop, you will have to be smart about how you save and invest, as well as ignore the pitfalls that can come with accumulated savings:

Pitfall #1 – Investing vs. Gambling vs. Speculating. These are three distinct concepts, though we often think of them in the same light. Investing is placing money into strategies where the long-run returns and risks are relatively knowable. Gambling on the other hand involves almost no chance for gain and the losses are total. Speculation is short-term gambling based on knowledge. Investing offers the only real opportunity over the long-run to build true wealth.

Pitfall #2 – Cutting back. As your income increases, don’t stall out on savings. Base your savings on a percentage of your income, not an absolute number, and continue to increase your savings to a target of 20%.

Pitfall #3 – It’s the whole that counts, not just the parts. Your individual investments will vary, but that doesn’t mean you should jump from winner to winner, or judge the success of your portfolio based on the performance of individual accounts. Having pieces of your portfolio that decline while others rise is what it means to be diversified!

It is also at this stage where planning becomes essential. Bad ideas are magnified, and if left unchanged can result in not efficiently moving toward your goals.

Develop personal and financial goals. If you haven’t done so seriously yet, now is the time to start to plan out longer-term goals. Start 5 years out. If everything went the way you would plan, what would your life look like? Consider the longer-term. What is it you want to be doing in 10 or 20 years? Is it what you are doing today? If not, what are the small steps that would move you forward to this end to start to consider today? Write your goals and the action steps out and revisit them periodically.

Have a plan. Having a financial plan that includes a plan for taxes and maximizing advantaged accounts like your 401(k) or 403(b), as well as IRAs and Roth IRAs, is crucial. Developing a long-term game plan to meet your goals will keep you focused, and on track.

Ignore the short-term. I speak with many today weighing the value of long-term retirement savings versus putting their money in 2% savings accounts or paying off a 5% mortgage. In their minds, the short-run guarantees are worth more than investing for the long-run in a diversified portfolio. However, this is investing based on yesterday’s returns, and ignores what may happen tomorrow, and what has happened through most time horizons.

To summarize and bring this series of blogs back to the starting point of potentially losing a generation of investors, this weekend, I spent time reading issues of Kiplinger’s from the early 1970s. While many of our challenges today are different, it was incredible to read the same economic catch phrases and concerns from a different time period. The market crash of 1973-1974 was devastating to those that lived through it. For those with a 5, 15, and 25 year time horizon, it was one of the best times in nominal terms to be an investor, and stocks gave the only liquid way to maintain the purchasing power of your savings. It is just as critical today understand the pitfalls and strategies at any stage to start out and stay on a prosperous track.

Building Your Financial Foundation: Watch Out for Money Complacency

2010-08-18T14:18:00.001-04:00

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

Originally published 7/27/2010 at the Financial Planning Association's All Things Financial Planning blog.

This is the second of a three part blog on the early stages of the Financial Life Cycle.

In my last blog post, I introduced the concept of the Financial Life Cycle. This week’s blog is all about the strategies and pitfalls in the first adult stage, and next week I will look at strategies and pitfalls for those who have navigated the first stage successfully.

The first adult stage of our financial life is all about self-sufficiency. Sure, you’ve got stuff (e.g., car, computer, nice clothes), but what you don’t have are the things that provide safety over the long-term. Your net worth is less than your annual income, or it may even be negative.

If you’re just starting out or starting over, this is right where you are supposed to be. But, for many, it is easy to become a little too comfortable and linger in this stage. If you are one in that category, you would have to admit a disaster would set you back substantially, and you aren’t quite sure how you would cope. For now, though, it’s not an issue.

This is an interesting stage for many, because while you have ample time to make up for any losses and mistakes, you may be tempted to take risks. Why not splurge a little?

The problem comes when people do just that every time they appear to be getting ahead and accumulate some money.

To move forward from here, below are some prerequisites to advance in your financial maturity:

Save. Some people say it’s not critical to save, that the opportunity to spend while you are young is worth more than saving for a goal decades away. But at this stage you probably couldn’t handle multiple setbacks like having to replace your car, losing your job, or a health emergency. Your short-term goal for saving at this stage should be at least 10% of your pay. Once you’ve achieved that, I suggest an additional 1 to 2% per year.

Pay off consumer debt. For more information on saving and debt, see my blog on the topic. Debt can drag down your best efforts to get ahead, making your life less enjoyable and unnecessarily stressful.

Track income and expenses. Start by writing down all of your expenses as they come up for at least three months, rounding to the nearest dollar. Get up close and personal to your spending and raise your awareness of where your money goes. After a few months, consider dropping the pencil and paper for software like Mint.com or Quicken, but however your do the tracking, continue to monitor changes in your expenses each month.

Develop your worth in the marketplace. Diversify your skills. Take courses that give you an edge in your career. For example, does your job involve work with spreadsheets? Take a class and become the expert in your office. Find a niche where you can add value, whether it enhances your income or makes you more employable.

Buy adequate protection. Your insurance may have gaps, such as not enough disability coverage. Or you may not want to pay for renters’ insurance, but likely it’s too risky to go without it. I recommend higher deductibles both to get the correct amount of coverage and to discourage claims that can cost you your coverage.

All the items I’ve just listed aren’t easy to contemplate or act on when life seems trouble free. However, like trying to get into physical shape (or stay that way), establishing good financial habits only gets harder over time.

In the next financial life stage, you will begin to have some discretionary income and learn how to put your money to work for you. Our litmus test to discern if clients are on their way is to monitor their net worth and make sure it approaches an amount equal to their annual income. In my next blog I’ll cover more strategies and pitfalls at the first stages of accumulation.

Unsure of What to Do Next? Know Where You Stand in the Financial Life Cycle

2010-08-14T14:01:00.005-04:00

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

Originally published 7/12/10 at the Financial Planning Association's All Things Financial Planning Blog.

Market volatility has led to concerns we may experience a lost generation of investors; a current Depression-era style generation that avoids the risks and long-term benefits of equity market investing.

I too hear that concern with prospective clients, however I find these individuals fit into more particular groups than just young people. Many who are swearing off the markets are not young at all.

This group tends to be individuals that have accumulated wealth in excess of 1-5x their annual income, placing them just past the first adult stage of their ‘Financial Life Cycle.’ As wealth takes shape, volatility becomes more noticeable, especially for those prone to certain ‘money scripts’ (more on below). Market swings of hundreds of dollars a day were one thing; in excess of several thousand dollars for many can become a nerve wracking event.

The Financial Life Cycle is an idea we use to measure the progress of our clientele, and show the path toward financial maturity. Like our biological or career cycles, the ideas in a stage are ever changing; the actions and strategies never stagnate.

Our Financial Life Cycle can tell us where we are on life’s roadmap in terms of our finances, and measure progression. The stages are not based on age, but rather we judge primarily based on one’s overall wealth or net worth relative to income.

Over the next few blogs, I will speak more about the life cycle as a roadmap to the strategies and pitfalls to watch out for during each stage.

While age does not determine where we are along the cycle, we do all start at the same place. From birth to adulthood, we become very familiar with certain money truths:

Though it is only paper, money should not be thrown out (money has value)
Your labor can be exchanged for money (earned income)
We can exchange money for things we want (money is a tool to achieve our goals)
Our time preference for using our money can lead to interest earned, or paid (budgeting and saving)

We can all grasp these basic money concepts, however more advanced financial learning largely comes from our personal observations and experiences, as well as witnessing the experiences of those we love and trust. My fellow FPA blogger Rick Kahler in his book The Financial Wisdom of Ebenezer Scrooge calls these ideas our ‘money scripts’ – our internalized beliefs and behaviors past the basic truths we all accept about money.

Personal finance is not often taught in our schools, and certainly not the degree of the different life cycle stages. It is easy for many to stop developing at various stages and miss out on habits that lead to true wealth. Becoming aware of both your money scripts and the life cycle are critical to maturing past financial infancy in an effective way.

If you are like many that are considering reacting to today’s economy based on your emotional scripts, consider spending time for introspection and learning before making drastic changes to your plan. While it is said that “money can not buy happiness,” having a sound relationship with your money based on understanding your tendencies and how you are progressing will lead to a more content life. In my next blog I will cover the first adult life cycle stage of self-sufficiency, where we need to begin to understand and work with our money beliefs in order to move toward a sound financial future.

Why Stay in the Market

2010-08-11T14:00:00.001-04:00

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

After a couple weeks of difficult market returns, investor fears are creeping up. As investor fears increase, so do the number of questions I receive regarding the market. Most of the questions revolve around the concept of exiting the market, essentially market timing. Should I sell everything to cash? Why should I be in the market during these volatile times? Should I move all my investments to bonds?

Just a couple years ago we were staring at a portfolio-killing time bomb waiting to detonate. The downturn of 2008-2009 really hurt, but, as with all downturns, it has become a memory. We all remember and still relate to the pain, but what did we learn? For those out there who exited the market, did you reenter the market at the right time? For those that stayed true to their investment strategies, did it pay off?

For most folks getting out of the market during rocky times is not difficult, but returning to the market is extremely precarious. Getting out is not what hurts the investor; consequently, it is not getting back in at the right time that is damaging. During Oct 2008, the stock market had wild swings. If an investor moved all their equities to cash, they would have missed out on a huge one-day run on Oct 13, 2008. All three major indexes (S&P 500, Dow Jones Industrial Average, and the NASDAQ) were all up over 11% in one day. The investors sitting on the sidelines in cash were rethinking their strategy after Oct 13, 2008. Being out of the market can be extremely costly.

What do we do?
Staying in the market is the right thing to do but only if you have a plan. An investment strategy based on factors associated with your life and risk profile is imperative. Positioning a portfolio to handle prosperous times while protecting against inflation and deflation creates a portfolio that promotes sleep at night. Blindly investing is risky in any market environment. Another important element of an investment plan should include dollar cost averaging. Consistently buying shares will reduce the total cost basis and increase return, so, while the market is down, buy the shares at a reduced price. Continuing to buy while the market is down is like buying your favorite product on sale. It makes sense, but most of us don’t follow through. I heard a wise investor once say the only thing American consumers don’t like to buy on sale is the stock market. It’s true!

While the questions continue, we should revisit those dark hours during 2008 and early 2009 when we thought the sky was falling. We should learn from our past experiences. Those who stuck it out and where positioned properly weathered the storm just fine. The next time the question about exiting the market pops up in your head ask yourself how did during 2008-2009. If you weather the storm, then you have your answer. If you didn’t, you either pulled out of the market or you had a poor investment plan. If you are currently without an investment plan, I highly suggest speaking with a fee-only advisor. Here are two websites to find a fee-only advisor in your area:
ACA
NAPFA

Feel Like Un-Retiring? Here's How to Prepare

2010-08-01T13:58:00.003-04:00

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

Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016. At the same time, MetLife reported that many American workers plan to stay on the job “at least” until age 69.

The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working. The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.

Add all these factors together and you have one of the most interesting labor situations for older Americans ever. That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues. It makes sense to meet with a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional.

Here are some critical points to address:

How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining. If there’s a way to get an employer to pay, do it. But if you have to pay for your own education, you really need to weigh whether your earnings will justify it.

Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place. You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.

Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial planner.

Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances. Most retirees realize that it doesn’t take much income to knock them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.

Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.

Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions. Keep an eye out for these programs and see if they work for you.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.

June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Robert Schmansky, a local member of FPA.

Why a Roth Conversion May Not Be Right For You

2010-07-28T13:56:00.002-04:00

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.

How to Spot and Stop Senior Financial Exploitation

2010-07-24T13:51:00.001-04:00

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.

Two Strategies to Deal with the Unkown of When Interest Rates Will Rise

2010-07-20T13:47:00.005-04:00

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.

Can You Answer These Questions?

2010-07-16T13:41:00.005-04:00

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.

What is a Fiduciary? And why is it Important to You?

2010-07-12T13:37:00.001-04:00

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:

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.

This is a strict code of conduct and I am proud that I am a fiduciary and held to these high standards. However, not all financial advisors are required to follow this standard. Hard to believe but it is true. Advisors who work for brokerage firms and insurance companies have to follow a "suitability" standard which only requires them to show that a proposed transaction is "suitable" for their clients. This leaves the door wide open for big problems and abuses in the industry. And we have seen many of these abuses in the recent years.

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.

Taking Stock of the Dow

2010-07-08T10:55:00.004-04:00

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.

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.

As for the rest of it, take a deep breath and remember with me to control the things we can and let go of those things that are outside of our power.

Room for Optimism

2010-07-04T10:47:00.002-04:00

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?

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.

My instinct today is to (sell / buy) stocks.

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!

Goldilocks and the Three Tax Preparers

2010-07-01T10:43:00.001-04:00

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.”

Don’t Be Alarmed by the Financial Scaremongers

2010-06-25T14:50:00.001-04:00

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

About once a week a client asks me about the latest prognostication from some famous so called “financial expert/alarmist.” They are either predicting the demise of the world as we know it or predicting a triple digit increase in the stock market. Maybe I am exaggerating, just a little, but we’ve all experienced those who think they can forecast the future and lead us to “Financial Paradise.” I remind my clients of two things with regard to these “miraculous forecasters.”

The first is that most of the TV hosts, radio shows, magazines, and financial authors are in the business of making money by selling magazines, books, and ad space. They are not in the business of providing the consumer with the best possible advice. They want to entertain, tantalize, and terrorize you. This is what gets and keeps our attention. Let’s face it! Good solid investment advice is really boring. It doesn’t change much and doesn’t sell magazines! Secondly, they cannot predict what the market is going to do tomorrow much less six months from now. Historically, no one has ever been able to consistently predict the future of the financial markets. Sure, when you have thousands of people making forecasts a few are bound to get lucky. As a good friend often says, even a blind man eventually hits the bull’s eye.

Develop a solid plan to meet your unique situation and stick with it. Don’t let the financial hype throw you off course. Below are a few quotes that help emphasize the fallacy of placing too much faith in financial forecasts.

“We’ve long felt that the only value of stock forecasts is to make fortune tellers look good. Short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children” (Warren Buffett).

“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window” (Peter Drucker).

” We have two classes of forecasters: Those who don’t know - and those who don’t know they don’t know” (J.K. Galbraith, US Economist and diplomat).

Greece: When the Trough Gets Smaller, the PIIGS Get Meaner!*

2010-06-22T14:48:00.001-04:00

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

The credit meltdown in Greece amplified the panic caused by a trading error to cause tumult in the stock market. While placing a sell order, an anonymous trader mistakenly entered ‘1 billion’ instead of ‘1 million’ (oh those pesky decimals…) The overreaction caused by the error subsided for the most part within an hour, but the unfolding events in Greece kept world markets in turmoil.

Watching crowds in Athens and other Greek cities participating in violent protests, to the point of killing 3 bankers, brought the impact of possible economic collapse up-front and personal. While Greece’s debt is not significant relative to other larger common market (EU) countries, it appears that the rest of the “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain) are also teetering on the edge. Each of these countries has accumulated debt equal to 66%-124% of their GDP (Gross Domestic Product produced by a country). Since the gross U.S. debt is now 93% of our GDP, Jason Zweig suggests the US should be added to the acronym: “PIG IS US.”

If the workers in other countries resort to violence as a reaction to the cuts in pay, benefits, and pensions, then their leaders may not be willing to institute much needed reforms, and other EU countries will not be willing to lend money to the PIIGS. International banks have already reacted by tightening credit offerings to customers including other banks.

Early on, Britain managed to sidestep the allure of the Euro keeping control of the British Sterling. But even so their politicians have ignored the dire economics of their situation. Britain must reduce an annual deficit that hovers at 13% of GDP, which is even worse than the U.S. Public spending in Britain is now over 50% of their GDP. There are so many Brits dependent on government spending for their livelihood, that during the election earlier this month not one of the three national candidates mentioned cutting pensions or government benefits. Instead they all relied on the empty promises of populist insanity to ‘reduce fraud, waste, and abuse.’

There is widespread concern that the U.S. is heading down the same path. According to Barrons, government employees in the U.S. are paid 50% more than employees working equivalent jobs in the private sector. This disparity is mostly attributable to factoring in lavish benefits such as holidays, vacation time, generous early retirement packages, and life-long health care. This is why nearly half of the states and cities in the US have huge underfunded pension plans. Already there is an expectation that the federal government will come to the rescue, and some localities have been using Stimulus grants to continue paying pensions.

Currently, 58% of Americans receive all or part of their livelihood from the government. During the period from September 30, 2008 to December 30, 2009 the U.S. accumulated debt has mushroomed from $5.8 trillion to $7.8 trillion. Since then it has increased another 8% so that it now totals over $8.4 trillion. This does not include unfunded liabilities for Social Security, Medicare, and the new national health plan. The popular concern is that the U.S., along with other countries, will buckle under the weight of their spoiled citizenry and inflate their currencies.

But we have reached the point where the real danger is that investors may refuse to loan more money to subsidize nations currently living beyond their means. This is the downside of an interwoven global economy. The fear is that the Greece virus can start a cascade of “the deadly Ds” = downturns, deficits, more debt, downgrades, and defaults. Many on Wall Street expect another financial shock, not unlike the 2008 collapse of credit markets. There is rising concern even about the liquidity of money market funds.

Despite the fears of impending inflation coupled with the dread of more deflation, I would caution against extreme reaction. It is easy to underestimate the momentum of prosperity and the resilience of free countries. Many investors are wondering: “Are stocks undervalued now?” So what is a prudent investor to do?

First, don’t sell off your bond ladder. As bad as the U.S. economy looks right now, it is healthy relative to Europe and most of Asia, and is much more diversified. The economic situation is so complex at this time, that it would be foolhardy to try to predict the outcome with any degree of certainty. That is why U.S. bonds are still considered the monetary safe haven by the rest of the world. Many brokers are stampeding their clients into investments such as commodities, inflation-adjusted bonds, and emerging markets, but these are likely already overpriced and are subject to the mania of market timing.

Gold is a possibility, if it is held as gold bullion. Unfortunately right now the market is dominated with speculators, so selling gold at any given ‘market price’ is chancy. Dollar cost averaging into the market now may seem brazen, but will likely be the winning strategy for the long term. Finally, don’t pay off your 30-year fixed rate mortgage any faster than you have to and pay attention to your liquidity and cash flow.

The one change we are recommending to our clients is to move their cash from commercial money market funds to money market funds that exclusively hold government bonds.

Keeping a balanced investment portfolio that includes government bonds, diversified stocks, and cash has shown to protect clients through all types of economic cycles. Greece may be the harbinger of the New World Economy, but eventually politicians throughout the free world will have to wake up and smell the coffee.

*To paraphrase Dan Sullivan

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY., as well as the blog editing by Susan Stanley.

Small Business Health Care Tax Credit

2010-06-18T13:50:00.001-04:00

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

This new tax credit is part of the recently signed Affordable Care Act (healthcare). It helps small businesses and small tax exempt organizations afford the cost of providing health care coverage for their employees.
Small businesses started receiving postcards from the IRS last month with details on this new tax credit. Here are the major points:

Credit is worth up to 35% of the premium costs paid by a small business in 2010 thru 2013. In 2014, the credit is increased to 50%
Credit phases out for small businesses with average wages between $25,000 and $50,000 and for firms with with the equivalent of between 10 and 25 full time (FTE) employees
A qualifying employer must cover at least 50% of the cost of health care coverage
A qualifying employer must have less than 25 (FTE) workers

Clearly, this tax credit is designed for the very small businesses that are the backbone of this country in an effort to encourage them to provide valuable health care for their employees. Many employers have always wanted to provide the coverage but could not afford to do so. Hopefully, this will give them an incentive to do so.

I have also provided a link to a video on You Tube link that explains this credit in more detail.

All the Serious Money Is Indexed

2010-06-15T13:46:00.001-04:00

By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/

A recent New York Times article discussed how index funds are not only the most efficient way for people of modest means to accumulate wealth but are also the best way for wealthy investors to keep and grow their wealth.

The reporter interviewed Princeton professor of economics Burton Malkiel, author of the 1973 investment classic "A Random Walk Down Wall Street" and pioneer in research which shed light on the folly of trying to beat the market. In the article he postulated that of all of the mutual funds in existence or created since the 1970s, the number that actually beat the broad indexes through 2009 would be in the single digits.

The counterpoints in the article from some active managers border on laughable. One compared stocks to baseball batters, saying "If you find the ones with the higher average, you're adding real value." Well no kidding...except that study after study shows that the odds of doing that are about the same as the odds of any single person reading this becoming an American Idol winner.

The same manager also said "We're selecting high-quality companies with earnings streams and eliminating all the bad stocks in the S&P that you have to own because it's an index." Apparently they're buying those great stocks from other active managers who prefer low-quality companies without earnings streams. (Remember they're not buying them from those silly indexers, because the indexers own a proportionate share of everything in the market.)

Malkiel also dispels the notion that commodities belong in a portfolio as a distinct asset class, because by properly diversifying one already has such exposure: "...if you're really well diversified and into emerging markets you're going to have some investments in Brazil, which is natural resource rich. It's simple."

Malkiel also divulges his personal holdings, which include buying some individual stocks "because it's fun. All the serious money is indexed."

Financial Tips for any Economic Environment

2010-06-12T13:29:00.001-04:00

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

It’s been more than 18 months since we first heard the utterance of the “R” word, recession. The funny thing about economic data is bad news travels much more quickly than good news. While we all heard about the economy’s struggles, many have no idea that we are technically out of a recession.

While the technical data points to some positive signs and the economy actually grew, the pulse of individuals still remains fearful. Economic gloom and doom doesn’t have a mortal enemy that clearly pronounces the proverbial all-clear. While the media loves to provide data illuminating every wrinkle in our economic system, good news remains sparse at best.

Are we still in a recession? Either way, what does it really matter? From a personal financial standpoint, it really doesn’t matter. Our habits and financial wherewithal should always remain diligent. I live in Nashville, the city that experienced an enormous flood that some experts claim to be a 500 or maybe a 1000 year flood. Does it matter to those flood victims if we are or aren’t in a recession? Of course not, but what does matter is sound financial planning and decisions.

Sound financial decisions transcend good and bad economic data or even disasters. The stock market is out of our control, and the ups and downs associated with our economy are beyond the reach of our hands. Focusing on something that is out of our control is not productive.

If we can’t control the market or the economy, what can we control?
The items listed below will allow you to focus on the things you can control, while participating in financial growth, buffering against economic downturns, and all while providing support during emergencies.

Have sufficient cash liquidity.
Liquidity is the keystone of the financial foundation. Emergency funds (cash) can provide liquidity to those in need during emergencies, large or small. This cash can prevent folks from going into debt for purchases that are necessary to return life to normal.

Live within your means.
Spend less than you make….save 10% of your income. These old adages will ensure that some money is set aside for tomorrow.

Dollar cost average.
Continue to be a buyer during economic downturns. Buying at regular intervals (such as into a 401k plan) will help buffer the ups and downs of the market.

Proactively manage your tax liability.
Proper tax and strategic planning can help reduce the single largest recurring expense that most Americans face.
Invest for the long term.
Don’t try to time the market. Timing the market most often results in disappointment. By focusing on the long term, the short term ups and downs become blips on the radar screen.

What we do behaviorally (controlling the things we can control) is much more important that what the market is doing or how the economy is holding up. So whether we are in a recession or not, the 5 tips above are simple to implement, yet extremely effective.

Financial Considerations for an Inheritance

2010-06-09T13:25:00.001-04:00

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

Originally published 5/24/2010 at the Financial Planning Association's All Things Financial Planning Blog

Receiving an inheritance can be one of the most emotionally charged situations concerning money. It is a memory of our loved ones, a symbol of their feelings for us, as well as their wish to enhance our financial security.

In today’s volatile market and low interest rate environment, many people are conflicted about what to do with this gift. Leaving a cash inheritance in a low-yield account just does not seem right. Likewise, you may be tempted not to sell stock gifts. Yet, a large stock position adds volatility and risk to a portfolio, and often creates an imbalance in your holdings.

Although it is only right to think about these funds in a special way, it is wise to consider your options before simply leaving them be.

When you receive an inheritance, it is important to remember that money is a tool. These funds were used for specific purposes during another person’s lifetime. Chances are, their purpose is not the same as yours, and how their place in your own plan may mean placing the funds in a better tool for you.

Spend some time considering alternative strategies for the funds and reviewing your portfolio. Do you need the money to meet short-term or emergency needs? If so, the best choice with a stock gift is to sell to fund this need.

Even if no immediate situation requires the money, a stepped-up basis makes it beneficial to sell stock and place it in a diverse portfolio. No matter how long this stock was held, your tax consequence is likely to be minor and will be considered a long-term gain or loss.

If you have longer term plans for the money, a further review with your financial advisor is definitely in order.

If you received non-retirement money and are not maximizing retirement savings, consider increasing your current year deductions and consume the cash. While you may prefer to keep the inheritance account intact, keep in mind money is money, and that your gift is simply shifting accounts; not so different than moving a wallet from one pocket to another.

With an inherited retirement plan, make sure not to tie up in long-term investments the amounts you will need to withdraw. Spousal beneficiaries should often roll over an IRA into an account in their own name.

Not lost in these suggestions are the emotional considerations. But keep in mind that someone wanted this gift to be a part of your life, and would certainly hope you use it wisely for your ends.

What makes a “fee-only advisor” different?

2010-06-06T13:21:00.002-04:00

By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/

I am frequently asked: what is a “fee-only advisor” and why should I work with one? First, a fee-only advisor’s compensation comes directly from the client. The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments). A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate. I focus the majority of my business on retainer fees.

In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.

A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them. In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”

I personally believe each of these advisors has a place in the financial service industry. However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid. The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales. Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.

When it comes to your money follow this common sense rule: “When you know how your advisor is getting paid you will know who he is really working for!”

You may find this article from Money Magazine interesting.

The Demise of an Investment Portfolio - Emotions and Market Timing

2010-06-03T13:16:00.003-04:00

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

Forecasting the short-term movement of the stock market and trying to time the market is fruitless. As in all areas of our lives, we can’t control what life throws at us but we can establish a defensive position to best deal with a variety of outcomes. When it comes to our investments, we accomplish this through diversification, dollar cost averaging, maintaining an emergency fund and staying the course. We need to fight the natural inclination to make financial decisions based on emotions. Don’t forget that the stock market is counter-intuitive. Generally, the best time to buy is when things seem really bad and the best time to sell is when things seem the brightest. But then again, we just never know. It is easy to get caught up in the fear or euphoria of the moment. But, keep in mind that emotional reactions to the market can have a devastating impact on your portfolio. The stock market is a long- term investment and we need to avoid reacting to short-term events.

Proof of this can be seen in a Dalbar study conducted in March of 2010 for the time period of 1/1/90 – 12/31/09. During this time the average return in the equity market was 8.8% but the average return for the individual investor was only 3.2%. This discrepancy is a result of investors trying to time the market or reacting emotionally to financial news and events. Below are two quotes that sum this up very well.

“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
-Peter Lynch, author and former mutual fund manager with Fidelity Investments

“The idea that a bell rings to signal when investors should get into or out of the stock market is simply not credible. After nearly fifty years in this business, I do not know of anybody who has done it (time the market) successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently”
- John Bogle, founder of Vanguard Investments

Diversifying a Portfolio with Real Estate

2010-05-31T15:11:00.001-04:00

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

Real estate as a wealth generator is hardly a new idea. People owned property long before the advent of stock exchanges and other capital markets. In more recent times, large corporations and institutions have held commercial real estate in their portfolios.

But individual investors have not traditionally had ready access to a professionally managed, diversified real estate portfolio. This has changed in the last few decades with the development and growth of real estate investment trusts, or REITs. Now individuals can add a real estate component to their portfolio to improve overall diversification.

What is a REIT?
A REIT is a company that owns, operates, and/or finances real estate property.1 Most of this discussion will address equity REITs, which manage different types of income-producing properties, such as hotels, office buildings, industrial facilities, apartments, and shopping centers. As commercial landlords, equity REITs typically generate dividend income from the rent paid by tenants. Many REITs in the US are traded on the public stock exchanges.

Publicly traded REITs offer investors several potential benefits:
•Real estate exposure. While publicly traded REITs account for only a small portion of the real estate investment universe and the equity market, academic evidence suggests that REITs have similar returns to the overall real estate market .2

•Low correlations with financial assets. Over longer periods of time, historical correlations of REITs and stocks have been generally low. (Correlation refers to the co-movement of asset returns. When two assets are positively correlated, their returns tend to move together; when negatively correlated, their returns are dissimilar.)

•Diversification. A REIT holds a portfolio of properties, which may specialize by property type and industry, or be broadly diversified according to industry and region. With the more recent advent of real estate securities overseas, investors can further diversify their exposure among foreign developed markets.

•Higher yield, regular income, capital appreciation. Since REITs have to pay out a large fraction of earnings as dividends, they tend to offer higher-dividend income than equities, and this may benefit certain income-oriented investors. Total return of the shares is tied to income and change in market value.

•Distinct asset class. While REITs are considered equity vehicles and can have significant exposure to the size and value risk factors, they are generally considered to be a separate asset class, due to their low long-term correlations with stocks.

•Liquidity and transparency. Publicly traded REITs can be bought or sold whenever the stock market is open for business. The availability of market-determined share prices can reveal information about the market’s assessment of the company’s prospects, including the ability of the firm’s management team.

•Tax treatment. REITs operate as “pass-through” corporations in which most income goes directly to shareholders. They typically pay little or no taxes on corporate income.3

Investing in REITS
A REIT mutual fund that manages a portfolio of REITs typically offers more diversification than owning a single REIT. Most REIT funds are either actively managed or indexed. An active fund manager seeks to pick securities that appear undervalued—an approach that often results in over-concentration in a single category, which may raise risks and potential costs, including transaction costs and management fees. On the other hand, an index fund tries to replicate a benchmark, such as the FTSE NAREIT Equity REIT Index or the Dow Jones US Select REIT Index. Although index funds may have lower fees, securities held in the portfolios may experience buying and selling pressure when indexes are reconstituted.

Our preferred approach is a structured strategy. Rather than trying to replicate an index, a manager may choose securities based on risk-return characteristics, diversification benefit, and favorable price negotiation. By keeping costs low and trading efficiently, a structured REIT strategy seeks to generate improved returns over time. Advantages of this approach include broader, more systematic exposure to the REIT universe at a lower cost.

Adding a real estate component to a portfolio may be a good diversification move. But strategy and implementation are crucial, and before investing, you should consider how a real estate strategy and the REIT you select may affect your portfolio. Some factors that may come into play:

• Asset coverage. Most actively managed stock funds and indexes include REITs in their equity holdings. This creates the potential for overlapping asset class exposure for investors who add a REIT component in their portfolio. Treating REITs as a separate and distinct strategy helps you achieve more precise risk exposure in the asset class weights. For example, investors with significant direct ownership in real estate may want to exclude REITs from the equity component in their portfolio to better control their overall exposure.

•REIT category. Equity REITs may operate property in a specific area of expertise, such as retail, office and industrial, hotels, or health care facilities. Residential REITs own and operate apartment buildings and multi-family commercial dwellings, rather than single-family homes. Mortgage REITs, which lend money directly to real estate owners or invest in existing mortgages or mortgage-backed securities, are generally excluded from the equity REIT universe because they perform more like fixed income instruments, with income based on interest payments. Hybrid REITs combine the strategies of equity and mortgage REITs.

•Diversification. As with financial assets, owning a broad mix of REITs can help reduce specific risk in a portfolio. This diversification eliminates exposure to a single REIT category, manager style, or geographic region. Also, adding international real estate can further enhance the potential diversification benefit.4 Correlations among international REITs are low across countries, regions, and equity markets, making them a useful complement to equities in developed and emerging markets.

Risk Considerations
REITs carry stock market risk, as well as risks specific to individual real estate properties, sectors, regional markets, and the operating firm. The securities are also subject to market pressures that may push share prices above or below the value of the underlying real estate. However, identifying a market premium or discount in a REIT is difficult since the underlying asset value reported by a REIT is based on an appraisal, which may be several months old. REIT returns also depend on the buying, selling, and operating decisions of management.

A manager may adopt risky strategies, such as heavy leveraging or lack of diversification. They may pay too much for properties, acquire poorly performing properties, change strategies regarding property mix, or make other business decisions that compromise performance. Investors holding foreign REITs or REIT funds are also exposed to risks specific to the country, such as legal structure, investment restrictions, ownership rules, tax treatment, and currency risk.

All of this underscores the importance of knowing your risk tolerance, carefully analyzing REIT fund managers, and diversifying to eliminate exposure to a single REIT manager or category.

Endnotes
1. Equity REITs make up about 91% of the REIT market. Mortgage REITs, which compose about 7% of the market, loan money to real estate owners or invest in existing mortgage-backed securities. Hybrid REITs combine the strategies of equity and mortgage REITs and make up about 1% of the market. Source: National Association of Real Estate Investment Trusts, Inc. (NAREIT).

2. Joseph Gyourko and Donald B. Keim, “Risk and Return in Real Estate: Evidence from a Real Estate Stock Index,” Financial Analysts Journal 49, no. 5 (September-October 1993): 39-46.

3. A US REIT must invest at least 75% of its assets in real estate and derive at least 75% of its income from real estate property or interest on real estate financing. It must also distribute at least 90% of its income to shareholders to maintain tax-advantaged status. This pass-through provision allows REIT investors to have access to the same cash flows as investors in private real estate equity. REIT shareholders, however, generally must pay taxes on income they receive from a REIT.

4. Over the 20-year period from 1990 to 2009, the annual return correlation between US REITs and the US stock market was 0.498 (1.0 denotes exact positive correlation in returns).

Disclosures
The information presented above was prepared by Dimensional Fund Advisors, a non-affiliated third party.
Diversification neither assures a profit nor guarantees against loss in a declining market.

Over One Third of Filers Paid Zero Taxes in 2008

2010-05-28T10:24:00.001-04:00

By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/

A study of IRS data published by the Tax Foundation found that out of 142 million tax returns filed in 2008, 51 million paid no federal income taxes - meaning the filers got a refund of every dollar withheld from their paychecks, and often more than that due to 'refundable' credits such as the Earned Income Credit.

The number of returns with zero income taxes has grown from 32.6 million in 2000 to 51.6 million in 2008. That's a 59% increase in tax returns paying zero income taxes during a period where total returns filed increased only 10%.

A record for nonpayers has been set every year since 2002 (30.1 percent), primarily because tax cuts implemented by the Bush administration such as the refundable child tax credit pushed low- to middle-income people off the federal income tax rolls. So much for the Bush tax cuts benefiting the rich and punishing the poor, eh?

The study, Tax Foundation Fiscal Fact, No. 214, “Record Numbers of People Paying No Income Tax; Over 50 Million ‘Nonpayers’ Include Families Making over $50,000,” was authored by Tax Foundation president Scott Hodge. A couple of key quotes from Hodge (emphasis mine):

“Nonpaying status used to be a sure sign of poverty, but thanks to increased use of the Tax Code to deliver social benefits, incentivize behaviors and funnel money to targeted groups, middle-class families have now been pulled into the growing pool of nonpayers. We’re now in a situation where a record number of tax filers are completely disconnected from the cost of government.”

“Tax years 2009 and 2010 are likely to produce a number of nonpayers equal to or greater than in 2008 because of Obama's new tax credits targeted at lower- and middle-income taxpayers. As the number of refundable tax credits continues to grow, more and more tax filers are seeing the IRS as a source of income, not something to which taxes are paid."

"With no skin in the game, these nonpayers have little reason to care how much government grows.”

What's Next: Inflation or More Deflation?

2010-05-25T14:47:00.000-04:00

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

Excessive government spending fueled by ‘printing more money’ or selling Treasury Bonds always raises the specter of runaway inflation. Inflation causes prices to rise rapidly, and is measured by the Consumer Price Index (CPI). Since the current downturn in 2008, the CPI has barely risen, and some measures of CPI actually indicate deflation (which is why retired folks didn’t get a CPI increase in their Social Security benefits this year).

Financial journalists, who write articles and commentary, as well as advertisements selling gold as an investment, often predict future inflation and point to reckless federal spending that erodes the future value of the dollar. Some suspect that government believes it can solve our economic issues by adding programs that will eventually pay for themselves (even though they never have in the past). These commentators may well be right. Inflation is created by too many dollars chasing too few goods. As the money supply increases on a vast scale many armchair economists are convinced that run-away inflation is inevitable.

The economic environment of the 1970’s is often offered as an example of government bungling that poisoned the financial markets. The 70’s remind us of wage and price controls, gas rationing, and oil prices increasing at the whim of the oil cartel. Yet these aren’t pertinent to today’s issues (so far). There are some parallels to the ‘guns and butter’ deficits (i.e. Vietnam and expansion of social services), distrust of government leaders, and the federal government artificially holding down interest rates. So while rampant inflation is a potential outcome, today’s economy doesn’t compare exactly with the 70’s. Inflation is not the only possibility.

Another possibility is the opposite of inflation, or deflation, which is characterized by too few dollars being available to purchase the goods and services being produced. If there is not sufficient ‘velocity’ in an economy to maintain ongoing economic growth, then prices, wages and employment can all decrease. I am more concerned about deflation than inflation in the future because deflation hits suddenly, whereas inflation typically increases gradually.

The Great Depression is the most common example of the deflation vortex. It was very difficult to obtain bank loans, so businesses had to scale back production and inventories. Lower sales created more layoffs, leaving even fewer people to buy goods and services. Deflation, once ignited, can become a voracious beast that sucks the life out of an economy.

Some economists believe the programs initiated by FDR pulled us out of the Great Depression. Others believe that the federal intervention created ‘make-work’ programs that made the situation worse. They note that we didn’t recover until we went into World War II. World wars are a horrible way to create full employment.

But what about today? As in the past the government is intent on increasing the money supply to help the economy move forward. Is deflation a possibility? I think so. There are at least three current phenomena, which can deflect the impact of increasing the money supply, and result in deflation rather than inflation.

The first is productivity, which measures G.D.P. This is the output of goods and services produced per worker. If productivity increases while the money supply is increasing, the impact of inflation can be nullified. Generally, recessions are initially accompanied by increased productivity as firms lay off the least efficient workers. This, of course, creates higher unemployment and puts downward pressure on prices. During the current ‘recession,’ productivity has steadily increased.

When the government creates ‘make-work’ jobs, which do not increase G.D.P., economic activity may be propped up temporarily. But this approach is not sustainable and could ignite inflation. If it were to continue, the economy would reach the point where virtually everyone worked for the government, as in Russia during the Cold War. But these daily lives without private incentive ultimately create economic collapse, sometimes expressed by the Russian saying: “We pretend to work and they pretend to pay us!”

The second factor is personal savings. If the personal savings rate increases in step with increases in the money supply, then less money is being spent. As monetary velocity drops, there are fewer buyers, and eventually fewer workers. Japan experienced this during the ‘Lost Decade’ of the 1990’s when they did not address the core problems with their banking system. As the Japanese government tried to “paper it over” by printing more money, people who increased their savings thwarted its efforts. It should be noted that the personal savings rate in the U.S. has increased from 0.5% at the beginning of this recession to 6.0% currently.

The third factor that comes into play is the global economy. Alan Greenspan, the former Chairman of the Federal Reserve, commented as he stepped down from office that he had been baffled by the low inflation in the 90’s despite large increases in the money supply. But by the end of his term he had identified that the expanding global economy enabled production to move to the least costly sites, which offset inflationary pressures.

Consider a ‘Perfect Storm’ of higher government spending and expansion of the money supply, offset by 1) higher productivity with high unemployment, 2) increased personal savings rates generated by widespread fear, and 3) protectionism exacerbated by a cycle of retaliatory tariffs strangling the global economy. This could create a much more destructive deflationary spiral than creeping inflation.

I am not forecasting this outcome for our economy. But it is a significant possibility that concerns me. That’s why we continue to structure our clients’ net worth using the guidelines of Functional Asset Allocation. This approach is designed to hedge against both inflationary and deflationary environments, as well as provide for long-term portfolio growth whenever we are fortunate enough to return to a period of prosperity.

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

Credit Card Rules Are Changing, Part 2

2010-05-22T14:42:00.003-04:00

By Deb Hoskins, JD, CFP
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/

The Credit CARD Act of 2009 was made the law of the land on February 22. It gives consumers greater protection from the abusive practices of credit card companies, as well as better education on responsible credit use. I know that the word responsible implies a values-laden judgment on credit usage. My goal, however, is not to chastise or shame, but to nudge you toward better financial planning practices. I define better as that which saves you money.

One of the truly inspired provisions of the new law is the fuller disclosure of how much you are actually paying when you make only the minimum payment due. Every monthly bill will state how long it will take you to pay off the balance and what the total amount—principal and interest—is that you will pay to reduce the balance to zero.

Every bill will also tell you how much you need to pay per month to pay off the entire balance in three years. Again, you’ll see the total principal and interest payments to achieve that goal. Any net savings compared to the minimum payment due method will be highlighted. Having the real numbers stated so clearly every month should motivate consumers to pay off balances at a quicker pace, saving real money in the long run.

As of this writing, the national average of interest rates on credit card balances was 14.15%. Late payments or increased credit risk can increase that rate to 25% to 29%. My values-laden judgment is that these rates are obscene and should be avoided at all costs. Pay down your balances as quickly as possible!

Credit Card Rules Are Changing, Part 1

2010-05-19T14:41:00.001-04:00

By Deb Hoskins, JD, CFP
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/

Have you noticed a flurry of mailings from your credit card account providers lately? Since the first of the year, I’ve received many letters that all start the same way: “Important Notice of Changes to Your Credit Card Account Ending in xxxx.” Almost all of them are notifying me of higher rates on any balances I might carry. Since I never carry balances, I just briefly scan the brochure and duly file it away without a second thought.

This month, however, I will do more than just scan. The law on credit card accounts is about to change, and for consumers, that’s good news. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, signed into law last spring, will take effect on February 22. The new law is lengthy (what act of Congress isn’t?), but a few features are worth noting.

First, credit card companies must give a 45-day advance notice before increasing your interest rate or other fees. This does not apply if you have a variable interest rate tied to an index or an introductory or “teaser” rate scheduled to expire. In addition, interest rates on newly opened accounts cannot increase for the first 12 months (again, unless you have a variable interest rate or an advertised teaser rate).

Another new feature is that the minimum payment due may increase, but it cannot increase by more than 100% at any given time. Also, account statements must be mailed 21 days before the bill is due, rather than the current 14 days, effectively lengthening the grace period for consumers.

But my favorite highlights of this new law are the provisions intended to change the borrowing behavior of consumers, nudging them toward more prudent use of credit. More on that next week.

Save Early, Save Often

2010-05-17T13:54:00.004-04:00

By Joe Alfonso, CFP®, ChFC
Santa Clara, CA
http://www.aegisadvisory.com/

Investors fret about the performance of their portfolios. They worry whether they will be able to realize a rate of return sufficient to help them meet their goals and if they are taking on enough (or too much) risk to achieve this. While these are valid concerns, they are ultimately beyond anyone's control. Other than diversifying broadly to lower volatility and keeping investment and tax costs low to increase net gain, there is nothing we can do to determine the actual rate of return on our investments; the markets will ultimately decide this fate for us.

There is, however, something outside of investing that we can all do that is completely within our control and that can have a great impact on whether we achieve our life goals. Indeed, by forming certain habits early, we can help reduce the rate of return that we need to realize on our investments and even how much we need to invest in the first place. I am referring to the habit of saving.

Perhaps the greatest risk we all face is not saving enough to meet our long term needs. Saving as much as we can and beginning this practice early allows our money to grow exponentially with time given the magic of compounding. Just how significant an advantage one can reap from an early commitment to saving can be illustrated in the following example.

Ben and Jerry are twin brothers. Ben decides to begin saving at age 30 at a rate of $10,000 per year. He continues this practice until the age of 40, at which time he stops saving altogether. Jerry waits until he turns 45 to begin saving. He puts away $15,000 per year until retiring at the age of 65. If we assume both brothers earned the same 7% average annual rate of return, how much did each accumulate by the age of 65?

First, let's compare how much each brother socked away. Ben saved $100,000 in total over 10 years compared to Jerry who saved a whopping $300,000 over 20 years. In spite of having saved more over a longer period of time, however, it turns out that Jerry winds up with the smaller nest egg of the two. At age 65, Jerry's savings will have grown to about $615,000, certainly a significant sum. In comparison, however, Ben's savings will have grown to approximately $750,000, $135,000 more than Jerry in spite of Ben having only saved a third of what Jerry saved for half as long. This is the magic of compounding at work and a great example of why saving early is so beneficial.

The moral of the story is that we are more in control of our financial destinies than we think. By deciding to save early and often, we can minimize the need to risk our money in the stock market since even modest rates of return over long periods of time yield impressive sums. The secret to getting rich is to do so slowly, saving as much as we can for as long as possible. So take matters in your own hands and get started, now!

What Our Tax Return Can Teach Us

2010-05-14T10:21:00.002-04:00

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

Tax season is behind us, and it’s time to move ahead with 2010. But we need to take a minute or two more with our 2009 return before we send it off into the black hole of all things stored. We can learn a great deal about the current year by reviewing last year’s return. This is one reason why I strive for all my clients to file timely (by April 15th).

First, look is at the bottom of your return. Did you have a balance due, or did you receive a refund? This will illustrate how well you planned. If you overshot the runway in either direction, a change may be needed. The easiest way to make this change, for most people, is by changing your W-4. This document tells your employer how much to withhold from your paycheck every pay period. If you are not an employee, but own your own business or work as contract labor, the change needs to come through quarterly estimated tax payments. Remember a large refund is not a high-five-your spouse experience. You just gave the government an interest free loan! Underfunding your tax liability and generating an underpayment penalty is not the answer either. I generally like to see clients get less than $1000 back at tax time. Anymore than that is just too much….but there are always exceptions.

If you had an event in 2009 that will not occur in 2010, but you received a taxable benefit in 2009, you should make appropriate adjustments. Did you buy a car in 2009 and utilize the sales tax deduction? That may have saved you several hundred dollars or more in taxes. Unless you buy another car in 2010, that deduction will disappear. Did you have a college age child graduate or finish college. If so, you probably received some tax deduction. That tax savings will not be there in 2010 if you don’t have a child in college. Be sure to understand where your refund or balance due came from.

Some of this may sound a bit confusing, or maybe you don’t care to understand the tax code. I’m not suggesting you become a tax expert, but I am simply stating that it is important to understand, at least from the big picture view, your tax return. Your preparer needs to understand the details, but it’s your job to understand how the details affect you. If you don’t, you could be dinged. If it’s confusing, ask your preparer for a little explanation.

The next question to ask yourself is did you fund your retirement? Remember that most retirement contributions will reduce your taxable income, which means it saves you tax dollars. Taxes are the single largest recurring expense for most people, so we should do our best to manage that expense. If we contribute to our retirement and reduce our taxable income, an amazing thing happens….we create leverage. For example, a couple in the 25% tax bracket making a $10k 401k contribution will save a minimum of $2500 in taxes. That’s a 25% return on investment before the money is ever invested in the market. Let’s take it a step further. If that couple then plans accordingly and puts the $2500 tax savings into their 401k, another $625 tax savings is generated. It creates a positive snowball effect!

Take some time and learn where your tax savings are generated. Look for the areas that create a tax liability. Speak with your preparer to seek methods to maximize your tax savings and minimize liabilities. Taking a proactive approach to managing your taxes can set the stage for financial freedom. Reviewing your 2009 return and learning from your tax successes and failures can help plan accordingly for a successful 2010.

Give a Man a Fish, You Feed Him for Today; Give a Man a 401(k)…

2010-05-11T10:17:00.005-04:00

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

Originally published April 5, 2010 at the Financial Planning Association's All Things Financial Planning Blog

It seems to me a lot of the conversations these days about ‘reform’ are really more of a way to get people to act a certain way, invest a certain way, or own a certain product, rather than promoting ideas that solve the underlying problems. Regulating behavior, rather than teaching how to fend for oneself.

Pundits and politicians are proposing ways to ‘fix’ the 401(k). Two ideas working their way through Congress and the administration include attaching annuities to 401(k) plans and regulating investment advice for participants.

But do these ideas fix the problem? Are they even necessary?

Many advisors think the above regulations offer little benefit, and may have the potential for significant confusion for savers.

Sure, the 401(k) plan isn’t perfect, but what I wonder is how the above changes answer the following questions participants have:

• How much should I save and where? Do I save more for retirement, or an emergency fund, or perhaps a home down payment fund? Do I save more or payoff debt?

• More than simply knowing how much risk I think I may want to take, how do I invest based on my goals, personal risks and emotional tolerance? What is the tradeoff I may face in investing for higher returns and my goals? Do I need to take on market risk, and if not, how do I make sure my savings keep up with inflation?

• Is my 401(k) working in concert with my overall financial plan? My estate goals? My other investment accounts?

The 401(k) itself is not a problem. It is just an account, and since it has been introduced savers have become wealthier than past generations by being allowed to take control of their savings. But, with that opportunity comes personal responsibility.

Below are my two cents in the conversation to improve retirement plans:

Focus on planning, not products
Mandate that participants can access their qualified plan money at any age to pay for financial planning services and advice. This advice includes, but is not limited to, investment management. Proposed legislation focuses on investment management and investment products, which, from a planning perspective, stem from the financial plan. The above questions savers need to address are not investment management questions as much as they are personal financial planning questions.

Thousands of advisors would offer advice if they were allowed to be compensated. The financial plan dictates the investment plan, and therefore investment funds should not be held hostage, only to be used for services that place the cart before the horse.

In addition, offer tax breaks for companies who pay for financial education that is independent from the investment custodian. Upstart financial companies offer education-only services to employees; these companies are not seeking to invest your money for you, but to teach you on how to do it yourself, or refer you to someone to work with (in other words, they “teach a man to fish”). A financially savvy workforce is also a more productive and loyal workforce.

Promote competition
The 401(k) model as currently structured traps participants into the investment options one provider allows.

On the other hand, we work with 403(b) plan participants whose plan options and services are a significant improvement over any current 401(k) plan. The reason? Competition for plan participant dollars.

These 403(b) plans offer: the choice of multiple plan providers, lower cost investment options, and the ability to pay for investment management to an independent advisor. The result is a participant has the ability to pick the provider that is appropriate, at a lower cost, and can work with an advisor on their comprehensive investment plan.

Until the day the 401(k) is required to offer more consumer-friendly benefits, what you can do as a saver is keep an active dialogue with your employer or human resources department about your plan. Make sure they are aware of your concerns about costs, limitations, and investment options their provider offers. Your retirement savings plan is, after all, an employee benefit.

What to Do When Your House Is Underwater

2010-05-08T10:13:00.004-04:00

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

Almost one of every four homeowners are faced with the sad reality that they owe more money on their home than they could sell it for. In the real estate world, that’s called ‘being underwater.’ This blog is a realistic review of your options, and discusses the biggest mistake people make when they are in this tight spot.

1. If you can still afford to live in your home and enjoy living where you do, stay there. If you are still working (or retired with the same income as when you bought the house and qualified for the mortgage) and living within your means – don’t worry about how much your home is worth because you don’t have to sell it. Your home is an inflation hedge, especially if you have a long-term fixed rate mortgage. In most areas of the country home values will eventually rise again. Keep in mind that one of the primary purposes of owning a home is the joy of living there.

2. If, however, you need to move, then you have to review your options. It may be that you have become unemployed, or your job requires relocation, or you want to downsize to cut expenses. Many people have adjustable rate mortgages that have been reset to a higher interest rate, so they cannot afford to live in their home. The obvious answer is that you can sell the house for what you can get, then sell other assets (perhaps some investments) and bring a check to the closing to cover the amount of the mortgage not covered by your sales proceeds. As we will discuss later, this is often the best option.

Regardless of what you may have heard, the following options (#3-#8) are successful only for homeowners who stop making payments. Banks are not likely to negotiate with you if they are still getting paid…and why would they?

3. There are 12 states* in the U.S. which provide that homeowners have no personal recourse for a mortgage taken out to purchase a principal residence. That means you can just walk away from the loan. The bank will foreclose and sell the home at auction, but they will not be able to sue you for any deficiency should the net sales proceeds not equal what you owe. Your credit score will drop by about 200 points, but this is a viable option. From a moral perspective, keep in mind that you paid a premium (built into your closing costs) when you bought the home to have this option. So it is not unlike collecting on an insurance policy.

In the past forgiven debt was taxable as income but currently this does not apply to cancellation of the unpaid portion of a mortgage used to buy the house. If there is a second mortgage, any unpaid amount may be taxable income.

4. In the 38 other states, if you walk away from your home the bank will foreclose and sell the home at auction. If the house doesn’t sell for enough to pay off the mortgage, they can sue you for the deficiency. With a judgment they can then put liens on other assets (like bank accounts or other real estate) and garnish your wages. So not only are you on the hook for the deficiency (plus the bank’s collection costs and attorney fees), but your credit score will likely crash about 300-400 points and you could have to pay income taxes on the unpaid portion of the mortgage.

5. A better option than foreclosure is to deal with the bank and work out an arrangement called a “deed in lieu of foreclosure.” When banks stop receiving payments, they will be open to talking about this approach. In these situations the bank agrees to have you just sign over the deed so they don’t have the expenses of foreclosure. With the bank’s agreement, you can qualify for non-taxable debt forgiveness. It will cut your credit score by 300-400 points initially, but you end up free of the debt. Again, the bank is not likely to agree to this if you are working or have other assets they can levy

6. In recent years there has been an effort by the government to pressure banks to provide “Loan Modifications” to homeowners who are unable to make their payments and who meet strict criteria. For most people, this is not a viable option. Loan modifications may include lowering the interest rate or extending the term to reduce monthly payments. However banks are not willing to reduce the principle owed. This is a time consuming process, and thousands of applicants have overwhelmed banks. It takes an inordinate amount of time to check applicants and banks don’t make any money beyond the $1,500 offered from the federal government (more red tape) if a loan is modified. Of the 4 million homes in foreclosure last year only 2% were approved for modification and 2 of every 3 modifications were in default again within 6 months.

7. Most homes selling now are ‘short sales.’ This requires the owner to find a buyer at a reduced price. If a bank accepts the low offer, the owner signs the house over to the bank and the buyer/investor buys the home from the bank and the bank releases the owner. Thus, there is no deficiency and the forgiveness of debt does not trigger a taxable event. It will knock about 250 points off your credit score. There are now some real estate agents who specialize in these transactions, although most avoid getting involved because of the paperwork, the time commitment, and very small commissions.

8. The final solution for most people who need to move from their home is to continue cutting the price until it sells, even though it means taking a check to the closing to pay off the mortgage. There are very few buyers in the market now, mortgages are difficult to get, and appraisals are very conservative. So even if you get a willing buyer at a reasonable price, often the appraisal will not be high enough to get a mortgage. As prices drop, this process reinforces itself.

You can sell your house if it is priced right but the ‘right price’ has nothing to do with what you paid for it, what you invested in it, what it was worth 3 years ago, or how much you owe on it. The ‘right price” is what someone in this market will pay for it.

To arrive at the ‘right price,’ recognize that pricing is a process, not an event. Start by listing your house somewhat below other comparable houses in your neighborhood. Keep in mind that current listings are overpriced – otherwise someone would have already bought them. Then ruthlessly cut the price on your house every 6-8 weeks by 5-10%, and keep cutting until you get an offer. Cutting the price will put you on the top of the pile and keeps your house from becoming a ‘stale listing.’

This makes good financial sense when you realize the tremendous carrying costs of a vacant house. Ignoring carrying costs is the biggest mistake people make when they face this scenario. Carrying costs generally run about 10% per year of the home’s value and include the house payment, taxes, insurance, repairs and upkeep, as well as opportunity costs for the equity (if you still have equity.) So if your home is worth $400,000, the carrying costs are about $40,000/yr. If you are determined to get your price, you might easily wait 2 years until the market bottoms out. Then you will have paid out $80,000 in carrying costs. Now it will have to appreciate 30%-40% per year for the next two years for you to pay 2 more years of carrying costs plus ‘catch-up’ appreciation for you to break even. To expect this spectacular market turnaround is naïve. You’re better off selling the home for $350,000 now, and in two years you will have avoided $80,000 in carrying costs.

Living in a home you can’t afford, or trying to rent it out, doesn’t change the math much either because the carrying costs don’t take into account the continuing drop in home values in most areas. In many areas there are huge inventories of unsold homes in foreclosure, and we are facing another tsunami of homes likely to go into default in the next year or two as all the of 5-year adjustable mortgages from 3-4 years ago are reset.

Keep in mind if you use any of the techniques in this article, under a new federal law you will not be able to obtain a new mortgage for 4-7 years. If you lost your job, or had a catastrophic illness, this disqualification period is shortened to 2 years.

Of course, each situation is different. It is advisable to get professional advice from someone whose compensation is not dependent on the outcome of your decision. The upside is that, if you are buying a home, you will very likely find a great bargain once this housing bust ends!

*AK, AZ, CA, CT, FL, ID, MN, NC, ND, TX, UT, WA – laws vary by state.

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY., as well as the fact-checking of Terry Fraser (Mackinac Bank), and Trevor Smith (Incline Village Real Estate), and blog editing by Susan Stanley.

How to Dig Out of Debt, Part 2

2010-05-05T10:10:00.004-04:00

By Deb Hoskins, CFP®, JD
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/

Have you lived without your credit cards for the last week? Has it seemed rather mid-20th century, or even un-American, to go “cash only” for all of your purchases?

If it feels odd, just remember that your ancestors lived this way for all of history; consumer debt is a recent luxury. You may also feel like a little kid again, carrying your weekly allowance around in your pocket for purchases. Trying anything new is bound to feel strange until it becomes a new habit.

If you are the type who is tempted to overspend, I hope that going “cash only” will be your new habit for 2010. Cash-only living forces you to recognize three things.

First, you will understand that you are dealing with real money. Intellectually, we all know that credit card balances represent real money, just like we know that Las Vegas casino chips represent real money. But somehow it just doesn’t feel that way. That’s why casinos use chips. If it doesn’t feel like real money, you’ll spend more of it.

The same is true with dining out. Next time you take your spouse to a restaurant, pay cash. That $60 food and bar tab will feel more expensive if you use three $20 bills than if you whip out your Visa card. Yes, the transactions are equal, but it will feel different.

Second, using cash pushes your spending habits into consciousness. Using a credit card can sometimes be an almost mindless activity, since you’ve pushed the day of reckoning into the future. You’ll pay your credit card bill next month and worry about it then. Watching cash leave your hands forces you to worry about it now.

Finally, using cash will remind you that you are dealing with a finite resource. If the $50 you intended as your walking-around money for the week is gone, it’s gone. With no credit card in your wallet to fall back on, you will feel broke—never a comfortable feeling. And you will feel it now, not just someday in the future. That immediate discomfort will change your behavior, and you will spend less and save more.

Just remember that your ultimate goal is to reduce your credit card balance to zero. These first steps to achieve your goal should bring some comfort and satisfaction

How to Dig Out of Debt, Part 1

2010-05-02T10:07:00.004-04:00

By Deb Hoskins, CFP®, JD
Colorado Springs, CO
http://www.pikespeakfinancialplanning.com/

At the end of 2008, the total credit card debt of Americans exceeded $972 billion. For those households that had a credit card, the average outstanding credit card debt was $10,679. Uninsured medical expenses, lost jobs, and other emergencies no doubt contribute to many Americans falling behind. However, overspending—otherwise known as deliberately living beyond your means—is a significant cause as well.

If overspending describes your behavior, the next few blogs are for you. Later postings will address approaches used for debt relief, no matter what the cause.

First, overspending and income levels are not necessarily correlated. Plenty of high-income earners are plagued with the overspending habit, while many low-income folks diligently save 10% of every paycheck, the most surefire way to avoid consumer debt.

Second, overspending can range from mild or occasional overindulgences to chronic or habitual behavior that rivals other addictions in its power to destroy lives. If the latter condition describes you, psychological counseling is needed. Trying to follow standard financial planning and debt management techniques on your own will ultimately prove futile and only waste time. Getting to the root causes of addiction and obtaining effective treatment of this behavior must be your first concern.

If your overspending habit is merely mild, I challenge you to do one simple step—lock away your credit cards for three months. I’m not suggesting anything extreme or permanent. This is just a temporary experiment. Try it now. In the next post, I’ll discuss why this is simple but not easy.

The Myth of Investment Bargains

2010-04-29T14:21:00.001-04:00

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

Originally published 3/8/2010 at FPA's All Things Financial Planning Blog

We all know there are deals to be found in the shopping world. But do we ever consider the value we receive for the price we pay?

William Poundstone’s book, Priceless: The Myth of Fair Value (and How to Take Advantage of It) points out most of us are really suckers when it comes to shopping. (Poundstone has written more than dozen books, his first, published in 1983, was titled Big Secrets: The Uncensored Truth About All Sorts of Stuff You Are Never Supposed To Know.)

We overwhelmingly lack the information we believe we possess to be ‘price’ experts. The result, Poundstone argues, is we’re often taken advantage of, and prone to paying just about any price (and sometimes more today than we would have yesterday).

In this video, Poundstone gives another example of the ways price can be misleading by demonstrating how one can leverage psychology in their Internet sales to increase the price of a product on eBay.

In the investment world, it can be even more difficult to consider cost and value. And it’s understandable why that is when product prospectuses are longer (and more dull) than a textbook. Often, investors will rely only on hypothetical or recent returns equate to value, and costs — and by this I mean the total costs of a strategy — are never considered.

A few of my biggest concerns are with products that investors believe “guarantee” growth in “retirement income,” or products that shed sound, investment principles to employ strategies that you would like to have owned yesterday, but have no promises for tomorrow. (I wrote more about that topic in a blog post on what I call the “Barnyard Rules of Investing.”)

Total costs include more than just a percentage of your investment dollars paid in annual management fees (when annual management fees for a product go above 1.5%, alarm bells go off for me.)

Total cost of a product may include:

Reduced growth or cash flow compared to traditional investment strategies;
High back-end penalties for leaving. My personal rule of thumb is to be wary of any back-end charges;
Fees that are low initially to attract dollars, only to rise when you are trapped in the product (the classic “bait-and-switch” tactic).

Whenever you review an investment proposal, consider your thoughts on the proposal before jumping in:

If you have the feeling that you are getting a real “deal”, or bargain — STOP! There are no “deals” in the investment world. Investing is not shopping.
If you sense that you are being pushed to make a decision today, or in the next week, stop and ask why. I hear stories from clients being told a product will no longer be offered over the next few months, so they need to invest now. Would you consider buying a car that is being discontinued? How about if your grocer told you a product is being recalled… buy now? Clearly you need to stop, and don’t walk, but run from this offer.
If you haven’t taken the time that’s necessary to analyze and compare the costs and benefits of an investment comprehensively by comparing it against low-cost strategies, stop and perform this exercise.
If you don’t have a clear understanding of how this product fits into your plan, stop and ask why you are not discussing how this product meets your future cash flow needs specifically. The product should be about a fit for your plan, not about exotic features that sound exciting.

If you don’t understand a product or strategy, don’t invest. It is sad to say, but most people who have been burned by products have not done their homework, and simply trust in an expert. They accept the sales pitch that they will receive “more” that is well worth paying hefty fees.

Clearly, it can be a tough job to compare products based on value. Because of that, I am a strong advocate of getting help explaining value by a second professional opinion before settling on a strategy. You would get a second opinion before major surgery, or even before buying a major household appliance. Your long-term financial security is far too important to squander on investments that drain, rather than provide, value.

Find qualified advisors for a second opinion with ACA's Find an Advisor tool.

Debit or Credit: How the Choice Can Affect Your Financial Security

2010-04-25T14:11:00.001-04:00

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

We are all familiar with the point of sale transaction vernacular: will this be debit or credit. What’s the difference, and how does it impact you? Most folks really don’t understand the difference, but the difference can be vital.

Unfortunately, in today’s world of ID theft and financial fraud the decision of debit versus credit matters. Many people feel that our banks will help to protect us in the case of a stolen card. While this true in most instances, it’s not guaranteed. Making the wrong choice between debit or credit may mean the difference between being protected or not.

Banks strive to protect their customers and indemnify (make whole after a loss) after a stolen card is wrongfully used. But some transactions may force the bank to refuse to pony up for your financial loss. If a check card customer uses the debit option, which requires the use of a personal pin, and the card and pin are stolen, the customer could be in trouble.

Using a check card as a credit card at the point of sell will require a signature and identification, at least in theory. Using the debit card option just requires a personal pin. If a thief steals a check card, or check card number, along with the personal pin (by looking over your shoulder or any other devious method), the bank may refuse to cover the wrongful charges. The bank’s stance is that the customer did not protect their personal pin; therefore, the bank can hang the responsibility of the wrongful charges on the customer. The personal pin is personal and should be protected!

The moral of the story; chose the credit option whenever possible. If you don’t have that choice and must use your debit option, be careful and protect your personal pin.

Roths Now Make the Tax Code Your Friend!

2010-04-21T11:59:00.002-04:00

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

Here are some points to ponder and strategies to consider. Again, these can be complicated so you should expect to discuss whether these apply to you during the year when you do tax planning with your ACA advisor (i.e. a member of the Alliance of Cambridge Advisors).

#1: Got negative tax? A Roth conversion creates taxable income because of the IRA distribution that funds the Roth, so it certainly is advantageous to convert whatever amount you can if you have negative taxable income. It’s an opportunity to declare income and pay no income tax.

#2: Defer taxes…again! There is a quirk in the law for 2010 that lets you choose to either pay taxes on the 2010 conversion as 2010 income, or pay half the taxes of the 2010 conversion in 2011 and the other half in 2012. There is no interest or penalty to doing the latter, so it would generally be a good option.

#3: Automatic extension. If you are unsure whether your tax rate will be increased in 2011, you can convert to a Roth in 2010 and then file an automatic extension in 2011 so you don’t have to file until October 15, 2011. Then you may know whether your tax bracket has increased or not. If your bracket is being increased you can elect to pay taxes at the 2010 rate.

#4: How much to convert? If you aren’t sure how much to convert, keep in mind that you must make the 2010 conversion before 12/31/2010. However if you convert too much, you can elect to ‘recharacterize’ part or all of your conversion up until you file your 2010 return (i.e. until 10/15/2011) and put it back in your IRA without penalty. So you should always covert too much rather than too little!

#5: In-kind. When converting an IRA to a Roth, you can transfer your IRA investments ‘in kind’ to the Roth without having to sell them and buy them back. If you have a broker, make sure you let him or her know that you know that you don’t have to “sell” (pay a commission”) to convert.

#6: Outfoxing Mr. Market. If the investments drop after you convert them, you still must pay taxes on the value of the holding when converted. How do you preserve the value of the investments that you converted? For many clients, we are setting up 2 Roth IRA accounts: one for bonds and one for equities. We will transfer the full amount to be converted to each Roth IRA, using Stripped Treasuries to go into the bond Roth, and stocks or equity mutual funds into the stock Roth. Then in October of 2011, if stocks have dropped, we will recharacterize that account back to an IRA and do likewise with the bond account if stocks rise.

#7: Asset Location. To optimize ‘asset location,’ Roth investments should be in assets with the highest potential returns, such as small cap or international mutual funds. If using #6 above, and the stocks are recharacterized back to the regular IRA, they should be sold to buy back the bonds and the bonds in the remaining Roth account should be sold to buy back the stocks.

#8: Efficient cash flow. Long-term tax management and tax efficient cash-flow strategies are enabled through the use of Roths. Since there are no minimum required distributions for Roths, taxable distributions are reduced and Roth distributions can be used to maintain cash flow while keeping taxes low in retirement.

#9: Coordinate with charitable contributions using Donor Advised Funds. If you intend to include charities in your will, consider gifting stock now to your Donor Advised Fund in about the same amount that you are converting to your Roth. The tax deduction for the charitable contribution can then offset most of the additional amount of taxes due to the Roth conversion.

#10: The Next Generation. This is an unprecedented opportunity for intergenerational planning. The beneficiaries (spouse, children, etc.) of Roth accounts have the same advantages of taking tax-free withdrawals. If you don’t need the IRA money during your lifetime consider the benefits of not paying income taxes on many years of compounded investment growth.

#11: Reduce onerous estate taxes. Using assets to pay income taxes now reduces your estate for estate tax planning and provides a way you can pay the future income taxes for your children or grandchildren now. (note: as of the date of this blog there is no estate tax. Rules are in flux but it’s a good bet that they’ll return in the future.)

Although it may be obvious, note that Roth conversions also appeal to the federal government because they can tax your pre-tax IRA money now, rather than in 20 or 30 years! But that’s why it’s important to at least review the above points to see how the current legislation affects you. Since your ACA Advisor knows your comprehensive financial plan more intimately than anyone, there may be even more points and issues to discuss.

Be sure to look at these ways to make the Taxman your friend in 2010!

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

Credit Card Act of 2009

2010-04-17T11:53:00.002-04:00

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

Recently, the most sweeping credit card reforms ever passed by Congress (The Credit CARD Act of 2009), began to take effect. On one side, consumer groups are excited that credit card companies are required to communicate more frequently and plainly about changes they make to your cards. Critics, however, say that these new regulations will make credit cards more expensive, in the long run, for everyone.
NPR’s “All Things Considered” outlines a few need-to-know-points for consumers:

Interest Rates: Card issuers cannot increase interest rates during the first year on new accounts. In most cases, retroactive rate increases are prohibited.

Payments and Billing: The issuer has to set the payment-due deadline on the same day each month.

Fees: Consumers cannot be charged extra fees for making payments online, by phone or by mail.

Disclosures: Issuers must notify cardholders of significant changes to their account terms at least 45 days before the changes take effect. If the consumer objects to the changes, he or she can close the account, or "opt out."

Young People: Consumers younger than 21 need an adult co-signer to open a credit card. In addition, the card issuers cannot entice students to sign up by offering free pizzas or other gifts within 1,000 feet of a college campus.

Also, have you ever tried paying your credit card over the phone, only to realize it will cost you 10 bucks to do so? That’s also out with these new credit regulations. (They always try to nickel and dime us, don’t they?)

What might be confusing to consumers is finding out what rules take place when. We found an interactive timeline at CreditCards.com that clearly outlines when legislation begins:

Creditcards.com Credit Bill Timeline

Who Wins When Your Financial Advisor Sells You a Product?

2010-04-13T11:49:00.001-04:00

By John Scherer, CFP®
Middleton, WI
http://www.trinfin.com/

A column by syndicated financial journalist Humberto Cruz appeared in my local Sunday paper this week titled - at least in our paper - "Who wins when your financial advisor sells you a product?" (You can read the full text of the article on the Salt Lake Tribune website.) The dozen paragraphs are a must-read for anyone seeking advice from a financial professional.

The article uses a specific example from Edward Jones, but every other brokerage firm, bank investment arm and insurance company is the same in that its registered representatives are held to a suitability standard rather than a fiduciary one. This means that reps must be able to prove that their recommendations are suitable for a customer's situation. In contrast, registered investment advisors (RIAs) who are held to a fiduciary standard must make recommendations that are in their clients best interests.

As an example consider a person whose portfolio would benefit from having exposure to the large cap asset class. As long as a registered rep recommended a large cap fund he or she would be meeting the suitability standard, regardless of whether that fund cost the investor 0.25% or 2.25%. The registered investment advisor must recommend the large cap fund that was in the investor's best interests. This does not necessarily mean the lowest cost fund, but in most cases lower costs directly result in better investment options. But in the event that a more expensive fund makes the most sense, the RIA must be able to prove why that fund is in the investor's best interests.

To quote Cruz "In plain English: When brokers recommend a product, you can't be sure it's because it's best for you or best for them."

What Can the NFL Draft Teach Us about Personal Finance

2010-04-09T11:43:00.003-04:00

By Robert Schmansky, CFP®
Franklin, MI
http://www.nfa1040.com/
Originally published 3/17/10 at Filife.com

Though it's still more than a month away, the National Football League draft is the nonstop talk of sports radio.

Given my hometown team's position at the number two pick in this year's draft, speculation is at an all time high. Will they pick the best athlete overall, or the one in a position they most need? Will their first choice be available, or will he already have been taken by another team? There may also be strategizing and offers to trade down to a lower pick.

There are several parallels to personal finance in these speculative times that we can learn from the draft.

Expect the Unexpected
Many things happen before draft time. Even the best laid draft plans are often thwarted by the moves of another team that you have no control over. These are factors we often spend all of our time focused on, despite the lack of control.

Likewise, you might think you know where the economy is headed. You might think the stock you've had your eye on (be it your own company or another) is headed higher. But don't get stuck counting on it! Despite your reasoning, the chances are good things won't turn out as planned. For that reason, come up with plans for multiple scenarios. In investment terms, this is diversification not only into different products, but diversification over asset classes in preparation for multiple economic scenarios.

Build Around Fundamentals, Not Flash
Flashy players are often the fan favorites, but make sure you have plenty of players that are solid in their fundamentals before taking too many prima donnas.

Often, the biggest need for a team isn't the player with the most interceptions but doesn't like to tackle. It's having players at all positions who can do the job. If you are lacking in a certain part of your portfolio, don't just take the best performer, you should diversify in all areas with solid performers.

Just the same, many investors place their hopes in flashy investments to make enough to fund their retirement. Whether it is a gimmicky product you wish you held last year, or the latest asset fad, a plan without solid fundamentals will not go the distance through retirement.

And the Expert Opinion Is…
The expert sports radio hosts in my town are always right, even when they end up being wrong.

But there are always plenty of equally 'right' experts who hold opposite opinions. The same is true of investment and economic experts:

The dollar is dead. The dollar is strong against other currencies.
The U.S. economy will stumble. Or it won't.
Inflation is coming. Or maybe it's deflation.

When the draft experts are predicting a team's picks, they are in as much disagreement as the economists' thoughts on the direction of the economy.

Don't get stuck on what one expert has to say. When the situation doesn't go their way, to their minds they are always either right for the time being, proven right by time, or their memories become a bit fuzzy. Economists are best at explaining why things happened after they happen. When it comes to what they thought was going to happen, they usually have a little less to say.

The same is true of draft experts. They too will tell you about that one scenario from the past in which they were right. They won't tell you about the 99 percent of their other predictions which didn't fare so well. It is human nature not to remember those times when we got it wrong. It's also true with economists predicting markets (and investors' stock returns).

Economist and historian Murray N. Rothbard said the value of the economist to the average businessman is limited to explaining generally truths of the economy; not in predicting its short-term movements. The same could be said for sports experts.

Take what you hear from economic, investment and sports experts with a grain of salt. Chances are good many have an educated forecast, but actual results will be something entirely different, for better or worse.

The Benefits of a Mortgage

2010-04-05T11:42:00.001-04:00

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

The recent downturn in the economy has spurred financial scrutiny in personal spending and savings. Most families have taken a closer look at their income versus expenses as well as savings versus debt to see how they can weather the financial storm. Anytime an examination of personal finances arises, the question of paying off the home mortgage seems to pop up. While the theory of debt elimination is good, understanding how a home mortgage can impact a personal financial plan is needed. To better understand the pros and cons of mortgage reduction we must take a closer look at debt.

Good Debt Versus Bad Debt
Some financial pundits argue that all debt is evil and there is no such thing as good debt. I take exception to this thought and find it somewhat short-sided. Some debt is bad, and I call this bad debt consumer debt, which includes personal loans, auto loans and revolving debt (credit cards). Consumer debt usually carriers a high interest rate and offers no tax benefits. The debt that I classify as good debt is mortgage debt and student loans. Both mortgage debt and student loans have tax advantages. While not all taxpayers can take advantage of the student loan interest deduction, I find an investment in one's education and future certainly justifiable.

Understanding Mortgage Debt
A mortgage is a debt secured by a personal residence, and that residence is an appreciating property (at least over the long term). Since a home will increase in value over time, mortgage companies allow long term debt against this property. A 30-year mortgage is the most common example.

The IRS gives homeowners a break by allowing a mortgage interest deduction for interest paid on a home mortgage. Obviously, there are rules and restrictions, but the majority of homeowners have allowable mortgage interest. This deductible mortgage interest effectively reduces the taxpayer's true mortgage expense. For example, a taxpayer in the 25% tax bracket with a 5.5% 30 year fixed mortgage will effectively hold an after-tax interest rate of roughly 4.4% (this number will vary based on the calculation and year of the loan).

There is another benefit to holding long-term mortgage debt that most people do not realize. A long-term fixed-rate mortgage provides a nice inflationary hedge. Sound confusing? Here's an easy way to understand this concept. A homeowner will pay tomorrow's mortgage payment in today's dollars. Simply put, the mortgage payment 10, 20 or 25 years in the future will remain the same (barring escrow payments). The home increases in value, but the mortgage payment does not.

Why Have a Mortgage?
Besides tax deductibility and the inflationary protection, a properly valued home and properly sized mortgage can create balance. Buying the right size home and carrying the right size mortgage is a vital piece of a balanced financial puzzle. If a homeowner pays off a mortgage and draws down cash to do so, a liability can be created. A rich house and cash poor homeowner who owns their home outright is not balanced.

Retaining cash and leveraging that cash can be quite powerful as well. I often see prospective clients that don't fully max out their retirement plans or IRAs but are paying extra money every month towards mortgage reduction. This move does not grow wealth. Imagine the scenario where a couple is paying an extra $500 a month to their mortgage. If that couple is not maxing out IRAs or 401ks, they could put the $500 a month towards their retirement. If they are in the 25% tax bracket, the $6,000 contribution for the year would reduce their tax bill at least $1500, and this is not factoring state taxes. That's a 25% return on investments before the money is invested. Once the money is invested it will grow and should outpace the after-tax effective mortgage rate in the long run. That's leverage!

A Few Things to Remember
Once additional money is paid towards a mortgage, it is gone. The only way to get that money back is to refinance, open a home equity line of credit or sell your home. All three of these have fees and costs involved. While a home is somewhat marketable, it is not an asset that can be sold quickly and efficiently. Any money put towards principle reduction will be tied up and difficult to utilize.

Personal financial planning is similar to Newton's Third Law: "For every action there is an equal and opposite reaction." Every financial action taken in one specific area will affect another. This is why the topic of mortgage reduction or elimination should only be discussed from a comprehensive viewpoint. The above examples illustrate how a mortgage can impact, either positively or negatively, many other financial areas, such as taxes, cash flow and even retirement.

Even though there are many positive attributes to having the right size mortgage, there must be parameters. Taking the stance that mortgage debt is a plus does not one give free rein to overspend! The decision of homeownership should be carefully considered in the context of the whole financial picture.

While we tighten our financial belts and march forward through the economic downturn, it is wise to fully understand all financial decisions and how those decisions can impact our financial wellness. The mortgage reduction question is one that requires careful consideration. For all the reasons discussed above, a rush to reduce a mortgage balance could be the wrong choice. A comprehensive understanding of a home mortgage is essential before any steps are taken to either increase or reduce mortgage debt.

Cash Is King!

2010-03-30T14:46:00.001-04:00

By Kevin Jacobs, CFP®
Broken Arrow, OK
http://www.stepbystepfinancialplanning.com/

One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash. My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective. I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.” I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash. My job as a financial planner is to recommend to them what I believe is in their best interest.

I am not against investing and taking risk. However, I am against investing and taking risk before you are ready. I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.

In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors. First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account. I call this the “ready cash” account. If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.” Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund. However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead. I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.

*I can hear it already. You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA. Well, let’s just save the answer to that question for a later blog entry.

Why Your Credit Score Is So Important

2010-03-25T11:17:00.003-04:00

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

Your Credit Score is like your reputation, it follows you everywhere. Protect it as best as you can.

What Makes Up a Credit Score
A credit score takes into account a lot of different information from your credit report, but it’s not all treated equally. Some aspects of your credit history are more important than others and will weigh more heavily on your overall score. Your FICO score is essentially made up of the following:

· Payment History – 35%
· Total Amounts Owed – 30%
· Length of Credit History – 15%
· New Credit – 10%
· Type of Credit in Use – 10%

As you can see, the bulk of your credit score comes from your payment history and how much debt you actually have. Those two items account for 65% of your score. So, if you’re really looking to improve your credit score, these are the areas you’ll want to tackle first.

Why Your FICO Credit Score is Important
We’ve determined what makes up a credit score, but why is it so important? Your credit score will follow you for your entire life and if you are ever trying to borrow money, the lender is going to look at your credit score to determine whether or not to lend money to you. Need to buy a car? They will check your credit score. Looking for a mortgage? You can bet they are checking your credit score. In fact, even some employers are checking credit scores when hiring to possibly determine who would make a good employee.

Not only does your credit score determine whether or not you’ll receive financing, it also determines how much it will cost you to borrow that money. People with higher credit scores are deemed to be less of a risk and therefore will typically receive the lowest interest rates. Those with lower scores are viewed as more of a risk so the bank will offset that risk by lending you money at a higher interest rate. And when you’re talking about larger loans such as buying a vehicle or a home, just an extra interest rate point could add up to thousands, and even tens of thousands of dollars wasted on interest.

The Best Financial Advisor

2010-03-20T11:06:00.000-04:00

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

There are some great checklists for choosing a financial advisor. The good ones include asking about education, professional credentials, how long they’ve been in the business, and what services they offer. But some of the most important information you’ll need isn’t on a checklist. And it’s very hard to find. You can’t ask it in a question and count on a reliable answer. Your gut or the financial planner’s other clients might be able to answer it. But some of these planners might not even have clients yet. So what is it?

Can you trust the planner?

Because if the answer to that question is “no”, don’t bother asking other questions.

I’m fortunate to have many trustworthy financial planning colleagues. One of them told a story recently that illustrates this. About five minutes before a client came in for an appointment, he found an error his staff had made in her account. It was – for him – a large error of about $10,000. So the first thing he did when she arrived was explain the mistake and write her a check that made her whole. That check pretty much cleaned out his firm’s operating account on that day. That was several years ago and the woman is still a client. He didn’t try to gloss over or hide his mistake. And she appreciated that people make mistakes, but the best people own up to them and deal with the consequences.

So trust your instincts when choosing a financial advisor. Technical knowledge and expertise are important. But honesty is priceless.

IRA to Roth Conversions in 2010

2010-03-16T11:01:00.000-04:00

By Joe Alfonso, CFP®, ChFC
Santa Clara, CA
http://www.aegisadvisory.com/

As you probably already know, the tax law is changing in 2010 to remove the current restriction for making traditional IRA to Roth conversions. Currently, individuals with modified adjusted gross incomes in excess of $100,000 cannot do a conversion without incurring a 10% penalty if they are younger than 59 1/2 years old. Additionally, taxes are due in the year of conversion on any pretax savings and accumulated growth. In 2010, the income limitation is being removed allowing anyone to make a Roth conversion without incurring the 10% penalty. Taxes would still be due as before however there will be an option to pay these in equal installments over the two years following the year of conversion.

Already, financial product salespeople are touting the advantages of Roth conversions in anticipation of 2010 by emphasizing the tax advantages Roth IRAs have over traditional IRAs. Unlike withdrawals from traditional IRAs, Roth withdrawals in retirement are tax-free. Another key advantage of the Roth is that there is no requirement to begin taking withdrawals after one reaches the age of 70 and 1/2, as is the case with traditional IRAs. This "required minimum distribution" (RMD) feature of the traditional IRA forces taxpayers to make taxable withdrawals from their accounts regardless of actual income need. Roth IRAs do not require RMDs, thereby allowing the taxpayer the option of leaving assets in the Roth to potentially appreciate over a longer period of time.

Unfortunately, financial product salespeople often do a better job promoting the potential advantages of Roth conversions than they do the more important job of assessing whether a Roth conversion is appropriate for an individual client. The answer is not clear-cut by any means and a careful analysis must be performed to make an informed decision. Factors that must be considered are current and anticipated future income tax brackets, the source of assets available to pay the tax due on the conversion, and projected income needs in retirement. This is not a straightforward analysis. Additionally, there is the element of the unknown with regard to future tax law changes that further complicates matters.

In many cases, the result of a careful analysis will be that a partial conversion is the optimal course of action, both for empirical reasons as well as a hedge against future tax law changes. The ability of a client to pay the taxes due upon conversion may also weigh in favor of the partial conversion strategy.

Clearly, this is an area fraught with traps for the unwary and no one-size-fits-all solution exists. Advisors seeking to maximize the business opportunity presented by this tax law change while failing to properly assess the appropriateness of a Roth conversion on a case by case basis do their clients a disservice. Undoubtedly, a tax planning opportunity exists for some in 2010. Advisors who truly put their client's interests ahead of their own, however, need to be prepared to tell some of these clients that a Roth conversion is not appropriate in their particular case. Those of us who understand that providing good advice, and not selling products, is the best value we can offer clients will be more likely to engage in the thoughtful analysis required by the Roth conversion opportunity in 2010.

Are You Really Ready?

2010-03-11T10:57:00.000-05:00

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

As we move deeper into tax season, I am seeing a trend in my office. I am finding more and more clients are waiting on tax documents, and the missing information is making everyone wait. It’s certainly not my clients’ fault.

Actually, the problem lies in a change in the law that will allow brokers and investment companies to send out 1099s a couple weeks later than usual. This means you may not receive all of your required tax documents until mid-to-late February. So, if you are still waiting, you are not alone.

It is extremely important that tax returns are completed fully. The last thing you want is to file a return and later find a nice little gift in your mailbox causing you to amend your return, which could result in penalties and fees.

What to do in the meantime?

If you are still waiting, the best thing you can do is to organize all your information. You might even ask your preparer if they would like to start your return and fill in the missing data later. The data in question is usually dividend, interest, and capital gain information. This is easy information to input into a return and does not require a lot of time. Your preparer can finish all but the missing data of your return, and, after the info arrives, the return can completed with a few clicks of the mouse. This tactic will keep you from being put at the end of the line.

I am a big proponent of communication between taxpayer and preparer. Preparers get very busy and stressed during this time of the year. The best way not to add to that stress is to communicate. Ask your preparer what you can do to make your tax preparation easier. Whether it be better organized data or letting them complete the bulk of you return until your remaining tax documents arrive, this allows the preparer to operate more efficiently…..which is certainly in your favor!

If you are not sure whether you have received all of your documents, simply wait a couple more weeks. Maybe you are waiting on a refund and are ready for the cash. Be patient, for it is more important to file an accurate return. In the meantime, speak with your preparer and determine your best plan of action.