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financial planning

How a 401(k) Contribution Affects Your Paycheck

May 16th, 2012
by jblankenship.
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K-Line

As you begin a new job, or if you are a longer-term employee who is just starting to make contributions to a 401(k) plan, you are confronted with a question:  How does a contribution to the 401(k) plan impact the final take home pay on my paycheck? Believe it or not, you could actually increase your bottom line assets by reducing your income through a 401(k) contribution.

Let’s work through an example so that we can more completely understand what happens.

Your New Job

So, you’ve started a new job, with an annual pay of $30,000.  We won’t go into all of the details behind a W4 at this point, but for the sake of the example, we’ll say you filed your W4 to exactly match your tax expected of $2,603 for the year (and you started in January).  In addition to this, you have opted to take advantage of your employer’s health insurance plan, which costs $50 per month.  You are paid on an every-other-week schedule, for 26 pay periods per year.

This means that your take-home pay amounts to approximately $884.82, which is calculated as follows:

Salary ($30,000/26)

$1,153.85
Federal withholding

$100.00
State withholding

$57.69
FICA & SS

$88.27
Health Insurance

$23.07
Net Pay

$884.82

Your 401(k)

So, you now are ready to begin making contributions to your available 401(k) plan.  The company will match your contributions as follows:

100% of the first 2% of contributions

50% of the next 2% of contributions

25% of the next 2% of contributions

If you make a total of 6% in contributions, the company will match that with 3.5% contributed to your account.  Your 6% of $30,000 will amount to $1,800 per year, and the company match will be an additional $1,050, for a total contribution of $2,850.

For each paycheck, you are making a contribution of 6%, which is $69.23, and the company’s match is an additional $40.38 added to your account.  The result in change to your paycheck will work out as follows:

 

Salary ($30,000/26)

$1,153.85
401(k) contribution

$69.23
Federal withholding

$89.71
State withholding

$54.23
FICA & SS

$88.27
Health Insurance

$23.07
Net Pay

$829.34

The difference in your final take-home pay is only $55.48, which is $13.75 less than the amount that you contributed to the 401(k) account.  This is due to the fact that when you make a contribution to the 401(k) account, this amount is no longer subject to income tax.

When you consider what your overall economic result from this new paycheck is, you’ll see that making the 401(k) contribution is, indeed, a no-brainer:

Net pay

$829.34
401(k) contribution

$69.23
Company match

$40.38
Total economic increase

$938.95

As you can see, the end result is that you actually have increased your overall money on your balance sheet assets by $54.13, which is a 6.11% increase.  Granted, your 401(k) account and the company match are restricted in access, but your overall situation is a significant increase.

Keep in mind that, while we used 401(k) as the example type of account, the same could apply to a 403(b), or other sort of tax-deferral account.

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Smoke, Mirrors, and Alphabet Soup

Mar 19th, 2012
by jblankenship.
7 comments
A bowl of alphabet soup nearly full, and nearl...

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In an environment of Ponzi schemes and financial scandals many Americans have lost trust and confidence in the financial profession; seems like there are some financial advisers that have been helping themselves, more than their clients. To fight back against this trend of lost trust and skepticism, advisors are being more creative with credentials, some of which can be earned with minimal or no study and can be bought with a couple hundred dollars. A quick look at the Financial Industry Regulatory Authority’s web site (FINRA) (http://apps.finra.org/DataDirectory/1/prodesignations.aspx) shows over one hundred and twenty different credentials being used by advisors to build creditability and trust.  I’m sure there are many more not tracked by FINRA.

Professional certifications arose decades ago as a way for people in various industries to identify qualified practitioners. It’s always good to know that our doctor has an MD or our account is a CPA. In the financial realm, many well-established credentials, including the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP®) designations, require long study, demand continuing education and enforce strict codes of ethics. In order to become a CFP®, for example, one must meet the following requirements:

1)      A bachelor’s degree or higher from an accredited college or university

2)      Three years of full time financial planning experience

3)      Complete a CFP® board registered program or hold one of the following

  • CPA
  • ChFC
  • Chartered Life Underwriter (CLU)
  • CFA
  • Ph.D. in business or economics
  • Doctor of Business Administration
  • Attorney’s License

4)      Successfully complete the 10 hour CFP® certification exam

5)      Complete 30 hours of continuing education every two years.

Increasingly, I suspect, financial advisers are using dubious designations as marketing tools to win back the trust of older, wealthier clients.  Some of the more popular are those that use the term “senior” in their name. Some examples are: certified senior adviser, certified senior consultant, certified senior specialist, certified senior financial planner, chartered senior financial planner and chartered adviser for senior living. I get confused when hearing all the “senior” designations and am left wondering, do the advisors who hold these, really have any special education or experience working with seniors, or do they just want you to think they do?

To confound the issue even more many designations sound similar (and I think this is intentional) for example, the certified retirement financial adviser, or CRFA, sounds similar to the CFA designation. But the CFA requires roughly 900 hours of study in accounting, economics, ethics, finance and mathematics, and only 42% of candidates pass its three required exams, a process that can take several years. The CRFA, by contrast, requires that students pass one exam consisting of 100 multiple-choice questions, for which 40 to 75 hours of preparation is typically sufficient preparation.

In much the same way, the CSFP, or chartered senior financial planner, credential could be confused with the certified financial planner, or CFP®, designation. The CFP®, established in 1972, requires that students pass the equivalent of 15 credit hours of college-level courses, culminating in 10 hours of exams. The CSFP, launched in 2003, requires a three-day review course and the passing of one two- to three-hour exam.

Over the last few years the term “Wealth Management” has become popular with advisors as a way to attract wealthier clients.  It didn’t take long for a list of wealth management designations to appear.

  • WMS – Wealth Management Specialist
  • CWC – Certified Wealth Consultant
  • CWS – Certified Wealth Strategist
  • AWMA – Accredited Wealth Management Advisor
  • CWM – Chartered Wealth Manager
  • CWPP – Certified Wealth Preservation Planner

While some of these designations may be good for consumers by giving their advisor specific knowledge and experience, many will turn out to be marketing gimmicks employed by advisor to attract wealthier clients.

Credentials are used because they help advisers make more money. A 2007 study by FINRA’s educational foundation determined that 46% of older investors were more likely to accept financial guidance from someone with a professional designation – and 17% of investors would be more receptive to advice from a “certified adviser for senior investing,” even though such a credential doesn’t exist.

Buyers beware when it comes to initials behind someone’s name. According to the American Academy of Financial Management, based in New Orleans, the things to look for are these: accredited degrees, licenses, or master’s degrees from government-recognized or accredited programs or educational institutions with concentrations in Finance, Investments, Securities, Economics, or Accounting. These requirements make individuals eligible for Professional Designation. You can also check out designations yourself by calling the issuing organization and finding out what the requirements are – you might be surprised by what you find.
Steven Young, CFP® (XZ$, LMNOP, EIEIO)

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Book Review: Investment Mistakes Even Smart Investors Make

Feb 13th, 2012
by jblankenship.
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Investment Mistakes Even Smart Investors Make

This book is a must read for all investors. Author Larry Swedroe has demonstrated once again how he has a full understanding of the average investor’s situation, by listing 77 real-life mistakes that all of us have encountered at one time or another.

What’s more, Mr. Swedroe also takes the time to provide examples of where the mistakes listed have damaged investors’ situations, as well as to show how the investors could have avoided the mistakes.

Larry Swedroe, for the uninitiated, is a best-selling author of many books which explain his concepts of investing – including The Only Guide series, The Quest for Alpha, and others.  These books cover primarily passive investing, or investing without active management, and as such he is a sort of guru in the self-managed investment world.

The listed mistakes in this book include everything from hindsight bias (believing after the fact that a particular occurrence was predictable) to believing that there are experts who can predict the future, as well as believing “this time it’s different”.

The list of the types of mistakes is broken up into four categories: Understanding and Controlling Human Behavior is Important for Investment Success; Ignorance is Not Bliss; Mistakes Made When Planning an Investment Strategy; and Mistakes Made When Developing a Portfolio.

Anyone who owns an IRA or invests in a 401(k) can benefit from this list of mistakes. Often these mistakes can be a part of our investing life without even knowing it – like having too many eggs in one basket (it’s not as easy realize as you think), or being too conservative (it’s easier to do than you think).  Swedroe’s insights are helpful in explaining how the mistake can come to pass, as well as how to avoid these mistakes in the future.

All of this is designed to help you to become a better, more successful and less-stressed investor… all the way down to the last mistake – Do You Keep Repeating the Same Mistakes?  Do yourself a favor and pick up a copy – it will be well worth the effort and your investing habits will be much better off for it.

Pre-Death Planning: Roth Conversion

Jan 25th, 2012
by jblankenship.
2 comments
Eilaine Roth
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Financial planning often requires us to face our own certain demise – something that we often don’t want to do, but still a certainty that we all must face.

Among the things that we want to do when planning for the inevitable would be to make certain that our surviving loved ones have access to adequate monetary resources to support themselves, in the most cost-effective manner.  Another thing that we hope to accomplish is to make the transition as easy as possible for our loved ones.  One way to do this is to convert a good portion of your IRA or other tax-deferred funds to a Roth IRA account.  Here’s why:

By converting to a Roth account, you will make the funds in that account available to your heirs totally tax free.

Granted, your estate will also be smaller by the amount of tax that you paid on the conversion.  At the same time, your heirs will also not have to go through the rather painstaking process of managing the IRD deduction, if the estate is of a size that requires estate tax to be paid.  This will simplify the overall process dramatically, and depending upon the size of your overall estate this could be a significant.

On the downside of this, it’s likely that if you convert your account in a single year the tax paid on the conversion would be much, much higher than if your heirs paid tax on the ordinary required distributions if the account is left as a traditional IRA.

However, if you converted your account over several years in smaller amounts using a strategy like filling up the brackets, the overall tax cost of the conversion will be less, maybe even less than the cost that your heirs would experience otherwise.

You can always use recharacterization strategies to make sure that the whole process is as tax-efficient as possible. And in today’s tax climate (and market volatility) there are literally very few reasons not to go ahead with a Roth conversion strategy.

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Book Review: Financial Fitness Forever

Dec 26th, 2011
by jblankenship.
1 comment

I have to tell you something about how I treat books: I have a great deal of respect for books.  I have so much respect for books that you will rarely find a book in my possession that has writing in it (other than an author’s signature) or page corners turned down.  I like my books to be pristine, so it’s against my own personal rules of conduct to do things like that to a book.

Occasionally though, I run across a book so important and useful that I am compelled to break these rules, in spite of myself.  This particular book is just such a book.  What I found so useful about this book is not the subject matter or the topic, as there are many, many books on the topic of how to be financially secure throughout your life, with most being far less impactful than this book.

I found that author Paul Merriman has such unique ways to explain the topic, I was immediately compelled to turn down page corners so that I can go back and reference them later. Mr. Merriman has captured some very useful explanatory methods that literally anyone can gain benefit from reading, and I expect I’ll come back to this book again and again.

Mr. Merriman’s many years of experience in the financial industry has provided him with an amazing wealth of knowledge about what works to help you become successful as a saver and investor.  What’s unique is that he also explains what the average person faces in terms of distractions from the successful track (such as listening to your neighbors or Jim Cramer) and why those things can work against you.  This kind of explanation is rare in this industry, but it’s critical to understand these things and avoid the distractions in order to ultimately be successful.

In addition, Mr. Merriman takes great pains to explain the process of investment portfolio construction – a topic that many folks spend far too little time on, but a concept that can literally have millions of dollars of impact.

If you’ve never read such a “how to be successful as a saver and investor” sort of book and you’re looking for answers, this is your book.  If you’ve read other books in this category and haven’t found the formula that you need – you should read this book.

If you’re already fine with your investing strategy and are in good shape, there are still some great nuggets of information here.  For one thing, Mr. Merriman includes as an appendix 20 pages of description of the top 50 401(k) plans in the industry… including sample recommended allocations for an aggressive, moderate, and conservative allocation within each of the 50 plans.  This reference alone is worth the cost of the book.  When you add in the fact that the same types of portfolios are listed in detail for six top mutual fund families plus a portfolio of ETFs, you’ve got a great value here.

If you’re saving and investing and have any questions at all about portfolio construction (or anything else about how to be successful at investing in general), you owe it to yourself to read this book.  And go for it – turn down the pages, it’s really that important!

5 Ways Baby Boomers Can Better Utilize Technology to Manage Their Finances

Dec 19th, 2011
by jameslander.
3 comments
New Mobile Cell Phone Technology
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This guest post article was written by James Lander, a writer for Couponing, a site that aims to save consumers money. They provide coupons and couponing advice.

The joy following the end of the Second World War led to a tremendous boom in population growth. With renewed faith in humanity, people expressed their love in a predictable fashion. The result of this collective sigh of relief is the over 75 million citizens now referred to as ‘baby boomers’. Perhaps being conceived in such a period of optimism had an effect on their general outlook, as this segment of our population has always believed our world was capable of great change. Positive or not, the world has certainly altered around them. Although the commonly held belief is that baby boomers are a hesitant group when it comes to technology, the amount to be gained from learning about the available resources online is inspiring many to educate themselves. Boomers stand to gain a great deal by learning about the benefits of utilizing technology in their everyday lives, especially when it comes to their finances.

1) Make use of online banking

As exciting as it seems to finally leave the work force, to relax and enjoy one’s ‘golden years’, it takes an immense amount of discipline to do it well. You need to be completely aware of your financial situation, with access to your accounts and banking utilities at all times. Online banking makes your account information constantly available in order to better keep track of where you are spending your money. It allows you to transfer funds, make payments and even repay loans whenever and wherever you wish. It is not easy to keep track of your finances at the best of times, but knowing where your money is is absolutely crucial when you are stretching your savings out over an indefinite amount of time.

2) Consider an online savings account

Want to earn higher interest on your nest egg? Want to pay lower monthly fees than traditional banking while still allowing for easy deposits or money transfers? An online savings account makes that possible. Because they are still unorthodox in that they exist independently from your regular bank, online savings accounts offer excellent deals to help you keep your all-important savings safe, secure and thriving.

3) Seek help on the Web

When it comes to universal woes, money difficulties are one of the most prevalent. This may explain the sheer amount of budgeting and money management programs that are available at no cost to the users. There are budgeting apps available for your mobile phone; sites that offer advice, spreadsheets and even live online help for those who are truly confused. For example, reputable sites such as simplee.com not only track your spending on your medical bills but will link your health care plans to your bank accounts in order to make paying your medical expenses much easier. This is particularly important, as studies have shown that the majority of boomers fail to take medical costs into account when budgeting for their retirement.

4) Look to the experts

In the same way that simplee.com acts as a personal valet of sorts for your medical expenses, countless blogs and websites exist to help you learn from others experiences how to best prepare for your golden years. These sites cover important topics ranging from the stock exchange to everyday frugality. Written by both experts and everyday folk in the retirement trenches, they can offer you a massive amount of helpful information in order to make retirement more ‘livable’.

5) Make your own calculations

If you simply don’t trust the advice of others or are the type of person that needs to ‘do’ in order to learn, there is an excessive amount of calculators and financial tools available online as well. These programs can help you calculate how much you will need for your mortgage repayment, retirement savings and even your net worth at the click of a button. There should be no mystery when it comes to where your money is going and having the resources to make the calculations yourself is a great deal of comfort to many retirees.

It is an unflattering but widely held belief that many ‘boomers’ are somewhat inept when it comes to current technology. This couldn’t be farther from the truth. Recently, Microsoft gathered focus groups to learn how boomers make use of technology. They were shocked to see that over 16 million people over the age of 60 have made mobile phones, computers and the Internet a large part of their lives. Don’t stop at texting and Facebook updates! Utilizing the tools available online to help manage your finances is not only a wise decision, it’s one that will help you to keep up your ‘boomer rep’ as a supporter of positive improvements in all areas of life.

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Why You Need to Register Your Business

Nov 28th, 2011
by Kelly Austin.
10 comments
Lincoln on U.S. one cent
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While many people have a dream of starting a business, some make the mistake of simply moving forward without understanding everything that business ownership entails. Ignoring important rules and regulations at the outset can prove costly further down the line, which is why certain aspects cannot be avoided – including registering the business.

Structure

When registering a business, the first issue under consideration is how the business is going to be set up. There are different business structures to choose from, including corporations, limited liability companies, and even partnerships. Each of these different legal structures has different requirements. Failure to comply with the requirements at the outset can mean legal and financial problems in the future.

Naming

When naming a business, remember that the default name of a business (when dealing with legal issues) is simply the name of the person or entity that possesses the business. For example, if John Anderson starts a business, on legal documents the name of the business will be listed as “John Anderson.” However, if he starts a business and names it “Anderson Electronics,” he will file an “assumed name” registration form. This form will be filed with local government, state government, and with various financial institutions.

Taxation

Of course, no one gets away with starting a business without letting the Tax Man know about it. If the business in question has employees (including listing the owner as an employee), the business must be registered with the Federal tax system so that it receives an Employer Identification Number. But, registering at the federal level is only the first step. Businesses must register at the state level, too, since the state likes to make sure it collects revenue from state and local businesses.

Licensing

Another important reason to make sure that businesses are registered comes in the form of licenses and permits. For many businesses, there are various licensing requirements and permits that must be used. Without registering a business, those permits will not be given – and that means the business will be operating outside the law. Naturally, this can lead to serious consequences, which is why it is vital to ensure that the business owner receives all proper permits and licenses.

These are the basic registration requirements for a business, and there are usually more needed, depending upon the type of business in question. While these registrations might seem overly complicated and some might even doubt their usefulness, making sure that all proper registration is in place allows a business owner to conduct business efficiently, legally, and with a minimum of registration-related problems in the future.

This post was contributed by Kelly Austin from Higher Salary. Visit her site for information on the average travel agent salary and guides to other popular careers.

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Book Review – Freedom From Wealth

Nov 14th, 2011
by jblankenship.
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Freedom From Wealth

This book is an excellent resource for folks who have been accumulating wealth over their lifetimes – wealth that is more than they need to live off of.  Granted this isn’t everyone, but it’s probably a lot more of you than you think.  You don’t need to be a Bill Gates to have these sorts of issues in your path.

When you’ve worked your entire life to build up your wealth, you likely want to leave some of it to your children and grandchildren, but is it best to just hand it all over to them at your passing?  What if you also hoped to make a difference in the world with your money – perhaps with charitable activities, or to help your offspring to establish their own place in the world, or to leave a legacy, a way that your name can live on?

The first part of this book, fully half of the text, helps the reader to understand some of the issues that are necessary to address in order to be successful with such intents.  It’s important to develop strategies and employ the proper resources so that you can ensure that not only will your dreams be fulfilled, but also that your children and grandchildren will not become constrained by the wealth you’ve passed into their care.

That’s what the title is all about.  The authors, Charles A. Lowenhaupt and Donald B. Trone, have many, many years of experience in working with families as they transfer wealth over multiple generations, and this experience has shown that without proper planning, the wealth itself (and fulfilling the goals of the original wealth accumulator) can become a burden to the successive generations.  By putting the appropriate strategies into place, the heirs of the original wealth accumulator can carry out the intended plans and achieve their own life goals without feeling that the wealth itself is a burden.

The book begins with a full chapter devoted to the question “What is wealth for?”.  The answer isn’t as easy as you think.  The easier question for most folks who haven’t really thought about it much is “What is wealth NOT for?” – as in,

  • I don’t want it used for taxes.
  • I don’t want it squandered.
  • I don’t want my spouse to take it in a divorce.
  • I don’t believe in charity, so I don’t want it to go to charity.
  • I don’t want my children to have it too young.
  • I don’t want my lawyers to use it up in fees.

So – what wealth is for is something altogether more than the sum of all the things it’s not for.  Clearly, part of it is to provide sustenance to the owner of the wealth – but that may only be a small part of the overall accumulated wealth.  What else does the wealth holder hope to accomplish?  Do your heirs understand your hopes and dreams?  More importantly, do they agree with your hopes for your wealth?

The remainder of the book is a workbook of sorts that will help the reader to walk through the process of developing the strategy to achieve his or her life (and beyond life) goals.  This matter isn’t a simple undertaking; depending upon the size and complexity of the wealth portfolio, it will likely be in the best interest of the holder of wealth to hire appropriate resources (advisors and the like) the assist in the process.  This book can be a very good first step in the process.

A brief overview on currency trading

Nov 7th, 2011
by Ms Smith.
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Note from Jim: The guest article below is simply an overview of the currency trading marketplace.  This sort of investing is extremely risky and should not be undertaken with funds that you are not prepared to lose completely, especially if using leverage (described below).  I don’t condone or recommend investing in this market; it is only presented here for edification, and the opinions presented are those of the author.  Proceed at your own risk!

Series of 1917 $1 United States bill
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The currency trading market is the largest financial market in the world where currencies are traded on a daily basis. Individual retail investors, corporations and financial institutions are the major participants in the currency market. The currency trading is mainly done through the brokers and the market makers. If you want to enter into this market, you are required to place trades through brokers, who will place equivalent trade on the interbank market. The most important hallmark of this market is its extreme liquidity. The investors can cash in or cash out of their investment with no time at all. This market is also characterized by high leverage ratio. If your investment amount is say $1000 and if the leverage ratio is say 100: 1, it implies that in actual practice you can trade with $100000. Whatsoever, currency trading offers you excellent income earning opportunities.

If you purchase some units of a currency at a certain rate and sell those units at some higher rates, then you can make some profit. The difference between the selling price and the buying price is your gain from currency trading. Value of a currency can change for a variety of reasons. The value of a currency is determined by several factors such as international inflows and outflows of business, speculation activities and political & economic activities. Say, US companies are importing the products made in the Euro zone. It implies that US dollars have to be exchanged for Euros to pay for the products produced in the Euro region. When huge amount of goods are imported from Euro to the US, it increases the demand for Euros and resultantly the value of Euro increases vis-à-vis US Dollars.

Whatsoever, trading in currencies is very risky too. In comparison to other markets, currency market is very much volatile in nature. In order to become successful as a currency trader, you need to follow a conservative risk management strategy. There are many aspects of effective risk management strategy. The bottom line is that you should have a proper trading plan and use caution while trading in currencies.

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A Beneficiary Designation Dilemma

Oct 12th, 2011
by jblankenship.
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Qtips
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Since families today are different and more complicated from the traditional situation, with ex-spouses, children from first and subsequent marriages, and children from unions where a marriage didn’t take place, designating beneficiaries for IRA accounts can be very complex.

For example, it’s not out of the question for an individual to have re-married later in life and have children from an earlier marriage. In addition, the new spouse could have children from his or her previous marriage.  And then possibly children resulting from the current marriage.

So, this individual might wish to leave the proceeds of his IRA to his or her current spouse first and foremost at his or her passing – but then to split the remainder of the account among his or her children from the first marriage and the children from the second marriage equally. If you know anything about how IRA beneficiary designation forms work, this situation likely couldn’t be accomplished using that simple form.  You need something more…

QTIP Trust

The tool you’re looking for here is a QTIP trust.  No, it has nothing to do with a stick with cotton on the end of it or any bathroom product for that matter, QTIP stands for Qualified Terminal Interest Property.  This QTIP trust is a special sort of trust that allows an individual to leave the income from their assets to a spouse and then, at the death of the surviving spouse the remaining principle is passed on to the beneficiaries designated by the original owner of the account(s).  In this fashion the children from the previous marriage have protection of the assets that they would eventually receive.

If a vehicle such as a QTIP trust isn’t used, then the current spouse could take control of the account and either use up all of the assets, or change the beneficiaries to only include his or her own children, excluding the children from the former marriage.

QTIPs are very complicated to put into use, since there are a lot of moving parts, beneficiaries, and a considerable amount of time could elapse from the time it is put into play (the first death) and the death of the surviving spouse.  The distribution process from the IRA is also complicated, since using a trust as a beneficiary takes away the designated beneficiary from the process, meaning that the account would be distributed to the trust within five years, as an example.

It’s best to make sure you’ve got an attorney who specializes in estate planning and IRAs to help with the process. But if you have a situation like the one described (or even more complicated) the QTIP trust may be your best bet to accomplish what you’d like to do with your IRA.  Incidentally, other assets besides an IRA could be put into a QTIP trust as well, for the same purpose.

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