Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

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I picked up this book at FinCon 2013, the Financial Blogger’s Conference held last year in St. Louis. The author, Brian J. O’Connor, is the Personal Finance Editor and syndicated “Funny Money” columnist at The Detroit News. The book is the compilation of a 10-part series O’Connor wrote in 2010, wherein he opened up his personal financial situation to his readers and attempted to come up with ways to save an on-going $1,000 per month on regular, everyday expenses.

The result is a surprisingly interesting (not to mention humorous!) journey with the author into the depths of personal financial dealings – everything from babysitting expenses to transportation costs to groceries. The author takes each section of his personal finances in turn, laying out what the current costs are, and the steps he took to make reductions in his monthly outlay. He the takes the series a step further to recommend steps for folks in three “saving” situations: Freeing Up Cash (where you’re looking for ways to increase your savings contributions, for example), Making Ends Meet (when you are constantly coming up just a bit short each month in paying your regular expenses), and Pinching Pennies So Hard That Lincoln Gets A Headache (for folks suffering through long bouts of unemployment or underemployment and have to make drastic changes).

For each situation the author provides sound advice that can be applied to other monetary situations, with a wide array of methods for saving. It seems like this might be a dry reading, but the author has a wonderful way of dropping in little bits of humor to really keep you interested. Of course, what would you expect from a column known as “Funny Money”?

In addition to the financial aspects of making these changes, O’Connor supplies some real-world advice to help you stay the course and make it all work for you. Here’s a quote from the Entertainment category, where the author drives home the point that you can’t live solely on Ramen noodles for long:

Trust me. Meal planning, shopping for bargains at the grocery store, and learning to love every part of the chicken – except the McNugget! – will be much easier to bear if you go out for a good crab cake once in a while. Otherwise, you become one very crabby cake yourself.

I won’t ruin it for you by telling how it turns out, but suffice it to say that I believe virtually anyone can gain valuable insights into reducing day-to-day expenses from this book. And who doesn’t want to save money?

Posted on Jan 20th, 2014

by author: jblankenship.

Posted in: Book review, financial planning, personal finance.
Tagged: book review · personal finance

Why Watching the Stock Market Can Make You Sick

Jan 17th, 2014

by sraskie.

4 comments

I recently read a fascinating article on the correlation between market declines and admission rates to hospitals. The authors point out that almost instantaneously; the effects of a market decline affect mental health such as anxiety. In a nutshell, the authors describe that expectations about the future play a role in investor’s utility (happiness) today.

The research in this article can be beneficial on two fronts. One the one hand, the information can be beneficial to advisors in educating their clients that once proper assets allocation for a particular client is achieved there is little to be gained by logging into an account and watching the daily and even hourly fluctuations of the market.

And every asset class will fluctuate – which is why we diversify and allocate assets accordingly such as real estate, large cap stock, small cap stocks, commodities, bonds, etc. It’s important to note that at any given time, any of these asset classes will be both in and out of favor. The more someone watches the gyrations, the more likely their headed for the antacids – or in the case of the article, the hospital!

The other benefit is self-evident for the client; not watching the market can be beneficial to your health and I would argue your wealth. The reason why it’s beneficial for your health is there’s going to be a lot less stress and worry looking at your account on a daily basis. Unless you’re a day trader (proven to be especially useless) there’s little need to look at your account more than once per month – and less if you can stand to.

The reason it’s beneficial for your wealth is that by not watching the daily movements, there’s less of a chance you’re going to act on that worry and succumb to the loser’s game of trying to time and actively beat the market. Additionally, you may be tempted to stop investing in your IRA, 401(k), or other savings plan which is the last thing you want to do in a down market; in fact, consider investing more when the market drops.

Finally, this is where a financial planning professional can be worth their weight in gold (no; that is not a recommendation to buy the metal!). Working with a professional can help you better control your emotions by helping you think objectively which can be extremely difficult in a market downturn.

That being said you still need to do your homework. Make sure your professional isn’t in the same boat when markets fluctuate. If he or she is irrational and thinking emotionally, it’s going to be difficult if not impossible to be objective. And this is your money.

Be leery of professionals that claim to be market prognosticators or actively beat the market or use funds that do so. Numerous empirical studies show that this is almost an impossible feat. And again, this is your money. Also be cautions of “order takers” – meaning professionals that do whatever you ask – as if you were ordering from the drive through.

A good professional financial planner will challenge your requests (politely) if they feel it’s not in your best interest and can help prevent you from making mistake that can be hard to recover from. Case in point: think of all the “orders” that were placed to sell in 2008 when it’s the last thing investors should have done. Some folks experienced irreversible damage to their portfolios.

To quote a wonderful line from one of my favorite investment books, The Investment Answer, “There are those that don’t know, and those that don’t know they don’t know.”

The market is much bigger than all of us so it makes sense not to worry about what we can’t control.

Posted on Jan 17th, 2014

by author: sraskie.

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Posted in: fee-only, fiduciary, financial planning, investing, investment, investment diversification, real estate investment, recession, retirement, retirement savings.
Tagged: fiduciary · financial planning · investment · retirement savings

Social Security and the Non-Citizen Spouse

Jan 15th, 2014

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Citizenship ceremony, 1960 (Photo credit: Oregon Nikkei Legacy Center)

With our increasingly global society today, many married couples are made up of a US citizen and a non-citizen. In some cases, the non-citizen spouse has never been covered by the US Social Security system – he or she may have been covered by another system in his or her home country. In other cases, the non-citizen spouse may have worked in a Social Security-covered job while living in the US, and so may have generated a Social Security earnings record of his or her own.

At any rate, it is important to know that your lawful spouse who is a non-citizen may be eligible for Social Security benefits based on your earnings.

As long as other qualifications are met (length of marriage, age of the spouse, and your filing status with Social Security), your non-citizen spouse may qualify for Spousal Benefits based upon your record. By the same token, your non-citizen spouse will also be eligible for Survivor Benefits upon your passing, as long as all other qualifications are met.

The good news is that if the non-citizen spouse is receiving a pension from another system (such as in his or her home country), this will not trigger GPO (Government Pension Offset) treatment of the Spousal or Survivor Benefits. These foreign pensions only trigger WEP (Windfall Elimination Provision) impact, and then only to the individual receiving the pension’s own retirement benefit, not the Spousal or Survivor Benefit.

Posted on Jan 15th, 2014

by author: jblankenship.

Posted in: Social Security, Social Security spousal benefit, social security survivor benefits.
Tagged: Social Security · spousal benefits · survivor benefits

Who’s Got Your Back?

Jan 10th, 2014

by sraskie.

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We all have people we look to for advice and people whom we trust deeply with our thoughts, feelings, money, fears and dreams.

These people could be loved ones, friends, family and professionals such a s doctors, psychologists, counselors and planners.

Naturally we don’t trust just anyone with our most intimate thoughts, feelings and dreams. These are reserved for those people that we feel have earned that privilege.

For the last week I have been working at my first residency for my PhD in Financial and Retirement Planning at The American College in Bryn Mawr, Pa. One of the courses involves the subject of ethics – and not just a list of commandments of what we should do, but more of a mentality of what we owe to ourselves, loved ones clients and people we come into contact with on a daily basis.

There has been a lot of theory discussed from Kant, Mills, Aristotle, Bentham and Boatright to name a few. All of these philosophers have had thoughts and contributions to the world of ethics and virtue and have striven to make the world a “better place”. From the standpoint of the scholars in my class we’ve discussed how these virtues can be applied in our lives and how the World would act if it applied the same views.

It became quickly obvious that many theories can be applied and there is not one theory that is better than the other. We all have our own moral compasses – but my question is – what if we all did our best to be our best and treat other with our best?

What kind of World would that be?

In the financial planning industry, what would that mean for the industry? For the people that trust us with their livelihoods, dreams and fears?

I would argue that we would advance the financial planning industry from a vocation to a profession in the eyes of the people we serve. And that’s what we strive to do here. That’s why we embrace the fiduciary standard. That’s why we do what is best for our clients – even if it means they do that best with another company or adviser.

And that’s why we choose to do what we do. For Jim and I, it’s a choice, a duty, a pleasure – and an honor to serve our clients.

Posted on Jan 10th, 2014

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

Medicare Part B and D Premiums for 2014

Jan 8th, 2014

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B (Photo credit: Flооd)

Even though other retirement-related items increased for 2014, such as the taxable income limit for Social Security tax ($117,000, up $3,300), the earnings limits for pre-Full Retirement Age Social Security benefits ($15,480 before FRA year, $41,400 during FRA year), and the COLA for Social Security benefits (+1.5%), the premium for Medicare Part B coverage remained the same for 2014, at $104.90 per month.

However, if your income in 2012 was above $85,000 for single filers or $170,000 for married filers, you will have to pay more for your Medicare Part B insurance, but it’s the same increase as in 2013. Medicare Part D coverage for upper income folks will rise slightly. The maximum increase for both Part B and Part D tops out at $300.10 per month, for a total premium of $405 per month.

This income amount is actually your Modified Adjusted Gross Income, which is equal to your regular AGI (bottom line on the first page of your 1040 tax return) plus tax-exempt interest, foreign earned income, and Series EE US Savings Bonds that were used for education (and which would otherwise be non-taxed).

Posted on Jan 8th, 2014

by author: jblankenship.

Posted in: 2014 Tax Year, Medicare.
Tagged: medicare part b

Penalty for Having No Health Insurance

Jan 6th, 2014

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English: President Barack Obama’s signature on the health insurance reform bill at the White House, March 23, 2010. The President signed the bill with 22 different pens. (Photo credit: Wikipedia)

Note: this provision has been repealed beginning with tax year 2019.

As you may already be aware, individuals are required to carry health insurance on themselves and their dependents, as of January 1, 2014. This is the mandate set forth in the Affordable Care Act – and of course it’s an important part of making the whole Act work. Small businesses (less than 50 employees) have a similar mandate to provide coverage for employees beginning in 2015, or face penalties themselves.

Without mandating insurance coverage for everyone, the system can’t sustain the lower-cost options for folks who desperately need the medical coverage. This includes folks who are not covered by any other means (employer, Medicare, Medicaid or individually-purchased policies) and who have medical problems that require costly care. With the mandate, healthier individuals will also have to pony up and purchase health insurance, so that the overall cost is spread among both healthy and not-as-healthy individuals.

There are a few ways that the penalty can be avoided:

Having an insurance policy purchased via the Affordable Care Act Healthcare Exchange for your state.
Having an insurance policy from any other source that meets the minimum standards of the “bronze” level plan on the exchanges. This includes employer-provided healthcare or other group policies (such as via an association), as well as individually-purchased policies.
If the coverage costs more than 8% of your household Adjusted Gross Income – this applies to employer-provided insurance as well as the net cost of a bronze-level policy from the exchange. If your income is so low that the cost of either type of policy is more than 8% of your AGI, you will not be penalized.
If you have to go without coverage for a period of less than 3 months, such as when changing jobs, you will also not be penalized.
The same goes for folks who can prove that a hardship has caused them to go without coverage, such as if your policy was canceled and you otherwise cannot afford a policy. (This one is a bit odd, it seems that the situation is covered via #3 above, but I guess that wasn’t complicated enough!)

If you don’t fit any of the above exceptions, you may owe this penalty. The penalty is the greater of either $95 per person in the household (half that if the dependent is under 18), capped at $285; or 1% of Adjusted Gross Income over the minimum to file a tax return ($20,300 for couples or $10,150 for singles, plus $3,950 per dependent). At no time can the penalty be more than the cost of the basic bronze-level policy offered on the exchanges.

When your income is less than certain limits, you will receive a tax credit for a portion of the cost of the insurance coverage. These limits are prescribed by the Act, and the upper limit is 4 times the federal poverty limit – for a family of four, this amounts to $94,200; for a single person, the limit is $45,960. The credit varies between the limit for filing (mentioned above) and the 400% poverty limit line. This credit can be paid directly to the insurance provider, lowering your monthly premium (if you’ve purchased via the exchanges) or you can wait to receive the refundable credit when you file your income tax return.

A Quirk

There’s a quirk about this law concerning the penalties for not having insurance: The penalty, which is actually called a tax, is administered by the IRS, collected with your income tax return each year. However, unlike income taxes and other taxes collected with your income tax return, the IRS cannot use a lien against your property or a levy against your income in order to collect the penalty if owed. In addition, any amounts unpaid are not charged interest (as with other taxes). The only way that the IRS can force payment of the penalty is by withholding refunds from other taxes reported on the tax return. If you’re astute, you’ll notice that there is a planning opportunity there – although not recommended nor for the faint of heart.

Posted on Jan 6th, 2014

by author: jblankenship.

Posted in: #noTOP, Affordable Care Act, income tax, income tax credit, irs.
Tagged: Affordable Care Act · income tax credit · irs

Chasing Returns

Jan 3rd, 2014

by sraskie.

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Wile E. Coyote and Road Runner

Looking at this morning’s financial section of the paper inevitably had a piece regarding the assets classes and the respective investors (gamblers) that did exceptionally well in 2013. There was mention of a firm that bet heavily on Japanese stocks and did very well, another investor bet against gold and achieved glamorous returns and a hedge fund that bet on US stocks and looked like gods among mortals.

But that’s the problem with these scenarios – we are mortal.

Pick up any financial magazine that reports on funds or stock returns and you’ll see examples of mutual funds, stocks and bonds that have either beaten or done worse than their counterparts. For example, US stocks did very well in 2013 – so a domestic large cap fund would look amazing based on what it did for 2013. Herein lies the problem; the publication is reporting what the fund did, not what it will do.

Investors that chase returns are falling prey to the thinking that past returns are indicative of future results when we know that that’s not the case. There’s no guarantee that the fund or stock or bond will increase in value and there’s no guarantee that it will decline. We just don’t know.

For more specific funds and stocks – there may be a good chance that the fund is going to go down although it may not happen right away. The reason is that when the publications show the funds with amazing returns, there are some people that flock to those funds since they are chasing returns. Prices temporarily increase. What happens next is that those folks that have been in the fund for quite some time sell – and sell a lot. Naturally when there’s quite a bit of selling fund prices drop – and so do the returns of those investors that chased last year’s results.

Another reason prices drop is due to mean reversion. Simply stated mean reversion is the concept that a fund’s prices will move toward their average over time. A simple, but exaggerated example of this is let’s say a fund’s average return is 10% over 20 years. In one year it returns 40% – which is very respectable. However, according to mean reversion it can be expected (although there’s no guarantee as to when) that at some point in the future the fund is going to experience a declination (either gradually or suddenly) in order to get back to its average return of 10%.

Another way to look at this concept is standard deviation (for another article later) which is really how much something flip-flops around an average. To keep things easy, let’s say this fund has a standard deviation of 10% also. With an average return of 10% and a high of 40%, means that this fund went three standard deviations above its average. This means that it could also go three standard deviations below the average or achieve a -20% return.

Without getting too mathematical or statistical on our readers it simply means that this fund flip-flops a lot and if it’s flipped 40% returns in the last year, there’s a good chance it could flop going forward.

Rather than chasing returns a wise choice is to invest broadly among asset classes and diversify accordingly. An excellent way to do this is through indexing – buying index funds of different asset classes (such as stock, bonds real estate and international stocks and bonds). This helps an investor avoid chasing returns and helps them accept that certain asset classes will rise and others will fall – but the combination of all of them in one portfolio not only lowers overall portfolio risk, but prevents an investor from chasing the next big fund – which according to the latest financial magazines – already happened.

Posted on Jan 3rd, 2014

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning, investing, investment, passive investing.
Tagged: fiduciary · financial planning · investment

Goals for 2014

Jan 1st, 2014

by sraskie.

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Goals setting and resolutions are among the top things on peoples’ minds when they start the New Year. And rightfully so. A new year signals a fresh, start a new beginning, a clean slate.

Feeling refreshed and ready, most people start on their resolutions with the best of intentions – for about a week or two. Then they either give up, forget, fall back onto the same habits and routines that they promised they’d get out of the year before.

It’s great to have resolutions – but they must be accompanied by resolve. What is resolve? Resolve, according to Merriam-Webster’s dictionary is to make a definite and serious decision to do something. This means planning ahead, expecting obstacles and figuring out ways to push through and achieve your goals. I recommend writing your goals or resolutions down.

Here’s how:

To begin write out your financial, fitness, work, eating, etc. goals that you would like to achieve throughout the course of this year. Make sure you study them carefully and write down reasonable goals. What I mean by this is that it’s important not to set a goal so high that you can’t possibly achieve it. For example, if I wrote down a goal stating that I’d like to be able to save $1,000 per day that would be a goal that’s too high. Instead, I might write down $100 per month. This goal could be sensible and attainable. Now if I was already saving $100 per month – than this wouldn’t be a goal at all – so I may up the amount to $200 and so on.

You want to lose weight? Set a reasonable amount you want to lose (2-3 lbs. per week is ideal). That goal can and will be attainable. Make sure you write down your goals and read them every night before you go to bed and every morning when you get up – WITHOUT FAIL.

Also, always write your goals in the first person, present tense. This programs your subconscious to take action immediately in the “here and now.” For example, you may write down, “I save $100 per month.” Or, “I run 5 miles per week.”

Write down your specific goal (whatever money, weight, business goal you want to attain). You can also put up a photo of someone whose net worth, business model or physique you’d like to achieve and of someone you don’t ever want to be or look like. Keep these photos where you can see them every day.

Once you’ve reached a certain goal, reward yourself!! This can be that new toy you’ve had your eye on, or something you’ve denied yourself until you reached that goal.

Finally, sign and date your goals. Giving yourself a deadline and committing to it with your signature produces a sense of urgency and importance. After all, can you think of anything you sign that isn’t important? Think of it as a contractual obligation to yourself!

Posted on Jan 1st, 2014

by author: sraskie.

Posted in: #noTOP, fee-only, fiduciary, financial planning, goals, retirement.
Tagged: fiduciary · financial planning

2014 IRA MAGI Limits – Married Filing Separately

Jan 1st, 2014

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Separated Strawberry (Photo credit: bthomso)

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2014. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2014. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $10,000 or more, you can not contribute to a Roth IRA.

Posted on Jan 1st, 2014

by author: jblankenship.

Posted in: #noTOP, 2014 Tax Year, IRA, magi, Roth IRA.
Tagged: IRA · magi · roth ira

2014 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

Jan 1st, 2014

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rendered universal joint animation. Español: M...

rendered universal joint animation. (Photo credit: Wikipedia)

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $96,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $96,000 but less than $116,000, you are entitled to a partial deduction, reduced by 27.5% for every dollar over the lower limit (or 32.5% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $116,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2014. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $181,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $181,000 but less than $191,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $191,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2014. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $181,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $181,000 and $191,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $191,000 or more, you cannot contribute to a Roth IRA.

Posted on Jan 1st, 2014

by author: jblankenship.

Posted in: #noTOP, 12/8/2010 update, 2014 Tax Year, IRA, magi, Roth IRA.
Tagged: IRA · magi · roth ira

2014 MAGI Limits – Single or Head of Household

Jan 1st, 2014

1 comment

David Lee Roth IRA ruins my perfect shot (Photo credit: nickfarr)

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility.

For a Traditional IRA (Filing Status Single or Head of Household):

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $60,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $60,000 but less than $70,000, you are entitled to a partial deduction, reduced by 55% for every dollar over the lower limit (or 65% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $70,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2014. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $114,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $114,000 and $129,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200. If your MAGI is $129,000 or more, you cannot contribute to a Roth IRA.

Posted on Jan 1st, 2014

by author: jblankenship.

Posted in: #noTOP, 2014 Tax Year, IRA, magi, Roth IRA.
Tagged: IRA · magi · roth ira

New Year’s Resolutions You Can Keep

Dec 30th, 2013

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Gym (Photo credits: www.mydoorsign.com)

This time of year it’s cliché to make resolutions for the coming year. Whether it’s to lose weight, stop a bad habit, or begin saving for retirement, many of us set these goals at the beginning of the new year. And then three weeks into the new year, we’ve left that goal astern – having changed nothing at all.

The problem is in how we set goals for ourselves. For example, we might make the bold statement that we want to lose weight. Often, that’s all there is to our resolution – but there’s much more to setting a goal than making a statement about it. There has to be a plan, and some specifics around the goal.

If the resolution is to lose weight, first of all you need to put some specifics around that goal:

I want to lose fifteen pounds in 2014.

Now, how are you going to do this? Is it going to happen all at once? One fine day you’ll wake up and you’re 15 pounds lighter? Of course not. But it’s that “presto” mentality that often derails us. We dive into our 15-pound goal with much gusto, going to the gym and working out four days a week for the first week. (Have you ever tried to get a treadmill at the gym during the first week of January? Impossible!)

Then, when we don’t see the automatic result after the first couple of weeks, we get discouraged, and we start to fall back into our old routines. Pretty soon we’ve given up on the goal altogether. How can you stop this cycle? Incrementalism.

Incrementalism

Instead of focusing on the year-long goal of losing fifteen pounds, look at the goal incrementally – set yourself monthly goals of losing 1¼ pounds each month. That’s a much more attainable goal, and not one that you have to spend hours on the treadmill each day to achieve. You might be able to achieve this by taking a walk for 20 minutes, three days a week, and pushing back from the table a bit sooner at mealtime. Before you know it, you’re incorporating the walks into your daily routine, and you’re not missing the extra helping of taters – and you’ve lost that month’s 1¼ pounds. Keep up the incremental changes through the year, and voila! you’ve met your yearly goal.

The trick is in looking at shorter-term increments to meet the larger goal. When we look at the larger goal only, we think we’ve got to do something heroic in order to meet the goal. By taking a short term view, we realize that smaller, incremental changes will help us to get to that short-term goal.

Let’s take saving for retirement as an example: In 2014 you have the goal of saving $5,500 to make a full IRA contribution toward your retirement. If we focus on the full $5,500 – that can be a significant amount to come up with. Instead, incrementalize the goal. Look at it in terms of your regular payroll cycle – every two weeks. That works out to $211 every paycheck.

That’s not insignificant, especially if you’re on a tight budget already, but it can be done. There are many places where we’re short-changing ourselves, paying for more things than are necessary. Most folks have more tax withheld from their pay than is necessary, which results in an over-large income tax refund. Making a change to your W4 filed with your employer will help to free up some extra cash to make up the $211 each payday that you are looking to save.

Other areas can be reviewed as well – rarely-used gym memberships, rented storage lockers (full of stuff we haven’t thought of for years!), magazine subscriptions that we don’t take time to read, and lunches out while working – all represent places where we can free up cash for the by-weekly $211 contribution to the IRA.

Insurance premiums – for homeowner’s and auto insurance – can be reduced by upping the deductibles on these policies. For example, a $1,000 deductible on your auto insurance policy (rather than $250) will result in a decrease in the cost of the policy. Most of the time, if you have minor damage to a vehicle (less than $1,000) you’re better off to pay for it yourself rather than submit a claim, since your insurance company will make up the difference (plus!) by increasing your premium in the coming years. The same is true for your homeowner’s policy.

Start going through your month-to-month expenses and finding those places to free up the cash on an incremental basis, and soon enough you’ll have that $211 per pay period freed up, and next thing you know you’ve saved that $5,500 for the year. This is the magic of incrementalism.

Keep in mind that the net result of your $5,500 contribution to the IRA, if it’s a deductible IRA, will be less than the full $5,500 after you’ve prepared your tax return. If you’re in the 25% marginal tax bracket, the net resulting cost is $4,125, since you are paying $1,375 less tax on your income by making the $5,500 contribution.

So – go forth and make your resolutions for 2014. But put some more planning into the process, and incrementalize the goals. You’ll have a much better chance of meeting them. And if you follow this advice, leave word below about your plans and your successes. We’d love to hear about them!

Posted on Dec 30th, 2013

by author: jblankenship.

Posted in: goals, IRA, retirement savings.
Tagged: goals · IRA · retirement savings

What’s in Store for 2014?

Dec 27th, 2013

by sraskie.

1 comment

A few weeks ago I was interviewed by a local business journal about our firm’s thoughts as to how the market would react in 2014 and how to best prepare for that reaction. Essentially, the journal was asking us to predict where the market would be in 2014.

Most of our clients know the answer I am about to write, which was, “No one can predict the direction of the market with any degree of accuracy.” “If that were the case, (as I told the interviewer) neither she nor I would be having this interview.” In other words, we’d be clinking our glasses on our respective tropical beaches because we’d have gotten filthy rich predicting and timing the moves of the market.

Markets are pretty efficient – meaning that the price of any particular stock in any particular sector, industry or country is generally priced based on all available information about that particular security. Think of it this way: Wall Street hires thousands of analysts to comb through the financials of thousands of publicly traded companies. So the information about those companies is known almost instantaneously and the prices of those stocks react instantly to any change in information.

Rhetorical questions:

If Wall Street analysts are good at forecasting the market and different stocks, why do they still work as analysts?

If Wall Street was any good a predicting the market, how did 2008 happen?

If I had to make a prediction for 2014 it would be this: Markets will rise and fall and be jittery and overly-emotional. They’re just like people – after all, that’s who drives markets anyway.

It can be very tempting to try to predict and time the markets and react emotionally. A few months ago we had the debt ceiling issue and there was worry that markets would crash. We recommended clients hold steadfast – and our clients are happy they did; as markets didn’t crash but actually reached new highs shortly afterward.

This wasn’t brilliance on our part – but sticking to our strategy of once we find the right mix of assets for a particular client, the majority of returns comes from that investment mix – not timing.

Not timing and not predicting prevents us from one of the major psychological flaws that can happen to money managers – confirmation bias. Say we predicted that 2014 was going to be a bullish year and we were right, now we would be tempted to enter 2015 thinking we had superior knowledge of the direction of the market instead of really admitting it was dumb luck.

The best way to predict is to own the market and diversify accordingly. This includes owning a well-diversified mix of index funds and or ETFs (which we do for our clients) and learn to manage emotions (which we try to do for our clients).

This allows our clients time to focus on things worth focusing on such as family, friends, goals and aspirations and frees them from the burden of trying to time their investments (something we admit we cannot do). It also allows us to focus more on building relationships with our clients and keeps our clients costs very low.

Posted on Dec 27th, 2013

by author: sraskie.

Posted in: #noTOP, fee-only, fiduciary, investing, investment.
Tagged: fiduciary · financial planning · income tax · investment · retirement savings · tax

Roth 401(k) Conversions Explained

Dec 23rd, 2013

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Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Earlier in 2013, with the passage of ATRA (American Taxpayer Relief Act) there was a provision to loosen the rules for 401(k) plan participants to convert monies in those “regular” 401(k) accounts to the Roth 401(k) component of the account. Prior to this, there were restrictions on the source of the funds that could be converted, among other restrictions. These looser restrictions apply to 401(k), 403(b) and 457 plans, as well as the federal government Thrift Savings Plan (TSP).

Recently, the IRS announced that guidance was available to utilize the new conversion options. As long as the 401(k) plan is amended to allow the conversions, all vested sources of funds can be converted, even if the participant is not otherwise eligible to make a distribution from the account.

This means that employee salary deferrals, employer matching funds, and non-elective payins to the 401(k) account can be converted to a Roth 401(k) account (as long as the plan allows it). Previously, only employee deferrals were eligible to be converted, and then only if the participant was otherwise eligible to make distributions from the 401(k) account, such as being over age 59½ (if the plan allows) or having left employment.

The converted funds will remain under the purview of the 401(k) plan’s distribution restrictions. Administrators of 401(k) plans can choose to amend their plan to allow these new conversion options or limit existing conversions as they see fit.

Any conversions will cause the converted funds to be included in your ordinary income for the tax year of the conversion, most likely triggering income tax on the additional ordinary income. If you don’t have funds outside the 401(k) plan to pay the tax on the conversion, the whole operation becomes less attractive, since you’re having to take a (presumably) unqualified distribution of funds to pay the tax on the conversion. In the future, qualified distributions from the Roth 401(k) account will be treated as tax-free (as with all Roth-type distributions).

For example, if you have a 401(k) account with $100,000 in it and you wish to convert the entire account to your company’s Roth 401(k) option. If your marginal tax bracket for this additional income is 25%, this means that you would have a potential tax burden of $25,000 on this conversion. If you have other sources to pull this $25k from, then you can convert the entire $100,000 over to your Roth 401(k) plan.

However (say it with me: “there’s always a however in life”), if you don’t have an extra $25,000 laying around to pay the taxes, you might need to withdraw the money from your 401(k) plan to pay the tax – which would also trigger the 10% penalty on the withdrawal plus tax which adds up to an additional $8,750. So now your conversion has cost nearly 34% overall – and the chance of such a conversion paying off due to higher taxes later becomes less likely.

And then there’s the additional rub: most 401(k) plans have significant restrictions on taking an in-plan distribution such as the one mentioned above to pay the tax. Your plan may allow the Roth 401(k) conversion distribution, but not the regular distribution while you’re participating in the plan, so you’re stuck – and will be stuck with a huge tax bill the following April.

Posted on Dec 23rd, 2013

by author: jblankenship.

Posted in: 401 k, 403 b, 457, Roth 401(k).
Tagged: 401k · 403b · 457 · roth 401 k

Charitable Donations

Dec 20th, 2013

by sraskie.

2 comments

This time of year many people find it in their hearts to give. They’ll give to friends, family, loved ones and charitable organizations that can help maximize the gift such as a church, charity, or foundation.

Last week I had written about the law of reciprocity and giving, and this week I’d like to mention how you can make your giving work in favor when tax season rolls around. As of this writing there are about 11 days left in 2013. Some individuals will be looking to see how much they can give or how much more they can give in order to receive the biggest tax deduction they can for charitable giving.

Of course, gifts to friends and family are not deductible, but there are times when gifts or donations are completely deductible and may be to the tax advantage of the person giving or donating the gift.

According to IRS Publication 526 there are some of the organizations that can receive and therefor qualify the giver for a potential tax deduction:

Churches, synagogues, temples, mosques, and other religious organizations
Federal, state, and local governments, if your contribution is solely for public purposes (for example, a gift to reduce the public debt or maintain a public park)

Author’s note: I get a kick out of “reduce the public debt”

Nonprofit schools and hospitals
The Salvation Army, American Red Cross, CARE, Goodwill Industries, United Way, Boy Scouts of America, Girl Scouts of America, Boys and Girls Clubs of America, etc.
War veterans’ groups

Source: http://www.irs.gov/pub/irs-pdf/p526.pdf

One great way to give this Holidays season is to make a donation to your favorite charity. Another great way (and something my wife and I practice) is when new gifts come in to either us or our children, we make a list (or stockpile – thank you grandparents!) of items our children no longer play with or my wife and I no longer need such as clothes, games (it was tough giving up Hungry, Hungry Hippos), or household items and donate them to our local Goodwill.

Many of the items donated are tax deductible and here at the BFP World Headquarters Jim and I have some excellent resources to put a true dollar amount on the items donated. Generally, the charitable deduction is going to be limited to 50% of AGI and in some cases 20% or 30% – depending on the type of organization or type of property given.

Should you want to make a donation of money there are many organizations such as your church, Goodwill, The Red Cross and others that will gladly accept the needed funds and happily issue a receipt for your records. The Red Cross has been busy with the typhoon relief in the Philippines and locally (just an hour or so up the road) with the efforts to help the town of Washington, IL recover from the devastating aftermath of an F4 tornado.

Finally, as the saying goes, “I’m not against paying taxes; just not more than my fair share” may also be in the thoughts of taxpayers this coming tax season. Many tax payers are happy to donate money and items to help reduce their tax burden and or give the money to an organization they feel may be more efficient and astute and allocating their hard earned money – rather than paying the money directly to Uncle Sam via a higher tax rate.

Posted on Dec 20th, 2013

by author: sraskie.

Posted in: 2013 tax year, charitable contribution, fiduciary, financial planning, gift tax, itemized deduction, itemized deductions, tax.
Tagged: charitable contribution · income tax · income tax credit · tax · tax preparers

Book Review: How Much Money Do I Need to Retire?

Dec 16th, 2013

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This book, by Todd Tresidder, cuts through much of the extra “stuff” that you find about retirement planning, to help you do some really useful, back-of-a-napkin retirement planning for yourself.

Tresidder, who has a practice coaching folks with financial planning based on his concepts, developed his planning methods in real practice for himself. Tresidder “retired” from his regular job at the age of 35 using these tactics, and has been helping other folks to use these methods in planning for retirement ever since.

In this book, Todd goes through the conventional methods of planning for retirement savings, which includes gathering some information that is impossible to calculate:

How much money will you need every year for the rest of your life?
What will be the rate of inflation?
When will you die? Your spouse?
What rate of growth will your investments experience over your lifetime?
What will be the sequence of returns that your investments achieve?
When will you and your spouse retire?

In reviewing these questions, Tresidder points out how difficult it is to develop these numbers for yourself, and then he points out flaws in the conventional methods of determining or estimating these numbers.

Upon reaching a conclusion about the problems with the conventional method of retirement planning, the author then goes on to lay out his methods for determining the amount of money required for you to retire. His methods are definitely different from the conventional methods, and he gives his reasons for believing that they will provide a useful gauge for you. I don’t disagree with his findings – I believe he has some very good information to pass along here.

One example of Tresidder’s decision-points is determining an appropriate withdrawal rate from your invested assets. Tresidder says that the primary factor to use in determining the sustainable withdrawal rate on your investments is the price/earnings ratio in the overall market as of your date of retirement. The higher the PE ratio, the lower your sustainable withdrawal rate. I won’t ruin the surprise by explaining it all here, you should read the book if you are interested.

One interesting factor about this book is that Tresidder takes great pains to point out that he believes any planning that is based on past information has flaws. At the same time, his sustainable withdrawal rate conclusion depends entirely upon a back-test of historical information. I believe that this anomaly just points out that you must have some historical information to work from – and all methods of planning for the future have shortfalls.

I think this is a great book for anyone who is looking for a do-it-yourself method for planning your retirement. I would also use other methods to test your results against, since all methods of predicting the future have flaws. Using a few options to test against one another is a great way to help ensure your success in financial dealings.

Posted on Dec 16th, 2013

by author: jblankenship.

Source: http://www.militaryonesource.mil/pfm/saving-and-investing-basics?content_id=269225

Posted in: Book review, financial planning, retirement plans.
Tagged: book review · financial planning

Saving in The Military

Dec 13th, 2013

by sraskie.

No comments yet

If you or a loved one are in the military and are about to be deployed you may be able to take advantage of a special savings account that is specifically for our Armed Forces members that are deployed in a combat area.

The Savings Deposit Program (SDP) is a unique savings account for service members that are deployed in combat zones and allows the service member to allocate some, most, and in some cases all of their combat pay to a savings account. The maximum that can be contributed to the savings account is $10,000 per deployment and that money grows at 10%, yes 10%.

Eligible service members include:

You are deployed to an area in support of Operation Enduring Freedom/Operation Iraqi Freedom (OEF/OIF), or other contingency operations where you are receiving HFP/IDP.
You serve in the combat zone or in direct support of a designated combat zone for more than thirty consecutive days.
You serve in the combat zone for at least one day for three consecutive months. This situation would more than likely occur if you are in a special operations unit.
You are serving in OEF/OIF in the area of the Arabian Peninsula including the Persian Gulf (the Arabian Peninsula, the Strait of Hormuz, or the Gulf of Oman), Bahrain, Iraq, Iran, Israel, Jordan, Kyrgyzstan, Kuwait, Lebanon, Oman, Pakistan, Qatar, Saudi Arabia, Tajikistan, Turkey, United Arab Emirates, Uzbekistan, and Yemen.

Generally, the service member may begin saving to the account after 30 days of deployment to the combat zone and once he or she returns home, can allow the money to grow in the account for an additional 90 days. The service member can choose to take it our earlier.

Although the thought and anxiety (as I can only imagine) of deploying must be hard on the service member and their families, they can find a silver lining in the SDP – a great way to save combat pay at 10%.

More information can be found at www.militaryonesource.mil and http://www.dfas.mil/dfas/militarymembers/payentitlements/sdp.html

Posted on Dec 13th, 2013

by author: sraskie.

Posted in: military savings, saving, Thrift Savings Plan, TSP.
Tagged: military savings account · SDP

2014 Mileage Rates for Tax Deductions

Dec 9th, 2013

2 comments

Image courtesy of David Castillo Dominici at FreeDigitalPhotos.net

Recently the IRS published the mileage rates for various classes of deductible miles driven for tax year 2014. This amount is used in place of managing, collecting and tabulating the exact costs involved in operating a vehicle throughout the year.

In order to use the standard mileage rates, you just track the miles you drive for each purpose (see below) and then compute the deductible mileage on your tax return when you file it the following year. Keep a log of the miles driven and the purpose of the trip to substantiate the deduction. This can be as simple as a paper calendar with your log notes, or more elaborate (check around, I bet there are apps out there for your iphone or other gadgets to do this).

You have a choice to either use the standard rate or the actual expense of operating your vehicle. In either case, parking and toll costs associated with the applicable mileage can be an additional deductible expense.

Business Mileage

For business purposes, you’ll take the deduction on your Schedule C as a sole proprietor, on Form 1065 for a partnership, or form 1120 as a corporation, along with your other business expenses. Commuting from your home to your place of work is not allowed as a mileage deduction, but travel from your home or office to a temporary work location (for example, as a contractor) or to a client’s location (e.g., sales) can be deductible mileage.

As an employee, unreimbursed mileage (same restrictions as above) can be deducted using Form 2106 (Unreimbursed Employee Business Expenses), carrying the deductible expense to your Schedule A, where it will be subject to the 2% floor, along with your other miscellaneous expenses.

The rate for business mileage for 2014 is 56 cents per mile. This is a reduction of ½¢ per mile over the 2013 rate.

Medical/Moving Mileage

Certain mileage expenses for auto use when you are moving to a new home can be deducted, using Form 3903, Moving Expenses. Travel is limited to one trip per person, however, each member of the household can move separately and at separate times. All of the other requirements for moving expenses must be met (time and distance test, and work test).

In addition, mileage driven for medical purposes can be deducted on your Schedule A along with your other medical expenses, subject to the 10% floor and AGI limits (7.5% floor if you’re age 65 or older). This includes travel for any medical purpose, as long as it’s a legitimate medical purpose. An example would be to track your regular visits to the doctor throughout the year and deduct the mileage from your income for tax purposes.

The rate for both types of mileage for 2014 will be 23.5 cents per mile, also down by ½¢ per mile over the 2013 rate.

Charitable Mileage

If you use your personal vehicle for charitable purposes, such as hauling your items to donate to the Goodwill store, you can deduct the mileage along with your other non-cash charitable contributions on Schedule A.

The standard mileage rate for charitable purposes for 2014 is 14 cents per mile, which is unchanged from 2013.

Posted on Dec 9th, 2013

by author: jblankenship.

Posted in: #noTOP, 2014 Tax Year, charitable contribution.
Tagged: charitable contribution · tax deductions

The Law of Reciprocity

Dec 6th, 2013

by sraskie.

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As your wealth accumulates and continues to grow, there is a law I want you to be mindful of and respect. You don’t have to follow it, but believe me, it will pay you more than any bank, investment, mutual fund, or stock could ever do. I’m talking about the law of reciprocity. Some call it tithing, luck, karma, reaping what you sow, give and take. Whatever you want to call it, it works. And I highly recommend that you do it.

Following the law of reciprocity means giving a little of what you make. It could mean giving to your favorite charity, your church, a friend in need, a homeless shelter, or any other cause or helpful service in your community. The point is to give. And it will come back to you in droves. Don’t ask me how it works, it just does. I promise you that. Consider this for a moment: money is called currency for a reason. Like any current, it was meant to flow, to travel, to move. And the more you give, the more comes back to you.

Posted on Dec 6th, 2013

by author: sraskie.