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

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Stibnite-121128 (Photo credit: Wikipedia)

Oftentimes when folks are considering leaving employment, the decision to rollover 401(k) to an IRA is a no-brainer. After all, why would you leave your retirement funds at the mercy of the constricted, expensive investment choices and other restrictions of your old company’s 401(k) administrator, when you can be free to invest in any (well, most any) investment you choose, keeping costs down, and completely within your own control in an IRA?

Well, for some folks this decision isn’t the straightforward choice that it seems to be, for the very important reason of access to the funds before reaching age 59½ (see this article for more info about The Post-55 Exception to the 10% Penalty for Withdrawals from 401(k)). Since only within a 401(k) (or other employer-sponsored plans) can you take advantage of this early withdrawal exception, it might be in your best interests to think about your rollover choice before automatically rolling over into an IRA. This is only important if you are under age 59½, of course – and much more important if you’re under age 55 when you leave your old employer.

Why it’s important

If you are under age 59½ and you have a sudden need for the funds that you’ve saved over the years in your old 401(k), and you’ve rolled over the funds into an IRA, you will have to pay a 10% penalty in addition to the ordinary income tax on your withdrawal, unless you meet one of the other exceptions to the early withdrawal penalty.

However, if you rollover the old 401(k) into another 401(k) (or 403(b), et al), you will preserve your opportunity to withdraw those funds if you leave employment at the job associated with the new 401(k) plan after you’ve reached age 55.

How can this work in your favor?

If you start work with another employer, as long as the new employer offers a 401(k) plan that accepts “roll-in” of 401(k) plan money and IRAs, you can rollover those old plans into the new plan, which will keep your options for access open should you need them upon leaving employment after age 55.

That’s not really under your control so much, is it? How about this: as you’re leaving employment at the old employers, if you have the opportunity to start your own business – such as consulting, or perhaps some part-time business – you can start your own Solo 401(k) plan and rollover the funds from your old plan(s) and IRAs if you have them. Then, on the chance that you’d need the money later on after you’re at least age 55 (but not yet 59½), assuming that you can end your employment in your consultancy or other self-employment activity, you can then have access to those funds in your Solo 401(k) plan without penalty.

Some Cautions

If you go the self-employment route, you need to make sure that the business that you’ve created is valid and legitimate. The IRS doesn’t at all take this lightly – if your business isn’t making money (or at least validly attempting to make money), your actions in creating a 401(k) plan and everything else associated with the business can be considered fraud.

This also applies to the dissolution of the business in order to have access to the retirement funds. If it’s deemed that the only reason you did this was simply to have access, this action could be considered fraud as well. This could come about if you dissolved the original business and then shortly afterward started a similar business again, for example.

The Downside

Of course, as with attempts to “work the system” in your favor, there are usually downsides to the matters. In addition to the concerns about fraud mentioned before, there is the matter of control. If you roll-in your funds from the old employer to another 401(k) plan and you remain employed with that new job past age 59½ you will give up access to those funds unless the new plan allows in-service distributions.

Say for example you left an old company at age 50 and started work with a new company, rolling over your money from old employer’s 401(k) plan to the new plan. Then you work until age 65 at the new employer. Unless the new employer’s 401(k) plan allows in-service distributions, you can’t get to the funds until you retire at age 65. Had you left the money at the old employer (or rolled it over to an IRA) you would have had access to the money from the old plan free of penalty or restriction once you reached age 59½.

What do you think? Do you see any other downsides to this type of plan? How about other ways to use these rules to your advantage? I’d love to see your thoughts on the subject – leave a comment below.

Posted on Sep 18th, 2013

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: 401k, 403 b, Early Distribution, IRA, rollover.
Tagged: 401k · early retirement · IRA · rollover

Did the Advent of 401(k) Plans Hurt Americans?

Sep 17th, 2013

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The 87-vehicle pile up on September 3, 1999 (Photo credit: Wikipedia)

There’s been quite a bit of press lately about the recent Economic Policy Institute study (see this article “Rise of 401(k)s Hurt More Americans Than It Helped” for more), which indicates that the 401(k) plan itself is the cause of American’s lack of retirement resources. I think it has more to do with the fact that the 401(k) plan (and other defined contribution plans) were expected to be a replacement for the old-style defined benefit pension plans, and the fact that those administering the retirement plans did little to ensure success for the employees.

Traditional defined benefit pension plans didn’t ask the employee to make a decision about how much to set aside – this was determined by actuaries. Then the company made sure that the money was set aside (in most cases) so that the promised benefit would be there when the employee retires. In the world of 401(k) plans, the employee has free choice to decide how much and whether or not to fund the retirement plan at all. Human nature kicks in, and the nearer term needs of the employee win out over long term needs – of course the long-term requirements get short shrift!

It’s the same as when we turn over the car keys car to a 16-year-old. Up to this point, the child has just ridden along, not having to know anything about rules of the road, car maintenance, or paying attention. You wouldn’t just toss Johnny the keys and say “You know where you want to be. Do your best to get there!” Of course you’re going to make sure that he has all the training necessary to operate the vehicle safely, and that he knows when to put fuel in the car, as well as that he knows how to navigate to his destination on time.

If the playing field had been level – that is, if when 401(k)-type plans were introduced as replacements for pension plans that there was no choice regarding participation and funding level, we’d see a much different picture. I don’t think education alone is the answer, because the importance of continual funding is so difficult to comprehend. Forced participation runs counter to the “American Way”, but that would have changed our outlook dramatically.

The problem isn’t the 401(k) plan itself – it’s that when companies dropped pension plans in favor of 401(k) plans they didn’t provide employees with the correct message about the importance of participation. Free will is a good thing, don’t get me wrong. But I think employers could have done much, much more to emphasize the importance of participation, of making long-term investment decisions, and of providing for your future with today’s earnings.

It wasn’t the account that is the problem, it’s in the implementation.

Posted on Sep 17th, 2013

by author: jblankenship.

Posted in: 401k, 403 b, delayed benefit, investing, qrp, qualified retirement plan.
Tagged: 401k · 403b · qrp

Increase Your Income Tax Knowledge

Sep 16th, 2013

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Image courtesy of debspoons / FreeDigitalPhotos.net

If you find yourself stymied by the Income Tax Code (more power to you if you don’t!) and you’d like to get a better understanding of this very important area of your financial life, the IRS has many resources to help you improve your knowledge of taxes. At the risk of sounding churlish, I suggest that if you’re an incurable insomniac these resources can also be used in lieu of the strongest over-the-counter sleep aid drug with satisfactory results and few (if any) side-effects.

The IRS recently published their Summertime Tax Tip 2013-21, which describes several of the resources available to help you gain a better understanding of income taxes. The text of the Tip follows, in its entirety:

Explore a Quick and Simple Way of Understanding Taxes

If you’re a student or teacher, the summer months may be a nice break from class, but they’re also a good time to learn something new. A quick and simple way to learn about taxes is by using the IRS Understanding Taxes program.
The program is a free online tool designed in partnership with teachers for classroom use. The interactive tool is a great resource for middle, high school or community college students. However, anyone can use it to learn about the history, theory and application of taxes in the U.S.

Here are seven reasons why you should consider exploring the Understanding Taxes program:

1. Understanding Taxes makes learning about federal taxes easy, relevant and fun. It features 38 lessons that help students understand the American tax system. Best of all, it’s free!

2. The site map helps users quickly navigate through all parts of the program and skip to different lessons and interactive activities.

3. A series of tax tutorials guide students through the basics of tax preparation. Other features include a glossary of tax terms and a chance to test your knowledge through tax trivia. Interactive activities encourage students to apply their knowledge using real world simulations.

4. Understanding Taxes makes teaching taxes as easy as ABC:

Accessible (web-based)
Brings learning to life
Comprehensive

5. It’s easy to add to a school’s curriculum. Teachers can customize the program to fit their own personal style with lesson plans and activities for the classroom. They will also find links to state and national educational standards.
6. The program is available 24 hours a day. All you have to do is access the IRS website and type “Understanding Taxes” in the search box.

7. There are no registration or login requirements to access the program. That means people can take a break and return to a lesson at any time.

You can use the Understanding Taxes anytime during the year. The IRS usually updates the program each fall to reflect current tax law and new tax forms.

Additional IRS Resources:

Understanding Taxes
IRS YouTube Videos: English | ASL

Posted on Sep 16th, 2013

by author: jblankenship.

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Posted in: income tax, irs.
Tagged: income tax · irs

Opportunity Cost

Sep 13th, 2013

by sraskie.

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Nearly every day in our lives we experience trade-offs and make choices affecting whether or not we’ll do something, buy something or do nothing and buy nothing. Some of us will choose to walk rather than drive, some will choose to pack a lunch rather than dine out, some of us will choose to save money while others will choose to spend it.

These trade-offs are what can be referred to as opportunity costs; meaning what we’re giving up in order to take advantage of another availability opportunity.

Financially, we make the choices all the time; the choice to dine out versus saving the extra money towards retirement; the choice to not save in our employer’s retirement plan so we can have more money to spend today. These opportunity costs can add up. Here’s why.

When a person makes the choice to not save in order to spend for today, they are missing the opportunity for their money to grow and compound over time towards a nice retirement nest egg. Their opportunity costs may be giving up a nicer retirement for immediate gratification today. For the person who decides to eat lunch every day at a restaurant rather than packing a lunch is potentially giving up the opportunity to save more for retirement, their children’s college or another goal that they “wish” they could achieve, but just can’t “afford”.

The truth is that we prioritize what we can afford and what we think we can afford. A great example is the person that says they can’t afford to save for retirement but they can afford to pay over $100 for their smartphone plan, $75 for cable TV, and daily coffees and lunches. This is an example of opportunity costs. In this case the person is willing to forgo saving for retirement in lieu of watching TV, talking on the phone and drinking coffee.

It doesn’t mean that these things are bad; it simply means what a makes a priority becomes what they can afford.

The crux of this article is to help our readers think about their own opportunity costs and what they’re giving up in choosing another alternative. When it comes to saving money and being able to afford retirement, is there anything we can give up today in order to afford our future?

Posted on Sep 13th, 2013

by author: sraskie.

Posted in: retirement, retirement accounts, retirement benefits, retirement home, retirement plan, retirement plans, retirement savings, retirement savings plans.
Tagged: retirement accounts · retirement plan · retirement savings

Who Will Be The Biggest Benefactors of Obamacare?

Sep 9th, 2013

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Insurance (Photo credit: Christopher S. Penn)

According to data cited in a recent WSJ article (The Health-Care Overhaul: What You Need to Know), there is a specific demographic that should benefit the most from the up-coming institution of the Affordable Care Act’s changes to the healthcare system. If you’re wondering why this writing seems a bit smug, it’s because I’m one of these projected benefactors: folks between age 50 and 64.

Why is this group deemed the most likely to benefit?

It has to do with some current realities about our nation’s health and the way that the (current and proposed) health insurance marketplace works. First of all, folks in this age group who are not covered by an employer plan, or are not covered by Medicaid, must find insurance in the private marketplace. And the reality is that folks who’ve seen half a century of life or more are typically in poorer health than younger people, thus having greater need for health insurance coverage. Plus, if you’re in that age group and you find yourself unemployed, whether by early retirement or layoff, AND you have a pre-existing condition, finding health insurance at all can be nearly impossible. According to the WSJ article, in 2012 20% of this group had no health insurance at all, and up to 29% had been rejected for insurance (2008 figures).

Under the Affordable Care Act (aka, Obamacare), these folks will have access to health insurance without the possibility of denial due to health or any other reason.

Secondly, given the income caps that have been legislated and the tax credits associated, the insurance is expected to be much more affordable in the brave new world. Premiums for older adults are to be capped at no more than 3x the rate of younger policyholders.

One way that this might not work out as intended is if the younger folks (not covered by an employer plan or Medicaid) opt out of policies in favor of the tax penalty (which will eventually be the greater of $695/year or 2.5% of income). If that were to happen, the overall cost of health coverage under “marketplace” plans could skyrocket. If younger, healthier folks are opting out of insurance coverage, all that would be left in the plans would be young, unhealthy folks and the other non-covered group up to age 64 – and the cost of covering this group could be enormous.

Honestly, I don’t know what will happen, and whether anyone will actually benefit from the implementation of the Affordable Care Act. I expect that many folks will have health insurance coverage when before they didn’t, but how the costs will work out is up in the air.

What do you think? Share your thoughts in the comments section below.

Posted on Sep 9th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: #noTOP, 2013 calendar year, Affordable Care Act, early retirement, health insurance, health plans, high deductible health plan, Obamacare, PPACA.
Tagged: Affordable Care Act · early retirement · health insurance · Obamacare · PPACA

Review Tax Withholding In Time to Fix Problems

Sep 9th, 2013

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Income Tax Sappy (Photo credit: Wikipedia)

At this time of year, with a few months remaining on the calendar, it can be a good time to review your income and withholding to ensure that you will have enough in tax payments to ensure that you don’t get hit with underpayment penalties next year when you file your return. This can be a relatively simple activity – all you need to do is gather your most recent pay-stubs and all of your other income information together and produce an estimate of your tax burden. You’ll then compare the estimated tax with the amount of withholding and estimated tax payments that you’ve made up to date.

To do the estimates, you can use the worksheets available within Form 1040-ES, as well as the IRS’s Withholding Calculator online tool. (click the links to go to the tool or form)

If your withholding is significantly less than the estimated tax on your income, you have a few months remaining in the year to make an adjustment to your withholding or make an estimated tax payment (by September 16 for income through the end of August), in order to make up the difference.

On the other hand, if your withholding is significantly more than the expected tax, you can make adjustment to your withholding, decreasing the amount withheld. This effectively gives you a raise in take-home pay for the remainder of the year.

Either way, it’s a good idea to try to bring your withholding very close to the amount of tax you’ll owe – the best of all circumstances would be for you to owe nothing and receive no refund, since you won’t have to come up with extra money to pay tax, and you also aren’t giving the IRS a free loan of your money.

The IRS recently produced their Summertime Tax Tip 2013-25, detailing the important facts about how to review your withholding. The actual text of the Tip follows:

Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Some people are surprised to learn they’re due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it’s a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.

Here are some tips to help you bring the tax you pay during the year closer to what you’ll actually owe.

Wages and Income Tax Withholding

New Job. Your employer will ask you to complete a Form W-4, Employee’s Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime.
IRS Withholding Calculator. This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

Estimated tax. This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
Change in Estimated Tax. After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
Additional Medicare Tax. A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. For additional information on the Additional Medicare Tax, see our questions and answers.
• Net Investment Income Tax. A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. For additional information on the Net Investment Income Tax, see our questions and answers.

See Publication 505, Tax Withholding and Estimated Tax, for more on this topic. You can get it at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

Posted on Sep 9th, 2013

by author: jblankenship.

Posted in: estimated tax, irs.
Tagged: estimated tax · irs · withholding

Avoid the Freshman 15

Sep 6th, 2013

by sraskie.

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“15” (Photo credit: Lincolnian (Brian))

It’s that time of year again when students either embark on a new journey from high school to college or return to undergrad studies from their freshman, sophomore, or junior summer into a new year of college. It’s also the time when bad habits, if left unmonitored, can result in what’s called the Freshman 15 – debt and weight gain.

Historically, the Freshman 15 meant that a student settled down in college and in the first few months gained weight due to poor eating habits, stress, and perhaps alcohol consumption after turning 21.

Today, I’ve expanded the Freshman 15 to also mean 15% – of credit card debt. Like consuming food, consuming money and on credit can lead to bad habits and have negative consequences.

I can remember when I was a freshman in college and the credit card offers came pouring in. What an amazing display of copywriting! It was as if these credit card offers were written for me and me only. The print seemed to understand my situation, the words made perfect sense. Unbeknownst to me at the time, the credit card companies pay their copywriters hundreds of thousands of dollars to write that copy. Why? Because it sells. And sell me it did.

Long story short, had I not caught myself I would still be in credit card debt – at a rate of 15%.

So how does a person avoid the 15? Here are some simple steps that can make it easier to avoid the added weight and interest.

Pay yourself first. It doesn’t matter if you get student loans, scholarships, work study or grants, put a little bit aside and save that money. You’ll be surprised at what effect it has on your behavior. As that amount grows you’ll want to save more and spend less.
Carefully consider (as many times as you have to) applying for a credit card. Ask yourself why you need it. It doesn’t mean credit cards are bad, but if you don’t need one don’t apply. Chances are if you have to buy something on credit you couldn’t buy with cash, you can’t afford it.
Talk to your parents about credit. They know more than you think.
Parents – talk to your kids about credit. They’ll listen more than you think.
Establish a budget.
Avoid dining out as much as possible.
Go grocery shopping when you’re full, not when you’re hungry. You’re less likely to buy food you don’t need when you’re full.
If you get a credit card, consider a card with no annual fees, and a low credit limit – just for emergencies.
If you get a credit card, pay off your balance monthly. Never spend more than you can pay off in one month.
Have an accountability partner. Typically this could be your parents that have access to your account and can help monitor and ask questions. In many cases, parents cosign for their childrens’ first credit card.
Establish a schedule. Most college students have their class schedules for the semester. Consider working around that schedule to plan meals at the school’s cafeteria or pack a lunch and snacks if you’ll be on campus and away from your dorm or apartment most of the day. This will help reduce the urge to binge eat and spend when you’re hungry.
Go home for holidays and breaks. You’ll appreciate the good food (and bed) you once got for free.
Join the college’s gym. Most colleges have their exercise facilities for students free of charge or for a small fee and generally the hours are more than accommodating.
Walk or bike to class. If you have to drive, park as far away as possible and walk. Usually parking farther away means no parking meters. Use the time walking or riding to enjoy an audio book or recorded lecture from class.
Take an exercise or nutrition class. You have to get these credits anyway, might as well use them to your advantage.

Remember that when college is finished most students and parents may have considerable student loan debt. It makes no sense to compound that with more debt through credit cards. Use those four years in college to establish good eating and spending habits and you’ll be that much more prepared for success after you graduate.

Posted on Sep 6th, 2013

by author: sraskie.

Posted in: budgeting, education, education expenses, fafsa, financial aid, lifetime learning credit, teenager, tuition and fees.
Tagged: college · college tuition · credit card debt · tax credits

Can Both Spouses File a Restricted Application for Spousal Benefits Only?

Sep 4th, 2013

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Couple married in a shinto ceremony in Takayama, Gifu prefecture (Photo credit: Wikipedia)

Note: with the passage of the Bipartisan Budget Bill of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

In the wake of my post last week, Can Both Spouses File and Suspend?, I received multiple iterations of the same question, which is the topic of today’s post: Can Both Spouses File a Restricted Application for Spousal Benefits Only?

Unlike the original situation where technically it is possible to undertake but the results would not be optimal, in this situation it’s not technically possible. (The one exception is in the case of a divorced couple. For the details on how it works for divorcees, see this article: A Social Security Option Strictly for Divorced Folks.)

The way the restricted application for spousal benefits works is that there are three rules that must be met:

You must be at or older than Full Retirement Age (FRA)
Your spouse must have filed for his or her own retirement benefit – does not have to be actively receiving benefits, he or she could have filed and suspended
You must not have filed for your own retirement benefit

As you can see, #2 & #3 cannot both be done by the same person in the couple. It is not possible to (#2) file for your own benefit, enabling your spouse to file a restricted application and (#3) not file for your own benefit, enabling you to file a restricted application.

Therefore, only one of the members of a currently-married couple can file a restricted application for spousal benefits.

Posted on Sep 4th, 2013

by author: jblankenship.

3 comments already - add to the conversation!

Posted in: #noTOP, file and suspend, restricted application, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: restricted application · Social Security · spousal benefit

Same-Sex Joint Filing

Sep 3rd, 2013

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Joint (Photo credit: Chris KWM)

One result of the strike-down of DOMA is that legally-married same-sex couples will now be required to file federal tax returns as marrieds – either married-filing-jointly or married-filing-separately. This ruling takes effect on September 16, 2013. This means that, regardless of how the members of the couple filed their returns in the past, they only have the MFJ or MFS filing statuses to choose from for returns filed on or after September 16, 2013.

For couples who have not filed a return for 2012, now is the time to review whether filing as Single status provides a superior result (lower overall taxes) versus the MFS or MFJ option. If filing Single or Head of Household works out better for the couple, the (presumably) extended 2012 tax return must be filed before September 16, 2013 in order to utilize a Single or Head of Household filing status. After that date, the Single and Head of Household filing statuses will no longer be available.

State tax return filing status will still rely on the state’s law: if same-sex marriages are not recognized as “legal”, then the couple will still not be allowed to use a “married” status, regardless of whether the marriage was performed in another state where same-sex marriages are recognized.

In addition, couples in civil unions or domestic partnerships are still not allowed to use the “married” options – they must use either the Single or Head of Household filing status, whichever pertains to the situation.

A couple of technical notes:

Even though, since DOMA was invalidated, meaning that legally-married same-sex couples are retroactively considered to be legally married at the federal level, it is not expected that these couples will be required to re-file tax returns using one of the married statuses.
On the other hand, legally-married same-sex couples may benefit by filing using one of the married statuses, and it is my understanding that amended returns may be filed in those cases, within the statute of limitations for such filings. If a refund is included, this means that most 2010 and later returns could be amended after the September 16, 2013 date. The latest date for filing a 2010 amendment with a refund is October 15, 2013.

Posted on Sep 3rd, 2013

by author: jblankenship.

Posted in: 2013 calendar year, 2013 tax year, DOMA, head of household, income tax.
Tagged: DOMA · filing status · income tax

What is Risk Tolerance?

Aug 30th, 2013

by sraskie.

2 comments

Happy Tums

What is risk tolerance and why is it important to investors? As an investor you’ve probably been asked this question by yourself, or your financial advisor. It’s not an easy question to answer and not a question that can be answered with one word or a quick sentence.

Risk tolerance is simply a particular investor’s appetite for risk. Some investors have little appetite for risk and their stomach churns when they think about losing money in the market. Generally these investors are considered risk averse or risk intolerant.

Other investors aren’t really concerned about the ups and downs of the market and are willing to accept these market gyrations in or to receive the benefit of potentially higher returns. This is called the risk/return trade-off. In order for investors to receive higher returns they generally have to be willing to accept more risk for those returns. In other words, these investors are risk tolerant.

So why is this concept important for investors? It’s important for a number of reasons. The first is that it helps the investor and their advisor properly line up the correct investment portfolio for that particular investor. A risk averse investor will generally be more at ease in a low-risk portfolio with few, if any equities, more exposure to high-quality bonds and cash. A risk tolerant investor would be more tolerant of risk – such as more exposure to equities, and riskier assets.

But determining what an investor’s appetite for risk isn’t that easy. There are a number of risk tolerance questionnaires used by various companies and professionals to help investors narrow down their true tolerance. This is hard to do depending on the day – literally!

The reason why is because on any given day the market could be way up, way down, or flat. Someone who is really risk averse may feel risk tolerant in a bull market (isn’t everybody?), but that same person will run for the antacids the second the market drops; which leads to this point:

Investors’ real appetite for risk appears in bear markets.

So what can investors do? Find a professional that asks a lot of questions and takes the time to get to know you. Yes, a risk tolerance questionnaire can be used and is a good thing, but the questionnaire should be only a piece of the conversation. Investors can ask themselves questions too.

Imagine you have $100,000 invested and in two weeks it grows to $150,000. How do you feel? In another two weeks it plummets to $75,000. Now how do you feel?

You answer will determine nodding in expectation or running to the medicine cabinet.

Posted on Aug 30th, 2013

by author: sraskie.

Posted in: financial planning, investing, investment, investment diversification.
Tagged: fiduciary · financial planning · investment

Can Both Spouses File and Suspend?

Aug 28th, 2013

8 comments

portrait of C. A. Rosetti (Photo credit: Wikipedia)

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

This question continues to come up in my interactions with readers, so I thought I’d run through some more examples to illustrate the options and issues. The question is:

Can both spouses file and suspend upon reaching Full Retirement Age, and collect the Spousal Benefit on the other spouse’s record, allowing our own benefit(s) to increase to age 70?

Regarding file & suspend and taking spousal benefits, although technically both of you could file and suspend at the same time, only one of you *might* receive spousal benefits at that point. The reason is that once you file (regardless of whether you suspend) the spousal benefit is then limited to the amount over and above your own Primary Insurance Amount (PIA), up to 50% of your spouse’s PIA. (Remember, PIA is the amount of benefit that you would receive at exactly Full Retirement Age.)

For example, if you and your wife have PIAs of $2000 and $800 respectively and you both file and suspend, your wife could file for spousal benefits of $200 (half of your PIA minus her PIA equals $200). However, you would not be eligible for a spousal benefit since half of your wife’s PIA minus your PIA is a negative number.

Now, if we change the numbers so that you have a PIA of $2,000 and your wife’s PIA is $1,200 and both of you file and suspend, neither of you would be eligible for a spousal benefit. Half of either of your PIA’s is less than the PIA of the other, so no spousal benefit is available if both file and suspend at the same time.

Typically this works out best if only one spouse files and suspends, usually the one with the greater PIA, and the other spouse files a restricted application for spousal benefits only. Using my first example numbers, if you filed and suspended and your wife filed a restricted application for spousal benefits only, she would be eligible for a $1,000 spousal benefit, and both of your own benefits would accrue Delayed Retirement Credits (DRCs) up to age 70. At that point, again, using the first example numbers, you would be eligible for a benefit of $2,640, and she would be eligible for a benefit of $1,056.

Another way this could be done would be for your wife (again, working with the first numbers) to file for her own benefit at Full Retirement Age, receiving $800 per month. Then you could file a restricted application for spousal benefits only, and receive half of her PIA, or $400 per month. You’d continue to receive this for four years until you reach age 70, at which point you would file for your own benefit, enhanced by the DRCs to $2,640. At this point your wife could file for spousal benefits, increasing her own benefit to half of your PIA, or $1,000. This second option actually gives you more money over the four-year span from FRA to age 70, but your wife’s benefit would be limited to a maximum of $1,000 (rather than $1,056) for her lifetime or yours, whichever is shorter.

At any rate, hopefully this resolves the question once and for all – while technically both spouses can file and suspend at the same time, there’s not a lot of reason to do so as the spousal benefits would only be available to one of them, at most.

If you have other situations that you’d like to review, leave a comment below and I’ll do my best to answer promptly.

Posted on Aug 28th, 2013

by author: jblankenship.

8 comments already - add to the conversation!

Posted in: #noTOP, file and suspend, restricted application, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: file and suspend · restricted application · Social Security · spousal benefit

Book Review: The M Word

Aug 26th, 2013

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Subtitle: The MONEY TALK Every Family Needs to Have About Wealth and Their Financial Future

This book, by Lori R. Sackler, presents to us a very insightful overview of the types of conversations that families need to have with one another – beginning with spouse to spouse, following with intergenerational conversations – about money topics. These conversations are critical to the success of most all financial plans that require some interaction between two or more people.

Mrs. Sackler has a great deal of experience with the topic, having for several years hosted a radio program dealing specifically with this subject. It is this wealth of experiences, coupled with her own clients’ experiences, that really delivers a wonderful array of knowledge about the process.

Throughout the book are excellent examples, which provide the reader with a portrait of each concept, in the flesh as it were. The book walks you through the various types of transitions that require a Money Talk – including a change in financial circumstances (positive or negative), such as when a job change occurs or a windfall is received, when a marriage or re-marriage occurs, when planning for retirement, end of life, or caring for an aging parent. These transitions can bring out the worst in family members, or they can be opportunities to successfully pass the milepost with little stress. Too often when passing these transitions it’s the stressful reaction of others that causes the planning to go awry – and according to research, it is conversation (or lack of) that causes the stress.

The author then goes on to explain how preparation and planning are important to the success of the communication – and then explains a five-step process for successful communication in all types of transitions.

I found this book to be an excellent guide for the communication process, and the shining star is Mrs. Sackler’s examples. The real-life situations help to provide the reader with illustration of the process that can easily be put into place in similar circumstances. I highly recommend this book for any advisor who finds himself or herself in the position of helping clients with this sort of transition.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Aug 26th, 2013

by author: jblankenship.

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

A Stable Pyramid

Aug 23rd, 2013

by sraskie.

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Pyramids (Photo credit: Mathew Knott)

One of the basic fundamentals regarding financial planning and saving money revolves around what is known as the financial planning pyramid. You may hear other names such as the wealth management pyramid, the financial house, etc. You may also see different stages or “building blocks” added here or there, but I’ve broken it down for the purpose of this book to three basic levels for easier understanding.

The first level is where we see risk management. This is the foundation of your plan. It’s important to have a strong base to build off of, otherwise the slightest of breezes or tremors can send it toppling. Risk management can be simply seen as your insurance – and this can range from your auto, home, renters, life, health, disability, and umbrella insurance, to your will, emergency fund, and debt management.

The reason why insurance is the base is due to the fact that we have risks that most of us cannot afford to take on ourselves. Most of us don’t have $300,000 stored away to rebuild our home if it’s destroyed and most of us don’t have a million dollars to pay in case were liable for damages in an auto accident. By using proper risk management and having the correct insurance in place, we can leverage that risk and only pay a small amount of premium for a large amount of coverage.

The proper insurance coverage will make sure in the event of the worst happening, you have a bad day, not a bad life. Proper coverage can protect our wealth and our savings. Likewise with an emergency fund and a will. An emergency fund is just that – 3 to 6 months of living expenses in case you lose your job, become ill or suffer a loss and have high insurance deductibles. A will protects you making sure if and when you die, your possessions go to the people you want them to, and assign guardians for your children.

The next level is the wealth accumulation level. This is where we start saving via IRAs, 401(k)s, and other savings vehicles. It may also be the area where you may invest in not only the stock market, but also real estate, and other investments you know. Notice that it builds off of the risk management foundation – just in case you’re sued or suffer a catastrophic loss, your wealth is secure, since you have a solid base.

Finally, you have the estate planning level making the pyramid complete. This is where distributions strategies are employed regarding the wealth you’ve built, where proper trusts and other legal entities are employed to protect wealth from taxation. It’s also the level where people think about charitable giving and leaving a legacy.

It goes without saying; please see a competent professional when working and employing strategies in any of the levels of the pyramid.

Posted on Aug 23rd, 2013

by author: sraskie.

Posted in: estate planning, estate tax, fee-only, fiduciary, financial planning, goals, home insurance, Insurance, investing, investment, life insurance.

Are You Protected?

Aug 21st, 2013

by sraskie.

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Home destroyed by Hurricane Elena (Photo credit: State Library and Archives of Florida)

I recently received a call from a friend of mine asking questions about his newly acquired rental property. He had just moved from a duplex where he owned the entire duplex and lived on one side. Having purchased a home and finding a new tenant to replace where he was living, he was surprised and upset when his insurance on the duplex nearly doubled.

After some debate he decided to reduce the replacement cost of the building that the insurance company had placed on the building from $500,000 to $250,000. This, of course, sent red flags flying in every direction in my brain.

His first question to me was why his insurance nearly doubled. The reason was that since he was no longer a tenant in his own duplex the insurance company assesses that as more risky and adjusts the premium accordingly. He further commented that the replacement cost was just too high and that he hadn’t paid nearly $500,000 for it and even $250,000 seemed high.

This is what I explained to him. When an insurance company assesses the cost to rebuild your home, a number of factors go into that assessment. They will look at the price and kind of materials to rebuild, labor, style of the home, basement or not, landscaping, number of bedrooms, bathrooms, and more. When the home was first built, almost always the materials and labor were cheaper and chances are the home was built (if in the city) in conjunction with several homes in the subdivision. Big trucks, cranes, etc. could be used to build the home. Now it may take several workers with wheelbarrows to do the same thing so as not to infringe on the neighbor’s rose bushes.

In addition, insurance doesn’t care what you paid for the home, just what it costs to rebuild it. If the duplex was purchased for $125,000 in 1973, that $125,000 had much more purchasing power than it does today in 2013.

This leads to the heart of this story – the coinsurance clause.

Many insurance policies contain a clause that states that your home needs to be insured to at least 80%of its reconstruction cost. This means that in the duplex above, the home needs to be insured for at least $400,000. As long as a building is insured for at least 80% of the reconstruction cost then the insurance company will pay the full replacement cost of the home.

If not, a formula is used and you can guess it’s not to the insured’s advantage. For the duplex above, let’s say we had a $100,000 loss from a fire. In this case the policy would use the formula which is what the duplex is insured for ($250,000) divided by what it at least has to be insured for ($400,000) multiplied by the amount of the loss ($100,000).

So: ($250,000 / $400,000) x $100,000 = $62,500.

In this case, the insured would only get $62,500 for a $100,000 loss! This example also ignores any deductible which would bring that amount even lower.

Before we got off the phone my friend was now very concerned he was under-insured. He promised to look at his policy and get back to me to see if the coinsurance clause applied to him.

I highly suggest our readers consider doing the same.

Posted on Aug 21st, 2013

by author: sraskie.

Posted in: home insurance, mortgage, principal residence, renters insurance.

5 Essential Financial Planning Steps for Your 30s and 40s

Aug 19th, 2013

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(jb note: the article below is from my friend Roger Wohlner, who blogs at The Chicago Financial Planner.)

Many of the calls that I receive are from folks in their 50s or 60s who are either within sight of retirement or already retired. Many of these callers are pretty well-prepared for retirement and are seeking my help to fine-tune their situation and/or to help them through this next phase of life. This type of financial readiness doesn’t just happen it takes planning and preparation. Here are 5 essential financial planning steps for those of you in your 30s and 40s to help you reach your retirement goals and more importantly to help you achieve financial independence.

Get started

If for whatever reason you haven’t done much of anything to ensure your financial future it’s time to get going. Today is the best day to get started, tomorrow is the second best day, and so on. If you are in your 30s or 40s and haven’t begun to save for your retirement, if you have a family and don’t have a basic will or any life insurance, if you have debt or spending issues it’s time to get started on a path to secure your financial future.

Protect your family

I can’t tell you how many phone calls I’ve received from a 30 or 40 something professional (always a male) with young kids and a stay at home spouse. Typically the caller is all excited about investing or perhaps about buying income property. Both are great ideas. However when I ask whether he has any life insurance in place or even a basic will naming a guardian for his young children the answer is something like “… we’ve talked about that…” My response is to implore him to stop talking about it and get it done. I generally follow-up the phone call with a list of estate planning attorneys for them to consider.

My point is this, if you are in your 30s or 40s and have a family you need to ensure their financial security. Term life insurance is very cheap in this age range assuming that you are in good health. Until you’ve accumulated sufficient assets to provide for your family in the event of your death, life insurance is a great way to build an estate quickly.

It is vital that parents of minor children at least have a will in place that names a legal guardian for their children in the event of their death.

While we are on this subject make sure that all beneficiary designations on retirement accounts, annuities, and insurance policies are up to date and specify the correct beneficiary. There is no better way to say “I love you” to a spouse than to have you life insurance go to an ex-spouse or somebody else because you forgot to update the policy’s beneficiary designation.

Even if you are single at the very least you will want to give some thought as to where your money and assets would go if you were to die and take the appropriate actions to ensure this would happen.

Save for retirement

There is still time to accumulate assets for retirement. Time in fact is one of your greatest assets here. Contribute to your 401(k) or similar retirement plan. Contribute to an IRA.

In many cases you may be starting a family or looking to fund college during these years. While there may be conflicting demands for your money, save as much as you can for retirement. As you get to your 50s, 60s, and beyond you’ll be glad you did.

If you are single this is all the more reason to ramp up your retirement savings, assuming you never marry it’s all on you to save for a comfortable retirement.

Financial planning is vital

Many folks get serious about financial planning in their 50s and 60s as they approach retirement. There’s nothing wrong with this. However having a plan in place in your 30s or 40s gives you a head start. Are you on track to beat the odds in the “retirement gamble?” Better yet what will it take to help you achieve financial independence?

Make sure the basics are covered. Get your spending in check and pay down your debts. If you haven’t done so already, adopt the basic fiscal habits needed to live within your means.

If you work with a financial advisor become knowledgeable. Take an interest in your situation. This doesn’t mean that you need to be a financial expert, but a bit of knowledge combined with your own good common sense will help shield you from fraud or just plain bad advice. If your financial advisor recommends what seems to be costly, proprietary (to his/her employer) financial products trust your gut and look for advice elsewhere. My very biased view is that you should seek the help of a fee-only financial advisor. Check out NAPFA’s guide to help you in finding the right advisor for your needs.

Combine and consolidate

By this time you’ve likely worked for several employers. If you are like many people you haven’t paid as much attention to your old 401(k) accounts as you should have.

This is a good stage of your life to do something with these old retirement accounts. Combine them into a consolidated IRA account. Roll them into your current employer’s plan. Do something with these accounts, don’t ignore this valuable retirement asset.

Invest like a grown-up

There’s nothing wrong with allocating a portion of your investment assets to taking some”flyers” on a stock you like, or an ETF that invests in a hot sector of the market, play money in other words.

The vast majority of you investments should be allocated in a fashion that dovetails with your financial plan. Have an allocation plan, stick with it, rebalance your holdings periodically, and adjust your allocation as you age or if your situation warrants.

This investing plan should take into account all of your investments including IRAs, company retirement plans, taxable investments, and so on. If you are married this should include both of your accounts.

For most people mutual funds and ETFs generally make the most sense. There is nothing wrong with individual stocks, but they require a level of expertise and research that most investors don’t have.

The planning, saving, and investing that you do in your 30s and 40s will pay major dividends down the road, as you seek a comfortable retirement and financial independence. Don’t waste time, get started today. Don’t become part of the retirement savings crisis in the U.S.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Please check out our Resources page for some additional links that might be beneficial to you.

Photo credit: Flickr

Posted on Aug 19th, 2013

by author: jblankenship.

Posted in: education, fiduciary, IRA, qrp, qualified retirement plan, retirement.
Tagged: financial planning · guest

Why Diversify?

Aug 16th, 2013

by sraskie.

2 comments

Diversity (Photo credit: Wikipedia)

Remember Enron? I think we all do. Enron was once a powerhouse company that saw its empire crumble and took the wealth of many of its employees with it. Why was that the case? Many of Enron’s employees had their 401(k) retirement savings in Enron stock. This was the classic example of having all of your eggs in one basket and zero diversification.

Let’s say that the employees had half of their retirement in Enron stock and half in a mutual fund. Enron tanks but their mutual fund stays afloat. This means that they lost, but only lost half of their retirement, all else being equal.

Imagine if they had only a quarter of their retirement in Enron and the remaining 75% in three separate mutual funds. Enron’s demise is only responsible for a fourth of their retirement evaporating. This could go on and on.

The point is that when you choose to diversify you’re spreading your risk among a number of different companies. That way if one goes belly-up you’re not left with nothing.

Mutual funds are an excellent way to diversify among an asset class. For example, if you purchased a total stock market index fund you’d have nearly the entire US Stock Market in your portfolio which amounts to approximately 4,100 different stocks.

That’s great diversification but we can do better. The US equity market is only one area. We can diversify into domestic bonds, international stocks, international bonds, real estate, and so on. This is called diversifying among asset class. The point is that you want to spread your risk and diversify as much as possible so one market or asset class doesn’t ruin your entire portfolio.

A term we use often in the industry is correlation. This simply means how one particular security moves in relation to another. If I own two large cap growth funds they’re pretty closely correlated; meaning that if large cap companies fall both of these funds are going to fall very similarly.

If I own a large cap fund and a bond fund, then if large cap stocks fall, the bonds may rise or may stay the same or even fall slightly. This is because they are a different asset class and move differently than equities. Keep adding different assets to the mix and you have a potential portfolio that can withstand the dip and turns of the market.

Even the Oracle of Omaha, Warren Buffett diversifies. Granted he may have all of his eggs in one basket, Berkshire Hathaway, but own Berkshire Hathaway stock and you’ll get exposure to insurance, bricks, candy, cutlery and underwear to name a few. Admittedly, not many people have $175,000 to buy just one share of BRK stock, but the point is that even Mr. Buffett diversifies.

Diversify. It works.

Posted on Aug 16th, 2013

by author: sraskie.

Posted in: 401 k, 401 k 403 b, 457, asset allocation, asset class, diversify, financial planning, investing, investment, investment diversification, roth ira, Roth IRA.
Tagged: 401 k · 401k · investment · IRA · retirement savings · roth ira

Education Expense Tax Tips

Aug 14th, 2013

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Title page to Locke’s Some Thoughts Concerning Education (Photo credit: Wikipedia)

One way to help ease the bite of the cost of a college education is to use all available tax rules to your advantage. There are several items you can use, including 529 plans, Coverdell ESAs, and various credits for tuition and fee payments.

The IRS recently released their Summertime Tax Tip 2013-19: Back-to-School Tax Tips for Students and Parents, providing a valuable overview of a couple of important credits and deductions. The actual text of the Tip follows:

Back-to-School Tax Tips for Students and Parents

Going to college can be a stressful time for students and parents. The IRS offers these tips about education tax benefits that can help offset some college costs and maybe relieve some of that stress.

American Opportunity Tax Credit. This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. A recent law extended the AOTC through the end of Dec. 2017.
Lifetime Learning Credit. With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.You can claim only one type of education credit per student on your federal tax return each year. If you pay college expenses for more than one student in the same year, you can claim credits on a per-student, per-year basis. For example, you can claim the AOTC for one student and the LLC for the other student.You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for these credits. The tool is available at IRS.gov.
Student loan interest deduction. Other than home mortgage interest, you generally can’t deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.

These education benefits are subject to income limitations and may be reduced or eliminated depending on your income.

For more information, visit the Tax Benefits for Education Information Center at IRS.gov. Also, check Publication 970, Tax Benefits for Education. The booklet’s also available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Additional IRS Resources:

Tax Benefits for Education Information Center
Am I Eligible to Claim an Education Credit? – Interactive Tax Assistant tool
Publication 970, Tax Benefits for Education

Posted on Aug 14th, 2013

by author: jblankenship.

Posted in: american opportunity tax credit, coverdell accounts, education expenses, income tax credit, lifetime learning credit.
Tagged: american opportunity credit · college expenses · coverdell · education credit · education expenses · income tax · lifetime learning credit

Book Review: Asset Allocation-Balancing Financial Risk

Aug 12th, 2013

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This was a re-read for me, with the recent publishing of the fifth edition of this very important book. Roger Gibson has updated his excellent work with the results of his strategies during the Great Recession, up to date as of late 2012.

Advisors have much to learn from Mr. Gibson’s tome regarding the optimal methods for allocating your investment assets. Throughout the first portion of the book, the concepts of market-timing and superior asset selection are summarily debunked, and the benefits of market index investment and diversification are shown to be optimal. The author uses real-world data to underpin his findings. The result is the explanation that, with known investment time horizons, an optimal mix of investments can be determined that will produce superior long-term risk-adjusted results.

Much is written in the book, which is directed primarily to investment advisors, about the mind-set of the investor himself or herself. The point is that, even though as an advisor you develop and implement the best possible investment allocation, if the investor is reluctant to stick with the allocation plan through thick and thin, the benefits of the allocation are lost.

It is important to ensure that the advisor understands where the investor stands on the concepts of market timing and superior investment selection. Mr. Gibson displays this as a matrix as follows:

		Is Successful Market Timing Possible?
		YES	NO
Is Superior Security Selection Possible?	YES	Quadrant 1	Quadrant 2
	NO	Quadrant 3	Quadrant 4
Source: Roger C. Gibson, 1995

Folks who fall into Quadrant 1 believe that it is possible to choose the best time to enter and exit the market (e.g., buy low, sell high), and that it is possible to choose specific securities that will result in superior returns. This means that one day the investor wakes up and looks at his charts, graphs, and company reports and magically, he’s able to tell the future. He is capable (in his mind) of choosing just the right investment at just the right time, and furthermore he is capable of knowing when to sell that investment to avoid a downturn. Without going into the backing data, hopefully you can see that these folks, while they do exist, their results aren’t as anticipated – if the results were clearly superior, obviously all investable funds would eventually be placed with such a manager. No one has that kind of result.

Quadrant 2 devotees only believe that it is possible to choose superior securities, but that choosing the entry and exit times is not predictable. This investor buys his chosen superior investments and holds them for long periods of time, a true “buy and hold” investor.

Those with a Quadrant 3 worldview are of the belief that superior investment selection is not possible, therefore these investors choose to invest in index mutual funds or other methods of owning a broad basket of securities across various asset classes. However, Q3 folks believe it is possible to determine when is the best time to enter a holding in a particular asset class and when to exit the holding. This investor is constantly choosing between the asset class that he believes is in favor versus the asset class he believes is out of favor. Long-term results have shown that this sort of market timing is similarly unsuccessful as the Q1 worldview. Again, had this ever been the case, the results would speak for themselves.

This leaves us with Quadrant 4 – giving in to the fact that superior asset selection is not predictable, and timing is not possible. This means that we choose index-type broad market investments, and we hold to the investment allocation over long periods of time. This is the only long-term successful method of investment allocation, proven time and again with real world results.

This of course doesn’t mean to just simply determine the asset classes across which your investments should be allocated and split your investments evenly across all chosen asset classes. Time horizon for the investment activity must be known, as the shorter the time horizon, the less risk the portfolio can endure.

In addition, the investor’s appetite for (and tolerance of) risk must be determined. This determination is made by considering the amount of loss that the investor can emotionally withstand – and using knowledge of the risk profile of various mixes of investments to match up with the risk appetite. Naturally this risk appetite is countered by the requirement for returns from the investment – in order to achieve increased returns, generally risk must be increased.

In addition, once the asset class allocations are chosen based on the time horizon, return requirement, and risk appetite of the investor, as investment results occur over time the investment allocation must be re-balanced regularly. This is necessary to maintain the same risk/return profile that was originally selected. As well, over time the time horizon becomes necessarily shorter, so the original asset allocation must be re-aligned to fit the new horizon.

The above is only a brief overview of what I found to be the most important take-aways from this critical book. I highly recommend this book for any advisor who is looking to develop long-lasting superior risk-adjusted returns for his clients. Individual investors can benefit from the book as well, although the much of the book is devoted to working with clients to develop allocation plans.

Posted on Aug 12th, 2013

by author: jblankenship.

Posted in: Book review, investing.
Tagged: book review · investment

Book Review: The 7Twelve Portfolio

Aug 9th, 2013

by sraskie.

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Diversification – Investing (Photo credit: 401(K) 2013)

The 7Twelve Portfolio is an excellent concept for financial planners and novice investors alike. The book is very well written and easy to comprehend as Dr. Israelsen keeps the concepts simple and analogies easy to follow. The crux of the book is regarding diversification and Dr. Israelsen uses the analogy for making salsa as a reference. For example, you don’t have salsa of you just have diced tomatoes and it really doesn’t improve if you simply add some onions and salt. It improves a little bit, but still isn’t salsa.

The same is true for diversification. You’re not diversified if you own one stock or bond in your portfolio and have all of your holdings in that one asset. The benefits of diversification begin when you start adding additional ingredients to the mix. This starts to lower risk and help maximize return. This is a concept us nerdy planners call correlation. The less assets are correlated the better. That means when one asset class falls a different asset class may rise or even stay the same.

With enough ingredients in our salsa of investments we get a portfolio that’s well diversified and less susceptible to extreme gyrations in the market. It also provides a portfolio that generates better returns than one would think simply because we got the ingredient mix correct.

Think of it this way: you absolutely love dessert. But too much of a good thing isn’t always the best idea, right? If you just ate dessert all the time, your blood sugar would spike and then you’d crash later in the day. What you want is a balanced meal that keeps your energy relatively even throughout the day. With investing, if you only have one or two investments, you’ll reach extreme highs and then you may crash later as well. Having the right mix of assets keeps your portfolio balanced and better prepared to handle “market indigestion”.

Overall if you’re looking for a good book that reinforces the diversification discussion (and you like salsa) the 7Twelve Portfolio is a good, short read that will give some valued insight on proper diversification and asset allocation.

Posted on Aug 9th, 2013

by author: sraskie.