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

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

Do Advisers Practice What They Preach?

Sep 27th, 2013

by sraskie.

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With a cornucopia of information available to us regarding investing, financial planning and money management making a choice between who’s right and who’s not even in the same area code may come down to what your personal preferences are, and just as important, if the person giving the advice practices what they preach.

In a previous article, I spoke about how advisers get paid and the type of advice or products they may recommend depending on how the advisor gets paid for that advice.

In this article I want to expand a bit further to whether or not the advice you’re getting is really being followed by the person giving it.

Admittedly, there is some advice that may need to be given that may not pertain to the adviser giving it. One area may be debt reduction advice if the adviser doesn’t have any debt (but has practiced good money management principles to avoid it). Another area may be the physician that recommend proper diet and exercise to an overweight individual and yet the doctor may be physically fit.

What I’m talking about is the adviser (or doctor) that doesn’t practice what they preach. For example, an advisor may give advice regarding where a client should invest their Roth IRA. Preferably for the adviser, the client would want to invest their money with him or her and the adviser may only recommend commissioned or load mutual funds while the adviser invests his 401(k) money into index funds.

This is a very common practice especially among bigger firms with many employees as advisers. The firm offers high commissioned products such as annuities and commissioned mutual funds for clients’ IRAs or retirement plans but the firm’s own 401(k) plan holds only index fund options and zero annuities. Yet their advisers will tell their clients that their products are the best for them. If that’s the case, why doesn’t the firm offer their own products in their 401(k)?

Another thing you’ll see is an adviser or broker touting the next hot fund or the stock of the day. A great question to ask is if they own it themselves – and why. Generally you’ll find that they don’t own it and usually the recommendation is trickling down from company headquarters. Another great question is would they recommend it to their own family. Watch their face – it may say more than their words.

You may also want to be careful when it comes to the talking heads on TV. Self-proclaimed financial gurus and big dogs are generally getting paid through endorsements, book deals and from the network they broadcast on. This is how they make their money. In fact, some deeper digging will find some of these people have actually lost A LOT of money investing or becoming heavily debt laden only to file bankruptcy.

An adviser may be recommending sound money management advice while at the same time his credit card is maxed out, he has a high car payment and he’s living paycheck to paycheck. Granted, this adviser would probably never admit this but it doesn’t hurt to ask how they feel about money, debt, etc. How can an adviser manage your money if they have no control over their own?

Finally, trust your gut. If something doesn’t feel right – it usually isn’t. If you go in for budgeting advice and the adviser tries to sell you insurance – this isn’t a good sign. If your adviser hasn’t been around very long, but is in a fancy office and a new car is out front – they may be trying to appear successful, but are struggling to get by.

Ask a lot of questions when you talk with your prospective adviser. Just like you’re a potential client for them, they’re a potential client for you. It works both ways. You can do an internet search on their business, and even verify if they have any industry credentials. There are even websites where you can verify their tenure in the industry and whether or not they’ve received any disciplinary action.

The main thing is that you want an advisor that believes in the advice they’re giving you and most of the time follows their own advice.

Posted on Sep 27th, 2013

by author: sraskie.

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

What You Can Do If Your 401(k) Has High Fees

Sep 25th, 2013

2 comments

Image courtesy of anankkml at FreeDigitalPhotos.net

Now that we’ve all been receiving 401(k) plan statements that include information about the fees associated with our accounts, what should you do with that information? Some 401(k) plans have fees that are upwards of 2% annually, and these fees can introduce a tremendous drag on your investment returns over a long period of time.

There are two components to the overall cost of your 401(k) plan. The first, and the easiest to find, is the internal expense ratios of the investments in the plan. Recent information shows that, on average, these investment fees are something on the order of 1% to 1.4% or more. The second part of the costs is the part that has recently begun to be disclosed: the plan-level fees. These are the fees that the plan administrator has negotiated with the brokerage or third-party administrator to manage the plan. These fees can average from 1% up to around 1.5%. When added together, these fees can amount to nearly 3% for some smaller 401(k) plans. Larger employers’ plan fees average about 1% less, at approximately 2% per year.

For example, if average investment returns are 8% you should be doubling your investments (on average) every 9 years. However, if there is just a 1% fee deducted from the average investment return (so that now you’re only earning 7% annually) the doubling will take a bit more than 10 years. A 2% fee brings you down to a 6% net average return, and so now your account won’t be doubled until 12 years has passed. If you started our with $10,000 in your account, this would result in a differential of more than $42,000 over the course of 30 years – at 8% your account could grow to $100,627, while at a 6% return would only grow to $57,435.

The information about fees used to be kept pretty much secret, but beginning in 2012 the plan-level fees have begun to be disclosed to participants in the plans. Now you know more about the overall fees that are charged to your plan and thereby reduce your overall investment returns.

What Can You Do?

So, now that you know what your expenses are in your 401(k) account, there are a few things that you might do to improve the situation. While it’s unlikely that you can have an impact on the plan-level fees, you may be able to control some of your exposure to investment fees. Listed below are a few things you can do to reduce your overall expenses in your 401(k) account.

Lobby for lower fees. Talk to your HR representatives and request that your plan has lower-cost options made available. Index funds can be used within a 401(k) plan to produce the same kinds of investment results as the (often) high-cost managed mutual funds, with much lower expense ratios.
Take in-service distributions, if available. If your plan allows for distributions from the plan while you’re still employed, you can rollover some or all of your account to an IRA, and then choose lower-cost investment options at that time. Typically a 401(k) plan may offer this option only to employees who are at least 59½ years of age – but not all plans offer in-service distributions.
Balance the high-fee options with lower-cost options outside the plan. If your 401(k) plan is unusually high-cost, if available do the bulk of your retirement investing in accounts outside the 401(k) plan, such as an IRA or Roth IRA, if you are eligible to make contributions. Review the investment options in your 401(k) plan for the “diamonds in the rough” – such as certain institutional funds with very low expenses – that can be desirable to hold. Then complete your allocations using the open marketplace of your IRA or Roth IRA account.

Don’t forget that there are sometimes very good reasons to leave your money in a 401(k) plan, even if the expenses are high. See the article Not So Fast! 9 Special Considerations Before Rolling Over Your 401(k) for more information on why you wouldn’t want to make a move.

Posted on Sep 25th, 2013

by author: jblankenship.

Posted in: 401k, qrp, qualified retirement plan, retirement accounts.
Tagged: 401k · qrp · qualified retirement plan · retirement accounts

Uncertainty Abounds With ACA Implementation

Sep 24th, 2013

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English: President Barack Obama's signature on...

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)

Several high-profile companies have recently made known that they will be directing retirees and in some cases employees to the Health Exchanges with the implementation of the Affordable Care Act (aka “Obamacare”). How this will wind up affecting us as taxpayers is uncertain, to say the least (See the article at this link: Workers Nudged to Health Exchanges Seen Costing U.S. Taxpayers).

Since participation in the Exchanges carries the possibility of taxpayer subsidy to those with lower incomes, adding more folks to the rolls of the Exchanges will likely drive up the cost of these subsidies. And of course, that will mean increased taxes to pay for the subsidies.

It makes sense for IBM, Time Warner and others to send the retirees to the Exchanges with a stipend, since the stipend will be less (presumably) than the cost to the company for health coverage in the long run. Many of the retirees will (likely) fit into the subsidized categories since they are in retirement and likely have lower incomes, so a portion of the cost will certainly be subsidized.

What do you think – is this a trend? And what if the Exchanges become the dominant method of health insurance delivery? Would the law of large numbers eventually begin to bring down the overall costs, or will the costs spiral out of control?

Posted on Sep 24th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: #noTOP, 2013 calendar year, Affordable Care Act.

Selling Your Home? Be Aware of These Half-Truths

Sep 23rd, 2013

2 comments

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Since selling a home is one of those events that many folks only do a few times in their lives, there is much uncertainty about what kinds of potential rules and laws may trip you up. Recent data suggests that the average American will buy and sell their primary home something like 10 times in their lifetimes – for many that number will be far less. There is a lot of information about the tax impacts of selling a home out there flying about on the internet, and some of it is mostly bunk. And much of what’s not bunk is limited in applicability.

Below are a few half-truths about home sales that you want to understand before you sell your home, along with the explanation of the facts behind them, including how they may apply to your situation if at all.

1. If I sell my house I need to buy another one with the proceeds or owe tax. Not true, as long as you lived in the home as your primary residence for two of the preceding five years. There is an exemption of the tax on such a residence sale, of up to $250,000 ($500,000 for a married couple) of gain in value over the original purchase price plus improvements to the property. In other words, if you purchased a home for $100,000, updated the kitchen for $10,000, lived in the house for three years and then sold it for $120,000, you’d have a gain of $10,000 on the sale. This sale is exempt from tax since you lived in the home as your primary residence for at least two of the preceding five years.

The truth to this one has roots in the olden days – long ago it used to be the law that when you sold your primary home you needed to purchase a new one with any gains from the sale within two years. This rule expired in 1996, so it doesn’t apply any more. Many folks think it still applies since they haven’t sold a home in a very long time and they recall this rule.

2. Beginning in 2013 if you sell your home you’ll owe an extra 3.8% surtax on the proceeds due to Obamacare. Not true, except in some limited cases. This one has gotten its traction via emails and internet postings, and has enjoyed a rather long life. I’ve written about this specific myth in the past in the article The “Tax on the Sale of Your Home” Email Myth.

Here’s the deal: Following the information presented in #1 above, if you wind up with a non-exempt gain on the sale of your primary home – either because you didn’t live in the home for 2 of the previous 5 years, OR the gain was more than the exempted limit – AND your other income (Modified Adjusted Gross Income) is greater than $200,000 for single folks or $250,000 for marrieds, then you might owe the additional 3.8% surtax on the gain.

3. Loss on the sale of my home can be written off against income. Not true, for a primary or secondary home. You (generally) don’t have to pay capital gains tax on a gain when you sell your home, and likewise you cannot take a capital loss if the sale results in a loss. This is the same for all personal property not held for investment purposes.

If you sold a property that you had held for rental purposes at a loss, this loss would be eligible to be written off against other investment gains, but losses on personal property, including your main home, doesn’t allow this option.

Posted on Sep 23rd, 2013

by author: jblankenship.

Posted in: Affordable Care Act, baby boomers, income tax, Obamacare.
Tagged: Affordable Care Act · income tax · irs · Obamacare

Avoid the Trap

Sep 20th, 2013

by sraskie.

2 comments

English: Venus Fly trap in detail. Taken with ... Eating and dining out all the time can drain our money and potential retirement savings without us even being aware of it. We get asked from friends to go to lunch, coffee or we find ourselves skipping breakfast and getting in the line at the coffee shop for a scone and latte. Before we know it, we’re left asking, “Where did the money go?” Or worse, “I can’t afford to save for retirement.” What’s happened is we’ve fallen into the trap – a habit really, but it can be broken and we can relearn. Here’s how:

The first thing you can do is to pass on that latte or scone all together. Instead, make yourself breakfast at home. Invest in a coffee maker if you don’t have one, and make your own coffee. Then make a nice meal of scrambled eggs and whole wheat toast, a cup of cottage cheese with fruit, or one of my favorites – a thick, mixed berry protein smoothie. It’s quick, easy and cheap – much better than the latte and scone. And trust me, if you work at a sit-down job, the protein in place of the simple carbohydrates will keep your energy level sustained, and your metabolism going fast. That’s very important if you’re stuck in a chair all day long.

Next, pocket the $2-$3 that you would have spent on the latte and scone. Put it in a jar, put it in the bank, put it anywhere you can save it. There’s a great start! Think about it. $2-$3 per day times an average of 30 days is an extra $60-$90 in your pocket every month!

Now, if you eat fast food at lunch or find yourself eating out a lot, make a commitment to pack your lunch. Resist the temptation to go to lunch with your office. If you go to lunch on a daily basis, that will average $5-$10 per lunch, at least. That’s an extra $100-$200 saved! Put them together and you’ve saved $160-$290 – in one month!

I’m not saying never go out to lunch. I have friends of mine that I meet for lunch every now and again. The point being that I don’t make a habit of it. On the other hand, once you have made a habit out of saving this extra money and have learned to discipline yourself to save, then it’s not going to hurt you to go out every once in a while.

Posted on Sep 20th, 2013

by author: sraskie.

Posted in: financial planning, investing, investment, retirement, retirement plan, retirement plans, retirement savings, retirement savings plans, saving.
Tagged: fiduciary · financial planning · investment · retirement plan

Unintended Result From Obamacare?

Sep 19th, 2013

4 comments

Image courtesy of stockimages at FreeDigitalPhotos.net

One of the primary tenets of the Affordable Care Act legislation (Obamacare) is guaranteed healthcare insurance for all Americans. This insurance is expected to have lower premium rates than individually-purchased healthcare insurance policies – although the jury is still out on exactly what those rates will be. When the Health Insurance Marketplaces begin operation next month we’ll learn more about how this new health insurance delivery will be priced, compared with employer-provided health insurance or individually-purchased policies.

If the rates are dramatically lower than the individually-purchased policy, an unintended result may occur: early retirement for many. (For more on this phenomenon, see “Obamacare could encourage more early retirements from baby boomers”.)

Think about it – everyone knows at least one successful self-employed individual, and probably several, whose spouse works in a position with a large local employer (around here it’s likely the state, or a hospital or insurance company) – solely so that the couple can get health insurance at a reasonable rate.

In addition, I believe there are lots of folks out there who have the resources to retire but are (for example) only 62 years old. This leaves them in a pickle for insurance for three years, since Medicare is not available until you hit 65.

How many times have you heard this:

John is ready to retire, but keeps his full-time job at Acme so that we can have health insurance. If it wasn’t for health insurance, we’d be retired and travelling to spend time with our grandkids.

Similarly, I’ve heard this one as well:

I’ve been building this company of mine up for several years, and someday I’ll drop my old job to do this full-time. It’s hard to give up the health insurance though!

How will this impact the economy? If we have lots of folks making the leap from work at large businesses to either established small businesses, starting new sole proprietorships or retiring, I think a couple of things will happen:

The old position that was left will be open, providing a job for some of the unemployed
The addition of manpower into an established small business could spur additional economic growth

On the other hand, as we all know, a very high percentage of new small business enterprises fail within the first couple of years, so the economic gains might turn out to be nil. When you add in the costs that Obamacare is expected to cause many small- to medium-sized businesses to incur (via the required insurance coverage or pay a penalty provisions), the overall result may wind up being a drag on the economy. It’s going to be interesting to see how everything shakes out…

What do you think? Will Obamacare be a positive influence on the economy, or a drag? Or will it have no positive or negative effect? I’d like to hear your opinions – leave a comment below!

Posted on Sep 19th, 2013

by author: jblankenship.

4 comments already - add to the conversation!

Posted in: #noTOP, 2013 calendar year, Affordable Care Act, early retirement, Obamacare.
Tagged: Affordable Care Act · healthcare insurance · Obamacare

When Rolling Over a 401(k) to an IRA Isn’t a No-Brainer

Sep 18th, 2013

6 comments

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

2 comments

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

4 comments

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.

4 comments already - add to the conversation!

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

Opportunity Cost

Sep 13th, 2013

by sraskie.

No comments yet

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

1 comment

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

3 comments

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.