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

Posted in: Delayed Retirement Credit, DRC, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: DRC · Social Security · spousal benefit

The Value of Your Social Security Benefits

Oct 5th, 2012

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As you consider your Social Security benefits and when you might begin to draw them, keep in mind that the benefits you’re receiving are actually akin to an annuity – a stream of income that you will receive from the time you start the benefits throughout your life. As with an annuity, if you live longer than average, you will receive much more than the original value (premium) of the annuity. If you have a way to increase the amount of the stream of income, by delaying start of the benefits, the overall amount that you eventually receive will increase as well (assuming you live longer than average).

Let’s say that your Social Security benefit would be $1,500 at Full Retirement Age. If you started your benefit early at age 62, your benefit would be reduced to 75% of that amount, or $1,125; if you delayed your benefit to age 70, the benefit amount would be increased by 32% to $1,980.

If you started receiving benefits at age 62 and you lived to age 75, the total benefit that you receive over your lifetime would be $189,000 – not including Cost of Living Adjustments. In a similar manner, calculating the total lifetime benefit if you started receiving benefits at Full Retirement Age (FRA, age 66 for folks reaching that age these days) comes out to $180,000 if you live to age 75. Waiting to age 70 to start benefits results in a lifetime benefit (to age 75) of only $142,560.

So if you only live to age 75, it makes the most sense to start your benefits as early as possible. But read on…

What’s interesting about this sort of calculation is that if you live beyond age 75, say to age 80, now your lifetime benefits are starting to be greater by delaying a bit. If you start at age 62, the total lifetime benefit would be $256,500 through age 80; starting at 66 results in $270,000 over your lifetime. Delaying to age 70 still results in a lower lifetime benefit at this age – only $261,360.

So if you happen to live even longer, let’s say to age 90 – now the later you’ve delayed results in the greatest overall lifetime benefit. Starting at age 62 results with a total lifetime benefit of $391,500; 66 amounts to $450,000, and beginning at age 70 yields $498,960.

What about the value of that income stream in today’s dollars?

There’s another calculation that we financial guys do when evaluating things like annuities – it’s known as a Net Present Value (NPV) calculation. Essentially what we do is to take the value of the cash flows and use a set rate of return to determine what amount of money we’d need in order to produce those cash flows at those times in the future.

So, for our example above, using a rate of return of 5%, we come up with the following net present values of the cash flows:

Age to start	NPV to age 75	NPV to age 80	NPV to age 90
62	$133,632	$163,152	$204,404
66	$138,991	$186,834	$253,691
70	$120,598	$198,360	$304,631

As you can see, the NPV increases for your delayed receipt of benefits starting with a lifespan of age 80, and becomes more pronounced if you live even longer. As we saw with the total lifetime benefit, there’s a higher value to the cash flow if you start early only if your lifetime is relatively short – in this case, to age 75.

Conclusion

This is the reason that we financial-types often recommend delaying receipt of Social Security benefits. As the figures above attest, there can be a substantial lifetime benefit increase if you life beyond age 80 – in our example it comes to over $100,000 by changing your start date from age 62 to age 70 and you live to age 90. Of course, if you don’t happen to live beyond age 80 (and who knows how long you’ll live?) starting earlier will likely result in the greater benefit for you in your lifetime.

Given that folks are living longer and longer these days, you should really consider delaying Social Security benefits as your strategy. Keep in mind that we’re only talking about a single person’s benefits – for a couple, the calculations become infinitely more complex, as we have to account for two lifetimes, two potential benefits, and spousal and survivor calculations. We’ll get to that next time…

Posted on Oct 5th, 2012

by author: jblankenship.

Posted in: Delayed Retirement Credit, Early Filing, Social Security, social security retirement.
Tagged: delayed retirement credit · early filing · Social Security

My credit card meets Carly Rae

Oct 1st, 2012

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So, is it just me? I try not to be too terribly difficult to work with. I go along with most requests without any roadblocks, but every once in a while something comes up that just drives me bats.

Problem is, this seems to be something that crops up more and more often. All too often I come across this issue – maybe not every day, but very regularly. What is it that I’m talking about? Let me borrow a line from Ms. Carly Rae Jepson to help explain:

Hey! I just met you…
(And this is crazy)
… but here’s my number,
so call me maybe?

Okay stop being freaked out that I happened to know the lyrics to that song. I just happen to know things, among those things are the lyrics to many a song, inane or otherwise described. Ask anyone who has taken a long road trip with me – included in my repertoire is the complete lyrics of CW McCall’s Wolf Creek Pass. As such, the Pass often makes an appearance on such trips.

It’s all in the cards

Wow, I can sure digress, can’t I? Let’s get back to what I was talking about before – the matter that just drives me crazy these days. I’m talking about credit card processing.

Recently I was signing up for a conference, filling out the form to pay for it. This particular conference had not invested the effort into online processing, opting instead for a Word doc with a simple form to be filled in and emailed. Of course the form asked for all of the pertinent credit card information, including the name on the card, the full card number, expiration date, and zip code. Then, the pie’ce de re’sistance: the CVV code. This is the 3- or 4-digit code from the back of your card.

I recognize why this code is there, it’s for the card not present sort of transactions that we all encounter these days, providing an additional bit of security to ensure that the person using the card actually has possession of the card. I agree with the use of it when necessary, but I also know that it’s not always necessary.

I process credit cards regularly from clients paying for services over the phone, and my processor has clearly noted that use of the CVV code is optional when processing a transaction. Since this is the case, I never require the client to give up this information over the phone. In these circumstances, it serves no purpose (but that’s still not what my problem is).

It’s all about the security itself. In these days of online access for just about everything, it is just irresponsible to request all of this information in a manner that is so unsecured as an email-attached document. In the case of the outfit that is running the conference I mentioned earlier, there is literally no excuse: they have infinitely-adequate resources to enable this transaction to be completed online in a secured fashion.

However, they chose to use the unsecured method of the Word doc. So when I got to the blank requesting the CVV code, I simply wrote to call if absolutely necessary. Not long after I sent the email, there was a response email asking me to call with the code. Busy at the time, I called back a couple of hours later. The person who I needed to talk to had left the office for the weekend, and she had left instructions with her backup to take the number. Still okay with me, until the backup said I’ll just write this down on the application and give it to her on Monday.

Crap. I told her no thanks, I’ll send a check. Which is exactly what I did.

The problem

The problem here is that the CVV code is really your only last defense. If you give that away, especially in a fashion that provides an enduring record, you may as well have sent your credit card over to whoever it is.

When you enter your CVV code in a secured automated processing system, the code is only held for a moment, passed over to the processor and then eliminated. Because of this, if the system you’re using is fully secure, you are not giving up control over the information.

On the other hand, if the numbers are written down, you have given up complete control over your card and its defenses. When this is coupled with the prospect of living on a Post-It note attached to your file over the weekend, you can see why I was squeamish.

Processors are required to only maintain the CVV code until the transaction is complete and, per my own experience, it’s optional.

Here’s my adaptation of Ms. Jepson’s lyrics:

Hey! I don’t know you (maybe you’re in an Internet cafe’ in a third-world country?)…
(and this is crazy)
… but here’s all of my credit card numbers (including my CVV),
so rob me blind, maybe?

How it’s supposed to work

So, back to the thing that drives me bats. It’s actually two things:

If you’re processing credit cards other than over the telephone, go the extra mile and install your processor’s online transaction system in a secured location. This way your system will handle all of the security, and you don’t have to worry about a breach. Better yet, use a third-party secured system such as Paypal or Intuit to handle the processing so that there’s an additional buffer between you as the proprietor and the processor of the information.
If you must handle card transactions offline, do it over the telephone while entering the information into the processor’s system. But by all means don’t ask your customers to submit their last defense information via unsecured email and Word doc attachments. And most of all, don’t leave someone behind to handle this information by just writing it down to be left on your desk over the weekend.

As a consumer, you can insist that only a third-party processor is used (such as Paypal), or even better, you could use one of the virtual or one-time-use credit card numbers. These are available from lots of sources, such as your own credit card issuer, and even paypal contact. The one-time-use card allows you to ensure that the number is only used for that particular transaction and never again. How secure is that??

As it becomes more pervasive in our world we’ll continue to run across these situations. Even though I don’t like to do it, I do give the number out when I know the transaction is being processed directly. But this only happens when there is no secured online option – or better yet, a Paypal option. Absent this, I’d prefer to send a check, or at last resort take my business elsewhere. Or maybe I’ll put in the effort to get on board with the one-time-use card option.

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Posted on Oct 1st, 2012

by author: jblankenship.

Posted in: credit cards, financial planning.
Tagged: credit cards · financial planning

Taking Distributions from Your IRA In Kind

Sep 26th, 2012

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When you take a distribution from your IRA, whether to put the funds in a taxable account or to convert it to a Roth IRA, you have the option of taking the distribution “in kind” or in cash.

In cash means that you sell the holding in the account or simply take distribution of cash that already exists in the account. This is the most common method of taking distributions, and it is definitely the simplest way to go about receiving and dealing with a distribution. Cash is cash, it has only one value – therefore the tax owed on the distribution, whether a complete distribution or a conversion to a Roth account.

On the other hand, if you choose to use the “in kind” option, you might just save some tax on the overall transaction. The reason this is true is due to the fact that the amount reported on your 1099-R for the distribution is the Fair Market Value (FMV) of the distribution.

Quite often, when you have holdings in your IRA that have very limited liquidity or marketability, the actual value on any given date could be discounted quite a bit from the eventual or Net Asset Value (NAV) of the holding.

For example, if you held shares in a limited partnership (LP) that makes investments in leveraged real estate, meaning that the real estate holdings are encumbered by mortgage loans, the value of the overall holding will first be reduced by the outstanding non-recourse (mortgage) loans against the assets. Secondly, if the property is limited in its marketability (and what property isn’t these days?) there could be a reduction in the FMV for liquidity and marketability.

Let’s say that the LP owned several properties that amounted solely to vacant real estate that is to be eventually sold to developers. The property was purchased several years ago with the idea that developers would quickly be willing to purchase and develop the tracts, as the area was growing quickly. Then the property values dropped off drastically and development in the area dried up completely.

When you originally purchased the shares in the LP, you invested $100,000, and your shares are encumbered by an additional loan of $100,000 – so the original NAV of your holdings is $200,000. Now that the property values have dropped off by 40%, your holdings effectively have a value of $120,000. When a qualified appraiser reviews and values the property in the LP, the Fair Market Value (FMV) is set at exactly 60% of the original NAV. In addition, the loan balance against your shares is now down to $90,000.

If you decide to convert your holdings of this LP to your Roth IRA in kind, here’s how the FMV would be calculated for tax purposes: your FMV of the overall holdings of $120,000 (60% of the NAV) minus the encumbrance loan of $90,000, for a total value of $30,000. So this is the amount that is reported on the 1099-R for the value of your holdings being converted.

Then (hopefully), after a year or so, fortune once again smiles on your LP, and developers come a’callin’. Now they’re willing to pay full value plus a premium of 30% on the original values of the properties – for a total of $260,000 value on your shares. So effectively you have a property that cost you a total of $100,000 initially, is now worth $170,000 (your $260,000 minus the $90,000 loan), and you only had to pay tax on $30,000 of the value – the rest is tax free!

Granted, this is an extreme set of circumstances that uses the tax laws to your advantage, but it represents an example that, with some adjustments, could be a real world happening. If you happen to be investing in esoteric-type investments that might have wildy-fluctuating FMVs over time, this could be a good strategy to look into. Just make sure you have a trusted advisor on your side who is familiar with this sort of activity – you don’t want to mess this one up, as the tax and penalty downsides can be substantial.

Posted on Sep 26th, 2012

by author: jblankenship.

Posted in: IRA, ira funds, Roth conversion, roth ira.
Tagged: IRA · roth conversion · roth ira conversion

Tax tips for college expenses

Sep 24th, 2012

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Most all college students are back on campus by this point but the benefits that you can receive from various tax credits will not become apparent until you pay your taxes next year. It’s important to know what tax credits you may be eligible for early on, so that you keep good records as you pay these college expenses. Recently the IRS published their Summertime Tax Tip 2012 – 25 which details tips for students and parents paying college expenses. The actual text of this tip is listed below.

Back-to-school tips for students and parents and college expenses

Whether you’re a recent high school graduate going to college for the first time or a returning student, it will soon be time to head to campus, and payment deadlines for tuition and other fees are not far behind.

The IRS over some tips about education tax benefits that can help offset some college costs for students and parents. Typically, these benefits apply to you, your spouse or dependent for whom you claim an exemption on your tax return.

American opportunity credit. This credit, originally created under the American Recovery and Reinvestment Act, is still available for 2012. The credit can be up to $2500 per eligible student and is available for the first four years of postsecondary education at an eligible institution. 40% of this credit is refundable, which means that you may be able to receive up to $1000, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.
Lifetime learning credit. In 2012, you may be able to claim a Lifetime Learning Credit of up to $2000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for eligible student.

You can claim only one type of education credit per student in the same text year. However, if you pay college expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. For example, you can claim the American Opportunity Credit for one student and the Lifetime Learning Credit for the other student.

Student loan interest deduction. Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, you may be able to deduct interest paid on a qualified student loan during the year. It can reduce the amount of your income subject to tax by up to $2500, even if you don’t itemize deductions.

These education benefits are subject to income limitations, and may be reduced or eliminated depending upon your income. For more information, visit the Tax Benefits for Education Information Center at IRS.gov or check out Publication 970, Tax Benefits for Education.

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Posted on Sep 24th, 2012

by author: jblankenship.

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

How is the Social Security Survivor Benefit Calculated?

Sep 21st, 2012

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This is one of those very complicated and difficult to understand areas of the Social Security universe, but it’s very important to know what amount of benefits a surviving spouse will be eligible for upon the passing of his or her spouse.

There are different rules that apply, depending upon whether or not the late spouse was already receiving benefits based on his or her own record, as well as the age of the surviving spouse when he or she begins receiving survivor benefits.

We’ll look at the easy one first: when the late or decedent spouse was not already receiving benefits based on his or her own record.

When The Decedent Spouse Was Not Receiving Benefits

In the case where the late spouse had not already begun to receive benefits based upon his or her own record, there are three factors that you need to take into account: the age of the surviving widow(er), the age of the decedent at death, and the Primary Insurance Amount (PIA) of the decedent. PIA is the amount that the late spouse would receive in benefits at his or her Full Retirement Age (FRA).

If the deceased was younger than or exactly at Full Retirement Age, then the PIA is the operative amount of benefit for our calculation. In the event that the deceased was older than FRA, he or she would have accrued Delayed Retirement Credits (DRCs) which would have the effect of increasing the benefit amount that the surviving widow(er) is eligible for. These credits are equal to 8% for each year (2/3% for each month) beyond FRA that the deceased spouse lived, up to age 70. Past age 70 there are no additional DRCs.

See below (The Age of the Survivor) for the last portion of the calculation.

The Age of the Survivor

The last factor is the age at which the surviving spouse begins receiving the Survivor Benefits. These can begin as early as age 60, at which point the benefit will be reduced to 71.5% of the benefit determined in the paragraph above. Between age 60 and Full Retirement Age (of the surviving spouse) the amount of benefit increases pro-rata to eventually equal 100% of the deceased spouse’s benefit (determined above). There is no additional increase if the surviving spouse delays receipt of Survivor Benefits after FRA, although these benefits can begin at any age thereafter at 100%.

If the Decedent Spouse Was Already Receiving Benefits

This calculation is much more complicated. When the deceased is already receiving benefits, we need to work through some additional calculations.

To start with, if the late spouse started his or her benefits at or after FRA, then the amount of benefit for our calculation is equal to the actual monthly benefit amount that the deceased was receiving upon his or her death.

On the other hand, if the deceased had started receiving benefits prior to FRA, the amount of his or her benefit would be something less than his or her PIA. If that’s the case, the Social Security rules have determined that the operative amount of benefit might be something more than the amount that the deceased was receiving upon his or her death.

Here’s how it works: Three amounts are calculated – 1) the amount of benefit that the decedent was actually receiving; 2) the reduced benefit based on the PIA of the decedent and the survivor’s age (see the paragraph above “The Age of the Survivor” for details on this calculation); and 3) 82.5% of the PIA of the decedent. These three amounts are listed from lowest to highest, and then the following determination is made: if #2 is less than either of the others (#1 & #3), then that amount is used for the calculations. If #2 is the greatest of the three amounts, then the greater of the other two amounts is the benefit amount used for the calculations.

I realize that computation is very complex and convoluted, so here’s a brief example:

Let’s say that Jane is the surviving spouse, and Dick had started receiving his SS benefit earlier this year at age 62. Jane is now 64. If Dick’s PIA was $2,000, then when he started receiving his benefit at age 62, it was reduced to $1,500.

So, we run our calculations to come up with the three figures: 1) $1,500 (actual benefit that Dick was receiving); 2) the reduced benefit based upon Dick’s PIA and Jane’s age, which calculates to 90.167% times $2,000, or $1,803; and 3) $1,650 (82.5% of Dick’s PIA).

Arranging these figures from lowest to highest gives us 1,3,2. As described above, if #2 is the largest of the three figures, then the larger of the others is the actual benefit – so #3, $1,650, is the amount of the survivor benefit that Jane is eligible for, in these circumstances. This is the maximum amount of Survivor Benefit that Jane is allowed.

Hope this helps to clear up a very complex set of rules!

Posted on Sep 21st, 2012

by author: jblankenship.

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Posted in: early retirement, Social Security, social security survivor benefits, survivor benefits.
Tagged: Social Security · survivor benefits

Does Your IRA Include After-Tax Money?

Sep 19th, 2012

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Or: There’s Basis In Them Thar Funds!

If you have an IRA that has certain types of funds in it, you may be in a position to have some of your distributions treated as post-tax, meaning that you will not have to pay ordinary income tax on the distribution as you normally would. But what kinds of money is considered post-tax?

The common way to have post-tax funds in an IRA is to make non-deductible contributions to the account. This occurs when you are not eligible to make deductible contributions due to income restraints, but you still wish to make IRA contributions for the year.

For example, if in 2012 you have income in excess of $112,000 ($68,000 if single) and you’re covered by a retirement plan at work, you can still contribute up to $5,000 (plus $1,000 if over age 50) to an IRA – you just can’t deduct the contribution from your income for tax purposes. See the article on 2012 Retirement Plan Limits for more details on how this works.

Another way to have post-tax funds (also known as “basis” in the IRA) in your IRA is to over-contribute funds without distributing them. This happens if you put in more than the annual limit.

In addition, if you rolled over a retirement plan that included post-tax funds, you’ve established basis in the IRA.

The last way to do this is if you made contributions to the IRA as a qualified reservist – if a reservist called to active duty after September 11, 2001 makes a distribution from a qualified retirement plan (QRP) this can be rolled over into an IRA as post-tax funds without tax or penalty. Commonly this type of distribution is either made as a rollover into a Roth IRA or just taken as cash, so this one probably doesn’t occur very often.

What Happens With the Post-Tax Money?

So, what happens when you have basis in the IRA? Even though you made post-tax contributions to the account, there is likely a portion of the account that is also pre-tax. Any other (deductible) contributions made to the account, as well as pre-tax rollovers from QRPs, and the growth of the funds in the account will be pre-tax when distributed.

In addition, all of your IRAs are aggregated when considering how the money is taxed. So, for example, let’s say you have two IRAs, one with all pre-tax money in the amount of $50,000, and another with $25,000 of basis (post-tax) and $25,000 of pre-tax money. When you take a distribution of $10,000 from either account, the total amount of taxable and non-taxable (basis) is considered to determine the ratio of taxation. Since the total of taxable funds is $75,000, and $25,000 non-taxable, $7,500 of the $10,000 distribution will be subject to tax, and $2,500 will be tax-free.

Posted on Sep 19th, 2012

by author: jblankenship.

Posted in: IRA, ira contribution limits, non deductible ira contribution.
Tagged: IRA · ira contribution limits · non deductible ira contribution

Financial Planning Pyramid: Foundations

Sep 17th, 2012

by sraskie.

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You can’t build a house from the top down, right? Like most solid structures, they start with solid base, a firm foundation. Some of the biggest skyscrapers are started below ground level, well beyond what’s in our view when we look at the behemoths of structures. Can you imagine a skyscraper built on just a foundation of concrete? The first strong wind or tremor would send it toppling. The same process can be applied to financial planning. You have to have a solid base, a firm foundation before you can think about building a portfolio, estate planning, etc.

Generally, the financial planning pyramid starts with the base known as risk management. This includes such risks as auto and home insurance, an emergency fund, life and disability insurance, and a will. Having this solid base protects you from many risks in life, but also protects your plan and your money that you’ve worked so hard to earn and invest. For example, let’s say you’re at fault in an auto accident and are liable for $500,000 in damages. Proper auto insurance liability limits will take care of this amount. If you don’t carry enough coverage or choose to not have insurance, then you are essentially choosing to self-insure – meaning you’ll pay the damages out of pocket. Very few people I know can afford to do this; which is why we transfer that risk to the auto insurance company. This scenario can be made analogous to home insurance, pre-mature death (life insurance), an emergency fund (unexpected expenses from job loss or to pay high deductibles in an insurance policy), and so on. It’s this risk management base that protects our wealth and future wealth and plans, so we don’t have to dip into our IRA, 401(k), etc., and having our financial future being upended.

Another time, I’ll dive into and explore the middle of the pyramid – wealth accumulation and management.

Posted on Sep 17th, 2012

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning, health insurance, Insurance.
Tagged: emergency fund · financial planning · insurance

A Social Security Option Strictly for Divorced Folks

Sep 14th, 2012

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There is a loophole in the rules surrounding how divorced folks’ Social Security benefits are treated. As you may know from other articles you’ve read here and elsewhere, if you were married for at least ten years and you’ve been divorced for two years, as long as your ex is at least age 62, you are eligible to file for a Spousal Benefit based upon the ex’s record. In addition, as long as you fit the circumstances, if your ex passes away before you, you will have access to his or her Social Security benefit amount as a Survivor Benefit. These things are pretty much the same as if you were still married to your ex-spouse.

There’s one rule that is different for ex-spouses than for a married couple – and it has to do with the restricted application for Spousal Benefits.

Restricted Application for Spousal Benefits

If you’ll recall, this is when you have reached Full Retirement Age (FRA, age 66 for most folks these days, but increasing up to 67 between birth years of 1955 to 1962), and at this age you can file strictly for Spousal Benefits if your spouse has already filed for his or her benefits. This allows you to receive a benefit equal to half of your ex’s Primary Insurance Amount (PIA, the amount he or she would receive in benefits at his or her FRA) while allowing your own benefit to accrue Delayed Retirement Credits of 8% per year, as much as a 32% increase.

What’s different for divorced folks is that your ex-spouse doesn’t have to have already filed for benefits in order for you to file the restricted application for Spousal Benefits only. You only need to be divorced, at Full Retirement Age and have not filed for your own retirement benefit.

The fact on its own isn’t really a departure – after all, you wouldn’t want your ex to control when you would have access to benefits that you are eligible for. What’s different is that BOTH spouses can file restricted applications on the other’s record. In the case of married folks, only one can file a restricted application, because there is a requirement for the other spouse to have filed. Since this requirement is not present for divorced spouses, both can file the restricted application.

So, there you have it. The one rule that can be used by ex-spouses that can’t be used by anyone else. It’s not much, but it’s at least something.

Posted on Sep 14th, 2012

by author: jblankenship.

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

Financial Autonomy

Sep 10th, 2012

by sraskie.

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Recently, I had the opportunity to sit across from a couple nearing retirement, and looking for some options with regards to their cash flow needs, possible retirement dates, and the ever-present question, “Do we have enough?” Typically, these conversations involve careful consideration given to a number of different worries, fears and “big” problems that clients face. Frequently I will work with couples who have a hard time agreeing on how much they can spend in retirement, how much the can afford to save, and where to prioritize and allocate the money (to retirement, a wedding, college, etc.).

This couple, however, was different.

Well in position to enter retirement comfortable with little, if any to worry about, the tension between these two spouses could be cut with a knife – it was almost tough to sit through. One would snip at the other, and the other would interrupt while the snipping was happening to snip back. Small jabs, really – and nothing to get too excited about – at least in this practitioner’s opinion. Were they arguing about needing more, where to save, who will work more? Not at all. They were arguing about the little things. One spouse was upset because the other spouse was spending money on a local community newspaper subscription, while the other was upset about spending on something similar.

After about 20 minutes of quasi-hostile bantering back and forth, they asked my opinion. And here’s what I told them:

Autonomy.

I suggested that they each allocate a certain portion of their earnings each month to separate and personal checking accounts. I also suggested that other than knowing the amounts going in each month to each account, they needn’t discuss the purchases they make from their respective, separate accounts – it was their money to do with what they wanted, from newspaper subscriptions to purchasing items for a hobby. The looks on their faces were of genuine consideration of the idea. And they seemed to relax just a bit in their chairs. This couple was brilliant on the big things, but was letting the little things hamper their progress toward their financial planning goals. They left the office saying they would give it a try.

For couples I have recommended this to, the results have been extremely favorable. Many couples often report a sense of freedom, even though they may not feel chained down to their mutual budgets. Some have even reported using the money to buy gifts for the other spouse, relating back to the time when they were dating and such gifts were surprises, not expected and known purchases from the mutual account.

Financial autonomy can be a great tool in financial planning for couples. And sometimes being allowed to have some independent control on the little things, makes working together on the big things tolerable, if not enjoyable.

Posted on Sep 10th, 2012

by author: sraskie.

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

Clarification on Questions About Spousal Benefits

Sep 7th, 2012

7 comments

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.

Since I’ve been receiving quite a few inquiries about certain aspects of the Spousal Benefit, I thought I’d put up an article with a few definitive statements about this confusing part of the Social Security system.

1. If you are eligible for a Spousal Benefit and you’re under Full Retirement Age, when you file for your own benefit, you are automatically filing for both your own benefit and the Spousal Benefit at the same time. This is known as the deemed filing rule.

By “eligible”, we mean that your spouse has filed for his or her benefit, or filed and suspended.

If you are in the situation above, you cannot file for your own benefit alone, you’ll have to file for both benefits at that time, and both benefits are reduced since you’re filing before Full Retirement Age.

2. The only time that you can file solely for Spousal Benefits is when you are at least at Full Retirement Age and your spouse has filed for his or her benefit (could have suspended). This is known as a restricted application for Spousal Benefits only.

3. You cannot File and Suspend and also file a restricted application for Spousal Benefits only at the same time. This doesn’t mean that one person couldn’t use both provisions at some point, or that two spouses couldn’t use these provisions at the same time – but one person can’t do both at exactly the same time.

4. Two spouses cannot File and Suspend at the same time for the reason of allowing the other spouse to file for spousal benefits. Technically they both could File and Suspend, but doing so would not allow the other to file for Spousal Benefits. There is a little-known side-benefit to the File and Suspend option that could allow you to “unsuspend” and receive all back-benefits up to that point in your life, rather than re-applying and receiving the Delay Credits. This has to be done while you’re alive, but it’s a technical option available.

5. It’s possible for both spouses to at some point each receive a Spousal Benefit – here’s example:

Dick is 66, and Jane is 62. Jane files for her reduced benefit at 62 and Dick, being at FRA, files a restricted application for Spousal Benefits and receives half of Jane’s PIA for the coming four years, until he reaches age 70. When Dick files for his own benefit, now increased by Delay Credits, Jane is eligible to file for the Spousal Benefit increase. So both eventually received the Spousal Benefit in their lifetimes.

Hope these things helped to clear things up. Let me know in the Comments if you have additional questions about Spousal Benefits.

Posted on Sep 7th, 2012

by author: jblankenship.

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Posted in: Deemed Filing, delayed benefit, DRC, Early Filing, file and suspend, Social Security, Social Security spousal benefit.
Tagged: Deemed Filing · delayed retirement credit · Social Security

Student Loan Interest Rates Won’t Increase, For Now

Sep 5th, 2012

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On June 29, 2012, Congress approved legislation to stop the interest rate on federal subsidized Stafford Loans from increasing from the current 3.4% to 6.8% on July 1, 2012, for new college borrowers. The rate had been scheduled to increase under provisions in the College Cost Reduction and Access Act of 2007. The rate freeze is effective for one year – and will (unless extended) increase to 6.8% on July 1, 2013.

Under the new legislation:

Rates on subsidized Stafford Loans will remain at 3.4% for undergraduates for one more school year, until July 1, 2013.
As of July 1, 2013, undergraduate students with a subsidized Stafford Loan will have a maximum of six year of in-school status when the federal government will pay the interest on the loan while the student is in school. Previously, the government paid the interest for as long as it took a student to get a diploma.

Posted on Sep 5th, 2012

by author: jblankenship.

Posted in: 2012 Calendar Year, education.
Tagged: education expenses · education saving

How to Keep Your Sanity When the World Around You Isn’t

Sep 3rd, 2012

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In my current re-read of Benjamin Graham’s timeless book “The Intelligent Investor”, I ran across the following paragraph and was immediately struck by the simple, deep truth in the lines:

But note this important fact: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and not more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.

Jason Zweig, in his notes for the Revised 4th edition of The Intelligent Investor writes:

This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets. If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.

I couldn’t possibly agree more. This is the exact advice that I have given to many folks who become anxious at market downturns and the like. The point is that you should never have money invested that you’ll need in the short term, something like within two years. That money should be placed in rock solid accounts, such as money markets, checking, CD’s, or good ol’ passbook savings accounts.

This allows you to withdraw the money you’ll need without having to concern yourself with current market conditions. The remainder of your investment portfolio is then invested in the normal way, via stocks, bonds, and the like, which you’ll rebalance on an annual basis. As you rebalance, you’ll replenish the short-term account(s) with the coming couple of years’ worth of funds needed (more years if you’re being conservative!).

This doesn’t mean that you’re burying your head in the sand – rather, it means that you’re not allowing short-term “noise” of the market’s fluctuations to cause you to take actions when you’re better off standing still. Use the quote above to reassure yourself when doubts are clouding your judgment: since you’re not forced to sell, you haven’t lost anything.

Posted on Sep 3rd, 2012

by author: jblankenship.

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

How Social Security Earnings Limits Impact Total Family Benefits

Aug 31st, 2012

3 comments

As we’ve discussed in the past, there are limits on the amount of earnings that a person can receive while also receiving Social Security benefits, if the person on whose record the benefits are being received is under Full Retirement Age. But those earnings limits don’t only impact the benefit of the primary receiver of benefits – anyone else who is also receiving benefits based on his or her record will also be impacted by the earnings limits.

How Does This Work?

As you know from the previous article, in 2012 if an individual is receiving wage income in excess of $14,640, for every $2 of earnings over that amount, benefits received are reduced by $1. If there is no one else receiving benefits on his or her record, the individual would lose benefits by $1 for each $2 over the limit.

However, if someone else is receiving benefits on the same record, such as a spouse and/or a child, the total amount of reduction remains the same, but the reduction is spread pro rata across all benefits being received on that person’s record.

An Example

For example, let’s say that John has a PIA (Primary Insurance Amount) of $2,000, and is age 62. He files for his own benefit, at a reduced amount of $1,500 per month. At the same time, John’s wife, Priscilla (age 66) who has no earnings record of her own, files for Spousal Benefits on John’s record. The Spousal Benefit to Priscilla is $1,000 per month.

John is still working, earning a total of $20,000 per year, which is $5,360 more than the earnings limit. That amount will reduce the benefits for both John and Priscilla by $2,680 – prorated between the two benefits. So once the amount of earnings is known (typically by the following year), benefits of $1,072 will be withheld from Priscilla’s checks, and $1,608 from John’s checks. The math is as follows:

$2,680 x ($1,500 / $2,500) = $1,608 (John’s reduction)

$2,680 x ($1,000 / $2,500) = $1,072 (Priscilla’s reduction)

The same would go for any other people that are receiving benefits based on John’s record – the total reduction is limited to the overall $1 for every $2 rule.

Posted on Aug 31st, 2012

by author: jblankenship.

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Posted in: Early Filing, Earnings Limits, Social Security, Social Security spousal benefit.
Tagged: earnings limits · Social Security · spousal benefit

The “Fiscal Cliff”

Aug 29th, 2012

2 comments

What is the “fiscal cliff”? It’s the term being used by many to describe the unique combination of tax increases and spending cuts scheduled to go into effect on January 1, 2013. The ominous term reflects the belief by some that, taken together, higher taxes and decreased spending at the levels prescribed have the potential to derail the economy. Whether we do indeed step off the cliff at the end of the year, and what exactly that will mean for the economy, depends on several factors.

Will expiring tax breaks be extended?

With the “Bush tax cuts” (extended for an additional two years by legislation passed in 2010) set to sunset at the end of 2012, federal income tax rates will jump up in 2013. We’ll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The maximum rate that applies to long-term capital gains will generally increase from 15% to 20%. And while the current lower long-term capital gain tax rates now apply to qualifying dividends, starting in 2013, dividends will once again be taxed as ordinary income.

Additionally, the temporary 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax, in place for the last two years, also expires at the end of 2012. And, lower alternative minimum tax (AMT) exemption amounts (the AMT-related provisions actually expired at the end of 2011) mean that there will be a dramatic increase in the number of individuals subject to AMT when they file their 2012 federal income tax returns in 2013.

Other breaks go away in 2013 as well.

Estate and gift tax provisions will change significantly (reverting to 2001 rules). For example, the amount that can generally be excluded from estate and gift tax drops from $5.12 million in 2012 to $1 million in 2013, and the top tax rate increases from 35% to 55%.
Itemized deductions and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit all revert to old, lower limits and less generous rules.
Individuals will no longer be able to deduct student loan interest after the first 60 months of repayment.

There continues to be discussion about extending expiring provisions. The impasse, however, centers on whether tax breaks get extended for all, or only for individuals earning $200,000 or less (households earning $250,000 or less). Many expect there to be little chance of resolution until after the November election.

Will new taxes take effect in 2013?

Beginning in 2013, the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–increases by 0.9% for individuals with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals. This tax applies to some or all of the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

Both of these new taxes were created by the health-care reform legislation passed in 2010–recently upheld as constitutional by the U.S. Supreme Court–and it would seem unlikely that anything will prevent them from taking effect.

Will mandatory spending cuts be implemented?

The failure of the deficit reduction supercommittee to reach agreement back in November 2011 automatically triggered $1.2 trillion in broad-based spending cuts over a multiyear period beginning in 2013 (the formal term for this is “automatic sequestration”). The cuts are to be split evenly between defense spending and nondefense spending. Although Social Security, Medicaid, and Medicare benefits are exempt, and cuts to Medicare provider payments cannot be more than 2%, most discretionary programs including education, transportation, and energy programs will be subject to the automatic cuts.

New legislation is required to avoid the automatic cuts. But while it’s difficult to find anyone who believes the across-the-board cuts are a good idea, there’s no consensus on how to prevent them. Like the expiring tax breaks, the direction the dialogue takes will likely depend on the results of the November election.

What’s the worst-case scenario?

Many fear that the combination of tax increases and spending cuts will have severe negative economic consequences. According to a report issued by the nonpartisan Congressional Budget Office (Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013, May 2012), taken as a whole, the tax increases and spending reductions will reduce the federal budget deficit by 5.1% of gross domestic product (GDP) between calendar years 2012 and 2013. The Congressional Budget Office projects that under these fiscal conditions, the economy would contract during the first half of 2013 (i.e., we would likely experience a recession).

It’s impossible to predict exactly how all of this will play out. One thing is for sure, though: the “fiscal cliff” figures to feature prominently in the national dialogue between now and November.

The foregoing post was brought to you by Broadridge/Forefield.

Posted on Aug 29th, 2012

by author: jblankenship.

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Posted in: #noTOP, 2012 Calendar Year, 2012 tax year, capital gains rate, financial planning.

Book Review: The Malign Hand of the Markets

Aug 27th, 2012

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Subtitle: The Insidious Forces on Wall Street that are Destroying Financial Markets – and What We Can Do About It

This book, written by Duke Professor of Psychology, Biology and Neurobiology John Staddon, provides a quite interesting view of the way our markets are impacted by the “malign hand” – a play on the “invisible hand” described by Adam Smith in his book “Wealth of Nations”.

Briefly, the Invisible Hand Theory describes how an unknown force allows the market to self-balance – the self-interest of the individuals making up the marketplace has a beneficial impact on the overall marketplace, even though the individuals in the marketplace are only interested in their own benefit.

But we’re not here to talk about Invisible Hand, but rather the Malign Hand. Staddon explains that individual self-interest may have a negative impact to the overall marketplace. One example of this is in the tragedy of the commons – where a finite amount of resources, let’s say for example fish in the sea, are harvested by a set number of fishermen. For each additional fish caught, the fisherman makes more money. Self-interest leads the fishermen to catch more and more fish, and for a while that means they all make more money. After some time has passed, the number of fish available begins to dwindle, enough that none of the fishermen is making enough money to live on.

Once this has happened, preservation measures must be taken in the form of regulation, limiting all fishermen to a severely reduced catch. This regulation drives some of the fishermen out of the market, and gradually the fishery recovers (hopefully) to a point that sustains the fewer remaining fishermen with an adequate living.

Mr. Staddon argues that the tragedy of commons, which has many faces in our financial industry, is brought on by the way our system of regulation (and de-regulation) has evolved over time. This system results in feedback loops that end up reinforcing the wrong kinds of behavior – behavior that actual exacerbates the situation, rather than restoring balance to the market.

Many diverse disciplines are used to help explain how the reinforcement process works: biology, psychology, behavioral economics, and philosophy. This leads to some very interesting theories on how things work in our system. However, this does not lead to a light read – it’s pretty heavy indeed. For those who endeavor to take it on, it’s interesting to read Staddon’s takes on how it all plays out.

Staddon isn’t a believer in Efficient Market Theory, and he takes many opportunities to poke holes in it. Instead, he believes that the EMT only goes part-way to explaining how the market works – and that the rest of the story is left unexplained since there is inherent unpredictability in the market. This is further enhanced (in Staddon’s explanation) by the fact that value in the marketplace is not a consistently easily-identified figure, and in order for a market to be efficient, measures must be easily and concretely identified. Efficiency infers a ratio – and without a way to identify the figures as inputs, a ratio cannot be useful.

I found this book to be very insightful in explaining how governmental influence has not regularly been helpful. One of the examples was particularly interesting: How the fiscal policies and excess (deficit) spending of FDR’s administration during the Great Depression actually prolonged the economic problems rather than improving them as has often been attributed. The improvements to the economy didn’t actually come about until the US entered WWII – which continued the deficit spending, but it also put into play severe austerity measures on the populace, while at the same time putting more people to work. Upon the end of the war, unemployment was at manageable levels and the consumer public had an intense pent-up demand to consume. It was these factors that eventually turned around the economy. Staddon points out that forced austerity measures aren’t readily accepted by the public, so something like this isn’t likely to be artificially employed to resolve our current economic situation.

All in all I enjoyed the book – even though it is a relatively heady read – and I recommend it to anyone who would like more insight on our economic situations, past and present. Staddon also provides some examples of regulatory changes that could be made to help resolve current economic issues. He’s given me a lot of fuel for future research on the topic – I suspect that there are many other sides to the arguments he’s posed.

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 27th, 2012

by author: jblankenship.

Posted in: Book review, economic update.
Tagged: book review

Maximizing Your Pension Using Term Life Insurance

Aug 22nd, 2012

1 comment

There are many, many ways that life insurance can be used. Sometimes it is to replace lost income, when a wage earner dies during his or her working years. Other times it may be to help pay taxes on a large estate upon the passing of the second spouse in a couple, so that your heirs can receive the full fruits of your labors and won’t have to worry about a tax haircut.

Another use for life insurance is to help you to maximize a pension. I know, everyone believes that pensions have gone the way of the buggy-whip. That may be the case for many folks, but I still find a lot of people retiring these days who have a traditional pension.

For those of you who are familiar with pensions, you’ve probably seen the payout options that are typically available: lump sum, single life annuity, joint and 100% survivor annuity, joint and 50% survivor annuity, and so forth. We’ll focus on just two of these options: a single life annuity, versus a joint and 100% survivor annuity.

For an illustrative example, we’ll say that the single life annuity would pay out at a rate of $40,000 per year, while the joint and 100% survivor annuity would pay at a rate of $33,000 per year. The retiree is 62. (Note to the insurance professionals out there: I pulled those numbers out of the air, they may or may not represent realistic annuity payout rates!)

Naturally, you’d like to receive the higher amount from the pension – but the risk that you take is that your survivors would have to get by without that pension income. And if you happened to die relatively soon after leaving the job, this could turn out to be catastrophic for your surviving spouse (and family, if you have other dependents).

You might actually be able to get by on the lower amount, and that would provide your surviving spouse with the same benefit over his or her lifetime as well – but it would be nice to have a leetle bit extra. One way to do this would be to use term life insurance.

If you took out tiered (or laddered) term life insurance policies to cover an approximately 20 years, this could cover any shortfall if you happened to die during that 20-year period. During that time, receiving an extra $7,000 per year from your pension, you could use $2,000 (and gradually less, as your tiered policies expire) to pay the premium on the policy, and then you’d have an additional $5,000. If you saved the difference at an average of 5% return, this would equate to a $165,000 savings by that time. Even if you didn’t save the extra, your portfolio should have grown by that much, assuming that you’re maintaining some willpower over your spending.

At any rate, if you happen to outlive the averages and live beyond age 82, every year that you receive the pension is extra money. If you die earlier, your term policies will pay out to your surviving spouse, providing him or her with the funds to continue with the same or a similar standard of living afterwards.

A pension-maximization strategy isn’t for everyone! Several factors need to be in your favor:

The increase in pension is more than enough to pay the insurance premiums
Your health must be good enough to qualify you for the additional insurance policy(s)
Your spouse must know how to handle the insurance proceeds if you die first
Keep in mind that if the pension is increased, taxes on that retirement income will also increase – to the amount you receive may be less than you think

Posted on Aug 22nd, 2012

by author: jblankenship.

Posted in: life insurance, retirement plans, retirement savings plans.
Tagged: retirement plans · retirement savings plans

The Roth 401(k) Plan

Aug 20th, 2012

by sraskie.

2 comments

Many hard working Americans have access to a defined contribution retirement plan called a 401(k). Essentially, a 401(k) is a retirement savings vehicle provided by employers to their employees as a means for the employee to save for retirement, often with the employer providing a “match” of the employee’s contributions up to a certain percentage.

As of January of 2006 (a result of EGTRRA 2001), employers can now offer employees the Roth 401(k) as part of their 401(k) plan. Before we get into the advantages of the Roth 401(k), let’s briefly look at how the regular 401(k) works. Employees that have access to a 401(k) are generally allowed to contribute up to $17,000 (2012 figures, indexed annually) per year to their 401(k). Employees aged 50 and over are allowed an additional $5,500 (again, 2012 figures, indexed annually). Employee salary deferrals are taken from the employee’s earnings on a pre-tax basis – meaning the amounts going to the 401(k) are not taxed and thus allowed to grow tax deferred in the 401(k) until needed or required to be withdrawn at 70½ (RMDs). When withdrawn, they are then taxed at ordinary income tax rates.

Enter the Roth 401(k).

With a Roth 401(k), an employee’s salary deferrals are taken after the paycheck has been taxed – meaning after tax money goes into the Roth 401(k) account and is allowed to grow tax-deferred and qualified withdrawals are income tax free. Like its regular 401(k) counterpart, the Roth 401(k) requires RMDs to be taken at age 70½.

The Roth 401(k) offers an employee many advantages. The first is that an employee may make more money than would allow him or her to contribute to a Roth IRA. There are no such income restrictions or phase-outs in a Roth 401(k). Additionally, an employee can choose to save money to their Roth 401(k) if they feel they may be in a higher tax bracket at retirement or if they feel tax rates will increase in the future. Also, the maximum contribution to a Roth 401(k) is $17,000 annually versus $5,000 annually for a Roth IRA. Those age 50 or over are allowed to put in an additional $5,500 into their Roth 401(k), whereas those same people are only allowed an additional $1,000 for their Roth IRA. Finally, when an employee retires, they are allowed to roll their Roth 401(k) to a Roth IRA – without taxation or penalty, and avoid RMDs (remember Roth IRAs do not have RMDs).

The first place to check to see if you can take advantage of the Roth 401(k) is with your HR representative. Should you have access to this option, see if your employer will match your contributions to the Roth 401(k). The Roth 401(k) can make a lot of sense for those wanting to save even more money on a tax-advantaged basis.

Posted on Aug 20th, 2012

by author: sraskie.

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Posted in: IRA, retirement plan, Roth 401(k), Roth IRA.
Tagged: IRA · retirement plans · roth 401 k

Average Indexed Monthly Earnings Years

Aug 17th, 2012

2 comments

We’ve discussed the AIME (Average Indexed Monthly Earnings) calculation before, and it’s not like anything has changed about those calculations. It turns out that the calculation process can be a bit confusing (shocked? I think not).

The AIME is calculated using what’s known as the “base years”, which are those years between your age of 22 and 62 that occurred after 1950 (I realize most folks needing to know about this didn’t need that 1950 reference, but it’s part of the rules, so I included it). Of those 40 years, only the 35 years with the highest earnings are used to calculate the AIME. The earnings for each year is indexed (see the original article for details) and then the earnings are averaged.

One of the questions that comes up is how years after age 62 are handled in this process. If earnings in subsequent years are greater (after indexing) than earnings in the earlier “top 35” that was used for the calculation, your AIME can be recalculated, which might make a change to your PIA. So working past your age 62 can have a positive impact on the benefit that you (and possibly your family) can receive.

See the earlier article about the Primary Insurance Amount (PIA) calculation for how the AIME is used to generate the PIA. Bear in mind that additional earnings may not have a dramatic impact on your PIA. This is because (using 2012 figures) any amount of your AIME between $767 and $4,624 are included at the rate of 32%, and AIME amounts above $4,624 are included at only 15%. Therefore, increases to your AIME above those amounts have only a minimal impact on your PIA.

Posted on Aug 17th, 2012

by author: jblankenship.

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Posted in: Social Security, social security benefits, social security retirement.
Tagged: Social Security · social security benefits · social security retirement

Book Review: Low Fee Socially Responsible Investing – Investing in your worldview on your terms

Aug 15th, 2012

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Today I’m reviewing a book written by a friend and colleague, Tom Nowak, CFP®. Tom is passionate about Socially Responsible Investing (SRI) and he has written a great overview of the concept. He introduces some very good tools that the average investor can use, either on your own or to help guide conversations with your advisor.

But SRI concepts are available in many forms from many sources – what makes Tom’s book unique is that he develops a framework that allows the individual investor to implement SRI strategies (or for that matter, any investment strategy reflecting a particular worldview) in a very cost-effective manner.

Mr. Nowak starts out with a discussion of fees and how they can have a major impact on your overall investment returns. As you may already know, any reduction that you can achieve on the fees that your investment activities cost you will be returned directly to your bottom line. Tom outlines the options that you can use for investing, pointing out the pros and cons of each alternative. Certain alternatives are more cost effective at various asset levels – and these alternatives are discussed and reviewed at length.

Next, the author outlines his recommended approach for the Ultra-Low Fee SRI portfolio. Interestingly, as Tom points out, this sort of approach could be used for literally any worldview, including SRI in its many forms as well as, for example, whatever you might call the exact opposite of socially-responsible (socially irresponsible? sin-oriented? college fraternity house oriented?).

Tom then follows up with a chapter with Q&A on the approach, which provides excellent insights to help you implement such a strategy. After that chapter is a chapter for your advisor to review as you look to implement your strategy. Advisors can learn quite a lot from reading what Mr. Nowak has to say – I’ve found his insights quite valuable over the years, and the chapter presents his insight very well.

All in all, I think this is a great book for any investor to read – regardless of whether or not you are looking to implement an SRI investing approach. Advisors have a lot to learn from Tom’s approach as well, for helping your clients to implement investment approaches that reflect the client’s particular worldview. Tom does a wonderful job of explaining how to implement very low-cost investment strategies using readily-available tools and investment products.

Tom’s passion for the subject shows through in the book – do yourself a favor and spend some time learning about Tom and his excellent ideas.

Posted on Aug 15th, 2012

by author: jblankenship.