Sunday, June 24, 2018

Measuring Risk

Risk comes in many forms. The numerous types of insurance available help us mitigate some risk. Often folks take elaborate measures to avoid any kind of risk. But risk abounds. Life is a risk.

To avoid risk it may make sense to keep your money in cash, money markets, CD's or stable value funds. You watch as the stock market completes daily gyrations. After a huge downturn you express relief that your pile of cash is safe. But then you groan during an upturn, lamenting all the profits "you could have made"!

Running water, over time, wears away stone or carves a riverbed.

So too does inflation and taxes which wear away at your purchasing power when you keep your money "too safe". Little by little, year by year your pile of cash shows the same amount, or maybe a tiny gain. But below the surface, inflation has dramatically reduced the goods and services you are able to buy.

Over time, your cash will suffer the same fate as the stone - it will be worn away.

Bite the bullet. Put your money to work for you.
Yes, keep your emergency fund in cash or money markets.
Yes, keep the money you'll need for purchases in the near future (12-18 months) safe. Invest the rest. The stock market goes up and down. If you draw a trend line on a stock market chart you will see that the trend, over time, has been up.

Be $ Smart
- Work hard. Save. Make your money work hard too.

Sunday, May 13, 2018

Promoting Financial Literacy

It is sad to say that in our amazing country where we have so many opportunities and access to so much that we are sorely lacking in financial education. Personal finance is not taught in schools. Decades ago I learned budgeting and money while working on a Girl Scout badge. At 10 years old, not much stayed with me. Unfortunately, that was my only exposure.

On the whole, we are all working/living with a handicap. Some folks have a knack for handling money, some have a mentor but most fly by the seat of their pants. Too many people are embarrassed to admit what they don't know. This struggle breeds fear, stress, anxiety and illness.

Good money skills have far reaching effects. They allow me to:

- control my day to day spending,
- effectively allot my month to month finances and live within my means,
- create, track and meet my financial goals,
- be prepared for emergencies with a $ cushion,
- understand complicated transactions like loans, insurance and mortgages,
- have a feeling of success and self-sufficiency, and
- make sound choices to live life to the fullest.

Those are the personal benefits. On a wider basis, for the general public, good financial skills:

- increase every one's ability to meet basic needs,
- improve their purchasing power,
- allow folks to work, spend and play putting their earnings into circulation,
- increase overall productivity, profits and economic growth,
- reduce general stress and illness, and
- keep personal wealth and the economy growing.

After the "big financial meltdown" in 2008 we became acutely aware of our financial savvy deficiency. Many programs were proposed for schools. Was anything ever done? For ourselves and the future of our country it is important that we pursue and encourage financial literacy.

Some ways we can help:

1. Take a class - at a local high school or library.
2. Read a financial book - increasing vocabulary recognition.
3. Ask your HR director to provide a class at work.
4. Teach your children or your grandchildren shopping skills and how to make change.
5. Approach the principal at school to request money ed be added to the syllabus.
6. Encourage students to take a financial basics course in college.

Be $ Smart - talk about money with your kids, grand kids and family. Bring money out into the open. Make financial literacy important, we all will benefit.

Monday, April 30, 2018

The Cost of Financial Abdication

In spite of decades of the women's movement some attitudes are difficult to change. Many more women are in the workforce than 30 or 40 years ago. Many women make substantial salaries - some even make more than their spouses. A recent survey showed that 56% of married women still leave major investing and financial decisions to their spouses. 61% of that group, qualified as millennials, fall into that category. (Those born between 1981 and 1991.)

Women who have experienced divorce or widowhood plead with their colleagues to pay attention to important financial decisions that will profoundly impact their future! These women suffered the consequences of lack of involvement in financial decision making and urge others to break the cycle of financial abdication.

Some of the surprises that surfaced:
- outdated or lost wills making the estate distribution more costly and time consuming.
- hidden debt and credit cards,
- shared beneficiaries,
- hidden spending,
- secret accounts,
- undisclosed IRA's or 401k plans,
- lack of adequate life insurance or huge loans against life insurance policies.

Remember, women usually live longer than men. Whether you choose to be single or become single as a result of death or divorce, you will need the confidence and experience of being financially savvy.

Be $ Smart - make financial decisions a partnership. You need to protect your future.

Sunday, April 15, 2018

Investment Tax Categories

Last week I addressed tax-efficiency in your portfolios. Here I shall review the differences among those classifications of taxable, tax-deferred and tax-exempt to make tax-efficiency more readily understood. The following are simple explanations. For expert tax guidance please speak with your accountant or tax attorney.

Taxable: an account that holds money on which you have already paid taxes - e.g. bank checking or savings accounts or brokerage accounts. These accounts may have stocks, bonds, CD's, etc. Every year you receive a 1099 of all reportable earnings: dividends and interest as well as reportable proceeds: stock or bond sales. You enter these numbers on your tax return and pay taxes accordingly.

Tax-exempt: refers to bonds (loans) issued by municipalities (states, cities, towns, counties). These bonds are exempt from federal taxes. As an incentive to its residents to buy these bonds, which finance local projects, you pay no state taxes on the interest. As a NY resident, if you purchase a NY State bond, it will be double tax exempt as you will pay no state or federal taxes on the interest. However, NY reserves the right to tax the interest earned on other states' bonds.

Tax-deferred: means you pay no taxes now but when you withdraw the money both state and federal taxes are due. IRA, SEP, 401k, 403b all grow tax-deferred. Your 401k or 403b plan from work will take money from your paycheck before deducting taxes, deposit the money into your plan where it will grow tax-deferred (you will not receive a 1099 each year). Taxes will be paid when you start withdrawing money from these accounts later in retirement. The money will be taxed, as your income is taxed, both by the state and the federal government. Hopefully, in retirement you will be in a lower tax bracket and, consequently, pay less in taxes.

: refers to a Roth IRA where money grows without paying taxes each year and is distributed without being taxed. Actually, the money contributed to most Roth IRA's is money on which you have already paid taxes; it is the earnings (growth) that are tax-free.

Be $ Smart - Learn about the impact of taxes on your investments. Position your assets effectively to pay less in taxes.

Monday, April 9, 2018

Make Your Portfolios More Tax Efficient

We are in the midst of tax season so this is a good time to review your portfolio to make sure it is arranged in the most tax-advantaged way.

Most investments (bonds, bond mutual funds and ETF's) that generate interest work best in a tax-deferred account.

Muni bonds are an exception as their interest is exempt from federal taxes and in many cases, exempt from state taxes as well. Hold municipal bonds in your taxable accounts.

Stocks, usually long term investments, should be held in your taxable account for several reasons:

1. long-term capital gains on stocks are taxed at a maximum 20%. Most folks will pay less, 15%. That is certainly a better rate than 25% - 30% regular income as it would be taxed from an IRA or 401K distribution.

2. losses in your taxable account can be used to balance any gains you realize. Losses cannot be taken in a tax-deferred account.

3. qualified dividends from stocks are taxed at 20%. These same dividends in a tax-deferred account are added into the overall distributions and are taxed as ordinary income - 20% -37%.

4. you may donate stock that has grown significantly to charity avoiding any capital gains tax.

5. you may pass appreciated stock on to your heirs at your death. This will give them a step-up in basis (which means the cost basis of the stock - what you paid for it - will now be the value of the stock on the day you died.) If they sell the stock immediately there will be little or no capital gains tax.

Roth IRA's are different!!
All contributions to Roth IRA's are after tax.
Distributions from a Roth are tax-free, so holding both stocks and bonds in a Roth is fine. The one problem is that you may not take a loss on any stock that may have fallen in value.

Be $ Smart - be aware of how dividends, interest and capital gains are taxed so you may position your portfolios in the most tax-efficient way. You keep more money in your pocket and less in Uncle Sam's.

Thursday, March 22, 2018

A Success Story

Earlier this year I wrote a money tip about finding lost pensions.
About a month later my daughter asked me for her dad's expired passports. As I rummaged through old papers I found a letter from one of my late husband's former employers stating that because of his employment of so many years he would be entitled to a monthly pension at age 65.

This letter started a months-long quest for the missing pension. My thinking was to act on my own advice!

The quest began in March by searching for the company that bought the firm my husband had worked for more than 30 years ago. I kept hitting dead ends as there had been several company mergers. Finally I discovered the name and address of the present firm - very different from the original. Also, the company headquarters were in a foreign country!

I emailed the main office, and to my surprise, had a response within three days. Who was I? What did I want? Why did I wait so long?

After a few exchanges they asked for birth, death, and marriage certificates as well as social security numbers. Weeks passed. They eventually responded saying they had no record of my husband ever having been an employee of that company!! I insisted that he had and he was not just an employee but also a corporate officer, at one time the Financial Vice President. Still no records to be found. They then told me to request a Record of Earnings from the Social Security Administration.

The SSA required a form (found online) and a check to pay for the record. Four months later the earnings report arrived showing the years, company names and earnings for my late husband. It was a short walk down memory lane of our early years together.

In the meantime, to back up the earnings report, I found online the company's old annual reports existed on microfische at the 42nd Street Library. (Several of which he oversaw as corporate Treasurer.)

Bottom line - This past week the company agreed to pay me the survivor benefit of half the pension in lifetime, monthly payments.

By law, companies may not just ignore pension obligations and absorb pension money. They must make an effort to find former employees but they give up after mail is returned three times. It is up to us to pursue.

Be $ Smart
- take the initiative to find a lost pension. You will reap the rewards.

Below is a link to the brochure issued by the Pension Benefit Guaranty Corporation to help you in your search. Pass it along to friends and family. Good luck!

Sunday, March 18, 2018

When Should We Seek the Help of a Financial Advisor?

Many folks think financial advice is for the wealthy. Not true! In my experience, it's the not-so-wealthy who need expert guidance to move to the next level. We have not been given the tools in our formal education. Most of us fly by the seat of our pants. Many have no plan at all so the end result is haphazard.

Reading financial magazines and books helps us become familiar with the lingo/jargon of the industry and prepares us to meet and comprehend an advisor.

When should we seek advice?

- at a young age after getting our first job. Here we'll learn the benefit of saving and using a 401k/403b. Maybe even get some direction about cash flow (aka budgeting). An advisor can help us get off to a strong start!

- getting married where an advisor may offer ways of combining assets and setting common goals. Also, he/she may offer guidance about protecting assets.

- mid career when we feel we're not meeting our financial goals. We need someone to point out our mis-steps and get us back on track.
Or if our career has catapulted us into higher income, how best to invest those extra dollars.

- birth of children for suggestions how we must stretch those dollars if one partner will stay at home or how to afford the high cost of child care. In addition, where to find the extra money to fund an education account.

- inheritance (or winning the lottery)
, when extra money appears and before we celebrate too aggressively! This one-time event can be a real blessing in reducing debt, buying a house or fulfilling other dreams.

- divorce, actually prior to meeting with a divorce attorney, to receive guidance on how to structure a settlement and protect yourself.

- death of a partner or spouse to help determine how to survive as a single and the financial implications of being alone.

- prior to 55 to plan for retirement. A good advisor can help us learn if we have "enough" to retire. We may have to work longer or change our life style. Also, we'll learn the best time to file for Social Security. Prior to 55 gives us time to double up on savings or reduce spending before leaving the workforce.

- in retirement to devise a plan for tapping into our nest egg in the most tax-efficient way. We'll determine our sources of income and learn where to find guaranteed streams of income and how large our cash reserve should be.

Financial advice is for those who want to become wealthy or to retain their wealth. The best advice may come from a fee-only advisor who has our best interests at heart.

Be $ Smart - seek financial advice throughout life to grow and protect our wealth.