Maybe you are aware of a lifestyle called FIRE - financial independence retire early. Their goal is to retire at 40.
I recently learned about this movement and have spent some time reading what it espouses. You might find FIRE worthy to explore as it will help you review your spending and ultimately give you more money to invest.
From the blog of Mr. Money Moustache:
FIRE is simply about making smart decisions with your spending so that you waste less money. This means that you have way more money available to work with.
Living with less may test your definition of happiness.
Happiness is your goal in life, and it comes from meeting certain core Human needs. The thing is, that there are many ways to meet each of these needs – some of them free and some of them shockingly expensive.
For example, improving your physical health is one proven way to be happier. But you can accomplish this with a $2500 per month personal trainer or a $100 set of barbells from Craigslist. Same happiness, vastly different cost.
And as it turns out, there is a similar hack for every single one of life’s major expenses. You can meet all your needs at little or zero cost – it just takes a bit of skill. At this level, you would be able to save almost all of your income.
Or, you can substitute a bit more money and a bit less skill to meet those needs in an (only slightly) more efficient lifestyle, like the one I try to lead. This might allow you to save half or two thirds of your income.
Or, you can spray money in every direction randomly, trying to meet an unfiltered list of wants and needs, and end up with a random but very expensive life, while remaining almost broke throughout the entire thing. This is what most people do, and it leads to saving almost none of your income.
Reading the blog could bring you insight and reinforce some of your financial goals. Leading a meaningful life, caring about yourself and others tends to bring satisfaction. I believe in balance in all things.
When a client asks "do I have enough money to retire?" I respond: "please tell me when you plan to die." Not knowing when you will die, how long your good health will last, puts us all on notice to live every moment; to be present.
Be $ Smart - Learn new skills as what FIRE offers. Toss old habits that haven't worked. Find fulfilling work through your job or as a volunteer. Follow the three S's - spend, share, save. Retirement will come, eventually.
Sunday, November 4, 2018
Sunday, September 23, 2018
Take Steps to Protect Yourself Financially
So many of us have heard stories of financial scams. It's not just the elderly who are targeted. We all can feel the pinch, the anger and the shame when we fail to recognize a deal gone wrong. Please read the suggestions below and take action to protect yourself. Pass it along so friends and family also might benefit.
To help adults protect themselves, the Federal Reserve Bank of Philadelphia published seven actions to take. They are:
1. Assign trusted contacts to all financial accounts. This is a person whom a financial institution can contact when exploitation or unusual behavior is suspected.
2. Prepare a durable financial power of attorney. A financial power of attorney allows a trusted person (an “agent”) to act on behalf of someone who can no longer make decisions independently (a “principal”). This is a powerful privilege and should only be given to someone who is trustworthy.
3. Prepare a will. Having a will prepared is important no matter what age you are. For the elderly it will help avoid future problems, because changing the will requires a person to have the legal capacity to do so.
4. Keep up on the latest scams. The Philadelphia Fed says the Federal Trade Commission (www.consumer.ftc.gov/features/scam-alerts), the National Consumers League (www.fraud.org) and AARP (www.aarp.org/money/scams-fraud/fraud-watch-network) are good sources for information.
5. Monitor your credit and your identity. This is an issue for everyone. Older adults tend to apply for new credit less often, they are also less likely to monitor their credit on a regular basis. AnnualCreditReport.com (www.annualcreditreport.com/index.action) allows reports from all three credit bureaus to be accessed for free each year.
6. Consider hiring a money manager. In our extra-busy lifestyle a daily money manager (DMM) can perform many essential financial services, often at a far lower cost than an accountant or a financial planner. The Philadelphia Fed suggests contacting the American Association of Daily Money Managers (https://secure.aadmm.com) for local DMMs.
7. Consider purchasing financial account monitoring services. These are third-party account monitoring services that help to spot suspicious financial transactions. One company mentioned, but not explicitly recommended, is EverSafe (www.eversafe.com).
Be $ Smart - Act now by implementing at least three of the suggested measures within the next month.
To help adults protect themselves, the Federal Reserve Bank of Philadelphia published seven actions to take. They are:
1. Assign trusted contacts to all financial accounts. This is a person whom a financial institution can contact when exploitation or unusual behavior is suspected.
2. Prepare a durable financial power of attorney. A financial power of attorney allows a trusted person (an “agent”) to act on behalf of someone who can no longer make decisions independently (a “principal”). This is a powerful privilege and should only be given to someone who is trustworthy.
3. Prepare a will. Having a will prepared is important no matter what age you are. For the elderly it will help avoid future problems, because changing the will requires a person to have the legal capacity to do so.
4. Keep up on the latest scams. The Philadelphia Fed says the Federal Trade Commission (www.consumer.ftc.gov/features/scam-alerts), the National Consumers League (www.fraud.org) and AARP (www.aarp.org/money/scams-fraud/fraud-watch-network) are good sources for information.
5. Monitor your credit and your identity. This is an issue for everyone. Older adults tend to apply for new credit less often, they are also less likely to monitor their credit on a regular basis. AnnualCreditReport.com (www.annualcreditreport.com/index.action) allows reports from all three credit bureaus to be accessed for free each year.
6. Consider hiring a money manager. In our extra-busy lifestyle a daily money manager (DMM) can perform many essential financial services, often at a far lower cost than an accountant or a financial planner. The Philadelphia Fed suggests contacting the American Association of Daily Money Managers (https://secure.aadmm.com) for local DMMs.
7. Consider purchasing financial account monitoring services. These are third-party account monitoring services that help to spot suspicious financial transactions. One company mentioned, but not explicitly recommended, is EverSafe (www.eversafe.com).
Be $ Smart - Act now by implementing at least three of the suggested measures within the next month.
Sunday, August 19, 2018
Finally, Some Protection for Seniors
A major concern of financial advisors is senior financial abuse. Until recently our hands have been tied for fear of liability breaking privacy laws by contacting family members or halting suspicious transactions. Many advisors are aware their elderly clients are being scammed or taken advantage of by unscrupulous relatives. Client conversations curtail some activities but most advisers hands were tied as they watched assets be drained away.
Finally some protective measures have been put into place effective February 2018:
1. when a new account is opened by someone over 65 the broker or advisor must request the name of a trusted contact person who may be called about questionable transactions. This trusted individual may also share current contact and health concerns as well as guardian, trustee or POA (power of attorney) holder.
The brokerage firm may also request the name of a trusted contact person when it annually or biannually updates records and pertinent account information.
2. brokers are now allowed to place a temporary hold on disbursements they deem suspicious. The rule not only covers investors over 65 but also account holders with mental or physical impairments who may show difficulty protecting their own financial interests. Before making disbursements the broker or money manager may put a temporary hold on the money while he/she investigates and reaches out to the investor, trusted contact or appropriate agency including the police.
This is a big step in the right direction. Now firms may use the trusted contact as a resource to protect assets of the elderly and help reduce financial exploitation. It also allows for proactive measures to stop the crime as once the assets are gone, there is little chance of recovery from fraudsters and scam artists.
Be $ Smart - Encourage your elderly friends and relatives to register a trusted contact with their financial institutions as protection against fraud.
Finally some protective measures have been put into place effective February 2018:
1. when a new account is opened by someone over 65 the broker or advisor must request the name of a trusted contact person who may be called about questionable transactions. This trusted individual may also share current contact and health concerns as well as guardian, trustee or POA (power of attorney) holder.
The brokerage firm may also request the name of a trusted contact person when it annually or biannually updates records and pertinent account information.
2. brokers are now allowed to place a temporary hold on disbursements they deem suspicious. The rule not only covers investors over 65 but also account holders with mental or physical impairments who may show difficulty protecting their own financial interests. Before making disbursements the broker or money manager may put a temporary hold on the money while he/she investigates and reaches out to the investor, trusted contact or appropriate agency including the police.
This is a big step in the right direction. Now firms may use the trusted contact as a resource to protect assets of the elderly and help reduce financial exploitation. It also allows for proactive measures to stop the crime as once the assets are gone, there is little chance of recovery from fraudsters and scam artists.
Be $ Smart - Encourage your elderly friends and relatives to register a trusted contact with their financial institutions as protection against fraud.
Pro's of a Roth IRA Conversion
The Roth IRA is possibly one of the best savings vehicles Congress has given to the American taxpayer. You get to save after-tax dollars, allow them to grow tax-free and take distribution in retirement tax-free.
In 2010 Congress allowed owners of traditional IRA's to make a full or partial conversion to a Roth IRA. Yes, the tax is still due on the money held in your Traditional IRA but once the tax has been paid and the money transferred into the Roth, you are done.
Roth IRA's have many benefits. Today we will address the reasons for converting a Traditional IRA to a Roth. Next week we will cover the reasons when and why you might not/should not convert to a Roth. Note that most reasons are not hard and fast rules. As conditions change, e.g. tax bracket, employment, etc. your decision needs to be reviewed, maybe annually.
Benefits of converting are numerous:
- retirement assets taxable on distribution now move into an account that will grow free of taxes and be distributed free of taxes as well.
- Roth IRA's have no required minimum distribution at age 70 1/2. You may hold a Roth as long as you like and take distributions whenever you like (once you are over 59 1/2 and the account has been opened for 5 years.)
- Distributions, also know as income, pass through as non-events in the federal tax system so payouts do not count as increased income to raise your income tax bracket, Medicare premiums or impose the 3.8% tax on investment income.
- Roth IRA's prove beneficial during the in-between years of retirement before Social Security kicks in.
- Distributions provide necessary income boost without increasing taxes as in filing FAFSA for college aid.
- A Roth conversion helps you better control your tax strategy as once you have paid the tax you no longer worry about tax increases or changing tax policy. Your income/distributions will be tax free.
Be $ Smart - consider the benefits of converting all or part of your Traditional IRA to a Roth IRA. Be sure to consult your tax preparer before making the move.
In 2010 Congress allowed owners of traditional IRA's to make a full or partial conversion to a Roth IRA. Yes, the tax is still due on the money held in your Traditional IRA but once the tax has been paid and the money transferred into the Roth, you are done.
Roth IRA's have many benefits. Today we will address the reasons for converting a Traditional IRA to a Roth. Next week we will cover the reasons when and why you might not/should not convert to a Roth. Note that most reasons are not hard and fast rules. As conditions change, e.g. tax bracket, employment, etc. your decision needs to be reviewed, maybe annually.
Benefits of converting are numerous:
- retirement assets taxable on distribution now move into an account that will grow free of taxes and be distributed free of taxes as well.
- Roth IRA's have no required minimum distribution at age 70 1/2. You may hold a Roth as long as you like and take distributions whenever you like (once you are over 59 1/2 and the account has been opened for 5 years.)
- Distributions, also know as income, pass through as non-events in the federal tax system so payouts do not count as increased income to raise your income tax bracket, Medicare premiums or impose the 3.8% tax on investment income.
- Roth IRA's prove beneficial during the in-between years of retirement before Social Security kicks in.
- Distributions provide necessary income boost without increasing taxes as in filing FAFSA for college aid.
- A Roth conversion helps you better control your tax strategy as once you have paid the tax you no longer worry about tax increases or changing tax policy. Your income/distributions will be tax free.
Be $ Smart - consider the benefits of converting all or part of your Traditional IRA to a Roth IRA. Be sure to consult your tax preparer before making the move.
Sunday, July 15, 2018
Summer $ Reading
Many newspapers and magazines offer book lists for light, summer reading.
As you know, if you want to learn something, read.
Read books. Read magazines. Read websites.
Perhaps reading about money and investing is not considered light reading but when you are determined to care for your money and make it work for you, it is essential reading.
Here are a few books to consider:
The Little Book of Common Sense Investing
by John Bogle, the father of index investing.
Mr. Bogle, also the founder of Vanguard, offers timeless and sensible advice.
A Random Walk Down Wall Street
by Burton Malkiel, helps you understand the workings of Wall Street.
The Investment Answer
by Daniel Goldie and Gordon Murray, give easy to understand investment knowledge.
The Little Book of Main Street Money
by Jonathan Clements (often seen on PBS) provides good, basic financial advice.
One book I suggest for widows or newly divorced is
On Your Own: A Widow's Passage to Emotional and Financial Well-Being
by Alexandra Armstrong and Mary Donahue, offers easy-to-follow advice with step-by-step guidance.
If tackling a book is too heavy for your summer schedule pick-up a financial magazine like MONEY, Kiplingers or FORBES. Read it all - read the ads, the comments, the table of contents, the articles, cover to cover. The more you read the more familiar you become with the terms and the language of finance. The better you understand the language, the less intimidated you feel.
Be $ Smart - Build your confidence. Grow your assets. Learn about investing. Your future is yours to create.
As you know, if you want to learn something, read.
Read books. Read magazines. Read websites.
Perhaps reading about money and investing is not considered light reading but when you are determined to care for your money and make it work for you, it is essential reading.
Here are a few books to consider:
The Little Book of Common Sense Investing
by John Bogle, the father of index investing.
Mr. Bogle, also the founder of Vanguard, offers timeless and sensible advice.
A Random Walk Down Wall Street
by Burton Malkiel, helps you understand the workings of Wall Street.
The Investment Answer
by Daniel Goldie and Gordon Murray, give easy to understand investment knowledge.
The Little Book of Main Street Money
by Jonathan Clements (often seen on PBS) provides good, basic financial advice.
One book I suggest for widows or newly divorced is
On Your Own: A Widow's Passage to Emotional and Financial Well-Being
by Alexandra Armstrong and Mary Donahue, offers easy-to-follow advice with step-by-step guidance.
If tackling a book is too heavy for your summer schedule pick-up a financial magazine like MONEY, Kiplingers or FORBES. Read it all - read the ads, the comments, the table of contents, the articles, cover to cover. The more you read the more familiar you become with the terms and the language of finance. The better you understand the language, the less intimidated you feel.
Be $ Smart - Build your confidence. Grow your assets. Learn about investing. Your future is yours to create.
Sunday, July 8, 2018
The Magic Of Compound Interest
Here's a topic we've addressed before. It is a topic worth repeating. I took the simple explanation directly from the U.S. Department of Labor, Employee Benefits Security Administration.
Compounding investment earnings is what can make even small investments become large investments given enough time.
How It Works – The money you save (either in a savings account, a mutual funds or in individual stocks) earns interest. Then you earn interest on the money you originally save, plus on the interest you've accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.
Start Saving Early - For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.
Starting at 20 - If you put $1,000 a year into an IRA every year from age 20 through age 30 (for 11 years) and stop - and the account earns seven percent annually - your savings will equal $168,514 at age 65.
Starting at age 30 - If you don't start until age 30, but save the same $1,000 amount annually but for 35 years straight at the same seven percent rate, you will have saved three times as much money but your account will grow to only $147,913 at age 65.
Where you might obtain a steady 7% return puzzles me, especially in this low interest rate environment but the point is clear even on a lesser scale:
- Start early!
- Save regularly or automatically!
The difference is significant if you wait. Even small amounts saved early have many more years to grow.
Be $ Smart - Start saving now! Any amount is better than none. Your future depends on it.
Compounding investment earnings is what can make even small investments become large investments given enough time.
How It Works – The money you save (either in a savings account, a mutual funds or in individual stocks) earns interest. Then you earn interest on the money you originally save, plus on the interest you've accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.
Start Saving Early - For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.
Starting at 20 - If you put $1,000 a year into an IRA every year from age 20 through age 30 (for 11 years) and stop - and the account earns seven percent annually - your savings will equal $168,514 at age 65.
Starting at age 30 - If you don't start until age 30, but save the same $1,000 amount annually but for 35 years straight at the same seven percent rate, you will have saved three times as much money but your account will grow to only $147,913 at age 65.
Where you might obtain a steady 7% return puzzles me, especially in this low interest rate environment but the point is clear even on a lesser scale:
- Start early!
- Save regularly or automatically!
The difference is significant if you wait. Even small amounts saved early have many more years to grow.
Be $ Smart - Start saving now! Any amount is better than none. Your future depends on it.
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.
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.
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.
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.
Tax-free: 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.
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.
Tax-free: 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.
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!
https://www.pbgc.gov/documents/finding-a-lost-pension.pdf
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!
https://www.pbgc.gov/documents/finding-a-lost-pension.pdf
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.
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.
Thursday, March 15, 2018
Nobel Prize Winner Works for the Little Guy
Recently the Nobel Prize for Economics was awarded to Richard Thaler. He was probably one of the few winners to create an immediate difference for millions of folks' retirement.
Back in the 1980's when the first 401k's were established, they were never intended to replace pension plans. One BIG difference, which proved detrimental: the 401k was voluntary. In order to activate the account:
1. the employees had to enroll in the plan,
2. they had to contribute some of their own money to receive the employer match, which was often considered "free money",
(Some companies contributed a minimum amount with no employee contribution.)
3. AND they had to choose the investments within the account.
This proved too big a task for most folks. They found the requirements confusing or intimidating even when help was offered. So instead of being a beneficial tool towards retirement savings, the 401k faltered.
Richard Thaler and others working in behavioral economics found, through their studies, that employees needed more than help; they needed the task to be done for them! For years he advocated that companies "nudge" employees to enroll. That "nudge" evolved into auto-enrollment changing the process for most firms: all new employees would be automatically enrolled as part of the companies' employee orientation and benefits.
The next step he championed was "auto-escalation". The employee starts small, contributing 2%-4% of his/her salary to the plan and agrees to increase that percentage each year until they reach the maximum allowable amount. In good years, when the employee receives a bonus or sizable raise, he/she may jump the increase 2% or 3% extra to reach the maximum amount sooner.
An employee always has the option to "opt out" and close the account or discontinue contributing. Also, in a time of financial struggle, the employee may decrease or stop contributions for a period of time.
Many thanks to Richard Thaler and other behavioral economists for their contribution to helping Americans retire well.
Be $ Smart - call your HR office to learn about auto-escalation and other saving choices to help you reach your retirement goals.
Back in the 1980's when the first 401k's were established, they were never intended to replace pension plans. One BIG difference, which proved detrimental: the 401k was voluntary. In order to activate the account:
1. the employees had to enroll in the plan,
2. they had to contribute some of their own money to receive the employer match, which was often considered "free money",
(Some companies contributed a minimum amount with no employee contribution.)
3. AND they had to choose the investments within the account.
This proved too big a task for most folks. They found the requirements confusing or intimidating even when help was offered. So instead of being a beneficial tool towards retirement savings, the 401k faltered.
Richard Thaler and others working in behavioral economics found, through their studies, that employees needed more than help; they needed the task to be done for them! For years he advocated that companies "nudge" employees to enroll. That "nudge" evolved into auto-enrollment changing the process for most firms: all new employees would be automatically enrolled as part of the companies' employee orientation and benefits.
The next step he championed was "auto-escalation". The employee starts small, contributing 2%-4% of his/her salary to the plan and agrees to increase that percentage each year until they reach the maximum allowable amount. In good years, when the employee receives a bonus or sizable raise, he/she may jump the increase 2% or 3% extra to reach the maximum amount sooner.
An employee always has the option to "opt out" and close the account or discontinue contributing. Also, in a time of financial struggle, the employee may decrease or stop contributions for a period of time.
Many thanks to Richard Thaler and other behavioral economists for their contribution to helping Americans retire well.
Be $ Smart - call your HR office to learn about auto-escalation and other saving choices to help you reach your retirement goals.
You Just Inherited an Investment Portfolio. Now What?
Inheriting an investment portfolio may come with a wagon load of feelings - sadness at some one's passing, joy of new found money and overwhelm and confusion - not knowing how to handle it.
Several things must be considered before you go on a spending spree or quit your job. Chances are the portfolio belonged to someone older who constructed the portfolio to meet his/her financial goals, like provide income in retirement. An income portfolio generates income for living expenses and along with income comes taxes. If you are working you may not need additional income or the taxes you will ultimately owe Uncle Sam.
I recommend: Stop, Think, Ask and Plan.
Stop: Resist spending that money. You may incur serious tax consequences. Breathe. There is no hurry. There is much to learn. The stock and bond markets go up and down daily. Take your time.
Think: Review your financial goals and see how this money fills gaps in your overall financial plan. It may allow you to retire earlier or defray education costs.
Ask: talk with a financial professional to learn more about this money.
Is it in an IRA or other tax deferred account?
What are the IRS requirements for taking distributions - within 5 years or over your lifetime?
What are the tax consequences? In a taxable account the original cost (cost basis) gets stepped up to the value on the date of death so you might owe little, if any taxes. Taking money from a tax deferred account creates "a taxable event" where the distribution is taxed as if it were ordinary income (like your pay).
Plan: The urge to spend is part of our culture so plan to spend 10% of that money on anything your heart desires - but only 10%.
Where does this money fit into your financial goals?
Can it - pay down some credit card or student loan debt?
- build the down payment for a house?
- help a son or daughter graduate with less debt?
- bolster your emergency fund?
- help you retire more comfortably?
If you are not a sophisticated investor and prefer to hold mutual funds instead of individual stocks, make a plan for selling the stocks, know the taxes involved and carefully put that money back in the market to work for you.
Be $ Smart - use discipline with inherited money. Unless you have multiple relatives to leave you money, this might be a one time opportunity to fulfill your financial goals.
Several things must be considered before you go on a spending spree or quit your job. Chances are the portfolio belonged to someone older who constructed the portfolio to meet his/her financial goals, like provide income in retirement. An income portfolio generates income for living expenses and along with income comes taxes. If you are working you may not need additional income or the taxes you will ultimately owe Uncle Sam.
I recommend: Stop, Think, Ask and Plan.
Stop: Resist spending that money. You may incur serious tax consequences. Breathe. There is no hurry. There is much to learn. The stock and bond markets go up and down daily. Take your time.
Think: Review your financial goals and see how this money fills gaps in your overall financial plan. It may allow you to retire earlier or defray education costs.
Ask: talk with a financial professional to learn more about this money.
Is it in an IRA or other tax deferred account?
What are the IRS requirements for taking distributions - within 5 years or over your lifetime?
What are the tax consequences? In a taxable account the original cost (cost basis) gets stepped up to the value on the date of death so you might owe little, if any taxes. Taking money from a tax deferred account creates "a taxable event" where the distribution is taxed as if it were ordinary income (like your pay).
Plan: The urge to spend is part of our culture so plan to spend 10% of that money on anything your heart desires - but only 10%.
Where does this money fit into your financial goals?
Can it - pay down some credit card or student loan debt?
- build the down payment for a house?
- help a son or daughter graduate with less debt?
- bolster your emergency fund?
- help you retire more comfortably?
If you are not a sophisticated investor and prefer to hold mutual funds instead of individual stocks, make a plan for selling the stocks, know the taxes involved and carefully put that money back in the market to work for you.
Be $ Smart - use discipline with inherited money. Unless you have multiple relatives to leave you money, this might be a one time opportunity to fulfill your financial goals.
The Family Bank
The past few years have been truly difficult for our young adults. With diplomas in hand they eagerly sought employment. Some were fortunate to find work but many, not so lucky, "launched" in reverse - they moved back home.
Recent statistics show 44% of parents over 55 financially aided adult children in the past year. It might be tough for the graduates to be back with mom and dad but for mom and dad it strains saving for retirement or even postpones retirement for the next generation.
Continued support for young adults can drain a well-planned retirement.
Parents want to help their offspring but some rules must be considered.
Adult children must realize parents are not bottomless ATM's.
- Room and board could be in exchange for chores: yard work, painting, simple repairs, window washing, clearing a yard or a garage.
- Money loaned needs a signed, promissory note stating the date, amount, interest and term (date of repayment).
- Clear communication of expectations by both sides, in writing, keep feathers from flying.
Yes, parents want to help their children but consider the consequences:
When parents run out of money in retirement where will they go? They will move in with their children.
Parents - do you really want to live with your kids?
Young adults - do you really want your parents moving in with you?
Be $ Smart - Make it easy for everyone. Talk about expectations; put it in writing.
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