Financial planning is a wonderful profession that allows me to help people plan for the future - homes, education, travel, retirement, etc. Over the past five or more years there has been a growing movement to maximize Social Security benefits by employing little known strategies.
There are provisions that allow a couple to add thousands, tens of thousands of dollars to their future retirement income - when you learn the best time and way of applying for Social Security.
If you are too young to even think about SS, then pass this information along to your parents or aunts and uncles. If you are already receiving SS then pass this along to younger friends and your children. There is nothing illegal; but the folks at SS offices, as knowledgeable as they might be, are not aware of some of these provisions.
For example: File & Suspend
A husband reaching 66 (or 67) may file for SS and then suspend receiving payments. By filing, it then allows his wife to file for spousal benefits, receiving a monthly check for the equivalent of half his benefit. He then waits until 70 before activating his benefit which has grown by 8% each year giving him a higher monthly amount and increasing the survivor benefit for his wife.
Or someone who has been divorced may receive a higher benefit if he/she applies for spousal benefits from the ex-spouse and allows his/her benefit to grow until age 70, It has NO impact on the amount the former spouse receives! But you must have been married 10 years or longer. So for anyone contemplating divorce and nearing the 10 year mark, delay the final divorce decree until you reach 10 years.
Be $ Smart - Find a trusted financial planner who is familiar with Social Security Strategies. You may reap many years of benefits that will far exceed his/her fee!
Wednesday, July 15, 2015
Words of Wisdom
With graduations just behind us we often think of offering guidance to young people as they embark on life's journey. Here are two thoughts to pass along which I found in a WSJ column.
The path to long-term wealth includes:
- living within your means,
- a commitment to putting away so much money each year,
- allocating those long-term savings wisely among stocks, bonds and cash using low-cost, passively managed mutual funds, index funds and ETF's,
- and keeping costs (fees and taxes) associated with those investments as low as possible.
Be aware of "life-style creep".
As you climb the corporate ladder or wend your way through a career, each pay raise will bring new opportunities and choices.
How you handle those raises can be critical.
Think about spending the new money in ways that will bring enjoyment, but not commit you to an immediate and future higher spending level.
Commit to spending "just" half the raise for enjoyment and allocating the other half to ongoing savings.
Reaching financial independence will get easier and come sooner as well.
Be $ Smart - Over-spending and over-eating have consequences; diets are never fun.
The path to long-term wealth includes:
- living within your means,
- a commitment to putting away so much money each year,
- allocating those long-term savings wisely among stocks, bonds and cash using low-cost, passively managed mutual funds, index funds and ETF's,
- and keeping costs (fees and taxes) associated with those investments as low as possible.
Be aware of "life-style creep".
As you climb the corporate ladder or wend your way through a career, each pay raise will bring new opportunities and choices.
How you handle those raises can be critical.
Think about spending the new money in ways that will bring enjoyment, but not commit you to an immediate and future higher spending level.
Commit to spending "just" half the raise for enjoyment and allocating the other half to ongoing savings.
Reaching financial independence will get easier and come sooner as well.
Be $ Smart - Over-spending and over-eating have consequences; diets are never fun.
Monday, June 15, 2015
Minimize your taxes
It makes sense to find ways to reduce your taxable income. One place to start is your portfolio. Your investments generate a certain amount of taxable income each year as witnessed by the number of 1099's you receive in the new year.
If you want to reduce the taxes generated by your portfolio, put the big tax generating investments in your tax-deferred retirement accounts - IRA, Roth IRA and 401k. These include real estate investment trusts (REIT's), taxable bonds and actively managed mutual funds (which usually have high, annual portfolio turnover).
Put stocks and stock indexed mutual funds in your taxable accounts where you will be happy holding them for 12 months or longer. After 12 months, they are taxed as long-term capital gains not as ordinary income, a much lower rate. If you pass this account on to your heirs, they could pay virtually no capital gains tax when they sell.
Be careful as you reconfigure your portfolio. Do it slowly and methodically. If you sell too many investments with gains in any given year in your taxable accounts you may increase your tax obligation and push yourself into a higher tax bracket. Best to consult your account first.
Be $ Smart - re-position your investments to minimize your taxes.
If you want to reduce the taxes generated by your portfolio, put the big tax generating investments in your tax-deferred retirement accounts - IRA, Roth IRA and 401k. These include real estate investment trusts (REIT's), taxable bonds and actively managed mutual funds (which usually have high, annual portfolio turnover).
Put stocks and stock indexed mutual funds in your taxable accounts where you will be happy holding them for 12 months or longer. After 12 months, they are taxed as long-term capital gains not as ordinary income, a much lower rate. If you pass this account on to your heirs, they could pay virtually no capital gains tax when they sell.
Be careful as you reconfigure your portfolio. Do it slowly and methodically. If you sell too many investments with gains in any given year in your taxable accounts you may increase your tax obligation and push yourself into a higher tax bracket. Best to consult your account first.
Be $ Smart - re-position your investments to minimize your taxes.
Monday, June 8, 2015
Another Type of Diversification
Over the past few weeks we have talked about diversification within your portfolio. We use diversification to reduce potential risk. Another kind, tax diversification, occurs with the types of accounts in which you hold your assets and how withdrawals are taxed.
No matter how you make your money, Uncle Sam is waiting to take his share. You can structure withdrawals to be tax efficient and lower your tax burden. This is especially effective during retirement. For you to have income choices you must build these accounts prior to retirement, while you are young and in the "accumulation" phase of your life.
A well diversified portfolio will hold a mixture of assets - stocks, bonds, cash, real estate, precious metals, etc. Creating a tax-diverse portfolio means you hold assets in taxable, tax-deferred and tax-free accounts.
A trained advisor will scrutinize a retirement plan for tax efficiency. You want to minimize taxes by taking income from specific accounts.
Remember, money held in tax-deferred accounts (traditional IRA, 401k,etc.) is fully taxed as ordinary income on withdrawal paying both state and federal taxes.
If all your assets are tax-deferred, every withdrawal will count as income and could push you into a higher tax bracket. For example, say you need $60,000 a year for income, you must withdraw $72,000 to cover the 20% withholding. Add that to Social Security or pension income, you could bet bumped into the next tax bracket. But, if you could take $40,000 ($48,000 less 20%) from the IRA, $10,000 from your taxable account(paying some capital gains tax) and $10,000 from your Roth (tax-free), you maintain a lower taxable income.
Be $ Smart - build your savings in different types of accounts for tax efficiency.
Be sure to consult your tax advisor for specifics.
No matter how you make your money, Uncle Sam is waiting to take his share. You can structure withdrawals to be tax efficient and lower your tax burden. This is especially effective during retirement. For you to have income choices you must build these accounts prior to retirement, while you are young and in the "accumulation" phase of your life.
A well diversified portfolio will hold a mixture of assets - stocks, bonds, cash, real estate, precious metals, etc. Creating a tax-diverse portfolio means you hold assets in taxable, tax-deferred and tax-free accounts.
A trained advisor will scrutinize a retirement plan for tax efficiency. You want to minimize taxes by taking income from specific accounts.
Remember, money held in tax-deferred accounts (traditional IRA, 401k,etc.) is fully taxed as ordinary income on withdrawal paying both state and federal taxes.
If all your assets are tax-deferred, every withdrawal will count as income and could push you into a higher tax bracket. For example, say you need $60,000 a year for income, you must withdraw $72,000 to cover the 20% withholding. Add that to Social Security or pension income, you could bet bumped into the next tax bracket. But, if you could take $40,000 ($48,000 less 20%) from the IRA, $10,000 from your taxable account(paying some capital gains tax) and $10,000 from your Roth (tax-free), you maintain a lower taxable income.
Be $ Smart - build your savings in different types of accounts for tax efficiency.
Be sure to consult your tax advisor for specifics.
RoBo Advisors
In our wonderful hi-tech world you now have the option of having a robot invest for you! We have been invaded by a group of R2D2 automatons who will direct you and your money towards the future.
It is very tempting to have someone else be responsible for investing your money, especially when you don't know whom to trust. But these online automated investment platforms present their own problems. They ask a series of questions to determine your goals, level of investing experience and time horizon (just like any financial adviser would). It is still your responsibility to ask questions and know what you're getting into. Caveat emptor - let the buyer beware!
Here are some things to learn before you commit your hard earned dollars:
1. Terms and conditions? What is the time commitment, required minimum sum to be invested, and what are the fees?
2. Investment choices. From what universe are the investments drawn? May they choose funds from ALL companies or promote only their own?
3. One size fits all. Garbage in, garbage out plays the same role here as it did in early computer programs. The robo adviser will only be able to make pertinent recommendations dependent upon what you tell it. Be as specific as you can to make sure your money is properly allocated.
4. Sensitive information. Keep your personal information protected! Be wary of scams that may trick you into providing confidential financial data.
5. The "In" thing. Know that as cool as hi-tech may seem, this may not be right for you. Before you send your money, check it out with friends and relatives. Read reviews.
R2D2 won't ask how your kids are doing nor talk about the latest sports or movies. You may miss the personal touch of a real-life adviser.
Be $ Smart - before you invest, protect your assets and research Robo Advisers (automated platforms) to learn the rules.
It is very tempting to have someone else be responsible for investing your money, especially when you don't know whom to trust. But these online automated investment platforms present their own problems. They ask a series of questions to determine your goals, level of investing experience and time horizon (just like any financial adviser would). It is still your responsibility to ask questions and know what you're getting into. Caveat emptor - let the buyer beware!
Here are some things to learn before you commit your hard earned dollars:
1. Terms and conditions? What is the time commitment, required minimum sum to be invested, and what are the fees?
2. Investment choices. From what universe are the investments drawn? May they choose funds from ALL companies or promote only their own?
3. One size fits all. Garbage in, garbage out plays the same role here as it did in early computer programs. The robo adviser will only be able to make pertinent recommendations dependent upon what you tell it. Be as specific as you can to make sure your money is properly allocated.
4. Sensitive information. Keep your personal information protected! Be wary of scams that may trick you into providing confidential financial data.
5. The "In" thing. Know that as cool as hi-tech may seem, this may not be right for you. Before you send your money, check it out with friends and relatives. Read reviews.
R2D2 won't ask how your kids are doing nor talk about the latest sports or movies. You may miss the personal touch of a real-life adviser.
Be $ Smart - before you invest, protect your assets and research Robo Advisers (automated platforms) to learn the rules.
Tuesday, April 14, 2015
Investment Diversification cont'd - Cash
In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
Investment Diversification cont'd - Bonds
When you talk about diversification you hope to spread your money into a variety of investments. By doing so, you are given the opportunity to create the potential for your money to grow while you reduce the risk.
Last week we addressed stocks. This week we'll review the many facets of bonds.
Bonds come in many varieties - both taxable and tax exempt.
With a bond, you are lending your money; it may be to a corporation, a country or a municipality.
Corporate bonds are issued by companies, of all sizes. High grade corporate bonds from major corporations carry high ratings and the interest earned and distributed is taxable. Most high rated bonds are backed by collateral, e.g. inventory, buildings, property, machinery, etc. Because of their relative safety, they will pay a lower interest rate.
High yield corporate bonds pay a higher return because they may be less safe. The company may be having some financial difficulty and the bonds may be backed by a "promise to pay", not real collateral.
Governments issue bonds for many reasons to run their country. Our own U.S. Treasury offers several types of bonds. Sovereign bonds issued by governments outside the U.S. offer international diversification. Because of the solvency of each country, the risk and yield (return) will vary. You will pay taxes on the interest you earn on these bonds.
Municipalities like cities, states, counties, towns all have the ability to borrow money and issue bonds. Again, the solvency of the region will determine how safe your money may be and the interest each will pay. There are several agencies that rate these bonds. AAA is the highest all the way on down to NR, not rated. The U.S. government does not tax the income from these bonds - they are considered tax-exempt.
A bond issued by New York city would be triple tax-exempt to a resident of NYC. He would pay no city, state or federal tax on that bond.
For diversification you would want some taxable and tax exempt bonds.
You would use bonds of different countries as well as different municipalities.
Be $ Smart - use several different types of bonds when building a portfolio.
Bonds can be quite complex. This is a simplified overview.
Last week we addressed stocks. This week we'll review the many facets of bonds.
Bonds come in many varieties - both taxable and tax exempt.
With a bond, you are lending your money; it may be to a corporation, a country or a municipality.
Corporate bonds are issued by companies, of all sizes. High grade corporate bonds from major corporations carry high ratings and the interest earned and distributed is taxable. Most high rated bonds are backed by collateral, e.g. inventory, buildings, property, machinery, etc. Because of their relative safety, they will pay a lower interest rate.
High yield corporate bonds pay a higher return because they may be less safe. The company may be having some financial difficulty and the bonds may be backed by a "promise to pay", not real collateral.
Governments issue bonds for many reasons to run their country. Our own U.S. Treasury offers several types of bonds. Sovereign bonds issued by governments outside the U.S. offer international diversification. Because of the solvency of each country, the risk and yield (return) will vary. You will pay taxes on the interest you earn on these bonds.
Municipalities like cities, states, counties, towns all have the ability to borrow money and issue bonds. Again, the solvency of the region will determine how safe your money may be and the interest each will pay. There are several agencies that rate these bonds. AAA is the highest all the way on down to NR, not rated. The U.S. government does not tax the income from these bonds - they are considered tax-exempt.
A bond issued by New York city would be triple tax-exempt to a resident of NYC. He would pay no city, state or federal tax on that bond.
For diversification you would want some taxable and tax exempt bonds.
You would use bonds of different countries as well as different municipalities.
Be $ Smart - use several different types of bonds when building a portfolio.
Bonds can be quite complex. This is a simplified overview.
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