January 7th, 2013
Should you get your investment advice from a couple of plumbers? I did and it turned into a wonderful career for me. Those plumbers were my grandpa and my dad.
Learn how I got introduced to investing at a very young age and how it has influenced my thinking about investing ever since by reading “Blogger Interview: Hourly Planner’s Michele Clark” at the Wealth Gathering website.
Michael Goldman at Wealth Gathering asked me some questions about;
- My professional background and why I didn’t stay in the traditional, commissioned-based brokerage firm environment. I have worked in a bank, bank brokerage firm, a full commission brokerage firm, and a full service discount brokerage firm.
- How does my family balance living in the moment vs. saving for the future. Such a great question, because it is the essence of financial planning.
- Who is your financial role model. I could have gone on and on with this one. I think I will do a future blog post of my own.
- And do I think everyone is capable of learning enough about personal finance to do it on their own. This answer may surprise you!
I know Michael through the Garrett Planning Network. He is like me, in that he owns his own financial planning firm. In addition he has the Wealth Gathering site which is so unique. It is designed to offer online tools, coaching, and peer support. It is structured like a financial fitness program. As you know, I am a fee-only financial advisor, so I do not receive any compensation from them, and am not affiliated with Wealth Gathering. If you have a chance to look at the interview, take a look around at the other information on the website. Especially considering this is the time of year that so many people are tackling financial To Do items.
December 28th, 2012
I believe that just about everyone has some sort of financially related To Do item sitting on their To Do list. And they have every intention of taking care of it. However, so many other more time critical things seem to keep the financial items from getting to the top spot of the list.
If you are going to resolve to get some of your financial To Dos To Done, what actually matters - how it got done or that it got done? I will come back to that thought in a minute.
When people come to see me they have accumulated a list of tasks, and it is so easy to see how that happens in our busy lives.
You take a new job – a nice jump up the career ladder. Something needs to be done with that old 401(k). But what? You’re busy with the new job right now. So you put it on The To Do List.
Your income is higher now with the new job, should you have more life insurance? Or is the life insurance at work enough? You did buy some whole life from that guy that came to the house when you first got married. Is that still the right policy for you or not? So you put that on The To Do List.
Your kids are getting older, and you haven’t saved as much as you had intended for college. How much can you afford to put away for their college vs. how much should you be saving for our own retirement? Well, the kids are in middle school, you have a couple more years, so you put it on The To Do List.
At work they keep changing your investment choices and you don’t know what to pick. You don’t have the tools to see all of your investments together and create a diversified portfolio that incorporates all of your accounts, but you know that you need to do it one day. But you don’t have the time right now. So you put that on The To Do List.
Sometimes when potential clients meet with me in the free Get Acquainted meeting they tell me that they feel bad about not taking care of these things themselves. I stress to them, that I do not want them to feel that way. I tell them that when I have electrical problems at the house, I call an electrician. And when I have serious plumbing problems I call a plumber. I have had a handy man come to the house a few times to work though lists of little things that were annoyances. Sometimes you call in a professional to help you with your list. And it feels great to work on that list.
So if you are making a resolution to get your financial To Do items To Done, make a plan to either do them yourself, or to contact a professional to help you do them. Because when you mark them off the list, what actually matters – how it got done, or that it got done?
Resolve to take action today!
Have a Wonderful New Year!
December 12th, 2012
US News and World Report quoted me in their article “Your Retirement Benefits: What to Expect in 2013” on their website this week.
I shared my thoughts on 401(k) fee disclosures. 401(k) providers are required to disclose the fees for the plan. All things being equal, if two funds are simlar but one has lower fees than the other, choosing the fund with lower fees will allow the investor to keep more of their money invested for their future.
The article is full of information on a variety of topics. It covers information about changes to contribution limits, the Roth IRA income limit increase, the saver’s credit, the pension insurance limit for 2013, the increase in Social Security taxes (expiration of the tax cut), and Medicare premiums and coverage.
November 22nd, 2012
Happy Thanksgiving! I hope that you have a wonderful Thanksgiving surrounded by those that you love the most.
I am so very thankful this year, this is the first time I have ever been able to celebrate Thanksgiving with the wonderful family that I married into and the terrific family that I was born into. I am so happy. In the St. Louis area I live near my in-laws, however my family is scattered all over the country. So after dinner it is time to hop in the car and drive for hours to go to where my family will be gathered for a wedding this weekend, I am really looking forward to it.
And I am grateful for all of the families that have placed their trust in me this year and allowed me to work with them. Thank you.
November 9th, 2012
The maximum amount that you can put into your IRA is increasing in 2013 from $5,000 to $5,500. This holds true for Traditional IRAs and Roth IRAs. The Catch-Up Contribution, for those over 50 years old, will remain the same at $1,000.
In order to invest in an IRA you must have earned income. People ask if they can count income they “earn” from investments, the answer is no. Earned income is income earned from working. If your income is less than $5,500 keep in mind you must have earned income to make a contribution , so you can only contribute $5,500 or 100% of earned income whichever is less. Examples of earned income given on the irs.gov website are:
- Union strike benefits
- Long-term disability benefits received prior to retirement age
- Net earnings from self-employment
Income that is not Earned Income:
- Pay received for work while an inmate in a penal institution
- Interest and dividends
- Retirement Income
- Social Security
- Unemployment benefits
- Child Support
Everyone with earned income can invest in a Traditional IRA. However, not everyone can deduct the contribution that they make to a Traditional IRA. There are IRA deduction phase-out limits for active participants in employer sponsored retirement plans, or if one person in a married couple is an active participant. The phase-out limits are based on your tax filing status.
The way the phase-out works is you can deduct the full amount when your modified adjusted gross income falls below the low end of the phase-out. You cannot deduct anything once your modified adjusted gross income hits the high end. And you can deduct a pro rata portion when it falls in the middle range of the phase-out.
- Single $59,000 to $69,000
- Married Filing Jointly (for spouse covered by employer retirement plan) $95,000 to $115,000
- Married Filing Jointly (for spouse that is not covered by employer retirement plan, but married to a covered spouse) $178,000 and $188,000
Not everyone can make a Roth IRA contribution. In order to make the full contribution your modified adjusted gross income must be below the phase-out threshold. If your modified adjusted gross income hits the top of the phase-out range you cannot make a contribution at all. If your modified adjusted gross income falls in the middle of the phase-out range you can make a pro rata contribution.
- Single $112,000 to $127,000
- Married Filing Joint $178,000 to $188,000
Many people have automatic investing set up so that they put a little each month into their IRA accounts. If you do this, be sure to make the adjustment to increase the amount you are putting into your IRA account, you can put another $41.66 a month away in 2013. Every little bit helps!
November 5th, 2012
What is so great about investing in an IRA or employer retirement plan? Tax deferral. You put money into the account and it grows, tax deferred, for many years. What does “tax deferred” mean? It means that the money is growing but you are not paying taxes on those earnings… yet. You have heard the saying “It takes money to make money.” The idea is that you can keep your money and use it to grow your portfolio, and later, when you take the money out of the account to use it, that is when you will pay the taxes. You “defer” the taxes until later.
Can I defer the taxes forever?
No. Uncle Sam thought he was being nice enough to let you defer the taxes, but he does want to get his hands on those taxes at some point. That is why there is a Required Minimum Distribution (RMD) starting at 70.5 years of age. Most people start taking money out before that, because they were saving their money for retirement after all. Even if you are taking money out of your IRAs, and other qualified accounts, make sure that you are taking at least the RMD, because there is a stiff penalty if you are not taking your Required Minimum Distribution or if you are not taking as much as you are supposed to take.
Required Minimum Distribution Penalty
The penalty for not taking your Required Minimum Distribution is 50% of the amount not taken or of the shortfall. Yes, you read that right, 50%. It is very important to take your RMD each year.
What if I made an honest mistake?
If, after the fact, you find that you have not taken your RMD and you correct the situation. Or you didn’t take enough, and you correct the situation, the IRS has a process for asking for the penalty to be waived, as long as it was “due to a reasonable error”, according to the IRS website. Keep in mind that does not mean that it will be waived. You can find information on www.irs.gov you will be filling out Form 5329 to try to qualify for the waiver, this is an instance where you might consider consulting a tax advisor.
Required Minimum Distribution (RMD) blog post series
Required Minimum Distributions generate many questions so I am creating a series of blog posts to address these questions:
- What is a Required Minimum Distribution (RMD)?
- What is the penalty if I do not take my Required Minimum Distribution (RMD)?
- How do I calculate the Required Minimum Distribution (RMD)?
- What if my spouse is significantly older/younger than me?
- When do I have to take a Required Minimum Distribution (RMD)?
- Do I have to take the Required Minimum Distribution (RMD) from each account individually or can I take it all from one?
October 26th, 2012
An excellent way to save
What is my favorite feature of investing in your retirement plan at work? No, it’s not the employer match, well alright it is the match, but a very close second is the fact that it is automatic!
Because companies are doing away with pension plans, saving for retirement can seem like an impossibly huge task. But as the old saying goes “How do you eat an elephant? One bite at a time.” Having a little money taken out of each paycheck and deposited automatically into an employer sponsored retirement account is taking that one bite at a time. Eventually you will get that Retirement Elephant eaten.
Change in contribution limits
Each year the IRS announces if there are changes in the maximum contribution limits to employer plans due to cost-of-living increases. Why is that important to you? Because you can take bigger bites; and get that Retirement Elephant eaten sooner. The catch is, depending on the instructions you set up for 2012, you may need to take action and contact your Human Resources department to let them know that you want to increase the amount you are investing in your retirement plan. This is the month that HR usually wants to hear from you about these decisions, so the timing is right.
401(k), 403(b), 457, and SARSEPs
The 2013 maximum contribution limit is $17,500, an increase of $500 over 2012. Be sure to contact your company to take advantage of the opportunity to put more money into your plan next year! If you are 50 or turning 50 in 2013 you have the opportunity to add additional money to your employer sponsored retirement plan each year in the form of a Catch-up Contribution, the amount for 2013 is $5,500 the same amount as last year. However, please check to make sure you are taking advantage of this opportunity; it is common for me to find that new clients are not doing this, and have often never even heard of a Catch-up Contribution. But now you have, and you can take full advantage of it!
The maximum contribution limit also went up for the SIMPLE, it will be $12,000 in 2013 whereas it was $11,500 in 2012. If you are 50 or turning 50 in 2013 the Catch-up Contribution for SIMPLEs in 2013 will be unchanged at $2,500.
What to do
Check to see what you are contributing to your employer sponsored retirement plan, if you want to “put the max in” as I so often hear, make sure that you do that by adjusting the numbers for the new 2013 increases.
If you are over 50 or will turn 50 in 2013, make sure that you take advantage of the Catch-up Contribution which allows you to put additional money in the account.
If you are not “putting in the max” make sure that you are getting at least the full amount of the match from your company. This needs to be balanced with having an emergency fund/savings account.
Once you have gotten to the point of getting all of the match, and establishing the appropriate emergency fund for your family, you need to evaluate all your goals and make sure that you deploy any extra cash among those goals in a way that fits with your priorities and values.
A hint for increasing your retirement savings – each time you get a raise, increase your retirement account contribution by one percent. You will not even feel the loss, because it is money you didn’t even have yet.
Take action today, and you will be that much closer to retirement!
October 5th, 2012
Yesterday morning I attended the St. Louis Chapter of the Financial Planning Association meeting to hear a presentation titled “Modern Portfolio Theory 2.0.” It was excellent, no surprise, because it was presented by Michael Kitces MSFS, MTAX, CFP®, CLU, ChFC, RHU, REBC, CASL whom I often describe as a “walking brain” when discussing him with peers. He is also the author of a reference book I own, and to which I often refer.
Michael came in from the Washington DC area to share his research on market and economic history, the accompanying signals and data, and what it has told us about subsequent market performance. He also had ideas for how this information could be layered on top of Modern Portfolio Theory in a tactical way to mitigate some risk in client portfolios.
Modern Portfolio Theory
In the 1950’s, Dr. Harry Markowitz pioneered the idea of considering your investment portfolio as a whole unit, rather than as individual securities, when measuring risk and expected return. He determined mathematically, that you could put investments in the portfolio that had a bit more risk (more volatility) and yet create less volatility in the portfolio as a whole.
This reduction in volatility was accomplished by having investments that were not completely correlated, meaning they did not move in tandem. So when one investment zigs another one zags. In effect, when you have multiple investments moving in different amounts of up and down directions at different times, it creates a smoother path overall.
There are different steps involved in implementing Modern Portfolio Theory. I gave a “plain English” version of the Asset Allocation step in my blog post “Peter Cottontail Makes A Lousy Investment Advisor!” which explains the reasons for diversification and rebalancing a portfolio.
Modern Portfolio 2.0
In his presentation Michael pointed out three factors that make following Modern Portfolio Theory, without any adjustment, challenging.
- Returns – they seem to vary for an extended period of time
- Standard Deviation – there are distinct high and low volatility periods
- Correlations – became close to 1 during the recent crisis
He shared with us different valuation data points, macroeconomic information, and technical trend analysis information to evaluate when considering adjustments to Modern Portfolio Theory inputs.
I have seen Michael speak on similar topics and can see that his research is expanding, he shared more data points and ideas for implementation than in the past. I look forward to seeing where the research leads.
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