May 18th, 2012
If you own a television, you have probably seen one of the many versions of commercials touting the free credit reports. Or as you have browsed the internet, you surely have seen the banner ads with enticing “click here for your free credit report” messages.
The problem is, with so many companies saying that they offer the free reports; I have found that many people don’t know where you are actually supposed to go to get your free reports. But they do know that if they go to those places that are advertising, they are going to be offered something to buy.
The website you should use is www.annualcreditreport.com or call 1-877-322-8228.
Equifax, TransUnion, Experion
Well, I hate to break it to you, but when you go to the official website, the three credit bureaus are going to try to sell you something too. They are going to ask you if you want to buy your scores. Do not buy them. They are not the FICO scores that banks use so the score is not very helpful. Getting the reports; now that is tremendously helpful, so definitely do that once a year.
What to look for on your reports
Make sure that there are no duplicate accounts, errors in information reported, or activity that isn’t yours. For information about identity theft refer to the FTC identity theft website.
Which one to get first
This is my personal preference; I like the summary that Equifax provides at the beginning of the report. If you have not printed your free credit reports before, I suggest printing the Equifax report first and looking over the summary, it is educational as well as informational.
How often to get your Free Annual Credit Reports
You can pull all three at once and be done with it until next year. Or spread it out and get one every four months as a way to monitor your information on an ongoing basis. Just keep in mind that, surprisingly, information can vary from credit bureau to credit bureau so spreading it out does not guarantee that errors will be caught in a timely manner. But if you consistently pull them, any errors will be caught once a year.
For further information see the Federal Trade Commission website for the Free Annual Credit Report.
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Tags: advice, College Graduates
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May 11th, 2012
So many new clients come to me already owning an annuity or several annuites, and they do not understand them or know what types of fees are in them. I went back through my e-mails to clients and looked through the types of questions I get about annuities and thought I would answer some of them here by explaing some of the concepts around annuities.
An annuity is a product offered through insurance companies. It is tax deferred, which means the income and earnings from the investment stay in the account and are not reported on your tax return each year. That is the good news. The bad news is that when you take the money out of the account, it is taxed at your income tax rate, which could actually be at a higher rate than the rate you would have paid if you hadn’t had your money invested in an annuity, depending on the type of annuity you have. However, the tax deferral is a nice benefit.
Fixed Annuity
With a fixed annuity you get a specific interest rate for a specific time period. Sometimes you will get a higher rate for the first year and then a lower rate for the remaining years, but you know this when you make your initial purchase.
Variable Annuity
A variable annuity offers you the opportunity to invest in mutual funds. There are annuities that invest in multiple fund families, including index fund families.
Death Benefit
This is an insurance product, so one feature, or “insurance rider” that some of these products have is something called a Death Benefit. Sometimes the Death Benefit value can be more than the Account Value. Each product’s Death Benefit works differently. Sometimes it is as simple as saying the Death Benefit is the greater of current market value or what you invest minus withdrawls. Or it might have a Step Up feature. For example each year on the anniversary of the purchase date the value is recorded and the highest annual value or current market value is the Death Benefit if you pass away.
1035 exchange
One nice benefit to this type of product is that you are allowed to move from one insurance company to another without any tax consequences. Doing this is called a 1035 exchange (that is the IRS name for the procedure of moving the money, it seems like they put code numbers in the names of all of their procedures). If you cashed the money in you would have to pay taxes on the gains. If you just move it to another annuity, then you can continue to defer the taxes.
Fees
When looking at annuities be sure to compare fees. Fees are quoted in percentages. It is extremely important to convert the percentages to actual dollars based on the amount you are investing because when you do that you can sometimes see thousands of dollars of difference in fees between two annuities that when just looking at percentages seem to be pretty similar in fee structure. I would always rather see my clients with that money in their account rather than give it to an insurance company unnecessarily.
Surrender charges
A surrender charge is a fee you pay the insurance company if you take your money out in the first few years after you have had the annuity. A seven year surrender charge schedule is very common, for example the first year surrender charge would be 6%, the second year would be 5%, and so on until the surrender charge went away. You might be surprised to know that there are annuities that do not have surrender charges! So if you have an annuity and you are in the position of having to decide what to do with it, you can 1035 exchange it to an annuity that does not have a surrender charge. Most people are not aware of that.
IRA annuity
If you have an annuity that is an IRA, you can always move it directly to an IRA, and forgo the extra layer of fees that you find in an annuity. Things to consider before doing that: 1) are there surrender charges? 2) is the death benefit greater than the current value of the account?
Learn more about your annuity by reading the statement and the prospectus. If you don’t have the prospectus, many of them can be found online by Googleing the product name. If that does not work, give the customer service department a call, they will be happy to e-mail or mail you a copy of the prospectus which has the fee and investment information.
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Tags: Savings, Taxes
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May 6th, 2012
As of Tuesday you can now get your full Social Security Statement online. It includes your lifetime earnings history and estimates of disability benefits you could receive should you become disabled. It also lists benefits your family could receive if something were to happen to you. It provides much more information that was previously available online.
Last year the government stopped mailing the statements, which saved $70 million dollars. Statements will be mailed again, but only to individuals who are over 60.
Getting the online Social Security Statement is very easy; I got mine in about six minutes. Go to https://www.socialsecurity.gov/mystatement/ and click on the button that says “Sign In or Create and Account “.
You will need to:
* set up an account by creating a log in id and password
* set up a few questions and answers in case you forget your password
* put in your basic information such as name, address, phone number, date of birth
* answer multiple choice questions to verify your identity, (for example; who is the lender on your mortgage, what is the make and model of your car, etc.)
When your statement pops up you can print it or save it as a PDF.
Keep your login id and password in a secure place, you will want to review your Social Security statement on an annual basis to make sure that the earnings information is correct and use the retirement benefit estimate figures when doing your retirement planning.
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Tags: income planning, Retirement Planning
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April 27th, 2012
You haven’t lost it – you didn’t get it! Your Social Security retirement benefit estimate statement has not been mailed to you because the government is trying to save money.
But you can still get the information. Just go to http://www.socialsecurity.gov/estimator/ and click on the button in the center of the page that says Estimate Your Retirement Benefits.
You will need very basic information such as name, date of birth, social security number, mother’s maiden name, and the state in which you were born.
Your Retirement Benefit Estimate will come up; it will give you the estimated benefit amount for:
1) early retirement at age 62
2) at your Full Retirement Age, which depends upon your date of birth
3) delay starting benefits until age 70
Click on the Save/Print button at the bottom.
It is very easy to do; it took me 3 minutes and 53 seconds from start to printout in my hand.
Social Security income is one factor of many when collecting data for the retirement planning process. If your situation has some complexity due to divorce, remarriage, etc., and you are nearing retirement, I encourage you to make an appointment with the St. Louis Social Security office to get your specific retirement benefit payments.
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April 13th, 2012
The MOST – Missouri 529 College Savings Plan recently announced that they are offering a dollar-for-dollar match up to $500 per year per account up to a $2,500 lifetime maximum for qualified accounts. This is a privately funded grant, rather than funded by Missouri taxpayers.
Qualifying for the MOST – Missouri 529 College Savings Plan Matching Grant
In order to qualify for the matching grant, you must meet certain criteria. Quoting from the website www.most529grant.org :
* Applicant must be a parent or legal guardian of the beneficiary.
* Both you and the beneficiary must be Missouri residents.
* You must be the account owner of a MOST 529 account.
* The beneficiary must be 13 or younger (when you are first approved for the matching grant).
* Your household Missouri adjusted gross income must be $74,999 or less.
You must submit an application by June 30th. You will be notified by August 31st if you receive a matching grant. The matching funds will be applied to the account January 31st. You must reapply each year.
For details and to get the application, go to www.most529grant.org.
Saving for college
There is $125,000 available for the matching grant program per year over the next four years for a total of half a million dollars. With the high cost of college constantly in the news, and frequently on the minds of parents, this seems like a no brainer if you are a Missouri resident with a child under 13 and an income under $75,000.
Investing
College can be so expensive; it makes sense to create a nest egg to offset as much of that cost as you can. People are often surprised to learn how much small regular investments can grow to over time. If you save $40 a month (think of it as just $10 a week) for 18 years assuming 6% annual growth you would have $15,611 for college. Length of time invested is such a terrific boost to your investment, the longer you have the better. However – being invested is the most important factor. The key is to get started.
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Tags: Boomerang Kids, College Graduates, College Planning, FAFSA, Parents, Savings
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April 6th, 2012
Oh, I know he’s beloved by millions. And I can’t wait to bite off those chocolate bunny ears he will bring me on Sunday. But let’s face it; you wouldn’t want to get your financial advice from someone who puts all his eggs in one basket! You have probably heard that old adage, but do you know what it means?
Portfolio Diversification
Have you ever been in rush hour traffic and the lane you are in is practically stopped but the other lanes around you are moving faster. So you decide to switch lanes, but as soon as you change lanes, your new lane slows down and the lane you were in finally speeds up. That’s the problem with only being able to make one choice at a time, you have to pick the right one or you lose. With investments it is even trickier because there are so many different areas in which to invest. Luckily, with investments, you do not have to choose just one. You can diversify, and put a little bit of money in each area so that you are sure to be invested in the best performing area but you do not have all of your money invested in the worst performing area either.
Asset Classes
So what are these areas of investing that we are talking about? A portfolio should be diversified, or spread out, among stocks, bonds, and cash. Whether you should invest in an asset class or how much depends on your particular situation.
Depending on your situation, your stock portion can be divided up among the following asset classes:
* Large Company, United States stocks
* Mid-Sized Company, United States stocks
* Small Sized Company, United States stocks
* Developed International stocks
* Emerging Markets stocks
Depending on your situation, your bond portion can be divided up among the following asset classes:
* Short Term Bonds
* Intermediate Term Bonds
* Long Term Bonds
Portfolio Rebalancing
You have probably seen the investment pie charts, either in your work retirement plan materials or if you have an investment account, in the materials they provided you. Have you ever wondered “Why is it that everyone keeps telling me to use these darn pie charts?” Each different color of the pie chart represents a different asset class and that illustrates the diversification of the portfolio. So once you pick your asset classes and populate them with investments you are done right? Not so fast!
Annual Portfolio Rebalancing: The most important part!
The marketing materials give you the pie charts; they just don’t tell you how to use them. And that is a shame because, when used properly, in a disciplined fashion, they can take a lot of the stress out of market downturns. Here’s how.
Picture your pie chart, let’s say that your pie chart tells you that you should have 35% in Large Company United States stocks and that area of the market has had a terrific year and you have watched that portion grow from 35% to 38% to 40% to 45% in a year’s time! “Wow”, you say, “I have finally found an investment that makes money!” So human nature tells us, “Add more money to it”. But not so fast. Haven’t we all heard that to make money we are supposed to “Sell High and Buy Low”? Well, fortunately for us, the pie chart is going to help us do that. More on that in a minute.
Picture your pie chart again, let’s say that your pie chart tells you that you should have 15% in Small Company United States stocks and the market has not been kind to small companies this year. You watched your Small Company slice of pie shrink from 15% to 12% to 10%. Your first instinct might be to sell this investment because it didn’t do as well as the others. But that is not what you should do, instead, you should “Buy Low”. Without a plan, human nature makes us do the wrong thing at the wrong time.
Now that does not mean you buy a poor quality investment, speaking to the topic of diversification again when you buy a single stock it can go out of business, when you buy an investment that represents an entire asset class, such as an S&P 500 index fund, it is highly unlikely that all 500 companies will disappear at once.
Annual rebalancing is simply the discipline to evaluate the portfolio once a year to look for changes in the quality of any of the investments and then to check to see if your asset allocation (slices of pie) have gotten out of alignment over the year. If they are more than a few percent off, make some changes. Please keep in mind there may be tax consequences, unless you can make the adjustments in retirement accounts.
What Annual Rebalancing will do for you:
1) Help you sell high (the best performing asset classes) so you can take your money off the table.
2) Help you sell high so you can protect yourself if when “the bubble bursts”. Have you ever noticed that it is often the investments that have gained the most, that end up falling the most when the market corrects?
3) Help you buy low (the underperforming asset classes), when prices are low.
4) Helps you prepare for when the underperformer rebounds.
2008 worst performing asset class was MSCI Emerging Markets -53.18%
2009 best performing asset class was MSCI Emerging Markets +79.02%
5) Removes emotion! Emotion has you selling when you should buy and buying when you should sell. But having a diversified portfolio and using a pie chart with an annual rebalancing plan will get you through every type of market cycle.
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March 30th, 2012
When I teach retirement income planning classes I love to ask attendees to jot down how much they paid for their first house, then I ask them to write down how much they paid for their last car. While I don’t ask them to share these numbers with the class, it does start a lot of discussion. And laughter. What usually comes out of this exercise is the fact that most of the retired folks in the room paid more for their last car than they did for their first home!
Inflation takes quite a toll on the wallet. We notice this happening as the price of items rise and rise over the years; milk, gas, property taxes and, as in the example above, cars.
If you set up house at the age of 22 and retire at the age of 65 that is a span of 43 years. That gives you 43 years to earn income and invest for the future.
If you retire at the age of 65 how long do you want to plan for in retirement? Do you plan for 90 years old? 95? 100? Depending on your age, gender, health, and longevity in your family, retirement can last 25, 30, 35 or more years!
And if you plan on retiring early, you might be retired for as many years as you worked!
Let’s say you finish college at 22 and work until you are 62; you worked 40 years. If you live to 102, you would be retired for 40 years.
If you think inflation is a challenge while you are in your earning years, imagine what it is like during retirement when you are tapping into the portfolio that you created for retirement.
Here is some food for thought. Let’s take the car example from above and see what type of impact inflation has on car prices during your retirement years.
Last year and the first two months of this year, the Toyota Camry was the best-selling car in America. The 2012 Toyota Camry LE model has a base MSRP of $22,500 in today’s dollars. Not the least expensive model, the L, but not the more expensive models, SE or XLE, either.
Let’s use an example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $22,500 now and inflates at 3% a year, they want to know what a Toyota Camry LE would cost at the following ages:
At 65 years old a 2022 Toyota Camry LE is estimated to be $30,238
At 72 years old a 2029 Toyota Camry LE is estimated to be $37,189
At 79 years old a 2035 Toyota Camry LE is estimated to be $45,738
At 86 years old let’s assume they are still driving, not as much as they used to, and mostly during the day, but their family insists that they have a reliable car, so they relent and end up spending $ 56,252 on the 2043 Toyota Camry LE.
If they maintain the car well and don’t put a lot of miles on it, they could look to knock off a quarter to a third of the price with a trade in if they are trading in every seven years.
What if your tastes run more toward Lexus than Camry? Let’s look at this example with the 2012 Lexus GS (again not the most expensive model, nor the least expensive) with a base MSRP of $46,900 in today’s dollars.
Let’s use the same example of a 55 year old who is thinking of replacing their car every seven years in retirement. If the car sells for $46,900 now and inflates at 3% a year, they want to know what a Lexus GS would cost at the following ages:
At 65 years old a 2022 Lexus GS is estimated to be $63,030
At 72 years old a 2029 Lexus GS is estimated to be$77,519
At 79 years old a 2035 Lexus GS is estimated to be $95,338
And at 86, in this example as well, they listen to their family and buy a new car so they have a reliable car, making the family feel better. They end up spending $ 117,254 on the 2043 Lexus GS . The good news is, the year is 2043, so it is the Jetson’s edition so it can fly.
In discussing future plans with families, I find that car replacement during retirement years is the most frequently forgotten item when individuals plan on their own. But having read this, you know to factor it in. Many people make the mistake when planning of assuming that they can keep the same car throughout retirement. Keep in mind that you may be retired for almost as many years as you were working. Think about how many cars you owned while working and consider if it would be realistic to have one car for a period approximately as long as that. You will possibly be driving more in the early years of retirement, because retired people are the busiest people I know. They have been putting off all the things they wanted to do; now they get to do them! But the amount of driving does slow down significantly in the later years for most, but not for everyone. Also, consider if you have more than one driver, you may be replacing more than one car in retirement. Forewarned is forearmed! If you haven’t already, be sure to account for car replacement and the inflation of the car prices in your retirement projections.
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March 16th, 2012
What is a stock?
The ownership of a publicly traded corporation is separated into shares of common stock, which is a type of investment. When you invest in common stock (buy shares) you become a partial owner (shareholder) of a corporation and you take on some of the risks and rewards of being an owner of a company. Equity is another word for stock.
Why buy stock?
To make money. Although, you can lose the money you invest, that is the potential reward vs. risk of stock investing. There are two opportunities to make money on stocks 1) capital gains and 2) dividends.
Capital Gains and Capital Losses
The dollar value per share of stock will fluctuate up and down depending on the perceived value of the share of stock. Stock is sold in an environment where there are buyers and sellers and it is their perception of the value of the stock that drives the price up and down. The buyers and sellers are observing many variables, some of which are directly tied to the stock itself, some of which are related to the stock’s competitors, some variables pertain to the U.S. economy as a whole, and some variables pertain to markets overseas. There are so many factors that go into the daily fluctuation of the price of the stock; it isn’t just the underlying value of the corporation itself that determines the share price of a stock.
If you buy a stock for $10 per share and sell it for $15 per share you have a capital gain of $5 per share. Congratulations, you have made money on your investment! Don’t get too excited though, Uncle Sam wants his cut. You will have to claim the income on your tax return. If you have held the investment for less than a year (short term capital gains); it will be taxed at your income tax rate. But it isn’t all bad news; for investments that were held longer than a year (long term capital gains); the 2012 capital gains tax rates are lower than income tax rates; 15% for those in the 25% income tax bracket or higher and 0% for those in the 15% income tax bracket or lower.
If however, you buy a stock for $10 and you sell it for $8, then you have a capital loss of $2, you have lost money on your investment. Uncle Sam lets you write losses against gains, and then write off $3,000 of capital losses against income as a capital loss deduction and then carryover any remaining loss to be used in future years.
See the www.irs.gov website for details.
Dividends
One of the rewards of being a shareholder includes participating in the earnings of the company, if they are paid out, in the form of dividends. Keep in mind that sometimes companies keep their earnings to invest back into the company with the goal of improving the company.
Shareholders also have the opportunity to vote on the election of board of director members and mergers and acquisitions.
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Tags: Investing, Stocks, Taxes
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March 9th, 2012
What is the FAFSA?
FAFSA is the abbreviation for Free Application for Federal Student Aid. It is the form that you complete when applying for financial aid. Financial aid is awarded as grants (you do not pay it back) and/or student and parent loans (you do pay it back, with the exception of loan forgiveness programs.)
Should you fill out the FAFSA?
Yes. When working with higher income households, people often indicate that they do not intend to complete the FAFSA. I encourage them to fill out the form, so that they may keep their options open. If their student applies to a private school, they may qualify for aid directly from the school. Private schools often have their own pool of funds to draw from when awarding aid to students, and create their own processes for awarding aid. However, completing the FAFSA is usually part of the process as well as the school’s own financial aid form. Public schools sometimes have awards to give as well, and part of the procedure at some of these schools is having a completed FAFSA form, so keep yourself in the game and fill out the form by the deadline in order to keep your options open.
What is the Missouri FAFSA deadline?
The FAFSA deadline for the 2012-2013 school year for Missouri is April 2, 2012. However, each school can have their own deadlines for priority award consideration. As an example, Mizzou’s FAFSA priority deadline was March 1, 2012 in order to apply for money that the University of Missouri had to give. If you missed that deadline you still have time (until April 2, 2012) to apply for money from state and federal programs. Being aware of each school’s individual FAFSA deadlines is a good opportunity for your student to practice their research and organizational skills. The best strategy is to complete the FAFSA as soon as possible after the first of the year. Watch the mail for W-2s and other tax forms that you will need.
Where can you go to get FAFSA questions answered?
The US Department of Education’s website www.fafsa.ed.gov is a great place to go to find out deadline information and get questions answered about the FAFSA form.
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Tags: College Planning, FAFSA, Taxes
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March 2nd, 2012
Garrett Planning Network is an international group of independent fee-only financial planners and advisors. To be a member you must be a fee-only advisor, meaning your compensation can only come from the client not from commissions, referral fees, or sales incentives. That independence ensures no outside influences affect the recommendations. Another important distinction of the Garrett Planning Network is that the members primarily deliver advice on an hourly as-needed basis.
The Garrett Planning Network is a professional organization, like the National Association of Personal Financial Advisors (NAPFA) or the Financial Planning Association (FPA). However, it is so much more; it is a way to jumpstart your practice and better serve your clients.
Jumpstart
When I started Clark Hourly Financial Planning, I had definite ideas about the types of services I wanted to provide clients and the kinds of relationships I wanted to build. But I didn’t want to spend a lot of time or thought process on what the forms should look like and other the minutiae of setting up a new business from scratch. Therefore I purchased the forms, manuals, and suggestions for processes from Garrett Planning Network, so that I could tweak them to make them my own and get started sooner on my favorite part of the business, working with clients.
Better serve
The reason I stay a member is the ongoing support that I get from the community of more than 300 independent financial planners. We are all connected through an intranet Knowledge Bank, which we can post to whenever we want to get a second opinion on a case we are working on or to share ideas. I can tap into this group of financial planners, some of whom have been planners for their whole careers, while others have a background as CPAs, or attorneys, have been in human resources, insurance, or mortgage lending. This is an invaluable resource which benefits my clients and me.
I have the benefit of being an independent financial planning business owner and the advantage of having colleagues to bounce my ideas off of - the best of both worlds!
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Tags: compensation
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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Clark Hourly Financial Planning, LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties' informational accuracy or completeness. All information or ideas provided should be discussed in detail with an adviser, accountant or legal counsel prior to implementation.
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