Interesting article in today’s WSJ on delaying Social Security and simultaneously withdrawing from both Traditional IRAs and regular taxable accounts simultaneously to fund retirement.
What Should You Do When the Market Gets Crazy?
August 17th, 2011This is a letter I sent to my clients on the recent market votility. I thought I would share it with everyone.
“Dear Clients,
With the recent quick decline in the stock market and talk of a double dip recession and rising interest rates, I wanted to take a moment and share with you my perspective on the recent stock market declines.
- This too shall pass. The stock market goes up and it goes down. In times of uncertainty like now it does it more frequently. This is why each of you have an asset allocation strategy where you understand the downside risk in your portfolio.
- Historical perspective is important. Is anyone talking about the crash of 1987 when the market dropped over 22% in a single day? The Wall Street Journal ran a series of articles comparing 1987 to 1929, hinting that another Great Depression was on the way.
- Interest rates on US Debt dropped yesterday even though it was downgraded. When money was pulled from stocks there was really no other place to put it which drove bond prices up and interest rates down. Even if interest rates rise in the future they would still be very low from a historical perspective. Did you know that in 1965 mortgage rates were 6% and did not drop below that level again until 2003? The interest rates we see today are lower than they have been in a very long time.
- Sometimes press coverage does not reflect an accurate picture of what is really happening.
a. On a given day only a very small percentage of outstanding shares are traded – most people are not selling and for every seller there is a buyer.
b. The press is often interested in covering the unusual because that is what sells. I received several press requests over the past few days asking me if I had any “panicked clients” who were calling me about the market. They did not wish to speak to clients who were not panicked for their stories. So they only report one side of the story, which is not at all representative of reality. - Emotional investing decisions often lead to poor outcomes. The typical investor who tries to time the market usually underperforms significantly. This is because they tend to sell after a big market sell off and wait until the market recovers to get back in. This is the “Sell Low, Buy High” theory of investing. Not too many market timers were jumping into the market in March, 2009. Even the pros (mutual fund managers) who practice this type of strategy, underperform the market by about 2% per year .”
Are You Thinking of Changing Your Career?
August 8th, 2011
Perhaps you are wondering what would it be like to do something else for a living? So many questions and doubts are raised. Is it worth the risk? How can you afford to do it? Where would you begin? If the mere thought of actually taking some action is exciting, scary and overwhelming, you are not alone! This is where the right coach can be of immense value.
Coaching is all about transformation. You may hear an inner voice of discontent and you recognize your need to make changes. That inner voice becomes persistent and you decide you want to take action. You are ready.
How can “the right coach” be of value? What does a coach actually do?
- Helps you to focus, be honest with yourself and explore options.
- Listens deeply and helps you see what is true and right for you.
- Challenges and motivates you.
- Builds your confidence.
- Helps you step back and see the entire picture.
- Helps you set goals that match your values.
- Facilitates in the process of developing strategy.
- Is present in every way – truly caring about what you want.
How do you find “the right coach”? Ask the people in your life if they know of anyone. Google the names of some coaches you have become aware of and visit their websites.
Some questions to consider when choosing a coach:
- Do you want an accountability partner? Do you want someone to bounce ideas off of?
- Do you need someone to motivate and support you?
- Do you need help in creating a game plan?
- What would be your desired outcome?
To fully understand if coaching is an opportunity to help you make this transition – please arrange a complimentary call by emailing Diane MacPhee at diane@dmacconsulting.org
Diane MacPhee, CFP is a business coach and owner/president of DMAC Consulting Services, LLC.
Unmarried Partners and Planning Software: Often a Bad Fit
July 14th, 2011If you are in a domestic partnership, civil union, or marriage that is not recognized at the Federal Level most of the software that financial planners use won’t work for you.
Here’s why:
Most software is keyed off the IRS tax filing status. This filing status is used to generate future tax projections. Let’s say you are in a newly minted Civil Union here in Illinois which is not recognized by the Federal Government. The planner has two options.
Option 1: Plan jointly but get the taxes wrong
In this scenario the planner enters in the information for both partners together. This allows for sharing of household expenses, and joint purchases, or liabilities. That’s great but in order to do that the software only allows the planner to check the “married” box, which means that all of the federal tax calculations will be incorrect leading to possible misleading projections.
Option 2: Get the taxes right but no joint planning
In this scenario the planner enters information for each partner separately. This means that the Federal tax calculations will be correct, but the couple will have two separate plans, vs. a joint plan.
Luckily a few software programs, including the one I use, do allow for joint planning with a “single” federal tax status. If you are part of a couple that is not considered married under Federal law make sure to ask your planner if their software can handle that. You may be surprised by the answer.
Don’t get trapped with a condo you cannot sell
March 7th, 2011I work with several clients who currently own condos but are planning to purchase a SFH in the near future. The trick will be selling their current condo. A Chicago Tribune story outlines the perils of trying to sell a condo in today’s market. Here are some of the things that will make it almost impossible for a buyer to purchase your condo:
- Too many rentals in the building (>30%)
- Inadequate reserves
- Delinquent assessments
- Foreclosures in the building
- Building not approved for FHA financing
If you own a condo you should know the situation in your association and get active to change it if any of the problems exist. If they are not addressed you may be trapped with a condo that you cannot sell.
Are you on track for retirement?
March 3rd, 2011Here is a ‘quick and dirty’ tool that I found in Money Magazine (Feb 2011), that gives you a quick assessment to see if your retirement savings are on track.
For each age there is a savings factor (e.g. at age 30 the savings factor is 0.3). This means that if you want to retire at age 65 you need to have 30% of your salary saved by age 30. If you earn $100,000 this means that you would need to have $30,000 saved for retirement. At age 50 the factor is 4.5 which means that if you earn $100,000 you would need to have $450,000 in retirement savings.
Age Savings Factor
30 0.3
35 1.1
40 2.0
45 3.2
50 4.5
55 6.2
60 8.2
65 10.6
This table is a better estimate for younger ages when retirement is far off and you want a quick reality check. As you get closer to retirement so many other specific factors could affect your number (e.g. will you have a mortgage, will you move, will your lifestyle change, etc.) that it may be worth doing a more specific sophisticated analysis, or even seeing a Fee-Only(tm) Financial Planner.
Index Funds are Hard to Beat
November 30th, 2010According to the Wall Street Journal index funds are likely to become even better in the future. The new twist: indices that phase out and phase in new stocks vs. adding and dropping them abruptly. This eliminates that tactic of active managers taking advantage of the time before the index changes and the index fund buys or sells the stock.
There are also some other great reasons to own index funds:
According to the Wall Street Journal index funds are likely to become even better in the future. The new twist: indices that phase out and phase in new stocks vs. adding and dropping them abruptly. This eliminates that tactic of active managers taking advantage of the time before the index changes and the index fund buys or sells the stock.There are also some other great reasons to own index funds:
- Lower fees. The typical actively managed stock fund has total annual expenses of 1.35% or $1.35 per $100 invested. Index fund fees tend to me much lower. For example, the Vanguard Total Stock Market Index charges 0.07% or $0.07 per $100 invested.
- Tax efficiency. An actively manage fund turns over its portfolio about three times per year. This means that it generates capital gains on any profits from those sales and all of those gains are taxable, whether or not you sell you shares. An index fund buys and sells shares much less frequently generating much lower annual capital gains. Meaning that most of the tax is owned when you sell your shares, and those gains are taxed at lower capital gains tax rates.
- Transparency. Actively managed funds only report their holdings a couple of times per year so it’s difficult to know exactly if their actual holdings match your expectations. For example a large cap fund could hold significant small cap stocks, or a large amount of cash without disclosing it. This could make maintaining an asset allocation more difficult. With an index fund you have much greater transparency into their holdings since they are required to track a publicly disclosed index.
When does a Guaranteed Income Annuity Guarantee Nothing but Excessive Fees?
November 23rd, 2010I recently reviewed a “Guaranteed Income” annuity contract that a new client had purchased before starting work with me. Here’s how it works:
Client purchases and annuity and chooses how to invest the funds.
- The annuity has a “Guaranteed Base” on which the “Guaranteed Income” is based on
- The Guaranteed Base will grow either by 6% or the actual contract value whichever is higher.
- After 10 years the client has a choice of receiving a guaranteed income stream based on either the Guaranteed Base value which will never go down, and will go up by at least 6%/year
Sounds great doesn’t it? There are a lot of “gotchas” though.
- Although the Guarantee Base will go up by 6% per year, there actual income received is a function of the Guarantee Base multiplied by an “annuity factor.” The annuity factor is determined by the insurance company at the time the client wishes to receive income and the insurance company can determine choose whatever value they wish, meaning that the client has no idea what her “Guaranteed Income” will be.
- Fees, fees, and more fees. Try 3.45% per year or OVER $9,000/year on a $250,000 annuity. This is about $8,500 more per year than a basket of low cost index funds would cost.
- Surrender charges. They start at 8% in the first year and go down by 1% per year for the next four years.
- All of the guaranteed income will be taxed at ordinary income rates. Had the client invested in low cost index funds most of the income would be taxed at lower capital gains income tax rates.
- No inflation protection. The amount is guaranteed by it doesn’t rise each year (unless you pay even higher fees).
So what do we have:
- A future undermined guaranteed income with no inflation adjustment
- High fees meaning that the real value is significantly eroded over time vs. investing in low-cost index funds.
- Tax inefficiency.
- High surrender charges.
And this is good because . . .??
Do Something Great and Save Big on Taxes
October 25th, 2010This post combines my personal and professional interests. I am a former board member and current finance committee member of Sarah’s Circle, a service agency for women who are homeless.
Sarah’s is in the midst of a campaign to raise funds to purchase and rehab a building that will house their daytime service center (currently in a rented space) and provide housing units and support services.
During a recent finance committee meeting I was shocked to find out that gifts to Sarah’s for this project qualify for a 50% state tax deduction. This means that if you are in the 28% Federal tax bracket you can reduce your taxes by an astounding 78% of your gift to Sarah’s for this project! (50% state + 28% federal)
For example, if you contribute $1000, $780 comes back to you meaning that your out of pocket contribution is $220.
Below is some additional information from Sarah’s Executive Director, Kathy Ragnar
“Sarah’s Circle, a 32 year old agency serving women who are homeless has a unique means of raising funds for a new building. The new facility will expand their ability to house, train and support societies most vulnerable women, women who are homeless.
This organization offers a unique tax benefit to those who donate funds. This is not only a wonderful cause to support, but donors also receive approximately 80% of their donation back as a result of a unique state tax credit combined with the federal deduction.
This project has excellent backing – the agency has two top global firms providing services on a pro bono basis. Perkins +Will is providing all the architectural services and Mayer Brown is providing legal services. Additionally, the agency has been awarded a new HUD grant which will not only provide much needed capital, but operating dollars to operate the building once it is up and running.
This is a way for donors to improve the lives of women for years to come, while easing their tax burden in the coming year.”
Sarah’s website is www.sarahs-circle.org
Information of the new building is at www.sarahs-circle.org/ways-to-help/new-home-for-sarahs-circle.html
The Refi Question
September 27th, 2010The Wall Street Journal recently ran a very interesting article about refinancing your mortgage. The main point of the article is that for some people refinancing may not be a great idea even though rates have dropped. Below are some factors to consider. (See the entire article)
- What are the closing costs to refinance? These may overwhelm any savings you receive especially if your mortgage balance is low.
- Can you qualify for the best rates? There are many new rules that are now in place that may prevent you for getting the lowest rate. (Higher credit scores, self-employment, equity you have in your home, etc.)
- To find out your real potential savings from a refi make sure to ask your mortgage broker to amortize the new loan over the remaining period of your current loan. Example: You are 2 years into your current mortgage and you are considering a refi. Have your broker amortize the new mortgage over 28 vs. 30 years to see an apple to apples comparison. Your savings will be less than the you originally thought since some of your perceived savings is from stretching your loan payments vs. having a lower interest rate.