Tag Archives: financial advice

5 Tax Rules for Investors

IRS-formsMy Comments: What day is it? Yes, it’s HUMP day, especially for those whose career path involves helping others with their tax returns.

Maybe some of what you find here will help you before the next HUMP day, April 15, 2015.

by: Allan S. Roth, CPA, CFP

Compared with taxes, investing seems simple. As a CFP and CPA, a very large part of my practice is focused on maximizing tax efficiency, a strategy that often saves clients tens of thousands of dollars annually. With the higher 39.6% marginal tax bracket and the 3.8% passive income Medicare surtax in effect, tax efficiency is more important than ever.

I don’t define tax efficiency as minimizing taxes, but rather as maximizing the return after taxes. For example, clients might be able to avoid taxes by holding municipal bonds – but if they are in a low enough tax bracket, they might keep more income after taxes by owning taxable bonds.
That’s the better goal.

Tax alpha comes from several sources, including:
* Product selection
* Asset location
* Tax-loss harvesting
* Roth conversion
* Withdrawal strategies

There are some general rules to follow for each of these sources. The one big caveat, however, is that everyone’s situation is different – some clients may have huge tax-loss carryforwards, others may have nearly all of their portfolios in either taxable or tax-deferred assets. That means some circumstances require breaking these rules.


Product selection is one way to increase a portfolio’s tax efficiency. At the most basic level, picking investment products for the long run avoids turnover. Whenever a client sells an asset in a taxable account, it generates a gain or loss with taxable implications. So holding on to assets with gains defers those taxes – that’s like getting an interest-free loan from the government. Meanwhile, some investment products are more efficient than others. Mutual funds or ETFs that turn over their holdings generate taxable gains passed on to clients. According to Morningstar, the median turnover of active equity mutual funds is 49%. This creates both short-term and long-term taxable gains – and, by the way, tends to reduce returns even before these taxable consequences are factored in.

Index funds may also create turnover, particularly those with narrower focus. For example, a small-cap value index fund must sell when a company holding becomes larger or no longer meets the definition of value. Even an S&P 500 index fund must buy or sell whenever S&P makes a change.

The broadest stock index funds, such as the total U.S. or total international stock funds, have the lowest turnover and are the most tax-efficient. Even those funds, however, sometimes must sell to raise cash to buy large IPOs, such as Facebook or Twitter.


Once you help a client choose the appropriate asset allocation, location becomes critical. As a rule, tax-efficient vehicles belong in taxable accounts, while tax-inefficient vehicles belong in tax-deferred accounts, such as 401(k)s and IRAs. (Roth wrappers are much more complex – more on that in a bit.) The Asset Location Guidelines chart offers a general guideline for asset location.

There are several reasons to locate some stocks in taxable accounts. First, capital gains can be deferred indefinitely – by avoiding turnover – and possibly eliminated altogether, passing them on to clients’ heirs with a step-up in basis. And dividends are taxed at 15% for most; even for those in the 39.6% marginal tax bracket, they still carry a 20% rate – lower than ordinary income.

By contrast, holding stocks or stock funds in tax-deferred accounts has three distinct disadvantages:
* It converts long-term gains into ordinary income, which increases the tax burden.
* Because stocks tend to be faster-growing assets, they create more ordinary income later, when the required minimum distributions will be larger.
* It could cause heirs to miss out on the step-up in basis.

What does belong in tax-deferred accounts? Slower-growing assets that are taxed at the highest rates. (Think taxable bonds.) Since REIT distributions are ordinary income, they also belong in the tax-deferred accounts.

One addendum: Although I believe muni bonds are overused, they would be held in a taxable account. Clients should not own stocks in a tax-deferred account while they have munis in their taxable account, however. They would likely earn more by holding the stocks in their taxable account and taxable bonds in their IRAs, and dropping the munis altogether.

What about Roth accounts? Although this is a complex subject (and very dependent upon individual situations), a general rule of thumb is that stocks and stock funds should be held in Roth accounts only when there is no more room (from an asset location perspective) in the client’s taxable account. REITs are often properly located in Roth accounts.

There are many other variables that could change asset locations, of course, including whether a client plans to pass assets on to heirs or will sell them to raise money to live on.
asset allocation

In late 2008 and early 2009, losses were plentiful and recognizing those losses created valuable tax-loss carryforwards. While only $3,000 a year can be recognized, an unlimited amount can be carried forward to offset future gains. With U.S. stocks at an all-time high as of mid-January, harvesting those losses even now is critical as equities are sold for any reason, including rebalancing.

When doing tax-loss harvesting, be sure to watch out for wash sale rules, making sure that clients don’t buy back the same security within 30 days. To avoid having to exit stocks for a month when selling a broad stock index fund, consider buying a similar but not identical fund. For example, you could replace Vanguard Total Stock Index Fund ETF (VTI) with Schwab U.S. Broad Market ETF (SCHB). Because they follow different U.S. total stock indexes, this transaction should keep your client clear of wash sale rules.

It’s never fun to harvest losses, but the silver lining to share with clients is that bad times don’t last forever – and that there will come a time when those losses will save them a bundle.

Roth IRAs and 401(k)s can be critical elements of your clients’ portfolios. A common myth is that the Roth wrapper is better than the traditional account if the assets are held for a certain number of years. This is false. The only things that matter are the marginal tax brackets in the year of the conversion and the year of withdrawal. If the marginal tax bracket ends up higher upon withdrawal, the conversion will have been beneficial.

There’s another factor: Since no one can be certain what lawmakers will eventually do, having three pots of money – taxable, tax-deferred and in a tax-free Roth – is an important way to diversify against unpredictable politicians.

Rather than have clients contribute to a Roth wrapper, I typically have them contribute first to a traditional retirement account, and then do multiple partial Roth conversions from existing IRAs to take advantage of potential recharacterizations later on.

I consider traditional IRAs to be partnerships between the client and the government. As an example: A $100,000 IRA owned by a client in the 30% tax bracket would be 70% owned by that client; converting it to a Roth costs the client $30,000 to buy out the government’s share.

If that client does three $10,000 Roth conversions, he or she will owe $9,000 in taxes – $3,000 per conversion to buy out the government’s share. If they put each $10,000 conversion in different asset classes early in the year, they’ll have up to 15 months or (if the client files an extension) even up to 21 months to see how each performs. If, for example, the assets in one conversion tank and lose half of their value, the client can hit the undo button and recharacterize – thus having the government buy back its share at the full $3,000 original price.

Recharacterization also gives a client a chance to undo an unexpected impact from the dreaded alternative minimum tax. Tax accountants often underutilize the strategy of multiple Roth conversions – which can often be a vital part of tax planning.

When clients transition from accumulation to withdrawal modes, tax strategy continues to be critical. There is a general rule of thumb that a client should spend taxable assets first, tax-deferred assets second and Roth assets last.

It’s not a bad rule to start with, because spending down taxable assets lowers future income when clients will be withdrawing from tax-deferred accounts – which generally have a zero cost basis and generate ordinary income.

But the analysis becomes more complex if a client has an opportunity to pay taxes sooner at a lower marginal rate. If, for example, a client is retired but elects to delay Social Security until age 70 (a wise move for the healthy), a client may have more deductions than income. Thus, it would be advantageous to either take out enough money to stay within the 15% tax bracket ($72,250 for married couples filing jointly), or to do multiple Roth conversions to use up that low marginal tax rate.

From a broad perspective, advisors have a wide range of options to provide clients with tax alpha. Another example: Because most advisors don’t get to design portfolios from scratch, they wind up keeping some existing assets while building a more diversified portfolio. So clients who come to me with S&P 500 funds and want to own a broader index – but have large unrealized gains that would create a tax hit if sold – can create a total index by using a completion index fund such as an extended market index fund, which owns every U.S. stock not in the S&P 500. Just by avoiding the sale of the S&P 500 fund, the client gains a tax advantage.

In most cases, coordinating with the client’s CPA is critical. Since many CPAs do not have a strong understanding of investing, you may need to explain some of these strategies to them. Tax strategy is far from simple – yet if done right, planners can create large amounts of tax alpha for clients in any phase of life.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo., and is a CPA. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

Buy Term and Invest the Difference?

Comments from me, Tony Kendzior: For many years, my primary income resulted from my license to sell life insurance, health insurance and annuities in the State of Florida. But like so much over these many years, the markets changed, the rules changed, the perception of need by consumers changed. And then came the internet.

One change that led to the headline of this article was driven by the fabulous return on investments during the years from 1987-2000. Roughly 93% of every trading day saw a positive result. Which meant that putting lots of money into a permanent life insurance policy was dumb, since you could buy term, invest the difference and come out way ahead.

Until you couldn’t. Which is what folks are facing now. My children now own the life insurance policy on my life that is essentially a term to age 120 policy. A level premium, very little cash value, but my family will get a payday to offset the fact that my savings got decimated during the 2008-2009 crash. Unless I live past 120 which means all bets are off.

by Jeff Reed on March 27, 2014

In the last year, one of the major tenets of financial planning came under fire. Studies uncovered that the 4 percent withdrawal rule for retirement may not be sustainable. As significant as that news is, perhaps the more important part of the exercise is questioning the conventional wisdom in the first place. That process leads to any number of other tried and true “rules” of financial planning that could also come into question, and maybe even be exposed as unreliable.

One that was in the news recently was the concept of “buy term and invest the difference.” This long-held belief by many CPAs and CFPs may be crumbling as retirement age is pushed further and further out for many individuals, and their term insurance expires while they still have an earned income to protect.

Truly, the Achilles heel of the strategy has always been, “What if things don’t go according to plan?” In this article, I try to answer that question.

It’s about risk management, not cash value

The historical battle lines of this issue have had the life insurance professional recommending permanent insurance on one side and the CPA or CFP recommending term insurance on the other. One of the major elements of the insurance professional’s argument has been the presence of cash value to offset premium or provide an income. But what if that is really the wrong battle? What if the real issue comes down to providing coverage with a finite termination point to cover a risk that has proven to have a duration of unknown length?

That’s really a square peg being driven into a round hole. If a more effective strategy is to match the risk profile with the right risk management tool, then we need to look at the problem completely differently. We need a risk management tool that has the ability to extend its useful life if we need it to, and at a price that is reasonable. The reality is that the best-suited product for this risk may not be term insurance. It’s simply too rigid.

The problem with averages

This issue comes up time and time again in our business. Put frankly, averages create a false sense of security. In 2013, according to Gallup’s annual Economy and Personal Finance survey, the average retirement age rose to 61, up from 57 back in 1993. Seems like a reasonable rate of increase, and today’s 45-year-old could expect, on average, to retire at age 65. The issue, however, is that means that 50 percent of current retirees, more or less, were over age 61 when they retired — some of them probably quite a bit older.

A portion of that 50 percent almost assuredly had to make some tough decisions about their life insurance coverage as they aged, particularly if their contract reached its natural expiry. So, too, will the cohort turning age 65, 20 years from now if they need to push their retirement age out beyond the norm.

Underwriting class drift

The obvious solution is to buy a new term insurance contract. Unfortunately, we all know that our clients’ health changes as they age. That exacerbates the problem with term insurance as an income protector, as just when these clients may need to make a new insurance purchase, their health may put the price out of reach, or they may not be able to qualify. How real is this issue? We pulled some data from one of our insurance companies about the changes in underwriting results as clients age.

The trend is obvious, with the percentage of applicants approved at standard rates increasing by 25 percent from age 40 to 65. This only represents applicants approved at standard or better, and there are almost assuredly a significant percentage of declines as well as clients who simply do not apply, knowing that they either can’t afford or can’t qualify for new insurance. The assumption that the client will be in the same health as they were at the time of their original underwriting and that today’s products are indicative of pricing that will be available 10, 20 or even 30 years from now is simply not realistic.

Based on the above, that is not a bet I would take, nor would most informed clients.

What’s the alternative?

This is the real question: Is there a life insurance product out there that matches this risk profile more closely than term insurance? Yes, there is, and it turns out that everybody may have been wrong about this one.

The issues with term insurance have been explored above, but what about the cash-value life insurance side of the argument? The accumulation solution works, but only if the client has the income to fund it. Logically then, it would follow that the people who successfully execute on that strategy are also likely to be retiring at or before the average retirement age. Where this issue really rears its ugly head is within a standard deviation or two of the mean, where retirement is much less secure. These clients are likely to have issues over-funding a policy on a consistent basis, or may have started to save for retirement at too-late an age to really utilize the income-generating potential of a life insurance contract. Whatever the reason, this group’s retirement is much less certain than their peers. And these people at the fat part of the bell curve need a different solution.

What they need is efficiently priced coverage that has flexible premiums and does not have a set expiration date, which sounds an awful lot like some of the efficient, low-cost insurance products discussed in previous posts. So much so, in fact, that we took a look at how that might play out by comparing the cost of term insurance versus permanent insurance utilizing low-cost permanent products that are not used to accumulate cash. Rather, they’re used to effectively match the risk we’re attempting to insure by eliminating the set expiration date of term insurance.

11 Tips to Help YOU With Social Security Benefits

SSA-image-2Comment from Tony Kendzior: I’ve been happily accepting monthly checks from the Social Security Administration now for over seven years. I don’t wonder much about it anymore; they just show up in my bank account and along with my wife’s check, make a better positive outcome for us every month.

I’m also finding ways to help individual clients optimize their benefits. It’s a function of doing the math to determine which of the 97 months you can choose to start taking your benefits. And knowing the impact of several options you have in each of those 97 months.

So my goal is to try and post something about the Social Security System at least once every week. If this is redundant, my apologies. But I never know who is reading this stuff so I just keep shoving it at you in hopes you will benefit. BTW, if you want a specific analysis for yourself, let me know. It’s free.

by: Ann Marsh / Financial Planning / Wednesday, January 22, 2014

The Social Security system may be in serious trouble but, right now, it’s still a critical source of support for clients, according to Theodore Sarenski, president of Blue Ocean Strategies Capital in Syracuse.

Sarenski started with the bad news during his presentation before CPA-planners at the Advanced Personal Financial Planning Conference sponsored by the American Institute of CPAs in Las Vegas.

Reserves for Social Security will be depleted by 2033 and, once they’re gone, incoming receipts will cover just 77% of scheduled benefits, Sarenski says. “It sounds like it’s a long time away, but it’s only 19 years.”

Trouble looms even sooner for the Social Security Disabilty reserves, which will be depleted by 2016, according to Sarenski. And, once depleted, anticipated income would cover just 80% of scheduled benefits, he adds.

For these reasons, Sarenski says, he urges caution.

“We need to be conservative, I think, in our planning,” he says. For people who are age 50 or younger, he is currently projecting they will receive 75% of their benefits.

While he holds out hope that government intervention – possibly in the form of tax increases – can provide a solution, planners still can help their clients get solid benefits from Social Security right now.

This is especially important because baby boomers, now entering their retirement years, have not been good savers, he says.

Across the U.S. workforce today, 51% of people have no private pension coverage and 34% has no retirement savings, he adds.

“So, now that we are all depressed,” he says, “what are the things that we can do for our clients?”

His advice includes the following:

Although there are exceptions, planners should urge most clients to wait to take their Social Security benefits. If they take them as soon as they can at age 62 rather than waiting until age 66, or even 70, they will receive lower monthly benefits. Planners should remind clients that Social Security is the only benefit with a built-in inflation adjustment.
“You cannot buy an annuity that has an inflation rider so it’s worth waiting” for the higher number, he says.

In some cases, it can make sense to start benefits at age 62 and then immediately suspend them – a strategy many clients are not aware of. For example, a spouse may want to start his benefits and immediately suspend in order to trigger spousal benefits for a wife who is 62 or older. He can then suspend his benefits in order to receive a higher benefit when he resumes them later. Some people take this route to reduce required minimum distributions from retirement savings.

“The closer [married couples] are in age, the better this works out,” he cautions.

However, if you do file and suspend, make sure to pay your Medicare Part B premium yourself. If you don’t, Social Security will pay that premium for you, which will reduce future benefits. “Be careful of that,” he says.

Remember that spouses need to be married for a full year to collect benefit from a spouse’s work record.


Both spouses in a couple cannot file and suspend in order to trigger benefits on each other. On the other hand, if they decided to get divorced, they could.
Planners “probably won’t get a lot of clients to do this,” Sarenski jokes.

Those already divorced must have been divorced for two years before they can collect a spousal benefit on their divorced spouse. The same goes for their exes if they want to collect on them. Benefits collected by ex-spouses do not impact the benefits due to a client’s family.

When working with clients who are much older and could lose the ability to care for themselves, those clients should appoint “representative payees” to receive funds on their behalf from the administration. That’s because Social Security does not recognize powers of attorney.

Once, Sasenski says, one of his clients had to close out a banking account that took direct deposits of Social Security checks for herself and her husband. Although she had power of attorney over her husband’s affairs, it took four months of wrangling with the Social Security Administration before she could have her husband’s check sent to her for his benefit.


Remember that, although the Social Security Administration has made a large push to get people to enroll for benefits online, anything beyond the simplest arrangements must be handled in person, at a Social Security office. The online system is not set up to handle anything anomalous.

“Someone told me here at the conference that one of their clients couldn’t apply online. Why? Because they were born on Feb. 29,” Sarenski says, and the system couldn’t recognize that leap year date.

Planners should urge all their clients to enroll online right now to receive annual Social Security statements. The administration sent out paper statements for the last time in 2010. It waited so long to move the entire operation online to ensure that people could safely and securely access their information online. Now, Sarenski says, the administration’s website is robust. But it’s important that clients check their data regularly because the government does make mistakes occasionally and the older those mistakes are, the harder they are to rectify.

For anyone wondering, Sarenski says, husbands or wives who kill their spouses can’t collect benefits on them. Neither can children who kill their parents. If someone goes to jail, any benefits that would have come due during that jail time are lost.

“But your spouse and children, as long as they are not in there with you, they can continue getting benefits,” he says.


In some situations, clients can start receiving benefits very rapidly. “There are 200 compassionate allowances,” he says. “You will get Social Security benefits within two weeks if you have one of those conditions.”

Global Markets: At A Turning Point?

My Comments: This article was published two months ago, so it is interesting to see how the ideas expressed were validated or not over February and March. At the time, the focus was a just ended and very dismal January. Everyone was asking me about the rest of the year. And I didn’t have a good answer.

All I can say is that the programs I use for investing our money, yours and mine, have the ability to move to cash on any given day, and if the trend line is negative, to use strategies that allow investors to make positive gains when the rest of the world is watching their investments decline.

What I would have you understand is that two months does not make a year. Or that what happened in 2008-2009 will not define your life if you seek good advice. If anyone would like proof of this for the seven years from January 2007 thru December 2013, let me know. I’ll email you a hypothetical that I think is outstanding.

Edmund Shing / Jan. 31, 2014

What to think about Recent Emerging Markets-Led Volatility

Wow! This has certainly been an exciting few days for global financial markets, led by sharp weakness in various Emerging Markets (stocks, bonds, currencies). Figure 1 below highlights how the Russian Ruble and Turkish Lira currencies have both suffered extensive weakness against the US dollar over the last month or so, the weakness accelerating over the last few days.

( This is a fairly long article so I invite you to CONTINUE READING HERE. )

Where Does Gold Go From Here? Let’s Use 40 Years Of History As Our Guide

5-little-known-facts4-spouse-lgMy Comments: I’ve never been a gold bug. My mother collected silver but that had nothing to do with silver, or gold, as an investment.

But it should be included in the category most of us call “alternative investments”, along with real estate, precious metals and other commodities. I make sure my clients include alternative investments when they have the ability to diversify beyond the normal categories.

If you like gold, there are ways to play it just as there are with other investments. But if you are not going to own the idea, then be prepared to lose your money. On the other hand, if your timing is right…

Hebba Investments / Feb. 26, 2014

Let’s just get this out of the way – nobody truly knows gold will be in the short or medium term and certainly not next month or next year. Prognosticators and price targets abound, but in reality gold is a very difficult asset to predict because it has so many different factors involved in its price movements which include the understanding of the macroeconomic picture, the mining industry, the financial markets, and even the world political climate – not an easy task for any firm let alone individual investors.

If that wasn’t enough, the gold market is very opaque and its political nature means that it historically has been manipulated (GATA has done excellent research on this issue) by many types of entities for different purposes. So even if you get the fundamental analysis right, you could be dead wrong when it comes to the actions of the large players in the gold market.

But we do believe that even though gold may be tough to predict, there are fundamentals in the gold trade that make it a strong investment for the long-term. We may not know where the gold market is going in the short-term, but we certainly can use the fundamentals to give us a higher probability of seeing where it’s going in the long-term.

In the past we’ve gone into the fundamentals of why physical gold ownership and the gold ETF’s (SPDR Gold Shares (GLD), PHYS, CEF) should give investors very good returns over an extended period of time, but in this article what we want to do is analyze the historical price movements of gold. We’re going to analyze some research put out by the World Gold Council of the historical price action of gold in similar situations to where we find gold today to try and see where it could be headed – and how fast it should get there.

A Historical Gold Price Analysis
As bad as 2013 was for gold investors, it wasn’t very different from many other corrections that gold has experienced since the 1970′s. In fact, gold’s 37% drop from its September 2011 highs was only the fifth largest drop over the last 40 years.
gold-40-yearsAs investors can see, gold has experienced twelve pullbacks that have been greater than 20% since the 1970′s and Richard Nixon officially ended the gold standard. The current correction of 37% has been almost exactly average (36% is the average) and at a length of 28 months, has been a bit longer than the average 18 months seen in the research.

We don’t know for sure if the correction is over, and even though we would be surprised to make new lows we cannot count it out. But it is more than likely that we saw the bottom in December of 2013, as gold registered a London AM fix low of around $1190 dollars per ounce (it went lower intraday), and with the current turnaround it makes it a good time to calculate where gold will go from here based on its prior recoveries.

What we’ve done in the table above is summarize the average historical retracement lengths and gains. Then we’ve used the $1190 bottom that we reached in December 2013, to estimate the expected date and gain of gold’s historical retracement performance.

Historically, gold has gained 69% from its low to its retracement date (the same length forward as the downturn – in the current case that would be 28 months). As investors can see, that would mean that we should expect gold to reach $2011 dollars per ounce in April of 2016 – an excellent return that we’re sure almost every gold investor would be happy with.

If we take it one step further and examine the average gain until the next gold peak, we find that historically gold has recovered 228% from its downturn low until its new peak. Using that in our calculations for our $1190 gold price, we would expect gold to reach $3903 per ounce – though for this calculation the date is much harder to estimate. If we had to put a date on it based on historic numbers, we would calculate the peak date as about 150% of the downturn length or about 42 months from the low (around June of 2017).

Conclusion for Investors
When it comes to gold we think the fundamentals are still very strong as the financial crisis is far from over, the debt load of governments continues to grow at a faster pace, geopolitical tensions continue to raise the odds of “tail-risk” event, gold all-in production costs hover around current prices, and we could go on and on. But this study by the World Gold Council gives investors a much more historical view on the past recoveries of gold, and it helps gold investors realize that these vicious drops in the gold price have happened before – twelve times to be exact.

Investors should remember that every single time the forward retracement (i.e. the same period forward as the length of the pullback) led to a gold price increase that averaged 69% – not bad at all even if that means a 2-3 year wait. Thus we remain gung-ho on gold and we believe it’s a good time to continue to build positions in physical gold and the gold ETF’s (SPDR Gold Shares , PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG).

Gold investors don’t miss the forest for the trees here and get caught up in the daily or weekly movements in the gold price – history shows that we should be expecting much higher gold prices. If we match the average gain of the last twelve 20% declines, then we should expect to see a gold price of $2000 per ounce somewhere in 2016. Be patient gold investors because history is on your side.

5 Simple Ways to Achieve Your Financial Goals

retirement_roadMy Comments: Don’t be fooled by this headline from the U.S. News & World Report. There is nothing “simple” about it. In relative terms, maybe, but in absolute terms, not a chance. If it was easy, few people would be entering their retirement years with not enough money.

That being said, a sixth step would be to find someone whose skill sets include helping people reach their goals, never mind the fee they will charge to help you. Trying to compete effectively with people in the financial industry who achieve their success by paying attention to details 24/7 is a losing cause. I hope you still have a life you want to live.

Whoever it is you find to help you, you should spend time with them and make sure you are comfortable with them personally. There is little chance you are going to ever know what they know about money, but you can use your people skills to determine if you can trust them, to enjoy working with them, to think that together you can accomplish what you want. Then go for it.

By Trent Hamm, U.S. News & World Report / 3/11/2014

Want to be debt-free? Retire early? Build your dream home? Just follow these steps.

All of us have financial dreams.

We’d like to be completely free from debt. We’d like to retire early. We’d like to build our dream home. We’d like to pay for our children’s college education at a top school. We’d like to open our own shop.

The challenging part is transforming those financial dreams into financial goals. Taking something so enormous and so nebulous and turning it into something that you can actually achieve in a specific timeframe is hard. It’s not easy for anyone, even the people who achieve their goals.

Regardless of your specific goal, there are five steps you can take that will drastically increase your chances of success.

1. Create a detailed but flexible plan
Ask yourself: How exactly are you going to get from where you’re at to where you want to be? What is the timeframe you desire for achieving that goal? What do you have to achieve each year to make it? Each month?

Your plan for achieving your goal should involve clear answers to all those questions. At the same time, it should allow for some flexibility, as you never quite know what the future will hold for you. Naturally, major life changes might upend a financial goal, but many goals are actually ended by minor life issues.

Your entire plan shouldn’t fall apart if you struggle to make one step of the plan. Instead, your plan should flex a little to account for that.

2. Add a healthy dose of reality to that plan
How do you add that kind of flexibility? The best thing you can do is make sure your plan is based in reality.

Quite often, people establish savings goals or other goals that are simply outside the realm of what can easily be achieved. A person who lives paycheck to paycheck isn’t suddenly going to be debt-free in a year.

Instead, look at what you can realistically pull off. If you are setting a goal for debt freedom in five years, can you realistically come up with 1/60th of that amount this month? If your goal isn’t realistic in the short term, it won’t be realistic in the long term.

3. Set small milestones
In fact, focusing on shorter timeframes is a powerful way to achieve a financial goal.

Let’s say your goal is to save $50,000 for seed money for a business. Rather than setting such a large number as your goal after, say, five years, break it down into smaller milestones. Your goal is to save $10,000 this year. Your goal is to save $800 this month. You need to save $175 this week.

When you break your goal down into small pieces with milestones, the day-to-day actions you need to take to achieve those goals becomes clearer. It’s easier to figure out how to save $175 this week than how to save $50,000 over the next five years.

4. Automate it
Once you have your goal broken down into small milestones, automate the entire plan. Set up an automatic savings transfer at your bank that transfers $175 per week to a savings account.

Doing this serves two purposes. First, it locks you into a plan that moves you toward your goal without having to make active decisions along the way. Second, it puts you in a position where you focus on dealing with how to live after making room for your goal – not trying to decide whether to make room for it.

5. Keep it out of easy reach
Once your saving begins, it can be very tempting to tap into that money for other purposes. But there should be no way for you to access that money immediately because impulsive decisions will do nothing but undermine your goal. You should not be able to access your savings via an ATM card, for example.

Instead, save your money in a remote financial institution. The decision whether to use a savings account at a bank or an investment account at an investment house is up to you, but your savings for your goal shouldn’t sit in a place where you can grab it at a whim. That’s what an emergency fund is for.

Taken together, these steps can help guide you toward almost any financial goal you can imagine. All that’s needed is the dream and the commitment.

What the Dept. of Labor Might Do With the Fiduciary Rule

My Comments: Last week I attempted a definition of the word FIDUCIARY. My goal was to somehow increase the chances that financial professionals who use the term “advisors” are in fact fiduciaries, and as such, bound by law, by tradition, by ethics, to act and behave in their clients best interests.

As a reminder, there are forces at work who we typically refer to as “Wall Street” who don’t want their salesmen and brokers to be held to a fiduciary standard, any more than your local car dealer salesmen and brokers are anything more than just salesmen and brokers. That’s not to say they are dishonest; they are not. But when there is a dispute, there is no accountability, as there is with a fiduciary.

This is another report on the saga those of us in the financial trenches face as we try to level the playing field.

By Paula Aven Gladych / March 26, 2014

The U.S. Department of Labor is scheduled to release its re-proposed fiduciary rules sometime this year or early next, so what should the industry expect in the latest rendition of the regulation?

The final rule, for starters, could include restrictions like preventing firms from paying their brokers or agents more for selling in-house products.

But according to Bradford Campbell at Drinker Biddle & Reath, the recrafted rule will most likely include exemptions for certain prohibited transactions.

The industry hopes DOL will exempt broker-dealers from having to change their business model, which reaches lower and middle-income investors who need advice but can’t afford a registered investment advisor.

If the DOL allows broker-dealers to continue doing what they’ve always done, despite their lack of fiduciary status, those in the industry who are opposed to the re-proposed rule may stop objecting to it.

Fiduciary status dictates how advisors set up their business. Fiduciary advisors usually are fee-based, whereas brokers tend to work on commission. Under the re-proposed fiduciary rules, brokers to IRAs would have to follow the same rules as registered investment advisors. Any advice they give to clients would be considered fiduciary advice.

The rules could cost millions in compliance and higher costs to investors, opponents say.

Another big issue is IRAs and rollover treatment, according to Campbell. If the DOL continues to apply the fiduciary standard to IRAs and restricts rollover solicitations, this could become the most controversial portion of the rule.

Opponents believe that restricting advice will damage the savings of low to middle-income people who can’t afford to pay for an RIA but can take advice from their broker-dealer. The problem with that scenario, according to the DOL, is that advice given by broker-dealers sometimes has monetary gain attached to it. The broker gets a commission if a client buys certain investments.

Under current law, investment advice is viewed as fiduciary investment advice only if it concerns valuation or buy/sell/hold recommendations and meets all five of these criteria, according to Drinker Biddle:
• Regularly provided (not just one-time advice);
• for a fee;
• individualized to plan;
• pursuant to a mutual understanding;
• that the advice will be a primary basis for plan decision-making.
A 2010 fiduciary rule proposal expanded the definition of fiduciary to include management recommendations, such as selecting an asset manager. Once implemented, it will require greater transparency and responsibility on the part of securities brokers who work with IRAs and 401(k) plans.

Other regulatory items that are on the 2014 agenda include the second round of fee disclosure rules, which propose that plan providers include a guide showing how plan sponsors can find all of the fees they are paying throughout plan documents.

Also expect the DOL to continue discussions about brokerage windows, lifetime income projections, annuity selection safe harbor and target date disclosure in upcoming months, Campbell said.

Fabulous Freebies 2014

My Comments: The people at Kiplinger have created another great blog post for me to borrow. I encourage you to explore their site and gather as much information as you need. If, at the end of the day, you need someone local to help you make smart financial decisions, Florida Wealth Advisors LLC has its’ hand up, trying to get your attention. We’ve been doing this for almost 40 years. Give us a call or send an email.

This image is what you will find if you simply click on the image. You will find yourself at the Kiplinger web site page about the Fabulous Freebies. Be aware it is a slide show and to get to the next slide, just click on the red arrow at the top right. It will take you to the first of many pages. Some are great, others not so, but there is something for everyone. Have fun.

How to Get Tax-free Retirement Income With Life Insurance

life insuranceMy Comments: As a financial planner and insurance agent for almost 40 years, I’ve sold my share of life insurance policies. Many of them are still in force, though I have had my share of clients who pass away.

The IRS is sensitive to those of us who promote the tax benefits of life insurance. Their job is to collect taxes, not help people avoid them. But they do have exceptions.

For one thing, death benefits are not considered taxable income. For another, you can withdraw money down the road and to the extent you don’t reach into the contract for more money than you have paid in, it’s considered a return of principal. After all, you paid the premiums with after-tax dollars.

But the fundamental idea behind this article is that you can get tax-free income from life insurance contracts. I call them contracts, rather than policies, as the document you receive is in fact a legally enforceable contract between the owner and the insurance company.

In a perfect world, there would be a way to pay for life insurence contracts with BEFORE-TAX dollars. There is a way to do this, but it takes a special circumstance. For everyone else, there is old fashioned life insurance, the kind that accumulates a cash value.

By Danielle Andrus / March 4, 2014

Life insurance can be a tough sell for advisors with clients who see it as an expense rather than an investment, and one that won’t even kick in until after they’re dead and gone anyway. What if they could use it in their tax planning, though?

Kevin Kimbrough, principal of national sales at Saybrus Partners, suggested ways advisors can use life insurance to secure tax-free income for their clients in retirement.

Life insurance can be used both in the accumulation phase and the distribution phase, Kimbrough told ThinkAdvisor. With younger clients who are still accumulating assets, he said advisors often use either variable or index policies.

“Frequently, we see advisors using the variable policy, similar to variable annuities, or an index policy, again similar to an index annuity, as an accumulation vehicle where clients have a need for life insurance,” Kimbrough explained. “[They purchase it] for that need, but they’re able to use the policy as an accumulation vehicle, putting in additional dollars over and above the premiums required to support life insurance, and those additional dollars go into subaccounts or into the index accounts, depending on the type of policy.”

Those dollars grow tax-deferred, just like an annuity, Kimbrough said, but “unlike the annuity, you’re able to take your basis out first and that comes out tax free. When you get into the gains, you’re able to switch over and start taking policy loans against the income-tax-free death benefit.”

He acknowledged that there are additional costs associated with using life insurance this way, but “those are offset substantially compared to the taxation you’d have had because you’d been able to take the loan against that tax-free death benefit. As long as that policy stays in force until the insured passes away, then the death benefit is paid out and the loans are repaid against that, they’ll be able to enjoy tax-free retirement distribution.”

Kimbrough noted that clients pick up this strategy fairly quickly when it’s presented in the familiar “bucket” format. Clients have three tax buckets, he said.

“They’ve got taxable assets, a lot of different types of vehicles they can use in that bucket. Then they may also have tax-deferred assets, which are oftentimes the IRAs, qualified plans and tax deferred annuities.” As for what to put in the tax-free bucket, though, Kimbrough said choices are pretty slim. “You may only have municipal bonds, perhaps, or Roth IRAs. To have money coming from life insurance would fall into that tax-free income stream bucket.”

Another benefit to using life insurance to secure retirement income is that clients can avoid the “encumbrances” of penalties for taking minimum distributions before they turn 59 and a half, according to Kimbrough. “So if a client actually started accumulating in a life insurance policy at, say, 40 years old and at 50 or 55 they need to start taking money out, they’re able to start getting into that money without those issues they would have in an IRA or another type of tax-deferred vehicle.”

For clients who are near or in retirement, assets accumulated in a life insurance policy can be used in legacy planning, too. If clients have assets in tax-deferred accounts that aren’t being relied on for income in retirement, “the question becomes, ‘What’s the ultimate plan for those type of assets?’ Frequently the answer there is those assets are probably going to be passed on to children or grandchildren,” Kimbrough said.

“With life insurance, frequently you’re able to purchase a larger amount of life insurance, and the fact that life insurance passes income-tax free, hopefully that nets quite a bit more to the heirs,” he continued. “What we’re seeing quite a bit now is in addition to that [advisors are] adding on the option of a long-term care rider or an accelerated benefits rider that might provide a benefit for the insured in the event of a long-term care stay but also adds protection for the heirs in terms of the assets that the individual would ultimately like to leave to them.”

Are We Looking At A Bond Bubble?

Interest-rates-1790-2012My Comments: There are just as many ways to lose money with bonds as there are with stocks. The risk is different; what happens to interest rates in the future vs corporate earnings and their relative size. That’s an oversimplification but you get the idea.

The chart above shows interest rates from 1790 – 2012. You can draw your own conclusions about where they are likely to go next. It won’t surprise anyone if it happens this year or three years from now, but happen it will. And yes, I’m sensitive to the length of the horizontal axis.

When it does, you need to be positioned to not only avoid losses, but to potentially make money. It can be done and smart people will make money. Who you talk with and when you act is up to you.

By Gillian Tett / March 13, 2014 / The Financial Times

The more money that floods into fixed income, the more risky any reversal

Seth Klarman, the publicity-shy manager of the $27bn Baupost hedge fund, has given investors a slap. In his quarterly investment letter, he declared capital markets are in the grip of a wild bubble.

“Any year in which the S&P jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern,” he wrote, pointing to “bubbles” in bond and credit markets, and “nosebleed stock market valuations of fashionable companies like Netflix and Tesla”.

It might sound reminiscent of 1999, when “fashionable” technology stocks last soared on this scale. But there is a twist: today it is not equities but bond markets that may yet be the most significant cause of concern.

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Consider the numbers. Just after Mr Klarman issued his warnings, the investment research group Morningstar produced analysis that suggests US investors have put $700bn of new money into the most mainstream taxable US bond funds since 2009. Since bond prices have risen, too, the value of these funds has doubled to $2tn. That is striking. But more notable is that these inflows to fixed income have outstripped the inflows to equity funds during the 1990s tech bubble – in both absolute and relative terms.

Meanwhile, Goldman Sachs estimates (using slightly different forms of calculation) that $1.2tn has flowed into global bond funds since 2009, compared with a mere $132bn into equities. And a new paper from the Chicago Booth business school estimates that inflows to global fixed income funds have been almost $2tn since 2008, four times that of equity funds.

Given this, it is no surprise that investment grade companies have been rushing to sell bonds at rock-bottom yields (this week General Electric, Coca-Cola and Viacom were just the latest). Nor is it surprising that junk bond issuance hit a record last year; or that Moody’s, the US credit rating agency, warned this week that investors are so desperate to gobble up bonds that they are buying instruments with fewer legal protections than ever before.

But the $2tn question is what might happen if, or when, those flows change course. Until recently it was often presumed that corporate bond investors were a less skittish group than equity investors; fixed income funds were not prone to quite such wild sentiment swings.
However, the four economists who penned the Chicago Booth paper argue that this is no longer the case.

Analysing market data since 2008, they conclude bond market investors have an increasing tendency towards volatile swings and herd behaviour. That is partly because of fears that the US Federal Reserve could soon raise rates. But the sociology of asset managers is crucial, too.

“Delegated investors such as fund managers are concerned with relative performance compared to their peers [because] it affects their asset-gathering capabilities,” they note. “Investing agents are averse to being the last one into a trade [which] can potentially set off a race among investors to join a sell-off in a race to avoid being left behind.” And while such behaviour can affect all fund managers, the Chicago analysis suggests bond fund managers have recently become much more skittish than their equity counterparts.

One sign of this occurred last year when bond markets, fearing the Fed was about to tighten monetary policy, had a “taper tantrum”, the Chicago Booth authors say. They warn that “bond markets could experience another tantrum” when the “extraordinary monetary accommodation in the US is withdrawn”. And since it is now the bond funds, not banks, that hold the lion’s share of corporate bonds, if another taper tantrum does take hold that could be very destabilising.

Today, as in 1999, nobody knows when that turning point might come. But the more money that floods into fixed income, the more dangerous any reversal could be. Investors and policy makers alike need to heed the message from the Chicago paper – or from Mr Klarman. History may not repeat itself; but, when bubbles occur, it does have a tendency to rhyme.