Choosing a Small Business Retirement Plan

Posted On August 3, 2015 By Admin In Retirement Planning /

If you own your own business, or are self-employed, there are a myriad of options for establishing a retirement plan for yourself and your employees. If you want to attract and retain high quality employees, you need to be able to offer wages and benefits that are competitive within your industry. There are many employees who will prefer a job that includes the stability of a robust benefits program over a job that just offers a higher salary.

I am surprised how often owners of small businesses balk at establishing a retirement plan. Yes, it may entail some additional costs and extra administrative work. Some business owners aren’t planning to retire, so they aren’t focused on creating a retirement nest egg. Of course, if you think your employees feel the same way – that they want to work for you until they die, you may be overestimating the attractiveness of your workplace!

Establishing a company retirement plan doesn’t need to be complicated or have unknown, limitless expenses. There are quite a few benefits to starting a plan, including:

Being able to move company profits into a creditor-protected account for the owner and his or her family as a tax deductible business expense.
Creating assets that are separate from your company. Diversifying your net worth so your wealth is not 100% linked to the value of your company. What would your spouse be able to do with your company, if you were hit by a bus tomorrow?
Providing valuable benefits so you can hire and keep top quality employees. Offering your employees a program to encourage their own retirement saving.

Luckily, there are a number of retirement plan options for employers, each with its own unique benefits. Here is a quick overview of six retirement plans to consider and a profile of the ideal candidate for each.

1) 401(k). The 401(k) is the gold standard of retirement plans, and while it would seem to be the obvious choice, 401(k) plans can be expensive, complicated, and often a poor fit for a smaller company. Many 401(k) providers are happy to work with your company if you have $500,000 or $1 million in plan assets, but fewer are willing to work with start-up plans or companies with fewer than 50 full-time employees.

Sometimes employers decide to offer a 401(k) but are not willing to provide a matching contribution. You may think you’re adding a benefit, but this often backfires. You will have very low participation without a match, so the administrative cost per employee and the fixed costs for the amount of assets in the plan ends up being higher. And since 401(k)’s have “top heavy” testing, the higher paid employees who do want to participate are often told that they have contributed too much to the plan and that they have to remove some or all of their contributions. No one wins in this situation.

The solution to avoiding the top heavy testing is to establish a “safe harbor” plan, but this will require that the company provides a matching contribution.

Best candidate for a 401(k): a company who is willing to provide a matching contribution for employees and will have at least 10 or 20 participants in the plan (actual participants, not just eligible employees). Without the company willingness to offer a match, I’m not sure the plan will satisfy the needs of the owner or the employees. 401(k)’s tend to have a better participation rate in companies with higher paid, white collar employees.

2) SIMPLE IRA. The Savings Incentive Match PLan for Employees (SIMPLE) was created to enable employers with fewer than 100 employees to be able to offer a “401(k)-like” plan, without complicated rules or high administrative costs. Employees choose to participate and have money withheld from their paycheck. They may contribute up to $12,500 for 2015; if over age 50, they may contribute an additional $3,000. The company will match employee contributions up to 3% of their salary.

If you have payroll of $200,000 a year, and ALL employees participate, you’d match $6,000 of their contributions. The company match is a tax deductible business expense. Both employee and employer contributions vest immediately and are held in each employee’s name where the employee chooses how to invest their account. If a participant makes a withdrawal in the first two years, the penalty is 25%. If the withdrawal is after two years, but before age 59 1/2, the penalty is 10%. For the business owner, there is no top heavy testing, so you may contribute the maximum (plus the match) to your own account, regardless of whether your employees choose to participate or not.

Best candidate for a SIMPLE IRA: any company with 2-100 employees that is willing to match 3% of employee contributions and wants a plan that is easy to administer and low cost. More owners should be looking at the SIMPLE rather than trying to make a 401(k) fit. It’s a great option. There are two reasons why you might choose a 401(k) instead. The first would be if you plan to have more than 100 employees. Second, if you think many of your employees will want to contribute more than $12,500 in a SIMPLE, they could contribute $18,000 to a 401(k). If neither of those reasons apply, a SIMPLE is a great alternative to a 401(k).

3) SEP-IRA. The Simplified Employee Pension (SEP) is an employer-funded plan. The employee does not contribute any money to a SEP; employer contributions are elective and can vary from year to year. However, the company must provide the same percent contribution to all eligible employees, from zero to 25% of salary. The maximum contribution for 2015 is $53,000 (at $265,000 of net income). Contributions are a tax deductible business expense.

If you are looking for a profit-sharing type of plan that allows the employer flexibility of how much to contribute each year, the SEP may be a good fit. In practice, the vast majority of SEP plans are established by sole proprietors or other self-employed individuals who do not have any employees, other than possibly a spouse. Since your contribution amount to a SEP depends on your profits, it is impossible to know the exact amount you can contribute until you do your taxes. Most SEP contributions occur in April, but the unique thing about a SEP is that it is the only IRA which you can fund after the April 15 deadline. If you file an extension, you can contribute to a SEP all the way up to October 15 on your individual return, or September 15 on a corporate return.

Best candidate for a SEP: a business owner with no additional employees. Note that any 1099 independent contractors you hire are not eligible for your company SEP, only W-2 employees.

4) Individual 401(k). Also called a “Solo 401(k)” or “Self-Employed 401(k)” sometimes, this is just a regular 401(k)/Profit Sharing plan where a custodian has created a set of boilerplate plan documents to facilitate easy administration. Even though the Individual 401(k) is for a single individual (and spouse) who is self-employed, there are technically two contributions being made: as the employee, you can make a salary deferral contribution (up to $18,000), and then as the employer, you can make a profit sharing contribution, up to 25% of net income. The plan has the same total contribution limit as a SEP, but because of the 2-part structure of the contributions, people with under $265,000 in net income can often contribute more the the Individual 401(k) than they can to a SEP.

The Individual 401(k) is what I have used for myself for my work as a financial advisor. I am also then able to make a SEP contribution based on my (small) earnings as a free-lance musician. Note that once your Individual 401(k) assets exceed $250,000, you will be required to submit a form 5500 to the IRS each year. If you are interested in an Individual 401(k), we can establish one for you with our custodian, TD Ameritrade.

Best candidate for an Individual 401(k): Self-employed person, with no employees (and no plans for employees), who wants their own 401(k) and plans to contribute more than they can to an IRA.

5) Traditional IRA. The Traditional IRA is not an employer-sponsored retirement plan. However, if you are single and do not have an employer-sponsored plan, you can contribute up to $5,500 to a Traditional IRA as a tax-deductible contribution, regardless of how much you make. Or, if you are married and your spouse is also not eligible for an employer-sponsored plan, then you can each contribute $5,500 into a Traditional IRA, with no income restrictions. I point this out, because if you don’t have any employees and only plan to contribute $5,500 (or $11,000 jointly) each year, then you don’t need to start a 401(k) or any of these other plans. Just do the Traditional IRA.

Best candidate for the Traditional IRA: a business owner not looking to offer an employee benefit, who will contribute under $5,500 per year.

6) Defined Benefit Plan (Pension Plan). 401(k) plans are “Defined Contribution” plans, where the employee makes the majority of the contributions and determines how to invest their account. At the other end of the spectrum is the Defined Benefit Plan, or Pension Plan, where the employer makes all the contributions, manages the investment portfolio, and guarantees the participants a retirement pension. Undoubtedly, there are fewer and fewer large employers offering DB plans today because of their cost and complexity. However, for a specific set of situations, a DB Plan can be a brilliant way to make very large contributions on behalf of owners and highly-paid employees of small companies. The Plan will aim to provide a set benefit, for example, 50% of the final salary, with 30 years of service, at age 65. Each year, the plan’s actuary will calculate how much the company needs to contribute to the plan’s account to be on track to offer this benefit for all eligible employees. Obviously, the amount contributed for employees who are older will be higher, as will be the amount contributed for higher income employees.

The plan does not need to pay pension benefits for an indefinite period. Assuming the owner is the oldest employee, he or she can simply shut down the plan when he or she retires and then distribute the plan assets into IRAs for vested participants. In a situation where the owner is much older (say 61, versus employees in their 30’s and 40’s), and the owner makes $300,000 versus employees who make $50,000, the vast majority of the assets will be distributed to the owner upon dissolution of the plan. The DB Plan can be in addition to a DC Plan, like a 401(k), and is a great way to maximize contributions for an owner with very high earnings who is planning to retire in a couple of years.

Best candidate for a DB Plan: high earners who are older, who will retire and shut down their business, and who have a couple of much younger employees. Many small law firms and medical practices fit this profile exactly. If you have been lamenting that the $53,000 limit in a Profit Sharing Plan is too low for you, consider adding a DB Plan.

At Good Life Wealth Management, retirement planning is our forte. We can help you determine the best plan for your needs and make it easy for you and your employees to get started. Drop me a line and let’s schedule a time to talk about how we can work together.

Four Student Loan Forgiveness Programs

Posted On July 27, 2015 By Admin In College Savings /

The size of student loans has grown tremendously in recent years. Many college graduates are finishing school with $100,000 or more in debt, especially those who pursue graduate degrees. It is becoming a substantial problem, one which is impacting a whole generation’s ability to become wealthy. Perhaps for the first time in American history, our young people face a tougher road to prosperity than their parents did.

With higher unemployment today for new graduates, and stagnant entry-level wages in many fields, it can be a significant burden to repay student loans, let alone save money for a 401(k), get a home mortgage, or do any of the financial planning steps I typically write about. For those who are struggling with their student debt, there are a number of student loan forgiveness and repayment programs which can help.

Student loan strategies are becoming an important part of financial planning, given the weight of this debt on young people. At Good Life Wealth Management, we’re prepared to help recent college graduates navigate these issues, as well as to work with parents who want to ensure their children get started on a path to prosperity. If your financial advisor doesn’t know about these programs, you need a new financial advisor! Here is an introduction to four loan forgiveness and repayment programs available today.

1) Public Service Loan Forgiveness (PSLF) Program. This program will forgive 100% of your eligible loans after you make 120 payments (i.e. 10 years of monthly payments), while employed full-time in a public service job. To qualify, you should use one of: the Federal Income-Based Repayment (IBR) Plan, the Pay as You Earn Repayment Plan, or the Income-Contingent Repayment (ICR) Plan.

Only loans received through the William D. Ford Federal Direct Loan Program eligible for the PSLF. However, if you have Perkins or FFEL loans, you may consolidate them into a Direct Consolidation Loan and then they will become eligible for the PSLF.

Public service jobs include those with a federal, state, or local government agency or public school or library. Additionally, a full-time job with any 501(c)(3) non-profit organization is also considered a public service job, regardless of what the organization does. For my musician colleagues, please note that a full-time position with a symphony orchestra, opera company, private university, or music school, would all qualify for the PSLF, provided the employer is a 501(c)(3). Likewise for employees who work full-time for an animal shelter or rescue group.

Payments made after October 1, 2007 may qualify for the PSLF. For further details on the program as well as instructions on how to verify and record your eligibility, please visit the Federal Student Aid Website.

2) Maximum repayment periods on Federal income-driven plans. If you participate in one of the three Federal income-driven plans, there is a maximum amount of time under these loans. If you still have a balance remaining at the end of that term, your balance will be forgiven. Please be aware that the amount of the loan forgiveness will be considered taxable income in that year and reported to the IRS.

Here are the maximum repayment periods:
IBR for new borrowers after July 1, 2014: 20 years
IBR for borrowers before July 1, 2014: 25 years
Pay as You Earn Plan: 20 years
ICR Plan: 25 years

Individuals who are making small payments under an income-driven plan sometimes find that their balances are actually growing rather than shrinking. While I’m not sure it’s a good idea to minimize your income for 20-25 years to qualify for this program, you may take some solace in knowing that your debt will eventually be forgiven as long as you continue to make on-time payments.

For details, visit this page on the student aid website.

3) Loan Forgiveness for Teachers. There are several programs offered by both Federal and State governments to offer loan forgiveness to public school teachers. Some of these programs are used to attract teachers in specific high-demand subjects, or to low-performing schools which struggle to attract qualified candidates. In addition to the PSLF described above in #1, teachers in Texas may be eligible for the Federal Teacher Loan Forgiveness Program, or the TEACH for Texas Loan Repayment Assistance Program, Details available on the Texas Education Agency Website.

4) Military College Loan Repayment Program (CLRP). Several branches of the military offer a loan repayment program to new enlisted personnel (not officers). The Army and Navy will repay up to $65,000 in student loan principal (but not interest), paying one-third at the end of your first three years of enlistment.

Payments are made directly to the lender, but are considered taxable income to the individual. For general information on the program, here is a good article on the CLRP. For details on the Army program, click here.

Using a loan forgiveness program could save you $50,000 or more, and allow you to move forward with your other financial goals, such as building an emergency fund, saving for retirement, or buying a home. Since each program has very specific requirements, it’s best to plan ahead and know which program you may be eligible for, and make sure you follow the rules carefully.

Several of these programs apply only to Federal Student loans. Be careful about consolidating your Federal loans into a private bank loan as this could cause you to lose your eligibility for a forgiveness or repayment program.

Guaranteed Income Increases Retirement Satisfaction

Posted On July 20, 2015 By Admin In Retirement Planning /

Several years ago, for a client meeting, I prepared a couple of Monte Carlo simulations to show a soon to be retired executive possible outcomes of taking his pension as a guaranteed monthly payment, versus taking a lump sum, investing the proceeds, and taking withdrawals. When I showed that the taking the pension increased the probability of success by a couple of percent, my boss promptly cut me off, and warned the client that if they didn’t take the lump sum they would have no control of those assets and would not be able to leave any of those funds to their heirs. That’s true, but my responsibility was to present the facts as clearly as possible for the client to make an informed choice, without injecting my own biases.

The fact is that retirees who are able to fund a larger portion of their expenses from guaranteed sources of income are less dependent on portfolio returns for a successful outcome. New research is finding that retirees with higher levels of guaranteed income are also reporting greater retirement satisfaction and less anxiety about their finances. Sources of guaranteed income include employer pensions, Social Security, and annuities. This is contrasted with withdrawals from 401(k) accounts, IRAs, and investment portfolios.

For the last two decades, the financial planning profession has been advocating 4% withdrawals from investment portfolios as the best solution for retirement income. Unfortunately, with lower interest rates on bonds and higher equity valuations, even a conservative 4% withdrawal today, increased annually for inflation, might not last for a 30+ year retirement. (See my white paper, 5 Reasons Why Your Retirement Withdrawals are Too High, for details.)

Professor Michael Finke from Texas Tech, writing about a Successful Retirement, found that, “The amount of satisfaction retirees get from each dollar of Social Security and pension income is exactly the same — and is higher than the amount of satisfaction gained from a dollar earned from other sources of income. Retirees who rely solely on a defined contribution plan to fund retirement are significantly less satisfied with retirement.”

Emotionally, there are a couple of reasons why guaranteed income is preferred. It mimics having a paycheck, so retirees are comfortable spending the money knowing that the same amount will be deposited next month. On the other hand, investors who have saved for 30 or 40 years find it very difficult to turn off that saving habit and start taking withdrawals from the accounts they have never touched. Although taxes on a $40,000 withdrawal from an IRA are the same as from $40,000 income received from a pension, as soon as you give an individual control over making the withdrawals, they want to do everything possible to avoid the tax bill.

The biggest fear that accompanies portfolio withdrawals is that a retiree will outlive their money. No one knows how the market will perform or how long they will live. So it’s not surprising that retirees who depend on withdrawals from investments feel more anxiety than those who have more guaranteed sources of income. The 2014 Towers Watson Retiree Survey looked at retirees’ sources of monthly income and found that 37% of retirees who had no pension or annuity income “often worry” about their finances, compared to only 24% of retirees who received 50% or more of their monthly income from a pension or annuity.

While I’ve pointed out the negative outcomes that can occur with portfolio withdrawals, in fairness, I should point out that in a Monte Carlo analysis, investing a pension lump sum for future withdrawals increases the dispersion of outcomes, both negative and positive. If the market performs poorly, a 4% withdrawal plan might deplete the portfolio, especially when you increase withdrawals for inflation each year. However, if the market performs on average, it will likely work, and if the initial years perform better than average, the portfolio may even grow significantly during retirement. So it’s not that taking the lump sum guarantees failure, only that it makes for a greater range of possible outcomes compared to choosing the pension’s monthly payout.

What do you need to think about before retirement? Here are several steps we take in preparing your retirement income plan:

1) Carefully examine the pension versus lump sum decision, using actual analysis, not your gut feeling, heuristic short-cuts, or back of the envelope calculations. If you aren’t going to invest at least 50% of the proceeds into equities, don’t take the lump sum. Give today’s low interest rates, the possibility of retirement success is very low if you plan to invest 100% in cash, CDs, or other “safe” investments.

2) Consider your own longevity. If you are healthy and have family members who lived for a long time, having guaranteed sources of income can help reduce some of the longevity risk that you face.

3) Social Security increases payments for inflation, whereas most pension and annuities do not, so we want to start with the highest possible amount. We will look at your Social Security options and consider whether delaying benefits may improve retirement outcomes.

4) If your guaranteed income consists only of Social Security, and is less than 25% of your monthly needs, you are highly dependent on portfolio returns. Consider using some portion of your portfolio to purchase an annuity. If you are several years out from retirement, we may consider a deferred annuity to provide a future benefit and remove that income stream from future market risks. If you are in retirement, we can consider an immediate annuity. For example, a 65-year old male could receive $543 a month for life, by purchasing an immediate annuity today with a $100,000 premium.

Annuities have gotten a bad rap in recent years, due in large part to unscrupulous sales agents who have sold unsuitable products to ill-informed consumers. However, like other tools, an annuity can be an appropriate solution in certain circumstances. While many financial planning professionals still refuse to look at annuities, there has been a significant amount of academic research from Wade Pfau, Michael Finke, and Moshe Milevsky finding that having guaranteed income may improve outcomes and satisfaction for retirees. This growing body of work has become too substantial to ignore. I believe my clients will be best served when we consider all their options and solutions with an open mind.

Five Ways to Be Richer in One Year

Posted On July 13, 2015 By Admin In Financial Planning /

When I tell people I’m a financial planner, I often get a response like “I wish I needed that service”. I know a lot of people live from paycheck to paycheck, including people who have graduate degrees and good jobs. It’s tough to have a conversation about something as far away as retirement when someone is worried about how they’re going to pay their bills two months from now.

No matter where you are today, it is not a hopeless situation; anyone can change their position for the better. It requires a plan, the willingness to make a couple of changes, and the determination to stick with it. If you’d like to be richer in one year from now, here’s how to get started.

1) Get organized. Do you know how much you owe on credit cards or what the interest rate is? How much money do you need each month to cover your bills? How much should be left over to save or invest? Establish a filing system, or use a tool like Mint.com or Quicken so you know how much you are spending and where. Like a lot of things in life, preparation is half the battle when it comes to personal finance. It can feel a bit daunting at first to take an in depth look at your finances, but ultimately it’s empowering because you will discover for yourself what you need to do.

2) Start tracking your net worth. There are two parts of your net worth: your assets (home, savings, investments, 401(k), etc) and your liabilities (mortgage, credit cards, other debt). Your assets minus your liabilities equals your net worth. If you take 30-45 minutes to calculate your net worth every month, it will change how you think. Just like starting a food journal or an exercise diary, tracking your net worth will make you mindful of your behavior. When you create a higher level of self-awareness of your actions, you will automatically start to change your habits for the better. And of course, if you don’t track it, how will you know if you are richer in one year?

3) Plan your spending. Most of us have a fixed salary where our ability to save depends on spending less than we make. People assume that if they made more money, it would be easy to save more. Unfortunately, what I have actually found as a financial advisor is that families who make $100,000 are just as likely to be broke as families who make $75,000. They may have a bigger house or a fancier car, but they’re no richer. If we want to save more, we have to learn to spend less.

The key to spending less is to find a system or process that works for you. For some people, creating a detailed and strict budget is key. For others, it may work best to become a cash consumer, where you leave the credit cards at home and only spend a set amount of cash each week. It can be helpful to comparison shop all your recurring bills and look to switch providers to save money. (For example, home/auto insurance, cell phones, gym membership, electric provider, etc.) Lastly, people are saving money by dropping their landlines, or dropping cable for Netflix.

4) Put your saving on autopilot. Money that you don’t see can’t be spent. You’re more likely to be a successful saver when you establish automatic contributions, versus waiting until the end of the year and hoping that something will be left over to invest. If your company offers a 401(k) match, that’s always your best place to start. If a 401(k) is not available, consider a Roth or Traditional IRA. If you don’t have an emergency fund, set up a savings account separate from your checking account, so you can’t easily access those funds. Even if you can only save $100 or $200 a month for now, that’s okay, because you’re creating a valuable habit. When you get a raise or receive a bonus, try to increase your automatic contributions by the amount of your raise.

5) Don’t go it alone. People are more successful when they have help, good advice, and accountability from another person. That may mean hiring a Certified Financial Planner, joining a Dave Ramsey Financial Peace class at a local church, or finding a knowledgeable friend who can lend an ear. If you’re looking for help with debt and improving your credit, contact the National Foundation for Credit Counseling at www.nfcc.org or by phone at 800-388-2227.

If you make these five changes today, you will be richer a year from now. Habits are important. For most people, wealth isn’t accumulated suddenly or through significant events, but by years of getting the small decisions right. Build a strong financial foundation, then you will find that a financial advisor can help you take the next steps to creating the financial life of your dreams.

2015 Mid-Year Market Update

Posted On July 6, 2015 By Admin In Portfolio Management /

We’re half way through 2015. How are the markets are doing and what does this mean to investors? Here’s a report card and our thoughts on the second half of the year.

US Stocks have had a stubbornly stable year, staying in a very narrow band of just a couple of percent above and below where we started the year. The S&P 500 Index was up 1.23% as of June 30. Although the US economic recovery is stronger and further along than the rest of the world, this was already reflected in US stock prices on January 1. So even with significant issues facing Europe, including high unemployment in several countries and the continuing Greek debt debacle, foreign stocks have outperformed US stocks so far in 2015. We have more weight in US stocks in our portfolios, which means that our home bias has held back our performance slightly compared to the market-cap weighting of our benchmark, the MSCI All-Country World Index.

Looking at stock styles, small cap was ahead of large cap in both US and foreign stocks. Growth continued to outperform Value globally. Emerging markets rallied from a lackluster 2014, performing slightly better than US large cap. The higher performance of foreign stocks over US stocks was in spite of the headwinds of the US currency’s strength in 2015. If we look at foreign stocks in their local currencies, their performance was even higher than in dollar terms.

The US aggregate bond index was down 0.1% in the first half of the year, with treasury bond yields finally starting to rise. Our bond funds have fared slightly better than AGG so far this year, with most posting small but positive returns. Unfortunately, we remain at an uncomfortable point in time where both stocks and bonds seem to carry above average valuations and risks. While I believe forecasting should be left to weathermen, returns over the next couple of years will likely be lower than those over the previous five years.

Volatility has been muted this year, but we can’t assume that will continue indefinitely. There are concerns about the Federal Reserve raising interest rates, or a bond default in Greece or Puerto Rico, but these are known problems that have been ongoing for more than a year. What I fear could be more likely to roil the market would be some unknown event which no one is expecting or predicting.

The top performing holding in our portfolios was SCZ, the iShares EAFE Small Cap ETF, which was up 10.49% through June 30. The worst performer was VNQ, the Vanguard REIT Index, which was down 6.30% over the same period. Interestingly, these two positions were also the best and worst performing funds in 2014, but reversed. Last year, VNQ was up more than 30% while SCZ was down 6%. If you looked at the numbers after December 31, you probably would have liked VNQ and bought more of it, and disliked SCZ, and sold it. Both of those decisions would have been losing trades for the first half of 2015. And that’s the problem with trading based on performance – you’re buying yesterday’s winners and not tomorrow’s. It is usually better to not chase performance, stick with a diversified portfolio, and rebalance to a set allocation when positions move away from their target weighting.

We take a disciplined approach to portfolio construction, but accept that we have no control over what the market is going to do. The factors which we can control include: having a diversified allocation, minimizing costs and taxes, and most importantly, managing our behavior by making good decisions. While the first half of 2015 has been a sleeper, we should be mentally prepared for the market to throw a few surprises at us in the second half of the year. If or when this occurs, it will be important to hold course or better yet, invest new money and dollar cost average. No matter what happens, you can always call me and I promise to be available to talk or meet with you to review your individual situation and make sure we remain on track to meet your goals.

Data from Morningstar.com, as of 7/5/2015.

The Best Way to Get in Shape

Posted On June 29, 2015 By Admin In Behavioral Finance /

In December, after years of good intentions and a couple of false starts, I finally joined a gym and hired a personal trainer. I meet with my trainer once a week and workout two or three times separately. Previously, I thought I could just get in shape on my own, but it was always too easy to find an excuse why today wasn’t a good day to exercise. And then days become weeks, you find other demands more pressing, and you just never get around to it.

Working with my trainer, Clint, has been great. I’m getting in shape and feel very confident that I’m now on the right path. Looking back, my only thought is that I wish I had gotten started much sooner with this process. Why are people more successful with a personal trainer than on their own? Here’s what a coach has to offer:

1) Knowledge. Clint has spent thousands of hours in education and his certifications demonstrate commitment to being qualified and skilled to help others. As for me, I have neither the time nor the interest to learn this information. Since you don’t know what you don’t know, it’s smart to seek out expert, objective advice.

2) Experience. Clint has worked with many clients and knows what works. While everyone’s individual situation is slightly different, a professional trainer has probably seen a lot of clients who have similar needs to mine.

3) A written plan. We started with a physical assessment to document my starting point, and after discussing my goals and commitment, developed a plan unique for me. Now I know what I need to do on a daily basis in order to reach my long-term goals.

4) The right tools. My trainer selects the most appropriate equipment for me to use and makes sure I use them correctly for maximum benefit and to avoid injury. When you combine discipline and consistency with doing the right things, good results happen.

5) Motivation. We have a workout schedule which has become a habit and routine. It’s rewarding to see our plan working, and when there are occasional set-backs, it’s helpful to have Clint’s patience, support, and encouragement to get back on track.

While I certainly suggest others take good care of their health and bodies, here’s what I want people to recognize: just as using a personal trainer is the best way to get in shape physically, using a financial planner is the best way to get in shape financially. What we offer is very similar. As a CFP(R) practitioner, I help individuals accomplish their financial goals, bringing professional knowledge, years of experience, a written plan, the right tools, and ongoing motivation.

Can you get in shape on your own? Of course it’s possible, but you’re more likely to be successful with professional guidance. You can be sure that athletes and actors always have a personal trainer or a team of trainers. Likewise, many of the most financially successful individuals I’ve met, including multi-millionaire entrepreneurs, board members of Fortune 500 companies, and Harvard-trained surgeons all use a financial advisor. It’s not a question of whether or not they’re not smart enough to do it on their own, it’s that they recognize the value in hiring an expert and the benefit that relationship can bring to their financial well-being.

If you are like I was, having good intentions, but procrastinating getting going, it’s time to give me a call. We will put together a financial plan you can understand and I’ll be there in the months and years ahead to help you stay on track with accomplishing your goals. If you’re waiting for tomorrow, don’t. Aside from yesterday, today is the best day to get started.

Why You Should Not Hold Bonds to Maturity

Posted On June 22, 2015 By Admin In Portfolio Management /

If you own individual bonds, as opposed to bond funds, you have the option to sell your bonds rather than holding them to maturity. There are a number of reasons why you might sell a bond before it matures, but we’re going to focus on an important opportunity bond investors have today to enhance returns through roll yield.

In recent years, short-term interest rates have been very low, which causes a steep yield curve. A corporate bond might have a yield to maturity of 3-5% when it has 5-10 years to maturity, but a similar bond with only one year before maturity may yield only 1-2%. Bond yields and prices have an inverse relationship, so as bonds near maturity, their yields shrink and the prices of those bonds increase.

Here’s an example: Let’s say we purchase a 5-year bond with a 5% coupon at par ($1000). One year later, the bond has four years remaining, and let’s say that similar bonds have a yield to maturity of 4%. The price of our 5% bond is now $1036. If we sell the bond after one year, we will have received $50 in interest, and we will made $36 in capital gains, for a total increase of $86, or 8.6%. The $36 gain is the roll yield, and it nicely enhanced our return from 5% to 8.6% for just one year.

When you buy most bonds, it’s not likely that the price of the bond will stay the same until maturity. Because of the steepness of today’s yield curve (low short-term rates), bond investors can benefit from selling bonds above par before maturity. If we go back to our example of a 5% coupon bond, let’s fast forward a couple of years to when the bond has just one year left to maturity. If the yield on 1-year bonds is 1.5%, our bond would be worth $1034. We could sell for $1034 today versus waiting a year to get back $1000. And while we’d miss out on the final $50 in interest payments, we could use our $1034 to buy other bonds further out on the yield curve. Also, given that the $34 gain would be treated as a capital gain (at a 15% tax rate for many investors), whereas the $50 bond interest would be treated as ordinary income (25%, 28%, 33%, 39.6% or higher), the after-tax return of selling a year early is almost the same as holding until maturity.

Generally, we advocate a laddered approach to individual bonds, but for the last several years, low interest rates have made it possible to sell bonds a couple of years before maturity to take advantage of roll yield. If your bonds are priced with a yield to maturity of 2% or less, it is definitely worth a look to see if you might benefit from selling rather than holding to maturity. This type of active management takes a bit of work, and frankly, we don’t see a lot of other advisors providing this level of service.

We typically suggest using bond funds for portfolios under $1 million dollars, because it is difficult to achieve a satisfactory level of diversification on smaller portfolios. The managers of your bond fund are likely looking closely at roll yield as well as other reasons to buy or sell bonds, to take advantage of the current interest rate environment. This is one of the reasons that it may be easier for fixed income managers to have a better chance of outperforming their benchmark than equity managers. While 65-80% of equity managers typically underperform their benchmark over five years, according to S&P, only 41.09% of intermediate investment grade bond funds were beaten by their benchmark from 2010 through 2014.

Equities tend to get all the attention, but many of our clients have 30 to 50 percent of their portfolio in fixed income. It’s important that investors do a good job selecting and managing both their equity and fixed income holdings. If you currently have a portfolio of individual bonds, bring me a statement for a complementary portfolio review. I’ll analyze your portfolio and suggest which bonds to keep and which ones to sell and replace. Or if you’re trying to decide between individual bonds or bond funds, please give me a call.

Fixed Annuities in Place of Bonds?

Posted On June 15, 2015 By Admin In Portfolio Management /

Today’s low interest rate environment is challenging for investors. Cash is paying virtually nothing, and even the 10-year Treasury has a yield of only 2.3% to 2.4%. If you do invest in longer-dated bonds, you have the risk of falling prices if interest rates begin to rise.

Low interest rates have pushed many investors to seek out higher yielding securities. But, there is no free lunch, as higher bond yields come with lower credit quality, heightened risk of default, and increased volatility.

Treasury bonds are a good tool for portfolio construction, because they have a very low correlation to equities. However, if investors replace those very safe (but low yielding) Treasuries with high yield bonds, they are increasing the probability that both their equity and fixed income positions will be down at the same time.

In 2008, for example, as equities tumbled, the iShares High Yield ETF (HYG) was down more than 17% for the year. Although high yield bonds have a place, investors need to understand that junk bonds may not provide much defense when the stock market takes a dive.

Cautious investors have been hiding out in short-term bonds, which might be yielding 1% or less. And while that will limit losses if rates rise, no one knows how long we will be stuck with today’s low rates. If low rates persist for years, short-term bonds aren’t providing much return to help you achieve your investment goals.

As an alternative to taking the risks of chasing yield, or the opportunity cost of hiding in short-term bonds or cash, some investors might want to consider a Fixed Annuity. These come in a variety of formats, but I am only suggesting annuities with a fixed, multi-year guaranteed rate. These are sometimes compared to CDs, but it is very important that investors understand how annuities differ.

Here’s the attraction: we can offer up to 3.25%, principal and interest guaranteed, on a 5-year Fixed Annuity today. And that’s the net figure to investors, which is fairly compelling for a safe yield. It’s more than 1% higher than the SEC yield on a US Aggregate Bond Index fund, like AGG.

Here are five key points to help you understand how annuities work and determine if an annuity is a good choice for you.

Tax-deferral. Annuities are a tax-sheltered account. While you don’t get an upfront tax deduction, an Annuity will grow tax-deferred until you withdraw your money. When withdrawn, gains are taxed as ordinary income, and do not receive capital gains treatment.
Like an IRA, withdrawals from an Annuity prior to age 59 1/2 are considered a pre-mature distribution and subject to a 10% penalty. This is an important consideration: only invest in an Annuity money that you won’t need until after age 59 1/2. This is obviously easier for someone who is in their 50’s or 60’s compared to younger investors.
Limited liquidity. Annuity companies want investors who can commit to the full-term and not need to access their principal. They may impose very high surrender charges on investors who withdraw money before the term is completed.
At the end of the term, investors have several options. You can take your money and walk away. You can leave the money in the annuity at the current interest rate (often a floor of 1%). You can roll the annuity into a new annuity and keep it tax deferred. If the annuity is an IRA already, you can roll it back into your regular IRA brokerage account. Or lastly, you can annuitize the contract, which means you can exchange your principal for a series of monthly payments, guaranteed for a fixed period, or for life. I don’t think very many investors annuitize – most will walk away or reinvest into another annuity.
Annuities are guaranteed by the issuing insurance company, and that guarantee is only as good as the financial strength of the company. Similar to how CDs are insured the by the FDIC, investors in Annuities are protected by your state Guaranty Association (Texas Guaranty Association). Since coverage for annuities in Texas is only up to $250,000, I would never invest more than this amount with any one company.

What I like about the annuity is that it can provide a guaranteed rate of return and price stability, unlike a bond fund. An annuity also can reduce a number of types of portfolio risks, such as interest rate risk, default risk, and will have no correlation to equity returns.

Is an annuity right for you? You should be able to invest the funds for at least 3-7 years and have ample money elsewhere you can access in case of an emergency. You can invest money from an IRA or a regular account, but either way, should not plan on withdrawing money from an annuity until after age 59 1/2. And we’re only using money that would have otherwise been allocated to bonds, CDs, or cash in your investment portfolio. If this describes you, please give me a call at 214-478-3398 and we can discuss Fixed Annuities and their role in your portfolio in greater detail.

Please note that as an insurance product, an annuity will pay the issuing agent a commission. Clients are not charged an AUM fee on monies invested in Annuities. We aim to disclose all conflicts of interest and provide transparency on how we are paid.

Win by Avoiding These Mistakes

Posted On June 8, 2015 By Admin In Behavioral Finance /

This week, I heard an orchestra conductor say, “It’s not simple to make it sound easy.” While he was talking about music, I was thinking how this applies to investing, too. The more we know about investing and the more experience we have, the more we recognize the benefits of following a very straightforward approach. You don’t have to be a genius to be a successful investor, you just have to avoid making a couple of big mistakes. The game of investing is not won by brilliant moves, but rather by patience and avoiding the common pitfalls that lure investors in year after year.

It’s easy to recognize mistakes in hindsight. The challenge is to anticipate these outcomes in advance, so you can prevent these these errors whenever you are tempted to make changes to your portfolio. Is your decision based on a logical examination of the facts, or an emotional response or ingrained bias? You can be successful over time by following a smart plan, even if it is not complicated. Let the market run its course and know that your plan will work best when you don’t get in the way! Here are three of most costly mistakes I’ve seen investors make in the past 15 years and the solution for you to avoid these each of these missteps. These are real, actual people, but I’ve changed the names here to protect their identity. Learn from their losses!

1) Lack of diversification. 10 years ago, I met Peter who was a client of another financial advisor at my firm. Peter was an engineer at Nortel, and like many employees at tech companies in the 90’s, he received substantial stock options. For years, the stock would double and split every 18 m0nths or so, which meant that anyone who sold their stock options regretted not holding for longer. Peter had more than 12,000 options when Nortel hit $90 a share in the spring of 2000, giving his options a value of over $1 million. At every meeting, they discussed exercising his options, selling his shares and diversifying, but Peter wanted to wait longer. The stock fell to $85, and Peter finally agreed to sell, but said that he had his heart set on a higher price and would sell as soon as it got back over $90 a share.

Unfortunately, the stock never regained the $90 level, and instead lost 90% of its value over the next nine months. His options were now worthless and his hopes of retiring in his 50’s lost forever. Nortel went bankrupt in 2009 and his division was sold to competitor. Peter had the majority of his net worth in company stock and the loss truly decimated his investment portfolio and derailed his retirement plans.

It is often said that diversification is the only free lunch in investing. By being diversified, you can avoid the risk of having one stock wipe out your plans. And I should mention that this also applies to bonds. I met another investor who had $100,000 of Lehman Brothers bonds for their portfolio. As I recall, I believe the investor recovered only about 25 cents on the dollar after the Lehman bankruptcy in 2008.

Solution: Don’t let company stock – or any single stock – comprise more than 10% of your portfolio. Even better, avoid single stocks altogether and use ETFs or mutual funds. For bonds, I’d suggest keeping any single issuer to only 1-2% of your portfolio. The potential benefits of having a concentrated stock position are outweighed by the magnitude of losses if things go wrong.

2) Trying to Outsmart the Market. Luke considered himself a sophisticated investor and enjoyed reading and learning about investing. He had an MBA and felt that with his knowledge and a subscription to the Wall Street Journal, he should be focused on beating the market. He looked at his portfolio almost every day and would be very concerned if any of his funds were lagging the overall market. As a result, he wanted to trade frequently, to put his money into whatever sector, fund, or category was currently performing best.

Funds typically include the disclaimer that “past performance is no guarantee of future results”, and yet, so many investors are focused on picking funds based on their most recent past performance. In Luke’s case, his insistence on “hot funds” meant that he was often invested in sector funds. His performance over time was actually worse than the benchmarks, because in spite of all his research and knowledge, he was focused on looking backwards rather than forwards.

Solution: stay diversified and don’t chase hot funds. Typically, 65% to 80% of all active managers under perform their benchmark over five years, which means that your safest bet is to never bet on a manager’s skill but to bet on the house. Using index funds works, and adopting an index approach means you can focus on what really matters for accumulation: how much you save. Luke’s portfolio was relatively small, under $100,000. Ironically, investors with smaller accounts are often the ones who believe that they need to outsmart the market to be successful. When I worked with a client with over $100 million, he had no qualms about index funds whatsoever.

3) Timing the Market. Angelina retired in 2007, a year before the stock market slumped. In early 2009, the market was down nearly every day, sometimes losing 5% in a session. We had conversations previously with Angelina about market volatility and had implemented a diversified, balanced portfolio. On March 6, 2009, Angelina called and insisted that we exit all her equity positions. It was that very day that the S&P 500 Index put in its intra-day low of 666. In hindsight, she sold on the actual worst day possible. Luckily, we were able to convince her to buy the equities back by June, but by then, she had missed a 30% rally.

Market timing mistakes aren’t limited to selling at a low; you can also miss out when the market is doing well. Last year, while the market was up double digits, some investors had significant capital in cash, fearing a drop or hoping to profit from any temporary pullback. Those with large cash positions under performed those who were invested in a target allocation. Having looked at hundreds of investors’ performance, I have yet to see anyone who has improved their return through market timing, except from random luck. Trying to get in and out of the market gives you more opportunities to make mistakes.

Solution: Choose an appropriate asset allocation and stick with it. Invest monthly into a diversified portfolio, and don’t stop investing when the market is down. If you think you will wait until you get an “all-clear” signal, you’re going to miss out on gains like Angelina. Rebalancing annually creates a discipline to sell your winners and buy the losers, which is difficult to do otherwise!

Investing should be easy. People have the best intentions when they load up on company stock, invest in a hot fund, or try to time the market. The reality, however, is that the more complicated strategy you adopt, the more likely you will hurt rather than enhance your returns. Our goal is to help investors gain the knowledge, confidence, and discipline to recognize that your most likely path to success is to stick with a simple approach that is proven to work.

Want to read more? Check out Winning The Loser’s Game by Charles Ellis.

Our First Year, in Review

Posted On June 1, 2015 By Admin In Financial Planning /

It’s our one-year anniversary at Good Life Wealth Management and we want to thank all of our clients, readers, and friends for your support this year. We’re only getting started with the great things we want to do, so please keep following for future news!

We’re donating 10% of our profits for 2015 to Operation Kindness and there’s nothing we would love more than being able to write them a large check at the end of the year. If you’re looking for a financial advisor, want to make a change in your current approach (or lack thereof), or just want a second opinion, please don’t hesitate to give us a call.

Over the past year, I’ve posted 53 articles to share important financial planning concepts which can help you achieve your goals. Chances are good that if you have a common financial question, I may have written about it already. Here are the articles we’ve posted over the past year; if you see one of interest, please click on the link. Thank you for reading!

Introducing Good Life Wealth Management

Three Studies for Smart Investors

6 Steps to Save on Investment Taxes

Who’s Going to Pay for Your Retirement, Freelancer?

Why Alan Didn’t Rollover His 401(k)

8 Questions Grandparents Ask About 529 Plans

How to Maximize Your Social Security

A Young Family’s Guide to Life Insurance

Catching Up For Retirement

Student Loan Strategies: Maximizing Net Worth

Health Savings Accounts

Socially Responsible Investing