Will the IRS Inherit Your IRA?

Posted On April 20, 2015 By Admin In Financial Planning /

For several years, there has been a proposal in Washington to eliminate the Stretch IRA, also known as the “Inherited IRA” or “Beneficiary IRA”. Currently, when your beneficiary inherits your IRA, they can keep the account tax-deferred by leaving the assets in a Stretch IRA. While they have to take Required Minimum Distributions, using a Stretch IRA keeps distributions small and taxes low, as well as encourages beneficiaries to use the money gradually rather than spend their inheritance immediately.

Congress is looking for new ways to reduce the budget deficit, and according to IRA expert Ed Slott, it is increasingly probable that the Stretch IRA will be eliminated in the near future. Forcing beneficiaries to withdraw their inherited IRAs will raise billions in tax revenue, while allowing politicians to say that they haven’t raised tax rates.

If the Stretch IRA is repealed, beneficiaries will have to withdraw all of an inherited IRA – and pay taxes on the distributions – within five years. For many retirees, their retirement accounts are their largest assets. Many have accumulated a significant sum, often $1 million or more. If your beneficiary receives a $1 million IRA in one year, regardless of whether they spend the money or invest it, they could owe up to $396,000 in income tax. Even spreading the withdrawal over five years ($200,000 a year) will push any tax payer into a high tax bracket where the IRS will collect 28%, 33%, or more from your IRA.

If you aren’t touching your IRAs because you have other sources of retirement income, such as a pension, Social Security, or other investments, you may have been thinking that you would leave the IRA to your heirs and not take any withdrawals. It’s a very generous plan, but if the Stretch IRA is repealed, a significant amount of your IRA is going to end up in the pockets of the IRS.

What can you do to minimize the taxes and maximize the amount your heirs will receive? Here are three ways to accomplish this:

1) Buy life insurance. Use your IRA money to fund a permanent life insurance policy, such as a level premium Universal Life policy. Life insurance death benefits are received income tax-free. Purchase a $1 million policy for your beneficiaries and they will receive all $1 million tax-free.

For example, a healthy 65-year old male can purchase a $1 million Universal Life policy for as little as $17,218 per year. That is a sizable premium, but not a bad deal to guarantee your heirs a $1 million payout, tax-free. While funding those premiums from your IRA does create taxes, the taxes paid will be lower if you take small withdrawals over a period of many years rather than leaving your heirs in a position of having to take the entire distribution over 5 years (or 1 year if they don’t do the distribution correctly).

If you don’t need the income from your RMDs, using those distributions to fund a life insurance policy may have a significant benefit for your heirs.

2) Leave to Charity. There is a way to pay no tax on your IRA on death and that is to leave the account to a charity. 501(c)(3) non-profit organizations will not have to pay any income tax when they are named as the beneficiary of your IRA or retirement accounts. If you were planning to leave something to charity, make sure that bequest is from your IRA and not from a regular account.

For example:

Scenario 1: You leave a $1 million taxable account to charity and a $1 million IRA to your daughter. The charity receives $1 million, but your daughter will owe taxes up to $396,000 on the IRA, leaving her with as little as $604,000.

Scenario 2: You leave the $1 million taxable account to your daughter and the $1 million IRA to the charity. The charity receives $1 million, your daughter receives $1 million (and a step-up in cost basis), and the IRS gets zip. Much better!

3) Spread out your IRA. If you leave $1 million to one beneficiary, they will have to pay tax on the entire amount. If you leave the IRA to 10 beneficiaries (perhaps grandchildren, nieces, nephews, etc.), the tax due will be much less on $100,000 for 10 tax payers than on $1 million received by one person.

Please note that spouses can roll their deceased spouse’s IRA into their own IRA and treat it as their own. If the Stretch IRA is repealed, this may not be a problem for leaving an IRA to your spouse. However, if your spouse consolidates both of your IRAs into one account, the tax problem for the subsequent heirs will have become even more significant.

The one good thing about IRAs is that you can change your beneficiaries at any time without having to re-do your Will and other documents in your Estate Plan. It is very important to remember that your IRA beneficiary designations override any instructions in your Will, so it is vital to have your beneficiary designations correct and up-to-date.

Not sure where to begin with your Estate Plan? We can help you find the right solution for your family, using our Good Life Wealth planning process. Interested in finding out more about life insurance? I’m an independent agent and can help you choose the best insurance policy for your goals. Call me with your questions, reducing taxes is my passion!

Rethink Your Car Expenses

Posted On April 13, 2015 By Admin In Financial Planning / 1 Comment

“Don’t be penny wise and pound foolish.”

This old nugget of wisdom remains relevant today with many people feeling frustrated that even with a decent income, it seems so difficult to save as much as we’d like for retirement and our other financial goals. Rather than worrying about the pennies, I think investors who want to increase their saving are best served by focusing on their two biggest expenses: their home and cars.

Although not a great investment, a home is generally an appreciating asset and offers some valuable tax deductions. It is possible to have too much home and be house rich and cash poor, but our focus is better first directed on car expenses. I love cars, as do most Americans. A car represents freedom, and as a kid, I couldn’t wait to learn to drive. I took my drivers permit test right on the day of my 16th birthday. We view our cars as a representation of our self, our status, and our importance. Yes, even Financial Advisors are guilty of this irrational vanity! (Or is it insecurity?)

Unfortunately, a car is a depreciating asset and often our biggest expense outside of our home. New car prices seem to have outpaced wage growth, and everyone always wants the latest and greatest. We have to set priorities for how we use our income, and any money we spend on a car is gone. You won’t get it back, it’s just flushed away. That’s money we can’t invest and can’t use to create our future independence and income. If you want to have more of your money working for you, it pays to be smart about your cars. Here are five ways to keep your automotive expenses down.

1) Keep what you have. Cars greatest depreciation is in their first 3-5 years, so if you can keep your car longer, your annual costs will be lower. The more frequently you replace your cars, the more expensive it will be. That’s the number one thing you can do: keep your vehicles 7-12 years. The more often you sell one car and buy another, the higher your costs over time.

2) Don’t fear the occasional repair. Today’s cars are more dependable and long-lasting than ever. Psychologically, people hate repairs, since they seem to always occur at the most inopportune moments. Many people would rather spend $500 a month on a new car payment rather than risk having $1,000 to $2,000 a year in maintenance and unplanned repairs. Does it make sense to spend $6,000 a year to avoid spending $2,000? Probably not, but this is what you are doing if you think that you must sell a car as soon as it is past its warranty.

It’s true, it feels much worse to spend $2,000 on an unplanned repair than to spend the same amount in scheduled car payments. In behavioral finance, this is called “prospect theory”, where people feel the impact of a loss much more severely than the benefit of an equivalent gain. Unfortunately, this can lead to less than ideal decisions, such as buying a $40,000 car because we’re upset over a $400 repair.

If a car is in relatively good shape, it will most likely be cheaper to keep a car with 100,000 miles on the road, rather than replacing it with a new car.

3) Pay cash for your cars. Most people don’t want to spend $60,000 on a new car, even though we all want that $60,000 car. I’d like to first point out the opportunity cost here. At a hypothetical 8% rate of return, spending $60,000 today on a car means not having $120,000 in 9 years, $240,00 in 18 years, or $480,000 in 27 years. That’s a steep price for a car. Which would you rather have, a new car today or potentially an additional $480,000 at retirement?

The strategy of paying cash for cars isn’t just about saving on interest payments; it’s about changing your behavior. Paying cash will force you to spend less, to look at used cars, and to keep your current car longer. Too often, I hear people brag that they got a new car and kept their payment the same. So what! Your current payment was going to end – all you’ve done is keep yourself in debt for another 5 or more years.

If you currently have a car payment, once your payments end, set aside that monthly amount in a savings account for your next car. Paying cash forces you to delay buying a new car. Otherwise, it’s very easy to take a loan for a new vehicle and then rationalize why you “needed” a new car.

4) Save money on maintenance. If you’re handy with tools, you can save a lot of money by doing some routine maintenance yourself. My dealership wanted $499 for a 30,000 mile service consisting of an oil change, tire rotation, brake fluid change, and replacement of two air filters. I did the work myself and spent less than $70 on materials. Oil changes are cheap, so you can’t save much there, but you can save a lot if you learn to replace your brakes.

Don’t try to save money by skipping preventative maintenance. Make sure you change all fluids on the factory recommended schedule. Even if you do some work yourself, I’d also suggest developing a good relationship with an independent mechanic who you trust to give you honest advice.

5) Know when to buy new, buy used, or lease. The price of used cars has skyrocketed in recent years. It used to be that a 1-year old car had lost 20% or more of its value. Today, that can be under 10% for some popular makes and models. This increased residual value has changed some of the old rules about car buying. A gently used 2-3 year old car is, in many cases, not the bargain that it was 10 years ago. In those situations where resale value is very high, you might actually consider buying new. This will improve your future resale value, keep you under warranty longer, and possibly offer better terms on any financing. If you’re planning to keep the car for a long time (7-12 years), starting with a new car can be a good decision.

Buying used cars used to be an easy way to save 30% or more. There are still some good deals on used cars, but consider dependability, any remaining factory warranty, and the cost of maintenance on used vehicles. If you get bored with vehicles after a couple of years, used cars will have less depreciation than buying new.

Leasing is more expensive than keeping your cars for as long as I’d suggest. However, it is still a good alternative to buying a new car every three years, provided you drive fewer miles than stipulated in your lease agreement (often 10,000 or 12,000 miles per year). For models with high residual values, lease rates have stayed low.

Manage your car depreciation like you would any other liability. At the end of the day, a car is just a way to get from point A to point B. It doesn’t define us, who we are, or what our value is to our family or society. If you have other priorities like retiring early, buying a vacation home, or making your first million (or your second or third million), recognize when your car buying is not helping you get closer to achieving your more important goals.

Three Things Millennials Can Teach Us About Money

Posted On March 9, 2015 By Admin In Financial Planning /

As a financial planner, I spend a lot of time thinking about how to approach the different goals of my clients. While each client has a unique set of needs and circumstances, I’ve been studying and observing generational trends with a keen interest. Baby Boomers are approaching retirement, or newly retired, and are redefining what retirement means compared to their parents. Gen Xer’s (born 1965-1979), like myself, are mid-career and working towards myriad goals with cautious self-reliance. And then there are Millennials (born 1980-2000), who are now starting their careers and families and making their own stamp on financial planning.

Each generation has unique ways of doing things, and it’s not simply that today’s 30 year old has the same issues as a 65 year old had 35 years ago. We often hear about the financial challenges facing Millennials: student debt, living at home longer, less decisive about careers, delaying starting a family. There’s no doubt Millennials have been shaped by two recessions, a war, a housing bubble and collapse, and a difficult job market for entry level employees. But, there’s more than enough articles detailing those concerns. I want acknowledge three of the things they are doing right, because there are plenty of Millennials who have high expectations and are well on their way to becoming wealthy.

1) Millennials participate in their investing. Growing up with Google, cell phones, and the Internet, Millennials are going to gather information, confirm details, and find out what their friends and colleagues are doing. Comfortable with technology, they favor paperless banking and are more organized than previous generations, keeping track of their finances using online tools, mobile apps, and programs like Mint or Quicken. We can have meetings by video conference or webinar, and there will be no difference between having an advisor who is one mile away or a thousand miles away. Technology is here to stay, and is really only getting started as far as its impact on the planning process.

Millennials are more personally involved in their finances, seeking to be partners with advisors, rather than delegators. The more Millennials read about the rationale behind using index funds, the more indexing makes sense. They want to find an investment solution that works and are not as competitive about wanting to “beat the market”. Even when they use index funds, they want a plan which is customized just for them and their goals, and not a cookie-cutter plan. In that regards, they are actually more likely to value financial planning than Gen X.

2) Millennials are more frugal and less materialistic. They recognize that buying things you can’t afford with a credit card is a mistake. And while they want the financial freedom to express themselves as a unique individual, they are less interested in trying to impress others with a display of wealth. They understand that having more “things” doesn’t make you happier. Overall, Millennials are making good decisions as consumers and would likely have less debt than previous generations, if it weren’t for the dramatic rise in student loan debt in recent years.

3) Millennials recognize when renting is a better fit for their lifestyle than owning a home. They saw the effects of the housing crisis and likely know people who went through foreclosure and lost their homes. Unlike previous generations, they no longer consider home ownership as the definition of adulthood or as a sure-fire investment. Baby Boomers typically bought a house as soon as they could, upsized when possible, and used their home equity to fund their lifestyles. Millennials want community and convenience and are less willing to tolerate a long commute to the suburbs to afford the largest home possible.

For Millennials who are career driven, renting offers the flexibility to move anywhere in the country as their career dictates. This change reflects the new reality of today’s job market: employees aren’t going to have a career with just one or two companies. They need to move to where the jobs are located.

Millennials outnumber Gen X nearly 2 to 1, so they will have a significant impact on the development of our economy, business, and even the future delivery of financial planning. I don’t view the generational differences as right or wrong, or better or worse. Each is a product of their environment. What I am interested in is understanding each investor fully so that our plan can be as thorough and complete as possible in helping each achieve their goals. That’s my commitment to you and why I built Good Life Wealth Management: to provide the flexibility and resources to enable investors of any age to create and execute a plan that works.

And for those of use who are a little more experienced, keep an open mind – it’s never too late to learn a few new tricks from the younger generation!

4 Strategies to Reduce the Medicare Surtax

Posted On February 23, 2015 By Admin In Financial Planning /

It’s tax season and we’re always on the lookout for ways to save on taxes for our clients. 2014 was the second year under the new Medicare surtax system, but there are still questions as to what the tax is and how to reduce its impact.

The Medicare surtax has two parts and is levied on earnings above $200,000, if single, or $250,000, if married filing jointly. The first part is a 0.9% tax on earned income (wages) that exceeds the thresholds above. Second, there is a 3.8% tax on net investment income above the threshold. Net investment income includes dividends, interest, capital gains, royalties, rental income, and other passive income. (It does not include Social Security, pension payments, or withdrawals from retirement accounts.)

Employers will withhold the additional 0.9% if your individual pay exceeds the threshold. However, employers don’t know a couple’s joint income, so in a situation where both spouses make $150,000 there would not be any additional payroll withholding, even though their joint income of $300,000 will trigger the surtax. In that situation, you may need to direct your HR department to withhold an additional amount for taxes or make quarterly estimated payments directly to the IRS.

With the top tax bracket back up to 39.6%, the surtaxes create a top marginal rate of 40.5% on earned income and 43.4% on investment income. With such high tax rates, it pays to make sure we turn over every stone in search of any possible way to reduce these taxes.

Below are four strategies which can lower your exposure to the new Medicare surtaxes. If you can reduce your taxable income to below the threshold amount, the surtaxes can be avoided altogether.

1) Maximize your 401(k) or employer sponsored retirement plan. Your pre-tax contributions will lower your taxable income. While that’s pretty obvious, we still find that many families are not contributing every dollar they’re eligible to invest. For example, make sure you are taking advantage of catch-up contributions in the year you turn age 50. For couples, make sure both spouses are making the full contribution amount to their retirement plan.

Deductions for Traditional IRAs are generally not available if you are subject to a Medicare surtax, unless both spouses are not covered by an employer-sponsored retirement plan. However, if you have self-employment income, you can contribute to a SEP-IRA for your self-employment, in addition to making contributions to a 401(k) at your regular job. And if you’re self-employed and have a high income, you may be a candidate for a Defined Benefit plan, which can offer a higher contribution limit than a Defined Contribution plan like a 401(k).

2) Health Savings Account (HSA). If you select an HSA-eligible high deductible health insurance plan, you can contribute to a pre-tax Health Savings Account. For 2015, the HSA contribution limits are $3,350 for a single participant, or $6,650 for a family plan. Holders age 55 or above can contribute an additional $1,000.

3) Choose Municipal Bonds. Interest from tax-free municipal bonds is not subject to the Medicare surtax. While their interest rates are lower than some other types of bonds, their tax-effective rate is attractive for taxpayers in higher tax brackets. Here at Good Life Wealth Management, we can help you select a municipal bond mutual fund, exchange traded fund (ETF), closed end fund, or even buy individual muni bonds directly for your account.

4) Employ a Tax-Efficient Portfolio approach. There are four ways we can reduce taxes from a portfolio. First, we can use low-turnover funds (such as index funds or ETFs) which do not distribute capital gains. Second, we can be judicious about buying and selling positions and creating unnecessary capital gains. Third, we can harvest losses annually to offset any gains. Lastly, we can use asset location to place income generating investments into a qualified account, such as an IRA, where the income will not create a taxable event. Tax-efficiency is not an afterthought for us, it’s a cornerstone of our investment process.

None of these methods are going to eliminate the Medicare surtaxes for everyone, but they can certainly help reduce your tax bill. It’s not too early to put these in place for 2015, so don’t wait until next January to take action if you might be subject to the Medicare surtaxes this year.

How to Become a Millionaire in 10 Years

Posted On January 26, 2015 By Admin In Behavioral Finance, Financial Planning / 2 Comments

Answer: save $5,466 a month and earn 8%.

I thought about ending the article there, because that’s all you actually need to do. Investing is simple, but it isn’t easy. No one likes the answer above, even though it really is that simple. When confronted with a difficult task, our brains are wired to look for an easier way, a shortcut. Many investors waste a vast amount of time and energy trying to improve their return by timing the market, buying last year’s hot fund, or day-trading stocks.

Unfortunately, these attempts at finding a shortcut don’t work. It’s like someone who wants to run a marathon but not train for it. There isn’t a shortcut, you just have to do the right things, stick to the training schedule, and put in the miles. You have to earn it. Yet there are entire magazines, TV networks, and firms who make their living from telling people that the shortcut is to trade frequently, and that beating the market is the sure path to prosperity.

The truth that no one wants to hear is that investors would be more successful in achieving their financial goals if they instead focused on how much they save. Let’s step back and consider what we actually can control when it comes to our investment portfolios:

how much we save and invest
our asset allocation and diversification
investment expenses
tax efficiency, which can reduce (although not eliminate) taxes

We cannot control what the market will do this month or year, so ultimately we have to accept the ups and downs of each market cycle. We have many studies which consistently show that the majority of active fund managers under perform their benchmarks over time. We also have compelling evidence that the average investor significantly lags the indices due to poor decisions and fund selection.

Few people are able to save $5,500 a month. It’s not easy, but that is the way to get to $1,000,000 in 10 years. For a family making $200,000 a year, this would require you to save one-third ($66,000) of your pre-tax income. Again, not easy, but possible. After all, there are many families who are able to “get by” on $134,000 (or much less), so it is certainly possible for a family with an income of $200,000 to save $66,000. While there are many families in Dallas who make this amount or more, saving is viewed by some negatively, as a sacrifice, rather than with pride and recognition that it is the key to accomplishing your financial goals.

If you did the math, saving $5,500 a month, or $66,000 a year for 10 years is asking you to save $660,000 over 10 years. So even at an 8% return, the market performance is not the main source of your accumulation. Your saving is the main driver of your accumulation.

However, in the next decade, after you have achieved your first million, things become much more interesting. Compounding is your new best friend. At $1 million, an 8% return means you’re up $80,000, and you’re now making more from the portfolio than you contribute annually. Continue to invest $5,466 a month for another 10 years at 8%, and you’re looking at a portfolio with over $3.2 million.

And that’s why I get very excited talking about saving with high-income professionals. If you can commit to that aggressive level of saving, your success will be inevitable. Is an assumed 8% return realistic? No one knows for 2015, but I think 8% is likely to be attainable for 10 years and almost a certainty over 20 years. 8% isn’t going to happen every year, but historically, it is possible to average that rate of return over time. In the long-run, the returns can take care of themselves when you stick with a sensible, diversified approach. The factor which needs more attention, and which you can control, is your savings rate.

Should You Invest in Real Estate?

Posted On January 19, 2015 By Admin In Financial Planning /

Almost everyone has wondered at sometime: should we invest in real estate? Perhaps it sounds appealing compared to the intangibility and lack of control in the stock market. However, for 90% of the people I meet, I think the answer is a definite no. I’m going to tell you why, and for the 10% of you who might still want to invest in real estate, I’m going to tell you how.

First, let’s get this on the table. Most financial advisors make their living from recommending or managing stocks and bonds, so yes, we have a conflict of interest. Unlike many advisors though, I have some first hand knowledge of real estate. Growing up, my parents purchased, managed, and sold 10 apartments, which in retrospect, was no small feat on teachers’ salaries. The proceeds from selling one property (which contained four apartments) comprised their entire contribution to my college education. It didn’t cover everything (the rest came from student loans, work study, and graduate assistantships), but I know that real estate investing does work and can be a wealth generator. I’m not fundamentally opposed to the idea of real estate investing for the right person who does it wisely.

During my childhood, we spent many weekends mowing lawns, doing maintenance, and interviewing prospective tenants. We cleaned, painted, did plumbing work, and whatever else was needed. The first thing that any potential investor needs to understand is that real estate is not a passive investment; it is a business which makes demands on your time, resources, and patience. Being a landlord is not about bricks and mortar, it’s a people business. Your job is to find, manage, and retain good tenants. Inevitably, you will still encounter the Tenant from Hell who doesn’t pay the rent, steals, vandalizes, and then moves out in the middle of the night owing you thousands. It can be frustrating, time consuming, and at times incredibly stressful.

You’ll never get a call in the middle of the night from your mutual fund because the hot water heater blew up. So trying to compare a real estate business to a passive investment program is apples and oranges. Don’t expect real estate to be easy, regardless of what “reality” program you saw on HGTV. For most people, you are already stretched too thin juggling your career, family, and other interests to want to tackle being a direct investor in real estate. It can detract from your quality of life, and there’s no guarantee of success.

As a stock investor, you can own the whole market with an index ETF and be very diversified. You can buy the same stocks as Warren Buffet, if you want, and get the same return. A person with $10,000 in a fund will receive the same return as someone with $10 million. Fund investing is liquid, requires no effort, and is very democratic, if you will. Real estate, on the other hand, is completely idiosyncratic. Every deal is different. Your neighbor might do well, and you could do poorly. A house in one city might appreciate significantly, but might depreciate in another city. Thinking that you have control over real estate, because it is a tangible item, is an illusion. Buying a house in 2005 could have created a substantial loss, while buying the same house in 2010 may have created a large gain. You have no control over the underlying economic factors which drive real estate prices, just like we have no control over the factors which drive stocks and bonds.

In the last downturn, I know several smart, hard-working people who went into personal bankruptcy because of their real estate investing. It can be risky. If you still want to own real estate, I suggest having it be only a portion of your portfolio, and keep your retirement accounts invested in stocks and bonds. Here are seven tips to keep your investment safe:

1) Get rich slow. Forget about flipping houses. Buy residential properties to rent and plan to hold them for years or decades. Make sure you are investing and not speculating. Buy a house that has good ratio of rent compared to its costs. A $100,000 house that generates $1000 a month in rent is obviously better than a $200,000 house that rents for $1600. The property is an investment, and not for your personal taste, so it does not have to be a luxury home. Wealthy people are not your target tenants. Look for clean, well-maintained properties with access to good schools.

2) Focus on building equity. Use your tenant’s money to pay down the mortgage – that’s how you create wealth in real estate. Get a short note (15 or 20 years) rather than a long mortgage, an interest-only loan, or balloon. Each year, your equity in the property will increase and the amount of interest you pay will decrease. Eventually, you can sell the house for a large gain, or you will pay off the note and then you can bank the rent each month. Don’t make it your goal to have high cash flow from the property for your own income. Invest that cash flow into the equity. And whatever you do, don’t quit your job thinking you will live off your real estate investing – that’s often a disastrous idea. Inflation (rising home prices) should be the icing on the cake; your primary objective is to build equity by paying down debt.

3) Do it yourself. Profit margins are razor thin in real estate. After you pay property taxes, insurance, the mortgage, and maintenance, there is almost nothing leftover. If you plan to hire a handyman every time you need to change a light bulb, you can easily slip into a negative cash flow situation. You have to save money where ever you can, so be prepared to be hands-on. No one will care more about your property than you. Don’t be a long-distance landlord; aim to buy properties within a 10-mile radius of your home. If the idea of sweat equity is a turn-off, real estate is probably not for you.

4) Use leverage wisely. If you have $100,000 to invest in real estate, you could pay cash for one $100,000 house. Or, you could make $20,000 down payments on five houses. Owning five houses will give you better diversification and a much better long-term return because of the leverage. It really is smarter to use the bank’s money for real estate, especially with today’s low interest rates.

5) Keep a strong cash reserve. You will have unexpected expenses, and they can be large. Real estate investors must have a sizable cash position and cannot be living from month to month. Budget for maintenance and vacancy. Will you be okay if you have to spend $10,000 on a new roof or HVAC system? Can you survive if the property is vacant two or four months a year? Know the occupancy rates and market rent rates in your area.

6) Be super organized. Everything needs to be in writing, including applications and lease agreements. Check references for prospective tenants. Keep all receipts and work with a good accountant to track your deductions, depreciation, cost basis, and other tax benefits. This is a business, not a hobby. Treat it seriously.

7) Appreciate your good tenants. They make your life easy, take care of your property, and keep your account in the black. Do nice things for your good tenants and make them want to stay. Their money is building your wealth.

As for me, I spent enough time with apartments to know I’d rather stick with stocks and bonds. It’s a better fit for my schedule and I know myself well enough to know that my efforts are better directed elsewhere. And over the previous 30 years, the nominal return of residential real estate was 4.38% versus 11.09% for large cap stocks. When we include taxes, inflation, and expenses, single family homes returned only 0.80% over those 30 years, compared to 5.97% for large cap stocks. So real estate is often not the home run that people believe it will be.

If you’re thinking about real estate investing, let’s get together and discuss what it entails before you get started.

How Some Investors Saved 50% More

Posted On November 18, 2014 By Admin In Financial Planning /

While some people view risk as synonymous with opportunity, the majority of us don’t enjoy the roller coaster ride of investing. Our natural proclivity for risk-avoidance can, unfortunately, become a deterrent in deciding how much we save. Without having specific goals, investors often default to a relatively low contribution rate to retirement accounts and other investment vehicles. They commit only how much they feel comfortable investing, rather than looking at how much they actually need to be saving in order to fund their retirement or other financial goals.

In the November issue of the Journal of Financial Planning, Professors Michael Finke and Terrence Martin published a study of 7616 people born between 1957 and 1965, looking at whether working with a financial planner produced improved outcomes for accumulated retirement wealth. Here are their conclusions:

Results indicate consistent evidence that a retirement planning strategy and the use of a financial planner can have a sizeable impact on retirement savings. Those who had calculated retirement needs and used a financial planner… generated more than 50% greater savings than those who estimated retirement needs on their own without a planner.

When I read the executive summary of their article, I wondered if perhaps the results reflected that higher income people were simply more likely to use a financial planner. However, the authors took this into consideration. They controlled for differences in household characteristics such as income, education, and home ownership… Even after controlling for socioeconomic status, households that used a financial planner and calculated retirement needs had significantly higher retirement wealth accumulation across all quantiles relative to households with no plan.

Interestingly, the authors noted that this result of 50% higher wealth was not due to investment performance. When they looked at individuals who used a financial advisor who was not doing a comprehensive plan (such as a stock broker), they noted that using a planner without estimating retirement needs had little impact on accumulation compared to having no retirement strategy at all.

And that’s why we put planning first at Good Life Wealth Management. Goals dictate actions. Only when we have a clear picture of what you want to accomplish will we will know if you are on track or behind schedule. We’re more willing to save when we are working towards a finish line, as opposed to worrying about what the market is going to do next. If you’re looking for a comprehensive advisor to bring clarity to your goals and to carry out your game plan, I hope you’ll give me a call.

5 Ways to Save Money When Adopting a Pet

Posted On November 11, 2014 By Admin In Financial Planning / 1 Comment

Americans love their pets, and although they repay every penny with their love and devotion, the amount we spend on our pets can be astronomical. I’ve been a volunteer in animal rescue since 1997 and here are my top five suggestions for ways to save money if you’re looking to add a four-legged companion to your family.

1) Adopt Don’t Shop. Puppies in a pet store or from a breeder can cost hundreds or thousands of dollars. Adopting from a shelter may cost a fraction of this amount, and often, a shelter pet has already been vaccinated, wormed, and neutered, saving you $300 to $500 in initial vet bills. Additionally, adopting a shelter pet saves a life, as currently, approximately 4 million unwanted pets are euthanized each year in the US. Take your time and make sure the dog or cat will be a good fit for your household – many pets are returned or wind up in shelters when people underestimate how much time and effort it will take to train a puppy to become a well-behaved adult dog.

2) Crate Train. Although cute, puppies love to chew and can be quite destructive when left unsupervised. They are naturally attracted to shoes, furniture, and other expensive items in your home. Besides being costly to replace these items, it can also be dangerous for dogs to ingest these items. There have been many expensive vet visits from dogs who got sick from eating something in their home that should have been off-limits. Save yourself this headache and expense by buying a crate to keep your dog from causing trouble when you’re not home. This has the additional benefit of helping with house training, which will save your carpets! Over time, dogs really do start to like their crates. My dog goes into his crate immediately when we get ready to leave the house – it’s his safe place. Read up on crate training. The $50-100 you spend on a crate may save you hundreds or thousands in preventable destructive behavior.

3) Ask Friends for a Veterinarian Recommendation. The price of vaccines, neutering, or heartworm treatment can vary significantly from vet to vet. Ask friends for a recommendation for a low-cost vet. Some clinics offer one or two days a month that they provide discounts on vaccines. Ask your shelter if they know of any free or low-cost vaccination or neutering clinics in your city. Still, make sure to develop a relationship with one veterinarian who knows your dog or cat, to monitor changes in your pet’s health over time and make sure you stay up to date with any needed care.

4) Consider a Mixed Breed Dog. A lot of people want a specific kind of dog, but unfortunately, many breeds have a higher likelihood of developing certain health issues. For example, some breeds are prone to hip dysplasia, cancer, or ear infections. These can be expensive to treat and often result in a shorter life expectancy for the animal. Mixed breed dogs tend to be healthier, live longer, and have fewer of these genetic predispositions for certain ailments. If you do want a specific breed, you can still probably find one through a local shelter or rescue group.

5) Buy Smart. A 15 pound bag of my dog food costs $35, but a 30 pound bag only costs $45. Buy the larger bags and use an airtight storage container. Buy a high quality food and skip the expensive treats, such as rawhides, that have limited nutritional value and can upset a sensitive stomach. Keep up with heartworm preventative and flea/tick medicine. Although it is one of the largest ongoing costs, these preventative medicines are much less expensive than treatment, should your pet become sick. And here in Texas, even indoor dogs have a very high likelihood of developing heartworms without prevention.

If you are looking for a pet, let me know and I will look for a good fit for you at Operation Kindness. We also have fosters in our home several times a year, if you are interested in a puppy.

Community Property and Marriage

Posted On October 14, 2014 By Admin In Financial Planning /

In Community Property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI), assets acquired during marriage are considered to be jointly owned regardless of how the account or asset is titled. Separate property includes assets which pre-date the marriage as well as inheritances and gifts received during the marriage. In the case of a divorce, community property is split equitably while separate property will remain with its original owner.

Assets are considered to be community property unless you can provide clear and convincing evidence that they are separate. You may have heard that you only need to keep your financial records for six years, as that is the length of time that the IRS can go back for an audit (unless you submitted a false or fraudulent return, in which case there is no statute of limitations). However, for the purpose of proving separate property, you have to keep documentation permanently.

It is important to also understand that income from separate property is considered community income in Texas. If funds are commingled, contributions added, or dividends reinvested, you may inadvertently cause separate property to become characterized as community property.

When a couple is getting married, it is important for both spouses to understand their individual separate property rights and to take steps to ensure that their assets maintain their separate property character. We suggest having all income, such as interest and dividends, swept from the separate account automatically when received and deposited into a joint account. Capital gains from mutual funds can be reinvested, and of course, you can sell one position and use the proceeds to purchase another another one in the account.

In Texas, we have an “inception of title” rule which means that any asset acquired before marriage is separate, even if debt for the asset is discharged with community income. For example, a home purchased before one day before the wedding will forever be a separate asset, even if the mortgage is paid during the marriage. The same applies for a business entity – if created before the marriage, it will be separate property, and if created during the marriage, it’s a community asset, regardless of debt or title of ownership. Debt can be a part of community property, so any debt acquired by one spouse during marriage may be considered to be a joint debt.

Separate Property can sometimes be an issue for first marriages, however, most first marriages are with young couples who have little or no assets. It’s a more common concern for couples getting married (or re-married) in their 40’s, 50’s, or later who may have substantial separate property and who often have children from a previous relationship. These issues could be addressed by a pre-nuptial agreement, and if you do decide to have a pre or post-nuptial agreement, both spouses should have separate counsel. The nine states which do have community property laws, all have slightly different rules, so be sure to use an attorney and advisor who are familiar with your state’s laws.

If you’re getting married or remarried, your financial advisor should be having these conversations with you well in advance of the marriage and be taking steps to ensure your separate property rights will be maintained.

Bringing Financial Planning to All

Posted On October 7, 2014 By Admin In Financial Planning /

In my first position as a financial advisor, I worked at a “Broker Dealer”, where we charged commissions on the sale of products. As an educator in my previous career, the sales aspect of the job was challenging and at odds with my belief that good financial planning encompasses much more than just which funds or securities to buy. Any investor in a transactional account is bound wonder from time to time if a trade is being suggested to improve their portfolio, or because the broker needs to make a sale.

In order to focus on a more holistic approach, in 2012, I joined a Registered Investment Advisor (RIA), a firm which did not charge commissions on the sale of investments, but charged a management fee based on the assets under management. I think this is a much better solution for both investors and advisors. It’s completely transparent and the client pays for on-going service, rather than upfront commissions. This eliminates feeling like you have to stay on guard to make sure a broker is not placing unnecessary trades to make more revenue for their firm. A fee-based account places investors and advisors on the same side: if the portfolio goes up in value, the advisor will make more, and if the portfolio declines, so will the advisor’s compensation.

While the RIA approach has many advantages over the commission platform, as a business model, it is difficult to spend a great deal of time on a client with limited assets as the revenue is low and it might take years to justify the initial time and costs. As a result, most RIA firms have minimum account sizes, often $1 million or more; at my previous firm, we did not take any clients under this level. It was a good business model for the firm, and it gave me the chance to focus extensively on investment research, developing portfolio models, and implementing trades across $375 million in client assets.

However, I found it frustrating to have to turn away friends and family who wanted to use my services. I believe in the American dream of financial independence. I want to help others achieve those dreams and not limit my efforts to solely helping those who have already accomplished their financial goals.

That’s why we created a two-part structure at Good Life Wealth Management – to have the ability to help clients of all sizes and ages. Here’s how it works:

Families with over $250,000 in investable assets will participate in our comprehensive Good Life Wealth Management Program. This includes creating a financial plan and customized management of your assets in a tax-efficient investment portfolio. The fee is 1% annually, (charged quarterly). This approach provides established investors with an ongoing financial plan that addresses your unique needs and changes as your situation requires.

For families below $250,000, we offer our innovative Wealth Builder Program. We create the financial plan you need today, with a focus on improving both sides of your net worth statement: your assets and your liabilities. We invest your accounts using no-transaction fee funds or ETFs, and will advise how to allocate your other accounts such as 401(k)s. Rather than charging as a percentage of your accounts, the Wealth Builder Program costs just $200 a month, which can be paid by credit card or debited directly from your accounts.

Using a monthly retainer is a relatively new approach in the RIA business, but I think is the crucial next step we need to bring the benefits of financial planning to the 90% of Americans currently not being served by the “$1 million and up” firms.

For more information on this approach, check out this article in October’s Think Advisor magazine, which quotes myself and other advisors who are leading and advocating for this change in the industry. Here’s the link:

http://www.thinkadvisor.com/2014/09/29/experimenting-with-new-compensation-models