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.

Deferral Rates Trump Fund Performance, Rebalancing as Key to Retirement Plan Success

Posted On March 16, 2015 By Admin In Retirement Planning /

A study by the Putnam Institute, “Defined Contribution Plans: Missing the forest for the trees?” contends that while a number of variables, such as fund selection, asset allocation, portfolio rebalancing, and deferral rates all contribute to a defined contribution plan’s effectiveness — or lack thereof — it is deferral rates that should be placed near the top of the hierarchy when considering ways to boost retirement saving success.¹

As part of its analysis, the research team created a hypothetical scenario in which an individual’s contribution rate increased from 3% of income to 4%, 6%, and 8%. After 29 years, the final balance jumped from $138,000, to $181,000, $272,000, and $334,000, respectively.

Even with a just a 1% increase — to a 4% deferral rate — the participant’s final accumulation would have been 30% greater than it would have been using a fund selection strategy defined as the “Crystal Ball” strategy, in which the plan sponsor uses a predefined formula to predict which funds may potentially perform well for the next three-year period. Further, the 1% boost in income deferral would have had a wealth accumulation effect nearly 100% larger than a growth asset allocation strategy, and 2,000% greater than rebalancing. Of course these results are hypothetical and past performance does not guarantee future results.

One key takeaway of the study was for plan sponsors to find ways to communicate the benefits of higher deferral rates to employees, and to help them find ways to do so.

Retirement Savings Tips

The Employee Benefit Research Institute reported in 2014 that 44% of American workers have tried to figure out how much money they will need to accumulate for retirement, and one-third admit they are not doing a good job in their financial planning for retirement.² Are you? If so, these strategies may help you to better identify and pursue your retirement savings goals:

Double-check your assumptions. When do you plan to retire? How much money will you need each year? Where and when do you plan to get your retirement income? Are your investment expectations in line with the performance potential of the investments you own?

Use a proper “calculator.” The best way to calculate your goal is by using one of the many interactive worksheets now available free of charge online and in print. Each type features questions about your financial situation as well as blank spaces for you to provide answers. But remember, your ultimate goal is to save as much money as possible for retirement regardless of what any calculator might suggest.

Contribute more. At the very least, try to contribute enough to receive the full amount of any employer’s matching contribution. It’s also a good idea to increase contributions annually, such as after a pay raise.

Retirement will likely be one of the biggest expenses in your life, so it’s important to maintain an accurate cost estimate and financial plan. Make it a priority to calculate your savings goal at least once a year.

Today’s blog content is provided courtesy of the Financial Planning Association.

Source/Disclaimer:

¹Putnam Institute, Defined Contribution Plans: Missing the forest for the trees?, May 2014.

²Ruth Helman, Nevin Adams, Craig Copeland, and Jack VanDerhei. “The 2014 Retirement Confidence Survey: Confidence Rebounds–for Those With Retirement Plans,” EBRI Issue Brief, no. 397, March 2014.

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

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.

5 Retirement Strategies for 2015

Posted On December 1, 2014 By Admin In Retirement Planning /

For 2015, the IRS has announced that contribution limits will increase for a number of retirement plan types. For 401(k) and 403(b) plans, the annual contribution limit has been increased from $17,500 to $18,000. The catch-up amount for investors over age 50 has increased from $5,500 to $6,000, so the new effective limit for participants over 50 is now $24,000. Be sure to contact your HR department to increase your withholding in January, if you are able to afford the higher amount.

Traditional and Roth IRA contribution limits will remain at $5,500, or $6,500 if over age 50. SIMPLE IRA participants will see a bump from $12,000 to $12,500, and SEP IRA contribution limits are increased from $52,000 to $53,000 for 2015.

If you’re not sure where to start, here are my five recommendations, in order, for funding retirement accounts.

1) Choose the Traditional Plan

More and more employers offer Roth options in their 401(k) plans, but I believe the most investors are better off in the traditional, pre-tax plan. The only way the Roth is preferable is if your marginal tax rate is higher in retirement than it is today. The reality is that your income will probably be lower in retirement than when you are working. Even if your income remains the same 20 years from now, it is likely that tax-brackets will have shifted up for inflation and you may be in a lower tax rate. Lastly, there has been continued talk of tax simplification, which would reduce tax breaks and potentially lower marginal tax rates, which would also be negative for Roth holders. So, my advice is to take the tax break today and stick with the pre-tax, regular 401(k).

2) Maximize Employer Plan Contributions

Your first course of action will always be to maximize your contributions to your employer plan. Many individuals do this, but I’m surprised that with many couples, the lower paid spouse often does not. If you’re being taxed jointly, every dollar contributed reduces your taxes at your marginal rate. And don’t forget that since 2013, on income over $250,000, couples are subject to an additional 0.9% tax on Earned Income and an additional 3.8% on Investment Income to provide additional revenue to Medicare. Add the 3.8% Medicare Tax to the top rate of 39.6%, and you could be paying as much as 43.4% tax on your investment income. That’s a big incentive to maximize your pre-tax contributions as much as you can.

3) Traditional IRA, if deductible

If you maximize your employer contributions for 2015, and are able to do more, here is your next step: If your modified adjusted gross income is under $61,000 single ($98,000 married), then you can also contribute to a Traditional IRA and deduct your contribution. If your spouse is covered by an employer plan but you are not, the income limit is $183,000. This opportunity is frequently missed by couples, especially when one spouse does not work outside the home.

And of course, if neither spouse is covered by an employer retirement plan, both can contribute to a deductible Traditional IRA, without any income restrictions.

4) Roth IRA

If you make above the amounts in step 2, but under $116,000 single, or $183,000 joint, you are eligible to contribute to a Roth IRA. If your income is above these amounts, you would not be eligible to directly contribute to a Roth IRA. However, if either spouse does not have a Traditional IRA (including SEP or SIMPLE), he or she would be able to fund a “Back-Door Roth IRA”. This is done by contributing to a non-deductible IRA and then immediately converting to a Roth. Since there are no gains on the conversion, the event creates no tax.

5) Self Employment

If you have any 1099 income, are self-employed, or work as an independent contractor, you would also be able to contribute to a SEP IRA in addition to funding a 401(k). You can contribute to both accounts, subject to a combined limit of $53,000, if you have both W-2 and 1099 Income.

One option I’ve not seen discussed often is that someone who is self-employed could also fund a SEP and convert it to a Roth. If you don’t have any other Traditional IRAs, this could, in theory, be used to fund a Roth with up to $53,000 a year. The conversion would be a taxable event, but it would be cancelled out by the deduction for the SEP contribution.

There are quite a few variations and details in terms of eligibility for each family. Want to make sure you’re taking advantage of every opportunity you can? Give me a call to schedule your free planning meeting.

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.

Machiavelli and Happiness in an Age of Materialism

Posted On September 1, 2014 By Admin In Financial Planning /

Hence it is to be remarked that, in seizing a state, the usurper ought to examine closely into all those injuries which it is necessary for him to inflict, and to do them all at one stroke so as not to have to repeat them daily; and thus by not unsettling men he will be able to reassure them, and win them to himself by benefits. He who does otherwise, either from timidity or evil advice, is always compelled to keep the knife in his hand; neither can he rely on his subjects, nor can they attach themselves to him, owing to their continued and repeated wrongs. For injuries ought to be done all at one time, so that, being tasted less, they offend less; benefits ought to be given little by little, so that the flavour of them may last longer.

– Niccolo Machiavelli, The Prince (1505)

Machiavelli’s political treatise, The Prince, remains an interesting, at times brutish, study of human nature 500 years after being written. If you’ll grant me some liberty in interpretation, his advice to experience pain quickly and reward slowly applies nicely to today’s field of behavioral finance.

The Hedonic Treadmill is a psychological premise that people require constant effort to maintain satisfaction, or “happiness”, if you will. A related concept is Habituation, which is that we tend to have a baseline state of happiness, and that when events move us above or below that level, we gradually become used to the new situation and revert back to our previous levels of satisfaction. Both principles suggest that to increase and maintain happiness, we have to work at it continually.

Consumer spending is important to our economy, but at the household level, we’re spending more and more money to realize a middle class lifestyle. Economists look at things like the change in the price of a gallon of milk as inflation, but it might also be relevant to consider how living has changed for the typical family. In 1973, the average new house size was 1,660 square feet, compared to 2,679 square feet last year. Over the same time, the average household size has shrunk from 3.01 persons to 2.54. Today, we have many more bills – cell phone, internet, satellite TV – than existed 40 years ago. These are all great improvements over previous technology, but the cost of a middle class lifestyle has likely grown well in excess of the reported inflation rates in the CPI. But are we happier for the increased spending?

We experience a brief increase in happiness from buying new items, but habituation has two effects: (1) the enjoyment we get from a new item quickly wears off, and (2) once we do become accustomed to the “bigger and better” item, we are generally unwilling to replace it with a lower cost option. Once we have a smart phone, there’s no going back to a regular phone. After living in a 3,000 square foot house, a 2,000 square foot house feels too small. If you’ve owned a luxury car, you won’t want to drive a simpler car. Will a Kia get you to work as effectively as a Mercedes? Yes, of course, but that’s not the reason we buy an expensive car. We decide what we want and then we rationalize why we have to have it.

I chose the name Good Life Wealth Management, because I view money as a tool to help us enjoy life. Not in the materialistic sense of fancy cars or fine wine, but in the holistic pursuit of finding meaning and balance. The Good Life, then, is not achieved by the acquisition of items, but by enjoying a state of financial independence and using those resources to live fully. It’s my job to help investors find that freedom and I love my job. It’s the last thing I think about at night and the first thing I think about in the morning.

I share the following six principles to define what we stand for. This is how we can seek happiness and financial security in an age of materialism. If these make sense to you, then I think our financial planning approach and sense of purpose will resonate strongly with your goals.

Spend money on experiences rather than things. I went on a hot air balloon ride this summer. If I considered the cost for a one-hour flight, it was perhaps expensive. However, I have since spent many hours thinking about that wonderful experience and enjoying my photographs of that day. I’ll always have those memories.
As Machiavelli suggests, take pain quickly and rewards slowly. If you decide to make spending cuts to be able to save more, make the cuts deep and immediate. If you want to save an additional $1,000 a month, you’re not going to get there by giving up a daily coffee. And you’re setting yourself up for continual frustration because you will have to make that sacrifice every day going forward. By making many small changes, it will feel like a death by 1000 cuts. Instead, have the courage to make a big move like downsizing or finding a different job. Once you adjust to the new change, it will be fine and it is not going to impact your happiness in the long-run. (To see an extreme example of a human’s ability to adapt, two friends recently completed a Buy Nothing Year, with interesting reflections on their experience.) Take your rewards slowly to enjoy them. Feed your Hedonic Treadmill gradually.
Saving is not self-denial. Some people view saving and investing from a negative view – they only do it out of fear. Fear of falling behind, fear of not having enough, fear of dying broke. No one wants to experience any of those unpleasant things, but fear will only motivate you to save so much. And you’ll resent the saving because you’re doing it because you have to and not because you want to. Saving can be its own reward. Make it fun and a game to see how much you can save. If you want to be financially independent, take the steps that will get you there as soon as possible. Do it for yourself – the more you save, the faster you achieve your next goal. Be laser-focused, driven, and determined when you have a goal. Saving is a virtuous cycle when it becomes an ingrained habit.
Money doesn’t define us and our value is not a number. If I did lose everything, I know I could make it all back. And I’d make it back even faster because I wouldn’t make all the mistakes I did the first time around! That doesn’t mean it’s okay to be reckless with investing, only that money is not the most important thing in life. And once you have money-making knowledge and skills, you realize that wealth is abundantly available for those willing to save and invest.
Our concept of frugality was framed by our parents or grandparents who lived through the Great Depression in the 1930’s. They learned to be self-reliant and strong, but for some, those tough times created permanent fear and mistrust. (Can you feel fulfilled and happy if you bury cash in coffee cans in your back yard because you think banks will lose your money?) The new frugality is about simplicity, optimism, and making the decision to place financial independence ahead of consumerism. It’s a positive choice and not a negative reaction based on hoarding, fear of loss, or mistrust of the system. Used properly, frugality is having the maturity to make decisions today that will be smart 10 years from now. It’s a recognition that “more stuff” does not create lasting happiness.
Tis better to give than receive. Donate, volunteer, make a difference. Happiness comes from a sense of purpose and living to the best of your abilities. Daniel Kahneman found that higher income increased happiness, but only up to about $75,000. Above that level, individual differences prevailed. Money does not create happiness, but we do know what is the most common cause for unhappiness: loneliness. Connect with people. Use your money to visit friends, take someone to lunch, or travel and make new friends.

Is your money helping you move closer towards financial independence or is the rising tide of middle class materialism keeping those goals a distant dream? If you’re not sure where to begin, give me a call and let’s get to work on your financial plan.

Catching Up for Retirement

Posted On July 28, 2014 By Admin In Retirement Planning /

A common rule of thumb is to save 10% of your income each year for retirement. If you started in your 20’s and invested for 30-40 years, this may well be adequate. But if you currently aren’t saving at this level, 10% can seem like a daunting amount. And if you got a late start or had some financial set-backs along the way, you may need to save even more.

What can a late starter do to get caught up on their retirement goals? Here are 5 ideas to help you take positive steps forward.

1) Save half your raise. When you get a raise, before you receive your next paycheck, increase your 401(k) contribution by 50% of the raise. You’ll still see an increase in your paycheck, but have a better chance of keeping the money which is automatically withheld, rather than taking the cash and hoping to have some left over to invest at the end of the year. This strategy works well for careers which have predictable, steady raises.

2) Downsize. If your kids are out of the house, you may not be needing all the space in your current home. By downsizing to a smaller home, you may be able to free up some home equity and invest those proceeds into investments with a potentially higher return. Additionally, a smaller home will have much lower expenses, including utilities, insurance, and property taxes.

If you really want to make a big impact on your finances, you have to look at the big expenses. For someone in their 50’s or 60’s, cutting out a daily latte just isn’t going to make enough of a difference. Many people have an emotional attachment to their home, which is completely understandable. However, if downsizing makes sense for you, you should try to make that change as soon as possible. Your home is one of your largest expenses and you want to make sure that it isn’t holding you back from achieving other important goals.

3) Spousal IRAs. Most people are aware of the catch-up provisions available after age 50 in their 401(k) or 403(b) plans at work, but many couples aren’t aware of their eligibility to fund an IRA for a spouse who doesn’t work or who doesn’t have a retirement plan. For 2014, the IRA contribution limits are $5,500 or $6,500 if over age 50. Here are the rules for some common scenarios:

– If neither spouse is covered by an employer plan at work, then both can contribute to a Traditional IRA and deduct the contribution, with no income restrictions. Both can contribute to an IRA, even if only one spouse works.
– If only one spouse is covered by an employer retirement plan, then the other spouse can contribute to a deductible Traditional IRA, if their joint MAGI is below $181,000 (2014).
– My personal favorite: if either spouse does not have any IRAs, that spouse can contribute to a Back-Door Roth IRA. There are no income restrictions to this strategy.

4) Social Security for divorcees. A common reason why individuals are behind in their retirement saving is divorce. If you were married for at least 10 years, you are eligible for a Social Security benefit based on your ex-spouse’s earnings. Many divorcees are not aware of this because spousal benefits are never listed on your Social Security statement.

The spousal benefit does not impact your ex-spouse in any way and they will not know you are receiving a spousal benefit. You do not have to wait for (or even know if) your ex-spouse has started to receive their benefits. We’ve often found that someone who was out of the workforce to raise a family or had a limited earnings history will have a very small Social Security benefit based on their own earnings and isn’t aware they are eligible for a benefit from a high-earning ex-spouse.

Details: you must be at least 62, unmarried, and the spousal benefit will only apply if greater than your own benefit. To apply, you will need your ex-spouse’s name, date of birth, social security number, beginning/ending dates of marriage, and place of marriage.
See: http://www.ssa.gov/retire2/divspouse.htm

5) Don’t get aggressive. For many investors, the temptation is to try to eke out extra return from their investment portfolio to make up for the fact that they are behind. They take a very aggressive approach or try to day trade. This is very risky and the results can be devastating. Invest appropriately for your risk tolerance, objectives, and time horizon, but stay diversified and don’t gamble your nest egg.

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

Posted On June 26, 2014 By Admin In Retirement Planning /

A regular employee has a steady paycheck which makes planning and budgeting easy. For a freelancer, your income may fluctuate greatly from month to month and be very difficult to predict from year to year. You may not know what work you will be doing six months from now and that’s likely to be a more immediate concern than retirement which could be 20 or 30 years away.

It’s often impractical for a freelancer to save up a large lump sum investment each year. What does work for freelancers is to “pay yourself first” by setting up a monthly automatic investment program into an Individual Retirement Account (IRA). This forces you to budget for retirement savings just as you would do for any other bill, such as your car payment or rent. It is easier to plan for smaller monthly contributions and this creates the same regular investment plan as an employee who is participating in a 401(k).

The maximum annual contribution for an IRA in 2014 is $5,500, which works out to $458 per month. If you aren’t able to contribute the maximum, that’s okay, there are mutual funds that will let you invest with as little as $100 a month. The most important thing is to get started and not put it off for another year. You can always increase your contributions in the future as you are able. If you are over the age of 50, you can contribute an additional $1,000 a year into an IRA, a total of $6,500 a year, or $541 per month.

If you can use a tax deduction, open a Traditional IRA. If you don’t need the tax deduction, and meet the income limitations, select a Roth IRA. Additionally, there is another reason the Roth IRA is very popular with freelancers. Many freelancers worry about hitting a slow patch in their business and needing to tap into their savings. A nice benefit of the Roth IRA – which may help you sleep well at night – is that you can access your principal without tax or penalty at any time. So if you do have an emergency in the future, you would be able to withdraw funds from your Roth IRA. (Principal is the amount you contributed; if you withdraw your earnings (the gains), the earnings portion would be subject to income tax and a 10% penalty if you are under age 59 1/2.)

If you are able to contribute more than $5,500 (or $6,500 if over age 50), the SEP-IRA is your best choice. You could contribute as much as $52,000 into a SEP this year, if your net income is over $260,000. The contribution for a SEP is roughly 20% of your net profit each year, so it works great for freelancers who want to save as much as possible. Why not just recommend a SEP for all freelancers? The challenge with a SEP is that it is impossible to know the exact dollar amount you can contribute until you actually prepare your tax return each year. That’s why most SEP contributions are not made until March or April of the following year. For freelancers who are getting started with saving for retirement, your best bet is to first maximize your contributions to a Traditional or Roth IRA through automatic monthly deposits. Then if you want to make an additional investment, you can also fund a SEP at tax time. A lot of investors assume that you cannot do a SEP if you do a Roth or Traditional IRA, but that is not the case, you can do both.

Being a freelancer can be very rewarding and fulfilling, but it does carry some additional financial responsibilities. You don’t have an employer to pay half of your social security taxes or to provide any retirement or insurance benefits. Unlike traditional employees, however, many freelancers don’t go from working full-time one day to completely retired the next day. What I often see is that many freelancers choose to keep working but reduce their schedule and select only the projects which really interest them. In this manner, they are never fully retired, but still stay active and have multiple sources of income. Regardless of your plans or intentions for retirement, my job is to help you become financially independent, so you work because you want to and not because you have to.