Monday, November 3, 2014

Open enrollment - how to best allocate my 401(k)?

During October and November we have to make open enrollment decisions. One of them is how to allocate our 401k (403, TSP, or another employer retirement plan) investments. Generally we have 3 to 100 choices of underlying funds, and the more choices there are the harder it is to make a decision.

In 2015 the IRS raised the limits to $18,000 on most employer sponsored retirement plans, including 401(k), 403(b), TSP, and most 457 plans. (;-Taxpayers-May-Contribute-up-to-$18,000-to-their-401(k)-plans-in-2015)

I have some suggestions for those who want to make a decision on their own:
Step 1: Determine your risk appetite and your retirement horizon and objectives.

To figure out your risk appetite and retirement horizon you may need to work with an advisor or use automated questionnaires provided by your investment bank/platform. Here are three suggestions:
1) a questionnaire by Morningstar:

It incorporates time horizon questions giving some perspective on risk appetite and retirement horizon.
2) a similar questionnaire provided by Vanguard

3) I tried to use and thought it was reasonably accurate the following quiz developed by two university personal finance professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at the University of Georgia. 

Step 2: based on the above steps determine what types of investments are suitable for you and select funds based on their composition, historic performance, and expectations for the market.  Here is a calculator recommended by the SEC:

SEC’s beginner’s guide to asset allocation ( notes that there is no single asset allocation model that is right for every financial goal. You'll need to use the one that is right for you. Some financial experts believe that determining your asset allocation is the most important decision that you'll make with respect to your investments - that it's even more important than the individual investments you buy. FINRA’s smart investing in 401k ( provides excellent suggestions as well.

This brings us to Step 3: Once you figured out your ideal allocation chose funds in those profiles with the lowest total investment management expenses. This information is required and will be provided in summary section for each fund under performance data. This information is often presented as a percentage or as a dollar amount per $1000. And while $8 to $20 per $1000 may not appear as much it is! You will usually have choices that are identical in composition but some will have lower fees. Why would you pay $180 to $360 annually if you can pay as little as $50 for getting the same level of management and diversification. And while many of us may believe you get what you paid for, you’ll see that historic performance numbers of those funds show otherwise.

As an example, two funds Scout Mid Cap Fund (SMCF) and Vanguard Extended Market Index Investor Fund (VEMIF) with the same bench mark Russel Midcap Index. SMCF has an expense fee of 1.07% or $10.70 per $1000 and 3 year return of 18.67%. Compared to VEMIF with expense fee of 0.24% or $2.40 per $1000 and a 3 year return of 23.28%. Fund with a much lower expense ration outperformed the more expensive fund.

See Warren Buffet's famous perspective on fund management fees

Friday, October 31, 2014

Financial Discipline

Discipline is defined as control that is gained by requiring that rules or orders be obeyed and punishing bad behavior…

Financial discipline is a discipline concerned with determining value and making decisions. The finance function allocates resources, including the acquiring, investing, and managing of resources.

Here are some suggested steps that can help you figure out your goal(s) and tactical steps to stay on target , or in other words practice Financial Discipline.

Step one:  What are your financial goals? 
Immediate – bills/expenses that must be paid within 12 months or less. 
Short term – goals for the next 5 years.
Long term – goals beyond 5 years, including retirement.

Step two:  Once the goals are defined a plan needs to be outlined.  It could be as simple as a quick budget consisting of your income and expenses.  This should help you identify any flexible items (perhaps additional income sources or expenses you can do without), which can be adjusted to help you reach the immediate, short, or long term goals.

Step three:  Practice ongoing financial discipline by following these tactical steps to keep you on track heading towards your goals.  While these steps are suggested in a certain format you can be flexible in allocating them on your calendar and choosing only those that apply.

January - Resolve to make yourself financially fit!

  1. Manage your debt. Start by paying off all of your high-cost, non-deductible credit cards, and other high cost debt.
  2. Establish an emergency fund equal to 3-6 months of expenses.
  3. Create (or update) your cash flow statement (income minus expenses) and statement of personal net worth.
  4. Give your portfolio a checkup-review the performance as you rebalance back to your target asset allocation mix.
  5. Double-check your employer retirement plan contribution percentage. At the very least, try to contribute up to the point where you take advantage of any available employer match.
  6. See the IRS Tax Calendar for federal tax items due throughout the year

February - Insurance and Tax Information.

  1. Check your insurance policies (property and casualty, liability, health, disability, life) to be sure you're not paying too much for the wrong kind of coverage.
  2. Annual tax forms 1099, 1098 and W-2 should be mailed to you by your various providers no later than January 31.  Get a head start on preparing your income tax forms.


  1. Free Annual Report, get a free annual copy of your credit report from Experian: 

April - File your Tax Return, contribute to IRA...

  1. File your income tax return by April 15. Even if you're requesting an automatic six-month extension, you still need to pay any taxes due by April 15.
  2. April 15 is also the last day to make a contribution to your IRA or Coverdell Education Savings Account for the prior year.

May - Inventory of your personal assets and Financial Disaster Plan.

  1. Create (or update) an inventory of your home and personal property. Use a video camera to make a record of your valuable possessions for insurance (and/or estate) purposes, and then store the video in a secure, remote location (like a bank safe deposit box).
  2. Create (or review) your financial disaster plan.

June - Mid-year financial check up…

  1. Perform a mid-year review of your finances to be sure you're on track.
  2. Planning a June wedding? Don't forget to update your financial plan accordingly.


  1. Free Credit Report; get a free annual copy of your credit report from Equifax:
  2. Keep learning-add at least one good book on personal finance or investing and a publication such as Forbes, Wall Street Journal, or Financial Times to your summer reading list. 

August - Review your vacation and holiday budget and plan for tax-deductible educational savings.

  1. Compare what you actually spent on vacation to the amount you projected in your annual cash flow plan. Start thinking about your holiday budget.
  2. As the kids or grand kids get ready for school, think about establishing or contributing to a Coverdell Education Savings Account and/or 529 College Savings Plan on their behalf. 

September - Estate Plan and Small Business IRA.

  1. Review your estate plan.
  2. If you want to establish a SIMPLE IRA this year for your small business, the account must be opened by October 1 (this date may change visit or our website for updates).

October - Tax projections, open enrollment season, and more

  1. File your income tax return by October 15 if you requested a six-month extension back in April.
  2. Run a projection of your current-year income tax liability to get a head start on your year-end tax planning.
  3. As open enrollment season rolls around at work, take the time to review your health insurance coverage and other employer benefits.

November - Free credit report, holidays, and charitable giving…

  1. Get a free annual copy of your credit report from TransUnion:
  2. Don't charge more for holiday gifts than you can comfortably pay for in full when the January credit card statements come around.
  3. Take time to give thanks for another year of financial success. Review your charitable giving plans and consider making tax-deductible gifts to charity or to a donor advised fund account before the end of the year.

December - Portfolio review for tax-deductible losses…

  1. Check your portfolio again for loss-harvesting candidates, as you rebalance back to your strategic, long-term asset allocation.
  2. If you want to establish an Individual 401(k) or other QRP (qualified retirement plan) this year for your small business, the account must be opened by December 31.
  3. If applicable, don't forget to take the annual required minimum distribution from your IRA by December 31.
  4. Request your annual Social Security benefit statement from Compare your earnings record against your old tax return info for accuracy.

Thursday, October 2, 2014

Getting ready for 2015 tax season…

Fully and correctly completed tax organizers are the key to a smooth and successful tax filing season. And while you are focused on your tax situations and getting your documentation together, it is also a good time to sit down and do some year-end tax planning that could save you money this year and going forward. 

The basics of year-end tax planning are: To minimize this year’s taxes, you will generally want to postpone income and accelerate deductions. The details of how to do this and how does that apply to your situation can be hard to understand. Additionally due to changes in your income, minimizing taxes this year may not be the best strategy. 

If you would like to postpone income, accelerate deductions, and otherwise reduce taxes for 2014 you can consider the following strategies: 

Increase withholding. 

Clients with substantial nonwage income in addition to their salary should adjust their withholding for the rest of the year to ensure that it covers their required estimated tax payments to avoid the penalty for failure to make estimated tax payments. 

More ...

Marital status.
If you are marrying or divorcing, evaluate how the year-end marital status will affect the tax return. Getting married or divorced during the year? You are treated as having had your Dec. 31 marital status all year. Now is the time to discuss how that will affect your taxes. 
 More ...

Minimize tax on Social Security benefits. 
When a Social Security recipient’s MAGI plus 50% of his or her Social Security benefits exceeds certain base amounts, the benefits can be taxable. The MAGI thresholds are $25,000 for single individuals, $32,000 for married taxpayers filing a joint return, and zero for married individuals filing separately. If your income is close to these thresholds you should consider deferring income to avoid the tax on the Social Security benefits. 

More ...

Miscellaneous itemized deductions.
Group miscellaneous itemized deductions in one year. Miscellaneous itemized deductions are deductible only to the extent they exceed 2% of your adjusted gross income. You should try to group such expenses in one year to meet the threshold. For example: 
· Pay professional dues and job-related tuition in December instead of January to bring them into 2014. 
· Prepay certain expenses using a credit card. Contributions to charity and deductible medical expenses are deductible when charged to the client’s credit card, rather than when the client pays the credit card bill (Rev. Rul. 78-38; Rev. Rul. 78-39). Such expenses charged in December will be deductible in 2014, even though the credit card bill is not paid until 2015.  
More ...

Dispose of passive activities to take advantage of suspended passive losses.

Losses from a passive activity that can’t be realized in a particular tax year because of the passive loss limitations are suspended and carried forward until they can be used. If you are carrying suspended passive losses you might want to dispose of the passive activity before the end of the year to take advantage of those suspended losses. When the passive activity is disposed of, the losses from the year of disposition, including carried- over losses that exceed passive income for the year, are no longer treated as passive losses. More ...

Realize stock losses to offset gains. 
You may be holding appreciated investments, but also lost money on some stock investments in 2014. You may want to consider selling the appreciated investments and offset them with the losses. You need to be aware that long-term capital losses first offset long-term capital gains and that short-term capital losses first offset short-term capital gains.  More ...

Convert ordinary income to qualified dividend income. 

You may want to consider shifting investments from ones where the income is taxed at ordinary rates, such as bonds, to stocks that pay dividends. If the dividend income is qualifying (received from a domestic corporation or qualified foreign corporation and the taxpayer held the stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date), the income will be taxed at capital gains rates. More ....

Make Sec. 179 expenditures. 
You can elect to deduct currently rather than depreciate the costs of new or used tangible property used in your business over a period of years. Unfortunately, the increased levels that were in effect for Sec. 179 for the past several years have expired. For 2014, the maximum amount that can be expensed is $25,000, and the deduction is phased out when qualifying property placed in service during the year exceeds $200,000.  More ...

For complete listing of downloadable forms visit our webpage 

Wednesday, December 11, 2013

How (and why) should you review your investments for Tax Deductions?!

Today my monthly reminder popped up to: Review my portfolio for tax deductible losses, IRA, SSA benefits, and more".  And I was just thinking how many people would know exactly what to look for.  My guess is: many.  But not all would be 100% certain they are looking at the right thing.  So to accomplish # 1 on the list of things to do in December I would:
Check my investment portfolio for loss-harvesting candidates:
Which means look for positions that have an "unrealized" loss.  You can deduct as much $$$ in capital losses as you have in capital gains and an additional $3,000 can be tax deductible.  So if you had a lot of positions that you sold at a gain you can and should look through your portfolio to sell off some less desirable stocks with an unrealized loss to realize the loss.  This loss will allow you to offset your capital gains and will save you the capital gains tax on your winners. 
As you "rebalance back" to your strategic, long-term asset allocation - means if you traded out of positions your portfolio may no longer reflect the asset mix of 20% in equities, 20% in bonds, and 60% in futures (just kidding) but you understand that after trading out of certain positions you may have a different investment mix than prior to your trades.   This provides an opportunity to sell out of loser positions and use the extra cash to fill in the gaps in the securities that align to your planned portfolio mix.
Always remember not to buy into the same positions within 30 day of the sale because that will render the trade useless for tax purposes.

This Forbes article How to Pay Taxes Like Mitt Romney is a good reference:
Here is the remainder of the December to do items on my Financial Calendar:
2) If you want to establish an Individual 401(k) or other QRP (qualified retirement plan) this year for your small business, the account must be opened by December 31.

3) If applicable, don't forget to take the annual required minimum distribution from your IRA by December 31.  - If you are 70 and 1/2.

4) Request your annual Social Security benefit statement from Compare your earnings record against your old tax return info for accuracy.  - Yep, Social Security Administration may make mistakes.  It also will help to have this document for your updated plan for next year.

Saturday, December 7, 2013

Whole life insurance versus Term. You could be mising out on thousands in savings!

Let’s review the following situation.  Mike, a young man in his 20s bough a whole life insurance policy for $1,600/year.  Fast forward ten years, the policy’s current value is $1,300 and policy coverage is $95,000 in the event of death.  This policy was sold as a supplement to disability insurance, i.e. the value of the policy could be used as a savings bond/savings account in the event of the insured’s disability.

Let’s revaluate an alternative scenario.  What if Mike bought term life insurance at $250/year and allocated the remaining $1,350 to a savings account that earned 2.5%.  He would still have his insurance coverage of $95,000 but his savings value would be at $15,503.

Whole Life v Term Life Insurance

Comparative table

Whole Life
Term Life Insurance
Annual Premium
 $             1,600
 $                 250
Death Benefit
 $           95,000
 $           95,000
10 Year Cash Value of Insurance
 $             1,300
 $                    -  
10 Year Savings
 $                    -  
 $           15,503

In this example, over a ten year period Mike could have saved $12,200 more if he opted to buy Term Life insurance.  If your whole life insurance coverage is more than $95,000 and your annual premium is higher you could be saving more!!!  There is a limited number of circumstances in which whole life policy is a better solution than a simple term life policy.  You should discuss the advantages of whole life insurance with a financial professional that is not commissioned for selling insurance products.

Tuesday, December 3, 2013

Five Factors that affect Your Credit Score

Recently I reviewed a book by Joe Lance Letizia "The complete Guide to a Higher Credit Score" and was surprised by this interesting statistic: "studies indicate that individuals with 6 or more (recent) inquiries on their credit reports are 8 times more likely to declare bankruptcy than those with no inquiries on their report".  Here is a brief Summary from the Chapter on Credit scores and the Five Factors that affect them:

Component % Details
Payment History 35% Payment information on all types of accounts: credit cards (visa, AmEx, Home Depot), installment loans (mortgages, auto, student).  Public Records and Collection items: bankruptcies, foreclosures, lawsuits, etc.  Details of delinquencies: late or missed payments, etc.  The number of accounts with no late payments: timely payment history will increase your credit score.
Length of Credit History 15% The length of time your credit accounts existed.  And history of use on certain types of accounts.
Credit Mix 10% The types and Quantities of credit accounts.
Amounts Owed 30% Amount you owed on all your credit accounts.  Overall amount you owe on credit cards and other accounts.  The types of loan balances.  The number of accounts with a balance.  The amount of credit line used on credit cards and other revolving accounts.  The amounts still owed on installment accounts.
New Debt/New Credit 10% The number of New accounts you have.  How recently they were opened (a lot of new cr5edit accounts indicates higher risk).  How many recent credit requests you've made.  Certain studies indicate that individuals with 6 or more inquiries on their credit reports are 8 times more likely to declare bankruptcy than those with no inquiries on their report.

Thursday, August 29, 2013

What's at risk when you only invest in very safe Bonds?

Most consumers have heard the story about buying bonds to be more secure, to avoid market fluctuation, and a whole slew of benefits.  But are they getting only part of the information?  Possibly.

Here is how bonds respond to upward shifts in interest rates:
This chart illustrates what has happened to bonds as interest rates slowly climb up and there is an expectation of more aggressive rate increases. (You can run this chart on yahoo Finance).

I pulled this chart today as the market expects a new direction for the Fed's monetary policy due to changes in FOMC's leadership with an accelerated shift into higher interest rates. Higher rate expectations devalue lower yielding (particularly longer maturity) bonds.

Based on this chart Vanguard total bond (BND) portfolio's versus Dow (DJI) to date performance, a professionally managed bond portfolio lost about 5% of its value, while a portfolio mirrored after Dow gained 15%. That's a 20% difference in value!