Meet Our Newest Planner: Cyrus Purnell

July 25, 2016

Cyrus Purnell, CFP® is driven to take the mystery out of why some people thrive financially and others don’t. Recently, I had the privilege of sitting down with our newest planner. We discussed his money story and how this Gen X father aligns his personal mission to help others get the information they need to make better financial decisions with his work at Financial Finesse and his role as a husband and father.

Why did you want to earn your CERTIFIED FINANCIAL PLANNER™ designation? What does it mean to you?

I earned my CFP® designation because my primary reason for joining this industry was to help families plan for their futures. When my mom would pick me up from school, she would have the radio on Larry Burkett’s radio show “How to Manage Your Money.” After listening to him help people work their way through financial situations day after day, I thought to myself, “I would like to do that.” Looking back on it today, I was struck by how effectively a short conversation can help relieve someone of stress and set them on a positive road.

What’s your money story – what your parents taught you about money, etc.? Did you hold any negative beliefs about money that you had to overcome?

In hindsight, my parents had a very well balanced view on money. They had very consistent positive money habits when it came to paying bills on time and maintaining low debt levels. They definitely lived within their means, but they would occasionally splurge on things like vacations for the family.

Growing up, I felt like they said “no” to everything, but as an adult, I realize they were very balanced in their yes’s and no’s, and that balance allowed me to walk away from undergrad with zero student loan debt. My perception of being deprived of certain luxuries growing up has always given me a slant toward spending on one event or item and then doing a 180 and spending nothing for a while to make up the difference. It took time for me to learn to plan for those special items and live in balance.

What is the biggest mistake you ever made with your money, and what did you learn from it?

When I started out on my own after college, I picked up what I call “pet debt.” I seemed to carry around some credit card debt and never really took the initiative to completely pay it off. My wife had a similar level of debt when we married, and while were very aggressive on paying off student loans and car loans, we still kept our “pet debt.”

After the birth of our first child, we took a hard look at what the debt was costing us in interest. We got on the same page and attacked the debt and paid it off aggressively. This allowed me to get my MBA without picking up new debt, and my wife was able to start her own business.

What have you learned about money and marriage that you can teach the rest of us?

You can accomplish a lot more working together than you ever could individually. Anytime my wife and I had individual agendas, it always produced tepid results. When we work together on something, we would have better-than-anticipated results.

I know how to run an amortization schedule and how quickly something can be paid down. When we work together, it was faster than any pay-down plan. We would have the wind at our backs.

How do you teach your kids about money?

While my kids are still young, we have felt it was important to begin conversations with them on the value of money and saving. We’ve wanted them to be very involved in the savings process, going to the bank and opening their own savings accounts. Now with any Christmas or birthday monetary gifts they receive, we have the conversation on what we will give, spend and save. My 8-year old is now earning money with doing extra chores around the house. I have been impressed that while he has enough in savings to get the toy he wants, he’s yet to ask for it but has a plan to continue saving $5/week.

If you could wave a magic wand and reform the financial services industry, what would you do?

I would shift cost from the products to the advice. I think there are many very intelligent and ethical people in the financial industry, but they are trapped by the fact that so much of the industry is product-focused and not solution-focused.

Tell me about your personal investment philosophy?

My study and experience with investments has shown that almost all investment return is based on asset allocation. The biggest obstacle to realizing the return from that allocation is fees. In my personal portfolios, I endeavor to build allocations well suited to my time horizon with an eye to keeping fees low.

Is there anything that really surprised you about coming to work at Financial Finesse? Why?

I did a fair amount of research before joining the company so there haven’t been many surprises. I will say the company is exactly what it says it is. Most companies tend to over-hype the strength of their culture and their dedication to mission. It is not hype here. All of that is real.

Have a question you’d like answered on the blog? Please email me at cynthia.meyer@financialfinesse. You can also follow me on Twitter at @cynthiameyer_FF

Investing Made Easy

July 18, 2016

Can investing be easy? How can you become a more informed, savvy investor without learning a lot of extra financial jargon? Investing really doesn’t have to be that hard. Consider following these three simple principles:

Know Yourself

Successful investing starts with knowing yourself: how you like to make decisions, whether you like advice or you like to do it yourself, and what you do when the going gets rough. The first step is to figure out your investing risk tolerance, which is how much of your invested money you’d be willing to risk losing in order to make a profit. Try and quantify that in real dollar amounts, e.g., you have $1,000 to invest, and you’d be willing to risk it going down to $900 (a ten percent loss) in order to have a good shot at ending up with $1,150 (a fifteen percent gain).

Would that change if your investment was $10,000 or $100,000? Are you a conservative, moderate or aggressive investor? Make sure to take a risk tolerance questionnaire like this one to double check your assumptions.

The next step is to ask yourself how involved you want to be in the day to day management of your investment portfolio. Are you more of a “hands-on” or a “hands off” type? A hands-on investor is actively involved in designing a portfolio, setting target weights for different types of investments and monitoring/re-balancing the portfolio regularly. A hands-on investor may favor individual stocks or actively managed mutual funds or setting up their own asset allocation (mix of investment types) of index mutual funds. The hands-off investor is looking for a one-stop shopping solution and is more likely to favor pre-mixed portfolios like target date mutual funds or use a robo-advisor to set the strategy and automatically re-balance.

Finally, ask yourself if you like to do it yourself or if you’re the sort of person that likes advice. There are many options for do-it-yourself folks, including low-fee financial services firms where you can invest on your own without an advisor. If you are the type who likes having a coach, consider working with a fee-only CERTIFIED FINANCIAL PLANNER™, professional who is paid only by clients and not by commissions or brokerage fees. Make sure to check your advisor’s background with FINRA or with the SEC if they’re a registered investment advisor.

Set a Clearly Defined Goal

When will you need to use the money? Certain types of investments are better suited to certain time periods due to their levels of risk. If you need access to the funds in less than three years, stick with very low risk investments like savings accounts, money market funds and CDs. A stock fund is no place for your savings for a home down payment!

If you will use the money in three to seven years, consider adding some high quality bonds or bond funds. Adding in stocks makes more sense for goals of seven to ten years or longer, like your retirement account. The longer your time horizon until you need the money, the more you can consider adding stocks and stock mutual funds to your portfolio.

How much do you need your investment to be worth in order to make your goal? That’s called your “investment return.” Take the home down payment scenario: The most important thing is that you don’t lose any money, and your investment return is secondary. However, with a large, far-off target like retirement, you may need to achieve a 6-7% average annual return in order to meet your goals.

Match Investments to Your Goals and Preferences

Your investments should match when you need the money (time horizon), your required growth (required return), your investment risk tolerance and whether you are hands-on or a hands off investor. According to fellow CFP® Kelley Long, choosing investments is a lot like choosing a pizza.  You can customize it to fit your tastes.

For a longer term, aggressive investor, you could consider adding 5 to 10 percent in stocks to a typical portfolio mix (for example, moving to a 70% stocks/30% bonds instead of a 60/40 mix). A more conservative investor would add 5-10% to their bond allocation (a 50/50 mix using the previous example). The bottom line is that with some easy tweaks, you can customize your investment portfolio to suit your tastes.

How do you make your investment decisions? Email me at [email protected]. You can also tweet them to me @cynthiameyer_FF

 

Five Fantastic Summer Money Reads

July 11, 2016

 

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What if you headed to the beach this summer with a great book that could change your life? Would that be worth a few afternoons of reading (especially if you’ve got your feet up, drinking the beverage of your choice)? I am a voracious reader of finance books, some for the blog and some just for my own learning. Many of them just rehash the same old content – not the books on this list! Consider stocking up on some of these perspective-changing, personal finance page-turners for the summer months:

Pensionless: The 10 Step Solution for a Stress-Free Retirement

Before I picked up U.S. News and World Report editor and columnist Emily Brandon’s excellent book to read, I was struck by the title, Pensionless: The 10 Step Solution for a Stress-Free Retirement. That term, “pensionless,” summarizes exactly where millions of Baby Boomers and Generation Xers find themselves in the age of disappearing defined benefit plans and having to shoulder the entire burden of saving for retirement. Brandon breaks down this elephant into bite-sized pieces, with a chapter each on the ten most important steps to funding a secure retirement and avoiding actions that could blow up that security. Her journalist’s eye for making it clear and simple serves the reader well, particularly her guidance on Social Security and Medicare. Follow her guidelines, and while you may still not have the endangered species of the company-provided pension, you’ll have a solid retirement nest egg.

Smart Mom, Rich Mom: How to Build Wealth While Raising A Family

The other day we received a glossy, die cut, colorful solicitation from a global insurance company informing us of their comprehensive homeowner’s insurance for fine homes. Did my husband want a complimentary lifestyle and insurance review? Wait a minute! We own this home together. Why did the insurance solicitation address him independently?

There’s still the assumption that men make the important financial decisions. In her new book, Smart Mom, Rich Mom: How to Build Wealth While Raising A Family, financial journalist Kimberly Palmer turns that assumption upside down. Her no-nonsense, funny personal finance guide for moms offers wisdom for women in every life stage.

This is, in many ways, a book about being in a relationship while navigating both your personal and your family economy without losing yourself. Palmer takes on some tough subjects with wit and humor, like how couples can split up financial responsibilities, the terror that can accompany a choice to be a stay-at-home parent, and the pull of saving for your children’s college while you are also saving for retirement. Each chapter includes useful action steps to put your decisions into practice.

Feel Rich Project: Reinventing Your Understanding of True Wealth to Find True Happiness

Financial Life Planner and columnist Michael F. Kay, CFP® is out to inspire you to feel rich. He believes that if you feel truly rich, e.g., your actions are aligned with your deepest values, you’ve got a much more realistic shot at setting the right financial goals for you – and knowing when you achieve them. Unlike so many financial authors who offer you the money version of a fad diet book, Kay dives deeply into the way personal beliefs and values drive financial behavior. The Feel Rich Project: Reinventing Your Understanding of True Wealth to Find True Happiness offers 10 chapters of thought-provoking exercises designed to uncover and reboot your beliefs about money. This book is best accompanied with a blank notebook and a good pen, as you write your way to your true north.

As I write this post, my eight year old son is looking over my shoulder, begging me for a new pair of $80 Steph Curry high top sneakers because, “everyone is getting new shoes for the end of the school year.” He’s eight! I’m not surprised, though. Our kids face a tsunami of consumer messages that tell them they must buy something now.  How can parents keep materialism at bay?

The Opposite of Spoiled: Raising Kids Who are Grounded, Generous and Smart About Money

New York Times columnist Ron Lieber, a parent himself, has written a practical guidebook for teaching kids about money and values, The Opposite of Spoiled: Raising Kids Who are Grounded, Generous and Smart About Money. In it, he takes on modern parenting behaviors, such as giving extravagant tooth fairy gifts or discouraging teenagers from working, as ways parents inadvertently give their children messages which undermine their financial success as adults. Lieber covers everything your kids are asking about: allowances, designer clothing, part-time jobs, cell phones, birthday parties, etc. in a witty and approachable way.

If you’ve got kids or are thinking of having them, The Opposite of Spoiled will change the way you think about your own money habits and what you’re teaching your children. As for my son, the answer on the sneakers was no (despite my admiration of Curry’s talent). He’ll have to save for them on his own with his allowance.

What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need To Know About Your Money

Did you know that with a modest income, you could become an automatic millionaire by taking full advantage of your employee benefits at work or that your choice of partner is the most important financial decision you’ll ever make? In What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need To Know About Your Money workplace financial wellness pioneer and our Financial Finesse CEO Liz Davidson shares ways to find your own financial security, maximize your employee benefits for your unique situation and practice financial self defense. The book comes with a companion website, where you can find the resources cited in the book, as well as ways to join the Financial Independence Day Community and create your own peer-to-peer learning group.

What’s your favorite summer money read? Send me your suggestions at cynthia.meyer@financialfinesse .com. You can also tweet them to me @cynthiameyer_FF.

Happy 4th of July!

July 04, 2016

We are thankful for our nation and for our democratic principles.

 

 

How to Protect Your 401(k) After Brexit

June 27, 2016

Will the “Brexit” affect your 401(k)? Global stock markets fell on the news that voters in Great Britain voted narrowly to leave the European Union. Investors don’t like uncertainty, and there will be plenty of that during the next few years as Great Britain and the E.U. sort out the terms of their divorce. Employees are worried, calling our Financial Helpline to ask whether they should react now to protect their retirement savings. Here are some questions to ask to determine what action, if any, is needed:

Does my overall portfolio match my risk tolerance?

Does all the news about the Brexit have you compulsively checking your portfolio during the day? Are you tempted to throw in the towel and put everything in the lowest risk investment possible? If that’s the case, then maybe it would be a good time to double check your investment risk tolerance.

Try downloading our risk tolerance and asset allocation worksheet, a questionnaire which help you determine your risk tolerance and time horizon to get an idea of what investment mix is best for you. Compare the results to your current portfolio mix. If they line up, you don’t need to re-balance. If there is a big discrepancy, you may want to make some changes. This blog post from my colleague Scott Spann, PhD, CFP® offers some guidance on choosing the right investments in your 401(k).

Keep in mind that investing in stocks and bonds always involves some financial risk. Bad days or even years in the stock market are completely normal. However the risk of not investing in stocks and bonds means that the money you save will lose purchasing power over long periods due to inflation (the rising cost of living).

Is my stock portfolio well-diversified by sector?

My fellow planner Cyrus Purnell, CFP® noted that, “Even if you have the right mix of stocks, bonds and cash, it is worth checking to see if your holdings are sector heavy. The Brexit shock is beating up some sectors more than others. If you have stock funds that are focused on financials (banks, brokerage firms and investment managers), you may see more than the average downturn.” International funds focused on Europe are also likely to have some hiccups as Brexit gets sorted out. “If you are running into high concentrations of sectors, consider indexing,” he added.

When is the last time I ran a retirement calculator?

The reason you’re investing in your 401(k) is to build a nest egg for retirement. Measure your success against whether or not you are on track to achieve your retirement goals, not from the highest balance on your 401(k) statement. Now is a great time to run an updated retirement calculator to see if you are on track, given your savings and reasonable projections for your rate of return and inflation. You can use our Retirement Estimator for a basic check in to see if you are on track. You can also use the calculator to model different scenarios using different rates of return to see what happens.

Be realistic in your estimates: recent research from the McKinsey Global Institute suggests investors lower their expectations for average annual US stock returns to 4 to 6.5%. It’s better to use a conservative expected rate of return. If you’re wrong about it, you’ll be happily surprised, but if you’re right, you’ll be adequately prepared.

Do you have a personal finance question you’d like answered on the Monday blog? Please email me at [email protected]. You can also follow me on Twitter at @cynthiameyer_FF

 

Digital Estate Planning in One Day

June 20, 2016

Recently, a notice popped up when I logged in to LinkedIn asking me if I wanted to endorse my friend Larry for certain skills and expertise. I think so highly of him, and I would willingly endorse him. There’s just one problem. Larry passed away several years ago.

What happens to your digital life when you die? Who can pay your electronic bills, shut off automatic debits to your checking account, and let your Facebook friends know you’re gone or get into your email account? Digital estate planning is the process of answering all those questions in advance, so that your survivors can easily wind down your digital financial presence and continue or discontinue your online and social media presence according to your wishes. A digital estate plan is essential to a well-constructed overall basic estate plan, which also includes a will, guardianship provisions for any minor children, beneficiary selections, an advance medical directive (e.g., living will), and durable powers of attorney for healthcare and finances.

Choose a digital executor

An “executor” is the person who carries out the instructions outlined in your estate plan. You’ll need to identify a trustworthy – and computer-savvy—person to be your digital executor and name them in your will. That may or may not be the same person who is your overall estate executor (who will have final authority over how your wishes are carried out).

Who would you want to control your website, blog or social media accounts after your death? If for some reason they were not available, who would be your backup choice? Make sure your digital executor knows you’ve chosen them as well as whom to contact in the event of your death. Discuss your overall goals for your online presence.

Take an inventory of your digital assets

If something happened to you, what tracks would you leave in cyberspace? Pull together everything in a central list:

Financial:

  • Bank and brokerage accounts
  • Employee benefits accounts, such as 401(k), FSA, HSA, etc.
  • Credit card and loan accounts
  • Other bills you pay online such as utilities, car loan, mortgage or gym memberships
  • PayPal, Apple Pay, Starbucks and other digital wallets
  • Amazon and other retail accounts
  • Cell phone account

Online/Social Media

  • Your blog or website
  • Email
  • Facebook, LinkedIn, Twitter, Instagram, Pinterest, Meetup, Snapchat, etc.
  • Music and video websites (Pandora, YouTube, Vimeo, Sonos, etc.)

Home and Office

  • Security system, heating/cooling, etc.
  • Computer and phone systems
  • Voicemail

Organize and store login information and passwords

This can be nerve-wracking. The best protection against identity theft is not to write your passwords down. Where will you store access information for all these accounts?

Consider a password vault or password manager. This will allow you to create one strong password you can remember and will also prompt you to update your weaker passwords for each of these sites. You would then create a way to get the master password to your digital executor upon your death. Don’t know where to start? PC Magazine compares the top choices here.

In any case, don’t just give the entire account and password list to your attorney to store in their paper files. That is too risky.  Consider an encrypted digital estate planning storage system such as Everplan or Principled Heart. An alternative could be to write them down and then keep them in a safe or safe deposit box. However, make sure your spouse or executor knows the combination to the safe or has the key to the safe deposit box!

Leave written instructions

Take some time to write down clear and comprehensive instructions, especially for websites and social media. What should happen with these accounts if you die? Should they be closed or taken down or maintained in memoriam? Who inherits them? Who manages them?

Check the user agreements of those sites to make sure your wishes can be implanted. Make sure your choice of digital executor is named in your written will. Don’t have a will? Check first with your HR department to see if you have access to a will creation program or legal consultation through a prepaid legal plan or employee assistance program.

Have you created a digital estate plan? What was your experience? Email me at [email protected] or follow me on Twitter @cynthiameyer_FF.

 

10 Steps to Jump Start Your Earning Power

June 13, 2016

Are you consistently earning less money than you are capable of, given your education and experience, in a way that negatively impacts your financial health? If you took the Quiz: Are You Underearning? from my recent blog post and it raised questions for you, don’t despair. Underearning is a behavior, not a character trait. You can change it. In this post, I offer ten steps people can take to begin to challenge limiting financial beliefs and earn an income that corresponds to their capabilities:

Step 1: Measure the problem. Set aside some time when you won’t be interrupted and do this exercise by hand. Fold a sheet of paper in two lengthwise. On one half, make a list of all your income that you earn during a typical month: salary (use the net take home, not the gross salary), consulting fees, investment income, etc. Add it up.

Next, on the flip side, list all your mandatory monthly expenses: mortgage/rent, utilities, transportation, insurance, taxes (if self employed), student loans/credit card payments, groceries, etc. Don’t forget to add 15% for retirement savings, even if you’re not currently doing that. Download this Easy Spending Plan as a guideline. Now add another 10% for wiggle room, things like vacations, gifts and donations. Add that all up too.

Open the paper and compare both sides. Is there a gap? How wide is it?

Step 2: Unmask hidden beliefs. Review your income and expenses from Step 1.  What’s your money story? Fee-Only CERTIFIED FINANCIAL PLANNER™ Michael Kay writes in his new book, The Feel Rich Project, that in order to overcome money misery and “feel rich,” you have to examine “your beliefs around money and values, that in most cases stem from your childhood and how you see yourself in the world.” Spend some time writing your money story in a journal.

Kay offers several writing exercises with powerful questions to help you uncover your beliefs, fears and attitudes about money. If money is a source of struggle for you, it’s particularly important to uncover your hidden belief system, which is guiding your actions now. This is likely to bring up uncomfortable feelings, so treat yourself gently.

Step 3: Write your new money story. Now that you have uncovered your money mindset, it’s time to write a new money story. For thought-provoking exercises, I like Kay’s chapter on “Stoking Your Money Mojo.” Take your money story from Step 2 and craft a new message for each of the beliefs which are limiting you and contributing to your underearning. For example, the old message might be, “people who earn money are greedy,” and the new message could be, “I am well compensated for my talents and abilities.”

Kay also suggests developing a Money Code. This is “a statement of who you are and what you believe when it comes to your financial life.” Summarize the key points and post them somewhere where you can read them several times per day.

Step 4: List 100 ways you can earn money. This simple exercise comes from Jerold Mundis’ Earn What You Deserve: How to Stop Underearning and Start Thriving, which brought the phrase, “underearning,” into the modern financial vocabulary. Make a list of 100 ways you could earn money: full-time jobs that fit your education, experience or skills, part-time work or side-gigs (e.g., coffee barista, drive for Uber), asking for a raise, freelancing, selling investments, holding a garage sale, etc. Don’t stop until you get to 100. This will be a more powerful exercise if you do it by hand.

When you’ve finished, review your list. Are there any surprises or “ah ha” moments? Pick something on the list that you can take action on this week.

Step 5: Sell something you no longer need. People who underearn often have a poverty consciousness and doubt that money they spend to take care of themselves can ever be replaced with future earnings. (It’s the opposite of the overspender, who doesn’t see any connection between what they spend today and their future earnings.)

Pick an item/items from your home or garage that you no longer need and that’s worth at least $20 and sell it. Perhaps you have books you can bring to a secondhand book shop, designer clothes you’ve never worn that you can consign, or unused exercise equipment. Here’s the kicker. After you’ve sold your items, take $20 and spend it on yourself doing something fun you wouldn’t normally do.

Step 6: Identify a financial role model. When I was working through my own financial issues, one of the things that helped me navigate the rough terrain was identifying a financial role model. As inspiration, I chose a friend who worked in the same field, always earned a good salary, managed her money wisely, and bought her first home at a young age as a single woman. Although I didn’t tell her she was my role model, every time I faced a tricky financial issue, I would ask myself what my friend would do in the same situation. If I wasn’t sure, I’d ask her directly.

Later on, after I had made financial progress and had more surplus income to invest, I studied clients in my financial planning practice. What financial habits and behaviors did they show that would teach me something I could use in my own life? In part because of inspiration from clients, I became a successful real estate investor. Now I look to our CEO, entrepreneur Liz Davidson, so I can learn to think even bigger!

Step 7: Read a book about investing. Remember the famous line from the film Field of Dreams, “If you build it they will come.” Act as if you will earn a comfortable income that offers you the opportunity to save and invest a generous percentage. What would you need to do to prepare to manage that money wisely? Start building your financial infrastructure by learning more about investing fundamentals. Beginners can start with The Wall Street Journal Complete Money and Investing Guidebook. Those who already know basic concepts can move on to the Forbes/CFA Institute Investment Course.

Step 8: Track your income and expenses daily. Creativity coach Julia Cameron, author of The Prosperous Heart, calls this practice of tracking your daily income and expenses, “counting.” Whatever you want to call it, it’s a way to be mindful of the constant flow of money in and out of your life.

If you’re kinesthetic, you may prefer to keep a notebook or ledger on your kitchen counter to track your money. Smartphone and computer users may prefer an application like Mint or Yodlee. I saw from decades of personal experience that tracking income and expenses is a powerful way to gain awareness of financial imbalance and align your spending with your values and goals.

Step 9: Say thank you. Are you thankful for the financial resources you already have in your life? If you focus on lack, you are likely to get less than you need. If you focus on gratitude, you are likely to get more experiences for which to be grateful.

Watch the short video, If the World Were 100 People, whenever you are feeling like you don’t have enough. Whenever you earn money or receive it as a gift, take a moment to feel grateful. This will help you keep your eye on the goal of increasing your earnings.

Step 10: Start a Financial Independence Day Group. Can your friends help you become financially independent? As I wrote in a previous blog post about my own experiences with peer-to-peer learning, having the support of a group of like-minded seekers of financial balance is like having a personal cheer-leading squad. The structure of the group learning experience creates confidence, and many of us are more successful when we are accountable to others. Visit our Financial Independence Day website to download an FID community guide on how to use our book What Your Financial Advisor Isn’t Telling You to create a powerful group learning experience.

Is there a topic or a question you’d like to see addressed on the blog? Send me your thoughts or questions at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

One Great Reason to Be Optimistic About Millennials and Money

June 06, 2016

Can millennials avoid the financial mistakes of the baby boomers, like not saving enough for retirement and taking on high consumer debt? Our recent 2016 generational research report shows there are some reasons for optimism. For a first-hand account of why, I didn’t have to look any farther than Financial Finesse’s own Maneeza Hasan, our marketing manager.

Maneeza is 29 and single and recently rented her own apartment in the LA area after living overseas for a few years. She paid off her student loans early, has an emergency fund, and has made good progress in her retirement savings. Maneeza has certainly got it together more than I did when I was her age. Here’s what she told me when we sat down to talk about her financial life:

What do employers need to know about what is important to millennials?

Millennials have gone through one of the most brutal recessions in history. They desperately want to have financial stability so they can start having families, investments, houses, and more. Helping them get out of student loan debt and paying them a great salary would keep millennials at the job. Otherwise, there are a ton of other ways to make money these days, and millennials will take on all of them if that would result in the stability they are seeking.

What are the biggest financial challenges that people your age face?

I think getting a financially stable job that is enough to provide a good life is the biggest challenge. It’s very easy for millennials to be “underemployed”, and this causes a lot of necessities and luxuries to go out the window. In addition, most people get into serious levels of student loan debt trying to acquire this stable income.

When you got out of college and started working, did you feel prepared to deal with all your financial challenges? What do you wish you had known?

I was fortunate in finding a very well-paying job (even though I had to move halfway across the world to find it) right out of college. This allowed me to take care of everything (student loans, savings, traveling, etc.) very easily. I wish I had known more about taxes before I graduated. I feel like I never got any real education on how taxes work.

What’s more important to you personally, enjoying life now or saving for the future?

Saving for the future. Enjoying life now happens regardless due to birthday parties, holidays, etc. with friends and family. For me, my savings are the only thing that will help me level up into a better and better life.

Do you want to own your own home? If yes, when would you like to buy?

I would like to own my own home, but I’m wary of being tied down. The world is constantly changing these days, and it is scary to sign up for a 30 year loan. I’d pretty much just want to do it if it was a really good investment. Ideally, I’d want to buy a home once I was married, but if I was stable enough to do it on my own, I would.

How does being multilingual and multicultural influence your financial decisions?

Well, growing up in New Delhi for the first 7 years of my life exposed me to a lot of dire poverty. My family wasn’t poor, but you can see it every day in the city. Being an immigrant to ambitious parents taught me to sacrifice a lot and do what needs to get done to reach that next goal, so I’ve been raised to save, save, save.

Ironically, this saving/investing mentality has resulted in incredible experiences. Living and visiting so many countries has given me a great perspective on the financial reality most people in this world face. That keeps me humble and focused on spending my money on the things that are really important.

If the blog authors could speak directly to people in your generation, what should they say?

Just really help them develop a good game plan for gaining that stability. Most people come up with some really bad ideas that they end up having to pay for years and years. Find low cost ways to get a good job or job training, go to college, etc. Also, be patient when it comes to having their own place, marriage, kids, and helping out family.

Most people want to do these things before they are financially ready. Share basic knowledge like Roth IRAs (I’m a big fan), high interest checking/savings accounts, cheaper options for TV/Internet. Great blog posts can help get them in that mentality of looking for the next financial “hack” until it becomes a habit and a natural part of their lifestyle.

What is the biggest mistake you see twenty-somethings make with their money?

I don’t see them focused on their finances in general. Some think money is just a bad thing, and some just don’t prioritize it. They just live on what they earn and focus on other aspects of their lives. Having an “investor” mentality would make a huge difference in their lives and set them up for their thirties very well.

Do you agree with Maneeza’s assessment of millennials? Email me your comments at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

 

 

A Special Memorial Day Message

May 30, 2016

On Memorial Day today, we remember the patriots who died while serving in the U.S. Armed Forces.  We honor their sacrifices and those of their families.  Thank you.

Quiz: Are You Underearning?

May 23, 2016

Are you constantly scrambling to make ends meet? While there can be many causes to budget problems, including sudden unemployment, overspending and big credit card or student loan balances, one frequently overlooked trouble spot is how much you earn. “Underearning” is the persistent state of earning less money than you are capable of earning, given your education, experience and the economic environment, in a way that negatively affects your financial health.

What’s the difference between underearning and living the simple life…or underearning and choosing to work in a lower paying non-profit or public service job in your field? The key is whether or not you are earning as much money as you need to meet basic living expenses. Underearning is not the same as poverty, although persistent underearning can lead to poverty. Underearning is a type of self-induced deprivation of financial wellbeing.

It is not dependent on profession or income. The medical school graduate who takes a job making less than she needs to pay her rent and student loans is underearning. People can appear financially successful, but still live paycheck to paycheck with a negative net worth. If you can meet all your basic expenses (housing, food, transportation, clothing, health insurance, etc.), save enough for retirement, and have some money left over for enjoying life now without going into debt, you aren’t underearning, even if you don’t make a high wage.

Underearning behavior is a symptom of an underlying belief system. It generally comes from a personal sense of unworthiness and/or lack of self regard, which manifests as an inability or unwillingness to seek appropriate compensation for one’s efforts. Underearning can include active activities such as the PhD in computer science who works in the bicycle shop and lives at home with his parents or the mother who spends all her time volunteering at her children’s’ private school while building up a huge credit card balance paying the tuition.

It can also include passive activities such as failing to turn in rebates after purchases, forgetting to submit benefits-related expenses for reimbursement, or paying excessive brokerage fees for investment management – areas where many busy professionals fail to fully maximize. According to Barbara Stanny, author of Overcoming Underearning: a Five Step Plan to Lead a Richer Life, those who underearn, “devalue themselves, giving away their time, knowledge, skills.” The good news is that because underearning involves some level of self-sabotage, bringing self-awareness and compassion to changing behaviors that deflect money can lead to a full turnaround.

Do you think you might be underearning? Take the quiz below to find out. Rate your answer to each question by assessing how often you engage in that behavior:

Never                   0 points

Rarely                   1 point

Often                    2 points

Almost Always     3 points

____I regularly accept lower-paying work which does not reflect my education and experience.

____I only work part time.

____I don’t think employee benefits are an important part of my compensation.

____I work all the time but I never seem to have enough money.

____I spend most of my week volunteering for causes and organizations.

____I believe most people who have money are greedy.

____I believe most people who have money are unethical.

____I resent people who have money.

____I believe that people who have money only have it because they are lucky.

____I don’t think my skills are worth much.

____I have never asked for a raise.

____I don’t make as much money as I think is fair.

____I feel poor.

____I would be embarrassed to tell my friends how much I really make.

____My income does not cover all my basic needs (food, clothing, shelter, transportation, healthcare).

____I do not save for retirement.

____I have trouble maintaining an emergency fund.

____I only pay the minimum payments on my credit cards and don’t pay them off.

____My income is not enough for me to pay down my debts.

____My student loans are in forbearance or on an income-based repayment plan.

____I incur library fines for not returning books or movies on time.

____I forget to use available coupons or discounts for things I usually purchase.

____I forget to submit rebates or expense reimbursements for which I am eligible.

____My salary is less than 90% of the median salary for those in my profession.

____If I am self-employed, my business is losing money.

____If I own a business, I do not pay myself a sufficient salary.

____Once I find a new job, I want to leave it soon.

____I believe that if I spend money on myself, no more will come in to replace it.

____I believe I will never have enough money.

____I have an advanced degree (e.g., graduate school or professional) but generally earn less than the median U.S. income (about $54,000 for 2014).

____Total Score

How did you do?

0 – 15 points                      Underearning is not a big problem. Congratulations!

16 – 35 points                    Some underearning behavior or limiting beliefs around money

36 – 55 points                   Underearning behavior contributing to financial challenges

55 points or higher           Serious underearning limiting financial wellness

Is underearning something you would like to address? In next week’s post, I’ll write about steps people can take to begin challenge limiting financial beliefs and earn an income that corresponds to their capabilities.  In the meantime, start with the two books listed above. Send me your thoughts or questions at [email protected] and follow me on Twitter @cynthiameyer_FF.

 

The Number New College Students Need to Know

May 16, 2016

What’s the most important number for a new college student to know? Is it the Expected Family Contribution calculated based on a family’s Free Application for Federal Student Aid? The number of credit hours needed to graduate? The time the library closes? While all of those are important, the critical number that a student needs to know is the HCC, the “hourly cost of college” or the total amount it costs a student for each hour of school.

Why does this matter? Let me give you a personal example. When I was a freshman at Georgetown University, I had an early morning French class three times per week. The professor was quite strict, and students who were even a few minutes late were locked out of class.

I was an immature 18 year old who spent many evenings my first year of university at fun, social events instead of getting to bed at a reasonable hour. It won’t come as a surprise that I missed my fair share of morning French classes because I did not arrive on time. What exactly did that cost my family even when I didn’t go to class?

Calculating the Hourly Cost of College

Using the credit hour method, the hourly cost of college is calculated by dividing the annual total tuition, room and board, books, fees and other charges by the total credit hours taken per year. Take Georgetown as an example. What would it cost a student who skips an hour of French class today? According to the university website, the total cost of undergraduate attendance in 2016 is $69,770. I did not receive any scholarships, but if any kind of direct aid applied (not loans), you would subtract it from the total.

A student needs at least 120 credit hours to graduate, and it typically takes at least 15 credit hours per semester or 30 credit hours per year. $69,770 divided by 30 is $2,325.67 per credit hour. You’ve paid for it regardless, so if you skip a class, you don’t get what you have purchased. That’s a pretty expensive hour to blow off!

An alternative method is to divide total college costs by the amount of total hours a student spends learning. At my alma mater, students are expected to spend at least 30 hours per week studying for a semester of 14 weeks (12 weeks of classes plus 2 weeks of exams). $69,770 total annual costs divided by 28 learning weeks per school year divided by 45 hours per week is $55.37 per learning hour. In this scenario, it’s not just skipping a class that’s an expensive waste of money. It’s avoiding the library when you should be studying to hang out playing Frisbee on the lawn.

Neither methodology for calculating the HCC changes if a student attends school close to home or goes to a public university or a less expensive private college. There’s an hourly cost of college no matter the school, and it’s important that students know what it is in order to avoid or moderate behavior – like showing up late for French class – which wastes huge amounts of money.

Borrowing Increases Your HCC

Many families who send their students to a university don’t pay the full cost of education out-of-pocket. If your student is borrowing to finance part of the cost of higher education, their HCC will increase. Remember, student loans are not financial aid. They are a financing mechanism, which increases the total cost of education.

Let’s examine what would happen if a student borrowed $20,000 at 6% interest to finance some of the annual costs in our example above. The loan will be repaid monthly over a ten year period beginning after graduation, with total interest paid of $6,645. Using the conservative method of calculating HCC in this scenario, borrowing the $20,000 increases the HCC by $221.50 per credit hour. Using the “learning hour” method, it increases the HCC by $5.27 per learning hour.

Most students aren’t used to thinking of the school experience as a consumer experience, something for which there is a clear financial cost and benefit. By helping your student calculate and understand their HCC, you are teaching them an important lesson about the relationship between their personal behavior and money. In the financial behavior change process, awareness and assessment usually lead to action (going to class instead of sleeping in) and thus are critical first steps for future financial success.

How about you? What was your hourly cost of college?  Email me at [email protected] or follow me on Twitter at @cynthiameyer_FF.

 

Can You Save Too Much For Retirement?

May 09, 2016

Is it possible to save too much for retirement? Isn’t that a bit like eating too many green vegetables? Recently, I read an article by journalist Constance Brinkley-Badgett, Are You Actually Putting Too Much Money Away for Retirement?, challenging the common financial planning guideline of using a generic “replacement rate” for retirement savings. Brinkley-Badgett quoted David Blanchett, CFA, CFP®, of Morningstar regarding his research into retirement income replacement rates. Do people really not need to save as much for retirement as they think they do?

The simplicity of this message worries me – a lot. According to a study by the Federal Reserve, 31% of American households don’t have any retirement savings at all…not one dime. Even if it’s true that some higher net worth households are “over-saving,” the far more urgent national problem is that most Americans are not saving enough.

There are two common, interrelated retirement planning guidelines. The first is that you should target replacing 70-80% of your pre-retirement income. Why 70-80% and not 100%? Primarily because you no longer have to save for retirement or contribute to Social Security.

However, Blanchett asserts that 80% may be inaccurate, and that based on his research the replacement rate range is a wide 54-87%. “The true cost of retirement is highly personalized based on each household’s unique facts and circumstances,” he wrote in the report summary, “and is likely to be lower than amounts determined using more traditional models.” It’s a thought-provoking piece of research, and if you are interested in financial planning, it’s worth a read.

Another general guideline is known as the 4% rule for retirement account withdrawals. Based on a 1994 article by William Bengen, CFP® in the Journal of Financial Planning, the idea is if you withdraw no more than 4% from your retirement accounts the first year of retirement, then adjust your withdrawals in subsequent years for inflation, a portfolio of 50% stocks and 50% intermediate Treasury notes should last at least thirty years. The two work in conjunction: save as much as you need to generate an annual 4% inflation-adjusted withdrawal from principal over thirty years to cover 70-80% of your pre-retirement income.

While it is true that the 80% and 4% rules are “one size fits all” generalizations that can be improved by personalizing them based upon your health, your expected monthly expenses, your total savings and your expectations for activities in retirement as Blanchett correctly notes, not everyone can afford to have a personalized retirement plan made for them. What does this mean for someone who’s saving for retirement in their 401(k) plan and does not have access to the ongoing services of a financial planner? It is tempting to listen to the “save less” recommendation. After all, if you save less for retirement, you’ll have more money to enjoy life now. However, when we consider the basis for the 80% and 4% rules, we can see how even if your personalized replacement rate was 50 to 60%, you might still want to save for the 80% replacement rate (or higher).

A 95% success rate still means running out of money 5% of the time.

These rules were developed based upon studying how people could spend money in retirement in such a way that they can feel a level of confidence that they will not “outlive their money.”  If one followed the 4% withdrawal rule, then you would have about a 95% chance of being able to live on your savings for 30 years. 95% confident sounds like a lot, but is it enough?

To see what this means, consider what would happen if you lived the same retirement over and over again thousands of times. In some of those lives, you’d get lucky and retire in a bull market, where stocks rise significantly, so your portfolio would always be enough. In others, you’d retire and the markets would fall 30% in the first year. The bottom line: during 5 out of every hundred lives you would run out of money before your thirty year retirement is up.

Past performance does not indicate future results

The model in Bengen’s original paper used long term historical rates of returns and inflation. However, the future may be different. While that could work out in your favor, with higher rates of return during retirement and lower than expected inflation leading to your savings lasting longer than predicted, the opposite could also be true. Rates of return could be much lower, and/or inflation could be higher, which means your money could run out sooner. You could also have the bad luck of retiring at the beginning of a bear market, with a few years of successive negative returns leaving you with a smaller portfolio to generate retirement income.

You could live much longer

According to the Social Security Administration, “a man reaching age 65 today can expect to live, on average, until age 84.3. A woman turning age 65 today can expect to live, on average, until age 86.6. And those are just averages. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.”

Even if your needed retirement replacement ratio were lower, perhaps because you paid off your mortgage or otherwise had significantly lower expenses, there is still a chance that you’ll outlive your savings. What if your money has to last you 40 or 50 years? One way to address that is to save more before retirement, but not spend more afterwards, so you have something left in your nineties. Aim for a 99% confidence level that you won’t outlive your money over a long retirement period.

When you consider that poverty is the price for outliving your money, you can see why financial planners generally want you to oversave for retirement. I don’t know about you, but I plan to live longer than 30 years. Since I can’t change what happens in the economy, I’m planning to save more – not less — than the 80% and 4% rules tell me.

How about you? What do you think are the ideal rules for saving and spending in retirement?  Email me at [email protected] or follow me on Twitter at @cynthiameyer_FF

 

11 Easy Ways to Save Money Without Changing Your Lifestyle

May 02, 2016

Does saving more money mean you have to make big sacrifices? If you are trying to find wiggle room in your budget to apply towards important goals like retirement or paying off debt, the first place to look is at the easy hacks. Where can you cut expenditures without drastically altering your lifestyle? Here are some ideas, all of which I have personally tried:

Spend less on hair and nails. I live in NJ, where big hair and gel manicures aren’t just something you see on reality TV shows. That kind of primping at the hair or nail salon is expensive.

Switch from coloring your hair to less frequent highlights and you can save $100 per month.  Doing your nails at home can save another $40-$50. For guys, switching from a salon stylist to a barber can save you another $40.

Give up restaurant beverages. Drink water instead of soda or alcohol and you can save 10-20% on the cost of eating out. If you eat out frequently, including lunch at work, you don’t even have to do this all the time, just most of the time, to see big savings. Your employer doesn’t provide beverages at work? Bring your own from home instead of using the vending machine or corner convenience store.

Join the library. I once had a Very Serious Book Habit. I adore book stores, read voraciously, and could easily spend $150 per month or more on new books and magazines. If I didn’t like the book enough to keep it, I’d trade it in for store credit after I was finished reading it.

I reduced my book buying habit reluctantly. First, I gave up magazines in favor of the library copies and then I made a concerted effort to also read library copies of those books I was pretty sure I didn’t want to own. I now use an e-reader and buy fewer printed books, which has cut my book buying considerably.

Go from two cars to one or even none. Do you really need two cars?  Maybe, but maybe you don’t.

Try living with one car for two weeks and see how you do. Can you take public transportation, carpool or catch a ride to work from your spouse? You may find it’s less painful than you expected. Giving up a car can save you as much as $700-900 per month. I know because I did it myself.

Shop for insurance. You may be able to save by changing your home and auto insurance. Every few years, shop around to compare coverage and prices. The right coverage could save you $100-$200 per month.

Host a swap party. Clothes, accessories, toys, holiday cookies, unopened gifts, books – almost anything could be swapped! What is unwanted to you could be valuable to someone else and vice versa. For more tips on hosting a clothing swap party, see this article.  The same principles can be applied to any swap or exchange party.

Share babysitting. A reliable babysitter can cost $10-15 per hour in my area. Babysitting during a night out with your spouse adds $40–$90 to the total cost of the evening.

What can you do if you don’t have family to help? Form a babysitting club to trade nights out with your friends. You watch their kids one time and then they watch yours the next.  Some friends I know took it a step further, forming a neighborhood group. Once a month, one family hosts a pizza/movie night at their home, while all the other parents get a night on the town.

Fill up at the cheapest gas station. Our neighborhood suffers from zip code inflation in gas prices. A favorite hack of my husband, Steve, is to take a certain route home from work that passes a less expensive station and fill up there. The result? He spends 30 cents less per gallon.

Quit the gym and mow the lawn. Another one of Steve’s hacks is that he thinks of yard work as his personal exercise program. Instead of paying a gym membership, he mows the lawn and chops wood, doing something every day as his workout.

He decided he wanted to do this on purpose, even though we planned for landscaping in our budget. Did I mention we live on top of a hill and have three acres and abundant trees? Needless to say, he is very fit, and our bank account is fatter.

Stock a snack box. How many times a week do you pick up a snack at a coffee shop or store? Those lattes and muffins can easily add up to $3-10 per day. Add in kids, and a quick trip to Starbucks is twice as much. Keep a well-stocked box in your car and your office with easy snacks.

Not ready to give up the coffee shop coffee? I don’t blame you. (I am a fan.) Consider ordering a less expensive version, such as an iced coffee instead of a fancy coffee drink. You can save 50-60% on each cup.

Fill a gift closet. If you have kids, you know that birthday party gifts can cost upwards of $100 per month. Plus there are always hostess gifts, teacher gifts, office gifts, etc. It’s easy to forget those expenses, but they can really eat into a monthly budget.

Set a maximum amount you’ll spend on them for the year and then shop in advance. We recently bought 8 ultra cool birthday presents on Woot.com for only $80! Stock up on inexpensive small house presents and interesting wines when you see them on sale so you’ll always have something to bring when you have dinner with friends. Better yet, shop for holiday gifts right after the holiday season has ended, often for 75-85% off.

Do you have an easy way to save money without changing your lifestyle? Please email me at [email protected]. You can also follow me on Twitter at @cynthiameyer_FF.

 

 

3 Reasons To Make After-Tax Contributions To Your Retirement Plan

April 25, 2016

Updated for current tax figures

Are you lucky enough to have the option to save after-tax money in your employer’s retirement plan? Most employees probably haven’t given it a thought, and not many utilize the option to save more than the current $18,500 pre-tax annual employee contribution limit (plus another $6,000 if you are 50 and older).

In fact, many people are not even aware that they may be able to save additional money in their employer-sponsored retirement plan, in some cases up to the annual total defined contribution limit (from both employee and employer) of $55,000 (plus $6,000 catch up if 50 and older) or 100% of your compensation, whichever is less. Sure, the likelihood of saving that much for many people might be small.

However, if you are already contributing the maximum in pre-tax and Roth contributions, here are some reasons to save more after-tax:

Automatic savings

Saving for an early retirement or financial independence? Let’s face it. It’s unlikely you’d save that much or invest on such a consistent schedule if you had to write a check every two weeks to a mutual fund company.

That’s one reason your employer can be your best financial services provider. Saving after-tax money in your retirement plan can be as easy as clicking a button or signing a form to choose what percentage of your salary you want to save. Every paycheck, you’ll defer money into after-tax savings and invest them in plan funds, just like your regular contributions. Little by little, you’ll save and grow that extra money without having to think about it.

Ability to withdraw contributions

You should generally be able to withdraw after-tax voluntary contributions, subject to the plan guidelines on withdrawals, even before you’re 59 1/2 and without meeting a specific need like you often do for a hardship withdrawal. That means if you have an emergency, you will be able to access those funds.

However, you may not be able to withdraw associated earnings growth, and if you are, those earnings – but not your original contributions – would be subject to taxes and a 10% penalty if withdrawn prior to age 59 1/2.

Tax-free rollover to a Roth IRA

You’ll reap the biggest rewards from your after-tax contributions when you leave your company or retire. Assuming you’ve been saving for a while, your after-tax balance will contain two components: your original after tax contributions and the tax-deferred earnings growth on those contributions. The IRS allows you to separate those two components out during the rollover process, so you can do a direct rollover into multiple destinations: rolling the tax-deferred earnings growth into a traditional IRA and rolling your after-tax contributions into a Roth IRA.

That’s right. You read that correctly. Your after-tax voluntary contributions can be rolled into a Roth IRA, where any future earnings growth will then be tax-free (assuming you leave the money in the Roth for at least five years and until after age 59 ½ ). You may even be able to convert your after-tax contributions immediately to Roth and have all future growth tax-free (but then you give up the ability to withdraw it early).

Here’s an example: Jane is already contributing the maximum $18,500/year to her pre-tax 401(k) plan at XYZ Company. She wants to save extra for retirement, so she saves an additional $10,000 annually in after-tax voluntary contributions in the plan.

After 10 years, Jane has about $144,000 from her after-tax contributions ($100,000 in contributions and $44,000 in growth). She also has about $260,000 in pre-tax savings and growth from contributing the maximum. When she leaves XYZ to take a new job, she can roll her plan balances into multiple destinations: $100,000 into a Roth IRA and $304,000 into a traditional IRA or her new employer’s 401(k) plan.

Fast forward another 15 years to when Jane retires. Without adding any more money to her Roth IRA and receiving a 7% return, her account is now worth about $285,000. That’s an additional $185,000 of tax-free growth, all because she originally saved after-tax money in her 401(k) plan.

 

 

Are Self-Directed IRAs a Good Idea?

April 18, 2016

If you could buy a private business, a rental property or racehorses in your Individual Retirement Account (IRA), would you do so? Even if you could, would that be a wise choice? Self-directed IRAs (SD-IRA) offering non-traditional investments have become increasingly popular and more broadly available.

The self-directed IRA is a traditional or Roth IRA in which the custodian, the financial institution which keeps records and reports to the IRS, permits the full range of investments allowed by law in retirement accounts. Many types of investments are permitted in IRAs, but there are certain things you can’t do, like buy collectibles (such as art and coins) and life insurance, as well as investment strategies that require borrowing, such as shorting stock or certain options strategies. However, the reality is the vast majority of financial institutions limit retirement account investments to the more traditional ones like stocks, bonds, mutual funds, CDs and exchange-traded funds.

“Self-Directed” Really Means “Alternative Investments Accepted”

The term “self-directed” is a bit off base. What it means is that alternative investments are accepted or offered by the IRA custodian. Technically, at most financial institutions, IRAs default to the more literal interpretation of “self-directed,” in that the account owner makes the final decisions on what investments to buy or sell, unless they have given discretion in writing to an investment advisor.

A custodian who offers self-directed IRAs agrees to keep required records of your non-traditional investments in the IRA and report them to the IRS. The custodian may or may not offer physical custody of the investment, depending on type, or may just house the records of investment activity and valuation. Common alternative investments available in SD-IRAs are precious metals, real estate, loans, and private equity.  Certain custodians of self-directed IRA accounts will accept just about anything allowed by the IRS, including tax lien certificates and dairy cows.

Very High Risk

Many alternative investments available in SD-IRAs carry a high risk of losing all or most of your money due to lack of diversification or the inherent risk of the investment itself. You may not be able to sell the investment later (lack of liquidity), meaning that you won’t be able to access the value of it to make distributions in retirement. Keep in mind that the entire burden of investigating the investment (doing your “due diligence”) is on you, the account holder. This could be a benefit when you are investing in an area of your professional expertise (e.g., the experienced real estate investor). However, it can also lead to fraud, when investors are duped into Ponzi schemes or other types of investment scams through slick offerings and piles of legal paperwork.

Beware of investing in anything you don’t understand and can’t explain easily to others. If you are considering an investment within an SD-IRA, read this pamphlet from the SEC first and do your homework. Use the checklist at the end of this post. Remember, if it sounds too good to be true, it probably is.

High Fees

Fees in self-directed IRAs are generally much higher than more traditional types of IRAs. Expect to pay set up fees, custodial fees and annual fees to value the investment. Many of the types of alternative investments offered in SD-IRAs are hard to value, so this can get quite pricey.

Keep in mind that the IRA or Roth IRA is the owner of the investment, so you don’t have direct control over it. With investments like real estate or a business, for example, that means you have to pay the custodian to do things like collect rents or business income. (Per this Bankrate article, some custodians propose that you set up a an IRA LLC to address this issue, which may give you checkbook control but is costly to establish and has legal risk.) No matter what, make sure you do some comparison shopping for a custodian who specializes in the type of investment you want to own in your SD-IRA.

Potential Tax Problems

Investors often get tripped up by unexpected tax consequences in SD-IRAs. Most importantly, in a traditional IRA, distributions in retirement are taxed as income, not the lower capital gains rate. The investor may have been better off holding the asset outside of a retirement account. Additionally, investors miss out on the ongoing favorable tax treatments for some common types of investments, such as real estate.

Depending on the type of investment income, a self-directed IRA may not be completely tax-deferred and a Roth IRA may not be completely tax-free. For example, if the investment generates Unrelated Business Income, the IRA or Roth IRA would be taxed at the high trust rates for the tax year in which it occurs. Those taxes must be paid by the IRA, not the account owner separately.

Can’t Invest in Yourself or Your Family

Don’t get too excited about selling the family business to your IRA! Certain transactions are prohibited in retirement accounts to prevent self-dealing, including transactions with people within your linear family, such as your spouse, your parents, your children, your grandchildren and their spouses. Most of your family could not work in or on behalf of the investment or live in a property held by the IRA.

When to Consider a Self Directed IRA?

SD-IRAs are not suitable for many people. Use this checklist to see if you might be a good candidate for self-directed IRA accounts: (Aim for at least 4 out of 6.)

  • I am an accredited investor. (If you don’t know what it is, you probably aren’t.) While you don’t need to be an accredited investor to open an SD-IRA, being one means you have the income and net worth to consider alternative investments.
  • I don’t need my IRA or Roth IRA for future retirement income. Either:
    • I am fully on track to completely fund my retirement with my employer-sponsored retirement plan, e.g., 401(k), 403(b), etc.
    • I have a pension or other investments (e.g., rental income) which will fully cover my retirement income needs.
  • I have well-diversified traditional investments in my work-sponsored and non-retirement brokerage accounts that can be liquidated to pay future living expenses if needed.
  • I have professional expertise and experience in the SD-IRA investment which I am considering.
  • I want to add a target percentage of precious metals to my retirement portfolio for diversification.
  • I am considering making a small private equity investment that might pay off big (a possible strategy in a Roth SD-IRA) but could also go bust.

The Investor’s Secret Guide to Understanding Your Account Tax Statement

April 11, 2016

It’s spring time again, that magic time of year when investors with brokerage accounts come face to face with the dreaded Year End Tax Reporting Statement. All over the country, tax filers are cursing at their computer screens. How do they dig through eleven pages of legalese to find out how much they actually paid for the 100 shares of stock they sold in 2015? Why is it that they received a capital gains tax distribution on a mutual fund which actually lost money? What in Heaven’s name is a “qualified dividend” and why is it also ordinary?

Most importantly – is there a hidden meaning in “This Page Intentionally Left Blank?” and what do they do with all the entries that say, “n/a?” It’s enough to make taxpayers throw in the towel, file an extension and head for the stash of stale Halloween candy to ease the anxiety. While I’m not an accountant and I can’t give you tax advice, I can shed some light (or at least light humor) on investment tax challenges.

What is Your Cost Basis?

Your cost basis is what you paid for an investment plus any commissions paid to acquire it. Why is this important? If you sold a security in a taxable investment account, you must report a capital gain or loss on Schedule D, summarizing all the transactions you list on Form 8949. You’ll need the sale price (minus commission if applicable) and the adjusted purchase price to figure out your capital gains and losses. The good news is that if you made a profit and you held the investment for more than a year, you’ll pay long term capital gains tax rates on the profits, which are lower than ordinary income tax rates.

Seems simple to calculate, right? Not always. This can get more than a little complicated if there has been a merger, acquisition, spin-off or stock split. Also, what if your brokerage firm doesn’t list your cost basis on your tax reporting statement? This could happen for a number of reasons:

You inherited the securities. What if your grandfather left you his 1000 shares of Big Oil Company, and you decided to sell 100 of them last year? The cost basis of those shares received a “step up” on the date of his death.

If you don’t have the actual record from the settlement of the estate, you could consider using the market low on that date as your basis. You can generally find that by entering the symbol on market data sites like Yahoo Finance or asking your brokerage firm. Make a printout of the data showing your price and keep it in your tax file in case of an audit.

You transferred them in from another brokerage firm. Technically, you are expected to keep a record of your purchase prices of securities. Did you keep your old statements from previous years?  Possibly not, unless you’re the kind of person that also kept your childhood report cards.

While brokerage firms have been required to include purchase data on statements since 2011 – and many firms have been back filling data from previous years – this data isn’t necessarily going to show up on your new statement if you switched firms. As you can guess, your old financial advisor’s team isn’t going to prioritize your 11th hour call seeking information about your long ago cost basis. This Forbes article has some helpful tips about how to reconstruct cost basis using tools like Netbasis.

You bought the securities at your current firm before they used their current statement software. Good news here. If it’s your current firm, they’ll be likely to prioritize answering your cost basis question. Call early though because they are inundated with these kinds of calls the last few weeks before the tax filing deadline. A firm will generally have old records on microfilm if they haven’t back filled data on customer files.

Please be considerate when you call. There’s an administrative person on the other end who’s been taking outrageous last minute requests for account information for a few weeks now. If you don’t get an answer, you can consider using the low market value for that date (even if the purchase price was less than a few dollars per share) – better to err on declaring slightly more gain than you needed to in case of an audit.

Why Do I Have to Pay Taxes on a Mutual Fund That Lost Money?

No, this is not a Kafka novel. This happens all the time. Investors who hold mutual funds in taxable brokerage accounts have taxes to pay on those investments, even if the fund performance was negative for the year, and even if they didn’t sell any shares. I know it seems cruel. Taxable distributions from mutual funds are likely if you own the fund in a non-retirement account and can take the form of capital gain or dividend income.

This is because the mutual funds must pass dividend income and net short and long term capital gains and losses that happen during the year through to fund shareholders proportionately. Fund managers buy and sell securities over the course of the year, either as part of active portfolio management or to meet fund redemptions. Yes, folks, it’s true…you can even get dividend and capital gains distributions when you own index funds.

There’s good news, though. Many dividends are taxed at a low rate. (See below). Even if they are not, the max you’ll pay is your marginal income tax rate.

Even better, you can net all capital gains and losses from security investments (“active” investments) against each other – short losses against short gains, long term losses against long term gains, and net short term against net long term. If you consistently have net capital gains in your taxable investment portfolio, you may want to consider switching to a more tax-efficient investment strategy. Check out these tips from Morningstar on capital gains tax season.

What is a Qualified Dividend?

A dividend is a distributed share of corporate earnings. According to NASDAQ, a qualified dividend  “is a type of dividend that is taxed at the capital gains tax rate. Generally speaking, most regular dividends from U.S. companies with normal company structures (corporations) are qualified.”  Not sure if your dividends are qualified? See this description from the IRS.

Why is This Page Intentionally Left Blank?

Despite appearances, it’s not for taking a meditative pause to regain your composure during tax time.  This is one of the true mysteries of the universe. Is this disclaimer there to inform us that there is not a printing error? Could we not have figured this out on our own? Wikipedia even has an entry on this topic, which goes to show you that others also see this as an enigma.

You Might Need a Tax Preparer

By the way, if your tax filing seems so tricky that you can’t figure it out on your own, this is a sign that you need to see a tax professional. That’s what they’re there for, people. A tax preparer has chosen to help people with their taxes as their life’s work. Seriously – they love this kind of thing!

If you’re looking for ongoing tax guidance and advice, consider engaging a Certified Public Accountant (CPA). Less complex or one-time tax preparation can generally be handled by an Enrolled Agent (EA). Tax preparation fees are usually tax deductible.

How about you? Do you have a financial topic you’d like me to address on the Monday blog? Email me at [email protected] or Tweet me @cynthiameyer_FF.

The F Word In Financial Services – And Why You Need To Know It

April 04, 2016

Should financial advisors have to act in the best interest of their clients? Absolutely yes, according to the U.S. Department of Labor. The Office of Management and Budget will soon release the final version of the DOL’s fiduciary rule, which will require more of those who provide retirement investment advice to put their clients’ best interests first by expanding the type of retirement investment advice covered by fiduciary protections. What does this mean, and how will it impact employees saving for retirement?

The term “fiduciary” comes from the Latin word, “fiducia,” meaning trust. A fiduciary must act for the benefit of another person in a financial relationship and not for their own personal gain. Fiduciaries must disclose all conflicts of interest, and have a legal obligation to take into account the beneficiary’s circumstances, goals, risk tolerance, time horizon and investment experience. In other words, when you hire a fiduciary, he or she is legally and ethically required to act in your best interests.

The practical implication of this is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers. A fiduciary can’t charge you ridiculously high commissions on an investment just because they have a mortgage to pay on their second home or their broker-dealer has a current sales promotion with a favored mutual fund company.

But wait…Aren’t all financial advisors supposed to do that anyway? Not to the same extent.

Many financial advisors operate under something called the “suitability standard,” which states that the advisor must have a “reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence.”  This is why a financial advisor can sell you a mutual fund with a 4% up front sales charge, recommend investment strategies with lagging performance or encourage you to roll over your 401(k) into a higher fee account when you leave a job. Fellow Financial Finesse planner Erik Carter wrote about this conundrum for financial advisors recently in his Forbes column.

Thankfully, there are some financial advisors already follow the fiduciary standard, such as registered investment advisors (RIAs) and certain retirement plan advisors under ERISA, the law that governs employer-sponsored retirement plans. Fee-only financial advisors who are members of the National Association of Personal Financial Advisors sign a Fiduciary Oath as part of their membership. According to the CFP Board, “CERTIFIED FINANCIAL PLANNER™ professionals providing financial planning services also must abide by the fiduciary standard,” acting “solely in the client’s best interest when offering personal financial planning advice,” and the Board has been very active in promoting adoption of the DOL rule and a uniform standard. However, some CFP® professionals work for big financial services firms who have not yet adopted the standard. So what is the new DOL rule likely to mean for retirement savers?

Lower fees

More types of retirement investment advice are covered, including for IRAs and individual work-sponsored retirement plan accounts. This could mean that certain types of investments are less easy to justify selling to retirement investors, such as high fee mutual funds, and may put downward pressure on fees overall. The DOL estimates that expanding who must provide fiduciary advice will save investors up to $40 billion in fees over the next ten years.

Less pressure to rollover your retirement plan to an IRA

According to a recent Wall Street Journal article, the new DOL rule will make it harder for advisers to recommend a rollover of your work-sponsored retirement plan if you leave your job, “as they will have to clearly document why it is in a client’s best interest. Additionally, once the money is in an IRA, advisers would generally have to avoid payments, including commissions, that create incentives for them to select one product over another.”

Rebuilds trust and confidence

The most consumer-friendly aspect of the expanded fiduciary rule is that it aligns the interests of retirement financial advisors and their clients. This eliminates conflicts of interest and gets financial advisors and clients on the same side of the table when it comes to retirement investing. If you know that your advisor is legally looking out for your best interest and not just looking to make a sale, this makes it more likely that you’ll consider his/her advice carefully.

More transparency should rebuild trust and confidence in financial advice. That is good for investors and good for financial services. The DOL rule has prompted the SEC to begin looking at adopting a Uniform Fiduciary Standard for all investment advice, not just retirement advice.

 

 

Can Life Insurance Be a Retirement Plan?

March 28, 2016

Listen to the radio these days and you’re likely to hear a commercial promising tax-free retirement income with no stock market risk. If you call a toll-free number or sign up on a website, you will probably get a follow up contact from a life insurance agent who wants to show you how you can use whole life or universal life insurance for tax-free retirement income. Doesn’t that sound too good to be true? Can permanent life insurance really be a retirement plan?

Be very, very cautious. Life insurance is not designed for retirement savings. Permanent life insurance is primarily designed to protect people in your family who rely on your income to maintain their standard of living. The “permanent” aspect means that this insurance protection stays with you for your life, as long as you pay the premiums.

Both major types of permanent insurance — whole life or universal life — include a death benefit component and a savings component. The savings component consists of a policy cash value, the amount of accumulated policy value which would be paid out to the insured if the policy were surrendered early. The “life insurance as retirement cash flow” strategies are based on the insured person borrowing against the cash value of their policy. While it is correct that you may borrow against the cash value in some circumstances without taxes, and that invested premiums grow tax deferred, there are some significant disadvantages.

A Loan is Not Income

A policy loan uses the cash value of the policy as collateral, and the insurance company charges the borrower interest on the loan. The interest is paid to the insurance company, not back to you. The interest rate may be the same, higher or lower than the rate you are crediting on the growth of the policy cash value. Financial planning expert Michael Kitces aptly calls this borrowing strategy, “nothing more than personal loan from the life insurance company.” That’s not real income.

Policy Dividends Helpful But Not Guaranteed

What about dividends? While certain types of insurance companies pay dividends to policyholders (who hold a “participating” policy) when their annual results are good (those dividends can be applied towards future premium payments or used to purchase additional coverage), they aren’t always likely to make profits every year. You may or may not receive dividends.

Potential Tax Problems

If you are eligible to receive policy dividends from a participating policy, they are not taxable. However, strategies that recommend borrowing against cash value life insurance have potential tax problems.  Should you borrow enough of your cash value so that the basis in the policy goes down to zero, you would have to put in more cash or risk a lapse of the policy and having the total outstanding loans included in your taxable income.

No Free Lunch

Another disadvantage of using life insurance as retirement savings are the fees. You’re paying for the insurance component. If you died early, your beneficiaries would receive the full death benefit, so you’ll be charged underwriting costs and mortality charges, etc. Plus you are paying for the distribution of the policy, in other words, commissions.  Someone’s getting paid, and those fees and charges eat into the type of returns you might otherwise earn if you invested the money into buying and holding tax-efficient index funds.

The Bottom Line: Do You Need Permanent Life Insurance?

Consider a life insurance proposal primarily in the context of your estate plan, not your retirement plan. Lifehappens.org has an overview of insurance basics and a helpful calculator to figure out how much insurance you actually need. Does the proposed policy meet your needs of providing for your family should something happen to you? Are you comfortable with/interested in having insurance protection you can’t outlive? How do the costs of this policy compare to costs of policies from other companies with the same face value?

If the life insurance meets those needs on its own merits, then your ability to borrow from it later on is an extra bonus. If paying premiums on this kind of life insurance policy are preventing you from other, more effective types of retirement savings, such as maxing out your tax-deferred retirement plans like your 401(k) and IRA/Roth IRA, that could do serious damage to your financial wellness. If you are on track for retirement, have low/no debt and need permanent insurance, then there may not be any harm. Don’t think of it as a retirement income strategy, however. Think of it as life insurance with access to a personal loan.

Do Your Homework

If you are considering one of the currently popular life insurance cash flow strategies, here are some questions to ask the insurance agent about your proposal:

  • How do you get paid?
  • What are the other fees involved — mortality, underwriting, surrender charges, investment management, etc.  Where can I see them reflected on your proposal?
  • What is the interest rate I’d be charged if I borrowed against my cash value?
  • What is the rate I’ll be credited on my cash value?
  • If I borrow from my cash value, can I repay that at any time? Are interest payments deducted from the cash value, or do I write checks for them?
  • What happens to the policy if I borrow the entire cash value?
  • What is the actual return net of all fees?
  • What’s the worst case scenario? Are there any circumstances in which I could be taxed? Lose money?  Lose my insurance?

How about you? Do you have a personal finance question you’d like answered on the blog? Email me at [email protected] or follow me on Twitter @cynthiameyer_FF.

 

Quiz: Do You Have Landlord Potential?

March 21, 2016

[fusion_text]Online or on cable these days, you’ll find many self-described real estate experts who want to teach you their systems for finding and financing great real estate deals.  According to these self-described millionaires, people can make money in real estate if they think like an investor and have the right system. The temptations they offer are many: inflation-adjusted income, rising home prices, leverage and avoiding stock market risk.  I’m a rental property investor myself, so I know firsthand both the benefits and the challenges.

While single family homes, commercial properties and multi-family units may be good investments for some people, they are not for everyone. The truth is, rental real estate investing may seem safer than it really is. Each property investment has unique risks.  A rental real estate investment that remains vacant or results in large, unexpected maintenance costs could be financially devastating. 

Still, real estate evangelists aside, rental property investments can contribute to your income diversification, net worth and financial security if you choose wisely and at the right time. How will you know when you’re ready to be a landlord? Take this assessment to find out if you have landlord potential. Give yourself one point for each “yes” answer: 

My financial position:

____I have zero credit card and other high interest debt

____My credit score is 740 or higher.

____I have enough cash to put down 20% of the value of the property

____I have enough cash to pay for any necessary renovations

____I have enough cash to cover vacancies and maintenance on the target property for a year

____I am already contributing the maximum to my retirement plan at work ($18,000 plus $6,000 catch up contribution if 50 or older)

____I am already contributing the maximum to a Roth or Traditional IRA ($5,500 plus $1,000 catch up contribution if 50 or older)

____I am maxing out other work-sponsored employee benefits that fit my financial situation (e.g., HSA, FSA, etc.)

____I have enough other income to pay the rental property mortgage if there’s a sustained period of vacancy

____Total financial position score

Did you score 8 points or higher? Then you can move on to the next round. 

If you scored 7 or lower, you aren’t yet in a strong enough financial position to be a rental property investor. Without sufficient cash reserves, a real estate investment that turned out badly could send you into bankruptcy. If you carry balances on your credit cards, the most important investment you can make is paying them off. Before you even consider diversifying into individual rental properties, make sure you are on track to meet your retirement goals and maximize all your tax-advantaged benefits at work.

Real Estate Knowledge:

____I’ve read some basic guidebooks on rental real estate investing and landlording, such as Nolo’s First Time Landlord

____I’ve done a review of rentals in my target neighborhood and I know average rents, time on the market, crime and school statistics

____I have owned my own home for more than three years, so I have a very good idea of how much time is needed to take care of one

____I don’t yet own a home, but I plan to buy a multi-unit property and live in one unit

____I have enough time to manage the property myself

____I’ve run the numbers, and the gross monthly rent on my target property is 1% or more of the total property value

____I can afford a property manager and the investment is still profitable

____ I like to fix things and do home improvement work around the house

____I understand that one or a few properties in the same area are not a diversified investment and that means there is higher risk

____I have run income and expense projections for the property for a year, including worst case scenarios

____I have researched the pros and cons of different legal entities in my state to hold the property, such as a limited liability company

____I have spoken to a mortgage lender and am confident I’ll be approved for financing

If you scored at 8 on real estate knowledge and 8 on financial position, it looks like you have landlord potential. Happy property hunting!

If you scored 7 or lower, take some time to rethink this. Will this be a profitable investment? Do you have the time to manage the property yourself?  Are there risks you are not comfortable taking? What additional steps are needed before you move forward?

How did you do on the quiz? Do you have landlord potential? Email me at [email protected] or follow me on Twitter @cynthiameyer_FF. 

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What Philosophy Can Teach Us About Our Finances

March 14, 2016

I recently asked my fellow planner, Brian Kelly, CFP®, to tell me about his personal financial wellness story. I expected a compelling tale. Brian has a dry sense of humor, a big heart and strong opinions, and I wasn’t disappointed. What I didn’t realize until he sent me this post is that Brian is also a philosopher who connects the dots between financial wellness, a 19th century movement and eighties music sensation The Talking Heads.  Here’s what Brian shared with me: Continue reading “What Philosophy Can Teach Us About Our Finances”