William's Blog

Maybe it isn’t harvest time in the traditional, farming sense, but it’s getting close to tax loss harvest time. This is only for those of you that have stocks, mutual funds or exchange traded funds (ETFs) in taxable accounts (outside of retirement accounts). Those of you that have been learning about managing your investments know that you, generally, want to sell high and buy low. Life is messy and that goes doubly for our U.S. tax code. This is an exception to the rule. I’m also, generally, against active trading, so why would I encourage you to sell something instead of sticking with buy and hold with occasional rebalancing? Well, this is an exception to that rule too. I’m going to briefly explain two of the situations where you should consider doing this.

The first situation is when you are simply trying to, legally, lower your tax bill for the current year. If one of your investments is showing a loss on paper, sell it. At least sell enough of it that you have a $3000 loss. Although you can carry over capital losses to future years, you can only use $3000 per year: unless you have other capital gains with which to offset these losses. Understand that this won’t lower your tax bill by $3000: it will lower your taxable income by $3000. If you’re in the 35% tax bracket, you’ll save up to $1,050 in tax. If you’re in the 28% tax bracket, you’ll save up to $840 in tax. You get the idea: multiply the appropriate tax percentage by $3,000 (or the actual number if the loss is lower).

The second situation is when you have sold other assets and you have a capital gain that you’re trying to offset. In this situation, your potential tax savings are much higher. If you have a $10,000 capital gain, and you have a stock, ETF or mutual fund that is currently showing a loss of $10,000, you can sell that security to totally offset the capital gain. If you have the same situation but you have a security that shows a larger loss, you can realize the loss (sell it), offset the entire $10,000 capital gain and still take the rest of the loss, up to $3,000 for that year with the rest carried over. This can get a little complicated if you have sold several items at either short or long-term capital gains or losses. You offset the long-term gains with long-term losses and then short-term gains with short-term losses, then you net the long-term with the short-term. However, if you only have a long-term gain and only a short-term loss those will directly offset the other.

What are a few of the complications or drawbacks to doing this?

First, you’re selling out of a position or partially out of a position in which you were advised to invest. Yes and No. As long as you do not replace that security 30 days before or after the sale with a substantially similar security (and that phrase can trip you up), you’re fine. So you could take a loss and rebuy that same security more than 30 days later. The drawback is that you could miss out on dividends and an increase in the price while you don’t own it. You may repurchase it and end up with a lower basis, however the new basis could be higher too. If you find yourself in a higher than normal tax bracket, this move might well be worth the trouble for you.

Second, there’s the time, trouble and, less significantly, the added commission expense for doing the trades. Don’t mess with it if the loss isn’t large enough to save you money after the trades and, possible, added expense with tax preparation are added back in.

As always, this is intended to be educational. Consult your financial advisor or tax person to see if these types of actions would be appropriate for your situation.

Bonds or bond funds or bond fund ETFs? Which should I buy? What’s the difference? What happens if interest rates go up?

First, there are many factors to consider. If you have a definite date that you need the money and you buy really safe bonds or you’re wealthy and can buy enough bonds to be nicely diversified; individual bonds are the way to go. An advantage to owning individual bonds is that you normally don’t have to worry about losing any principal as long as you hold the bond to maturity.

However,  a bond fund or a bond exchange traded fund (ETF) should serve you well when carefully selected and when held for the long-term. This is especially true in the case of intermediate or longer term bond funds. Most of the bond ETFs will have very low expense ratios. And you can select funds that give you a very well diversified bond portfolio. In the unlikely event that an investment grade bond in the fund failed, your exposure to that particular bond should be fairly limited.

Some investors are worried about the threat of rising interest rates. Interest rates and bond prices have an inverse relationship. If interest rates go down, bond prices go up. Right now interest rates are super low, so when the interest rates start heading back up: bond values will fall. When will this happen? No one knows for sure. It could be very soon or it could be several years from now.

When considering rising interest rates, with all else being the same, the shorter the amount of time to the maturity date, the less the value of the bond will fall. For those of you invested in short-term bonds and the bond funds invested in short-term bonds, you will see a small drop in price due to the interest rate change. The price drop will be more pronounced in intermediate term bonds (and funds that invest in those bonds). With the drop being most dramatic for the long-term bonds and funds. The good news is that ”bond dramatic” usually isn’t nearly dramatic as “stock dramatic”: think 2008. If the interest rates rise gradually, you may make in dividends close to what you lost in value.  

The tricky part about bonds is that even if the value goes down due to rising interest rates, as the bond closes in on the maturity date the price will move back to the face amount of the bond. Hold it to maturity and you get the full value back. In a bond fund though, the manager of an actively traded bond fund may not hold the bonds to maturity. They may sale the bonds at a loss in order to buy new higher yielding bonds. Looking at the turnover rate of a fund may be a good indicator of how actively the manager trades the bonds. If the turnover rate is low and bonds are generally held to maturity, you would have a dip in price which would rise again as the bonds matured and were replaced with the new bonds with the higher interest rates. A bonus to this situation would be that you’d end up making more money in dividends, because of the new, higher rates, that could then be reinvested or used as income.

There are other risks involved in investing in bonds and bond funds. For a full discussion, consult your investment professional.

This blog is for educational purposes and is not intended to be used as investment advice. Only you and your investment advisor can determine what is appropriate for your individual circumstances.

Happy Halloween Everyone! What frightens you most? Is it ghouls and goblins?

As adults, we’ve come to understand that the imaginary monsters under the bed or in the closet are exactly that: imaginary. We can suspend disbelief for an hour and a half to enjoy a horror movie, but at the end we come back to real life.

What really frightened me during part of my adult life was related to my personal finance issues. How was I going to make ends meet? Would I ever get to the point that I wouldn’t be living paycheck to paycheck? Could I even afford to save for retirement?

I’ve met many intelligent persons that are terrific in their respective fields, but that miss many important opportunities because they lack knowledge of the details dealing with: personal finance and budgeting, savings rates, investment programs, retirement accounts, Social Security, how to use insurance as a tool to protect your assets and your family, and the types of things they need to consider before an estate plan is created for them.

Who can look out for you when you’re financially “Spooked”?

• Generally, not an advisor that works on commission. This isn’t free. The advice is normally very investment-oriented even though investments are just one piece of the financial planning puzzle. The investments that are normally suggested to you charge a front or rear load and/or generally have hefty expense ratios. You can pay through the nose even though you don’t have to write a separate check to the advisor. Their pay comes out of the money you invested.
• Generally, not an advisor that requires that you have a minimum of investable assets before he or she will consider talking with you. If you do meet the minimum, make sure that the fee they charge to manage your money is reasonable. Generally, if it’s more than one percent you need to carefully consider whether the advisor will add enough value to pay that fee.
• Instead, you need a rare bird. A fee-only planner that works by the hour. You pay the planner and they work in your best interests (as a fiduciary). [This is what I'm proud to do as a member of the Garrett Planning Network!]

I attended the Garrett Planning Network Annual Retreat this week. [Read more about the network at www.GarrettPlanningNetwork.com] I had the pleasure of meeting the founder of the network, Sheryl Garrett, many network members and Garrett staff. These fine people share the passion of providing fee-only financial planning on an hourly basis to everyday people. The wonderful thing about the network is that, as fiduciaries, we aren’t looking to sell you anything, our mission is to create financial plans that educate you and lead you to well-considered decisions about your financial life.

I will be the first one to acknowledge that money is not, nor should it ever be “everything”. However, knowing how to manage the money you have definitely keeps you happier and your stress level lower.

If you live in the Las Vegas area and would like to communicate with me about a personal financial issue, please feel free to contact me at William@DuncanFinancialPlanning.com

Have you noticed, as you age, that your body needs a little more recovery time to heal from an injury? We don’t bounce back as easily as when we were kids. Your retirement portfolio has different phases in its life too. And what’s fine in one phase, might not work so well in another.  The two main phases are the accumulation and the distribution phases. I’m going to discuss a few general differences between how you should treat your portfolio in these phases. As always, this is meant to be educational and may not apply to your particular situation. Be sure to check with your financial advisor to see what’s appropriate for you.

The accumulation phase is when you’re working and saving money for retirement – you’re accumulating investment assets. Just as when you’re young, this is the time to make mistakes. You might get spooked by a big drop in the market and sell all your stocks or stock funds. While this is never good, it’s understandable; especially when it’s the first time you’ve suffered a major loss. [Hopefully, you won't panic after you've weathered a few big downturns over the decades.]  As you continue investing over the years; you’re able to make up for the past mistake and see your portfolio recover nicely.

The big difference with the distribution phase is that you are, not only, no longer adding to the investments; you’re taking distributions and may see the size of the portfolio decrease if you take out more than the total investment return. If you are living off a combination of Social Security benefits and your investment income, try not to kick your dog while it’s down. In this case, the dog is the stocks or stock funds (equities) in your portfolio. Over the long run, it is the equity portion of your portfolio that you look towards for long-term growth. If you sell a portion (or all!) of the equities while the market is down, your portfolio may likely never recover. This could lead to your running out of money. Ideally, you should keep enough cash and fixed income (bonds or bond funds) in your portfolio that you wouldn’t need to sell the equities on a downswing. You might also consider an immediate annuity (perhaps with an inflation adjustment), upon your retirement for a portion of your portfolio. An ideal situation would be to cover your basic living expenses with a combination of Social Security and the annuity. If you did this, the equities in the remainder of your portfolio could be left to grow for the long term.

Another difference between the accumulation phase and the distribution phase is in how you should handle rebalancing. You should have defined what percentage of your portfolio should be invested in the various asset classes (or subclasses). As the investments in the asset classes change value, the percentages shift and you will need to rebalance the portfolio. During the accumulation phase, it is ideal to use cash to purchase more of an investment which has dropped below the desired percentage of the portfolio. In this way, you are maintaining the correct allocation and you’re always building up the portfolio. However, once you’re in the distribution phase, if you need the cash, you will have to rebalance by selling a portion of the appreciated asset class to buy more of the depleted or depreciated funds.

The big takeaway is this: buy low, sell high. Once you’re retired, have your portfolio properly allocated so you will never feel the pressure to sell any of your equity funds while the market is down.

There are two types of people in the world. Habitual savers and the rest of us. The habitual savers were either born that way or had role models that showed them the way. Good news. The rest of us can figure out a way to save. After a while, it’ll feel so good that we start to do it without thinking about it. The hard part is getting started.

During this blog entry, I’m talking about all types of savings. This can be for short or long-term goals, for emergency expenses, for a large purchase or for retirement. I’m purposely not going to focus on the investing aspect of it because we have to get the savings started first.

As you start saving, you need to be having a dialogue, internal or otherwise – whatever works for you. You need to come to understand, or accept the fact that spending every last dime you make and more does nothing for your well being and peace of mind. Instead of the thought process that goes: “I deserve to buy this (fill in the blank), because (another blank to fill in).” Know that having money in the bank is not only going to give you peace of mind, it’s going to open doors for you by giving you options. However, you don’t need to have years of therapy to work through all of this (I hope!), you need to allow yourself to save with these thoughts providing encouragement. As you begin having success in the savings department, you will like the feeling and will want to keep going.

How should you get started? Regardless of the goal, the exact method will be a variation on the theme: Out of sight out of mind. Try to never let it in your sight (or checking account) from the very beginning. If you have a non-retirement goal use direct deposit to funnel a portion of your pay to a separate account. You can take the leap and save the ideal percentage from the beginning, or you can ease into it by starting with a lower percentage of savings and raising it later. Consider using an online bank so you will really have to think about it before withdrawing the money. You generally get a better interest rate online, just make sure you see the “Member FDIC” logo so you know your money is safe. Another trick is to not carry a debit card with you if one is provided. That can be a little too tempting at first.

For retirement savings, have it taken directly from your check if it’s in a company sponsored plan. For other retirement savings plans, use direct deposit where available or schedule an automatic transfer from your checking account on (or very close to) payday.

The hardest part of the whole process (and it isn’t hard) is to get the form(s), fill it out and turn it in. Then relax and let the savings begin. . . . .

Do ostriches really hide their heads in the sand when they’re afraid? I’m not sure about ostriches but I know many people do this when confronted with their personal finances. They figure if they ignore the facts, there won’t be a problem.

The problem with this behavior is that by not taking a good hard look at your personal finances, you’re probably making an already bad thing worse. I know I’m generalizing, some people will end up smelling like a rose because their spending never got out of control. However, for the others, the sooner you take charge, the better off you’ll be.

Everyone cares about their situation. The next step is making yourself aware of it. You’ve got to understand how you’re doing from a financial standpoint. Are you deep in credit card debt or do you pay those “bad boys” off monthly? Give yourself a gold star if you pay them off monthly, otherwise make a budget, stick to it and pay off the debt. This includes paying off other debt as well. Get the cars and the house paid off as soon as you practically can. 

If you’re out of credit card debt or getting there, do you have emergency savings in case an unexpected situation comes up and you aren’t able to work? With the job market being so uncertain, having a year’s worth of savings to cover your fixed expenses and a smaller percentage of your variable expenses is a wonderful idea.

It’s also a great idea to have money saved up outside of your retirement account(s) in order to take advantage of opportunities that come your way or to fund short and intermediate term goals.

Of course we can’t forget retirement. Save what you can. If you’re in your twenties or thirties, 10% should suffice for most people. If you start saving for retirement after that, 15% or more depending on your unique situation is a better idea. What if you just can’t squeeze that much out? Simple answer: do what you can. Anything is much better than nothing. As you go along, push yourself to increase the percentage of your income that you save. If it’s done gradually enough, it doesn’t hurt nearly as much as it would going from 0 to 10 or 15% cold turkey.

The absolute, best person to grab this personal finance bull by the horns is you! If you can manage it by yourself and will manage it, do it. Otherwise, consider using a fee-only financial planner that charges by the hour and doesn’t require a minimum of investable assets. The members of the Garrett Planning Network can work with you to build a plan or answer questions or even to act as a cheerleader. If you live in the Las Vegas area, consider me. You can find out more about me and my philosophy at: www.DuncanFinancialPlanning.com .

A financial plan helps you by bringing clarity to your current situation and focusing on the steps you need to take to set and achieve your financial goals.

Some people intuitively know how to manage their money. The rest of us struggle. And many of us find our way through attendance of “The School of Hard Knocks”: while others manage to flunk out of it when it comes to our personal finances. No matter how you’re currently doing financially, you need to own it. Accept it. And plan your way forward.

The vast majority of personal financial planners would have everyone retire wealthy. Don’t get me wrong: I’d love this for myself, my family and friends and all of my clients. If you pull in a six figure income over the last couple of decades you work, this should be easily achievable by living within your means and saving a decent percentage of your pay and investing it wisely. However, the rest of us should strive to find a balance because we will not retire wealthy unless we live like paupers before retirement (or hit the lottery).

When we think of retirement we might think about our parents or grandparents and how they easily retired with plenty of money coming in. They may have done everything right by saving diligently and getting out of debt before retirement, but they might have also had the good fortune to have a great pension. Pensions used to be so much more common. Now a much smaller percentage of companies offer pensions. Big business has pushed the responsibility for retirement saving onto the workers. This move increased corporate profits while putting the workers in a position that previous generations didn’t have to conquer. Now your retirement is largely in your own hands because Social Security isn’t going to cut it for most people.

The balance, I previously mentioned, is about enjoying your life today while still saving for your eventual retirement. Obviously, the sooner you start saving for retirement, the less sacrifice you’ll have to make to your standard of living now. If you can’t even find a modest amount to save for retirement, you need to slow down on the spending and pay down some debt. Then start saving. Having a financial sense of security about the future will feel much better than buying the latest “must-have” gadget today. Don’t believe me: try it!

If you need help getting on track, contact me. Together, we can do it. William@DuncanFinancialPlanning.com

I still vividly remember how the author of the textbook being used in my introductory accounting course described the main purpose of a publicly-held corporation. The purpose is: “to increase shareholder value”. From what I’ve seen over the years, the managers of the corporations are taking this to heart. We have to remember that many times the upper management are large shareholders in the corporation so they profit handsomely when the value of their shares go up.

What does this have to do with financial planning? Despite the warm, fuzzy or, depending on the corporation, even cool, edgy commercials, you need to think twice before using any financial planning services of a publicly-held corporation. The problem is due to the corporate purpose (increasing shareholder value) combined with financial planners that work on commission. Even if the corporate financial planner is trying to do a good job for you, she or he has to choose products for you that are designed by the corporation to be very profitable – because that’s the bottom line.

I’m not against anyone making a living or running a profitable business. However, it’s one thing to go out and buy a shirt that you pay a certain price for and understand that the retailer is making a profit from the sale, and another to understand what you’re getting when you go to a financial planner and they put you into various investments. It’s kind of painless because you write the check for the investments and sit back and watch your new portfolio grow (when times are good!). The growth is subdued a little after you’re nickled and dimed to death for management fees and expenses, because it isn’t profitable to invest you in low-cost index funds (which aren’t too exciting – even though the index funds better serve your interests).

In fact, the more exciting and exotic your investments are, the more they’ll cost. Oh yeah, the cost – including their profit – comes out of your profit! Who’s getting rich? The Wall Street types that run these companies.

Do yourself and your wallet a favor. Use a fee-only financial planner. That’s the only way to be sure that the planner has your best interests in mind. You have to pay the planner and yes, that planner should be making a profit for their work; the difference is that they aren’t selling anything so they can concentrate on what you need. The fee-only financial planner should take a look at your over-all financial situation and develop a plan to be sure that you’re on track to meet your goals.

You can find a fee-only financial planner in your area through www.garrettplanningnetwork.com . The Garrett Planning Network has over 300 financial planners across the nation that work on an hourly or project based fee.

First things first. Your Social Security strategy should not be: depending on it for your sole source of retirement income. With that out of the way, there are one or more choices to be made about it.

If you are under your full retirement age (FRA), but 62 or older, you can begin taking Social Security. However, this should be a last resort option for you. If you are in poor health or unemployed and have no job prospects, if you have no savings to live on until you reach your FRA and you have no relatives that can help you, then taking it is probably your best option. If you do have an option and can begin Social Security payments later, it is generally in your best interest to do it.

The problems with drawing Social Security retirement benefits before your FRA are twofold. The first is being penalized if you are still working if your income exceeds a (very low) threshold amount. That amount is $14,160 for 2010. The penalty works by subtracting $1 of your benefit by every $2 you make over the $14,160 threshold amount. Secondly, you will receive a lower per month benefit than you would have received had you waited longer to begin. This can make a substantial difference in total benefits received if you survive many years in retirement.

Depending on your situation, a few strategies you should consider to increase your monthly Social Security benefits are:

• Working at least part time and using savings to supplement your income. This could be an effective way of delaying the start of your Social Security retirement benefits by a few years.
• If you’ve reached your FRA, you can choose to take your spousal benefit (1/2 of what their benefit amount is – this does not reduce the spouse’s benefit) until you reach age 70. By doing this, you will accrue Delayed Retirement Credits. At age 70 you can begin drawing your increased benefits based on your work record. This makes sense provided that your income while working was high enough to provide a good boost to your income.
• If your spouse (or ex-spouse that you were married to for 10 years or longer – provided that you never remarried) has higher Social Security benefits than you and he or she has applied for their own benefits, you can begin taking them at age 62, (although at a reduced percentage). Then apply for your own benefits at somepoint between your FRA and age 70. If your spousal benefit would be lower than the benefit based on your own work record, this will not work. The Social Security Administration will automatically give you the benefit that is higher.
• Work full time longer and begin taking Social Security payments when you retire. Try to hold out for age 70 for maximum benefits. Can’t hold out until you turn 70? No worries, you accrue additional benefits by every month that you delay receiving Social Security. Do what you can.

All of us have circumstance that make our situation unique. Check with a fee-only financial planner if you need to develop your strategy. I can be reached by email at: William@DuncanFinancialPlanning.com . Another excellent resource is the Social Security Administration website: http://www.socialsecurity.gov/ 

Remember to sign up for Medicare at age 65 if you aren’t retired, but check with your employer’s benefit office before doing so to avoid any unintended consequences.

Drum roll please: the answer is all you can! The real answer is: it depends.

If you’ve been saving steadily over the decades, keep up the good work and check with a financial planner if you have any questions about whether you’re on track or not.

If you’re 40ish and just starting to save, the first answer applies to you. To give you a rule of thumb (take it for what it’s worth), six times your gross income is low, but if you’re out of debt and can count on social security, you should be fine. Not rolling in the dough, but OK. The good news is that by investing the money in  a more aggressive investment (but only up to the amount of risk that you can tolerate), the investment returns should do a decent portion of the work for you. Instead of socking it away in the money market fund, think about a moderate allocation fund in your retirement account.

If you’re pushing 50 and you still haven’t started. Yikes! Now that we got that over with, forget what you should have done, and start saving all you can. Start immediately in a Roth or traditional IRA if you can’t enroll in a company sponsored plan right now. You should also be planning a way to get out of debt before you retire. You should pay off cars, credit cards, loans, and mortgages. This may mean downsizing your entire lifestyle. However, this beats the alternative: cat food as an entree for your retirement meals.

Does this scare you a little? It should. I not trying to be mean. I’m trying to impress upon you how important it is to get started.

You do need a plan and you need to know what your alternatives are. Depending on how close to retirement you are, you might need to plan on working full-time longer. This helps for two reasons. First, you have more time to save and get rid of any debt you have. Even a few years extra can make a big impact on your savings. Second, this means you can put off starting Social Security. Wait longer to start it and you’ll get larger monthly checks. Between the extra savings and the larger Social Security payment, you will have a good boost in income.

When it comes time to retire and you have a smaller nest egg than you’d like, you should consult with a fee-only financial planner. He or she can help you develop a plan to get the most mileage with what you have to work with. One possibility to consider is an annuity for part of your savings. This will ensure that you don’t run out of money. The rest of your portfolio should be invested in order to keep pace with inflation and to have money available for large, unexpected expenditures. Otherwise, if you annuitize all of your savings, you may end up unable to meet those large cash needs.

These are just a few things to think about. Not the saving – don’t think about this one – do it! Meanwhile, talk to your personal financial planner about the specifics of your circumstances in order to develop the plan that is right for you. 

If you’re in the Las Vegas area and need to see a financial planner consider me: William Duncan of Duncan Financial Planning, LLC. I work by the hour and do not sell any products. That keeps the focus on your best interests. Contact me for a confidential and complimentary get aquainted meeting. 702-492-4926 or email William@DuncanFinancialPlanning.com