July 30, 2014

One Size Does Not Fit All!

I love Halloween. Sure, it’s partially because of the Snickers and the Whoppers, and definitely because of the Reese’s, but it’s also because I love dressing up. Ever since I was old enough to trick-or-treat with my trusty, plastic jack-o-lantern in hand, I’ve always enjoyed pretending I’m someone or something I’m not one night a year. You can only imagine my disappointment when I tried on my “one size fits all” Batman outfit a couple of hours before it got dark on an All Hallows’ Eve only to find that one size did not fit Tom!

Sort of like a Batman costume that might look super cool on one person, but look like some sort of oversized armadillo costume on another, one investment strategy does not fit all. One investment strategy may not even fit one individual with multiple accounts!

I get to work with clients of all ages with all sorts of needs from and expectations of their investment portfolios. I get to work with clients who are frighteningly conservative with their investments, and I get to work with clients who are frighteningly willing to roll the investment dice. One of my jobs as a financial planner is to help someone have enough prudently diversified investment assets to sustain their desired standard of living, and I can tell you unequivocally that one size does not fit all! Your age and stage in life can somewhat dictate an appropriate investment strategy that might fit most, but it takes an understanding of your entire financial position, tax situation, tolerance for market volatility, and life goals to make an investment strategy a custom fit.

Suppose you have a taxable brokerage account and a 401(k). Let's say you’re going to need a car in the next year or two, and your taxable brokerage account is going to need to supply the funds. Do you think your taxable brokerage account, which you are going to be taking a significant withdrawal from in the short term, and your 401(k), which you are not going to need to touch for many years, should be invested in the same manner? Maybe, but probably not. You should probably have a little more cash or bonds in your taxable account than you do in your 401(k), so that you can buy that car even if there is a stock market downturn, but you should probably also have a few more stocks in your 401(k), so that you can have a real shot at growing and increasing your 401(k) balance in the long run.

If you’re in one of the higher tax brackets, you might want municipal bonds for your taxable brokerage account. These bonds are tax-free for federal income tax purposes, so even though they pay a slightly lower yield, they may offer a higher net (after-tax) yield. That being said, there is rarely any reason you would want municipal bonds in a retirement account such as a 401(k) or IRA because you don’t have to worry about income taxes until you actually take withdrawals from them. If you don’t have to worry about income generated inside a 401(k) or IRA, you might as well go with a normal, taxable bond that will pay a slightly higher yield than municipal bonds. Just keep in mind that one type of bond might not be optimal for your different types of investment accounts.

What if you find yourself watching the markets too closely and checking your portfolios every day? You may still be making money, but you’re losing sleep. It might not be the ideal investment strategy, but finding a strategy that is a little less volatile and a little more conservative might be the antidote if it helps you sleep at night. Of course there are also people who have set enough prudently diversified investment assets aside to support their lifestyle and really enjoy the idea of trying to “play the stock market.” Setting aside a little extra cash in a “sandbox account” to play with can be just what the doctor ordered for those people. They can give their speculative and undiversified strategy a go without having to worry about sinking their overall financial position.

There are also a lot of age-based or retirement date-based investment strategies out there, and they’re usually pretty good, but they are kind of one size fits all. Maybe you’re “normal” and one of these strategies fits just fine, but you may want to look at it closely and try it on before it gets too late, unlike me and the Batman costume.

I can’t sew a lick. I almost bled to death in Home Economics sewing a pillow, so unfortunately, I can’t help you with a costume. However, I can help with investment strategy and allocations, and make sure they're a good fit.


July 24, 2014

How to Plan an Affordable Trip

If you know me personally, you probably know that I love to travel. Travelling is awesome. You get to experience historical sites, visit beautiful and exotic places, and eat a lot of delicious food. Well, like most of you out there, I’m not lighting my proverbial cigars with $100 bills, so when I travel, my budget has to be within reason. Luckily, my wife shares my love of visiting new places and doing new things, so we save specifically for trips and spend less in some other areas of our lives. Even though this extra saving allows us to spend more on vacations, a lot of our travelling escapades are also the result of careful planning and a few tricks of the trip-planning trade. With this in mind, I thought I’d share a few tips on how you can plan an affordable trip.
  • Plan and book your trip really early. That may sound crazy to some of you, but when it comes to getting a good deal on a trip, I really believe the early bird gets the worm. You can sometimes get sweet deals and complimentary upgrades, but if you make your plans early you can also get the aisle seats on airplanes, the window seats at restaurants, and more central seats for shows and concerts. Aisle seats, window seats, and more central seats don’t usually cost that much extra, if at all, but they can certainly make a trip that much better of an experience. Some of you will probably counter that you can get good deals at the last minute, and you’re absolutely right, but last-minute deals aren’t always available for what you want or need. Personally, I don’t want that last-minute stress when I’m trying to enjoy a glorious trip or vacation.
  • Don’t make things more expensive than they have to be. Tote your own bags to the room (if you don’t, keep it classy and tip the bellhop), don’t buy the family picture at every landmark you visit, and go with the full-sized rental car instead of the mid-sized SUV. Little things like that can save a little money and not reduce the overall quality of the trip.
  • You don’t always have to have a drink. Alcoholic beverages can certainly be a fun treat, but they aren’t always required. Have a few more waters and a couple fewer drinks, and you’ll have a few more bucks and maybe even a few more memories.
  • Travel light. Oh my goodness! Nothing irritates me more than baggage fees, so I do everything in my power to avoid them. Pack just carry-on luggage if you can, but if you need to check a bag, make sure it fits the weight requirements so you don’t get charged even more! If you’re travelling on multiple airlines or internationally, consider going with the airline(s) with friendlier (and more economical) bag policies.
  • Be careful of tourist traps. Some tourist traps, such as shops or restaurants, are a great part of the experience, but don’t fall into the costliest of tourist traps, such as a gas station at the Grand Canyon or a camera equipment shop at the top of the Eiffel Tower. Think ahead and gather what you need before you travel.
  • Look for coupon codes. I know they’re a nuisance to look up and they work a lot less often than I’d like, but a few minutes on Google can save you some real money. In the last few years I’ve found and used promotional codes intended for the guests of a hotel that was hosting a video game convention, for being a return customer, and for being a CPA. If you’re a member of a group such as AARP, have served or are serving in the military, or are an active or retired government employee, there are lots of promotional codes out there for you! It doesn’t hurt to look!
  • Consider currency implications. If you want to travel internationally and are trying to decide where to go, look at the currency exchange rates and find somewhere favorable. Not only will doing this make you look smart now, but it could also make you look smart when you arrive somewhere and trade in a few Greenbacks for a lot of local currency.
  • Look at websites like TripAdvisor.com. I don’t often specifically “plug” things, but Trip Advisor is my homeboy. It’s the best and most accurate source I’ve found for vetting hotels, restaurants, and landmarks. Look for options with lots of stars and not so many dollar signs. Look for a reasonable number of reviews and make sure the reviews are recent, too. I used to be skeptical, but now I’m a believer. You may think you want the hotel restaurant now, but after looking at a site like Trip Advisor, you may find that hidden jewel of a place that costs a lot less, has better food, is a lot more fun, and is within walking distance.
  • Go to National Parks. If you want to feel small, you want to be awed, and you want to experience natural beauty, go to national parks. They usually cost close to nothing to drive in, and visiting them can be a really good and enjoyable way to chew up a lot of time you could be using seeing less amazing things that cost a lot more!
These are a few of my tips. What are some tricks of the trade you other travel enthusiasts out there utilize to see the world without taking out a second mortgage?

July 15, 2014

How Famous People Lose Their Money

Credit: photostock
One of the saddest lessons I’ve learned during my time in the wealth management/financial advice business is that no amount of money or income can make someone immune from overspending. If you don’t live within your means, you can blow it; if you don’t properly diversify your assets, they can vanish; and if you do something that’s just plain stupid, you can make a lot of dollar signs go bye-bye, too. When I started writing this post I was going to give you some specific examples of how some famous people lost their fortunes, but the more I researched, the sadder I got. I just couldn’t believe what I was discovering. So, I’ve decided I’ll give you the examples, but I’ll remove the celebrities’ names. This will protect the identities of the personally innocent, but financially guilty. After all, they don’t need any more pain; they’ve already lost most of their money.
  • Can you believe that an actor who has been in films grossing more than $4 billion has been reduced to having to take almost any role thrown at him because he lost tons of money on highly speculative investments and wasn’t paying his share in taxes? Maybe so, but he also bought a castle, a dinosaur skull, 22 cars, 47 pieces of art, and a bunch of real estate. Are you kidding me?
  • Can you believe that a pretty famous golfer nearly lost it all as a result of gambling away $60,000,000? Sorry, but the zeroes were for effect!
  • Can you believe an actress walked away from a movie she had agreed to be in knowing it would cost her $9 million not to honor her previous commitment? Oh, and by the way, she probably could have written a check for the $9 million if she hadn’t recently purchased part of an actual town!
  • Can you believe a boxer could throw away $250 million through a bunch of divorces and alimony and child support payments? Of course, there was also a 109-room house…
  • Can you believe a really successful musician would buy a $30 million mansion? Actually, I can. What I can’t believe is that he paid 200 people to be part of his “entourage,” and it cost him $500,000 per month! How could anyone maintain that sort of lifestyle? Better yet, why wasn’t I invited to be part of his entourage?
  • Can you believe a world champion (and likely hall of fame) pitcher would invest almost everything he earned in his entire career in one, single, solitary investment? Guess what? It didn’t work out! And now he’s too old to pitch…
  • Finally, can you believe an actor who has made millions and millions of dollars since 1999 thought it would be okay not to file a tax return reporting his income until 2006? Did he think what happened in 1999-2005 would go away? A lot of back taxes (with penalties and interest) and a little jail time just rocked his oblivious world!

Like I said earlier, I started this post intending for it to be funny, but the stories aren’t funny – they’re sad. I can’t help but think of what I could have done for them if they had sought some genuine, unbiased advice. I can’t help but think about what they could have done for themselves if they’d just lived within their ample means, prudently diversified at least a portion of their assets, and avoided doing things that just aren’t smart. They had it, and they threw it away. Grrrrrrr.

July 10, 2014

A Traditional 401(k) vs. A Roth 401(k)

Credit: Stuart Miles
Another question that came up a few times from readers submitting questions for The Lightning Round was whether I would recommend a Traditional 401(k) or a Roth 401(k). This is actually a very difficult question to answer because it depends on the future tax rates of the individual asking the question. I tried to write an answer (I really did), but I also know that there are times when writing less is worth more. I think this is one of those times. Let’s look at an example…

Suppose Tom has two different 401(k) contribution options. With option one, he can contribute to a Traditional 401(k) plan where pre-tax income is deducted from his paycheck and placed in a tax-deferred account. Tom will have to pay taxes when he takes withdrawals from the account in retirement. With option two, he can contribute to a Roth 401(k) plan where after-tax income is deducted from his paycheck and placed in a retirement account. In this case, Tom will not have to pay any additional taxes when he takes withdrawals in retirement. Suppose Tom’s tax rate is 25% as he contributes and will remain 25% in the future when he takes withdrawals in retirement. Suppose Tom contributed $5,000 per year from his paycheck. Suppose Tom’s investments return a steady 5% per year.

     What would happen if Tom went with a Traditional 401(k)?

     What would happen if Tom went with a Roth 401(k)?

Are you surprised to see $21,239.15 as the answer to both scenarios? Don’t be! In the Traditional 401(k) scenario, Tom is deferring paying taxes now, so it’s only fair that he pays taxes on his contributions and earnings in the future, right? However, in the Roth 401(k) scenario, Tom is paying the piper (aka the IRS) up front, so why should he be taxed any more on his contributions or earnings years from now?

Great. I’ve mathematically proven to you that it might not make a difference whether you decide to go with a Traditional 401(k) or a Roth 401(k). How does that help you? I hope it helps you focus on the fact that saving for retirement is what really matters, not the Traditional vs. Roth decision.
If you’re expecting to have higher income in retirement than you do now (from things such as Social Security, a pension, or a large inheritance), I’d normally recommend you go with a Roth 401(k). If your income (and your tax rate) will be higher in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Roth 401(k) will likely be in your favor.

If, like most people, you’re expecting to have a lower income in retirement once your big salary goes away, I’d normally recommend you go with a Traditional 401(k). Save on taxes now while you’re at a higher tax rate and gladly pay taxes on your retirement withdrawals at a lower tax rate when your income is lower. If your tax rate is lower in retirement than it is now, there may be a mathematical difference between choosing a Traditional 401(k) and a Roth 401(k), and a Traditional 401(k) will likely be in your favor.

That leaves one last question. What if tax rates or tax law change between now and when you retire and take withdrawals? Neither of us knows the implications of such a change until it is implemented, but based on our growing federal deficit, I’d guess that if tax rates are going to move, they will be going up. If you’re still on the fence choosing between a Traditional 401(k) and a Roth 401(k), that logic might be a small nod to the Roth 401(k).

In closing, saving is what matters the most – not whether it’s a Traditional 401(k) or a Roth 401(k). If you expect higher taxes in retirement, go with a Roth 401(k). If you expect lower taxes in retirement, go with a Traditional 401(k). If you’re still unclear or nervous about tax rates in the future, hedge your bets - contribute half to a Traditional 401(k) and half to a Roth 401(k). You’ll be half right!


July 01, 2014

The Lightning Round: Take 3

Credit: FreeDigitalPhotos.net

Thanks to all of you for the many questions I received. Some of you even submitted more than one! You asked the questions, and now it’s time for me to share my answers to five of them...

1. I recently sold my house and have the profits sitting in a money market account. I'm relatively young,  have no more debt to pay off, already contribute to my work retirement account, have my rainy day fund, and would still like to put this profit toward my future as well. Is having this money sitting in a money market account the best “bang for my buck" or is there a better way to invest it?
- Anonymous                   

First of all, congratulations on selling your house for a profit! Real estate is not always a profitable investment, but it is certainly nice when it works out. Let me get this straight - you’re debt-free, you’re contributing to your 401(k), and you have set aside enough cash to form an adequate rainy day fund? Well done! You are certainly on a path towards financial success!

There are a lot of things you could do with the excess cash you have in your money market account that would provide you a bigger “bang for your buck.” Unfortunately, given current interest rates, the difference between burying your excess cash in your backyard and leaving it in your money market account earning interest is just not that much. I don’t know the ins and outs of your financial situation, but for someone in your shoes I’d usually suggest you redeploy some of that excess cash and put it to work for you. I’d suggest you consider increasing contributions to your 401(k) plan, opening and contributing to a Roth IRA, or opening and funding a diversified brokerage account. For simplicity’s sake, I’d probably lean towards increasing your 401(k) contributions. For 2014, you can contribute up to $17,500 per year (and if you’re age 50 or older, you can contribute up to $23,000 per year), and any additional contributions you make could be a nice boost to your long-term retirement savings. If you’re contributing to a Traditional 401(k) (not a Roth 401(k)), these additional contributions could also lower your 2014 tax bill, which makes increasing your contribution amount kind of a win-win. Two other things to consider, though: 1) Your 401(k) investment returns could provide you a much bigger “bang for your buck” than you would get in a cash account, but you could also see the value of your money go down in the short-term or during market downturns. 2) My guess is that your money market account balance will go down over time to help you sustain your current lifestyle if you decide to contribute more to your 401(k) going forward because your take-home pay will decrease to facilitate that change. I say that because I don’t want you to be surprised or concerned. By contributing more to your 401(k) going forward, you are essentially slowly and surely reducing your cash on hand and putting your excess cash to work. Just remember, if your money market account gets lower than you would like, you can adjust your 401(k) contributions back down to a level that will allow you to normally sustain your desired cash balance.  

Please let me know if you would like to discuss further.

2. Can you explain, in layman's terms, what supplemental income needs to be reported come tax season and how to do so? For example, I sell Thirty-One on the side and it's not a lot of money, so I'm curious if I even need to report it, and if so, how?
- Amanda                         

When it comes to miscellaneous supplemental income tax law implications in layman’s terms you’re asking a lot (just kidding), but I’m happy to try to translate. Your question is a great one and addresses a common misconception held by many taxpayers. Per the IRS, taxpayers “must also report other income such as: cash earned from side jobs, barter exchange for goods and services, awards, prizes, contest winning, and gambling proceeds…. It is a common misconception that if a taxpayer does not receive a form 1099-MISC or if the income is under $600 per payer, the income is not taxable. There is no minimum amount that a taxpayer may exclude from gross income.”

If you have income outside of basic things like your wages, salary, interest, and dividends, it really is best to talk with your CPA, and if you don’t have one, find one. That’s because supplemental income is tricky. I think you’ll agree that based on the IRS wording above, it’s pretty clear that supplemental income must be reported, but what is not always clear and most of the time cannot be put in layman’s terms is where to actually report the income. In some cases it might belong on Form 1040 itself, in some cases it might belong on Schedule C, in some cases in might belong on Schedule E, and in some cases, it might also need a Schedule SE (Self-Employment Tax) filled out, too. There could also be an opportunity to reduce the amount of your supplemental income you will be taxed on by specifically listing any expenses (such as travel expenses or postage expenses) you personally incurred by generating that supplemental income, but of course these expenses might belong on Schedule A, but then again, they could belong on Schedule C or Schedule E depending on how you actually generated the supplemental income. I’m about to answer your question, but for non-Thirty-One supplemental income earners I wanted to make two points: 1) See why the tax law really needs to be reformed and simplified? 2) If you have supplemental income, you probably need more than do-it-yourself tax software to make sure you get it right and report the supplemental income in the most tax-efficient (and legal) way possible.

So, I dug and dug for Thirty-One-specific tax guidance and was able to find buried on page 16 of their Consultant Guidebook some surprisingly helpful advice:

“Yes, you’re required to report your commissions and other earnings from your Thirty-One business as income in your tax filings each year. Your other earnings include your Overrides, free products, hostess and other business credits, etc. For tax purposes, you are “self-employed” and it’s important that you keep complete and accurate records of your business income and expenses.
There are some tax benefits for self-employed individuals that may allow you to deduct certain business expenses. We strongly recommend that you talk with your own tax advisor to learn how the tax laws apply to your Thirty-One business.
As a Consultant, you’re a self-employed, independent contractor of Thirty-One. You’re not an employee of Thirty-One and we won’t issue you a Form W-2.
The U.S. Internal Revenue Service (“IRS”) requires us to issue a Form 1099 to every Consultant who earns $600 or more during the previous calendar year. By January 31st of each year, we’ll issue you a Form 1099 for the previous calendar year. Your Form 1099 will include all of your earnings from your Thirty-One business, including your commissions and the other earnings described above.
You’ll have to report the income from your Thirty-One business on Schedule C of your federal income tax return. Because you are self-employed, you may be able to deduct certain business expenses like the use of your vehicle or home office. You can discuss this with your tax advisor and/or contact the IRS for more information at www.irs.gov or (800) 829-1040.
Also, if your state and/or city collect income tax, you may need to file income tax forms with them too.”

I hope this is what you were looking for. To recap in layman’s terms: you have to report the income, you are deemed to be self-employed, you are deemed to be an independent contractor, and Thirty-One will send you a 1099 by 1/31/15 for Tax Year 2014 to get you started. As always, I’m happy to help you specifically address your tax situation offline, but I really think you’re going to want the services of a paid tax preparer as well!

3. For the life of me, I do not understand the ad valorem tax. I've read a few government documents on it, but none of them are explicitly clear. Can you please explain for us new-to-Georgia folks? 
- Amanda                         

Sure, I’ll be happy to. Don’t you love it when people explain things in a way that’s so complicated no one can understand it?

On March 1, 2013, Georgia changed the way it taxes motor vehicles. For people who have cars that were purchased before March 1, 2013, nothing changed: you renew your tag right before your birthday and you get to pay an annual ad valorem tax (sometimes nicknamed the “birthday tax”) as part of that process. (An ad valorem tax is a tax based on value.) For people who have bought cars (or will buy cars) since March 1, 2013, the rules have changed: you no longer have to worry about paying an annual ad valorem tax when you renew your tag, but you do have to pay a title ad valorem tax all at once when you buy a new motor vehicle. The title ad valorem tax is calculated based on the fair market value of your new vehicle (less any trade-in value you may have gotten from your old car and less any discounts or rebates you may have received from the dealer) times 6.75%. I know the new title ad valorem tax has the words “ad valorem” in it just like the old tax, but try to ignore that and just think of the new tax as a sales tax of sorts. The new tax is essentially tax pain all at once as opposed to slow tax pain by a lash every time you have a birthday.

A couple of additional “nuggets:”
     - The title ad valorem tax also applies to purchases of used vehicles.
     - If you’re a Georgia resident and you buy your car out of state, you’ll still get to pay the Georgia title ad valorem tax even if you've already paid another state's tax.
     - If you transfer the title of a vehicle within your family, you will trigger a reduced title ad valorem tax.
     - The title ad valorem tax rate is scheduled to increase to 7% in 2015.

I hope that’s clear as mud. If it’s not, please let me know. Here are two other links that might help you: 1) a Georgia Department of Revenue Title Ad Valorem Tax Calculator and 2) a FAQs page about the new rules.

4. I have an opportunity to move to a state that I would prefer not to live in for a really good job opportunity. What should I be thinking about financially as I weigh the pros and cons? 
- Anonymous                    

Nice question, and one I’ve never been asked. Whatever you decide, congratulations on earning the opportunity to take the job!

If the job opportunity was something you were really excited about in a state you were really excited about, I don’t think I’d try to be a wet blanket on your job opportunity as long as it was financially lucrative. I believe there are more currencies in life than just money, such as time, happiness, and fulfillment, so I wouldn’t want financial implications to unnecessarily sway your decision. That being said, since the situation you are describing is "only" a really good job opportunity in a state that you are less than excited about, I can definitely see digging into the financial implications a little bit more.

I’d advise you to consider your new state tax rate versus your current state tax rate. I’d look into what your new property tax rates would be, and maybe even more importantly, how much a suitable home would cost you in your new state versus your current state. I’d look into potential cost of living differences in terms of utilities, transportation, and groceries. Once you factor in the cost of the physical move with these cost adjustments, versus any change you would experience if you took the job in terms of compensation and benefits (don’t forget benefits like 401(k) matching, paid time off, health insurance, etc.), I think you may be better able to gauge whether taking the job would be financially good for you or not.

If you’d like more specific assistance, I’d be happy to try to help you. I have also come across this nifty, little tool developed by the National Center for Policy Analysis that attempts to help you determine how much you will gain or lose by moving to another state, and I’d suggest you check it out. I’m not trying to dismiss your question in any way, but unless it really comes down to financially making it or financial ruin (which you should be able to figure out pretty quickly), I’d spend more energy on considering how your potential move could affect your family and friends, what amenities you might gain or lose, how stable your potential new employer is, and what your growth potential in your new role could be.

5. Do you recommend taxable bonds or municipal bonds for your clients?

That’s a very good question and is a question that all investors should ask their financial advisors or brokers and CPAs. (Actually, financial advisors or brokers should be discussing this with their clients and their clients’ CPAs, but that’s a different story.)

As I respond to so many “general” questions, I must also respond to this one: it depends. Bond investors are typically looking for investments with high yields and less volatility than the stock market. They basically have two general bond types to choose from: taxable bonds and municipal bonds. Taxable bonds are typically issued by corporations and offer a higher interest rate, but an investor will have to pay federal and state taxes on their gains. Municipal bonds are typically issued by state and local governments and offer a lower interest rate, but an investor will not have to pay federal taxes on their gains. If the municipal bond is from the state or a locality in the state that the investor resides in, the investor may very well not have to pay any state taxes on their gains either!

So, in summary, I recommend both taxable bonds and municipal bonds to the clients I work with, and in some cases, a combination. If someone is in a 25% tax bracket, they’d much rather have a 5% municipal bond than a 6% taxable bond that would only yield 4.5% after taxes. If someone is in a 10% tax bracket, they’d much rather have a 6% taxable bond that would yield 5.4% after taxes than a 5% municipal bond. My recommendations are client-specific, and under the right circumstances, could even be bond-specific. The one other general comment I can throw your way is that in light of municipal bonds usually having lower interest rates than taxable bonds, municipal bonds rarely ever make sense inside a tax-deferred investment account such as a 401(k) or IRA. A 401(k) or IRA is already pretty much exempt from income taxes until you take a withdrawal or distribution, so the potential after-tax “savings” of municipal bonds would really be of little to no value in these types of accounts.

I hope that helps!

Thanks again for all of the questions. The Lightning Round is a lot of fun for me, but please always feel free to reach out to me with your financial questions year round!