Your Money Matters More

Financial Rocket Science

 

 

Personal wealth management is not rocket science. However, it does require those of us who are professionals to use the same focus.  A rocket scientist sets the goal of reaching a destination and all of her efforts are aligned to make it happen. She doesn’t do it in a day, but overtime completes the mission.  When the unexpected occurs she doesn’t scrap the goal, she adjusts.

As a Certified Financial Planner it is my job to help you refine your goals. The market has created the opportunity for growth similar to the way a fire clears the forest for new growth.  If you continue investing for the long term you can’t lose sight of that goal.  Through the use of specific financial tools we can increase the efficiency of achieving those goals.

One specific tool is dollar cost averaging.  While prices are fluctuating we invest uniformly. Over time making the same investment, levels any crests or valleys that the long-term investor encounters. Whether it be periodically investing in an IRA or the payroll withholding in a 401k, dollar cost averaging provides a more consistent return as the market rebounds.

Even professionals have a difficulty timing the market.  Currently, we are in a situation that has no precedent; there is no foreshadowing.  Trying to guess what is about to happen will only derail the long term growth of your wealth. A CFP, with any experience, will keep you on track.

The role of a financial planner is to help you prioritize your goals for the optimal outcome.  Like any good rocket scientist knows, you must have a good return.

Charles T Shearman, CFP

Prospero Financial Planning

www.ProsperoFP.com

 

 

 

Retirement is Personal

Retirement is personal:  it can be an elusive goal or it can be a well -planned gift to yourself after a long career.  There are key milestones in this process. To avoid tax penalty waiting until you reach the age of fifty-nine and a half to take distributions from your qualified plan maximize your benefit. Contribute the maximum matched dollar value—the more the better—and keep it invested.  When you do reach fifty-nine and a half you have more options. Remember though, fifty-mine and a half is a number; retirement is a goal.

 

To avoid any penalty from a qualified plan your birthdays count. Once you are fifty-nine and a half, there is no longer a penalty to remove your money, but your money can still work for you if you leave it.  The penalty is considerable: it not only becomes taxable income, but there is an additional ten percent tax on the amount of the withdrawal. Conversely, if your money is not in a qualified plan these restrictions do not apply…you will have already paid tax each year as it accrued but you will have less to invest and you will have less accumulating tax defered. As always, talk to a Certified Financial Planner (CFP) before making any move.

Putting away the maximum dollar amount matched by your employer makes you less dependent on the rate of return as your investment accumulates funds. If you can add other moneys to this amount they too can grow tax deferred. The tax deferral allows you to accumulate money faster. For example if your 401(k) is being invested at the rate of $3,000 a year, you are not only saving the whole $3,000, but you are also compounding interest on that investment tax defered. If you are able to leave it until you are fifty-nine and a half, you will not pay tax until it is distributed.

Waiting until you are at the optimal age, you can take the entire amount or you can take any amount you need to live on and let the balance ride.  Determine with your CFP what supports your lifestyle. You can control your taxable income by controlling your distributions. The ability to combine your defined contribution plans gives you better economy of scale when it comes to selecting your investments, also.  

Although fifth-nine and a half is the point where penalties no longer occur, retiring later can have even greater benefit.  Your CFP can walk you through these options based on your personal financial standing. Begin planning as soon as possible to allow for the optimal benefit when using a defined contribution plan.  When the time is right—enjoy! 

Children are Expensive

 Children are expensive. That is a given: but the cost of higher education is growing at an unprecedented rate. A 529 Plan, a type of college savings fund, is a tax free way to accumulate money for college expenses. After the birth of a child, begin to put money away for college. The owner of the account can contribute for a named beneficiary. If for some reason the beneficiary chooses not to use it the owner can transfer it later to a different student. 

There are a wide selection of plans available. Each State has its own plan with some offering more than one, and an investor can choose from any of these. Each state provides its own residents additional incentives, but these tax incentives should be subordinate to the underlying returns of the investments of the plan. Always seek the advice of a Certified Financial Planner (CFP) when selecting a plan. 

Recent graduates have left college with a crushing debt load. An alternative to this is paying out of pocket. Making wise investments early allows compounding of returns to work for you. This is just one of the tools that your CFP has in their arsenal.  

Financial Rules of Thumb

I have relied on general rules of thumb for the financial well being of clients.

Financial security results by adhering to basic principles:

Controlling Debt
    o Not exceeding 20% of your net worth (excluding the mortgage and net equity in the home)

Housing Costs
    o should not exceed 28% of your net income
    o includes all the expenses related to your house

Emergency Fund
    o Represents three to six months living expenses
    o Should be liquid and not volatile
This would include your money markets, short-term bond funds, and other cash equivalents.

Retirement Funding
    o Contribute 6% on a pretax basis to an IRA or a 401(k)
    o Or 8% funded on an after tax basis

Following these four steps should result in the accumulation of enough wealth to retire comfortably

If you would like more ideas contact.:

Charles T Shearman, CFP

Prospero Financial Planning
23 S 8th Street, Suite 3400
Noblesville, IN 46060
Work (317) 774-5136

www.prosperofp.com

 

Portfolio Construction

When developing a portfolio for the average investor the key points you need to consider are: time horizon, taxability, liquidity, risk and diversification. 

 

• The first thing you have to figure out is what time frame you are going to need the money.  The longer time you have before you need the money the more aggressive you can be.  Due to the time you have to ride out cycles of the stock market.  Saving for retirement is different than saving for the down payment for the purchase of a house.  You can invest for the long term if you have a number of yours until you need the funds.  By increasing the amounts of risk you are taking you can statistically increase your returns.

 

• The second thing to take into account is how the money is going to be taxed.  Investments that are in a tax-free environment can stand more ordinary income. With taxable income you can write-off losses that you incur.  Also capital gains are preferable to ordinary income in a taxable environment.

 

• The next area that you need to worry about is the amount of liquidity available with your portfolio.  The longer you have to invest the more able you are to use illiquid assets like real estate.  Real estate functions on a longer cycle than stocks.

 

• You can’t expect return without taking a little risk.  Risk translates volatility. The level of risk that you take is what you personally can tolerate.  Risk is measured in different ways including standard deviation and/or beta.  They are measured relative to the standard deviation and/or beta respectively of the market as a whole.

 

• Last but not least to be sure that your portfolio is diversified by having enough holding, by industry and by type of investment.  Income oriented investments tend to have different characteristics than appreciation driven investments.  International funds add an extra level of risk in the fact that there is an exchange rate in play in addition to the underlying stock making then inherently more volatile. 

You needn’t go it alone; contact a financial planning professional.

Gain Distributions

When people prepare their taxes they are often surprised at the amount of gain that is on their 1099 from the mutual funds that they own.  I am often asked, "How can my mutual fund distribute gains in a down market?" 

The answer is evident if you look through the mutual fund to the underlying portfolio. The mutual fund portfolio manager will often build up cash heading into downward trending market and may have sold stocks that had accumulated gains over the life of the holding.  As the mutual fund manager attempts to accumulate cash in preparation for the down market these gains may be triggered.  These gains are accumulated over many years consequently the tax has been deferred for this same period.  This is especially the case with value funds that have low turnover ratios.

If you have a net loss in the fund then you can simply sell all of the fund by the end of the year and this negates the gains.  If you still have a net gain in the fund then this strategy does not work.  But you should consider yourself fortunate if you have a gain.

You should look at your mutual fund as a portfolio rather than just one investment. It provides a convenient way to diversify for the individual making smaller investments.  It has economies of scale that you may not get purchasing individual stocks as well as expert management, in most cases.  Mutual funds provide the best managers within their respective specialty. This is why I only use mutual funds.

I can explain this in greater depth just contact me.

Trust Decisions

I am often asked the question, what do I need to consider when daftng a trust. Below I have listed the top 3 items I think are important when creating a trust.

First you need to consider the beneficiaries. What are their ages and their spending habits? Are they a minor or an adult? They will have very different needs and you will have different decisions to make for different situations.  For a minor, you need to provide your spouse or the minor directly with income as well as a way to pay for college.  If some of them have been to college and others have not you need to determine when to make distributions from the trust and how long you keep the money in, and trust.

Next you have to determine how many distributions you make from the trust. I suggest to clients that they make more than one but not more than three. The reasoning behind this is that two gives them a second chance and handling the money.  However if they have not learned their lesson by the time they receive the third distribution they probably are a lost cause.

The final main decision are the trustees. While corporate trustees such as banks provide for a knowledgeable trustee, you don't know who you're going to get when your trust actually comes into existence.   A private trustee, although less expensive, may not know what to do.

These are the main decisions you need to make.   Although there are many more decisions that have to be made.  You should consult with an attorney before drafting any trust documents.

It's the beginning of a new year!

Starting into the new year is the prime time to plan for the future. Basic planning is dependent on three things, cash flow planning, tax planning, and projecting your asset growth based on these two previous categories.

Cash flow planning consists of projecting future revenue streams as well as future expenses. An estimation of your future expenses needs to be as accurate as possible. Things such as capital expenses, buy a new car, or buying a new house needs to be included with the ongoing expenses. It pays to be specific with these items even though you might be off by the year in which they occur.

Tax planning is based on the revenue you project and the deductible expenses that you incur. These items should already be in your cash flow projections and the two projections need to be interactive with each other.

The net worth projection needs to be based on the taxes, cash flow, and pure asset growth. Items such as the net cash flow need to be included in the investment detail of the projection. As well as the purchase of capital assets, the car, the new house, need to be added to the assets already on the books. You may find it advantageous to have the net cash flow to flow in and out of a cash account.

You may seek professional help with this task. A true comprehensive planner is out there you simply need to do your homework. Professionals come in two forms, the fee only planner who charges by the hour and the commission-based planner who collects commissions on the products that he puts in place. Make sure you understand how they are compensated. They should have to disclose this in their presentation.  Above all they should be a Certified Financial Planner (CFP)

Simple IRA

Overview

If you need to have a basic retirement plan, one with limited paperwork maybe a simple IRA is for you. With a simple IRA you have the increased contribution levels with much additional paperwork. With contributions up to $12,000 with a catch-up provision of an additional $2500 for those over 50, these are fairly attractive plans without much in the way of paperwork. Overall they provide for low-cost  operation with increased contribution limits.

Prosess

1. Fill out an IRA application
2. Adopt a prototype
3. Fill out an Employer Agreement
4. Contribute

 

Different Types of Trusts

When establishing your estate plan, trusts can serve as a way to put your intent into the estate plan even after your death. The trust is funded from the estate. In an estate, property passes by ownership first where jointly owned assets are passed to the joint owner, contracts with a named beneficiary are second (i.e. IRAs, Insurance Policies), and lastly only what is left over flows through your will. Many people establish elaborate trusts only to have them unfunded at their death because they have everything titled jointly with their spouse.

Testamentary Trusts 

The most common trust is a Testamentary Trust. This trust is drafted as a part of your will and is funded at the time of your death. This is the next step up from having only a simple will. While this is a perfectly acceptable form of trust, this lacks several of the advantages which Living Trusts provide.

 Living Trusts or Inter-Vivos Trusts

These are the next step in the sophistication of your estate plan. This form of trust can be funded during your lifetime or upon your death. A living trust can be the beneficiary to contractual assets. In addition, the will would divide your assets into two baskets; personal property and invest property.  This means that all of the personal property are disposed of through the will and the remainder are investment assets which are transferred into the trust.

 Irrevocable Insurance Trusts

These are drafted in addition to or in place of the two other trusts. This trust is named the owner and beneficiary of your insurance policies. Since they are irrevocable they are not included in your estate at your death.  A neat trick is to make it the owner of a term policy. That way if you later decide that you don’t want the trust, if you are insurable, then you simply don’t fund the policy and it defaults thus rendering your trust irrelevant.

 Items of Note

With any of these trusts the terms are open to your intent. Regarding distribution, you can distribute income and principle as you see fit.  You will probably want to make the terms of all your trusts similar if not identical. Children with special needs require specific care to be drafted within the trust so as not to disrupt their disability services.

 

This is an oversimplification of the trust law and you should consult your attorney before establishing your estate plan.