Many of these options go unrecognized.

Today’s average student borrower takes out more than $25K in loans. Education debt has reached record levels in America – more than $1 trillion. In the face of those numbers, parents and students are looking for assorted ways to pay for college without incurring big liabilities.¹

In addition to grants, loans, merit-based aid and your student holding down a job, there are other ways to reduce college cost – some little recognized.

First, how expensive will college be? Can you project the total cost of your student’s college education? Assuming five years in school (which is the average for today’s undergrads) and no change in majors along the way, can a financial aid officer give you a ballpark figure?  If not, an online resource such as Alltuition.com may be able to estimate it for you.^1,2

Presumably, you opened a 529 plan or some other form of college savings fund for your student years ago. If those funds aren’t enough, where can you find other resources to meet a projected shortfall?

What about outright gifts of cash? If you or relatives or friends have the money, that is an option. Will you suffer gift tax consequences as a result? No. If the money constituting that completed gift is used directly to pay tuition expenses at an educational institution, that gift is not taxable. It will not cut into your annual gift exclusion amount ($13,000 for 2012) or your lifetime unified credit (currently set at $5.12 million).^3,4

One caveat, however: if you make any kind of tuition payment on behalf of your student, that will be characterized as untaxed income on the FAFSA (Free Application for Federal Student Aid). That could wipe out your student’s chances of getting any need-based financial aid. This is why some families elect to put off tuition gifts until a student’s senior year.⁴

Can you reduce your taxable income to get your student more financial aid? You may be able to do so. If getting federal student aid is your objective, knocking down your taxable income (through moves big and little) might make a big difference.

On the FAFSA, family income matters more than family assets. Retirement account balances, net worth attributable to home values and small businesses matters very little in the overall needs analysis.  However, please keep in mind that private colleges can create alternate needs assessments.. The FAFSA is used to determine the expected family contribution (EFC), which is the combination of funds that the parent(s) and student can make available for a school year. The gap between the EFC and the expected total education costs of the school year represents the level of financial need weighed in determining federal student aid.⁵

So the lower your EFC is, the greater your level of financial need will be – and the greater amount of federal student aid that may be available. This is why many parents and students elect to spend down their combined savings and assets set aside for college during the freshman year. With no assets left for the sophomore year (and by this same logic, subsequent academic years), eligibility for federal student aid is wide open. Of course, you may be also opening a door to potential long-term debt.

There are other ways to alter your tax picture to get your student some financial aid –aid not linked to lingering debt.

Have you heard of “tax scholarships”? No, not scholarships linked to a state tax credit (though those may be worth a look). These are de facto scholarships that you may be able to create for your student with the help of a CPA or financial advisor (and the IRS). If you can find or arrange new tax deductions this year, you can redirect that money toward your student’s college expenses.

What about untraditional scholarships? For example, CollegeNet.com currently offers a “weekly scholarship” running between $3,000-10,000. Collegians themselves decide which applicant deserves the funds. There are other such examples.¹

Can you negotiate tuition? At first instinct, does that seem rude, uncouth? It may prove smart – and it is done. There are such things as tuition discounts (and grant programs) offered to those who negotiate, even those not eligible for need-based aid. If a university really wants your student, you may have some leverage.

Are you willing to go the Juni or College route? Going to a local junior college for the first two years of study toward a bachelor’s degree can save a student and family tuition, housing and travel and auto expenses, and maybe a little anxiety – if your student decides he or she wants to major in oceanography instead of marketing, you haven’t paid $10,000 or $20,000 a year to arrive at that conclusion.

Recognizing the costs of housing, commuting and parking permits, some colleges are offering parts of their curriculum online or in more accessible settings – for example, Virginia Tech offers introductory math courses through computer labs and the University of Minnesota’s new Rochester campus uses part of a local shopping mall to hold classes. While taking classes on a computer or at some obscure satellite campus may not give you the full university experience, it may help to reduce expenses.²

Need help with college planning? Talk with a financial professional well versed in the matter – sooner rather than later.

Citations.

1. www.dailyfinance.com/2012/04/19/paying-for-college-two-websites-offer-outside-of-the-box-ideas/ [4/19/12]
2. www.businessweek.com/printer/articles/70120-student-loans-debt-for-life [9/6/12]
3. www.irs.gov/uac/In-2012,-Many-Tax-Benefits-Increase-Due-to-Inflation-Adjustments [10/20/11]
4. www.education.com/reference/article/pay-college-saving-understand-gift-tax/ [9/6/12]
5. thechoice.blogs.nytimes.com/2011/01/11/fafsaq-and-a/ [1/11/11]

[contemplate1]

Originally posted. September 11, 2012

A few simple steps to help you get started on the right foot.

Planning financially for retirement may feel overwhelming. For some, that feeling is what keeps them from really focusing on and implementing a plan. If you haven’t started planning for your retirement – do yourself a favor and make TODAY the day you begin.

1. The earlier the better.

Time is definitely one of your greatest allies. A person who begins contributing a modest amount to a retirement plan in their early twenties could end up on par with someone who contributes much more aggressively but does not start until their mid-thirties. Even if you have to start small, start now. Whatever amount you can afford to set aside for later, do it – and let it grow.  If you don’t have the luxury of starting young, don’t waste time worrying about it. Start now. You’ll never again be younger than you are today.

2. Be smart about what you’ll need.

Yes, it’s true – the senior discount is alive and well, and the general cost of living may be less for those who have retired. But don’t forget, there are other costs to consider. Your healthcare costs, for example, may be greater in retirement simply because you’re not as healthy as you were in your youth. Additionally, you’ll want to take inflation into account. If you plan your retirement based on the cost of living and income of your 30’s, by the time you hit your retirement years, you may find you greatly underestimated your needs.

3. Be smart about how long you’ll need it.

When Social Security was being developed, in the 1930’s, a male retiring in the United States was really only expected to live about 12 years past his date of retirement.² However, the average life expectancy of a United States citizen has risen fairly steadily throughout the last fifty years.¹ Depending on when you retire, you may need to plan for 20 or more years of income.

4. Take advantage of tax-deferred contributions.

It sounds like a no-brainer, but sometimes people determine how much they can afford to contribute to a retirement account based on their net income, rather than their gross income. You may decide you can only afford $50 less per paycheck, net. But remember that some contributions, like those to your 401(k) for example, may be made with pre-tax dollars. That means you can afford to contribute a bit more from your gross income and still only “miss” $50 from your net income. This is an important consideration.

5. Take advantage of matching contributions.

If your employer offers a 401(k) match – consider scrimping here and there in order to take maximum advantage of it. It’s a very positive domino effect. The more you contribute, the more you earn in matching contributions (up to the maximum allowable amount). Think of it this way – if your employer offers a 50% match, then for every $100 you don’t contribute, you’re missing out on $50 in “free money”. You’re also missing out on the growth potential of that money as well.

6. Do the math.

This might be the most important retirement tip of all. Block off some time to sit down and do some calculations. Consider the different levels of contributions you could make and calculate how far those could take you by the time you reach retirement. Once you see what you COULD achieve, you may be more motivated to increase your contributions.

7. Trim the fat.

Keep careful track of your spending for one month (if you bank online, you may have access to tools that help you do this). After one full month, sit down and take a careful look at what you spent money on. Did it all make sense? Was some of it frivolous? Any regrets? Taking a close look at exactly where your money is going is often the best way to discover areas that need improvement, and ways you could adjust your spending habits. Add up all the money you feel you spent unnecessarily, then add that amount to the contribution math you did previously … how much further might that extra monthly contribution have taken you?

8. Get help.

These retirement tips are intended to help you get started down a path toward, potentially, a more successful retirement. But they’re just that – a starting point. While it’s definitely important to educate yourself and understand your finances, seeking the assistance of a financial professional may be one of the best moves you could make.

Citations.

1. google.com/publicdata?ds=wb-wdi&met=sp_dyn_le00_in&idim=country:USA&dl=en&hl=en&q=life+expectancy [10/29/10]
2. http://www.newretirement.com/Planning101/Retiring_Too_Soon.aspx [10/25/10]

Originally posted. August 13, 2012

What do you do when you’re self-employed or commission-reliant?

When your income stream is uneven, you must deal with some distinct financial issues. Besides cash flow, what do you do about your tax strategy? How should you try to save? If you are self-employed, what about health coverage?

Budgeting. One significant financial detail in your life probably won’t fluctuate – the amount of money that you need to live on per month. A detailed monthly budget is essential. Maybe you need (or want) to pay for 17 expenses in your life per month. In some months, you may be able to easily pay for all 17. In other months, you may be able to pay for only 12. The key is to list them in order of priority, from the crucial to the near-frivolous. List every expense you can think of and rank them in order. Arranging automated bill paying may be useful if you are looking at several fixed monthly debts you will have for the long run.

Managing taxes. Sans withholding, you must be disciplined. If you are self-employed and your income is predictable, you can estimate taxes and arrange quarterly payments to the IRS (take a look at Form 1040-ES, Estimated Tax for Individuals.) For the record, the IRS says you don’t have to make quarterly tax payments until you actually have the corresponding income.¹

Estimating tax becomes much tougher, however, when your income stream is inconsistent or if you have multiple income streams. If you underestimate your quarterly payments, you must pay interest. Schedule AI of Form 2210 (found in IRS Publication 505) can be a great help here – as complex as it appears, it is a solid way to document and calculate estimated quarterly payments when your income fluctuates. (If you are a self-employed fisherman or farmer, special rules apply.)^1,2

Legions of freelancers neglect to set money aside for taxes. It might be wise to set up a savings account dedicated to that purpose, so you don’t have hassles come April.

Managing savings. Saving when your income rises and falls is challenging, but not impossible. After you meet your expenses in a particular month, there may be little or nothing left – but you have to take a little bit of the little and save it, and commit yourself to saving much more in good months.

One radical approach might help you ramp up your savings: austerity. Let’s say you decide not to spend a dime on golf for six months, or eating out. Voila – more money can potentially go into your savings, or into investing.

Another, less radical approach: take $1,000 (or even $500, if the institution permits) and put it into a short-term CD. Or take $50 a month (or your bonus) and put into equity investments. Or put extra funds toward your mortgage. If your arrangement is salary + commissions, you could elect to live off your salary and invest or save your commissions if your salary permits that.

You won’t have an employer-sponsored 401(k) or 403(b) plan at your disposal, but you can invest through traditional and Roth IRAs – and if the annual contribution limits seem low, you could look at creating a SEP, Solo(k) or Keogh plan for yourself.

Arranging health insurance. It isn’t 2014 yet, so like many self-employed Americans you may be faced with paying three or four times the premiums for health insurance than you would as a “captive”. According to Gallup, a record 17.1% of self-employed individuals lacked health insurance in 2011 – not surprising.^3,4

Still, there ways to sustain and/or arrange health coverage. If you are leaving a salaried position to go solo, COBRA can extend coverage for 18 months. About one-quarter of U.S. firms still offer some level of retiree health benefits, and roughly one-sixth extend group health benefits to part-time workers.³

If you have a pre-existing condition, some states have high-risk pool programs and all states have PCIPs (pre-existing condition insurance plans) for which you might be eligible (see statehealthfacts.org for more).³

You might also be able to get coverage through a family coverage option in your spouse’s plan, or via a professional or trade group you have joined. Hiring an employee might allow you to qualify for a small business group plan (talk with an insurance professional to determine your options).³

Do you work for yourself and pay for your health insurance? In 2012, the IRS will let you deduct 100% of the cost of those health insurance premiums from your taxable income (the deduction is not subject to the 7.5% AGI limitation). You do this on the first page of Form 1040. Notably, the IRS defines sole proprietors, partners, members of LLCs and anyone with more than a 2% share in a S-Corp whose underlying personal service activity represents a material income-producing factor as “self-employed”.^3,5

Citations.

1. www.irs.gov/businesses/small/article/0,,id=110413,00.html/ [2/24/12]
2. www.irs.gov/pub/irs-pdf/f2210.pdf [2011]
3. www.forbes.com/sites/kerryhannon/2012/01/04/the-best-ways-to-find-health-insurance-if-you-are-self-employed-in-2012/ [1/4/12]
4. www.hrmorning.com/workers-covered-by-company-health-plans-hits-new-low/ [4/6/12]
5. www.berrydunn.com/resources-detail/heres-a-tip-on-how-to-deduct-your-health-insurance-premiums [1/11/12]

[contemplate1]

Originally posted. July 30, 2012

Little things to keep in mind for life after work.

Decades ago, there was a popular book entitled What They Don’t Teach You at Harvard Business School. Perhaps someday, another book will appear to discuss certain aspects of the retirement experience that go unrecognized – the “fine print”, if you will. Here are some little things that can be frequently overlooked.

How will you save in retirement? More and more baby boomers are retiring with the hope that they can become centenarians. That may prove true thanks to healthcare advances and generally healthier lifestyles.

We all save for retirement; with our increasing longevity, we will also need to save in retirement for the (presumed) decades ahead. That means more than budgeting; it means investing with growth and tax efficiency in mind year after year.

Could your cash flow be more important than your savings? While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulated wealth?

There’s a longstanding belief that retirees should withdraw about 4% of their savings annually. This “4% rule” became popular back in the 1990s, thanks to an influential article written by a financial advisor named Bill Bengen in the Journal of Financial Planning. While the “4% rule” has its followers, the respected economist William Sharpe (one of the minds behind Modern Portfolio Theory) dismissed it as simplistic and an open door to retirement income shortfalls in a widely cited 2009 essay in the Journal of Investment Management.^1,2

Volatility is pronounced in today’s financial markets, and the relative calm we knew prior to the last recession may take years to return. Because of this volatility, it is hard to imagine sticking to a hard-and-fast withdrawal rate in retirement – your annual withdrawal percentage may need to vary due to life and market factors.

What will you begin doing in retirement? In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored?

Impossible, you say? It happens. Some people retire with only a vague idea of “what’s next”. After a few months or years, they find themselves in the doldrums. Shouldn’t they be doing something with all that time on their hands? 

A goal-oriented retirement has its virtues. Purpose leads to objectives, objectives lead to plans, and plans can impart some structure and order to your days and weeks – and that can help cure retirement listlessness.

Will your spouse want to live the way that you live? Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this dissonance can be aggravating. A conversation or two may help you iron out potential conflicts. While your spouse’s “picture” of retirement will not simply be a mental photocopy of your own, the variance in retirement visions may surprise you.   

When should you (and your spouse) claim Social Security benefits? “As soon as possible” may not be the wisest answer. An analysis is needed. Talk with the financial professional you trust and run the numbers. If you can wait and apply for Social Security strategically, you might realize as much as hundreds of thousands of dollars more in benefits over your lifetimes.

Citations.

1. www.forbes.com/forbes/2011/0523/investing-retirement-bill-bengen-savings-spending-solution.html [5/23/11]
2. articles.marketwatch.com/2010-05-19/finance/30729568_1_retirement-period-retiree-spending [5/19/10]

[contemplate1]

Originally posted. July 6, 2012

A noted economist disputes that generalization.

True or false? You may have heard this claim before (or something like it): “Many Americans are being forced to retire later because their savings and investments took a hit in the Great Recession.”
Recently, a big-name economist disputed that belief. In a commentary for Bloomberg, former White House budget director Peter Orszag wrote that some of the statistics don’t seem to back up this conventional wisdom, but perhaps it all depends on which statistics you cite.

A fact that can’t be ignored. In mid-January, a widely reprinted Washington Post article mentioned that since the start of the recession, the population of U.S. workers older than 55 has increased by 12% to 3.1million.¹

Examining this Labor Department finding, the Post feature referenced longevity and the loss of traditional pension plans as contributing factors. It presented stories of older workers who didn’t think they could easily retire, and quoted respected commentators such as Alicia Munell, director of the Center for Retirement Research at Boston College, who remarked that “some of these people are just clinging by their fingernails to jobs.”¹

But is there more to the story? It turns out that Americans were trending toward staying in the workforce longer even before the recession. In 1994, Orszag notes, 43% of Americans aged 60-64 were working; in 2006, it was 51%. Nearly half of 62-year-olds went and claimed Social Security benefits in 1994, but 12 years later, less than 40% of 62-year-olds followed suit.²

Orszag mentions another factor that may have kept older employees working during the recession: declining home equity. Put that alongside diminished IRA and 401(k) balances, and there was every reason to stay on the job these last few years.

However, just because older Americans wanted to keep working didn’t mean that they could.

In the 2011 edition of its respected Retirement Confidence Survey, the Employee Benefit Research Institute found that 45% of retirees ended their careers earlier than they wanted to, in many cases due to layoffs and health issues.³

The Post article noted that the jobless rate for workers older than 55 was just 3.2% in December 2007 when the downturn began. In December 2011, it was up to 6.2%.¹

The percentage of employed Americans aged 60-64, which had steadily risen during the 1990s and early 2000s, has remained at roughly 51% for the past five years.²

That brings us to Orszag’s central point: “The bottom line is that people’s retirement decisions aren’t always entirely voluntary.”²

How about your retirement decision? Do you think you will retire when you want to retire? Are you prepared for retirement financially? A new year is a good time for a new look at the state of your finances and your retirement readiness. With astute planning, you might be able to retire sooner than you think.

Citations.

1. www.usatoday.com/USCP/PNI/NEWS/2012-01-17-PNI0117biz-older-workersART_ST_U.htm [1/11/12]
2. mobile.bloomberg.com/news/2012-01-18/look-at-jobs-before-leap-on-older-retirement-commentary-by-peter-orszag [1/18/12]
3. www.ebri.org/pdf/briefspdf/EBRI_03-2011_No355_RCS-2011.pdf [3/15/11]

[contemplate1]
74_2012

Originally posted. January 23, 2012

Interest rates on 15-year fixed mortgages are near record lows.

Mortgages have become even cheaper. This summer, economists and real estate industry analysts looked at skidding Treasury yields and wondered just how much further interest rates on home loans could fall. The answer: perhaps even further.

On November 17, interest rates on 15-year FRMs averaged just 3.31%. Rates on conventional 30-year home loans averaged 4.00%, and average rates for 5/1-year ARMs and 1-year ARMs were respectively at 2.97% and 2.98%.¹

The yield on the 10-year note was just 2.01% on November 17, and it has been paltry all fall. We recently saw all-time lows of 3.26% for the 15-year fixed and 3.94% for the 30-year fixed (in Freddie Mac’s October 6 Primary Mortgage Market Survey).^2,3

Those able to refinance are seizing the moment. If you can do it, keep your long-term goals in mind. Years ago, a refi came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. Today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you intend to live in your home.

Let’s say a refi frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi might not be worth it.

If you plan to live in your home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.

How long will rates stay this low? It is truly hard to say; recent history has illustrated that. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. At that time, the average rate for a 30-year fixed mortgage was 5.31%. Look where it is now.⁴

In November, Cleveland Fed President Sandra Pianalto told Reuters she expects inflation to retreat from the current pace of about 3.5% to around 2% and stay at about 2% through the end of 2013. That kind of forecast doesn’t imply further easing (and the higher interest rates it would encourage). The Fed has left short-term interest rates near zero for about three years now, and has shifted $2.3 trillion into long-term Treasuries to help keep borrowing costs lower.⁵

Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. In August, Dow Jones Newswires polled bond dealers to get a consensus forecast for the 10-year Treasury yield; they expected yields to end 2011 at 2.5%. Some fund managers and strategists felt that benchmark Treasury yields could end the year under 2.0%. If that holds true, rates on 30-year fixed mortgages would be in the vicinity of 3.6-4.2% circa New Year’s Eve.⁶

Interest rates will move significantly north at some point, so a window of opportunity beckons – and no one really knows how long it will stay open.

Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.

Citations

1. www.freddiemac.com/pmms/ [11/18/11]
2. www.reuters.com/article/2011/11/17/markets-treasuries-asia-idUSL3E7MH16O20111117 [11/17/11]
3. www.usatoday.com/money/economy/housing/story/2011-11-17/Mortgage-rates/51266020/1 [11/17/11]
4. www.nytimes.com/2010/04/11/business/economy/11rates.html [4/11/10]
5. www.reuters.com/article/2011/11/17/us-usa-fed-pianalto-idUSTRE7AG20F20111117 [11/17/11]
6. online.wsj.com/article/BT-CO-20110818-715221.html [8/18/11]

[contemplate1]
1359_2011

Originally posted. December 9, 2011

A way to “sweeten the pot” and retain executives and managers with “Golden Handcuffs”.

A job that is simply too good to leave. Businesses arrange “golden handcuffs” or “golden handshakes” agreements with key managers to reward loyalty and promote retention. A golden handcuffs strategy can make a management position so attractive that it would be financially irresponsible to walk away.

A flexible option for a widely held or publicly traded business. The classic golden handcuffs arrangement is a “top hat” program – a non-qualified deferred compensation plan (NQDC) designed solely for management employees. Being a NQDC plan, it does not have to comply with the bulk of ERISA regulations – and there are no IRS reporting requirements. The business must still file Form 5500 with the Department of Labor; however, if the business sends the DOL a letter notifying it of the presence of the plan, no further filing is necessary.¹

Substantial rewards for the executive who becomes fully vested. Most golden handshakes are discreetly offered as extensions to executive employment contracts. Typical arrangements include:

• 401(k) mirror accounts (NQDC plans) into which an executive can defer X% of salary and/or bonus annually. There may be a company match – perhaps the company kicks in 50¢ for each $1 deferred.
• The money can be withdrawn at retirement or merely at some other future point, and the executive can bolster his or her retirement savings using pre-tax dollars.
• SERPs (supplemental executive retirement plans) funded entirely by the employer.
• Upon retirement, the SERP assets can foster a pension-style income for the key employee.

• Stock options with a vesting period of 3 years or less, perhaps complemented by subsequent options down the line. (This could also take the form of restricted or phantom stock.)
• Many key managers owe sizable income tax to the IRS corresponding to their considerable salaries. In the sweetest scenario, the key employee defers most or all of his or her annual salary – so instead of regular income tax, he or she faces a lesser burden of paying capital gains tax linked to the income from the options.^2,3,4

To fully reap benefits like these, a key employee must fulfill the designated terms and conditions of the golden handshake. Usually this requires staying in the executive position for X number of years and/or completing a specific major task. (Most NQDC plans also provide a death benefit to a designated beneficiary if there are still benefit payments remaining for the employee at the time he or she passed.)²

If the key manager quits or jumps ship before becoming fully vested, he or she could lose the matching dollars contributed to the plan by the company. There will also be the matter of having to deal with a lump sum of income and a big tax bill.³

How do companies fund top hat plans? Many businesses elect to do this with corporate-owned life insurance. Other options include a private annuity contract, company stock, or even earnings from a company investment portfolio.

You may be wondering how a life insurance policy can be tapped to make payments to a living individual. Here’s how: loans are made against the cash value of the policy, or policy withdrawals are made. Such loans are commonly tax-free, and withdrawals are also tax-free to the extent of the premiums paid toward the coverage.²

COLI funding offers the business the potential for tax savings and cost recovery. If a 45-year-old executive puts away $15,000 annually into an NQDC plan for 20 years at 7% interest, in 20 years he or she will end up with $658,000. If those assets enjoy tax-deferred growth with COLI funding of the plan, the business can save 35% (nearly $120,000) in federal taxes on the gains in that period. If the executive passes away at age 78 with the company still owning the life insurance policy, the company would collect a $2.3 million death benefit.²

NQDC plans are commonly unsecured. This means that if a company goes belly-up, a golden handshake may amount to an empty promise. Bankruptcy and cash flow factors may delay or reduce payments to the key manager. The company may undergo a change of control; acrimony between the key manager and ownership may even result in a change of heart. Some firms conscientiously address these risks by establishing trust funds with banks and trust companies.

A top hat plan is usually not a good idea for a small family business due to tax reasons. When a closely held business sponsors a NQDC plan, it can’t deduct employee contributions to the plan until the year in which the employee recognizes income. If it sponsors a qualified retirement plan such as a profit-sharing plan or a 401(k), it can deduct such contributions before the worker has to recognize them as income.¹

A useful tool to help big companies retain their superstars. A golden handshake can make key managers feel appropriately rewarded – and cause them to think twice if they are ever tempted to leave your business.

Citations.

1. umass.edu/fambiz/articles/money_issues/nonqualified.html [8/11/11]
2. capitasfinancial.com/producercenter/docs/Article%20on%20insurance%20in%20NQDC.pdf [1/28/09]
3. shrm.org/Publications/hrmagazine/EditorialContent/1000/Pages/1000agn-compensation.aspx [10/1/00]
4. investopedia.com/terms/t/top-hat-plan.asp#axzz1UlHffgkb [8/11/11]

[contemplate1]
1099_2011

Originally posted. September 9, 2011

Will the reality of retirement live up to expectations?

In January 2011, Merrill Lynch released the results of a survey asking baby boomers with $250,000+ in investable assets about their retirement hopes. There were some interesting across-the-board findings – 70% of those polled expected to work at least part-time, and 84% felt their retirements would be more comfortable and dynamic than those of their parents. Yet it was the collective response of women in the 1,000-investor study that drew the most attention.^1,2

Women envision a very active retirement. Volunteering and travel registered as major priorities for women, more so than for men: 64% of women said they wanted to get more involved in their communities, 62% planned to devote more time to philanthropy, and 86% planned to travel when retired. Additionally, 14% of the women surveyed said that they wanted to start a business after their careers ended.²

Women are more concerned than men about running out of money. While 52% of male respondents were unsure that their retirement assets would last a lifetime, 63% of women polled were worried about outliving their money. Additionally, 70% of the women surveyed said they worried about rising healthcare costs.²

Will reality prove disappointing? Too many women approach retirement unprepared, with too little saved or invested. You can cite two major reasons for that.

1. The multiyear absence of some women from the workplace (which can coincide with peak earning years, lessening the rate of retirement plan contributions)
2. A notable earnings gap (full-time working women earn 78 cents for every dollar men earn, which may reflect everything from gender inequality in career paths to wage discrimination).³

Another factor may be conservative investing. While you can take on too much risk in your portfolio and pay the price, there may also be a cost for assuming too little risk – your portfolio may not be able to produce returns that keep up with inflation. The federal Consumer Price Index from June 2011 shows annualized inflation at 3.6%.⁴

How are you investing and saving to pursue your retirement dream? Is there a strategy in place with realistic objectives? A chat with a financial professional may lead to the discovery of creative new ways to pursue your retirement ambitions.

Citations.

1. reuters.com/article/2011/01/31/us-retirement-study-idUSTRE70U3E820110131 [1/31/11]
2. mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1521693&highlight [1/31/11]
3. civilrights.org/archives/2009/04/291-equal-pay-day.html [4/29/09]
4. online.wsj.com/article/SB10001424052702304521304576447641965268196.html [7/15/11]

[contemplate1]
913_2011

Originally posted. August 2, 2011

You’re suddenly rich. Now what?

What’s the plan when you have a windfall? Through luck, inheritance, talent, or legal decisions, some people receive “sudden wealth” – a lump sum of money that is at least several times their annual income. Sometimes people think that the money will solve all of their problems. But if they aren’t careful, it can create entirely new ones.
Sudden wealth often comes with emotional baggage attached to it. If you’re suddenly wealthy, you may experience degrees of fear, guilt, anxiety and even paranoia in the months following your good fortune. As Dennis Pearne, Ed.D., author of The Challenges of Wealth notes, sudden wealth “changes what you can do, what you no longer have to do, where you can live” and other aspects of your life that seem set in stone. “So much changes so fast that it can be terribly overwhelming, and some people go into money shock.”¹

We’ve all heard stories about people who won the lottery and ended up broke. In fact, you may have seen stories on TV or in magazines or newspapers about people who lost sudden fortunes in a matter of years, or let wealth wreck their families. It seems incredible, but it happens.

So, how does it happen? And how can you avoid it?

Rule #1: Get financial advice from a qualified source. You would think that anyone who receives a six-figure or seven-figure check would immediately talk to a financial planner. But that is not always the case.

Some people put it on their “to-do list” … and then go out and do other things with the money. Some never bother to seek qualified financial advice at all. Instead, they listen to relatives or neighbors.

The problem is, sometimes these relatives or neighbors

• Have never had great money and do not understand the responsibilities that come with it
• Only see wealth in terms of material things and purchases
• Would like to vicariously live out their fantasies as a byproduct of your good fortune
• Urge you to take chances (risks) with your money
• Assume that you are “set for life”
• Want you to look at wealth from their mentality, or want you to associate with their shady lifestyle

While your relatives and neighbors may mean well, they are likely not financial planners. In fact, some financial planners aren’t well equipped to consult people with sudden wealth either.

Rule #2: Find a Financial Planner familiar with the issues surrounding sudden wealth. Ideally, you want someone who has consulted people in a similar situation. This is because sudden wealth is truly a special circumstance. It’s not just a matter of putting more money in bank accounts or investment accounts. Sudden wealth can mean a whole lifestyle shift – a new address, a new reason to get up in the morning, or maybe new questions about what to do with your life. Your loved ones may not look at the money the same way you do, and there needs to be harmony.

If you come into sudden wealth, do yourself a favor and pause. Find a financial planner who has consulted people who have come into money. Ask him or her to help you put together a team – because you may need one. Many millionaires and quasi-millionaires have financial planners, CPAs, and estate planning attorneys working for them – working in a unified effort to help them manage their money, reduce their taxes, make charitable gifts and arrange inheritances for their heirs.

Any new millionaire, or near-millionaire, should strive to make newfound wealth grow and last. To do that, you need an investment plan that makes sense in the long run and makes you feel comfortable. You also need to plan to defer or reduce taxes and risks to your wealth – and when you are a new millionaire, you’re looking at a level of taxation and potential risk most people will never experience.

So if you find yourself with sudden wealth, plan. Instead of acting on impulse, act with intent and purpose. Meet with a qualified financial advisor to learn about your options and to establish financial priorities.

Citations.

1. articles.moneycentral.msn.com/RetirementandWills/EscapeTheRatRace/YoureSuddenlyRichBummer.aspx [8/1/08]

^{[contemplate1]}

^802_2011

Originally posted. July 8, 2011

Why plan?

“One of the dominant themes from our research is that breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another.” – Jim Collins, Author of Good to Great

At Rainstone Financial we create plans designed to help clients make good decisions and accumulate them one on top of another.  The challenge has always been how to make good decisions to begin with, especially when there is so much uncertainty in the future.  We work off of four first principles that seem to stand the test of time.  Regardless of fluctuations in the financial markets, recessions, how old someone is or what type of work they do, these principles still hold true.

Principle 1: Think long term regarding goals and investments.
Principle 2:  Spend less than is earned.
Principle 3:  Maintain liquidity, a.k.a. Emergency Savings.
Principle 4:  Minimize the use of debt.

Out of all the first principles, only number one involves a mental exercise to create.  It makes the probability of sticking to the remaining principles more likely. Using conclusions found in “Harnessing Our Inner Angels and Demons: What We Have Learned About Want/Should Conflicts and How That Knowledge Can Help Us Reduce Short-Sighted Decision Making” by Katherin L. Milkman, Todd Rogers and Max H. Bazerman.

The central theme is the internal conflict in our heads.  Imagine a cartoon character with a whispering angel (the should) on one shoulder and a fiery devil (the want) on the other offering competing recommendations.  The metaphor illustrates that we behave as if we are two people:

1. A want self, fighting for whatever will bring more short-term pleasure and
2. A should self, representing an individual’s long-term interests.

We will explore short sightedness in decision making and how to overcome these potentially devastating financial decisions. We have five techniques to help squelch the want and promote the should.

1.  Make the Choice in Advance

One of the best ways to silence the want is to make the decision in advance.  When we work out a decision prior to having to choose, it is the should that is in charge.  If you plan out your meals in advanced it is less likely you will end up eating pizza every night.  Developing a Financial Plan maps out these should decisions in advance, decreasing the chances of detrimental outcomes based on wants.

2.  Compare Similar Options

The study finds that when people choose without comparing options, the want easily gets out of control.  Without comparison it is easier to justify bad decisions.  Direct comparisons force us to rationally weigh the costs and benefits of a choice.  By way of testing alternate scenarios in a financial plan, clients are able to make the choices that lead to the highest probability of achieving their goals.

3.  Avoid Decisions Under Pressure

Spur of the moment decisions enable our basic desires to take over.  When our minds are occupied by time constraints or other distractions, less brain function gets dedicated to the task at hand.  Next time you go to a car dealership, put off you decision until you get home and can think without the salesman putting the tight shoes on you.  Given the proper time and environment you are more likely to make the right decision.  Having a Financial Plan helps diminish the desire for short term investment gains or panic when the markets head in the wrong direction.  We can also include major purchases such as vehicles or home improvements to avoid impulse spending when cash flow is inadequate.

4.  Make One-Shot Decisions

Have you ever told yourself, “I’ll have cake today, then I’ll eat healthy the rest of the week.”  How likely is it that you will eat healthy for a whole week if it can’t be done right now?  All sorts of strange things happen when we imagine the choices we are making now as one in a series.  There are no guarantees the remaining decisions will ever come into being.  It really needs to come down to “Am I going to be good or bad right now?”  The key to a Financial Plan is assistance from the trusted advisor in carrying out the plan, someone to hold us accountable for the remaining actions that still need to be completed to achieve your goals.

5.  Use Commitment Devices

Can we stop ourselves acting on impulse by committing to a course of action that is in our long term interests? Of course we can, we just need to take the choice away from the want.  In personal financial planning, putting money in a 401k or IRA is a device to save for the future.  Withdrawing funds pre-maturely from these qualified retirement plans will impose pain in the form of taxes and penalties. The childhood equivalent might be a piggy bank that needs to be smashed to access the funds inside.  It is always important to make sure there is an adequate emergency fund before tying funds up in a long term investment or account.

Conclusion

A Financial Plan that is tailored to your goals, assets and cash flow is the best way to utilize these techniques.  May we all be able to ignore the devil on our shoulders and do what we should.

Originally posted. April 11, 2012