Military Holiday Homecoming Surprises

Guest post by Marcie


While I save and "spend within my means" (sometimes I really hate that term!) during this holiday season, sometimes it can get a little frustrating knowing that I need to keep within my budget for gifts. It's pretty hard not to get caught up in the 'buying' madness. 


First it was just Black Friday, but now I need to resist spending for Small Business Saturday AND Cyber Monday, too?! And while subscribing to Groupon and other local coupon deals help save money, it's not been helping me to resist the temptation to go beyond that budget and shop 'til I drop. Because, heck, it's 60% off for crying out loud!!!!


I needed to come back to Earth before I destroyed my checking account. 


I began to search for heartwarming photos and stories to help me see beyond the lie that having the perfect gifts would automatically equate to a perfect holiday season. I found it.


The following videos are surprise holiday homecomings from our men and women who sacrifice every day: our military. I often forget that many families go without the one thing they want most, their friends and family...


After watching these, much humbled and a bit puffy-eyed, I am reminded how thankful I am for these families that serve together. I hope you'll join me in this spirit and watch these videos. 

And a whole montage of great surprise military holiday homecoming here, too.

Thank you, United States Military, for serving. I wish you a peaceful and safe holiday.

Free Tax Saving Strategies Help (Part Two)

Even this cat disapproves of this tax organizing technique!

Last month we posted Part One of a two part blog: great strategies on how to save on your 2011 taxes this year. Click here to visit the previous blog. Here are some more great tips!:

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholdings of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won't create an alternative minimum tax (AMT) problem.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions.
• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won't be available after 2011.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions as these deductions are allowed only after exceeding a percentage of adjusted gross income.
• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.

Remember, make sure you are working with a pro who can help you navigate all the complex tax strategies mentioned here.  Have a dialogue!

Should I Refinance?

This is one of the most frequently asked questions from clients.  Here are some rules of thumb:

• Mortgage rates are historically low right now and most likely the lowest we will ever see so it is wise to take advantage of the opportunity in today's economic environment
• You need to have at least 20% equity in your home to refi
• You should be planning to stay in your home for at least 3 years or longer to offset the cost of the refi
• It only makes sense if you can lower your interest rate by a 1/2 percent or more
• Always get a fixed rate loan

Many folks think that getting a 15 year loan is a smart deal as their house will be paid off quicker.  While that is true, I always counsel folks to get the 30 year fixed loan because it doesn't lock you into the higher payment.  And you always have the option of paying extra principal on your loan and shortening the payoff time.  And, for example, what if you lost your job or had significant unexpected expenses to deal with, then the 30 year loan is a welcome relief.  A 30 year loan gives you peace of mind at night. 

What about the costs of refinancing?  Many mortgage companies promote "no cost mortgages" This certainly sounds appealing.  You pay no costs to refinance.  But is it truly free?  Unfortunately, there is no "free lunch" in business.  You will pay these costs one way or another.  Your interest rate will be higher with the "no cost mortgage".  Anywhere from .5% to 1.25% and over the period of 30 years, this higher interest rate really adds to the cost of the loan.  In most cases, it makes more sense to pay the closing costs either out of pocket or added to the loan balance. 

Bankrate (www.bankrate.com) is a good place to start to get an idea of the current refinance rates.  That way, you are are prepared to talk to a lender with competitive information.  The refi marketplace is highly competitive so do your homework! 

Free Tax Saving Strategies Help (Part One)

Photo by soukup on Flickr.

Whether you like it or not, you have to pay taxes.  But understanding the tax code these days requires a rocket scientist to interpret.  Even Albert Einstein said “the hardest thing in the world to understand is the income tax.”  There is hope and that’s where a good tax advisor comes to the rescue.  Our firm take a very proactive approach to tax planning.  Let’s look at some ways that your taxes can be reduced for 2011:

• Increase the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year. Don't forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year's worth of deductible HSA contributions for 2011.
• Sell the stock/mutual fund losses in your taxable portfolio and capture the losses.  Even if you cannot use all the losses in 2011, they can be carried over.  You can always claim at least $3,000 in losses in any one year.  That’s a savings of $1000 in taxes for most folks.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill
• Consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011. However, Roth IRAs are tax free forever. 
• If you converted assets in a traditional IRA to a Roth IRA earlier this year and the assets in the Roth IRA account have declined in value and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA. 
• Consider deferring any bonuses into early 2012.
• Consider using a credit card to prepay expenses that can generate deductions for this year.

Tomorrow, I'll have more free tax saving tips to save you even more in 2011! Remember, make sure you are working with a pro who can help you navigate all the complex tax strategies mentioned here.  Have a dialogue!

10 Financial Truths that are Just Plain Wrong

Many of the financial planning concepts and strategies that have been around for many years are just not applicable to most folks. A lot of these so called “truths” developed out of the need to sell products rather than doing what is right for the client. In the next few blogs, we are going to debunk these financial “truths” and set the record straight. Much of this information comes from a real pioneer in the fee-only financial planning arena and his name is Bert Whitehead, the founder of Alliance of Cambridge Advisors, of which I fortunate to have been a member for the past 13 years. And am still actively involved. So, let’s get started


1. Risk Tolerance is an important consideration in your portfolio---WRONG

Most financial advisors, stock brokers etc…. administer a psychological test to clients to assess their psychological tolerance for risk. This is really a CYA strategy that is more about protecting the advisor or broker. The real question that needs to be probed and addressed is how much risk the client currently has in his/her life. Based on an analysis of current risk, we then determine how much risk is appropriate for the client.


We look at things like job stability, persons dependent on your income, current savings level, protection against inflation and deflation and risk needed to meet the client’s goals. I am a big fan on only taking as much risk as is needed. This is totally counterintuitive to psychological risk questionnaires. For example, let’s assume that a person answers test questions that show an enormous appetite and tolerance for risk. However, they are in an unstable job, married with 3 people dependent on him/her and have not been saving much. It doesn’t matter how the test scores came out, this person should not be taking a great deal of risk in their investments. Get the picture?


Bottom line… It is the current risks in your life/job/circumstances that are important and not some risk tolerance score based on a set of questions.


Next blog…we will look at debunking myths about inflation. Stay tuned.

Willeen: A Life Well Lived

Last Friday I attended the memorial service for a dear friend and client of ours. She lived 82 years and listening to the eulogy, I was in awe of how she lived those 82 years.

I met Willeen Hasler when I was a budding entrepreneur in 1998 with the lofty goal of starting my own financial planning practice. Willeen was involved in Score Counseling and also the Carlsbad Chamber of Commerce. She took me under her wing and introduced me to several folks.  She chaired the North County Women’s Roundtable and there I met many women who were instrumental in getting my business off the ground. She managed to rope me into chairing the Chamber’s First Friday breakfasts and also involved me in several other committees.  Somewhere along the way, she became my client, which was the highest form of friendship and trust.  

As I sat there last Friday listening to her life story, I was struck by how she lived her life. I would sum it up in two words: Servant Leadership. She loved to serve people and she did so with a forever expanding heart and unconditional love. She always had the other person’s best interest in mind. She wanted others to succeed and she stood by cheering them on. She loved business and used her God given talents and gifts to help others in business. She was a friend to all and she always had positive things to say about everyone.  

She also served her church and was generous with her time, talent and treasure. When one passes away at 82 years of age, there usually are not a lot of people in attendance at the funeral because so many friends and loved ones have passed away and often, elderly people just do not socialize any more. Not in the case of Willeen as the church was filled with folks of all ages. It was a beautiful testament to a treasured soul.

Oh, and did I forget to mention that Willeen only retired in 2010!  

Rest in peace, dear friend, you were a good and faithful servant. 

The State of the US Economy

Some economic indicators took a downward turn last month and of course the media has focused on these negatives. But there have been many more positive trends and let’s take a look at the “good stuff” happening in the US economy.


• The Index of Leading Economic indicators (see definition below) turned upward at the end of June and points to slowly expanding economic activity in the coming months

• Payroll data reflects modest improvement and is displaying a typical pattern of jobs recovery that occurs after a serious slump

• There were 117,000 net new jobs added in July and Unemployment claims have fallen from their high in April of 2009

• Cities, states, counties and federal entities are still shedding jobs but the private sector is adding jobs—this is good news for a more healthy economy

• Unemployment rate for college graduates is only 4% compared to national average of 9%. Getting a college degree is a smart thing to do!

• Fiscal stability of most states has greatly improved and revenues are now in line with expenses. Most states have balanced budgets. And have made the necessary cuts.

• Vehicle sales have been sluggish and pulling down Gross Domestic Product (GDP) (see definition below) growth mainly due to the parts shortage caused by the Japanese Tsunami. However, that is improving and we should be back to 13 million in sales per month for the last quarter of 2011.

• The US GDP growth is forecast to be close to 3% for the remainder of the year.

• Consumers have significantly shed debt loads and consumer credit is surging. This is a key driver in our consumer driven economy.


• Housing affordability is at an all-time high

• Interest rates expected to be very low for at least next two years, allowing more folks to take advantage of extremely low real estate prices.

• The US adds approx. 3 million new bodies each year. New housing starts have averaged 1.5 million per year. Considering that we have only been adding approx. 500,000 new housing units, the demand will soon exceed the supply. Once all the foreclosures and short sales get off the market, the demographics prove that a strong housing recovery will occur.


• Retail sales are higher now than before the crash of 2008. The consumer has more disposable income and is spending. But the consumer is also being wise and saving—the saving rate is 5.4%.

• Inflation is not expected to be an issue for several more years as promised by the Fed Reserve at yesterday’s meeting.

• Companies are reporting strong corporate earnings. Much of these earnings are being derived from overseas sales which are expected to persist. China, India and other emerging countries have a huge appetite and capacity to purchase our goods and services. And earnings drive the market in the long run. Right now, the S%P is selling for 11 times earnings and that is dirt cheap! The outlook for the stock market is good.



Index of Leading Economic Indicators

An index that is compiled by the Conference Board, a private-sector consulting firm. The index is designed to indicate the future direction of economic activity. A rising index signals that economic activity can be expected to increase in the near future

Gross Domestic Product

The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

9 Reasons to Not Panic About the Debt Downgrade

The Silver Lining in the US Credit Downgrade

Photo by Eric E Proimos on Flickr

 The US has had a AAA rating since 1941 and certainly in my lifetime, it was unthinkable that we could ever lose this coveted rating. But the unthinkable happened last Friday and one of three credit rating agencies (S&P) stripped the US of the AAA rating and downgraded us to AA. So…what does this mean and what are implications? 

1. Only S & P chose to downgrade, that means that Moody’s and Fitch still have confidence in our AAA status. Two out of three ain’t bad!

2. Insiders at the rating agencies and many large companies believe that the S&P move was super cautious because, remember, that they gave AAA ratings to all the companies that held all the toxic assets that brought down the economy in 2008. They were severely chastised by Congress for being asleep at the wheel and they lost a lot of credibility in the process. Payback time??? 

3. The downgrade is more a function of the political impasse in Washington and concerns that our political system cannot chart the necessary course to reduce our deficit and have a balanced budget. 

4. Warren Buffet’s perspective (and I value his commentary far more than the “talking heads” of the media) is that there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said. 

5. Japan lost its AAA rating many years ago but has had no problems borrowing money at super low interest rates despite a Debt-GDP (gross domestic product) ratio about where we will be in 7-10 years.

6. Rates are a function of supply and demand. Our supply isn’t changing, so a downgrade would tell us that the demand will now change. Really folks? Where will the money go? China is a huge purchaser of our debt and might like to park it somewhere else but where? No other country has the liquidity and the size to store their cash reserves. And no other country is safer. 

7. The new rating does not mean we are heading into a recession. While our economy is still struggling (Pimco calls it a “hobble through” economy) there is room for cautious optimism. 70% of the S&P 500 companies have exceeded earnings estimates this year. The unemployment figures look bad but if you drill down, the governments (cities, states, counties, US govt) are the ones shedding jobs while the private sector is adding jobs. Isn’t this what we hoped for and expected to happen as our infrastructure shrinks? 

8. The silver lining is that this is a wakeup call to Washington. It is a loud and urgent signal that we can no longer kick this can down the road. We have to deal with our burgeoning debt, our not so balanced budget, our entitlement programs such as Medicare and social security and we need to do it NOW. Both parties need to put aside their agendas and do what is right for our country and the world as we are still the Super Power. I was encouraged by President Obama’s speech today because I think that our politicians (both parties) now realize the damaging effects of the past 4 weeks. It was a humiliating picture to the world of how partisan and childish we have become. There will be enormous pressure on the bipartisan committee of 12 to get the job done and come up with a plan to show the world that we are serious about putting our country back on the path to financial soundness.

9. I, for one, am almost elated that this happened. We needed a kick in the butt. If I had a boatload of cash lying around, I would be buying every good US Company that I could. Ahhh… if only I had a small portion of Warren Buffet’s fortune!

A Summer Rollercoaster Ride

With the U.S. stock market falling for eight of the past nine days and dropping 8% during the past week, you are probably just a little bit on edge. After Thursday’s 5% drop in the S&P 500, the index is now down for the year, and the media is having a field day with terms like global meltdown, double dip recession etc.. I can understand the anxiety that you are feeling. It’s only natural.


My advice to you is the same as it was in 2008 (and has been for the past 13 years). Take a deep breath, stay calm, and keep your emotions in check. Successful investing requires us to be patient and have a long term attitude. Successful investors are not market timers. None of us has a crystal ball that tells us where stocks will go in the next month or quarter. But we do know that throughout history, stocks as a group have gone up two out of every three years, and I am confident that investing in a well-diversified portfolio of stocks and bonds remains one of the best ways to create lasting wealth for you and your family.

Looking back for context, we know that after falling 22% during 2002, the S&P 500 rallied 28% in 2003. In 2008, the market dropped a whopping 37%, only to gain 26% in 2009 and 15% in 2010. History is on the side of the patient investor who remembers that investing is a long term process.

Perspectives on the US Debt Ceiling Debate

Today, I participated in a conference call with the senior economists from TD Ameritrade.  These notes are taken directly from this call.  I must credit TD Ameritrade for a great job in detailing the four most likely outcomes and the ramifications for each scenario. 
 
Scenario 1….”to dream the impossible dream”


In this scenario, congress finally agrees to the “grand bargain” whereby $3-4 trillion in financial austerity is agreed to. This is the most optimistic scenario and probably hard to achieve within the short time frame of only 4 days. But this agreement would yield the most positive financial market reaction. And a rough path would be carved out for a more sustainable US budget picture. But while the markets would calm down, this will come with a huge economic price as our GDP growth will slow down over the next several years. It will be a painful process as we move towards a balanced budget with expenditures not exceeding income and severely trimming the deficit. Something that absolutely needs to be done but folks, there will be pain in the process.

Scenario 2…”no harm..no foul”

In this scenario, a last minute deal is struck and government operations are not affected. However, this deal involves only an incremental increase in the debt ceiling in exchange for ongoing discussions of further reductions etc… Standard and Poor’s will most likely downgrade the current AAA status of the US government because they do not see a long term plan in place for reducing the deficit. Having said this, it will only have a benign impact on the US economy. Other rating agencies do not appear inclined to follow Standard and Poor’s. The markets should react favorably in the short run.

So, while we dodged the bullet in the short term, we still need to come up with a long term plan much like the “grand bargain” cited above. We have just kicked the can down the road.

Scenario 3…”a flesh wound”

In this scenario, no agreement is reached before the Aug 2nd deadline. S&P downgrade is certain and also the risk of downgrades by other rating agencies. We will have a double hit to the economy. Approx $135 billion a month would be withdrawn from the US economy (this is the current shortfall resulting from $165 billion a month in revenues and $300 billion a month in expenses). You can imagine the immediate impact of spending $135 billion a month less and how this will slow down the economy. The second hit would come from a rise in Treasury yields (our bonds would not be as credit worthy, so therefore we have to pay investors more to buy them). If the situation is only for a few days..a week at the most, the impact will not be disastrous. We clearly have the revenues ($165 billion a month) to pay our debt and the debt payments would receive first priority. So we would not default on our interest payments but other government expenditures would be severely cut back. Gee—maybe Congress would not get paid! But if allowed to continue for the entire month of August or later, then we could certainly be back in a recession. Bottom line is that this scenario would lead to short term financial turmoil that will weaken an already weak and fragile US economy. But not the end of the world.

Scenario 4…”a mortal blow”

In this scenario, there would be an actual default because Congress has been unable to reach any type of agreement and it has dragged on for too long after the 8/2/deadline. This would be considered a technical default as the Central banks understand this would be caused by bi-partisan politics and not the inability of the US to pay its debt. While we may receive grace from the financial markets, the rating agencies would lower our rating to “SD” which stands for selective default. This is unknown territory for the US. Interest rates on our government bonds would probably rise dramatically. Investors would flee from treasuries (once considered the safest investment in the world) and there would be a rash of redemptions. Stock market would tank and there would be a total freeze in the credit markets. We would be plunged back in to a deep recession.



So what do I think will happen? Much as I would love to see #1, I just do not think it likely due to the late hour but who knows…miracles do happen. I think there is a 75% chance that the#2 scenario will occur and 25% for # 3.

Changing Residency to Reduce Taxes

Many retirees or pre-retirees are desirous of having a second home in a more "tax friendly" state in order to claim residency in that state; thereby increasing their standard of living by paying less on taxes.  With California boasting one of the highest state tax brackets, this often can be a smart decision.

However, claiming residency in another state is not as easy as it sounds.  According to tax laws, "residency" is the location of your permanent home.  You are considered a resident of a state if you intend your main home to be in that state.  Your state of residency is determined by whether the time you spent in that state was permanent or temporary.

So...how do you prove that your new state is your permanent home and not your temporary home?  Here are some pointers:

• Register to vote in your new state
• Register your car in your new state
• Change your drivers license to your new state
• Plan on living in the new state over 50% of the year
• Move your primary bank account to the new state
• Change your permanent mailing address to the new state
• Apply for a property tax exemption on the residence that you purchase in the new state

Can changing a state of residency really save you that much on taxes.  Consider Nevada where there is zero state tax.  A retired couple with $75,000 of taxable income will pay approx $3300  in California state taxes.  However, by claiming residency in Nevada, they will pay no state taxes.  That is like giving yourself a monthly increase of $275.  That's a lot of golfing green fees! 

The Healthcare Reform Law and how it Affects Retirees

The health care reform law will bring a mixed bag of good and bad news—with many of the changes affecting benefits provided to retirees by former employers. Here's a look at the key trends that will impact retiree health care spending.

 
Good News: Improved Medicare Prescription Drug Benefit----The Affordable Care Act (ACA) boosts the value of the Medicare D prescription drug plan by closing the notorious “doughnut hole.” That's the coverage gap that starts when a beneficiary's annual drug spending hits $2,830, and resumes at the catastrophic level ($4,550). Fidelity estimates that about 30 percent of seniors enter the doughnut hole in any given year.

Good News: Pre-65 Insurance Options Multiply--Workers who retire before age 65 – sometimes involuntarily – face some tough challenges replacing the group health coverage they enjoyed at work. The ACA creates new public health insurance exchanges that will open for business in 2014. Their aim is to create competitive marketplaces offering individuals high quality, affordable coverage. At the same time, insurers will be barred from turning away applicants due to medical conditions, or charge them higher rates – although they will be able to charge up to three times the differential between the oldest and youngest insured in the plan. Finally, the ACA offers a combination of credits and subsidies aimed at keeping policies bought in the exchange affordable

Mixed news: Health Savings Accounts Proliferate--Health Savings Accounts (HSAs) can help workers save money to offset health expenses down the road in the retirement. Created during the Bush years, HSAs have very attractive tax features: contributions and account growth are tax free—as are withdrawals, so long as the funds are used to pay for healthcare. Unused funds can be rolled over from year to year, and the accounts offer IRA-like portability. HSAs are gaining ground among workplace plan sponsors, mainly because they are tied to high-deductible insurance plans that reduce premium costs up to 30 percent. About 27 percent of retiree plan sponsors offer an HSA option, according to the Towers Watson/National Business Group on Health survey. But 25 percent of companies plan to convert their current retiree health coverage subsidy in the coming year But the jury's still out on HSAs as a retirement saving vehicle. Most participants use the accounts to fund current-year expenses, since insurance plan annual deductibles linked to HSAs must be at least $1,200 for individuals, or $2,400 for family coverage. And the deductibles can run much higher. As a result, Fidelity says only 24 percent of HSA accounts at plans it administers are used for long-term saving.And, since HSAs have only been on the scene a few years, average account balances are quite small, averaging $1,355 in 2010.

Bad news: Affluent Retirees Face Steep Hike in Medicare Premiums--The ACAACA freezes the threshold at 2010 levels through 2019, starting this year. The ACA also extends the income threshold formulas to seniors enrolled in Part D prescription drug plans. The changes will affect just five percent of Medicare enrollees this year, although that figure will rise to 14 percent by 2019 as more seniors jump past the frozen income threshold levels, according to the Kaiser Family Foundation, a non-profit health policy and research organization. High-income seniors who pay both Part B and Part D premiums could see their combined premiums rise anywhere from $300 to $700 per month by the end of the decade, according to Juliette Cubanski, associate director of Kaiser’s Medicare Policy Project. “That’s a considerable sum, considering that the base Part B premium for most people this year is $96.40,” she says. The new income thresholds also affect people who choose a Medicare Advantage plan (Part C). These are privatized managed care plans that replace traditional Medicare, and usually incorporate prescription drug coverage. Advantage enrollees typically pay the monthly Part B premium plus a supplemental premium to the Medicare Advantage plan; now, these premiums are being adjusted to factor in the higher-income amounts for Part B and Part D coverage, where applicable.

Credit to Mark Miller who is a journalist and author and writes about trends in retirement and aging. He has a special focus on how the baby boomer generation is revising its approach to money, careers and lifestyle after age 50.

Asset Location, Location, Location

Asset location is deciding what assets should go in which accounts.  Most investors have accounts that receive different tax treatment such as the following:

• Traditional tax-deferred account such as IRA , 401k, 403b, 457.  Contributions may be tax deductible and the growth and income are not taxed until the money is withdrawn.  Withdrawals then taxed as ordinary income ranging from 10-33%.
• Roth IRA or Roth 401k.  Contributions are not tax deductible but withdrawals are tax free
• Taxable non-retirement account.  The taxation of these types of accounts depends on the investments in the account.  Short term capital gains and interest from bonds and CDs are taxed as ordinary income, but qualified dividends and long-term capital gains are taxed at lower rates between 0-15%.

So..what types of investment should go in these different types of accounts to minimize taxes and create greater wealth?

• Traditional tax-deferred.  Corporate bonds, treasuries, TIPS, high yield stocks and commodity funds
• Roth accounts.  Small cap stocks, REITS, high turnover and/or high yielding funds especially if they have above-average growth potential.
• Taxable non retirement accounts.  Low-or non yielding stocks you plan to own for several years, low turnover stock funds (such as Index funds and tax managed funds), municipal bonds, US government savings bonds and maybe Treasuries. 

Remember:  It's not how much you make but how much you keep that matters in creating wealth. 

Living an Extraordinary Second Half

With over 76 million baby boomers entering their "golden years", some folks find it a little daunting to imagine what life will be like during retirement.  This is a compilation of some strategies and ideas that I have gleaned from my readings:

1)  Money is all about numbers.  Happiness is all about attitudes and behaviors.
2)  Live below your means if you want to be comfortable in retirement.  Pay yourself first and build your lifestyle around these two habits. 
3)  Have a plan.  A road map to retirement is as necessary as breathing oxygen. 
4)  Start saving early.  But remember that it is never too late to try and catch up. 
5)  Take care of your health.  A nutritious and low fat diet combined with exercise and stress reduction will ensure that you make it to retirement.
6)  Hang out with people who make you feel good and enrich your life.  Ditch the negative influences.
7)  Invest like a millionaire.  Work with a fee-only advisor with no conflicts of interest.  Take a long term view and keep your costs as low as possible.  Don't chase the "hot tips" your friends or the media tout. 
8)  Stimulate your brain with constant learning, taking trips, reading, trying new things, making new friends. 
9)  Create your bucket list.  Go for it.  Be engaged in life. 
10)  Give back with your time, talents and treasure.  Create a legacy

Following these ideas will truly allow you to enjoy those golden years and live a full and glorious life.

Warren Buffet’s Annual Letter to his Shareholders

 

I am a huge fan of Warren Buffet and always enjoy reading his annual letter to his shareholders.  I am convinced that if every CEO and company in the US had the same guiding principles and integrity that is the hallmark of Buffet, we never would have the economic problems that we do today.  Here are some of my favorite highlights, all quoted from his letter:

• Money will always flow toward opportunity and there is an abundance of that in America.  Commentators today often talk of “great uncertainty” But think back, for example, to December 6, 1941, October 18, 1987 and September 10, 2001.  No matter how serene today may be, tomorrow is always uncertain. 
• Our citizens now live an astonishing 6 times better than when I was born.  The prophets of doom have overlooked the all important factor that is certain; human potential is far from exhausted and the American system for unleashing that potential…remains alive and effective.
• A housing recovery will probably begin within a year or so. 
• If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did.  Our approach was simply to get a meaningful down payment and gear fixed monthly payments to a sensible percentage of income..
• Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates.  All things considered, the third best investment I ever made was the purchase of my home (the two best investments were wedding rings).  For the $31,500 I paid for my house, my family and I have gained 52 years of terrific memories with more to come. 
• But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender—often protected by a government guarantee—facilitates his fantasy.  Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford. 
• The fundamental principle of auto racing is that to finish first, you have to finish first.  That dictum is equally applicable to business and guides our every action at Berkshire. 
• Unquestionably, some people have become very rich through the use of borrowed money.  However, that’s also been a way to get very poor.  But leverage is addictive.  Once having profited from its wonders, very few people retreat to more conservative practices. 
• We can afford to lose money—even a lot of money.  But we can’t afford to lose reputation—even a shred of reputation.
• America’s best days lie ahead! 

Gotta love this guy! 

Meet Judy Stewart!

Judy Ann Stewart is the owner of Stewart Financial Services.  She has been offering life-centered and comprehensive financial planning services for 10 years.  She became a Certified Financial Planner (CFP) after serving as the President and CEO of Rancho Vista National Bank, a community bank that she and others founded in 1982.  Ms Stewart has a Masters in Business Administration and is an Enrolled Agent licensed by the IRS.  In 2003, she was honored to be named as one of the top 100 Financial Advisors in the Untied States by Mutual Funds Magazine. And in 2009, Ms Stewart is reconginized as one of the 2009 Five Star Wealth Managers in San Diego.
Ms Stewart is a member of Cambridge Advisors; a national network of fee-only financial advisors committed to serving the financial planning needs of Middle-America and is also a member of The National Association of Personal Financial Advisors, the largest fee-only financial planning association in the world. 
She attends and serves at Generation Church in Oceanside, California, and has traveled to Uganda in 2007 and 2008 to teach men and women basic business classes so that they can help lift themselves out of poverty. She resides in Oceanside, Ca., and Borrego Springs, Ca., with her husband, Bill and their two pets, a cat named Daisy Mae and a dog named Dakota.

Rising Oil Prices and Falling Dictators

The headlines and talk shows scream at us about the rising oil prices and Mideastern dictators falling like dominos. The stock market is scared and so the S&P500 has fallen 5% in the past week. Here we go again, you might say. Are we sliding back into another recession? These are very legitimate concerns but let’s look at the facts:



• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.

• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.

• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.

• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!

San Diego's A-List of Wealth Managers

Once again, I am very proud to announce that I have been chosen as a 'San Diego 2011 Five Star Wealth Manager' by San Diego Magazine. I love serving San Diego county, now including Borrego Springs! Thank you for everyone who voted for Stewart Financial Services. We work really hard to make your financial dreams a reality. 


From the article...


"With more than 11,000 wealth managers in the San Diego area, how do you find someone who listens to you, represents your interests and operates with an emphasis on integrity and service?


The resulting list of 2011 Five Star Wealth Managers is an elite group, representing less than 4 percent of the wealth managers in the San Diego area."


Thank you again San Diego! We continue to look forward to serving you in 2011! 

Tidbits from the TD Ameritrade Conference

Cheryl and l recently attended the annual TD Ameritrade National Conference in San Diego.  I can truly say that it was one of the best conferences I have ever attended.  While I will be sharing more specific information with clients one on one at meetings, here are some of the highlights:

 

General Colin Powell---He has unwavering faith and confidence in our nation and our people.  He sees great wealth created in certain countries over the next several years, countries like China, India and some of the Latin America countries.  This is good for the entire world because stability in the government and the economy is needed to create wealth.  We should not fear these emerging countries but rather embrace them.  The US is still the best place in the world to invest wealth.  Their success is our success.

Jeremy Siegel is a professor at the prestigious Wharton School of Finance in Pennsylvania.  Professor Siegel is still very bullish on stocks for the long run.  He showed charts that illustrate the real return (after taxes and inflation) of stocks from 1802-2010 is 6.7%.  The past 20 years from 1990-2010 (which includes the horrific recession of 2007-2008) shows the exact real return of stocks is 6.7%.  Cash and bonds cannot deliver this kind of return so it is prudent and imperative that in order to create wealth, an investor must be willing to invest in stocks.  He thinks the US market of good quality companies is poised to deliver strong returns over the next few years.  Price earning ratios are below the long term average and corporate earning are strong so therefore the price earning ratios will be rising.  He also showed charts that made a compelling argument to be investing in stable emerging markets such as China, India and some Latin America countries. 

Craig Alexander is Senior Vice President and Chief Economist for TD Ameritrade.  He said the US economy is on the mend.  We still have a long way to go but it is encouraging that we are on the road to recovery.  There are three key factors that will determine our recovery.  1.  Housing –currently we have approx 9 months supply of houses on the market versus 2005 when the supply was only 4 months.  We have too much product and there is more coming with short sales and foreclosures.  The housing market still has another 5% to decline in value before we hit bottom.  2.  Unemployment remains high at over 9% but he was optimistic that jobs are coming.  Companies have squeezed expenses all they can and are now experiencing growth due to increased demand for products and more access to credit.  This will result in slow job creation.  3)  State and local governments are struggling with reduced revenues and high liabilities to service.  Some states are worse than others like New Jersey, California etc… 

Bottom line is that Mr. Alexander also confirmed what Professor Siegel stated, the next few years will be good for equities.  Bonds will suffer and interest on cash will remain low but stocks will reward the wise investor.  

The Zen of Creativity

On the afternoon of the first day of the TD Ameritrade conference, I attended one of the most amazing and inspirational sessions I have ever had the good fortune to attend. Our speaker was Dewitt Jones, a former photographer with National Geographic Magazine. He is now a speaker in much demand and I can certainly understand why. He took us on an extraordinary journey with the many beautiful and unique photos that he has captured over the years. However, instead of just showing us photographs he used each picture to convey his message of “falling in love with the world” and “celebrating what’s best in the world.” His purpose was to teach us how to be creative, to think outside the box and to always search for a better answer. He demonstrated this by showing us many photos of a particular scene that he was trying to capture. Most of the photos were very good but there was usually one that so clearly stood out and captured the essence of what he was trying to get the viewer to experience, that it took your breath away.


In my own financial planning practice, I am always looking for the right solution for the client and most of the time I can come up with the right one. But Dewitt showed us that while we may have the right or best solution, there might be a better one out there and don’t give up until you get it! In order to get that better solution, you need to let yourself be fully engaged and fully in love with the process so that the creativity can flow and you do come up with that better answer.


Dewitt is clearly a man who loves life and all that it offers. A man who always looks at the glass as “half full”, an eternal optimist who believes that our world is an extraordinary place. He used an example from a meditation class that he attended. He had a difficult time concentrating on his breath in meditation as his mind continually wandered. His teacher told him to try the one breath meditation. Take it all in with one breath and give it all back. Take in everything the world can give you and give it all back out again. As a yoga practitioner myself, this totally resonated with me and my yoga practice will never be the same again. Thank you, Dewitt, for a most inspirational afternoon.

Poor, sweet Toxie

Hey everyone, Marcie here!

While I was perusing through NPR's business section this morning, I came across a little video. While humorous and mildly cute, I watched the story of Planet Money's "Toxie." As an experiment, Planet Money bought a toxic housing asset to, literally, "watch it die." (Yeah, they named it "Toxie," and she wears a cute little bow.) And while it's a little morbid in a dark humor type of way, watching Toxie's video and inevitable death, actually sheds a lot of light for us normal folk as to what really happened with the economic collapse a couple years ago and also what's still happening today.

So, how did "Toxie" the little toxic asset with the cute bow fare? Listen for yourself! Oh, and if you want to watch the video of the cute floofball asset (which I highly recommend), click here.

We wish you a financially happy new year

How many times did you hear this phrase this weekend?

"Happy New Year!"

Did you say it? Did family, friends or people at the store say it to you? I think I sent and received dozens of messages, emails, and texts with that exact phrase. We say "Happy New Year" so easily, but making resolutions, having dreams of a new start year after year, does that really make us happy?

Dr. Henry Cloud, a clinical psychologist, says no, but he gives several helpful hints to happiness in his interview on CNN's American Morning.

So, how does this relate to finances? We hear from many friends, clients and acquaintances about issues with their finances, especially pertaining to the economy. We empathize with what's happening now and we understand. It's hard for some of you. But we want to encourage and remind everyone it doesn't need to affect your overall happiness or outlook on life.

There are items that Dr. Cloud says that align perfectly with achieving financial peace of mind:

1. Make goals. They don't need to be lofty goals. Begin your goals at square one and work from there. For example, achieving a goal of saving 10% of all income for retirement in one year seems really hard. So, start at 5% and work from there.

2. Concentrate on what you can control. We can't control the stock market or the unemployment rate. But we can control  making good spending decisions and educated choices.  Doing research, asking for help and making goals can help achieve peace of mind.

We know that this new year won't be perfect. But it's nice to know that despite the cloudy days, there are decisions we can make to give us sunshine through the clouds. If you have questions about any goals you'd like to make, feel free to give us a call!

And we wish you peace and true happiness, in all aspects of your life!


1/3/11, 3:46pm edit: Dr. Cloud himself responded to our blog on his Facebook page. His words: 


It is incredible how much of this material affects people's finances. Several of the practices are related to people making more money, and at the same time, not needing to make more in order to feel happy. The happy ones do better, but know that happiness does not come from material circumstances. And, many of these practices, like gratitude, for example, mitigate against stupid spending and financial problems. Take the one about comparing oneself to others. If people just would follow that one principle, they would often save a LOT of money not trying to keep up with the Jones'.


You can follow Dr. Henry Cloud on his Facebook page!