4 years ago
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admin
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Sticky
When was the last time you had to decide whether to pay cash or to buy on credit?
What is your money worth and what is the cost of holding on to it and going into debt instead?
Let’s set aside the risks of using money you don’t have for the time being and just talk about making that decision.
If you are faced with doing some kind of calculations – might I suggest you look into the calculators in the resources section of our website? You might be surprised at the results.
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4 years ago
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HSA: the only tax trifecta and a possible alternative to Long-Term Care Insurance.
Since HSAs were created in 2003, their popularity has been growing steadily. If you have a High Deductible Health Plan: minimum annual deductible of $1,200 for individual and $2,500 for family coverage, you may qualify for an HSA. Additional requirements are: you cannot have other health coverage, nor be enrolled in Medicare nor be another taxpayer’s dependent.
We all heard from our wise elders that the only two things certain in life are death and taxes! To encourage retirement savings, we are afforded certain tax advantages in qualified retirement accounts most commonly in IRAs, 401(k)s and 403(b)s. With these, your contributions are tax deductible and they can grow tax-free until you get taxed when you withdraw them in retirement. If your contributions are made in Roth accounts, you pay taxes first, your contributions will grow tax-free and your withdrawals are tax-free. So our generous taxman gives us a tax break so that our retirement account can grow tax-free but takes his dibs either when the contributions are made or when they are withdrawn.
But with a HSA, the tax advantage is trifold in that 1) your contributions are tax deductible, 2) they grow tax-free and 3) your withdrawals are also tax-free as long as they are used to pay for qualified medical expenses. These are the reasons why HSA is often called Medical IRA except with three instead of the typical two tax advantages. Note that outside of HSA, the only medical expense deduction you can claim is if your medical expenses are above 10% of AGI threshold.
With an increased life expectancy of the average American, more of us are concerned about outliving our retirement savings or having our retirement savings get wiped out by long term health care costs that seemed to have far outpaced other inflation rates. Many have been turning to long-term care insurance to mitigate the effect of this outcome or to have peace of mind one or two decades down the road. Of course long-term care insurance has its own issues, the biggest drawback being the cost. As the saying goes, those who can afford it don’t need it, and those who need it can not afford it. In addition the insurance companies can hike premiums after your purchase. Also a typical LTC insurance has 90 day deductible period which means if your stay in a nursing home is less than 90 days your LTC will not pay you a dime.
So if you are closer to those who can afford rather than those who need it, an alternative might be that you can use a HSA to specifically fund your long-term care needs. Let’s say you are a 50-year-old married couple, contribute to a HSA the maximum of $6,650, including catch up of $1,000 from age 55 until age 65 and not withdraw but allow your account balance to grow at the rate of 3% after inflation. Your HSA balance would grow to $197,356 by age 75, $228,789 by age 80 and $265,229 by age 85.
This may be one way to self-fund your long-term care needs at least partially. Again as long as your withdrawal is to pay for qualified medical expenses, it is tax-free and you can pay for either spouse’s long-term care needs. Should you not need any long-term care needs, you can pay for other qualified medical expenses. Note that the withdrawals not related to qualified medical expenses will be taxed at an ordinary income tax rate but without 20% penalty after 65.
If you are maxing out all other available retirement contributions, a HSA might be an excellent alternative to the high cost of long-term care insurance due to the tax advantages it offers.
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4 years ago
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I happened to watch a TV crime drama recently and the criminals were a group of graduate students who were caught selling biotech research data to a shady entity. At the end of the show one of them blurts out a number, which represents the amount of debt he has incurred in student loans while pursuing his education. Then it hit me how bad the conditions are for these young adults who are entering the worst job market since the Great Depression. Some are calling them the lost generation.
There are indeed bleak data, headlines and personal stories all around us validating this conclusion. I have a personal friend whose grandson, after graduating as a valedictorian with a chemical engineering degree, has yet to find a job after one year out of college. A colleague’s clients son armed with an engineering undergrad degree, a JD from a prestigious law school, and after passing the bar exam has not been able to find a job. He presumed that those degree combinations would place him safely at the top tier of the legal field of his choice to become a patent attorney. My own son is back home after his graduation from one of the most highly regarded art and design schools a year ago, still struggling to land his first job. The Bureau of Labor Statistics reports that 50% of recent graduates are either unemployed or under employed.
While the average amount of debt for a 2011 college graduate was $27,200, or $34,000 including parent loans, it is not uncommon to see some come out of college with student loan debt well into 6 figures. The total student loan debt surpassed the 1 trillion dollar mark and now exceeds consumer debt in the U.S. Some economists are speculating that this landscape will cast a long gloomy shadow in the lives of this generation as well as the society as a whole. The former students saddled with burdensome student loan debt, which cannot be forgiven even in most bankruptcy cases unlike mortgage debt, are inclined to put off marriage and purchase of a home. Also many baby boomers carry some of this burden through parent plus loans or cosigning with their children at the expense of their own retirement savings.
So what is a good financial planner’s advice regarding the question “Is college worth it?” The short answer is yes but with some caveats. The unemployment rate for adults at least 25 years old with a college degree is 4.1% compared to 8.7% for the high school graduates according to the Bureau of Labor Statistics. The BLS also shows that the median income of high school graduates was $33,176 while college graduates’ median income was $54,756 for 2011.
But not all college education cost makes sense. The students and the parents should consider where to study and what to study as some private college expenses can reach $40,000 plus a year and certain majors in tech related field still enjoy high demand from the employers even in this economy. Following your heart can be a luxury not too many can afford these days. Likewise it makes little sense to have an education debt north of $100,000 with no prospect of earning above $35,000 salary in a chosen field. While weighing the options in schools and majors, the students should proceed with their eyes wide open since their decision could impact their financial lives in years to come if they must incur a substantial educational debt.
As for the parents, I would advise them to take a parents’ Hippocratic Oath of “do no harm” to their retirement savings. As much as you would like to help your children to take the right steps to get a good education and stable and fulfilling life, you can not jeopardize your own plan and savings for retirement and should place retirement savings as your highest priority. If you are able, and willing to support your children through current assets, college savings and manageable loans with “no harm done” to your own retirement savings, by all means, have at it. Otherwise some unpleasant conversations about college, major choices and affordability might be in order. And that would be a conversation worth having!
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4 years ago
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Pink or blue. Right or left. An apple or orange make an array of decisions daily: some are simple and inconsequential while others could have more impact in later times. Somewhere in the upper side on that scale lies a decision about a Roth account as a retirement savings choice.
The question of Roth has become quite the contested issue among financial professionals and the general public alike. In recent years, Roth has gained some momentum and more employers are offering Roth 401(k) in addition to traditional 401(k) programs.
The biggest difference between a Roth account and a non-Roth retirement account is that you contribute to it with after tax dollars and consequently the withdrawals are income tax free if made after age 59. It can only be funded with earned income including alimony but not an investment income or gifts.
There are several conditions and benefits to consider in deciding for Roth.
Current marginal income tax rate vs. marginal tax rate in retirement:
For a young worker who has a very low current income tax rate and pays no or little income tax, Roth is a powerful option. Consider a teenager who works at her first job making a few grand a year. She can put a way all of her earned income up to $5,000 in a Roth IRA in 2011 that can grow tax-free. If she makes only five annual $5000 contributions and the account grows at annual rate of 8%, her nest egg will grow to $468,394 over 40 years. So when your teenager pesters you wanting to hang out with you instead of going out with his friends, this would be a great topic of conversation!
Diversification and Maximum Contributions:
Consider a recently empty nested couple who file a joint income tax return. The husband maxes out his retirement contributions through his employer and the wife brings in “spending money” through her voice lessons to students. If they are trying to save extra in a tax investment account, she should consider a uni Roth 401(k) in which she can contribute up to $22,000 with catch up amount if she is over 50 years of age. This will offer a measure of diversification in that their retirement savings are divided among tax deferred accounts as well as a Roth account. It also means that since her contribution is made with after tax dollars, she is putting away more for retirement than she would in a regular retirement account.
Flexibility:
If you withdraw from regular retirement accounts before 59 ½, this withdrawal will be taxed as regular income (there are a few exceptions) plus an additional 10% penalty on the amount of distribution. With a Roth account, which follows first in first out rule, you can always withdraw your contribution amounts without tax or penalty. If you dip into earnings you may be subject to tax and or penalties. Another key benefit is that you do not have Required Minimum Distributions from a Roth account the year you turn 70. If you fail to withdraw RMDs from a regular retirement account, the penalty is 50% on the short fall. Thus, you can have a greater flexibility in how much and when you withdraw from you Roth accounts or if you desire to leave the funds to your heirs if not needed. In addition, there is no lower or upper age limit to contribution so long as you have earned income. Even if you work past 70, you can continue to contribute to your Roth account.
If you expect to be in a higher or same income tax bracket in retirement or you desire maximum savings, diversification and flexibility, a Roth account can be a very powerful tool in retirement planning. If you have further questions on Roth, do not hesitate to contact me at bg@beaconfinancialmgmt.com or 760-473-3335.
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4 years ago
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Don’t Know Where Your Money Goes
Quoted in “Don’t Know Where Your Money Goes? That’s a Problem” – WSJ
I contributed to an article by a WSJ reporter about the importance of budgeting: you can read her full article here. http://www.wsj.com/articles/dont-know-where-your-money-goes-thats-a-problem-1461835800?mg=id-wsj
The most fundamental element in personal finance is budgeting or cash flow management. As the saying goes “All roads lead to Rome,” in personal finance, everything flows from cash flow.
But most surveys show that only 32% of Americans have a budget for their households which means a whopping 68% do not. Often times money issues are one of the biggest causes for divorce (22%) only behind basic incompatibility (43%) and infidelity (28%) according to a Certified Divorce Financial Analyst Professionals survey. After a certain income level, your financial security almost becomes irrelevant to how much money you make if you do not watch your spending. This is why we often hear about celebrities or pro athletes going bankrupt even after earning stratospheric incomes, (78% of NFL players go broke within 2 years of retirement and the numbers for NBA players are 60% and 5 years) while unassuming ordinary individuals leave an extraordinary amount of fortune relative to their incomes to universities, hospitals or other causes dear to their hearts. If your cash outflow consistently exceeds cash inflows, you will incur debt which eventually will blow up in your face.
So what are some basic tips that can help you build a budget and stick to it?
Pay yourself first.
Even as we are talking about spending habits, the first item on your budget should be savings. While you are doling out money to everyone (grocers, bankers, car makers, doctors, educators, clothiers and etc.) for sustaining your current life, you cannot neglect your older self’s needs in the future. It could be for 5 years down the road or 50 years down the road. Most industry experts recommend 10-15% of your income should be earmarked for retirement savings.
Be honest and be thorough and be diligent.
Start out by backtracking the past 3-6 month’s spending to see a trend or range. Create every spending category possible and record every spending that you incur. Avoid a miscellaneous category altogether, as it amounts to a black hole in which you cannot see exactly where the money is spent. This will help you be more accountable for what you spend money on. Fast food or Starbucks runs can rake up hefty amounts without you realizing.
Goldilocks: Be realistic.
If your budget is too tight, you are likely to give up. If your budget is not tight enough, you will not likely achieve cost-cutting measures needed to ensure positive cash flow each month to save for different goals either short term or long term.
Reward yourself.
If you successfully stay within your budget, reward yourself a little. If this feat was achieved by cutting out frequent meals out, plan to have a nice dinner out as a special treat and experience. Similar to people trying to lose extra weight needing to mind calories consumed, you need to practice mindful spending rather than impulse spending.
Streamline to one card.
Avoid having multiple credit cards. The more cards you carry, the more likely you will rake up balances in all of those accounts. That is why they offer you those cards. Consolidating will also make it easy for you to keep track of your spending and save you time.
Budgeting can seem daunting at first but it is not that complicated. Just like anything else, you need to plan your spending and stick with it. If you do not control your money your money will control you. By taming your budget, you can achieve financial stability which will allow you to live the life you would like to live.
Boonseon Gudmundsen, CFP®
Beacon Financial Management LLC
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4 years ago
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Tough Love for a College Graduate: Confessions of a Mother and a Financial Planner
I came across a question posed by a business reporter, “Should parents of a recent college graduate help pay back the student loan instead of retirement savings?” Of course the answer is a resounding “no” since saving for retirement is the holy grail of what to do with our current financial resources. This got me reflecting back on what my husband and I went through recently as we watched our boomerang son leave home for the second time. It was bittersweet since that was our ultimate goal to see him stand on his own two feet when he came home after college over three years ago. I would like to offer some insights from my experience beyond the numbers or the strategies to take advantage of income-based repayment option or student loan forgiveness programs.
My son attended one of the most highly regarded art design schools in the country, if not the world. When he started school, we learned that 100% of the recent graduates had high paying jobs already lined up before graduation. Of course by the time he graduated, the economy had imploded and after a few months of trying to find a job, he had to return home with five times the average graduate’s student loan debt.
Our stipulation was that we would offer him room and board but he was responsible for making the loan payments. He was compelled to be humble, immensely discouraged at times and often miserable for the next two years. He would pay about 80% of his take-home pay while waiting tables at a restaurant. He shared with us that one day while going from table to table he had a surreal epiphany, “This is it. This is going to be my life!” It was agonizing to witness as his parents.
Two years later, he would tell me that working at the restaurant was the best thing that ever happened to him. How did he get there? Sometime after he had that epiphany, he learned of a freelance opportunity for an online video game company. For the next year, he would not only build a portfolio of artwork but also self-teach himself the steps of converting his artwork to be used in the video game. Now he is one of the highest-grossing artists for the company, has paid off all of his loans and has moved to another state with no state income tax.
So what were our lessons?
Tough love is hard for the recipient as well as the giver: As hard as I tried, I could not convince him of the downside of taking on that much debt by going to an expensive school or going another year instead of trying to finish in 4 or 4 ½ years. Some things cannot be taught without having to live through the experiences. His money lesson was very costly but now my son has vowed never to go into debt, which is music to my ears. As parents, we agonized and were tempted to consider paying part of his loans to lift his burdens. In the end, we are glad we did not, which might have jeopardized our plans and may have hampered his will to succeed. That is why it is called tough love, to help but allow your child through the struggles to fulfill a personal responsibility. I am glad to see that more students and their families are cognizant of high levels of debt that are common to graduates and the need to avoid them as much as possible. Only a few years ago the mentality was very different.
We should discuss and educate our children about money early on and not treat the topic as taboo: Amid all the concerns we have for the next generation, ways to raise and prepare them for the world, we are so lacking in preparing them with money skills. Personal Finance or some form of that should be taught in both schools and families. There are games for the young children, publications and other tools for the teens so that the concept of money would not be so foreign as they get older. I do not know of any adults who can live well without understanding money management. Inevitably everyone will be forced to learn them at some point in their lives with sometimes very costly consequences.
Luck will find those who persevere and who are ready: With a smile, I reflect on a headline that read, “An overnight success 15 years in the making.” How is it that putting in 15 years could be considered an overnight success? Yet we hear of such stories from people of all walks of life from musicians, scientists, entrepreneurs, business owners and etc. Some may not be as long as 15 years but the point is that those who persevere will eventually find success in whatever form that may be to each person. My son’s luck came in the form of the increase in the membership of the online gamers. Within two short years the membership increased from 500,000 to 7 million. So he was incredibly lucky but had he not put in blood and sweat to learn the processes, to work to create his art, he would not have been able to take the ride when that train came.
While recent graduates and their parents are burdened with high level of student loan debt, the parent’s highest priority still should be saving for retirement. There is help available to them and ways to lighten their load. But the intangible lessons cannot be emphasized enough. In the end nothing can replace early money discussions in the families, personal responsibility and perseverance.
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